emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.year.id | http://emaj.pitt.edu business excellence in kazakh higher education institutions hatice akdağ ph.d kadir has university | e-mail: hatice.akdag@khas.edu.tr abstract the aim of this paper is to deepen and to encourage further research for sustaining quality improvement in kazakh higher education institutions. this paper is explaining the kazakh education system and is also trying to figure out whether if it fits to the european foundation for quality management (efqm) excellence model. the paper is based on literature concerning the kazakh higher education system. the pros and cons are also mentioned in the paper. in accordance to this it is easier to find the strengths and weaknesses of the system and finally a list of factors are given in order to be a guide of excellence for the kazakh higher education institutes. this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.3 | http://emaj.pitt.edu mailto:hatice.akdag@khas.edu.tr http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ business excellence in kazakh higher education institutions emerging markets journal | p a g e | 33 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.3 | http://emaj.pitt.edu business excellence in kazakh higher education institutions hatice akdağ ph.d i. introduction the aim of this paper is to deepen and to encourage further research for sustaining quality improvement in kazakh higher education institutions. there are a number of researches done to help the improvement in the quality of education in kazakhstan. kazakhstan education is transforming from cultural planning to a market oriented system, with the government encouraging non-government provision of education and increasingly private sector driven employment opportunities (ta completion report, 2002).this paper has tried to capture the essence of the issues and challenges faced by the education sector in kazakhstan. kazakhstan has a lot of grants coming from the asian development bank (adb) which is used to increase the quality of education in the country. the grants were given to identify the key sector issues and priorities and contribute to strengthening the government’s education sector development strategy. in 1995 the adb has approved a technical assistance grant for an education and training study in the republic of kazakhstan. the technical assistance was used to review the education and training sector, formulate the strategic plan for the sector, identify major policy issues and required sector restructuring, and prepare a project to address priority needs within the sector. as the report mentions, since independence from the former soviet union in 1991, kazakhstan’s economic and fiscal crises and its transition to a market-based economy have led to severe cutbacks in educational finance while at the same time placing numerous new demands on the education system. the emerging market oriented economic system needs to adopt to meet new market needs. because of this private schools have emerged and there is also a need to ensure the quality of the programs of these new comers. the adb is also providing a technical assistance grant to help the ministry of education and culture, the project’s executing agency, to prepare and implement a rationalization plan and to reform educational management. (www.adb.org, 1997). the government has taken steps to reform the sector. but it faces challenges in maintaining generally high standards and literacy rates, while improving funding, management and quality (www.adb.org, 2003). it should be also cleared that since joining adb in 1994, kazakhstan has received 11 loans (for seven projects) totaling $467 million, supporting reforms and investments in social security, agriculture, education and transport; and programs in agriculture, pension reforms and macroeconomic stability. in the same period, there have been 44 tas totaling $21.59 million to prepare loan projects and for advisory activities (www.adb.org/media, 2003). another problem is the teacher pay and incentives are low, making it difficult to attract and retain teachers, particularly in rural areas. reforms should be done to support and strengthen teacher’s professional development. since independence in 1991, kazakhstan’s economy has shrunk enormously and cutbacks in public spending, including education, have led to a severe deterioration in educational facilities and equipment and also to the resignation of many teachers due to low salaries which are frequently slow in being paid (www.adb.org, 1996). the government’s goal is to establish an education system that provides universal access to quality schooling for the country’s children and young people, according to the country’s needs. this is one of the main points were the education should stem on the country’s needs, in order to support the country to improve itself with the support of a quality education system. the http://www.adb.org/ http://www.adb.org/ http://www.adb.org/ http://www.adb.org/ hatice akdağ ph.d p a g e | 34 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.3 | http://emaj.pitt.edu government’s major priorities under the planned education reform include (i) providing one year of compulsory preschool education to better prepare students for formal schooling, (ii) improving education standards; (iii) providing equal access to education at all levels; (iv) developing information and communication technologies to support the education system; (v) extending school education; (vi) modernizing education management; and (vii) rationalizing the vocational and technical education system through partnership with the private sector to cater to the needs of sme’s (www.adb.org, 20062008). “quality has become a dynamic concept that has constantly to adapt to a world whose societies are undergoing profound social and economic transformation. encouragement for future-oriented thinking and anticipation is gaining importance. old notions of quality are no longer enough … despite the different contexts there are many common elements in the pursuit of a quality education, which should equip all people, women and men, to be fully participating members of their own communities and also citizens of the world” (ministerial round table on quality education, unesco, 2003, p. 1). at this point in time, quality education has essential characteristics that can be implemented in many culturally appropriate forms. quality education: supports a rights-based approach to all educational endeavors. education is a human right, and therefore quality education supports all of the human rights; is based on the four pillars of education for all – learning to know, learning to do, learning to live together and with others, and learning to be; views the learner as an individual, a family member, community member, and a global citizen and educates to create individual competency in all four roles; upholds and conveys the ideals of a sustainable world – a world that is just, equitable, and peaceable, in which individuals care for the environment to contribute to intergenerational equity; takes into consideration the social, economic, and environmental contexts of a particular place and shapes the curriculum or program to reflect these unique conditions. quality education is locally relevant and culturally appropriate; is informed by the past (e.g. indigenous and traditional knowledge), is relevant to the present, and prepares individuals for the future; builds knowledge, life skills, perspectives, attitudes and values; provides the tools to transform current societies to more sustainable societies; is measurable. (http://portal.unesco.org/education/en/ev.phpurl_id=27542&url_do=do_topic&url_s ection=201.html) ii. policies and strategies for improving education quality effective policies and strategies can be developed in all levels of administrative and management of a university, but the core issue is to fit it to its culture at the same time for the purposes of improving the education quality. many of the issues related to improving quality apply to all levels of the education system, including the need for: a. training that procedures well educated, technically competent instruction; b. incentives that reward performance; c. adequate salaries to discourage moonlighting; d. adequate learning materials; e. continuing staff development; f. increased staff productivity; g. management designed to give instructional support and leadership; http://www.adb.org/ business excellence in kazakh higher education institutions emerging markets journal | p a g e | 35 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.3 | http://emaj.pitt.edu h. national and institutional monitoring of standards. i. quality improvement at any level is interrelated with and, at least indirectly, dependent on supporting changes at other levels. j. improving behavior must address the behavior of the whole education system. (www.adb.org/documents/books/educatio n_natldev_asia/quality/policy.pdf) in order to monitor and sustain quality improvement, there is a need at all levels bur practically at the local level for both practical technology and, within contexts of decentralization, for participatory decision processes. head of department, deans and even the president of the higher education institution should be able to assess the quality of their institution and utilize such information in local strategic planning. conditions for sustaining quality improvement: for one to sustain quality improvement in their institution, they have to first understand the current conditions at the classroom, course, university, and staff levels. an example of how to do this may be as follows, which was a research undertaken by adb. the wording was remidified to suit this research. conditions for success include: (i) information to interpret the meaningful internal and external environment of the university. the existing and potential influence of such context defines opportunities and limitations of the university as an organization. a basic question is: how can the organization and its environment be altered to enable teachers, administrators, and students to do what needs to be done to achieve the university's objectives? (ii) information in support of university objectives on how given classroom teaching and learning processes lead to specific student outputs. what could academic staff and administrators be doing that could help achieve the various learning and performance targets? (iii) information on the somewhat unpredictable process involving a number of community stakeholders in transforming insights on effective university practice and context into acceptable university and classroom interventions. which potentially useful changes or innovations make acceptable demands on the academic staff? (iv) information on the processes of monitoring and evaluating student performance and other learning integral to the process of improving university practice collected and analyzed over time. which innovative technology is promising, available, and user friendly? (v) continued acceptance by academic staff of the validity of the new practice. what opportunities can be developed to share experiences and problems with administrators and academic staff from other universities to provide a useful forum in which academic staff can reassess their support for an innovation in light of the experience of other staff? (vi) continued sense of ownership of the new practice by academic staff and administrators. what are the indicators of ownership and lack of ownership? (vii) in the long term, integrating university-level change into the behavior of the larger education system. what communication channels need to be opened, and what decision processes need to be penetrated in order to extend quality improvements? http://www.adb.org/documents/books/education_natldev_asia/quality/policy.pdf http://www.adb.org/documents/books/education_natldev_asia/quality/policy.pdf hatice akdağ ph.d p a g e | 36 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.3 | http://emaj.pitt.edu iii. the efqm excellence model: an integrated approach to total quality management efqm excellence model is dedicated to increasing the competitiveness and effectiveness of european organizations, whatever size, sector, function or structure of incorporation. even though it is not still that common to apply this model to the higher education institutions, there are a number of studies that did prove the applicability of the model to these institutions. for an institution to apply this model it does not have to be a european organization, but just trying to compete within a european market is enough o implicate this model. as if an organization is willing to be in the top levels of competition it must think global and go global. organizations which join efqm or use the efqm excellence model, align themselves with role-model organizations and gain practical exposure to leading edge developments in the field of business and organizational excellence (pupius, sheffield hallam university, uk).the efqm model can be equally applied to any organization regardless size, sector and structure. in addition it should also be stated that in the efqm model the customer and staff satisfaction and integration into society are achieved via the role of the organizational leadership in setting the policy and strategy and the management of staff, resources and processes, culminating in excellence in key performance results (www.efqm.org). iv. 4.0 application of the efqm excellence model in kazakhstan higher education institutions the research done for the sheffield hallam university, united kingdom was chosen to be the guide or benchmark for the universities in kazakhstan as they are the leader in using the efqm excellence model in education. the efqm model comprises five “enablers” criteria: 1. leadership; 2. policy and strategy 3. people and management; 4. resources and partnerships; and 5. processes it also comprises four “results” criteria:  customer satisfaction;  people satisfaction;  impact on society; and  key performance results (efqm, 2000) in order to imply this model to education or even more specifically to higher education institutions in kazakhstan it is better to deepen the key important criteria for education. five “enablers” criteria: 1. leadership the leaders behavior is the mirror to how the institution creates a clarity and unity of purpose within the organization and an environment in which the organization and its people excel. the leaders of the institution should develop a strategic vision and share this with all staff and students. 2. policy and strategy: policy and strategy should be based on total quality concepts. the higher education institutions policy and strategy s\should be clear based on improvement of quality in education as well as the management of the organization. http://www.efqm.org/ business excellence in kazakh higher education institutions emerging markets journal | p a g e | 37 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.3 | http://emaj.pitt.edu 3. people and management: there must be effective top-down and bottom-up communication system. participation of all staff, rewarding systems and performance management systems should be included in this criterion. the staff should be aware of the decisions made in the top management, plus they should also be involved in the decision making process. 4. resources and partnership: when an institution is the subject, partnership is usually done with other colleges, businesses and local organizations to get their support and involvement in this higher education system. continuous improvement in tqm goals and increasing investment in facilities to match increasing class size must be done. the main resource should be to fund research plus the infrastructure requirements due to the growth in the student numbers. 5. processes institutions should map and make a model of all the processes and show how they work in the hierarchy e.g. faculties and departments. each process should have a standard and should be measured bye time-to-time. having a list of critical success factors would ease the application of this criterion. four “results” criteria: 1. customer satisfaction as the customer is the final authority to judge your quality of your product or service and customer loyalty; retention and market share gain is best optimized through a clear focus on the needs of current and potential customers. in education the major step is to identify the customer. in higher education institutions customers would include parents, businesses, local, regional and national agencies and students who are paying their own fee. 2. people and satisfaction satisfying the needs and expectations of staff is very important. the people in an organization are the most important criteria to take care of. their satisfaction depends on how you as an organization satisfy them. trust is a must for process working. the work environment for lecturers, research students and administrative staff should be improved. job security should be provided especially in the private universities. the high level of absenteeism and employee turnover should be decreased, as it is very high in kazakhstan, regarding the foreign faculty staff. 3. impact on society a higher education institution should satisfy the needs and expectations of the community at large through increased involvement in community initiatives. an institution has a public responsibility as well to its people to serve the best and even exceeding the expectations and regulations of the community at large. for an institution, this would include defining a role within the local community, region or country to enhance the social and economic well-being or the people.(pupius, 2002). 4. key performance results the key performance results should be based on the annual capital allocations, cash flows, research ranking and league tables, performance league tables, and stakeholder value(osseo et al, 2002). a higher education institution should also meet the requirements of the higher education council of kazakhstan, and then it should be able to get accreditation. the institution should also be effective in dealing with student complaints. adapting effective performance measurements systems e.g. efqm, benchmarking with worlds best heis etc. heis in kazakhstan should also hatice akdağ ph.d p a g e | 38 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.year.id | http://emaj.pitt.edu improve research ranking and position in performance league table. 5.0 conclusion the aim of this paper was to deepen and to encourage further research for sustaining quality improvement in kazakh higher education institutions. this paper explained the kazakh education system and also tried to figure out whether if it fits to the european foundation for quality management (efqm) excellence model. the paper was based on literature concerning the kazakh higher education system. as the efqm excellence model has the potential to enable an education institution to build on existing quality management systems for ways to achieve excellence in the core learning, teaching and assessment process and associated support processes it will be also useful to kazakhstan heis to improve the quality in education. the pros and cons were also mentioned in the paper. in accordance to this it is easier to find the strengths and weaknesses of the system and finally a list of factors are given in order to be a guide of excellence for the kazakh higher education institutes. the research done for the sheffield hallam university, united kingdom was chosen to be the guide or benchmark for the universities in kazakhstan as they are the leader in using the efqm excellence model in education. there is not much other heis using efqm excellence model so it was decided to choose the once which best uses this model in the same field. each and every efqm excellence model criteria was mentioned in detail which was also reworded in order to fit to the situation on kazakhstan. each criteria definition includes the key areas, strengths and areas of improvement regarding kazakhstan heis. there is a reality that for successful implementation of any change program there is a requirement for adequate education and training to the staff that will be involved in the implementation process. business excellence in kazakh higher education institutions emerging markets journal | p a g e | 39 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.year.id | http://emaj.pitt.edu v. references article from adb news and events: 1. http://www.adb.org/documents/news/ 1995/nr1995021.asp 2. http://www.adb.org/documents/news/ 1997/nr1997080.asp 3. http://www.adb.org/documents/news/ 2003/nr2003001.asp 4. http://www.adb.org/documents/news/ 2003/nr2003145.asp 5. http://www.adb.org/documents/csps/ kaz/csp0200.asp 6. http://www.adb.org/documents/periodicals/ adb_review/2006/vol38-3/central-asia.asp 7. efqm website www.efqm.org article from unesco website: 1. http://portal.unesco.org/education/en/ev.php?url_id=27542&url_do=do_topic&url_s ection=201.html) 2. (www.adb.org/documents/books/education_natldev_asia/quality/policy.pdf) 3. http://www.unesco.kz/education/he/kazakh/kazakh_eng.htm 4. ministerial round table on quality education, unesco, 2003, p. 1. 5. osseo, a.e., asare jr and longbottom d.; “the need for education and training in the use of the efqm model for quality management in uk higher education institutions”, quality assurance in education, vol.10. number1, 2002, pp.26-36 6. panth, brajesh; “technical assistance completion report”, adb, 2002 7. pupius, mike; “achieving excellence in education and training”, sheffield hallam university. http://www.adb.org/ http://www.adb.org/ http://www.adb.org/ http://www.adb.org/ http://www.adb.org/ http://www.adb.org/ http://www.efqm.org/ http://www.adb.org/documents/books/education_natldev_asia/quality/policy.pdf http://www.unesco.kz/education/he/kazakh/kazakh_eng.htm emerging markets journal empirical look at the factors affecting perception of business ethics in turkey  vedat akman ph.d beykent university | e-mail: vakman@khas.edu.tr abstract this study aims to explore the influence of gender, age, education, profession and sector choices towards factors affecting business ethics in turkey. self-administered questionnaire with scale of 1-5 was used to measure attitudes towards business ethics (1= "strongly agree" to 5="strongly disagree") with reasonable good score on cronbach's realibility test. with cronbach alpha of .692 and kmo (kaiser-meyer-olkin meaure of sampling adequecy) .746 (which sould be greater than .5 for a satisfactor analysis) we proceeded to our analysis successfully. choice job, sector, age and gender were significant determinants to factors affecting perception of business ethics but education level was not a significant determinant keywords: attitude towards business ethics, gender, education, age, profession and sector choice in turkey this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program and is cosponsored by the university of pittsburgh press.  special thanks to hatice akdağ ph.d at kadir has university for her contribution in preperation of this paper. volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu mailto:vakman@khas.edu.tr http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ empirical look at the factors affecting perception of business ethics in turkey emerging markets journal | p a g e | 1 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu empirical look at the factors affecting perception of business ethics in turkey vedat akman ph.d i. introduction factors influencing business ethics have attracted attention in turkey following a series of collapses in the turkish financial system. in today's business scandals fundamentals are not lack of intelligence or education anymore but instead a lack of business ethics. (choe kum lung, 2010) this current situation has intensified the importance of business ethics in the governance of corporations especially in developing countries. (barclay and smith, 2003) in the case of turkey, there are about 15 professional associations giving information or education which are in general accepted as public bodies having either codes of conduct on its website, have ethics commission or professional ethics rules listed on their websites. (tyec report iii, 2009) a code of ethics is a crucial element in forming a professional. the distribution of the pa‟s according to three choice of criterias by the tyec are (tyec report-ii, 2009); turkish dental association, turkish pharmacist association, the confederation of turkish tradesman and craftsmen, union of chambers of turkish engineers and architects, turkish medical associations, turkish veterinary medical association, union of turkish bar associations, union of turkish public notaries, the union of certified public accountants and sworn-in certified public accountants of turkey, association of the insurance and reisurance companies in turkey, the union of chambers and commodities exchanges of turkey, union of turkish chambers of agriculture, the association of capital market intermediary institution of turkey, the banks association of turkey and the central union of agricultural credit cooperatives of turkey. though it is a constitutional obligation, only the confederation of turkish tradesmen and craftsmen of the 15 pa‟s has “public servants ethicl rules”. (tyec report-ii, 2009) union of turkish chambers of agriculture is the only pa that has no codes of conduct, high pride/discipline/ethics commission and profesional ethical rules. none of the 15 has all 3 criterias complete. (tyec reportii, 2009) there are mainly 3 levels of factors affecting the ethical behavior macro-level, (culture, economics, technology, religion, law), middle-level (competition, job, organizational culture, leader), and micro-level or individual level (demographics, family, values, beliefs). (tahmasebi, 2010; dibavar, 2010; pirsemsari, 2010) factors affecting perceptions of bussiness ethics are individual characteristics (personal values), structural variables (leader behavior), organization culture, environment, and family. according to model of relationship among environment, values and individual ethics (winesa and napier, 1992), gender, education, age, education level and choice of profession may be the significant moderators in explaining perception of business ethics. ii. background research on the determinants of ethical decision making in the literature include; competition and business ethics (hegarty and sims, 1978), peer influence on ethics (jones and kavanagh, 1996), quality of the work experience on business ethics (jones and kavanagh, 1996), managerial influences on ethics (jones and kavanagh, 1996; stead et al., 1990); reinforcement contingencies (hegarty and sims, 1978; jansen and von glinow, 1985; stead et al, 1990; trevino, 1986); and ethical decision making models (dubinsky and loken, 1989; ferrell and gresham, 1985; ferrell et al., 1989; hunt and trevino, 1986). vedat akman ph.d p a g e | 2 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu 2.1. literature in business ethics literature researches are categorized in two main categories mainly conceptual and empirical. (preble and reichel, 1988) our research approach is empirical which places emphasis on examining prevailing business ethics perceptions and attitudes in turkey. there is a full body of literature in general supporting difference in attitudes on gender perception of business ethics (dawson, 1997; gilligan, 1982; peterson, rhoads, and vaught, 2001) but not on turkey‟s case. in contrast to (cortese 1989; kidwell, stevens and bethke, 1987; sikula and costa, 1994). there are also studies supporting existence of positive relation to attitudes with differences in age towards perception of business ethics in general (harris, 1990; mason et al, 1996; singhapakdi et al, 1999; ruegger et al, 1992; serwinek, 1992; hofsted, 1991; peterson et al, 2001; kohlberg, 1969; dowson, 1997 and peterson et al, 2001) in contrast to (cortese, 1989) who claims no significant relation exists. there is a lack of literature for turkey. there is also body of literature claiming a significant relationship between culture and perception of business ethics in general (erdener, 1996; jackson and artola, 1997; robertson, crittendan, brady and hoffman, 2002; singhapak di, karande, rao and vitell, 2001) with very little research on turkey. iii. methodology 3.1. sample for this study, five hundred selfadministered questionnaires were collected from adults working in and around istanbul area. snowball sampling method was used in which questionnaires were distributed to business ethics students at kadir has university , to their working friends, relatives and colleagues. respondents were also interviewed by students. participation to our survey was voluntary and no remuneration was offered. prior to performing the necessary statistical analysis, frequency distributions were tabulated for each item to ascertain possible response biass. in addition, a visiual inpection was also performed to identify possible anomalies in which 230 respondents out of 730 were eliminated leaving us with total of 500 respondents. all respondents were asked to respond each 21 statements. a five-point response scale was employed (1= "strongly agree" to 5="strongly disagree") for all items indicating their belief about that particular situation. our analyses included descriptive statistics, correlations and regression analysis. correlations were calculated to gain an initial understanding of the relationship between the variables. 3.2. instruments the survey instrument consists of 21 statements that describe a specific event that has some kind of ethical choice connotation. survey is conducted in turkish for clarity, readability and understandability by the turkish respondents. in addition, respondents were asked to provide demographic data about themselves. the data collected from the survey was analysed by reliability test, frequency analysis, factor analysis and regression analysis anova test. two hypothesises will be tested. the hypotheses are listed below: hypothesis 1: h0: age and gender is a positive determinant of attitude towards business ethics. h1: age and gender is not a positive determinant of attitude towards business ethics. hypothesis 2: h0: job and sector is a positive determinant of attitude towards business ethics. h1: job and sector is not a positive determinant of attitude towards business ethics. empirical look at the factors affecting perception of business ethics in turkey emerging markets journal | p a g e | 3 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu gender frequency percent valid percent cumulative percent valid female 245 49,0 49,0 49,0 male 255 51,0 51,0 100,0 total 500 100,0 100,0 education frequency percent valid percent cumulative percent valid primary school 19 3,8 3,8 3,8 secondary school 7 1,4 1,4 5,2 high school 105 21,0 21,0 26,2 university 369 73,8 73,8 100,0 total 500 100,0 100,0 age frequency percent valid percent cumulative percent valid 18-25 154 30,8 30,8 30,8 26-30 128 25,6 25,6 56,4 31-35 77 15,4 15,4 71,8 36-40 63 12,6 12,6 84,4 41-50 51 10,2 10,2 94,6 51-60 27 5,4 5,4 100,0 total 500 100,0 100,0 in order to test the hypothesizes, factor analysis was used twice. the first factor analysis was done to the 21 questions in order to gain the factors related to the erthical variables. the second factor analysis was done to gain the important factors for the demographic issues. the variables for each factor analysis were retained for regression analysis. the article continuous with the two different factor analysis and then the regression analysis is done to test the two hypothesises. iv. analysis and results 4.1 reliability test when reliability analysis was tested with the 21 questiones included in the questtionnaire the cronbach alpha was found to be 0,692 which means that the data collected is consistently reliable to be analysed. 4.2 frequency analysis demographic data were also summarized to provide insights into the nature of the participants. demographic characteristics of turkish respondents are as follows. when reliability analysis was tested with the 21 questiones included in the questtionnaire the cronbach alpha was found to be 0,692 which means that the data collected is consistently reliable to be analysed. table 1: age distribution table 2: gender distribution table 3: education distribution vedat akman ph.d p a g e | 4 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu job frequency percent valid percent cumulative percent valid academician 10 2,0 2,0 2,0 accountant 32 6,4 6,4 8,4 advertiser 5 1,0 1,0 9,4 analyst 1 ,2 ,2 9,6 architect 10 2,0 2,0 11,6 artist 1 ,2 ,2 11,8 assistant manager 2 ,4 ,4 12,2 bank manager 3 ,6 ,6 12,8 banker 24 4,8 4,8 17,6 cashier 9 1,8 1,8 19,4 cleaner 3 ,6 ,6 20,0 cook 4 ,8 ,8 20,8 craftsman 2 ,4 ,4 21,2 customer representative 11 2,2 2,2 23,4 dentist 3 ,6 ,6 24,0 designer 2 ,4 ,4 24,4 director 12 2,4 2,4 26,8 diver 1 ,2 ,2 27,0 doctor 13 2,6 2,6 29,6 driver 7 1,4 1,4 31,0 economist 1 ,2 ,2 31,2 electirican 1 ,2 ,2 31,4 engineer 20 4,0 4,0 35,4 entertainer 1 ,2 ,2 35,6 expm 1 ,2 ,2 35,8 flourist 1 ,2 ,2 36,0 general manager 3 ,6 ,6 36,6 guard 4 ,8 ,8 37,4 human resource 4 ,8 ,8 38,2 information processor 3 ,6 ,6 38,8 interior designer 1 ,2 ,2 39,0 empirical look at the factors affecting perception of business ethics in turkey emerging markets journal | p a g e | 5 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu jewler 1 ,2 ,2 39,2 judge 1 ,2 ,2 39,4 lawyer 84 16,8 16,8 56,2 librarian 1 ,2 ,2 56,4 manager 16 3,2 3,2 59,6 mechanic 1 ,2 ,2 59,8 nurse 2 ,4 ,4 60,2 officer 1 ,2 ,2 60,4 optition 1 ,2 ,2 60,6 pharmacist 1 ,2 ,2 60,8 police 1 ,2 ,2 61,0 project manager 1 ,2 ,2 61,2 publc employee 6 1,2 1,2 62,4 public relation officer 1 ,2 ,2 62,6 sales director 3 ,6 ,6 63,2 sales person 21 4,2 4,2 67,4 secretary 7 1,4 1,4 68,8 selfemployed 56 11,2 11,2 80,0 student 23 4,6 4,6 84,6 teacher 26 5,2 5,2 89,8 technician 2 ,4 ,4 90,2 waiter 45 9,0 9,0 99,2 worker 2 ,4 ,4 99,6 tailor 2 ,4 ,4 100,0 total 500 100,0 100,0 table 4: job distribution vedat akman ph.d p a g e | 6 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu sector frequency percent valid percent cumulative percent valid accounting 33 6,6 6,6 6,6 advertisement 8 1,6 1,6 8,2 automotive 6 1,2 1,2 9,4 beauty and personal care 2 ,4 ,4 9,8 chemical 2 ,4 ,4 10,2 cleaning 1 ,2 ,2 10,4 communication 1 ,2 ,2 10,6 computers and software 7 1,4 1,4 12,0 construction 19 3,8 3,8 15,8 education 44 8,8 8,8 24,6 electronic 1 ,2 ,2 24,8 entertainment 3 ,6 ,6 25,4 fashion 2 ,4 ,4 25,8 finance 32 6,4 6,4 32,2 food and beverage industry 11 2,2 2,2 34,4 health 21 4,2 4,2 38,6 industry 3 ,6 ,6 39,2 information technology 3 ,6 ,6 39,8 insurance 7 1,4 1,4 41,2 jewelry 4 ,8 ,8 42,0 leather 1 ,2 ,2 42,2 legal 85 17,0 17,0 59,2 library 1 ,2 ,2 59,4 media 1 ,2 ,2 59,6 other 95 19,0 19,0 78,6 public 8 1,6 1,6 80,2 retail 27 5,4 5,4 85,6 security 6 1,2 1,2 86,8 service 30 6,0 6,0 92,8 telecommunication 2 ,4 ,4 93,2 textile 30 6,0 6,0 99,2 tobacco 1 ,2 ,2 99,4 empirical look at the factors affecting perception of business ethics in turkey emerging markets journal | p a g e | 7 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu tourism 3 ,6 ,6 100,0 total 500 100,0 100,0 table 5: sector distribution 4.3 factor analysis factor analysis is a technique used to identify the smallest number of decsribtive terms to explain the maximum amount of common variance in a correlation matrix. (hill and petty, 1995) factors with eigen values greater than 1.0 are retained. 4.3.1 factor analysis for ethical variables (fa#1) inspection of scree plot and eigen values enabled the analysis to reduce the 21 business ethics variables into five factors. factor 1: work environment factor factor one work environment factor has 5 components included such as; q1. the rights which are provided to me in my workplace are enough and protective q2. i believe that i am working in an honest workplace q3. the social responsibility projects in my workplace are sufficient q4. i believe that my work environment is transparent q5. at workplace enough importance is given to business ethics factor 2: compelling factor q15. i find it unethical to use child labor (under 18) in my workplace q16. i find it unethical for workers at my workplace gossip about each other q17. i find it unethical for co-workers to blame each other for things they did not do factor 3: encouraging factor q12. in my workplace everybody works professionally q13. i am not faced with any lack of knowledge and miscompetence at my workplace q14. no discrimination or no preferential treatment at my workplace factor 4: family factor q20. an effective communication is very important at workplace q21. i believe the golden rule of having a good communication is to respect others factor 5: managerial factor q18. i will feel guilty if i see someone at work making a transaction at the expense of the company and not tell q11. managers have an influence over the business ethics of the company 4.3.2 factor analysis for demographic issues (fa#2) inspection of scree plot and eigen values enabled the analysis to reduce the 4 variables into two main factors. factor 1: job and sector factor first factor includes both job and sector. factor 2: age and gender factor second factor has two components age and gender. these two factors will be used as the dependent variables and factor analysis #1 factors will be taken as the independent variables in the following regression analysis. vedat akman ph.d p a g e | 8 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu v. regression analysis analysis of hypothesis 1 and hypothesis 2 are seen in the table below. dependent variable independent variable significance rate from anova relationship job and sector (f1 of fa#2) factor 2: compelling factor child labor workplace gossip blame each-other 0,071 0,321 0,296 0,264 slight relationship no relationship no relationship no relationship job and sector (f1 of fa#2) factor 3: encouraging factor (only q13) (q13):facing lack of knowledge and miscompetence at workplace 0,052 strong relationship job and sector (f1 of fa#2) factor 5: managerial factor feeling guilty if i see someone making a transaction at the expence of the company and not tell managers have an influence over the business ethics of the company 0,017 0,013 0,077 strong relationship strong relationship slight relationship age and gender (f2of fa#2) job and sector 0,000 strong relationship age and gender (f2of fa#2) factor 2: compelling factor child labor workplace gossip blame each-other 0,071 slight relationship age and gender (f2of fa#2) factor 4: family factor effective communication is very important having good relationship is to respect others 0,076 0,065 0,065 slight relationship slight relationship slight relationship age and gender (f2of fa#2) factor 5: managerial factor feeling guilty if i see someone making a transaction at the expence of the company and not tell managers have an influence over the business ethics of the company 0,021 0,095 0,052 strong relationship no relationship strong relationship table 6: anova analysis results the anova done for this analysis shows that if the significant value is greater than 0.05 which means that the independent variables (business ethics variables) do not explain the total variation very well according to the dependent variable (age and gender/ job and sectorthe null hypothesis is rejected, meaning that there is no relationship between age, gender and business ethics variables / job and sector and business ethichs variables. the anova done for this analysis shows that if the significant value is smaller than 0.05 which means that the independent variables (business ethics variables) does explain the total variation very well according to the dependent variable (age and gender/job and sector). so we accept the null hypothesis, meaning that there is a relationship between age, gender and business ethics/ job and sector and business ethichs variables. the anova done for this analysis shows that if the significant value is slightly above 0, 05 empirical look at the factors affecting perception of business ethics in turkey emerging markets journal | p a g e | 9 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu which means that the independent variables (business ethics variables) does explain the total variation slightly but not bad according to the dependent variable (age and gender/job and sector). so we accept the null hypothesis, meaning that there is a slight relationship between age, gender and business ethics/ job and sector and business ethichs variables. vi. conclusion this study explored the influence of gender, age, job profession and sector choices towards factors affecting business ethics in turkey. self-administered questionnaire with scale of 1-5 was used to measure attitudes towards business ethics. the reliability test resulted with a cronbach alpha of 0,692 shows that the data is consistantly reliable to analyse especially for factor analysis and regression analysis. regarding the frequency distribution of the data 30.8% of the respondents were at the age of 18 through 25, 25.6% through 26 to 30 and 15.4% through 31 to 35. cumulative3 percentage of age shows that almost 72% of the respndents were at the age through 18 to 35. 49% of the respondents were female and the rest were male. 73.8% of the respondents were university graduates and 21% were highscholl graduates. the job distribution of respondents was huge. the job distribution was among 55 different job titles. the repsondents had a sector distribution of 33 which is listed in table 5 above. factor analysis was done twice for different reasons. the first factor analysis (fa#1) was tested for the 21 questions included in the questionnaire related to business ethics variables. the second factor analysis (fa#2) was done to gain the important factors for the demographic issues. each variable from factor analysis were retained for the regression analysis. according to the results of regression analysis job and sector factor has a strong relationship with the encouraging factor specifically with „facing lack of knowledge and miscompetence at workplace‟; with managerial factor in addition specifically with „feeling guilty if the worker sees someone making a transaction at the expence of the company and not tell‟ variable. job and sector has a slight relationship with the compelling factor but no relationship with its components. it also has slight relationship with one of the components of managerial factor which is „managers have an influence over the business ethics of the company‟. age and gender factor has a strong relationship with managerial factor same as it had with job and sector fctor. age and gender factor has a slight relationship with the compelling factor but no relationship with its components; with family factor and its components such as „effective coomunication being very important‟ and „having good relationship to show respect to people. recent findings in the literature pointed us to the fact that, open to conflict, most previous research in the field were dominated by normative approach. (hosmer, 2000) there is a lack of empirical research which this paper hopes to fill by generating facts through empirical research to provide solutions to some of the conflicts. hopefully, our findings could be incorporated into acceptable further normative studies and we would reach our goal. vedat akman ph.d p a g e | 10 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu vii. discussion so our current findings with five components under factor one and their relationship to factor two with two components (job,sector, and gender, age & education) which is trying to establish positive correlation among them. in our case they are job, sector and gender and age, education is not. our result confirms with the turkish tradition that family is the key factor replacing education in ethics. when we take into consideration the current availability of ethics education over pa‟s and their affectiveness in turkey, our result is not suprising. our current findings where job, sector and gender and age are positively correlated with perception of business ethics and no significant correlation found between education. are coherant with the previous works. number of directions for the future research might be suggessted forexample more detailed view of dominant professions in terms of perception of business ethics might be in order. empirical look at the factors affecting perception of business ethics in turkey emerging markets journal | p a g e | 11 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.5 | http://emaj.pitt.edu viii. references 1. joan marie mcmahon, “an analysis of the factor structure of the multidimensional ethics scale and a perceived moral intensity scale, and the effects of moral intensity on ethical judgment”, dissertation submitted to the faculty of the virginia polytechnic institute and state university, 2002, pp.1-188. 2. hortacsu, ayfer and ozkan gunay, e. nur, “ethical issues and attitude in the turkish banking sector”, june 2004, mpra paper, no. 26338, posted 31. october 2010. (http://mpra.ub.uni-muenchen.de/26338/) 3. gülçimen yurtsever, “the ethical beliefs of turkish consumers”, d.e.ü.i̇.i̇.b.f.dergisi issuet:13, no:ii, 1998, pp:135-146. 4. “dünyada ve türkiye‟de i̇ş etiği yönetimi”publicatin no: tüsi̇ad/t-2009-06-492, june 2009, pp.1-151. 5. gregory c. petty, “work ethic characteristics: perceived work ethics of supervisors and workers”, journal of industrial teacher education, volume 42, number 2, 2005, pp.1-20. 6. ethics for the prevention of corruption in turkey (tyec), council of europe and council of ethics for the public services in turkey: academic researches on public ethics, vol. i-ii, nov. 2009. 7. choe kum-lung, “attitude towards business ethics: examining the influence of religiosity, gender and education levels”, international journa of marketing studies, vol.2, no.1, may 2010, pp. 225-232 8. chris perryer and catherine jordan, “the influence of gender, age , culture and other factors on ethical beliefs: a comparative study in australia and singapore”, public administration and management: an interactive journal, 7, 4, 2002, pp. 367-382. 9. zohreh tahmasebi, ahmad dibavar and nasrin pirsemsari, “ factors affecting ethical behavior of employees”, aims international conference on value-based management, august 11-13, 2010. 10. m.g. serap (atakan) ekin and s. hande tezölmez, “business ethics in turkey: an empirical investigation with special emphasis on gender”, journal of business ethics 18,1999, pp. 17-34 11. i̇gi̇ad, “i̇ş ahlakı raporu”, i̇stanbul, i̇gi̇ad yayınları, no.9, rapor.2, 2008. microsoft word 21-247-1-ce.doc volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.09 | http://emaj.pitt.edu servant leadership and organi̇zational trust: the mediating effect of the leader trust and organi̇zati̇onal communi̇cati̇on morad rezaei sajjad salehi masomeh shafiei somaye sabet e-mail: morad923@yahoo.com abstract the purpose of this paper aims to clarify the relationship between servant leadership and organizational trust, and tries to demonstrate the mediator role of leader trust and organizational communication in this relationship. the study sample included 258 employees of guilan province tax administration and for sampling we used cluster method. previous studies have also focused on the positive impact of servant leadership in organizational trust and in this article the results show that there is a significant relationship between servant leadership, organizational trust, leader trust and organizational communication. keywords: servant leadership, organizational trust, leader trust, organizational communication, iran this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.21 | http://emaj.pitt.edu servant leadership and organizational trust: the mediating effect of the leader trust and organizational communication emerging markets journal | p a g e | 70 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.21 | http://emaj.pitt.edu servant leadership and organizational trust: the mediating effect of the leader trust and organizational communication morad rezaei sajjad salehi masomeh shafiei somaye sabet i. introduction   the importance of trust in social, economic, and political organization is considered significantly. in studies, organizational trust known as a fundamental factor and the researchers believe that the organizations should creation trust in their employees [3]. therefore, the leader's behavior is thus more important than that anyone else in determining the level of trust that exists whitin a group or organization [2]. trust between management and employees will have a large impact on the quality of public management. thus, the shortage of trust in public organization is one the main factors lead to uninventive and indifferent employees. it seems that the servant leadership is an appropriate solution to address this problem in the government agencies because trust is one of the indicators of servant leadership [7]. necessity, importance, status and role of leadership in the organization are not secret to anyone. leadership is a basic need in human society and organizations. servant leadership is one of the leading figures in the angle of service delivery, growth, development and empowerment is given to the relationship between leader and followers [6]. servant leadership theory is not a new issue [29]. because has been implemented in almost all cultures for centuries [35]. laub (1999) [17] believes the servant leader is a person that insisted on his followers benefits compare to personal benefit. in recent years the understandings of the servant leadership theory has increased [14]. most of researchers indicate that servant leadership theory can be root of many researches about organizational management and leadership [22]. in fact, the servant leadership have been supported and implemented in some of the most successful american companies [30]. when the model of meyer et al. [23] was used for the communication between leaders and followers, it was suggested that trust is a function of the leader. leaders create trust and maintain it through the leader's behavior [12]. woolston (2001) [34] characterized maintain of cultural norms by leader lead to trust and leader trust depends on leader behavior. trust grows when people see leaders will become their own honesty to loyalty of organization [16]. the lack of leader trust in work place can lead to dissatisfy of employees [24]. schweiger and denisi (1991) [31] found that communication between manager and employees through by telephone, weekly session and news can increase the level of trust in organization and high level of trust between manager and employee can improve job satisfaction in organizations. therefore, due attention that trust is one of the main indicator of servant leadership and a main factor for influencing in manager and followers relations we can say that it is a key factor in inter personal communication. in this study we are going to introduce the servant leadership theory, organizational trust and their relationships with the mediating effect of the leader trust and organizational communication. servant leadership and organizational trust: the mediating effect of the leader trust and organizational communication emerging markets journal | p a g e | 71 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.21 | http://emaj.pitt.edu ii. literature  review  and   hypotheses   servant leadership servant leadership theory presented for the first time by greenleaf [12]. greenleaf in response to the question of who is a servant leader in the book, "the role of servant leader," writes one who is servant leader is servant first. servant leadership begins with a natural feel. it means that a person who has the innate desire to serve [9]. this conscious choice can enthusiastic person to lead others. when people cash good services they will to be a good servant and with this process we will have a good society [1]. according to greenleaf [11] the leader should first consider the needs of others. in addition, some other authors indicate that servant leadership theory is an authentic and modern theory in organizational leadership. servant leadership is a subject that discuss about it in academic and general environment [9]. the definition of servant leadership is a leader who insisted on his followers benefits compare to personal benefit [26]. in greenleaf's opinion organizations do not deliver good services to the communities. therefore, he said that by servant leadership the leaders can serve. servant leadership theory is based on stewardship theory while traditional leadership theory is based on agency theory [21]. the final goal of greenleaf is the creation of servant community. a society people can share its benefits and use its advantages. in his view for achieving to this society we should have the servant leaders in all organizations [9]. in fact, he imagined a society that serves to others is always the first choice [18]. thus, the servant leadership model is not described the organization members who have less abilities compare to his manager, but also gives competence to employees such as managers of the organization. all members have equal dignity and all of them are active and participate in management decisions. greenleaf believes that servant leadership is based on service philosophy and the servant leaderships prefer the empowerment, trust, cooperation, ethical use of power and serve to others rather than other things [19]. if we believe that the servant leadership is differing from other style therefore, we should introduced different dimensions for it [4]. after reading numerous articles and reviews, 10 features for servant leaders that are enumerated: 1. listening, 2. empathy, 3. healing, 4. awareness, 5. persuasion, 6. conceptualization, 7. foresight, 8. stewardship, 9. commitment to the growth of people, 10. building community [17]. organizational trust several researches from different fields try to define the trust [8]. cofta (2007) [6] pointed out that trust has 17 different meanings. also, the definitions of trust between the various fields (psychology, sociology and economics) and the level of analysis (individual, organizational, and social) are different. shaw [32] defines trust as the belief to achieve our dreams and expectations that are dependent on others. charlton believes that employees trust their leaders, who want to fulfill job to do [31]. in that organization that trust is low, there is not discipline in works. low level of trust makes remove the open communication and relations and leads to low quality decisions. in these organizations, employees avoid expressing their idea, because they fear that their plans face failure [10]. the trust not only effect on quality but also can affect on performance, efficiency and effectiveness. reserachers indicate that organizational trust has direct communication with citizenship behavior, organizational performance and job satisfaction [27]. leader trust honesty and integrity are essential factors a good leader, based on the history of leadership. servant leadership and organizational trust: the mediating effect of the leader trust and organizational communication emerging markets journal | p a g e | 72 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.21 | http://emaj.pitt.edu these values can cause the creation of people trust and organizational trust. leaders who have honesty can inspiration trust to others [20]. nyhan (2007) [26] defines trust as an extent of assurance of a person abilities from others view. joseph and winston (2005) [15] says the servant leadership known as some unique behaviors that trust is one of them. the trust climate can establish a good organizational climate and facilitate the participation [26]. bennis and nanus (1999) [4] believes that the capacity to generate and maintain trust is a central element in leadership. organizational communications the concept of organizational communication tactics has been developed by yamaguchi (2005), based in studies of influence tactics. influence tactics are "the tactics used by people at work to influence their superiors, coworkers, and subordinates [35]. organizational communication is the transfer point between members. when exchange information and ideas occur that the purpose transferred from one person to another [5]. communication between management and employees through a newsletter, telephone, and weekly meetings can reduces uncertainty and will increase job satisfaction, commitment and reliability and honesty increases [10]. development of hypotheses for this study at first we evaluated the literature and then selected the servant leadership and its dimensions as independent variable and organizational trust as the dependent variable. leader trust and organizational communication have mediate role. conceptual model of research based on various theoretical studies shows in figure 1 and indicated the relationship between servant leadership and its dimensions with organizational trust due attention to leader trust and organizational communication. according to this model, the hypotheses are developed. based on a conceptual model the research hypotheses are as follows: servant leadership and organizational trust: the mediating effect of the leader trust and organizational communication emerging markets journal | p a g e | 73 volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.09 | http://emaj.pitt.edu h1: there is a significant relationship between servant leadership and organizational trust. h2: there is a significant relationship between servant leadership and organizational trust due attention to leader trust. h3: there is a significant relationship between servant leadership and organizational trust due attention to organizational communication. iii. methodology   research method this study is descriptive and we survey the real attitudes and behavior of employees and managers in the workplace. variables don't control and manipulate and for implementation of research do not create the artificial environment. for data collection we used different methods and to investigate relationship between variables field studies method is applied. therefore, this study is a survey research and applicable. sample and data collection the statistical populations of this study are the employees of tax affairs in guilan province. sample study based on limited population formula was 258. data collection tools in this research are four separate questionnaires for assessing servant leadership capital and organizational trust due attention to leader trust and organizational communication. measures servant leadership questionnaire design based on dennis (2004) [7] and leiden et al. (2005) [20] ideas and includes 36 questions and for the indigenous construction of the questionnaire's and for measure its validity we used factor analysis and 8 questions was removed and the number of questions was reduced to 28 questions. organizational trust and leader trust questionnaires includes the 12 questions that 8 question was for organizational trust and 4 questions was for leader trust design by nyhan and marlowe (1997) [26]. organizational communication questionnaire design based on schweiger and denisi (1991) [31] ideas and includes 5 questions. to test the questionnaires reliability we used cronbach's α scores for each variable as shown in table 4. if the calculated alpha is greater than 70 percent, indicating high credit questions and questionnaires are reliable. in this research the reliability scores were high. also, for measure the validity of questionnaires researchers used the idea of ten experts that were selected among the faculty of the university (an expert in the field of research) and executives' managers. servant leadership and organizational trust: the mediating effect of the leader trust and organizational communication emerging markets journal | p a g e | 74 volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.09 | http://emaj.pitt.edu test of hypotheses 1. relationship between the servant leadership and organizational trust based on the above relation, the first hypothesis was given test by pearson correlation due attention to table 2. first hypothesis: there is a significant relationship between the servant leadership and organizational trust in the tax affairs of guilan. the results of statistical tests of this hypothesis indicate that in a significant percentage "there is a significant relationship between the servant leadership and organizational trust in the tax affairs of guilan ". the intensity of relation between these two variables is 0.593 and this represents a direct link between them. therefore, this hypothesis is generally confirmed with the %99 confidence level in the tax affairs of guilan. table 2. test of hypothesis organizational trust servant leadership pearson correlation 1 .593** sig. (2-tailed) .000 organizational trust n 258 258 pearson correlation .593** 1 sig. (2-tailed) .000 servant leadership n 258 258 2. relationship between the servant leadership and organizational trust due attention to leader trust based on the above relation, the second hypothesis was given test by pearson correlation due attention to table 3. second hypothesis: there is a significant relationship between the servant leadership and organizational trust due attention to leader trust in the tax affairs of guilan. the results of statistical tests of this hypothesis indicate that in a significant percentage "there is a significant relationship between servant leadership and organizational trust due attention to leader trust in the tax affairs of guilan". the intensity of relation between these variables is 0.631 and this represents a direct link between them and shows that with entire the mediate variable (leader trust) in relationship between servant leadership and organizational trust the intensity of relations increase 3.8 percent. therefore, this hypothesis is generally confirmed with the %99 confidence level in the tax affairs of guilan. table 3. test of second hypothesis change statistics model r r. s. adjusted r. s. s. e. r. s. change f change df1 df2 sig. f change 1 .631 .398 .397 2.53688 .398 84.443 2 255 .000 servant leadership and organizational trust: the mediating effect of the leader trust and organizational communication emerging markets journal | p a g e | 75 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.21 | http://emaj.pitt.edu 3. relationship between the servant leadership and organizational trust due attention to organizational communication based on the above relation, the third hypothesis was given test by pearson correlation due attention to table 4. third hypothesis: there is a significant relationship between the servant leadership and organizational trust due attention to organizational communication in the tax affairs of guilan. the results of statistical tests of this hypothesis indicate that in a significant percentage "there is a significant relationship between servant leadership and organizational trust due attention to organizational communication in the tax affairs of guilan". the intensity of relation between these variables is 0.643 and this represents a direct link between them and shows that with entire the mediate variable (organizational communication) in relationship between servant leadership and organizational trust the intensity of relations increase 5 percent. therefore, this hypothesis is generally confirmed with the %99 confidence level in the tax affairs of guilan. table 4. test of third hypothesis change statistics model r r. s. adjusted r. s. s. e. r. s. change f change df1 df2 sig. f change 1 .643 .413 .409 2.50542 .413 89.800 2 255 .000 iv. conclusion   most of the leading theorists and researchers introduced servant leadership theory as a valid model for the modern organization. however, this leadership style is not yet supported by empirical research [9]. but the concept of servant leadership has this potential that can change organizations and communities. because, servant leadership can design organizational and personal change. in this method, all members of the organization have same rights, similar information, and same vision and the leadership role is facilitating the formation of the group in organization. this leadership style can help organization in today's world because it has various concepts and has ability to strengthen the sympathy in the organization. trust is one of the concepts that will affect on relationship between leader and follower. leaders who are trusted by their followers can easily make sense of commitment and responsibility in their followers. trust to leaders can affect on many results of organizations and based on many research trust in one of the main dimension of servant leadership. so the servant leadership style can be a good mechanism for building trust in the organization [17], [26], [30]. this research shows that there is as relationship between servant leadership and organizational trust and with entire the leader trust and organizational communication as moderator the intensity of this relationship was increased. this finding is related to previous studies provide evidence of relationship between servant leadership and organizational trust due attention to leader trust [15] and organizational communication. servant leadership and organizational trust: the mediating effect of the leader trust and organizational communication emerging markets journal | p a g e | 76 volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.09 | http://emaj.pitt.edu v. references   1. andersen, j.a. (2009),"when a servant leadership comes knocking", leadership & organizational development journal, vol. 30, no. 1, pp. 4-15. 2. aryee, s.; budhwar, p.s.; chen, z. x. (2002),"trust as a mediator of the relationship between organizational justice and work outcomes: test of a social exchange model", journal of organizational behavior, no. 23, pp. 267-285. 3. baried, a.; amand, r. (1995),"trust within the organization", monograph, issue 1. 4. bennis, w.; nanus, b. (1997)"leaders: strategies for taking charge", new york: harpercollins publishers. 5. bennis, w. (2002),"become a tomorrow leader", in spears, l.c. (ed), focus on leadership: servant leadership for the 21st century, wiley, new york, ny. pp. 101-109. 6. cofta, p. (2007),"confidence, trust and identity", bt technology journal, vol. 25, no. 2, pp. 173-178. 7. dennis, r. s. (2004),"servant leadership theory: development of the servant leadership theory assessment instrument", a dissertation presented for the degree doctor of philosophy. 8. de pree, m. (1997),"leading without power: finding hope in serving community", jossey-bass publishers, san francisco, ca. 9. fridell, m.; belcher, r. n.; messner, p. e. (2009),"discriminate analysis gender public school principal servant leadership differences", leadership & organizational development journal, vol. 30, no. 8, pp. 722763. 10. gopinath, c.; becker, t. e. (2000),"communication, procedural justice, and employee attitudes: relationships under conditions of divestiture", journal of management, vol. 26, no. 1, pp. 63-83. 11. greenleaf, r. f. (1970),"the servant as leader", the greenleaf center, indianapolis, in. 12. greenleaf, r. f. (1977),"servant leadership: a journey into nature of legitimate power and greatness", paulist press, mahwah, nt. 13. horsman, j. h. (2001),"perspectives of servant leadership and spirit in organization", a dissertation for the degree doctor of philosophy, gonzaga university. 14. humphreys, j. h. (2005),"contextual implications for transformational and servant leadership", management decision, vol. 43, no. 10, pp.1410-1431. 15. joseph, e.; winston, b. (2005),"a correlation of servant leadership, leader trust and organization trust", leadership & organizational development journal, vol. 26, no. 1, pp. 6-22. servant leadership and organizational trust: the mediating effect of the leader trust and organizational communication emerging markets journal | p a g e | 77 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.21 | http://emaj.pitt.edu 16. kuczmarski, s. s.; kuczmarski, t. d. (1995),"valuesbased leadership, prentice-hall, paramus. nj. 17. laub, j. a. (1999),"assessing the servant organization: development of the servant organizational leadership assessment (sola) instrument", unpublished doctoral dissertation, florid atlantic university, boca raton. 18. laub, j. (2004),"defining servant leadership: a recommended typology for servant leadership studies", servant leadership roundtable, pp. 1-12. 19. lee, h. j. (2004),"the role of competence based trust and organizational identification in continues improvement", journal of managerial psychology, vol. 19, no. 6, pp. 623-639. 20. liden, r. c.; wayan, s. j.; zhoa, h.; henderson, d. (2005),"development of multidimensional measure of servant leadership", management association, charleston, sc. 21. levering, r.; moskowitz, m. (2000),"the 100 best companies to work for in america", fortune, vol.141, no.1, pp. 82-110. 22. martins, n. (2002),"a model for managing trust", international journal of manpower, vol. 23, no. 8, pp. 756757. 23. mayer, r. c.; davis, j. h. (1995),"an integrative model of organizational trust", academy of management review, vol. 20, no. 3, pp. 709-734. 24. nyabadza, g. w. (2003),"leadership at the peakthe 10th trait of effect leaders", servant leadership zimbabwe in dependent -aagm, february 7. 25. nyhan, r. c.; marlowe, h. a. (1997),"development and psycolometric properties of the organizational trust inventory", evaluation review, vol. 21, no. 5, pp. 614-535. 26. nyhan, r. c. (2000),"changing the paradigm: trust and its role in public sector an organizations", american review of public administration, vol. 30, no.1, pp.87-109. 27. robbins, s. p. (2002),"fundamental of organizational behavior", translated by ali parsaeiyan and mohammad a'rabi, cultural researches bureau, 5th edition, tehran, [in persian]. 28. ronald, w.; lawrence, d. (2007),"organizational trust, trust in chief executive and work satisfaction", public personnel management, vol. 36, no. 2, pp. 165-179. 29. russell, r. (2001),"the role of value in servant leadership", leadership & organizational development journal, vol. 22, no. 2. pp. 76-83. 30. sendjaya, s.; sarros, j. c. (2002),"servant leadership: its origin, development, and application in organizations", journal of leadership and organizational studies, vol. 9, no. 2, pp.57-64. servant leadership and organizational trust: the mediating effect of the leader trust and organizational communication emerging markets journal | p a g e | 78 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.21 | http://emaj.pitt.edu 31. schweiger, d. m.; denisi, a. s. (1991),"communication with employees following a merger: a longitudinal field experiment", academy of management journal, no. 34, pp. 110-135. 32. shaw, r. (1997),"trust in the balance", published by jossey-bass. 33. waddell, j. t. (2006),"servant leadership", school of leadership studies, regent university. 34. woolston, r. l.(2001),"faculty perceptions of dean transitions: does trust matter", dissertation abstracts international,umi, no.3007300. 35. yamaguchi, i. (2009),"influences of organizational communication tactics on trust with procedural justice effects: a crosscultural study between japanese and american workers", international journal of intercultural relations, no. 33, pp. 21-31. factors effecting e-learning preference: an analysis on turkish university students from government and private institutions dr. emine sevinç çağlar beykent university, istanbul, turkey | email: esevincc@hotmail.com dr. tülay turgut marmara university, istanbul, turkey | email: tturgut@marmara.edu.tr abstract information and communications technology has become an important tool in education. the use of online e-learning by members of educational communities is increasing, and this seems to be an accelerating tendency that will go on for the coming years. so it is important to identify and address students’ preferences or their anxieties in e-learning, to offer beneficial programs. although turkish educational system, especially in universities, is also taking action parallel to this global trend, there is only limited research on the subject. present study aims to fill this gap, and to identify effective factors while highlighting their contributions on e-learning preferences of university students. the sample of the study consist 606 university students from both government and private institutions which enables group comparisons. results indicate ‘reduction in training costs’ and ‘time flexibility of the programs’ are the most valued factors to prefer e-learning. on the other hand, having courses and the exams on the internet was not found to be much favorable. with respect to demographic variables such as age, gender, private/government university, department, and grade (the year at the university) group differences were identified. based on the findings, suggestions were presented. keywords: e-learning, university students, cost reduction in training, gaining time in education new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.59 | http://emaj.pitt.edu | mailto:esevincc@hotmail.com mailto:tturgut@marmara.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.59 | http://emaj.pitt.edu dr. emine sevinç çağlar, dr. tülay turgut emerging markets journal | p a g e |43 factors effecting e-learning preference: an analysis on turkish university students from government and private institutions dr. emine sevinç çağlar dr. tülay turgut i. literature review in the last century, the stunning development of information technologies has certainly changed the way we acquire knowledge. networking and internet usage has become an important tool in education. learning is no longer the same as before which was limited to lectures in the classroom. this facility commonly called ‘e-learning’, can be defined as the use of telecommunication technology to deliver information for education and training (aixia and wang, 2011). a number of other terms are also used to describe this mode of teaching and learning. they include online learning, virtual learning, distributed learning, network and web based learning. fundamentally, they all refer to educational processes that utilize information and communications technology. as naidu (2006) suggests, however, these labels refer to slightly different educational processes and they cannot be used synonymously with the term e-learning. the term elearning comprises a lot more than online learning, virtual learning, distributed learning, networked or webbased learning. as the letter “e” in e-learning stands for the word “electronic”, e-learning would incorporate all educational activities that are carried out by individuals or groups working online or offline, and synchronously or asynchronously via networked or standalone computers and other electronic devices (naidu, 2006). during recent years, e-learning culture is seen as essential to the future of education and the facilitation of life-long learning. by enabling learners to learn anytime and anywhere, interest in it has been growing not only for companies to train their employees but also for academic institutions to establish web-course learning systems. flexible access refers to access and use of information and resources at a time, place and pace that is suitable and convenient to individual learners rather than the teacher and/or the educational organization. it allows distance learners, to be in full or part-time employment and also be able to study at a time, place, and pace that suited their convenience. they would not be required to live or attend lectures in locations away from where they may be living and working. information and communications technology also enables the capture and storage of information of various types including print, audio, and video. it affords a wide range of opportunities to capture, store and distribute information and resources of all types and formats. along with text, pictures and illustrations, these include multimedia-based simulations of complex processes from all sorts of domains such as the biological and medical sciences, agriculture, engineering and educational practice which are not easily or cheaply accessible in real time and settings. it ensures the increasing access to information, as well decreasing cost. moreover; educational organizations see advantages in making their programs accessible via a range of distributed locations, including on campus, home and other community learning or resource centers. e-learning as an emerging new paradigm of modern education, is not without limitations or constraints. lack of access to the necessary technology infrastructure may b e counted in the first instance. without it there can be no e-learning. careful selection and matching of media attributes with learning and teaching strategies is another critical issue (naidu, 2006).academicians, educationists, and teachers should work together; and also familiarize themselves to benefit from it in the most efficient manner. but above all, an introduction of a new educational system must be assessed first place, in the light of students’ characteristics (bertea, 2009), (lee, 2004). literature indicates many cases in which students stop their online learning after their initial experience (aixia and wang, 2011). the lack of human interaction conceives a socially isolated environment in which the students need to apply self-disciplined schedule and strategies. what are the attributes needed to benefit most from this type of learning? what kind of factors will be influential on students’ positive approach for such systems? as existing research indicates; positive perceptions of technology, ease of access and use of internet, computer literacy, perceived usefulness, selfefficacy, motivation, patience, self-discipline, selfregulation are among factors affecting students’ attitudes toward e-learning and achievement on these programs (bertea, 2009), (drennan, kennedy and pisarski, 2005), (liaw, huang and chen, 2007), (nogueira and machado, 2008), (sharma et. al., 2007), (sun et. al., 2008). furthermore, some studies state the effect of national culture for e-learning preference, usability, and satisfaction (downey et. al. 2004), (mcfeeters, 2003), (sanchez-franco, martinez-lopez and martin-velicia, 2009). however; there is still minimal research with respect to these issues (sharma et. al., 2007). turkish educational system; at all levels of education is also moving to a trend that supports the use of information technologies. especially universities, whether government or private, are switching rapidly to technology based systems in parallel with the worldwide undulation. there are already several instances of distant learning programs or classes held on the internet. these facilities seem to accelerate with an incredible speed in the years ahead. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.59 | http://emaj.pitt.edu factors effecting e-learning preference: an analysis on turkish university students from government and private institution p a g e |44| emerging markets journal ii. method ii.1.sample: undergraduate students (n = 606) from one government (n = 248) and one private university (n = 358) in istanbul took part in the study (251 male, 354 female; 1 did not report gender). the mean age is 20,72 years (sd = 2.21). most of the students have computer (88,3%) and access to internet at their home (86,8%). distributions based on other characteristics are presented in table 1. table 1. distributions based on demographics frequency % department psychology 173 28,5 business administration 153 25,2 finance 111 18,3 logistics 69 11,4 architecture 57 9,4 other 36 5,9 missing data 7 1,2 total 606 100 grade 1.year 224 37,0 2.year 178 29,4 3.year 161 26,6 4.year 40 6,3 missing data 5 0,7 total 606 100 economic status high 107 17,7 middle-high 105 17,3 middle 349 57,6 low 42 6,9 missing data 3 0,5 total 606 100 computer use activities school 155 25,6 social 278 45,9 games 52 8,6 other 87 14,4 missing data 34 5,6 total 606 100 ii.2.measurement scales: e-learning preference was measured with questionnaire composed of seven items. five of the items were adapted from the scale developed by bertea (2009) based on mishra and panda’s (2007) scale to measure elearning attitudes of students. these items consist elearning issues of time management, e-learning teaching efficiency, need for advanced technical abilities, schedule flexibility, reducing costs. the cronbach’s alpha of the five items was indicated as 0.749 (bertea, 2009). the remaining two items were added by the researches. one of them directly asks whether the student would prefer elearning over classroom education, and the other asks whether they would prefer also having exams on-line. the cronbach’s alpha was 0.77 for seven items. turkish translation of items was held in two steps. items were first translated into turkish by the researchers and afterwards re-translated into english by a colleague who is capable of both languages. there found no difference in regard of meaning between original and re-translated items. all items were rated on a 6-point scale, where 1=totally disagree and 6=totally agree. besides of the scales indicated above; attendants’ demographic information (i.e. age, sex, university, faculty, year, perceived economic status, whether they have computer and internet access at home) was collected. ii.3.procedure: all participants were recruited during class. their course instructors distributed the questionnaires to the students, invited them to participate on a voluntary basis, and asked them to complete the questionnaire at class time. it was emphasized that the participants should not write their names or any identifying marks on the questionnaire. iii. results to start with, mean scores of answers for each of the seven statements reflecting preferences of students’ for e-learning were calculated. as can be seen in table 2, the two highest mean scores are in items representing the financial gains (mean=3,67) and time flexibility (mean=3,58). however; students were not very much in favor of having ‘courses’ (mean=2,09) and ‘exams’ (mean=2,52)via internet. table 2. mean scores on items for e-learning preference items for e-learning preference mean standard deviation 4.e-learning reduces students’ educational costs. 3,67 1,54 3.e-learning assures schedule flexibility. 3,58 1,56 2.presenting courses on the internet, thanks to a wealth of visual material makes learning more efficient 3,31 1,59 1. elearning offers the possibility to efficiently manage your time. 3,28 1,62 7. i would prefer to have exams on the computer. 2,52 1,67 volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.59 | http://emaj.pitt.edu dr. emine sevinç çağlar, dr. tülay turgut emerging markets journal | p a g e |45 5.e-learning is a learning environment which needs advanced technical knowledge and pc use. 2,41 1,20 6.i would prefer to have courses on the internet, rather than in classroom. 2,09 1,47 independent sample t-test was used to assess whether there is significant difference between private and government university students on e-learning preference. as shown in table 3, a significant mean difference between private and government universities was observed (t = 4,180, p<.001); that is private university students scored significantly higher on elearning preference. table 3: e-learning preference scores of private and government university students university t private govern ment m sd m sd df e-learning preference 3,12 0,94 2,78 1,01 4,180 *** 604 ***p<.001 further analyses were conducted to compare government and private university students for each item. results indicated significant group differences for all items except one (table 4). students of government and private institutions were equally valued taking exams on the computer, item 7. table 4. t-test results for government and private university students’ e-learning preference items university t private government mean sd mean sd d 1. e-learning offers the possibility to efficiently manage your time. 3,47 1, 61 3,02 1, 59 3,41 *** 604 2.presenting courses on the internet, thanks to a wealth of visual material makes learning more efficient 3,50 1, 53 3,02 1, 62 3,71 *** 604 3. e-learning assures schedule flexibility. 3,78 1,4 3,29 1, 61 3,83 *** 503, 66 4. e-learning reduces students’ educational costs. 3,81 1, 44 3,48 1, 65 2,48 ** 483, 17 5. e-learning is a learning environment which needs advanced technical knowledge and pc use. 2,49 1, 19 2,29 1, 19 1,99* 604 6. i would prefer to have courses on the internet, rather than in classroom. 2,21 1, 53 1,93 1, 38 2,35* 561, 89 7. i would prefer to have exams on the computer. 2,56 1,64 2,46 1,72 ,75 604 *p<.05; **p<.01; ***p<.001 in order to find out whether there is a difference between male and female students on e-learning preferences, for each statement independent groups t-test analyses are applied. one but for all items, the two groups are found to be not differentiated. on item 7, indicating ‘having exams on computer’ females (mean=2,40) with respect to male students (mean=2,70) are less likely in favor of the computer testing. to find out any group differences with respect to grade (year at the university)and department, one-way anova are used. detailed results for each item can be followed at tables 5 and 6 respectively. the groups were significantly differentiated for each item except 7 and 5. accordingly, freshman is lower in e-learning preference scores compared to the other three student groups. moreover, e-learning preference increases as the student’s grade moves up. this result implies that students as having more years at the university are more becoming in favor of elearning. with regard to department, architecture students are more favoring having classes on the internet whereas finance students are the least likely. table 5.anova results for grade (year at the university) 1. year n=22 4 2.yea r n=17 8 3.yea r n=16 0 4.yea r n=40 f 1. elearning offers the possibility to efficiently manage your time. m 2,82b 3,46a 3,58a 3,97a 11,577 *** s d 1,58 1,55 1,56 1,75 2. m 2,91b 3,48a 3,55a 3,85a 8,414 *** volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.59 | http://emaj.pitt.edu factors effecting e-learning preference: an analysis on turkish university students from government and private institution p a g e |46| emerging markets journal presenting courses on the internet, thanks to a wealth of visual material makes learning more efficient s d 1,66 1,53 1,46 1,53 3. elearning assures schedule flexibility. m 3,08b 3,78a 3,88a 4,31a 14,380 *** s d 1,57 1,50 1,40 1,60 4. elearning reduces students’ educationa l costs. m 3,25b 3,89a 3,93a 4,13a 9,638 *** s d 1,63 1,46 1,36 1,62 5. elearning is a learning environme nt which needs advanced technical knowledge and pc use. m 2,27 2,44 2,58 2,36 2,186 s d 1,28 1,14 1,11 1,26 6. i would prefer to have courses on the internet, rather than in classroom. m 1,86b 2,11b 2,19b 3,03a 7,507** * s d 1,42 1,51 1,35 1,76 7. i would prefer to have exams on the computer. m 2,53 2,31 2,65 2,97 2,202 s d 1,85 1,50 1,57 1,75 p<.05; **p<.01; ***p<.001 table 6.anova results for department psyc holo gy n=1 73 b a n= 15 3 fin anc e n= 111 log istic s n=6 9 archi tectur e n=57 ot he r n =3 6 f 1. . em 3,17 b 3,3 1b 2,7 9b 3,42 4,16a 3, 64 6,21 6** * learni ng offers the possi bility to effici ently mana ge your time. s d 1,49 1, 60 1, 60 1,65 1,59 1, 74 2.pre senti ng cours es on the intern et, thank s to a wealt h of visua l mater ial make s learni ng more effici ent. m 3,25 3, 29 2,7 7b 3,55 3,96a 3, 69 5, 431 *** s d 1,40 1, 61 1, 62 1,59 1,59 1, 72 3 . elearni ng assur es sche dule flexib ility. m 3,55 d 3,6 4a 3,0 3b 3,83 a 4,35a c 3, 44 5,75 8** * s d 1,35 1, 63 1, 55 1,45 1,63 1, 66 4. elearni ng reduc es stude nts’ educa tional costs. m 3,69 3,8 4a 3,1 0b 3,54 4,28a 4, 03 5,91 1** * s d 1,38 1, 62 1, 60 1,42 1,52 1, 55 5.elearni m 2,52 2, 46 2, 16 2,60 2,46 2, 47 1, 453 volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.59 | http://emaj.pitt.edu dr. emine sevinç çağlar, dr. tülay turgut emerging markets journal | p a g e |47 ng is a learni ng envir onme nt whic h needs adva nced techn ical know ledge and pc use. s d 1,16 1, 24 1, 19 1,11 1,16 1, 32 6. i woul d prefer to have cours es on the intern et, rather than in classr oom. m 1,91 b 2, 06 1, 87 2,36 2,65 a 2, 33 2, 830 * s d 1,27 1, 39 1, 49 1,61 1,68 1, 80 7. i woul d prefer to have exam s on the comp uter. m 2,34 2, 54 2, 42 2,97 2,86 2, 31 2, 061 s d 1,45 1, 60 1, 86 1,87 1,74 1, 78 *p<.05; **p<.01; ***p<.001 with respect to economic status, anova results indicate that students from high end prefer e-learning more than low economic status group on schedule flexibility and gaining time factors. for the rest of the items group differences were not significant. table 7.anova results for economic status of students high n=10 7 midhigh n=10 5 mid. n=34 9 low n=42 f 1. elearning offers the possibility to efficiently manage your time. m 3,78a 3,18 3,22b 2,86 b 4,650 ** s d 1,61 1,46 1,65 1,55 2.presentin g courses m 3,62 3,20 3,27 3,14 1,727 on the internet, thanks to a wealth of visual material makes learning more efficient s d 1,62 1,47 1,60 1,60 3. elearning assures schedule flexibility. m 3,92 a 3,48 3,55 3,21 b 2,653 * s d 1,51 1,42 1,60 1,52 4.elearning reduces students’ educational costs. m 3,71 3,71 3,69 3,40 0,480 s d 1,53 1,43 1,44 1,54 5.elearning is a learning environmen t which needs advanced technical knowledge and pc use. m 2,54 2,35 2,35 2,69 1,544 s d 1,23 1,05 1,19 1,49 6.. i would prefer to have courses on the internet, rather than in classroom. m 2,21 2,16 2,00 2,40 1,338 s d 1,41 1,48 1,43 1,88 7. i would prefer to have exams on the computer m 2,85 2,62 2,42 2,29 2,192 s d 1,68 1,68 1,66 1,70 *p<.05; **p<.01; iv. discussion the main purpose of this research was to analyze university students’ preferences towards elearning with respect to various factors. efficient usage of time and reduced educational expenses were found to be on top of the list as the most valued advantages of elearning. however, this result does not commend to fully move away from classroom education. still, mostly students prefer having courses and exams in a classical way. additionally; our analyses revealed significant group differences in many aspects as well. some of the assumed causes and implications are discussed below. first of all; the comparison test displayed that private university students are more willing to e-learning. actually, there might be numerous reasons for such a volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.59 | http://emaj.pitt.edu factors effecting e-learning preference: an analysis on turkish university students from government and private institution p a g e |48| emerging markets journal difference. but what comes to mind is that private universities are much better in terms of economic conditions and advanced technologies. on the other hand, especially in istanbul, private universities established in the city are built on a narrow field which restricts the students' alternate socialization areas (i.e. space for a range of different clubs). thus, students at private university able to reach technology but not enough space for alternate activities might more likely prefer elearning. additionally, there is difference in terms of economic status between government and private university students. in our sample, 43 percent of private university students and only 23% of government university students reported that they have enough money to spend easily. thus, most of the students at private universities belong to high socio-economic class families and for them it is not an issue possessing advanced technology personally which facilitates e-learning. with respect to grade; as the students reach higher grade, they prefer e-learning more. one reason for that maybe, the first year students need more social support, as they are new at the university environment. but as they get used to the system in years, they need less for such a face-to-face interaction and socialization. also, turkish youth undergo a process very difficult to enter the university that when they gain the entrance they most likely want to experience what a university is in real, rather than to see what it is in virtual. a limitation of this result is that the number of students from 4th year is much fewer than the first year attendants that it might not be accurate to compare their preference levels. however, most of the 4th year students start to work at part time jobs and it becomes somewhat difficult for them to attend classes at the university regularly. hence, double career status might explain why 4th year students prefer elearning more. this study which revealed some indications is thought as a preliminary study to display e-learning preference levels of university students and further studies are needed to extend the limits of knowledge on e-learning preferences. it will especially be much helpful to examine e-learning preference in relation to other variables to have a clearer vision on the issue. v. references aixia, d. & wang, d. (2011). factors influencing learner attitudes toward e-learning and development of e-learning environment based on the integrated e-learning platform. international journal of e-education, e-business, e-management and e-learning. vol. 1, no.3, pp. 264-68. bertea, p. (2009). measuring students’ attitude towards e-learnıng: a case study.the 5th international scientific conference e-learning and software for education.bucharest.http://faculty.ksu.edu.sa downey, s.; wentling,r.m.; wentling,t. & wadsworth, m.(2004). the relationship between national culture and the usability of an e-learning system. http://nathanstrenge.com drennan, j.; kennedy, j. &pisarski, a. (2005).factors affecting student attitudes toward flexible online learning in management education.the journal of educational research.vol.98, no.6, pp. 331-38. lee, i. (2004).searchingfornewmeanings of self-regulatedlearning in elearningenvironments.http://dasan.sejong.ac.kr/~inlee/set/ articles/searching_040426.pdf. liaw, s.s.; huang, h.m. & chen, g.d. (2007). surveying instructor and learner attitudestowarde-learning.journal of computers and education.vol.49, no.4, pp.1066-80. mcfeeters, e.f. (2003). the effects of individualism vs. collectivism on learner’s recall, transfer and attitudes toward collaboration and individualized learning. virginia polytechnic institute and state university.doctorate dissertation.scholar.lib.vt.edu mishra, s. & panda, s. (2007). development andfactor analysis of an instrumenttomeasurefacultyattitudetowards e-learning. asianjournalofdistanceeducation. vol 5, no 1, pp 27 33 naidu, s. (2006). e-learning: a guidebook of principles, procedures, andpractices. 2nd edition. commonwealtheducational media center forasia, new delhi, india. nogueira, j. &machado, c. (2008).teams in virtualclasses: an experientialperspective. technology, education, and development. http://cdn.intechopen.com/pdfs/9415/pdf sánchez-franco, m.; martínez-lópez, f. & martín-velicia, f. (2009). exploring the impact of individualism and uncertainty avoidance in web-based electronic learning: an empirical analysis in european higher education.journal of computers and education. vol52, no.3, pp 588-98j. sharma, s.; dick, g.; chin, w.w.; land, l.l. (2007).self-regulation and e-learning.proceedings of the fifteenth european conference on information systems, pp. 383-94., st. gallen university of st. gallen, retrieved in may 16, 2012 from http://is2.lse.ac.uk/asp/aspecis/2007157.pdf sun, p.; tsai, r.j.; finger, g.; chen, y. &yeh, d. (2008). what drives a successful e-learning? an empirical investigation of the critical factors influencing learner satisfaction.journal of computers &education.vol. 50, no.4, pp. 1183-1202. http://faculty.ksu.edu.sa/ http://nathanstrenge.com/ http://is2.lse.ac.uk/asp/aspecis/2007157.pdf microsoft word 19-250-1-ce.doc volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.19 | http://emaj.pitt.edu the pri̇ce of hi̇gher educati̇on and i̇ndi̇vi̇dual demand filiz gölpek gazikent university | e-mail: filiz.golpek@gazikent.edu.tr abstract the rise in the living standards in most of the world, the rise in population and schooling rates have increased the demand for higher education. the attribution of semi public property becomes determinant to decide whom will provide the supply and the production in semi public properties is realized by means of a supply and demand mechanism. the supply of higher education is mostly secured in accordance with the public demand as well as the resources available. in addition, the fact that higher education services have produced significant benefits has led to over demand. this situation relates to a simple economic rule that a commodity or service which costs almost nothing or little will increase until the mariginal benefit of its demand equals to 0 or almost 0. however, the educational supply and demand is difficult to identify in accordance to the supply and demand and balance of price as observed in the economic theory. the high profits that would be attracted in the future are significant factors influencing individual’s decisions for investment. the decision for investment depends on the possible return in the future, the cost of investment, and the current interest rates. higher education with investment purposes is influenced by these three factors and higher education is demanded more and more by individuals on the expectation that they will gain high profits in theory, it is accepted that the basic factors identifying the demand for higher education are in harmony with empirical research results in several countries including turkey. keywords: demand of higher education, price of higher education, returns of higher education, public finance in higher education this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.19 | http://emaj.pitt.edu price of higher education and individual demand emerging markets journal | p a g e | 52 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.19 | http://emaj.pitt.edu the price of higher education and individual demand filiz gölpek i. introduction   the rise in the living standards in most of the world, the rise in population and schooling rates as well as the scientific and technical developments have increased the demand for higher education. however the main reasons for such demand increase are that the higher education is provided almost free of charge, the current and capital expenses of institutions are met by public resources, and the educational investments bring about significant effects for both individuals and the community. these effects are reflected as benefits in varying degrees in each stage of education. generally speaking, social benefits are derived at the primary and secondary stages, and private benefits are obtained at the higher education level. the purpose of this study is an attempt to present a theoretical framework to show that private and social benefits of education are the main determinants of the demand for higher education. the study is comprised of 4 sections including the introduction and conclusion parts. the second section focuses on the private benefit (return) of education and analyses the public financial system in higher education. these are the main determinant for price of higher education and individual demand in higher education. in the third section, analyses the individual demand for higher education in the public system within a theoretical framework. the conclusion section emphasizes that private benefits may vary depending on the stages of education, and private benefits prevail particularly in higher education, and as a result the individual demand for higher education is increased. ii. the  price  of  higher   education   private returns of higher educati in a classical sense, education provides financial benefits to both individual and the society. private and social benefits values are emphasized in order to find out how much benefit both individuals and the society obtain. generally, the studies in this area point out that the social benefits predominate in the primary and secondary stages and the private benefits in higher education. private returns are benefits that individuals receiving education gain which are not reflected on the society. these benefits are obtained when individuals are to earn more in their future as their employment opportunities, productivity, and earning capacity increase with education. the benefits which are described in financial terms are compared with private costs and expressed as private rate of returns of an individual [1]. private return rate of education is higher education in africa (32%) and south america (23%) than developed countries (12%). private return rate of higher education in south america (the highest 24%-the lowest 14%) is about twice higher than that of secondary level (the highest 15%, the lowest 5%) [2], [3]. in brazil the private return rate of education of those in low socioeconomic status (11.4%), that of the workers in france (11.9%), that of those individuals in kenya whose parents have no education (8.5%) is lower compared to others [4]. in the usa, the private return rates for high school graduates is 13%, whereas the rate for college graduates is 20% [5]; the benefits of male university graduates is the price of higher education and individual demand emerging markets journal | p a g e | 53 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.19 | http://emaj.pitt.edu approximately 83% higher than those of primary school graduates [6]. the studies in turkey reveal that the private return rate at higher education level (16.2%) is approximately twice higher than social return rate (8.5%) [7]; the private return rate of public sector personnel graduated from engineering faculty (40.26%) is higher than their social return rate (32.93%) [8]. according to mean averages of the oecd educational data, the private return rates at higher education (11.5%-10.7%) are higher than those at secondary education level. these are shown on the table 1 below. table 1. private return rates at different education levels in various countries (%) the literature review suggests that, no matter what the level of development and economic systems of the counters are, there is always a positive relationship between education and salaries, and there salaries at the level of higher education are comparably high. university graduates can find well-paid jobs in countries facing workforce shortage. for instance a brazilian study shows that female high school graduates are 3-4 times more fortunate than primary school graduates in finding employment; and when compared with females of no educational background, female primary school graduates are employed twice more [9], [10]. according to the oecd mean averages, employment rates are 65% at primary level, 88% at secondary level, and 90% at higher education level. the rates in turkey are 72%, 79% and 82% respectively [11]. according to the data from the 2011 household workforce research, workforce entry rates among males are approximately 68% below high school level whereas among females the rates are 23%; at higher education level the rates are 86% and 73% respectively among males and females [12]. monthly salary of a university graduate in argentina ($ 494) is twice higher than that of a primary school graduate ($ 236) [13]; a university graduate in botswana earns almost 5 times more than an employee of no educational background (2.842 and 584 pula respectively), an average monthly salary of a university graduate (2.504 pula) is almost 6 times higher than that of an uneducated employee (346 pula), and almost 2 higher than that of a secondary school graduate [14]. in south africa, african males receive a salary increase of 27% when they move from secondary to higher education graduate status, and receive an increase of 16% when they move from primary to secondary school graduate status. white males, on the other hand, receive an increase of 8% and 15% respectively [15]. in turkey, when the level of education is concerned, the highest annual salary is obtained by graduates or post graduates, being the price of higher education and individual demand emerging markets journal | p a g e | 54 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.19 | http://emaj.pitt.edu 29.258 tl for the male employees, and 23.899 tl for the females [16]. public financial system in higher education a popular policy in several countries in the 70’s was to offer free education which was provided by the state governments to a large extent. the welfare state view lies at the centre of such a policy. this has resulted in financing educational expenditure through taxes rather than demanding from parents in several countries. such policies have been regarded as a way to provide equal opportunity and to spread higher education [17], [18]. the fact that the provision of education was controlled by the governments and subsidized by taxes has been based on some basic reasons such as imperfect market, external factors, equity and public domain arguments. more concrete justifications could be listed such as protection of minors, external factors, views of democracy, search for common values, equal opportunity, the effects of education on economic growth, imperfect capital markets, misinformation and monopolizitations [19], [20], [21], [22]. provision of public finance and subsidization of educational services by governments have lead to serious problems and created rapid-growing costs. as educational and other service costs and prices have increased, we have reached at a stage of welfare state crisis in which governments fail to provide free or low cost services [23]. in countries where there is a high share of public sectors, such as greece (100%), ireland (96.9%), spain (94.4%) and italy (88.2%), it is interesting to observe immense amount of suffering following the 2008 crisis. there are dramatic differences among the oecd countries. in terms of private sector shares set apart for higher education from gdp. while chile (85%), korea (79%), the usa (68%), australia (60%), israel (47%) and new zealand (43%) have the biggest share of private sector, several european countries hit the bottom in this respect. while the oecd mean average is 33%, the rate in turkey is 10%. while the share of public sector is 96.8% in 2008 in turkey, it has decreased to 90% in 2010 [24]. according to public financial system, the oecd mean average rates for private return of higher education is almost 3 times higher than social return rates, and this figure varies from 2 to 4 times in the countries involved [25]. several popular university programs enable their welltrained graduates to secure very high returns. despite the social benefits many programs provide, the private benefits still predominate. iii. individual  demand  for   higher  education   the fact that the main determinant of individual behaviour is to gain profits and to maximize them is regarded as the basic principles of economy. the high profits that would be attracted in the future are significant factors influencing individual’s decisions for investment. the decision for investment depends on the possible return in the future, the cost of investment, and the current interest rates [26]. if no investment is made, the easiest way to make income is to deposit money for interest return. there is a reverse functional relationship between interest rates and investment capacity. when the interest rates fall, the investments increase in the businesses and the economy as the opportunity for profits arises. in this respect, a rational business or individual faces three situations while making decisions within the framework of return rates and interest rates [27]. • if the interest rate is equal to return rate (i = r), there is no need for investment as the money deposited in a bank will produce the same profit. the price of higher education and individual demand emerging markets journal | p a g e | 55 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.19 | http://emaj.pitt.edu • if the return rate is higher than the interest rate (r > i), it will be profitable to invest. for this reason the conditions are said to be appropriate for investment. • if the return rate is lower than the interest rate (r < i), the investment will not attract profits. for this reason the resources should be utilized in other ways. according to this, if r > i in higher education, the demand will increase. in the case of i = r there will be no demand increase. if r < i, the demand will decrease. in addition, there will be no demand when the current value is equal to the cost. in other words, if present value (pv) = c, i = r and p = 1. if the present value (pv) is greater than the cost (pv > c), the demand will rise (r > i p < 1). in case of pv < c, the demand will decrease (r < i; p > 1). higher education with investment purposes is influenced by these three factors and higher education is demanded more and more by individuals on the expectation that they will gain high profits. the most pre-eminent study to explain the demand for higher education has been carried out by g.becker. becker (1967) [28] attempted to describe individualistic supply and demand in higher education and used the terms the private return of education (r) and the opportunity cost of investment (i). becker believed that higher education would produce more benefits than other stages of education and assumed that supply curve is fixed invariably. according to this, when the supply is fixed, individuals’ demand for more human capital will cause a rightward shift of the demand curve. however, if there are position vacancies in classes because of unutilized capacity or if there are buildings to be leased as schools, then the higher education supply curve may tend to be positive. in this case, as the demand for higher education increases the service quantity, therefore, productivity will increase. the horizontal axis shows the quantity of education whereas the vertical axis indicates concealed price of public assets. the demand curve of public assets in higher education is formed considering the assumption “if other conditions are unchanged” which is called upon on the other demand curve. these assumptions are primarily family income and pleasure as well as the prices of other goods, especially personal loan and interest rates. the demand curve of higher education is shown at fig 1 below. the price of higher education and individual demand emerging markets journal | p a g e | 56 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.19 | http://emaj.pitt.edu fig 1. the demand curve of higher education since a fall in the cost of higher education increases the r, the prices will drop and the demand will increase. similarly, an increase in the net income will increase the r. such an increase will drop the price and increase the demand. a fall in the return of the investment will decrease the price and increase the demand for higher education. however, as the presence of over demand increases p, it will lead to a drop in the higher education return rate, and the balance will be preserved at p = 1, in other words at i = r. we may use of the factors affecting the demand in preserving the balance; in the short run scholarships, donations, subsidy increase or decreases, and financing through credits could be used as a means of policy while ending the excess demand created especially when p < 1 or compensating for the shortage of demand when p >1. an important variable for investment policy for governments becomes clear here. if r is accepted as the rate of social return in higher education the governments maintain their marginal capacity increases until i = r when the other conditions are unchanged. a price of balance is said to be present all the time. g.akalın (1980) [29], who used this approach in higher education in turkey for the first time, analyzed the demand for education and stated that the excess demand for higher education results from the low price due to the costs involved. akalın, indicated in his study that the kind of investments regarding i in turkey are the interest rates of state or private bonds or the return rates of real estates and the small funds are attracted to these kind of investments in turkey the researcher, in calculating the price for higher education, used the interest rate for real estate as basis in the long run for the small investor (i = 9%) and calculated the private return rate accordingly (r = 10.5%) and reached the result that the higher education price is smaller then 1 (p = 9/10.5). if the price is smaller than 1 there will be excess demand, if bigger, we will have low demand. such result shows that the over demand for higher education results from the low price of higher education. for the demand and supply to be balanced (d = s), in other words for the price to be equal to 1 (p = 1) will be realized either when the investment rate is equal to the return rate (i = r) or when the cost of higher education is collected from the benefactor. iv. conclusion   the demand for higher education has been increased significantly all over the world as the rapid technological developments rendered higher education and life long learning necessary. since education is perceived as a means to increase the number of trained manpower in especially underdeveloped countries and higher education expenses are met by public resources, the individual demand for higher education has increased. as the literature reveals, there is a strong positive correlation between private return rates and the price of higher education and individual demand emerging markets journal | p a g e | 57 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.19 | http://emaj.pitt.edu the demand for higher education. the demand rice in higher education has made it necessary for the governments to provide academic staff, the facilities and financial support, pressuring us into opening new higher educational institutions. the fact that higher education services are semi public has made it necessary to use the public resources. the production in semi public properties is realized by means of a supply and demand mechanism. the attribution of semi public property becomes determinant to decide whom will provide the supply. the supply of higher education service is mostly secured in accordance with the public demand as well as the resources available. however, the educational supply and demand is difficult to identify in accordance to the supply and demand and balance of price as observed in the economic theory. it is accepted that the basic factors identifying the demand for higher education are the costs and increasing profits. the empirical research results are in harmony with the theoretical applications. it has been observed that income and proportional wage differences have influenced the enrolment figures positively, that the effects of indirect costs are negative, and there exist determining variables in the demand model for income and foregone earnings. similarly, students’ chance to get financial credits affects the demand for education. the most important factor of all is that higher education costs are met by public expenses. price of higher education and individual demand emerging markets journal | p a g e | 58 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.19 | http://emaj.pitt.edu v. references   1. woodhall, m.(1994), eğitim ekonomisi: toplu bir bakış, eğitim ekonomisi: seçilmiş yazılar, çev. yüksel kavak ve berrin burgaz, ankara: pegem yayınları no.14 2. hans,w. (2005), internationalization of higher education in argentina, usa:world bank 3. psacharopoulos, g. (1985), returns to education: a further update internatıonal and implications, the journal of human resources 20 (4), pp.117-128 4. vawda, a. (2001), human development network, education team, and, east asia and pacific regio. human development sector unit. the world bank, washington, dc 5. saxton, j. (2000), investment in education: private and public returns, joint economic committee united states congress, january, pp.3-7 6. vedder, r.(2004), private vs. social returns to higher education: some new cross-secional evidence, journal of labor research, fall, 25(4), pp.677-86 7. kesik, a. (2005), yükseköğrenimde yeni bir finansman modeli önerisi: bütünsel model. ankara: maliye bakanlığı, araştırma, planlama ve koordinasyon kurulu başkanlığı yayın no:2003/362 8. gölpek, f. (2008), adalet ve etkinlik amaçları bakımından yükseköğretimde finansman politikası: türkiye örneği, yayınlanmamış doktora tezi. uludağ üniversitesi, bursa, ss.272-79 9. the world bank (1997), world development report, washington d.c., pp.71 10. psacharopoulos, g. (2008), funding universities for efficiency and equity: research findings versus petty politics, education economics, 16(3), september, pp.245-50. 11. oecd, (2010), education at a glance, received from http://www.oecd.org/bookshop/ (12.03.2010) 12. tüi̇k, (2011), i̇şsizlik rakamları, haber bülteni, sayı:79 [online] retrieved on, 17-march-2011, at url: http://www.tuik.gov.tr 13. rozada, m. g. and menendez, a. (2002), public university in argentina: subsidizing the rich?, economics of education review 21(4), august, pp.348-351 14. siphambe, h.k. (2000), rates of return to education in bostwana, economics of education review 19(3), june, pp.291-300 15. wabu, g. and schultz, t. (1996), education returns acroos quantiles of the wage function: alternative explanations for returns to education by race in south africa, american economic rewiev 86(3), june, pp.584-609 16. tüi̇k, (2008), haber bülteni, sayı:79 [online] retrieved on, 17-march-2011, at url: http://www.tuik.gov.tr the price of higher education and individual demand emerging markets journal | p a g e | 59 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.19 | http://emaj.pitt.edu 17. aslan, m. h. (2002), eğitim finansmanının ekonomi politiği ve yükseköğretimde adil ve etkin finansman politikaları, liberal düşünce 7(28), ss. 225-46. 18. psacharopoulos, g (2008), funding universities for efficiency and equity: research findings versus petty politics, education economics, 16(3), september, pp.245-60. 19. le grand, j. and robinson, r. (1984), the economics of social problems. london: mcmillan press, p.58 20. cohn, e. (1979), the economics of education, cambridge: ballinger publishing. pp.258-67 21. coulson, a. (1996), markets versus monopolies in education: the historical evidence, education policy analysis archives-a peer-reviewed scholarly electronic journal, 4(9), june. received from http://www.epaa.asu.edu , (21.7.2008) 22. mcmahon, w. (1994), eğitimin dışsallıkları, eğitim ekonomisi: seçme yazılar (çev. yüksel kavak ve berrin burgaz). ankara: pegem yayınları, ss.29-38. 23. gershuny, j. iand giarini, e. (eds.), (1987), the future of service employment i̇n the emerging service economy, new-york: pergamon books, pp.105-15. 24. oecd (2010), education at a glance, received from http://www.oecd.org/bookshop/ (12.03.2010) 25. psacharopoulos, g (2008), funding universities for efficiency and equity: research findings versus petty politics, education economics, 16(3), september, p.246 26. uluatam, ö. (1987), makro i̇ktisat, savaş yayınları, 6.baskı, ankara, ss.145. 27. unay, c.(2001), makro ekonomi, vipaş a.ş, bursa, 8.baskı, ss.80-81 28. becker, g. (1967), human capital and personal distribution of income, ann arbor, university of michagan press, p.1-12 29. akalın, g. (1980), yükseköğretim karma malına maliyetfayda analizi’nin uygulanması, ankara: ankara ün. siyasal bil. fak. yayınları no: 444,ss. 82-93 the price of higher education and individual demand emerging markets journal | p a g e | 60 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.19 | http://emaj.pitt.edu vi. appendix  a.   the rate of return is based on the principle of calculating the discount rate which renders the present value of benefit trends that will result from investments equal to the present value of cost. the required procedure in this technique is to select the rate by which the benefits will be discounted. in case the investment is financed through debts for a long period the real interest rate paid is accepted as the rate of discount. if no loan is received during the implementation of the project, then the interest rate of the central bank which is applied to long term bonds could be accepted as discount rate as these bonds carry almost no risks. in the following formula r indicates the return rate, the return refers to profit differences, and the m stands for the cost. private return rate (prr) includes total private costs and return rates. accordingly, the rate of private return is calculated by the following formula. prr private : 0 = return ö / (1+r) t m 0 = [private return t / (1+r) t ] (private cost) microsoft word emaj1sorhun 1-12 (1).docx   volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey engin sorhun bureau of theoretical and applied economics, (beta – theme) university of strasbourg, france, | e-mail: sorhun@unistra.fr abstract this paper aims to reveal the eventual impacts of european union (eu) membership process and other conventional factors on the city-size distribution of a candidate country (turkey). i can state main results as follows: analyzing from different estimation methods the direct effect of the eu reforms on agglomerating forces rather than congesting forces are revealed to be dominant for turkey. however, the main impact of the eu membership process has positive but modest coefficient that indicate the weak willingness of the country for eu reforms. keywords: economic itegration, agglomeration, city-size distribution, eu, turkey. jel classification: f15, f22, r12, r23 this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu   does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 1 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey engin sorhun i.introduction   one of the powerful regularities observed in rank-size distribution of cities is the zipf’s law. the law points out that there is a logarithmic proportional relationship between rank and size of cities in linear form. in empirical studies, when cities are ordered by population size, a linear regression of their log-rank on their log-size yields a very high r2 and the slope coefficient of the log-size is generally found to be close to unity. when zipf’s law holds, the largest city in the sample is more than b times as large as the bth largest city1 . as well as its empirical side, the theoretical side of the zipf’s law is open to discussion. despite the early empirical discovery, the quest for a robust theoretical model to explain such an empirical regularity remains elusive. for example christaller (1933) had described the rank-size distribution as “a most incredible law” which was “nothing more than just playing with numbers”. on the other hand, getz (1979) further claimed that the descriptive model of the rank-size distribution seems quite founded at least on the theoretical level. though the criticism on the law’s theoretical inadequacy had long lasted the theoretical side is recently challenged by mansury and gulyas (2006) with the agent-based approach, by krugman (1996) with the scale economy based model, by page (1999) with the spatial computational model, and by brakman et all (2001) with the congestion model. however, this empirical report is completed by a functional specialization at the various levels of the urban hierarchy due to the indispensable linkage between geographical regularity and economic logic. the hierarchies of the urban networks are apparently very stable in time. however it does not necessarily correspond to equilibrium. but it is a dynamic processes impelled in the past. it is known since christaller (1933) and lösch (1940) that a balanced space must comprise various categories of agglomerations: the small cities are used as interface between the rural world and the urban world, the average cities between the small centers and the regional metropolises, and so on, the capitals offering a privileged connection with the rest of the world. the sizes of the centers are decreasing according to the rank which they occupy in the hierarchy but their number is multiplied. the urban population residing in the small cities must be more important than that of the intermediate cities, the cumulated manpower of the intermediate cities superior to that of the regional cities, etc. to the capital. it is known since christaller (1933) and lösch (1940) that a balanced space must comprise various categories of agglomerations: the small cities are used as interface between the rural world and the urban world, the average cities between the small centers and the regional metropolises, and so on, the capitals offering a privileged connection with the rest of the world. the sizes of the centers are decreasing according to the rank which they occupy in the hierarchy but their number is multiplied. the urban population residing in the small cities must be more important than that of the intermediate cities, the cumulated manpower of the intermediate cities superior to that of the regional cities, etc. to the capital.by certain models of geographical economy     does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 2 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu (krugman, 1991; abdel-rahman and wang, 1995) and of endogenous growth (waltz, 1996; martin and ottaviano, 2001; baldwin, 2001) becomes visible. on the other a spatial duality may be observable as a result of center-periphery logic. according to parr (1985), the more the urban system is established the more the populations tend to be redistributed towards the small and average cities because of the negative effects (pollution, congestion, increase in ground rents… etc) which touches the great agglomerations. afterwards decentralization takes place at the final stages of development when the urban congestion and the improvement of the infrastructures (in particular of transport and communication) lead to a delocalization of the activities towards periphery (henderson et al, 1995). the “rank-size” distribution gives in fact a synthetic description of the spatial organization. and it provides a modeling tool by means of which one watches the inter-temporal trend and development in the system of cities of a country and compares this trend with those of other countries. as rank-size distribution is a dynamic process fed in the course of the time by many geographical, social, politic and economic factors, international or regional integration movements can be considered as institutions with potential of feeding this dynamic process. in this respect, the eu, one of the most successful integration projects, can be thought to have more or less impact on the dynamics in the urbanization trends and the development in the rank-size distributions of its member and candidate countries. this paper aims to empirically reveal whether or not the eu with its reform impulsion has impact on the dynamic city-size distribution of turkey. the rest of the paper is organized as follows: section ii presents two main estimators of zipf’s law and outlines estimation model. section iii describes data. and finally section iv presents main empirical findings and conclusion, respectively. ii.estimators  for  zipf’s  law   a. pareto estimator in brief, the zipf’s law posits that if one ranks cities in descending order according to their population size, and then estimates the following equation: log !! = ! − !"#$ !! (1) where α is constant, mj is the size of city j (measured by its population), and rj is the rank of city j (rank 1 for the biggest city, rank 2 for the second biggest city, etc.). in empirical research β is the estimated coefficient, giving the slope of the log-linear relationship between city size and city rank. it means that if and only if β =1, the zipf’s law holds. if β is smaller than unity, a more even distribution of city sizes results than the zipf’s law predicted. that is to say, if 0=β all cities are of the same size. if β is larger than unity, the large cities are larger than the zipf’s law predicted, implying more urban agglomeration (the larger city is more than b times as large as bth largest city. empirically, if the rank-size distribution holds, the question to pose is whether β =1 or not. the empirical validity of zipf’s law is debated by many authors (see black and handerson, 1999, 2003; gabaix and ionnides, 2004; krugman, 1996; soo, 2005). and even if they have different points of views, they reach a consensus on two points: (i) zipf’s law holds proximately but not absolutely (the coefficient’s value varies round the unity), and (ii) zipf’s law changes over time2. the differences in rank-size distribution among different countries results from the balance between agglomerating forces and spreading forces which depend mostly on the economic development stages in which     does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 3 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu countries are found. that is to say, change in β value over time depends on the economic as well as social and political parameter changes. following a progressive pattern, economic development begins with β well below unity. as economy develops, β value increases (agglomerating forces). and when the economy reaches a certain maturity level, then β value starts to decrease (congestion or spreading forces)3. a. hill estimator estimation of the β values by many authors diverge according to whether they use the method of least squares ordinary (ols) or the hill (1975) estimator. gabaix and ioannides (2004) show that the hill estimator (who is that of the method of the maximum of probability, when the zipf’s law is checked), for a sample of n cities with sizes nj mmm ≥≥1 is equal to: ! = !!! (!"#!!!"#!)!!! !!! (2) while the standard error for ! !  is given by the equation: 2 1 2 1 2 1 1 2 1 )1(1 1 )ln(ln )1( − ∧ − = + ∧ − ⎟⎟ ⎟ ⎟ ⎟ ⎠ ⎞ ⎜⎜ ⎜ ⎜ ⎜ ⎝ ⎛ − − − = ∑ n n mmj n j jj n ββ σ (3) if )1(1 ∧∧ > β σ β n , the standard error of the estimate of β is equal to: 2 1 2 1 2 1 1 2 12 )1(1 1 )ln(ln )( − ∧ − = +∧∧ − ⎟⎟ ⎟ ⎟ ⎟ ⎠ ⎞ ⎜⎜ ⎜ ⎜ ⎜ ⎝ ⎛ − − − = ∑ n n mmj n j jj n β ββσ (4) according to gabaix and ioannides (2004), the hill estimator, being more robust, corresponds better to the low part of the rank-size distribution of the cities that the estimator obtained through least squares ordinary (ols). using ols soo (2005) rejects the empirical validity of the law of zipf’s law for 73% of the cases (53 of 73 countries). this supports the results of rosen and resnick (1980) who invalidated the assumption that a pareto coefficient is equal to unity (82% of the cases of their sample). however through hill estimator, invalidation rate in rosen and resnick (1980) is reduced to 40% of the cases (soo, 2005)4.     does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 4 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu to begin, write the estimation model first: !!",! = !! + !!!"#!",!!! + !!!"#$#%!"→!",! + !!!"#$#%!"→!",! + !!!"#$#%!→!,!",! +!!!"#$#%!→!,!",! + !!!"!",! + ! (5) !"#!",!!!  represents average city-size of the big cities and agglomerations for which criteria were defined in the next section. !"#$#%!→!,!",! is the number of migrant from intermediary cities to big cities, and !"#$#%!→!,!",!  from big cities to intermediary cities in turkey. and also international immigration flows was included as follows: !"#$#%!"→!",! represents the number of immigrant from the eu to turkey, and from turkey to the eu,  !"#$#%!"→!",!. and the major factors having impact on the city-size distribution of turkey are presented as follows: wage growth: variance in average salary over time. wage-gap: the wage differential between average wage level of the eu-15 and that of turkey. price-gap: the gap in price level (measured by cpi) between the eu-15 average and that of turkey. gdp growth: gdp growth rate of turkey. openness: measurement of trade as % of gdp. fdi: yearly foreign direct investment flows of turkey in % of gdp. pop-growth: population growth rate of countries. basically this signifies that city-size distribution measured through β value, of country (turkey, tr ) at time t depends on city-size at time 1−t , population flows from intermediary cities to big cities, from intermediary cities to abroad, from big cities to intermediary cities, from big cities to abroad at time t , and also on eu membership process. and in order to evaluate the eu’s effect, or more clearly the effect of the reforms realized in the path of eu membership on city-size distribution, i used an overarching index that is composed of 42 partial indicators selected by the eu councils (structural indicators of european economic reformsieer) for monitoring former, new members and candidate countries (see table 1). using the sieer indicators i developed the global structural indicator (gsi). what does such an indicator serve? using it one can reveal to what extent a country converges to the eu-15 average. it is expected that the more an economy realizes economic reforms in the way of eu membership process, the more its β -value (or city-size distribution) is subject to deep change over time. the question is whether or not membership process accelerates agglomerating forces rather than spreading forces, or vice versa. though agglomerating forces are actually powerful within most of the eu-15 countries enter more or less under the effect of spreading forces thus one can think that convergence to the eu-15 threshold is a sign of activation of spreading forces in a member or accessing country. nevertheless considering their development stages it would be more reasonable to expect that at the beginning of the convergence with the eu-15, membership process marked by a set of reforms will enhance β -value. following an explanation about the gsi this prediction will be subsequently tested.     does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 5 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu in addition to conventional variables showing the effects of the principal factors on city-size distribution gsi is used to capture the reform driven effect of the eu membership process. gsi deducted from 42 partial take value from -1 to +1. 0 means that country is found at the average level of the eu-15. if a country’s gsi is greater than 0, then this country positively exceeds the eu-15 average. otherwise, country remains behind the eu-15’s average. integrating gsi into the estimated model i aim to reveal the direct effect of the eu membership process through reforms on the dynamic city-size distribution of turkey. as for econometric side using time series data arrangement will be more appropriate to the case. iii.  data     two city definitions (city proper and agglomeration definitions5) and calculation method of β value (pareto and hill estimators) are used. i use the city proper definition and the agglomeration definition with the threshold of more than 1.000.000 inhabitants. according to this demarcation, there are 18 city-proper-defined cities and 9 agglomerations in turkey (see table 2). however it implicitly suggests that the uneven distribution of large scale areas and small scale areas leads to migration flows between regions with more than 1.000.000 inhabitants and regions less than 1.000.000 inhabitants. full data set with time series cover the period between 1985 and 2010. data shortage limits time length of the study. as for dynamic change in city-size distribution one needs as large time perspective as possible. while the data set covering 25-year-period yields modest information about the development in city-size distribution it yields considerable information about the impact of eu reforms on this. the whole data were provided from the turkish statistical institute and eurostat. the rank-size distribution is calculated for the time period. and i estimated the pareto and hill estimators so as to cover the whole period. iv. empirical  results  and  conclusion     it is useful to take a larger look at the evolution in turkey’sβ value. graphics 1 and 2 show the course that turkey’s β value followed between 1955 and 2011. it is important especially because this period covers even the years when immigration towards western european countries and migration towards large urban areas gained acceleration. thus those intensifying population within-flows and out-flows is considered to have determining impact on β value. they emphasize two main movements: first, the vague of migrants towards big cities within the country accelerated agglomeration process by diminishing the size of the intermediary cities in favor of the growing size of the big cities over time. and second, the immigration towards western europe that is mostly fed by intermediary cities contributed to the acceleration in agglomeration process by undermining the size of the intermediary cities. the graphics show two things about city-size distribution: first, β value has stabilized since 1995 after it sharply and rapidly rose until 1995. second, the strongest acceleration inβ value in favor of agglomeration was observed between 1985 and 1995. at the beginning of the 1990’s turkey’s β value reached the unity and her ranksize distribution curve took linear form at that time. and turkish big cities, compared with intermediary cities, started to become larger than they had been before. to see more clearly to what extend factors having impact on turkey’s β value i estimated the equation 2 through time series regression. and i run the model according to different city definitions and estimators.     does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 6 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu as it is presented in table 3 remarkably 2r is the highest for pareto estimator based on agglomeration definition. this supports brakman et al (2001) prediction that agglomeration definition fits better the zip’s law. nevertheless there is not too large differentiation among estimated coefficients. it is important for credibility of the estimation. wage and price gaps negatively influence β while fdi, openness, growth rate and progress in average wage level have positive impact on β value. that is to say, two kinds of factors, agglomeration-decelerating and agglomeration-accelerating factors work together. expected signs are satisfied as in the previous literature: gdp growth and openness are positively the most powerful effects while wage-gap and price-gap are negatively most powerful effects. now deal with the backbone of the model: migration and immigration flows and eu membership process. city-size distribution largely depends on city population at time )1( −t , 1,ln −ttrm . its effect varies in ln-term between 0.20 and 0.36. ttrjiimig ,,ln → represents population movement from intermediary city to big city at time t ( sign of agglomerating forces) and ttrijimig ,,ln → represents population movement from big city to intermediary city at time t ( sign of “resistant factors”6). migration towards agglomerations within the country is a very determinant factor in city-size distribution. its impact on β value varies between 0.05 (min.) and 0.10 (max.). considering the development stage of turkey we can tell that the impact of “congesting forces”, ttrijimig ,,ln → , are limited. however, the estimations confirm the prediction that beyond a certain threshold of the development process congesting forces would appear. turkey has not reached that threshold yet. as for immigration, turkish immigration to eu-15 teutrimig ,ln → has relatively smaller effect than return immigration from the eu-15, ttreuimig ,ln → , has. this situation can be explained as follows: immigration vague generally occurs from intermediary cities to abroad. for this reason a fall in intermediary cities’ population causes a relative raise in big cities’ population and a change in β value so as to indicate acceleration in agglomeration process within the country. for this reason teutrimig ,ln → gives positive sign. and contrarily, returns immigrants coming back to intermediary cities create a reverse effect. return immigration to intermediary cities counterbalance the relative raise in β value. for this reason ttreuimig ,ln → gives negative sign. we see clearly the impacts of agglomerating forces, ( ttrjiimig ,,ln → , teutrimig ,ln → ), are superior to that of resistant forces ( ttrijimig ,,ln → , ttreuimig ,ln → ). this shows that for turkey agglomeration process will continue. the direct effect of the eu on the dynamic in city-size distribution is revealed through eu variable (gsi) that captures economic structural progress of countries in the way of eu membership. its estimated coefficient is found positive but modest (between 0.06 and 0.09) compared with those of other variables. this finding explicitly shows that eu membership process activates through reforms certain dynamics pushing β value. considering the upward movements of the estimated β value (see graphics 1 and 2) one can say that eu membership process has impulsively contributed to the city-size evolution within turkey. on the other hand whether this impact is modest or strong depends primarily on the willingness of the country for reforms. a weak coefficient may be explained by such a reasoning.     does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 7 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu v.references   1. abdel-rahman, h. and wang, p. (1995), toward a general-equilibrium theory of a core-periphery system of cities, regional science and urban economics, 25, pp. 529-546. 2. auerbach, f. (1913): das gesets der bevolkerungsknzentration. petermann's mitteilungen, 59:74-76 3. baldwin, r.e. (2001), core-periphery model with forward-looking expectations, regional science and urban economics, 31, pp. 21-49. 4. black, d. and henderson, v. (1998), spatial evolution of population and industry in the united states, the american economic review, vol. 89, no. 2, papers and proceedings of the one hundred eleventh annual meeting of the american economic association (may, 1999), pp. 321-327 5. black, d. and henderson, v. (1999), a theory of urban growth, journal of political economy, 107(2), pp. 252-84. 6. black, d. and henderson, v. (2003), urban evolution in the usa, journal of economic geography, 3, 343372. 7. brakman, s, garretsen, h., and van marrewijk, c. (2001), an introduction to geographical economics, cambridge, uk: cambridge university press (third edition, 2005). 8. christaller, w. (1933), die zentralen orte in suddeutschland, iéna ; english translation c.w. baskin, 1966, central places in southern germany, englewood cliffs, prentice-hall. 9. embrechts, p., kluppelberg, c, mikosch, t. (1997), modelling external events for insurance and finance, springer, new york. 10. eurostat (2008), eurostat data set, www.eurostat.eu, [acceded 10/12/2007] 11. gabaix, x., ioannides, y. (2004), the evolution of city size distributions, handbook of regional and urban economics, in: j. v. henderson & j. f. thisse (ed.), handbook of regional and urban economics, edition 1, volume 4, chapter 53, pages 2341-2378 12. getz, m. (1979), optimum city size: fact or fancy? law and contemporary problems, vol. 43, no. 2, growth policy in the eighties (spring, 1979), pp. 197-210 13. henderson, v., kuncoro, a., and turner, m. (1995), industrial development in cities, journal of political economy, 103(5), pp. 1067-1090. 14. hill, b.m. (1975), a simple approach to inference about the tail of a distribution, annals of statistics 3, pp 1163-1174. 15. hill, b.m. (1996a), the self-organizing economy, blackwell. 16. hill, b.m. (1996b), confronting the mystery of urban hierarchy, journal of the japanese and international economics, 10:399-418. 17. krugman, p. (1991), geography and trade, mit press. 18. krugman, p. (1996), the self-organizing economy, blackwell 19. krugman, p. and livas-elinzondo r. (1996), trade policy and the third world metropolis, journal of development economics, 49(1), pp. 137-50. 20. lösch a. (1940), die räumliche ordnung der wirtschaft, iéna, g. fischer, english translation (1954), the economics of location, new haven, yale university press. 21. mansury, y. and gulyas, l. (2006), the emergence of zipf’s law in a system of cities: an agen-based simulation approach, journal of economic dynamics & control, in the course of publishing. 22. martin, p. and ottaviano, g.i.p. (2001), growth and agglomeration, international economic review, 42, 947–968. 23. page, s. (1999), on the emergence of cities, journal of urban economics, 45, 184-208.     does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 8 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu 24. parr, j.b. (1985), a note on the size distribution of cities over time, journal of urban economics, 18(2), pp. 199-212. 25. pareto, v. (1897), cours d’économie politique, lausanne, switzerland:rouge. 26. pumain d. and moriconi-ebrard f. (1997), city size distributions and metropolisation, geojournal, n°43-4, pp.307-314. 27. rosen, k. t., resnick, m., (1980), the size distribution of cities: an examination of the pareto law and primacy. journal of urban economics 8 (2), 165{186. 28. rosenstein-rodan, p. (1943), problems of industrialization in eastern and south-eastern europe, economic journal, 53, 2002-211. 29. soo, k.t. (2005), zipf’s law for cities: a cross-country investigation, regional sciences and urban economics, 35, 239-263. 30. turkish statistical institute (2011), the census 2011. 31. zipf, g.k. (1949), human behavior and the principle of least effort, addison-wesley press 32. waltz, u. (1996), transport costs, intermediate goods, and localized growth, regional science and urban economics, 26, 671–695. table 1: structural indicators of european economic reform 1. headline indicators gross domestic product employment research and development spending ict (inf. com. tech.) expenditure prices in network industries business investment trade integration at risk of poverty before and after social transfers long-term unemployment dispersion of regional employment rates further education greenhouse gas emissions 5. economic reform prices market structure in network industries public procurement state aids 2. general economic background labour productivity employment growth inflation rate unit labour cost growth public balances general government debt 6. social cohesion inequality of income distribution persistent risk of poverty population living in jobless households 3. employment effective active exit rate gender pay gap in unadjusted form tax rate on low wage earners life-long learning accidents at work unemployment rate 7. environment energy intensity of the economy volume of transport relative to gdp modal split of transport urban air quality municipal waste renewables in electricity consumption 4. innovation and research spending on human resources level of internet access science and technology graduates patents venture capital investments     does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 9 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu graphic 1: city-size distribution of turkey with pareto estimator 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0 1,1 1,2 city-size distribution of turkey (1955-2010) with pareto est. β years cityprop agglom graphic 2: city-size distribution of turkey with hill estimator 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 0,70 0,75 0,80 0,85 0,90 0,95 1,00 1,05 1,10 1,15 1,20 city-size distribution of turkey (1955-2010) with hill est. β years cityprop agglom       does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 10 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu table 2 : city size according to city proper and agglomeration definitions city name city proper agglomeration adana* 2.006.650 1.611.262 ankara* 4.466.756 4.140.890 antalya* 1.789.295 1.127.634 balikesir 1.118.313 649.423 bursa* 2.439.876 1.979.999 diyarbakir 1.460.714 855.389 gaziantep* 1.560.023 1.342.518 hatay 1.386.224 681.665 mersin* 1.595.938 1.056.331 i̇stanbul* 12.573.836 11.174.257 i̇zmir* 3.739.353 3.175.133 kayseri 1.165.088 895.253 kocaeli 1.437.926 894.242 konya* 1.959.082 1.412.343 manisa 1.319.920 841.059 k.maras 1.004.414 584.726 samsun 1.228.959 725.111 s.urfa 1.523.099 919.832 total 43.775.466 27.020.367 source: turkish statistical institute, the census 2011 * denotes agglomerations.     does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 11 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu table 3: the impacts of the variables on the city-size distribution of turkey with pareto with hill estimator city proper urban agglomeration city proper urban agglomeration variables i ii iii iv 3.121001 (0.73413) 6.441375 (0.140473) 9.111630 (0.012121) 10.222454 (1,232587) (+) 0.259721 (3.717440) 0.262350 (7.164872) 0.200405 (6.166015) 0.365517 (2.149015) (+) 0.221015 (3.155731) 0.200444 (5.009813) 0.140792 (4.020072) 0.162852 (3.789456) (-) -0.081410 (-3.341472) -0.102580 (-4.090404) -0.071334 (-4.004401) -0.050019 (-2.237846) (-) -0.039284 (2.921424) -0.031783 (-4.161622) -0.060229 (-3.960131) -0.056560 (-6.000450) (+) 0.037678 (2.964034) 0.008158 (5.122181) 0.042414 (4.005118) 0.039844 (4.689547) lnwage-growth 0.047812 (5.723450) 0.041840 (4.937915) 0.033515 (4.783017) 0.050214 (3.852465 lnwage-gap -0.099504 (-5.050471) -0.059819 (-3.950544) -0.050024 (-5.321180) -0.062889 (-5.964713) lnprice-gap -0.066694 (-4.274024) -0.071989 (-4.417751) -0.045556 (4.785651) -0.082146 (4.242240) lngdp-growth 0.112042 (3.730001) 0.120013 (3.931110) 0.094415 (5.389067) 0.078254 (5.208540) lnopenness 0.0861333 (4.132394) 0.114404 (4.197476) 0.050642 (3.941546) 0.089999 (3.789524) ln fdi 0.069888 (5.111413) 0.091902 (3.160041) 0.059841 (5.078484) 0.0902148 (4.665659) lnpop-gowth 0.031111 (5.102224) 0.022214 (3.664478) 0.021111 (6.113331) 0.048521 (6.568500) (+) 0.031122 (4.198751) 0.041000 (4.325646) 0.032147 (4.686861) 0.025840 (5.165847) 0.76 0.80 0.54 0.58 all values (out of constant terms) are significant at 0.1. t values are presented in parenthesis. β β 0α 1,ln −ttrm ttrjiimig ,,ln → ttrijimig ,,ln → ttreuimig ,ln → teutrimig ,ln → ttreu , 2r     does eu-integration change agglomeration process? the impact of eu membership process on the city-size distribution of turkey emerging markets journal | p a g e | 12 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.35 | http://emaj.pitt.edu endnotes: 1 although auerbach (1913) is considered as the first scholar who observed the empirical regularity in the size of distribution of cities this phenomena was recognized “zipf’s law” due to zipf (1949) who propagated this regularity. what zipf did is that he had tried to approximate the distribution of city sizes with a pareto distribution. this is also known « power law ». this basically says that the pareto exponent of the distribution of city sizes is equal to unity. 2 for example look at empirical studies on the usa, caroll (1982) says that zipf’s law does not always hold for the united states. rosen and resnik (1980) find that the pareto coefficient is equal to 0.84 for the usa. black and handerson (1998) showed that the slope of the city-size distribution slowly increased in the usa over the course of the twentieth century. see also dobkins and ioannides (2000) and eaton and eckstein (1997) who find for japan and france that zipf’s law nearly holds and the coefficient changed over time. i will explain in the next section from what the differences between the empirical studies realized with the same data result. 3 for example, looking at the graphics 1 and 2, we can say that turkey is found at a stabilized level of its agglomeration process. see sorhun (2007) for more detailed comparative study covering the new member and accessing countries of the eu. 4 with a better determination of the standards errors, the hill method thus provides an estimation of the pareto coefficient which leads to a more systematic checking of the zipf’s law. nevertheless, this estimation method is subject to many criticisms, in particular as for its capacity to represent the lognormal distribution of the cities since their demographic growth is not independent of their size, which is a condition of rejection of the zipf’s law (embrechts, kluppelberg and mikosch, 1997; pumain and moriconi-ebrard, 1997). 5 brakman et al (2001) describe two ways in term of the definition of a city. the firs one is to limit the city to its legal boundaries, the so-called city proper (like in rosen and resnick, 1980). the second one is to define the city as the agglomeration (like in black and handerson, 1998) that is thought to constitute an economic unit and to put out official city definitions. 6 essentially, agglomeration forces and spreading (or congestion/disagglomeration forces) works against each others. but considering the development levels of the new member and accessing countries i decided that it would be better to rename and interpret “spreading forces” as “resistant factors” to agglomeration. microsoft word 15-253-1-ce.doc volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty m. sukru akdogan sevki ozgener erciyes university | e-mail: akdogans@erciyes.edu.tr nevsehir university metin kaplan aysen coskun nevsehir university nevsehir university abstract with the growth of international trade and travel, consumers are increasingly confronted with foreign products and services. but some negative attitudes towards foreign products can arise from several factors such as previous or ongoing political, military, economic, or diplomatic events. thus, both consumer ethnocentrism and consumer animosity have become important constructs in marketing. the purpose of this study is to investigate whether consumer ethnocentrism and consumer animosity affect repurchase intent towards u.s. products and whether this impact is moderated by customer loyalty. the findings of the research indicate that consumer ethnocentrism increases consumer animosity for the sampling. the present study also denotes that both consumer ethnocentrism and animosity have a negative impact on repurchase intent toward u.s. products in turkey. according to the results of regression analyses, customer loyalty may not be an important moderating factor between consumers’ animosity and repurchase intent toward u.s. products. however, customer loyalty moderated the relationship between consumer ethnocentrism and repurchase intent toward u.s. products. further implications for turkish consumers in supermarkets in the province of nevşehir are discussed. the value of future research is also acknowledged. keywords: consumer ethnocentrism, consumer animosity, customer loyalty and repurchase intent this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 1 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu the effects of consumer ethnocentrism and consumer animosity on the repurchase intent: the moderating role of consumer loyalty m. sukru akdogan sevki ozgener metin kaplan aysen coskun i. introduction   ethnocentrism and animosity as concepts associated with marketing management and organizational behavior are fairly new. both ethnocentrism and animosity are variables associated with the origin of a product. ethnocentric consumers believe that buying foreign products hurts the domestic economy and national employment. animosity refers to remnants of antipathy, or hostility towards a country (jimenez and san martin, 2010: 34-45). consumer ethnocentrism and consumer animosity are considered to have an influence on customers’ perception of the goods and services offered. in fact, consumer animosity and consumer ethnocentrism have a negative effect on customers’ repurchase intent to foreign products. but it is commonly known that there is a positive relationship between customer loyalty and repurchase intent. in this context, the goal of this study is to investigate the moderating role of customer loyalty on the relationships between consumer animosity consumer ethnocentrism, and repurchase intent toward u.s. products. ii. consumer   ethnocentrism   ethnocentrism has a negative influence on the evaluation and purchasing intentions of consumers, although that may vary within cultures and between different country-of-origin products (jiménez torres and san martín gutiérrez, 2007: 67). shimp and sharma (1987) apply ethnocentrism to the study of marketing and consumer behavior. they defined consumer ethnocentrism as a belief held by consumers on the appropriateness and indeed morality of purchasing foreign-made products. consumer ethnocentrism implies the normative belief that purchasing domestic products is more beneficial than purchasing foreign goods. previous studies found that scores on the cetscale are related inversely to willingness to purchase imports, perceptions of the quality of imported goods, cultural openness, education, and income (shimp and sharma, 1987; netemeyer et al., 1991). particularly, consumers who hold strong ethnocentric beliefs are more likely to evaluate foreign products negatively than are those who do not hold such beliefs. those who believe that it is wrong to buy foreign goods also tend to perceive those goods as lower in quality than domestic goods; ethnocentric consumers prefer domestic goods not only because of economic or moral beliefs, but also because they believe that their own country produces the best products (klein et al., 1998: 92). in the minds of ethnocentric consumers, the purchase of foreign-made products is wrong because it hurts the domestic economy, causes loss of jobs, and is unpatriotic. therefore, it is anticipated that ethnocentric consumers tend to be the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 2 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu biased towards domestic products (evanschitzky et al. 2008: 9). ethnocentric consumers will tend to reject people, symbols and values that are culturally dissimilar, while intra-cultural objects will become recipients of pride and attachment (herche, 1994: 6). consumer ethnocentrism is positively related but distinct from consumer animosity. klein and ettensen (1999) suggest that consumer ethnocentrism contributes to a consumer’s propensity to avoid buying foreign products in general, while animosity is directed towards a specific country (rose et al., 2009: 331). however, there are limited numbers of studies on consumer ethnocentrism and repurchase intent to foreign goods and services in turkey. iii. consumer  animosity   with the growth of international trade, an increasingly diverse array of products of different national origins is now available in many countries throughout the world. this has resulted in greater interest in examining consumer attitudes towards products of different national origins. because consumer ethnocentrism and consumer animosity substantially affect the multinational firms’ investment decisions and foreign capital flows. most research has been conducted in large industrialized countries such as the us, france, germany, and chinese those have large internal markets and a wide range of domestic alternatives or brands in most product categories (klein et al., 1998; witkowski, 2000: nijssen and douglas, 2004; bahaee and pisani, 2009). there are a few studies related with consumer ethnocentrism and consumer animosity in turkey. consumer animosity is defined as the remnants of antipathy related to previous or ongoing political, military, economic, or diplomatic events – will have a direct, negative effect on consumers’ purchase behavior in the international markets (ettenson and klein, 2005; riefler and diamantopoulos, 2007). consumer animosity refers to strong negative emotions toward purchasing products from a disliked nation or group. the majority of consumer animosity studies have examined the attitudes of the members of one nation towards the products of another nation (rose et al., 2009: 330). examples are numerous and range from reports of jewish consumers avoiding the purchase of german-made products to the boycott of french products by australian and new zealand consumers because of the recent nuclear tests made by france in the south pacific (klein et al., 1998: 90). if consumers think a foreign nation damages their own country, they will be likely to show animosity towards that specific country. the emotional nature of animosity shows how international tensions can have repercussions on relationships between persons of different nationalities. that is, consumer animosity towards a country and their consequences are associated with political behaviour; consumers indirectly protest about international events. both ethnocentrism and animosity would probably have some influence on consumer behaviour which is preceded by cognitive and affective aspects (jiménez torres and san martín gutiérrez, 2007: 4). witkowski (2000) studied u.s. consumers’ animosity toward chinese products and showed the negative impact of animosity on consumers’ purchasing decision. similarly, ettenson and klein (2005) analyzed the impact of australian consumers’ animosity on attitudes towards french goods: the results of study showed that australian consumers’ animosity toward france was negatively related to their willingness to purchase french products. on the other hand, bahaee and pisani (2009) investigated the relationship between iranian consumers’ animosity and u.s. products. the results suggested that the antecedent demographic variables of education, age and foreign travel experience are inversely related to the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 3 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu consumer animosity whereas women and students tend to hold greater consumer animosity feelings than men and non-students. additionally they found a strong and significant inverse relationship between iranian consumer animosity and intention to buy u.s.-made products. however, in turkey, the studies about consumer animosity and repurchase intent to the goods and services of foreign countries are rather few in number. iv. customer  loyalty   at the heart of many firm strategies is the desire to develop and to maintain close relationships with customers. accordingly, the creation of customer loyalty is a strategic objective for most company in global competitive markets. as customer loyalty may act as a barrier to customer switching behavior, it has an impact on the development of a sustainable competitive edge. oliver (1997) defines it as “a deeply held commitment to re-buy or re-patronize a preferred product/service consistency in the future, thereby causing repetitive same-brand or same brand-set purchasing, despite situational influences and marketing efforts having the potential to cause switching behavior.” customer loyalty is a function of perceived product superiority, personal fortitude, social bonding, trust, emotional attachment, and their synergistic effects (ogba and tan, 2009: 135; pitta et al., 2006: 422). moreover, hwang and wen (2009) suggest that customer loyalty depends on positive word-of-mouth, a resistance to switching, identification with the service, and a preference for a particular service provider among competition. the benefits of customer loyalty to a provider of either services or products include lower customer price sensitivity, reduced expenditure on attracting new customers; and improved organizational profitability (rowley, 2005: 574). loyal customers are customers who hold favorable attitudes toward the company, commit to repurchase the product/service, and recommend the product to others (bowen and chen, 2001: 214). loyal customers are less likely to switch to a competitor due to a given price inducement, and these customers make more purchases compared to less loyal customers (wong and sohal, 2003: 497). there is a positive relationship between customer loyalty and repurchase intent to foreign goods and services. in this study, it will be analyzed whether customer loyalty as a moderate variable will reduce or not the impact of customer ethnocentrism and customer animosity on the repurchase intent to u.s goods and services. v. repurchase  intent   in this study, repurchase intention is accepted as dependent variable. repurchase intention (ri) is defined the individual’s judgment about buying again a designated service from the same company, taking into account his or her current situation and likely circumstances (hellier et al., 2003: 1764). ri is one of the most appropriate dependent variable in any system of relationships designed to develop management insight and improved strategic planning and service delivery. customers’ repurchase intent depends on the value obtained in their previous transactions such as: appropriate performance criteria (benefits), competition, cost considerations, customer satisfaction (olaru et al., 2008: 555), mood and past experiences, affect and perceived value, convenience and customer familiarity (hume, 2008: 354). as we (it is) explained above, this study is needed because the researches relevant to the relationship between consumer’ animosity, consumer ethnocentrism and repurchase intent are limited. in this context, this study examines the effects of consumer ethnocentric tendencies and consumer animosity on repurchase intent. the following hypothesis will be tested in this respect: the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 4 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu h1: consumer ethnocentrism will be negatively related to repurchase intent. h2: consumer animosity will be negatively related to repurchase intent. h3: consumer ethnocentrism will be positively related to consumer animosity. h4: customer loyalty will moderate the relationship between consumer ethnocentrism and repurchase intent. h5: customer loyalty will moderate the relationship between consumers’ animosity and repurchase intent. vi. about  figure  1   methodology the sampling consists of turkish consumers in supermarkets in the province of nevşehir in turkey. interviewers were used to distribute questionnaires to 500 subjects. of consumers who responded, 208 provided useable questionnaires on all study variables for a response rate of 41.6 per cent. this rate is an acceptable response rate for this kind of study (özgener and i̇raz, 2006). repurchase intent was designated as the dependent variable in this study while consumer animosity, consumer ethnocentrism were considered as the independent variables. we used a 17-item scale called cetscale (consumer ethnocentric tendencies scale) to assess consumers’ ethnocentric tendencies developed by shimp and sharma (1987). the cetscale is comprised of 17 likert-type items anchored by 1 = strongly disagree and 7 = strongly agree. the 14items cetscale instrument had reliability (cronbach’s alpha) of 0.93. usually, a value of 0.70 in the cronbach’s alpha is considered adequate in order to ensure reliability of the internal consistency of a questionnaire (nunnally, 1978). similarly, we used three-item war animosity and four-item economic animosity adapted from klein et al. (1998) for measuring animosity, also, we used a single-item to measure general animosity developed by klein et al. (1998). this scale is reliable (0.94). on the other hand, customer loyalty was measured via a nine-item scale. the questionnaire was adapted from taylor et al. (2004) and modified to fit the turkish supermarket industry. participants responded on a 5-point likert-type scale dictating to the extent which they agree with each statement as it reflected their present work environment (1 = strongly disagree, 5 = strongly agree). the instrument had reliability (cronbach’s alpha) of 0.86. for measuring repurchase intent, a fouritem 5-point likert scale (1 = strongly disagree, 5 = strongly agree) was adapted from zeithaml et al. (1996), cronin et al. (2000), wang et al. (2004) and pavlou (2003). the scale showed adequate reliability. the cronbach’s alpha coefficient was 0.94. the results the demographic profiles of turkish consumers are presented in table 1. the sample consisted of 122 (53.5 percent) females and 106 (46.5 percent) males. 52.6% of those responding had less than 25 ages. 36.0 percent of the respondents were married and 64.0 percent were single. in terms of education levels, 2.5% of the respondents had graduated from primary school, 45.2 % from secondary school, 30.0% from high school, 25.4% held bachelor of science degrees, and 12.7% had master’s degrees. moreover, nearly half of the consumers had a foreign language (58.3%) and only 18.0 of the respondents had to travel abroad. as students represent a very large majority (41.7%) of the sample, we divided the occupation category into student and non-student. the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 5 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu when household income levels are taken into consideration, it is seen that the respondents to the survey are taken place widely in level of lower class (30.7 percent), lower middle class (38.2 percent), upper middle class (25.4 percent) and upper class (5.7 percent) of the sample. the 63.6% of the respondents had a monthly income between tl 577 and tl 2500. vii. about  table  1   this study proposed a model for empirically analyzing the relations between consumer ethnocentrism, consumer animosity and repurchase intent towards u.s. products. table 2 reports means, standard deviations, correlations among variables, and cronbach’s alpha coefficients. as predicted, consumer ethnocentrism was positively related to consumer animosity (r=0.359, p<0.01), supporting h3. however, both consumer ethnocentrism (r=-0,214; p<0.01) and consumer animosity (r=-0,259; p<0.01) were found to be negatively related to customer loyalty. similarly, consumer ethnocentrism (r=-0,378; p<0.01) and consumer animosity (r=-0,371; p<0.01) were negatively related to repurchase intent. thus, h1 and h2 were supported. moreover, customer loyalty was found to be positively related to repurchase intent at the 0.01 level. this result suggests that repurchase intent is largely a function of consumer loyalty. viii. about  table  2   moderated hierarchical regression was used to test the hypotheses related to the constructs. initially, the block of control variables were introduced into the model, followed by the appropriate independent and moderating variables. the variance inflation factors (vifs) associated with each regression coefficient (ranging from 1,079 to 2,921) was all smaller than the suggested threshold of ten indicating that multicollinearity is not a problem (morrow-howell, 1994). in addition, correlations between variables ranged from 0.566 to -0.378 and were significant at a minimum level of 0.01. given that none of the bivariate correlations was greater than 0.80, we can assume that multicollinearity is not a problem in data (grewal et al., 2004). in model 1, control variables were entered in the analysis. the results in table 3 suggest that the overall model was significant (r2=0.111; f(5221) = 5,499; p<0.01). that means that 11.1% of the variance in repurchase intent was explained by the control variables. the results showed that only education had a significant effect on repurchase intent. in model 2, consumer ethnocentrism, consumer animosity and customer loyalty were entered in the analysis. model 2 was statistically significant for repurchase intent (r2=0.439; f(8218) = 21,285; p<0.01). as it can be observed, the regression coefficients representing the main effects of consumer ethnocentrism and consumer animosity on repurchase intent are negative and significant. the result showed that consumer ethnocentrism (b= -0.155; p <0.01) and consumer animosity (b= 0.157; p <0.01) were significant predictors of repurchase intent. but customer loyalty had a positive and significant effect on repurchase intent (b= 0.503; p<0.05). in model 2, consumer ethnocentrism, consumer animosity and customer loyalty explained additional 32.8 percent of the variance in repurchase intent. ix. about  table  3   model 3 includes the interaction effects on repurchase intent. the results showed that model 3 was significant (r2=0.491; f(10-216)=20,877; p<0.01). model 3 showed that the interaction of consumer ethnocentrism and customer loyalty was positive and significant on repurchase intent (b= 0.849; p< 0.01). thus, h4 was supported. that is to the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 6 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu say, customer loyalty moderated only the relationship between consumer ethnocentrism and repurchase intent. however, the interaction of consumers animosity and customer loyalty had a positive but not statistically significant effect on repurchase intent (b= 0,125; p>0.01). thus, h5 was not supported. customer loyalty did not moderate the relationship between consumer’ animosity and repurchase intent. the interaction term explained additional 5.3 percent of the variance in repurchase intent. x. conclusion   world economies are very much dependent on each other. when one economy suffers, it is unavoidable that other countries’ economies will be affected by the crisis, which in turn affects international trade and multinational companies’ behaviours. moreover, when there is an economic and political crisis, it is possible that consumers give more priority to the purchase of local products. therefore, international trade activities are becoming a central part of the world economy, and it is recognized that there is a greater necessity to predict consumers' attitudes toward both domestic and foreign products. thus the relationships between consumer’ attitudes (consumer animosity and consumer ethnocentrism) and repurchase intent are in need of investigation. particularly, consumer animosity and ethnocentrism are strong in developing countries such as turkey. however, little research has investigated the relationships between ethnocentrism and consumers’ animosity toward foreign products in developing countries. consumer animosity and consumer ethnocentrism have gained considerable attention in strategic marketing literature as components of foreign product purchase behaviour. through the results of this study, we contribute to a better understanding of how multinational companies may effectively overcome the complex problems or dilemma to consumer animosity and consumer ethnocentrism. thanks to the findings of the study, managers of multinational companies could do well to manage marketing efforts or at least not take severe steps that may be difficult to reverse. this research investigated the impact of consumer animosity and consumer ethnocentrism on repurchase intent. previous studies suggested that consumer ethnocentrism was positively related to consumer animosity (rose et al., 2009). in parallel with the previous studies, we identified a significant and positive relation between consumer ethnocentrism and consumer animosity. however, both consumer ethnocentrism and consumer animosity were found to be negatively related to customer loyalty for the sampling. at the same time, consumer ethnocentrism and consumer animosity were found to be negatively related to repurchase intent toward u.s. products, which is consistent with the findings of witkowski (2000), ettenson and klein (2005), and bahaee and pisani (2009). the anticipated negative effect of attitude towards u.s. products was confirmed. furthermore, customer loyalty was found to be positively related to repurchase intent. according to the results of regression analyses, customer loyalty may not be an important moderating factor between consumers’ animosity and repurchase intent toward u.s. products. however, the findings of this study show that customer loyalty has a moderator effect on the interaction of consumer ethnocentrism and repurchase intent toward u.s. products. therefore, it plays a crucial role in providing repurchase intent the overall results show that animosity and consumer ethnocentrism significantly affect the willingness to purchase u.s. products. that is, the findings of this study suggest that when deciding on purchasing a product, some turkish consumers are less likely to consider products and services of u.s. companies. the present study also denotes that both consumer ethnocentrism and animosity have a the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 7 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu negative impact on repurchase intent toward u.s. products in turkey. this suggests that u.s companies and multinational companies in turkey should pay more attention to turkish nationalistic tendencies. the findings of this study need to be interpreted with the following limitations in mind. first limitation is that the results cannot be construed to be representative of all consumers in supermarkets around the world due to the highly limited nature of the sample. second, because these findings may be subject to cultural and economics factors, there is also a need to replicate the study in cultural and economic contexts that differ from the present one. third, the majority of the respondents could be reported drastic negative views due to u.s. supporter attitude of armenia related to turkisharmenian political problems. future research should test the effect of perceived quality on the relationships between consumer animosity and repurchase intent. in addition, in the aspect of sampling respondents, this study selected only turkish consumers in supermarkets in the province of nevşehir-turkey. follow-up studies can extend this scope to other consumer groups. finally, it would be interesting to test the proposed model in several product categories. the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 8 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu xi. references   1. bahaee, m. and pisani, m. j. (2009), iranian consumer animosity and u.s. products: a witch’s brew or elixir?, international business review 18: 199–210. 2. bowen, j. t. and chen, s. (2001), the relationship between customer loyalty and customer satisfaction, international journal of contemporary hospitality management 13 (5): 213-217 3. cronin, j. j., brady, m. k. and hult, g. t. m. (2000). assessing the effects of quality, value, and customer satisfaction on consumer behavioral intentions in service environments, journal of retailing, 76(2): 193–218. 4. ettenson, r. and klein, j. g. (2005), the fallout from french nuclear testing in the south pacific: a longitudinal study of consumer boycotts, international marketing review, 22 (2): 199-224. 5. evanschitzky, h., wangenheim, f.v., woisetschla, d. and blut, m. (2008), consumer ethnocentrism in the german market, international marketing review, 25 (1): 7-32. 6. grewal, r., cote, j. a. and baumgartner, h. (2004). multicollinearity and measurement error in structural equation models: implications for theory testing. marketing science, 23 (4). 519-530. 7. hellier, p. k., geursen, g. m., carr, r. a. and rickard, j. a. (2003), customer repurchase intention: a general structural equation model, european journal of marketing, 37 (11/12): 1762-1800. 8. herche, j. (1994), ethnocentric tendencies, marketing strategy and import purchase behaviour, international marketing review, 11 (3): 4-16. 9. hume, m. (2008). understanding core and peripheral service quality in customer repurchase of the performing arts, managing service quality, 18 (4): 349-369. 10. hwang, j. and wen, l. (2009), the effect of perceived fairness toward hotel overbooking and compensation practices on customer loyalty, international journal of contemporary hospitality management, 21 (6): 659675. 11. jiménez torres, n. h. and san martín gutiérrez, s. (2007), the purchase of foreign products: the role of firm’s country-of-origin reputation, consumer ethnocentrism, animosity and trust. universidad de burgos.documento de trabajo 13/07, october. 12. jimenez, n. h. and san martin, s. (2010), the role of country-of-origin, ethnocentrism and animosity in promoting consumer trust. the moderating role of familiarity, international business review, 19 (1): 34-45. 13. klein, j. g., ettenson, r. and morris, m. d. (1998), the animosity model of foreign product purchase: an empirical test in the people's republic of china, the journal of marketing, 62 (1): 89-100. the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 9 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu 14. klein, j. g. and ettenson, r. (1999) consumer animosity and consumer ethnocentrism, journal of international consumer marketing, 11 (4): 5-24. 15. morrow-howell, n. (1994). the m word: multicollinearity in multiple regressions. social work research,18 (4), 247-251. 16. netemeyer, r., durvasula, s. and lichtenstein, d. (1991), a cross-national assessment of the reliability and validity of the cetscale, journal of marketing research, 28 (august): 320–327. 17. nijssen, e. j. and douglas, s. p. (2004), examining the animosity model in a country high level of foreign trade, intern. j. of research in marketing, 21: 23–38. 18. nunnally, j. (1978), psychometric theory (mcgraw-hill, new york). 19. ogba, i. and tan, z. (2009), exploring the impact of brand image on customer loyalty and commitment in china, journal of technology management in china, 4 (2): 132-144. 20. olaru, d. purchase, s., and peterson, n. (2008), from customer value to repurchase intentions and recommendations, journal of business & industrial marketing 23(8): 554–565. 21. oliver, r. (1997), satisfaction: a behavioral perspective on the consumer, mcgraw-hill, new york, ny. 22. özgener, ş. and i̇raz, r. (2006), customer relationship management in small-medium enterprises: the case of turkish tourism industry, tourism management 27: 1356-1363. 23. pavlou, p. a. (2003), consumer acceptance of electronic commerce: integrating trust and risk with the technology acceptance model, international journal of electronic commerce, 7 (3): 101-34. 24. pitta, d., franzak, f. and fowler, d. (2006), a strategic approach to building online customer loyalty: integrating customer profitability tiers, journal of consumer marketing, 23 (7): 421–429. 25. riefler, p. and diamantopoulos, a. (2007), consumer animosity: a literature review and a reconsideration of its measurement, international marketing review, 24 (1): 87-119. 26. rose, m., rose, g. m. and shoham, a. (2009), the impact of consumer animosity on attitudes towards foreign goods: a study of jewish and arab israelis, journal of consumer marketing, 26 (5): 330–339. 27. rowley, j. (2005), the four cs of customer loyalty, marketing intelligence & planning, 23 (6): 574-581. 28. shimp, t. a. and sharma, s. (1987,). consumer ethnocentrism: construction and validation of the cetscale. journal of marketing research, 24: 280-289. 29. taylor, s. a., celuch, k. and goodwin, s. (2004), the importance of brand equity to customer loyalty, journal of product & brand management, 13 (4): 217-227. the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 10 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu 30. wang, y., lo, h. p. and yang, y. (2004). an integrated framework for service quality, customer value, satisfaction: evidence from china’s telecommunication industry. information systems frontiers, 6(4): 325– 340. 31. witkowski, t. (2000), ‘effects of animosity toward china on willingness to buy chinese products’. in g. mcclean, e. kaynak, and o. aliagra (eds.), managing in a turbulent international business environment (pp. 470–477). hammelstown, pa: the international management development association. 32. wong, a. and sohal, a. (2003), service quality and customer loyalty perspectives on two levels of retail relationships, journal of services marketing, 17 (5): 495-513. 33. zeithaml, v. a., berry, l. l. and parasuraman, a. (1996). the behavioral consequences of service quality. journal of marketing, 60(2): 31–46. the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 11 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu figure 1: research model table 1: descriptive statistics of turkish consumers demographic characteristics f (%) demographic characteristics f (%) gender female male marital status married single age less than 25 26-30 3135 36-40 31 or more average household size 122 106 82 146 120 40 24 24 20 53.5 46.5 36.0 64.0 52,6 17,5 10,5 10,5 8,8 education level of consumers primary school secondary school high school bachelor’s degree master's degree or phd monthly household income level (turkish lira) lower class (576 <) lower middle class (577–1500) upper middle class (1501–2500) upper class (>2501) occupation student 8 103 30 58 29 70 87 58 13 95 3,5 45,2 13,2 25,4 12,7 30,7 38,2 25,4 5,7 41,7 h3 h2 h5 h4 h1 consumer ethnocentrism repurchase intent consumer animosity consumer loyalty the effects of consumer ethnocentrism and consumer animosity on the re-purchase intent: the moderating role of consumer loyalty emerging markets journal | p a g e | 12 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu number of people less than 2 3-5 6-8 9-11 12 or more 39 146 36 3 4 17,1 64,0 15,8 1,3 1,8 non-student foreign language education of consumers yes no foreign travel level of consumers yes no 133 133 95 41 187 58,3 58,3 41,7 18.0 82.0 table 2: descriptive statistics and intercorrelations among study variables variables mea n std. deviatio n 1 2 3 4 1.consumer ethnocentrism 3,19 0,84 (0.93) 2. consumer animosity 3,45 0,82 ,359(**) (0.94) 3. customer loyalty 2,07 0,71 -,214(**) -,259(**) (0.86) 4. repurchase intent. 2,05 0,93 -,378(**) -,371(**) ,566(**) (0.94) ** correlation is significant at the 0.01 level (2-tailed). emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu strategies for competitive advantage in electronic commerce siamak azadi universiteti politeknik i tiranes | e-mail: irmitash@yahoo.com abstract despite rapid and sustained development of electronic commerce, many companies doing e-business are still in the investment and brand-building phase and have yet to show a profit. however, as e-businesses shift their focus from building a customer base to increasing revenue growth and profitability, they should reevaluate their current business strategies, if any, and develop strategies that provide a clear path to profitability. this study uses mccarthy‘s four marketing mix model and porter‘s five competitive forces model to identify strategies for internet companies that respond to the five competitive forces and thereby achieve a competitive advantage. the study provides significant new insights into the development and implementation of e-business strategies that contribute to increased profit. keywords: e-business, business strategy, marketing mix, competitive forces, profitability, competitive advantage this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu mailto:irmitash@yahoo http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://emaj.pitt.edu/ global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 59 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu strategies for competitive advantage in electronic commerce siamak azadi i. introduction e-commerce is fundamentally changing the economy and the way business is conducted. ecommerce forces companies to find new ways to expand the markets in which they compete, to attract and retain customers by tailoring products and services to their needs, and to restructure their business processes to deliver products and services more efficiently and effectively. however, despite rapid and sustained development of ecommerce, many companies doing e-business are still in the investment and brand-building phase and have yet to make a profit (zwass 1998). many e-businesses (or internet companies) have focused on the visual attractiveness and ease of use of their web sites as the primary method of increasing their customer base. however, as e-businesses shift their focus from building a customer base to increasing revenue growth and profitability, they should re-evaluate their current business strategies, if any, and develop strategies that provide a clear path to profitability. this study uses mccarthy's (1960) four marketing mix model and porter's (1980, 1985) five competitive forces model to identify strategies for internet companies (or dot.coms) that respond to the five competitive forces and thereby achieve a competitive advantage. the overall goal is to provide significant new insights into the development and implementation of e-business strategies that contribute to increased profit. this research is organized around two questions: 1) what impact does the internet have on mccarthy‘s four marketing mix (product, price, promotion, and place) and porter‘s competitive forces (the threat of new entrants, rivalry among existing firms, the threat of substitutes, the bargaining power of suppliers, and the bargaining power of buyers)? 2) what strategies can be derived from the four marketing mix that will affect the five competitive forces and thereby bring a competitive advantage to e-businesses? ii. global crisis effects the world economy is mired in the worst financial crisis since the great depression. what first appeared as a sub-prime mortgage crack in the united states housing market during the summer of 2007 began widening during 2008 into deeper fissures across the global financial landscape and ended with the collapse of major banking institutions, precipitous falls on stock markets across the world and a credit freeze. these financial shockwaves have now triggered a full-fledged economic crisis, with most advanced countries already in recession and the outlook for emerging and other developing economies deteriorating rapidly, including those with a recent history of strong economic performance. the crisis has already had a severe impact on global commodity markets with far-reaching implications for the prospects of the developing world at large. commodity prices have been highly volatile during 2008. most prices surged in the first half of 2008, continuing a trend that had begun in 2003. trends in world market prices reversed sharply from mid-2008, however. oil prices have plummeted by more than 60 per cent from their peak levels of july to november. the prices of other commodities, including basic grains, also declined significantly. in the outlook, most of these global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 60 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu prices are expected to even out further along with the moderation in global demand. growth of world trade decelerated to 4.3 per cent in early 2008, down from 6.4 per cent in 2007, owing mainly to a decline in imports by the united states. united states imports, which account for about 15 per cent of the world total, have registered a decline in every quarter since the fourth quarter of 2007 and dropped as steeply as 7 per cent in the second quarter of 2008. growth in the volume of world trade had dropped to about 3 per cent by september 2008, to about one third of the rate of growth a year earlier. in the outlook, global trade is expected to weaken further in 2009. owing to their limited exposure to the mortgage market derivatives that brought down major banks in the united states and europe, financial systems in most developing countries initially seemed shielded from any direct impact from the international financial crisis. growing risks have emerged through other channels, however, as investors have started to pull back resources from emerging market economies and other developing countries as part of the deleveraging process of financial institutions in the developed countries. unlike in recent years when the spread varied significantly across regions and countries to indicate investor discrimination among countryspecific risks, the latest surge has been uniform, suggesting that contagion and aversion to investing in emerging markets has taken hold among investors. spreads are expected to remain high in 2009, as the strains in global credit markets linger and also as capital flows to emerging market economies are projected to drop further. our society is facing a financial crisis, an economic crisis, and as recent research is increasingly showing, a humanitarian crisis. recession has hit the entire world. wherever we go everybody is talking about it and each and every trade is affected by it. the declining quality of work opportunities, barriers to employment, exploitation and the failure of income support programs to protect families from debilitating poverty impact everyone. while the country‘s increasing rates of incarceration impact communities of color disproportionately, our willingness to punish formerly imprisoned people indefinitely affects all of our lives negatively, as we make it impossible for them to contribute to our common wellbeing. the marginalization of poor immigrants of color helps to pull down labor standards for everyone, making work increasingly precarious for all workers. in the larger economic picture, the creation of populations who are unemployed and underemployed at far higher rates than the societal norm, and who remain locked out of stable employment, contributes to the country‘s overall levels of inequality. high levels of inequality are predictive of the overall lack of a robust national economy. removing barriers to equal employment for whole populations of people is one very obvious way to begin dismantling inequality in employment and help rebuild the national economy. in this recession, poverty could grow massively. as the economic crisis continues, deep recession could push 25% of middle-class families into more serious financial distress. the danger is higher for families of color, with 33% of blacks and 41% of latinos at risk of falling out of the middle class and into poverty (j. huezo et al. 2009) according to the bureau of labor statistics, eight of the 10 occupations projected to generate the most jobs by 2016 are low-wage jobs in the service sector (a. bernhardt and c. owens, 2009). these are precarious jobs that will make more and more workers extremely vulnerable to even small economic fluctuations. while developed countries are experiencing some of the sharpest economic contractions, households in developing countries are much more vulnerable, and likely to experience acute negative consequences, both in the shortand long-term. (justin yifu lin, 2009) global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 61 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu declining growth rates combined with high levels of initial poverty leave many households in developing countries highly exposed to the crisis. vulnerability is heightened if, at the same time, governments are constrained in cushioning the impacts due to limited institutional capacity and fiscal resources. when the financial crisis first broke, it was thought that developing countries in general would not be affected because their financial sector was not fully integrated in the global financial system. but now as the crisis has entered the second stage and problems in the real sector have emerged, it has become clear that developing countries will also be seriously affected by the downturn. between 2002 and 2007, these countries grew rapidly because of global trade expansion and the large inflows of private capital, including foreign direct investment (fdi), the increase in remittances and the surge in commodity prices. in fact, in 2007, private capital flows to the developing countries amounted to $1.2 trillion, a six-fold increase compared to the beginning of the decade, thanks in part to the rise in fdi which responded to the higher export earnings of the resource-rich developing countries. these higher earnings, in turn, were made possible by higher world commodity prices. also, workers‘ remittances expanded three times to $328 billion over the same period. now, with the crisis taking its toll, it is estimated that total fdi and private capital flows will decline from $1.2 trillion in 2007 to $363 billion this year. as a result of declining exports and reduced capital inflows, the developing countries may encounter a financing gap of between $352 billion to $635 billion. moreover, remittances are likely to fall by 7.3 percent in 2009 to the level of $305 billion. the gdp growth rate in developing countries in 2009 is forecast to drop to 1.2 percent, a sharp decline from 8.1 percent of growth rate in 2007 and 5.9 percent growth rate in 2008. this decline alone will cause more than 30 million workers to lose their jobs according to the united nations international labour organization, and of course, poverty will rise. in fact, if we don‘t do anything, this may just be the start of the worst scenario. new estimates for 2009 suggest that lower economic growth rates would trap 53 million more people in poverty, those living on less than $1.25 a day than was expected prior to the crisis. if the $2a-day poverty line is used, 65 million will stay trapped. if the recession protracts, more and more people will fail to get out of poverty. as robert zoellick, world bank group president, has said, ―the global economic crisis threatens to become a human crisis in many developing countries unless they can take targeted measures to protect vulnerable people in their communities.‖ critical to protecting households in countries exposed to the crisis will be the ability of governments to cope with the fallout of the downturn: to finance programs that create jobs, ensure the delivery of core services and infrastructure, and provide safety nets. yet, only one-third of the exposed countries have the fiscal capacity (i.e., ability to expand fiscal deficits) to render significant countercyclical spending. in countries with limited fiscal capacity it is imperative that assistance be provided via grants and concessional financing wherever possible. moreover, one-third of the countries with a reasonable amount of fiscal capacity are aid dependent, and will also require external support to finance increased spending. the crisis effects in south-eastern europe all economies in south-eastern europe continued to grow at relatively robust rates in the order of 5 per cent or higher in 2008, with the exception of croatia which had 3.8 per cent. growth in 2008 continued to be largely driven by domestic demand, underpinned by rising real global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 62 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu wages, strong fdi inflows and domestic credit expansion. however, in the course of the year, and with the escalation of the global financial crisis, these growth factors started to lose steam and will weaken further in 2009. hence, a further moderation in the pace of growth to about 4.5 per cent for the region as a whole is expected in the baseline scenario for 2009, down from 5.2 per cent in 2008. inflation accelerated in south-eastern europe in the first half of 2008, driven by surging world food and energy prices, strong domestic demand and rising real wages. the acceleration was quite pronounced in bosnia and herzegovina, croatia, serbia and the former yugoslav republic of macedonia. however, during the second half of the year, inflationary pressures weakened as world commodity prices started to fall from their highs and domestic inflationary pressures subsided. given the overall domestic and global macroeconomic prospects, this trend is likely to gain further ground in 2009. employment conditions improved in all south-eastern european economies along with the continued dynamic economic performance in much of 2008. nonetheless, unemployment rates remain very high (about 16 per cent on average); only croatia has a single-digit rate of unemployment. nevertheless, positive labor market developments are expected to continue in 2009 as a result of new investments in production capacity and the implementation of infrastructure projects. in croatia, though, the rate of unemployment may increase in response to weaker performance of the tourism industry. the general government budgets in most south-eastern european economies have become more balanced and were fortified by higher tax revenue following strong economic growth in recent years. there was some fiscal loosening in a number of countries in 2008, in part because of their electoral cycle. fiscal deficits are expected to widen as a result of the economic slowdown and anticipated expected fiscal responses in 2009, but larger deficits do not pose an immediate threat to macroeconomic stability. in contrast, there was a notable tightening of monetary policy in 2008, partly in response to rising inflationary pressures. central banks increased their policy rates in albania, serbia (in stages) and the former yugoslav republic of macedonia, while mandatory reserve requirements were increased in bosnia and herzegovina and croatia. the domestic monetary tightening was coupled with deteriorating conditions of access to international financial markets. the rising cost of credit is likely to further dampen economic activity in the region. against the backdrop of strong domestic demand and weakening import demand in the important european markets, imports by southeastern european economies generally outpaced their exports in 2008. as a result, both trade and current-account deficits continued to widen in all countries and, in a number of cases, have reached alarming proportions. financing these deficits up until the 2008 crisis did not pose a problem, but financing conditions have been changing for the worse, forcing a downward adjustment in domestic demand. the restraining effect of unfavorable financing conditions is likely to increase further in 2009 and the deficits may decline somewhat in the short run. iii. the poor as victims or as resilient and important consumers? coming on the heels of the food and energy security crises, the global financial crisis will most likely substantially set back progress towards poverty reduction and the millennium development goals. the tightening of access to credit and weaker growth will cut into public revenues and limit the ability of developing country governments to make the necessary investments to global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 63 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu meet education, health and other human development goals. unless adequate social safety nets are in place, the poor will no doubt be hit the hardest. an estimated 125 million people in developing countries were already driven into extreme poverty because of the surge in global food prices since 2006. in the global economy, lasting competitive value is no longer assured by natural resources, human talent, or even core competencies. in these areas, the world is indeed flat. sustaining innovative solutions and beating the competition is about tapping software and digital applications to wire customer knowledge into the core systems of the firm and measure customer behavior through smart analytics. and this can be done at lower costs and in faster time frames than many understand. the rise of global supply chains in asia, eastern europe and the west are highly competitive, fearless, and bubbling with new approaches driven by the young and ambitious upstarts of the next business generation. coming to terms with the implications of this transformation is both urgent and inevitable for the survival of businesses (c.k prahalad and m.s krishnan, 2008). ceos, senior executives, and managers of every level face an imperative to understand that to form strategy and execute it they must renew their knowledge of business processes, information technology, and data analysis. to win in the competitive landscape defined by creating one consumer experience at a time, decision makers must develop a ―whole new mind‖ for understanding their global supply, logistics and communications networks. the focus of young people and young professionals on sites such as my space, youtube, and facebook suggest that a whole generation of consumers are growing up expecting to be treated as unique individuals, and will have the skills and the propensity to engage in a market place defined by customer co-creation. value for them is not about traditional ideas of quality. that is a given. they want to be involved in shaping their own experiences. similarly, the imperatives of access to talent, speed, and cost will drive most firms towards this new global resourcing. by forging the ‗always on‘ network, firms can engage customers and employees emotionally and intellectually in the mission of the firm, minute by minute, day by day. as prahalad writes: ―from cement to jet engines, from children‘s toys to delivery of parcels to your home or office by ups, all industries are going through this transformation. this transformation is not a choice.‖ (c.k. prahalad, 2008) while there is a strong demand among the urban poor for better services and quality goods, as well as a demonstrated ability to pay for those services and goods, the failure of the private sector to provide adequate services and goods is in fact a contributor to poverty. because of the deliberate exclusion of the urban poor from mainstream urban market systems, they live in very high cost economies. for instance, slum dwellers without access to municipal water pay 4 to 100 times as much as their middle and upper class counterparts. they also pay 30% to 50% more for food items that are sold in small unit packages. the availability, accessibility and affordability of private sector goods and services are bound to change the situation of the urban poor and in turn address some of the challenges facing urban centers today. by expanding the global market system to include the urban poor would provide new markets for the private sector and at the same time create opportunities for poor communities. for example, the wireless telecommunication industry in africa and asia has been able to create a sustainable win-win situation for the private sector and the urban poor. mobile communication allows an incredible whole range of new ways to conduct business for the small slumbased entrepreneurs. this industry has created systems and channels that have increased global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 64 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu availability of affordable mobile phone service for the poor without creating cost structures that translate to higher prices for the poor. instead it has opened and created new business possibilities for the poor through access to technology, which a few years back was considered the prerogative of the middle and upper class (auclair c, 2008). iv. bottom of the pyramid in 1932, the phrase ―bottom of the pyramid‖ was used by former united states president franklin d. roosevelt in a radio address to his country that was in the midst of the great depression. he said, ―these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power (plans) that put their faith once more in the forgotten man at the bottom of the economic pyramid‖. it is almost an ominous coincidence that 80 years hence, we are also in the midst, although hopefully at the tail end, of a global crisis. it is apparent that president roosevelt‘s statement is as relevant for us today, as it was then. indeed, it is in adequately and appropriately serving and strengthening the sectors that we will be able to build a solid base for economic growth and development. ―if we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and kreative entrepreneurs and valueconscious consumers, a whole new world of opportunity will open up‖ . (c.k. prahalad, 2008) popularized by c.k. prahalad, the bottom of the pyramid concept which contends that poor people should be seen as potentially profitable customers rather than mere charity cases has caught on fast in the past few years. while some organizations have taken notice and reaped benefits, the bottom of the pyramid has been largely ignored by most. multinationals and even local companies are yet to be convinced there is a large enough profitable market. for long time the mnc have the idea that the poor cannot be the segment who they can be focus. the reasons are given to the table (c. k. prahalad and stuart hart, 2002). assumption implication the poor are not our target customers; they cannot afford our products or services. our cost structure is a given; with our cost structure, we cannot serve the bop market. the poor do not have use for products sold in developed countries we are committed to a form over functionality. the poor might need sanitation, but can‘t afford detergents in formats we offer. therefore, there is no market in the bop. only developed countries appreciate and pay for technological innovations. the bop does not need advanced technology solutions; they will not pay for them. therefore, the bop cannot be a source of innovations the bop market is not critical for long-term growth and vitality of mncs bop markets are at best an attractive distraction. intellectual excitement is in developed markets; it is very hard to recruit managers for bop markets we cannot assign our best people to work on market development in bop markets 1. the dominant logic of mncs as it relates to bop global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 65 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu the numbers are clearly against the views of such companies. more than half the world‘s population lives on less than us$ 2 a day. there is striking disparity between the rich and the poor with over 76.6% of the private consumptions made by 2 richest deciles of the world‘s population. the distribution of wealth and the capacity to generate incomes in the world can be captured in the form of an economic pyramid. at the top of the pyramid are the wealthy, with numerous opportunities for generating high levels of income. more than 4 billion people live at the bop on less than $2 per day. for more than 50 years, the world bank, donor nations, various aid agencies, national governments, and, lately, civil society organizations have all fought the good fight, but have not eradicated poverty. while various quarters shudder at the thought of the three crises mentioned there also laid limitless opportunities for enterprises, governments and entrepreneurs. the financial crisis maybe associated with closures and companies going bankrupt, but it must be kept in mind that some of the best known companies have thrived while some were born during such times. companies should be tough in anticipation of tough times. they should seize the downturn opportunities gear-up for the upturn. the bop three pillar principles posses the following questions to the private sector: • are the goods and services in the market available to the poor? • how accessible and at the disposal of the poor are these goods and services? • can the poor afford what is being proposed to them by the markets? if managers do not recognize this trend and get organized to compete in this new environment, they are likely to be left behind. businesses will need to ceaselessly improve flexibility and efficiency and transparency in all it and customerfacing processes. ultimately, the race for the future will be won by those who deliver a unique customer experience at the lowest cost. the crisis saw failure and closures of thousands of businesses worldwide, record unemployment, declines in consumer wealth estimated in the trillions of u.s. dollars, substantial financial commitments incurred by governments, and most notably significant decline in economic activity around the globe. now many economists, political leaders, bankers and other market commentators are jubilantly declaring the worst is over and everything is ok again. these same analysts who were oblivious to the looming financial debacle are ignoring evidence which corroborate that this marks only the beginning of larger impending global crisis. beyond the global recession, the world also needs to brace for more crises in the coming years. mti consulting‘ ceo hilmy cader states ―we are not out of the woods yet-the worst is yet to come! we still need to deal with the impact and aftershocks of the financial meltdown and the long term changes it has brought about. also the world, particularly the emerging and developing nations should be on guard to face a greater impacting eco credit crisis and bottom of the pyramid crisis‖ (hilmy cader, 2009). economies and enterprises should also be cautious of long term changes and implications that maybe brought about by the crisis. consumer‘s tendency to save and avoid large debt will become more popular leading to long term drop in consumption. government spending will also reduce in the long term which coupled with reduced private consumption will slow down investment. global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 66 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu as we recover from the global financial crisis we are faced with the greater imminent dangerthe eco credit crisis. the world‘s fast growing population is using up resources at an unprecedented level, significant part of which is not being renewed and is causing irreparable damage to the environment. if we continue to live on the earth ecological credit, by 2030 we need the equivalent of 2 planet resources to keep up our lifestyle. hilmy cader stated ―it must be kept in mind that unlike the economic recession, governments cannot bailout enterprises from the emerging credit crisis.‖ with the world‘s population expected to shoot to 9 billion by 2040, it is now up to governments and enterprises around the world to take responsibility-what is being done is certainly not enough (james leape, 2009)! one of the real threats to sustainable urbanization is urban poverty. it establishes a sophisticated and intricate system that results in a vicious cycle of poverty where conventional market economics condemns millions to poverty, while awarding a few with prosperity. the world bank affirms that over 3 billion people live on less than $2.50 a day, and with the recent global crisis, this number is bound to grow unprecedentedly. twelve principles of innovation for bop markets ( c.k prahalad, 2005). 1. focus on price performance of products and services. serving bop markets is not just about lower prices. it is about creating a new price– performance envelope. quantum jumps in price performance are required to cater to bop markets 2. innovation requires hybrid solutions. bop consumer problems cannot be solved with old technologies. most scalable, price-performanceenhancing solutions need advanced and emerging technologies that are creatively blended with the existing and rapidly evolving infrastructures. 3. as bop markets are large, solutions that are developed must be scalable and transportable across countries, cultures, and languages. how does one take a solution from the southern part of india to the northern part? from brazil to india or china? solutions must be designed for ease of adaptation in similar bop markets. this is a key consideration for gaining scale. 4. the developed markets are accustomed to resource wastage. for example, if the bop consumers started using as much packaging per capita as the typical american or japanese consumer, the world could not sustain that level of resource use. all innovations must focus on conserving resources: eliminate, reduce, and recycle. reducing resource intensity must be a critical principle in produkt development, be it for detergents or ice cream. 5. product development must start from a deep understanding of functionality, not just form. marginal changes to products developed for rich customers in the united states, europe, or japan will not do. the infrastructure bop consumers have to live and work in demands a rethinking of the functionality anew. washing clothes in an outdoor moving stream is different from washing clothes in the controlled conditions of a washing machine that adjusts itself to the level of dirt and for batches of colored and white clothes. 6. process innovations are just as critical in bop markets as produkt innovations. in developed markets, the logistics system for accessing potential consumers, selling to them, and servicing products is well-developed. a reliable infrastructure exists and only minor changes might have to be made for specific products. in bop markets, the presence of a logistics infrastructure cannot be assumed. often, global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 67 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu innovation must focus on building a logistics infrastructure, including manufacturing that is sensitive to the prevailing conditions. accessing potential consumers and educating them can also be a daunting task to the uninitiated. 7. deskilling work is critical. most bop markets are poor in skills. the design of products and services must take into account the skill levels, poor infrastructure, and difficulty of access for service in remote areas. 8. education of customers on product usage is key. innovations in educating a semiliterate group on the use of new products can pose interesting challenges. further, most of the bop also live in ―media dark‖ zones, meaning they do not have access to radio or tv. in the absence of traditional approaches to education—tradicional advertising— new and creative approaches, such as video mounted on trucks and traveling low-cost theatrical productions whose job it is to demonstrate product usage in villages, must be developed. 9. products must work in hostile environments. it is not just noise, dust, unsanitary conditions, and abuse that products must endure. products must also be developed to accommodate the low quality of the infrastructure, such as electricity (e.g., wide fluctuations in voltage, blackouts, and brownouts) and water (e.g., particulate, bacterial, and viral pollution). 10. research on interfaces is critical given the nature of the consumer population. the heterogeneity of the consumer base in terms of language, culture, skill level, and prior familiarity with the function or feature is a challenge to the innovation team. 11. innovations must reach the consumer. both the highly dispersed rural market and a highly dense urban market at the bop represent an opportunity to innovate in methods of distribution. designing methods for accessing the poor at low cost is critical. 12. paradoxically, the feature and function evolution in bop markets can be very rapid. product developers must focus on the broad architecture of the system—the platform—so that new features can be easily incorporated. bop markets allow (and force) us to challenge existing paradigms. for example, challenging the gridbased supply of electricity as the only available source for providing good-quality, inexpensive energy is possible and necessary in the isolated, poor bop markets. despite the idea of serving the poor profitably being with us for over a decade, little has been done to demonstrate the true calling of the private sector, as the entity of risk takers who utilize existing market opportunities to create wealth. while the skepticism of many in the private sector is based is real, the reality of the bop latent potential is real too. by dedicating more investments into research and development, forming alliances and partnerships with bop entrepreneurs the road to unleashing the full potential of the bop market will be realized in our live time. the private sector is bound to benefit from serving and working with the bop populace. the synergy created in the process is what will translate into a research ground where innovations and ideas will be developed tested and implemented before being moved up to other markets and segments of the urban society. the bottom-up approach to the creation and development of solutions to the urban global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 68 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu challenge will place the private sector on a track of sustainability and offer real benefits to the wider society. the challenges that rapid urbanization present us with makes it imperative that we create working models and framework that will enable the private sector to tap into the reservoir of the whole society, including the bop to come up with economic solutions to the economic problems that threaten the very fabric of urban living today. v. conclusions and recommendations in the world we live today, businesses and top executives must understand what differentiates their companies from others and must understand the needs of the consumers in their markets. if these two ingredients are understood, a business can develop a strategic plan to create a market niche and develop their customer base to be successful. development of this information along with the development of the internal business processes can lead to some form of a competitive advantage in the market. the businesses and their representatives are directly responsible for the patterns of purchases (in the long run) of each of their customers. how they (the customers) will react within certain situations is largely due to the education and supplying the customer with enough data and tools to proficiently inform them of what is to be completed and within what context and timeframe. understanding the customer and their reactions to the environment will prolong the life of the relationship between businesses and their customers. our society is facing a financial crisis, an economic crisis, and as recent research is increasingly showing, a humanitarian crisis. recession has hit the entire world. wherever we go everybody is talking about it and each and every trade is affected by it. if the recession protracts, more and more people will fail to get out of poverty. the bottom of the pyramid approaches offers the private sector an opportunity to lead the way towards urban economic and social transformation in the 21stcentury. what is fundamentally required is the elicitation of the adventurous spirit of the sector to push the frontiers of market economics to new heights. the risk-taking attitude of the entrepreneurs of the industrials revolution who opened the wells of wealth to humanity through inventions and innovations needs to be relived in our times. getting the right combination of scale, technology, price, sustainability, and usability requires that managers start with a ―zero-based‖ view of innovations for the bop markets. managers need a new philosophy of innovation and product and service delivery for the bop markets. the 12 principles that constitute the minimum set of a philosophy of innovation are critical to understand and apply. needless to say, they challenge the existing assumptions about product and market development. by forcing managers in large enterprises to rethink and re-examine their assumptions about form and functionality, about channels and distribution costs, bop markets can serve as catalysts for new bursts of creativity. the biggest advantage is often in challenging the capital intensity and the managerial cost structures that have been assumed in mncs. innovation in bop markets can reverse the flow of concepts, ideas, and methods. therefore, for an mnc that aims to stay ahead of the curve, global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 69 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.13 | http://emaj.pitt.edu experimenting in bop markets is increasingly critical. it is no longer an option. vi. references 1. bernhardt and c. owens, 2009. ―rebuilding a good jobs economy,‖ the nation, 30 march 2009 edition 2. auclair c. 2008. how can the bottom of the pyramid approach work for the slums? the habitat debate, 14, 3. bender, paul s. 1976 "design and operation of customer service systems", american management association, new york. 4. steven m. bragg, 2006 "outsourcing: a guide to: selecting the correct business unit, negotiating the contract, maintaining control of the process ", john wiley & sons, inc., new jersey 5. c. k. prahalad and stuart hart 2002, ‗the fortune at the bottom of the pyramid , strategy + business‘, 26, 6. c.k prahalad, 2004. ‗the fortune at the bottom of the pyramid‖, wharton school publishing, 7. c.k prahalad and m.s krishnan, 2008. ―the new age of innovation‖, mcgrawhill, london 8. foxall, gordon 1991. "consumer psychology in behavioural perspective", journal of economic psychologie , 12, 544-547 9. j. huezo et al., 2009). ―the state of the dream 2009: the silent depression,‖ united for a fair economy, 10. prlog press release 2009, after the global financial crisis... expect more, http://prlog.org/10373858 11. applied research center 2009, race and recession, , http://arc.org/downloads/2009_race_recession 12. un-habitat 2007. business for sustainable urbanization, challenges and opportunities, 13. world bank 2009, weathering the global economic crisis: lessons for emerging markets, http://worldbank.org/dec/weathering-the-global-economic-crisis 14. united nations 2009, world economic situation and prospects 2009, http://www.un.org/esa/policy/wess/wesp 15. united for a fair economy 2009, state of the dream 2009: the silent depression, www.faireconomy.org/dream. emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu recomputation of undp’s hdi rankings by data envelopment analysis mehmet tolga taner bülent sezen lutfihak alpkan selim aren e-mail: mtaner@gyte.edu.tr e-mail: bsezen@gyte.edu.tr e-mail: alpkan@gyte.edu.tr e-mail: aren@gyte.edu.tr abstract the hdi has played an influential role in the debate on human development. no index is perfect and so is the human development index of united nations development program. this paper aims to measure the performance of 182 countries in terms of performance by means of non-parametric input oriented crs employed data envelopment analysis. in addition, it elaborates on the cut-off values assigned by undp to categorize the countries. by means of this research, countries will be able to choose those elements by benchmarking from other countries that are applicable and most likely to develop strategy formulation processes for human development and international growth. this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu mailto:mtaner@gyte.edu.tr http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 21 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu recomputation of undp’s hdi rankings by data envelopment analysis mehmet tolga taner bülent sezen lutfihak alpkan selim aren i. introduction today, normalised measures of life expectancy, literacy, educational attainment, and gdp per capita are considered to be the main indicators of development for countries worldwide. these three indicators are unified to give a measure of development, namely the human development index (hdi). hdi has been first used in the united nations development program’s (undp) world development report. since the first publication of this annual report in 1990, undp has been seeking to explore the concept and measurement of global human development. the human development index (hdi) computes and assigns a single, scalar value to each country of the world based on three components of human development. this simple measure has changed the global debate on development and influenced public policy around the world. criticism and proposed alternatives abound, yet the index has managed to maintain its popularity and simplicity with only minor modifications over the years of 1991, 1994, 1995, 1999 and 2005. the hdi was developed to measure “the basic concept of human development to enlarge people’s choices” (ul haq, 1995). it was also designed as an alternative to the use of gdp per capita alone as a measure of human development. to these ends, it must be concluded that the hdi has achieved overwhelming success. however, it is still prone to criticisms as it lacks the means to correctly measure and analyse the annual performance of countries. ul haq stated that the purpose of the hdi was to measure at least a few more choices besides income and to reflect them in a methodologically sound composite index. indeed, the hdi has included only a limited number of indicators to keep it simple and manageable. this simple hdi algorithm is still being used today and calculated from regularly available data to produce a meaningful number that can be used to compare and rank countries across the world. up-to-date, critics on hdi have claimed that it uses very few or the wrong indicators. others allege that it presents an oversimplified view of human development and added that a pure economic model focusing on growth alone should set the tone on discourse regarding human development. in fact, some of these critics have developed their own novel indices or have resulted in the modification of hdi. but, collecting reliable data continues to be the major obstacle in the poorest countries (harkness, 2004). regarding health and longevity, harkness notes that mortality data are most likely to be missing in countries where mortality is the highest. according to another critic, both the resources allocated throughout a country and the levels of inequality that may exist across the country are not taken into account in the hdi index (foster, 2005; ul haq, 1995). in recent years, most critics have taken issue with the equal weights assigned to each of the respective indicators of the index (mahlberg and obersteiner, 2001; chowdhury and squire, 2006) but assigning differing weights have been proven to be unnecessary (stapleton and garrod, 2007). and yet, the hdi has been extensively criticised for its lack of desirable statistical properties. to overcome the deficiencies of previous traditional parametric approaches and weighing problems, data envelopment analysis can be employed. to measure the hdi, this analysis has recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 22 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu been firstly used by mahlberg and obersteiner in 2001. the following year, lozano and gutierrez proposed a new dea model that computes a range djusted measure (ram) of efficiency for hdi and lee et al. (2006) made use of a fuzzy multiple objective dea for the hdi. in 2005, the hdi of the asian and pacific countries were calculated by despotis (2005). having automatically overcome the subjectivity difficulties in weighing the component indices, this technique analyses the inherencies of the data by a different approach. ii. method data envelopment analysis (dea) is a data-oriented technique which has been proven to be an effective tool in evaluating relative efficiency. it is a nonparametric method of measuring the efficiency of a decisionmaking unit (dmu) such as a country, first introduced into operations research literature by charnes, cooper and rhodes in 1978. recent years have seen a great variety of applications of dea for use in evaluating the performances of many different kinds of entities engaged in many different activities in many different contexts in many different countries such as sports, logistics, hospitals, universities, cities, business firms etc. because it requires very few assumptions, dea has opened up possibilities for use in cases which have been resistant to other approaches because of the complex and often unknown nature of relations between the multiple inputs and multiple outputs involved in the dmus. throughout the paper, we use decision making units (dmus) to represent countries. each dmu is assumed to have a constant input and represented by three outputs , i.e. hdi component indicators (life expectancy index (lei), education index (ei) and gdp per capita index (gdpi)). the dea model used assumes an input oriented radial crs technology. the main advantages of dea are: (1) multiple inputs and outputs can be used effectively, while ascertaining efficiency, and a specific production function is not required; (2) the decision maker does not need prior information about weights of inputs and outputs; and (3) for each dmu, efficiency is compared to that of an ideal operating unit, rather than to the average performance. the hdi is based on three indicators: longevity, as measured by life expectancy at birth; educational attainment, as measured by a combination of adult literacy (two-thirds weight) and combined primary, secondary and tertiary enrollement ratios; and standard of living, as measured by real gdpi (purchasing power parity in us$). to calculate the dimension indices, undp has assigned minimum and maximum values (goalposts) for each underlying indicators. performance in each dimension is then calculated and expressed as a value between 0% and 100%. then, the hdi is calculated as a simple average of the dimension indices by basic algebra. in undp’s approach, this was followed by assigning (equal) weights to each dimension index given as follows: hdi = x. (lei) + y. (ei) + z. (gdpi) (where x = y = z = 1/3). whereas, in our approach, the indices are analyzed by the use of linear programming methods to construct a non-parametric piece-wise surface over the data. the crs surface is presented by a straight line that starts at the origin and passes through the first dmu that it meets as it approaches the observed population. the models with crs envelopment surface assume that an increase in inputs will result in a proportional increase in outputs. efficiency measures are then calculated relative to this surface. for the purpose of analyzing the data, efficiency measurement system (ems) is used. the inherent weights for the inputs and outputs are assigned by the model itself. recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 23 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu the essence of the crs model is the ratio of maximization of the ratio of weighted multiple outputs to weighted multiple inputs. any country compared to others shold have an efficiency score of 100% or less. the efficiency score in the presence of multiple input and output indicators is defined as: efficiency = weighted sum of outputs / weighted sum of inputs assuming that there are n dmus, each of with i inputs and j outputs, the relative efficiency score of a test dmu m is obtained by solving the following model proposed by [charnes et. al., 1978]: the above model is run n times in identifying the relative efficiency scores of all dmus. each dmu selects input and output weights that maximize its efficiency score. in general, a dmu is considered to be efficient if it obtains an efficiency score of 100% and a score of less than 100% implies that it is inefficient. iii. analysis unlike the hdi, the dea scores on table 1 are relative measures. each country is compared with the best practice countries when it assesses its composite performance on the human development indicators. as shown in table 1, the ems analysis has yielded differences in country rankings between the undp and dea approaches. the dea approach identified a group of 20 optimally performing countries that are defined as efficient and assigns them an efficiency score of 100%. these efficient countries are then used to create an “efficiency frontier” or “data envelope” against which all other countries are compared. in sum, countries that require relatively more weighted inputs to produce weighted outputs, or, alternatively, produce less weighted output per weighted inputs than do countries on the efficient frontier, are considered technically inefficient. they are given efficiency scores of less than 100%, but greater than 0%. recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 24 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu table 1 hdr 2009 data and dea rankings undp ranking dmu hdi efficien cy score gdp per capita index education index life expect ancy index dea ranking 1 norway 0,971 100,00% 1,000 0,989 0,925 1 2 australia 0,970 100,00% 0,977 0,993 0,940 1 3 iceland 0,969 100,00% 0,981 0,980 0,946 1 4 canada 0,966 99,85% 0,982 0,991 0,927 21 5 ireland 0,965 100,00% 1,000 0,985 0,911 1 6 netherlands 0,964 99,59% 0,994 0,985 0,914 22 7 sweden 0,963 99,41% 0,986 0,974 0,930 24 8 france 0,961 99,09% 0,971 0,978 0,933 25 9 switzerland 0,960 100,00% 1,000 0,936 0,945 1 10 japan 0,960 100,00% 0,971 0,949 0,961 1 11 luxembourg 0,960 100,00% 1,000 0,975 0,906 1 12 finland 0,959 100,00% 0,975 0,993 0,908 1 13 united states 0,956 100,00% 1,000 0,968 0,902 1 14 austria 0,955 98,86% 0,989 0,962 0,915 26 15 spain 0,955 98,59% 0,960 0,975 0,929 29 16 denmark 0,955 100,00% 0,983 0,993 0,887 1 17 belgium 0,953 98,41% 0,977 0,974 0,908 30 18 italy 0,951 98,71% 0,954 0,965 0,935 27 19 liechtenstein 0,951 100,00% 1,000 0,949 0,903 1 20 new zealand 0,950 100,00% 0,936 0,993 0,919 1 21 united kingdom 0,947 97,83% 0,978 0,957 0,906 32 22 germany 0,947 97,81% 0,975 0,954 0,913 33 23 singapore 0,944 100,00% 1,000 0,913 0,920 1 24 hong kong 0,944 100,00% 1,000 0,879 0,953 1 25 greece 0,942 98,71% 0,944 0,981 0,902 28 26 republic of korea 0,937 99,50% 0,920 0,988 0,904 23 recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 25 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu 27 israel 0,935 97,58% 0,930 0,947 0,928 35 28 andorra 0,934 100,00% 1,000 0,877 0,925 1 29 slovenia 0,929 97,58% 0,933 0,969 0,886 34 30 brunei 0,920 100,00% 1,000 0,891 0,867 1 31 kuwait 0,916 100,00% 1,000 0,872 0,875 1 32 cyprus 0,914 95,12% 0,920 0,910 0,910 47 33 qatar 0,910 100,00% 1,000 0,888 0,841 1 34 portugal 0,909 94,49% 0,906 0,929 0,893 52 35 united arab emirates 0,903 100,00% 1,000 0,838 0,872 1 36 czech republic 0,903 94,44% 0,916 0,938 0,856 53 37 barbados 0,903 98,12% 0,866 0,975 0,867 31 38 malta 0,902 94,70% 0,908 0,887 0,910 50 39 bahrain 0,895 95,04% 0,950 0,893 0,843 49 40 estonia 0,883 97,05% 0,887 0,964 0,799 38 41 poland 0,880 95,88% 0,847 0,952 0,842 44 42 slovakia 0,880 93,44% 0,885 0,928 0,827 57 43 hungary 0,879 96,64% 0,874 0,960 0,805 42 44 chile 0,878 94,00% 0,823 0,919 0,891 54 45 croatia 0,871 92,17% 0,847 0,916 0,850 63 46 lithuania 0,870 97,40% 0,863 0,968 0,780 36 47 antigua and barbuda 0,868 95,12% 0,873 0,945 0,786 48 48 latvia 0,866 96,71% 0,851 0,961 0,788 40 49 argentina 0,866 95,27% 0,815 0,946 0,836 46 50 uruguay 0,865 96,17% 0,788 0,955 0,852 43 51 cuba 0,863 100,00% 0,706 0,993 0,891 1 52 bahamas 0,856 88,79% 0,886 0,878 0,804 93 53 mexico 0,854 90,00% 0,826 0,886 0,850 78 54 costarica 0,854 93,19% 0,782 0,883 0,896 58 55 libya 0,847 90,38% 0,829 0,898 0,814 74 56 oman 0,846 90,63% 0,906 0,790 0,841 71 57 seychelles 0,845 89,23% 0,851 0,886 0,797 89 58 venezuela 0,844 92,70% 0,801 0,921 0,811 59 recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 26 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu 59 saudiarabia 0,843 90,72% 0,907 0,828 0,794 70 60 panama 0,840 89,49% 0,790 0,888 0,842 85 61 bulgaria 0,840 93,59% 0,788 0,930 0,802 56 62 saintkitts and nevis 0,838 90,16% 0,830 0,896 0,787 76 63 romania 0,837 92,07% 0,804 0,915 0,792 64 64 trinidad and tobago 0,837 91,13% 0,911 0,861 0,737 68 65 montenegro 0,834 89,70% 0,795 0,891 0,817 81 66 malaysia 0,829 86,60% 0,819 0,851 0,819 103 67 serbia 0,826 89,70% 0,773 0,891 0,816 80 68 belarus 0,826 96,77% 0,782 0,961 0,733 39 69 saintlucia 0,821 89,52% 0,765 0,889 0,810 84 70 albania 0,818 90,60% 0,710 0,886 0,858 72 71 russian federation 0,817 93,94% 0,833 0,933 0,686 55 72 theformeryug oslavre publicofmaced onia 0,817 88,61% 0,753 0,880 0,819 96 73 dominica 0,814 90,01% 0,729 0,848 0,865 77 74 grenada 0,813 89,07% 0,717 0,884 0,838 92 75 brazil 0,813 89,67% 0,761 0,891 0,787 83 76 bosnia and herzegovina 0,812 88,51% 0,726 0,874 0,834 98 77 colombia 0,807 88,69% 0,743 0,881 0,795 94 78 peru 0,806 89,70% 0,728 0,891 0,800 82 79 turkey 0,806 83,36% 0,812 0,828 0,779 117 80 ecuador 0,806 88,12% 0,719 0,866 0,833 99 81 mauritius 0,804 84,45% 0,789 0,839 0,785 115 82 kazakhstan 0,804 97,10% 0,782 0,965 0,666 37 83 lebanon 0,803 86,32% 0,770 0,857 0,781 104 84 armenia 0,798 91,49% 0,675 0,909 0,810 66 85 ukraine 0,796 96,65% 0,707 0,960 0,720 41 recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 27 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu 86 azerbaijan 0,787 88,67% 0,728 0,881 0,751 95 87 thailand 0,783 89,37% 0,734 0,888 0,728 88 88 iran 0,782 81,15% 0,784 0,793 0,769 126 89 georgia 0,778 92,18% 0,641 0,916 0,777 62 90 dominican republic 0,777 84,50% 0,702 0,839 0,790 114 91 saint vincent and the grenadines 0,772 82,30% 0,725 0,817 0,774 120 92 china 0,772 85,67% 0,665 0,851 0,799 106 93 belize 0,772 88,52% 0,703 0,762 0,851 97 94 samoa 0,771 91,10% 0,634 0,905 0,773 69 95 maldives 0,771 89,07% 0,659 0,885 0,768 91 96 jordan 0,770 87,56% 0,650 0,870 0,790 101 97 suriname 0,769 85,58% 0,727 0,850 0,729 107 98 tunisia 0,769 84,64% 0,721 0,772 0,813 112 99 tonga 0,768 92,61% 0,605 0,920 0,778 60 100 jamaica 0,766 83,91% 0,686 0,834 0,778 116 101 paraguay 0,761 87,67% 0,633 0,871 0,778 100 102 srilanka 0,759 85,88% 0,626 0,834 0,816 105 103 gabon 0,755 84,99% 0,838 0,843 0,584 110 104 algeria 0,754 81,86% 0,726 0,748 0,787 123 105 philippines 0,751 89,41% 0,589 0,888 0,777 87 106 elsalvador 0,747 81,31% 0,678 0,794 0,771 125 107 syria 0,742 85,08% 0,636 0,773 0,818 109 108 fiji 0,741 87,37% 0,628 0,868 0,728 102 109 turkmenistan 0,739 91,25% 0,651 0,906 0,661 67 110 occupied palestinian territories 0,737 89,22% 0,519 0,886 0,806 90 111 indonesia 0,734 84,61% 0,603 0,840 0,758 113 112 honduras 0,732 82,59% 0,607 0,806 0,783 119 113 bolivia 0,729 89,77% 0,624 0,892 0,673 79 114 guyana 0,729 94,56% 0,555 0,939 0,691 51 recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 28 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu 115 mongolia 0,727 91,87% 0,580 0,913 0,687 65 116 vietnam 0,725 85,47% 0,544 0,810 0,821 108 117 moldova 0,720 90,46% 0,541 0,899 0,722 73 118 equatorial guinea 0,719 95,54% 0,955 0,787 0,415 45 119 uzbekistan 0,710 89,43% 0,532 0,888 0,711 86 120 kyrgyzstan 0,710 92,38% 0,500 0,918 0,710 61 121 cape verde 0,708 80,87% 0,570 0,786 0,769 127 122 guatemala 0,704 78,22% 0,638 0,723 0,752 130 123 egypt 0,703 77,94% 0,664 0,697 0,749 131 124 nicaragua 0,699 82,74% 0,542 0,760 0,795 118 125 botswana 0,694 82,00% 0,820 0,788 0,473 121 126 vanuatu 0,693 77,85% 0,601 0,728 0,748 132 127 tajikistan 0,688 90,25% 0,478 0,896 0,691 75 128 namibia 0,686 81,60% 0,658 0,811 0,590 124 129 southafrica 0,683 84,84% 0,765 0,843 0,442 111 130 morocco 0,654 79,83% 0,620 0,574 0,767 128 131 sao tome and principe 0,651 81,87% 0,467 0,813 0,673 122 132 bhutan 0,619 70,52% 0,647 0,533 0,678 141 133 lao 0,619 69,70% 0,513 0,683 0,659 143 134 india 0,612 66,92% 0,553 0,643 0,639 151 135 solomon islands 0,610 70,91% 0,475 0,676 0,680 138 36 congo 0,601 74,07% 0,594 0,736 0,474 134 137 cambodia 0,593 70,85% 0,483 0,704 0,593 139 138 myanmar 0,586 79,23% 0,368 0,787 0,603 129 139 comoros 0,576 69,26% 0,407 0,655 0,666 145 140 yemen 0,575 64,96% 0,526 0,574 0,624 153 141 pakistan 0,572 71,44% 0,537 0,492 0,687 137 142 swaziland 0,572 73,56% 0,646 0,731 0,339 135 143 angola 0,564 67,26% 0,665 0,667 0,359 150 144 nepal 0,553 71,64% 0,392 0,579 0,688 136 145 madagascar 0,543 68,01% 0,373 0,676 0,582 148 recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 29 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu 146 bangladesh 0,543 70,53% 0,420 0,530 0,678 140 147 kenya 0,541 69,42% 0,457 0,690 0,477 144 148 papua new guinea 0,541 61,85% 0,507 0,521 0,594 160 149 haiti 0,532 62,45% 0,408 0,588 0,600 158 150 sudan 0,531 56,97% 0,507 0,539 0,548 165 151 tanzania 0,530 67,76% 0,416 0,673 0,500 149 152 ghana 0,526 62,59% 0,432 0,622 0,525 156 153 cameroon 0,523 63,11% 0,510 0,627 0,431 155 154 mauritania 0,520 55,46% 0,494 0,541 0,526 170 155 djibouti 0,520 55,75% 0,505 0,554 0,501 168 156 lesotho 0,514 75,80% 0,457 0,753 0,332 133 157 uganda 0,514 70,29% 0,394 0,698 0,449 142 158 nigeria 0,511 66,12% 0,497 0,657 0,378 151 159 togo 0,499 64,47% 0,345 0,534 0,620 154 160 malawi 0,493 68,96% 0,339 0,685 0,456 146 161 benin 0,492 62,49% 0,430 0,445 0,601 157 162 timor leste 0,489 61,87% 0,329 0,545 0,595 159 163 cote d’ivoire 0,484 55,21% 0,472 0,450 0,531 171 164 zambia 0,481 68,67% 0,435 0,682 0,326 147 165 eritrea 0,472 59,33% 0,306 0,539 0,570 163 166 senegal 0,464 52,64% 0,469 0,417 0,506 173 167 rwanda 0,460 61,07% 0,360 0,607 0,412 162 168 gambia 0,456 53,17% 0,418 0,439 0,511 172 169 liberia 0,442 57,76% 0,215 0,562 0,548 164 170 guinea 0,435 56,02% 0,406 0,361 0,538 167 171 ethiopia 0,414 51,59% 0,343 0,403 0,496 174 172 mozambique 0,402 48,17% 0,348 0,478 0,380 175 173 guinea bissau 0,396 55,60% 0,261 0,552 0,375 169 174 burundi 0,394 56,25% 0,205 0,559 0,418 166 175 chad 0,392 44,94% 0,449 0,334 0,393 177 176 democratic republic of the congo 0,389 61,26% 0,182 0,608 0,377 161 recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 30 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu 177 burkina faso 0,389 48,10% 0,404 0,301 0,462 176 178 mali 0,371 40,24% 0,398 0,331 0,385 181 179 central african republic 0,369 42,20% 0,328 0,419 0,361 179 180 sierra leone 0,365 40,54% 0,320 0,403 0,371 180 181 afghanistan 0,352 39,31% 0,393 0,354 0,310 182 182 niger 0,340 44,80% 0,307 0,282 0,431 178 we compared the dea efficiency scores with hdi values. pearson correlation coefficient of 0.958 shows that the two indices are highly correlated. despite this strong correlation, there are also some notable differences between the two measurements. iv. discussion benchmarks dea analysis shows that australia is the country that is the most frequently used as a reference by the inefficient countries (115 times or by the 63% of the inefficient countries). the corresponding frequencies for denmark and japan are 94 (52%) and 58 (32%), respectively. therefore, both australia and denmark can be regarded as role model countries. cluster analysis the basis of undp’s classification of 182 countries into 4 groups (shown in table 2) is based on a simple leveling structure. a better method for determining the real cut-offs between countries is the cluster analysis. in a previous research, wolff et al. (2009) have examined the consequences of data error in data series used to construct aggregate indicators and found that up to 45% of developing countries were misclassified in hdr 2008. our analysis of corrected hdi and dea-based cutoffs are given in table 3. grouping of countries by means of cluster analysis is given in table 4. in addition, the ranking results of dea have also been examined by cluster analysis. the countries have again been classified in four groups. however, there are substantial differences between the groupings of hdi and de table 2 classification of countries according to hdr, 2009 no. of countries undp’s lower cut-off (hdi) undp’s upper cut-off (hdi) very high human development 0.900≤hdi≤1.000 38 0.902 0.971 high human development 0.800≤hdi<0.900 45 0.803 0.895 medium human development 0.500≤hdi<0.800 75 0.511 0.798 low human development 24 0.340 0.499 recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 31 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu hdi<0.500 table 3 corrected and dea cutoffs classifying the 182 countries group no. no. of countries lower cut-off upper cut-off corrected hdi 1 66 0.829 0.971 2 63 0.683 0.826 3 30 0.499 0.654 4 23 0.340 0.493 dea 1 84 90.00% 100.00% 2 57 70.53% 89.49% 3 33 52.64% 70.29% 4 8 39.31% 48.17% corrected groups of hdi has differed from the former one in many terms. firstly, group 1 now includes many of the recently ec-integrated countries such as estonia, poland, slovakia, hungary, lithuania, latvia, bulgaria and romania. secondly, south and central american countries has appeared in group 1 for the first time. these countries include chile, argentina, uruguay, costa rica, venezuela, panama and trinidad tobago. it should be noted that argentina, uruguay and venezuela are full members of mercosur. thirdly, none of the african countries are categorized in group 1. next, group 2 now includes the majority of asian, turkic and north african countries. last, whereas group 4 includes mostly the central african countries. according to the classification by dea, all ex-ussr countries except azerbaijan and uzbekistan have moved to group 1 from group 2 due to their high adult literacy rate. in return, bahamas and malaysia have moved to group 2 from group 1 due to their relatively low ei. equatorial guinea have moved to group 1 from group 2 due to its high gdp per capita of 30.627 usd. in return, panama has moved from group 1 to group 2 due to its relatively low gdp per capita. moving from group 3 to group 2 has required countries to have superiority over other countries in any of the two indicators. for instance, pakistan has higher gdp per capita (0.537 versus 0.526) and life expectancy (0.687 versus 0. 624) indices than yemen. therefore, pakistan has moved to the upper group whereas the group of yemen has remained the same. it should be noted that high education index is proven to be the most important criterion while grouping the countries by dea. all countries moving from group 4 to group 3 such as malawi, zambia and rwanda have enjoyed relatively higher adult literacy rates. it is also observed that countries with the lowest efficiency scores are mainly from the central african countries. recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 32 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu group 1 group 2 group 3 group 4 corrected hdi norway, australia, iceland, canada, ireland, netherlands, sweden, france, switzerland, japan, luxembourg, finland, united states, austria, spain, denmark, belgium, italy, liechtenstein, new zealand, united kingdom, germany, singapore, hong kong, reece, republic of korea, israel, andorra, slovenia, brunei, kuwait, cyprus, qatar, portugal, united arab mirates, czech republic, barbados, malta, bahrain, estonia, poland, slovakia, hungary, chile, croatia, lithuania, antigua and barbuda, latvia, argentina, uruguay, cuba, bahamas, mexico, costa rica, libya, oman, seychelles, venezuela, saudi arabia, panama, bulgaria, saint kitts and nevis, romania, trinidad and tobago, montenegro, malaysia serbia, belarus, saint lucia, albania, russian federation, the former yugoslav republic of macedonia, dominica, grenada, brazil, bosnia and herzegovina, colombia, peru, turkey, ecuador, mauritius, kazakhstan, lebanon, armenia, ukraine, azerbaijan, thailand, iran, georgia, dominican republic, saint vincent and the grenadines, china, belize, samoa, maldives, jordan, suriname, tunisia, tonga, jamaica, paraguay, sri lanka, gabon, algeria, philippines, el salvador, syria, fiji, turkmenistan, occupied palestinian territories, indonesia honduras, bolivia, guyana, mongolia, vietnam, moldova equatorial guinea, uzbekistan, kyrgyzstan, capeverde, guatemala, egypt, nicaragua, botswana, vanuatu, tajikistan, namibia, south africa morocco, sao tome and principe, hutan, lao, india, solomon islands, congo, cambodia, yanmar, comoros, yemen, pakistan, swaziland, angola, nepal, madagascar, bangladesh, kenya, papua new guinea, haiti, sudan, tanzania, ghana, cameroon, mauritania, djibouti, lesotho, uganda, nigeria, togo malawi, benin, timor leste, cote d’ivoire, zambia, eritrea, senegal, rwanda, gambia, liberia, guinea, ethiopia, mozambique, guinea bissau, burundi, chad, democratic republic of the congo, burkina faso, mali, central african republic, sierra leone afghanistan, niger recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 33 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu dea norway, australia, iceland, canada, ireland, netherlands, sweden, france, switzerland, japan, luxembourg, finland, united states, austria, spain, denmark, belgium, italy, liechtenstein, new zealand, united kingdom, germany, singapore, hong kong, reece, republic of korea, israel, andorra, slovenia, brunei, kuwait, cyprus, qatar, portugal, united arab mirates, czech republic, barbados, malta, bahrain, estonia, poland, slovakia, hungary, chile, croatia, lithuania, antigua and barbuda, latvia, argentina, uruguay, cuba, mexico, costa rica, libya, oman, venezuela, saudi arabia, bulgaria, saint kitts and nevis, romania, trinidad and tobago, montenegro, serbia, belarus, saint lucia, albania, russian federation, dominica, brazil, peru, kazakhstan, armenia, kraine, georgia, samoa, tonga, turkmenistan, bolivia, guyana, mongolia, moldova, equatorial guinea, kyrgyzstan, tajikistan bahamas, seychelles, panama, , malaysia, namibia, south africa, the former yugoslav republic of macedonia, grenada, bosnia and herzegovina, colombia, turkey, ecuador, mauritius, lebanon, azerbaijan, thailand, iran, dominican republic, saint vincent and the grenadines, china, belize, maldives, jordan, suriname, tunisia, jamaica, paraguay, sri lanka, gabon, algeria, philippines, el salvador, syria, fiji, occupied palestinian territories, indonesia, honduras, vietnam, uzbekistan, cape verde, guatemala, egypt, nicaragua, botswana, vanuatu, namibia, south africa, morocco, sao tome and principe, bhutan, solomon islands, congo, cambodia, myanmar, pakistan, swaziland, nepal, bangladesh, lesotho lao, india, comoros, yemen, angola, madagascar, kenya, papua new guinea, haiti, sudan, tanzania, ghana, cameroon, mauritania, djibouti, uganda, nigeria, togo mozambique, chad, burkina faso, mali, central african republic, sierra leone afghanistan, niger recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 34 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu v. conclusions it is true that the hdi has brought the global community closer and inspired a united effort in the common cause of improving the human condition for those dwelling in the darkest corners of the world. it is also true that hdi is a simple and universal index. however, this index has been very subjective and not been scientifically successful in correctly categorizing the countries. to overcome this problem, cluster analysis has been used. the proposed approach in this paper differs from the previous hdi assessments since it does not need to assign any subjective weights to ei, lei and gdpi. it also differs from the previous dea applications on hdi assessment by clustering countries by means of dea-based cutoff points. recomputation of undp’s hdi rankings by data envelopment analysis emerging markets journal | p a g e | 35 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.10 | http://emaj.pitt.edu vi. references 1. human development report (1990, 1991, 1994, 1995, 1999, 2005, 2009). united nations development program, oxford university press: new york. 2. despotis, d.k. (2005), “measuring human development via data envelopment analysis: the case of asia and the pacific”, omega, 33, pp.385-390. 3. lozano, s. and gutierrez, e. (2008), “data envelopment analysis of the human development index”, international journal of society systems science, 1, 2, pp.132-150. 4. mahlberg, b. and obersteiner, m. (2001), “remeasuring the hdi by data envelopment analysis”, international institute for applied systems analysis (iiasa), interim report ir-01-069, laxenburg, austria. 5. lee, h.s., lin, k. and fang, h.h. (2006), “a fuzzy multiple objective dea for the human development index”, in kes 2006, part ii, gabrys et al. (eds): lecture notes in artificial intelligence, 4252, pp.922-928. 6. andersen, p. and petersen, n.c. (1993), “a procedure for ranking efficient units in data envelopment analysis”, management science, 39, pp.1261-1264. 7. charnes, a., cooper, w.w. and rhodes, e. (1978), “measuring the efficiency of decision making units”, european journal of operational research, 2, pp.429–444. 8. harkness, s. (2004) “social and political indicators of human well-being”, research paper no. 2004/33, united nations university: world institute for development economics research (wider). 9. foster, j., lopez-calva, l. and szekely, m. (2005), “measuring the distribution of human development: methodology and an application to mexico”, journal of human development, 6, 1, pp. 5 -29. 10. ul haq, m. (1995), “reflections on human development”, new york: oxford university press. 11. chowdhury, s. and squire, l. (2006), “setting weights for aggregate indices: an application to the commitment to development index and human development index, journal of development studies, 42, 5, pp.761-771. 12. stapleton, l.m. and garrod, g.d. (2007), “keeping things simple: why the human development index should not diverge from its equal weights assumption”, an international and interdisciplinary journal for quality-of-life measurement, 84, 2, pp.179-188. 13. wolff, h., chong h. and auffhammer, m. (2009), “human development index: are developing countries misclassified?”, agricultural & applied economics association 2009, aaea&acci joint annual meeting. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu factors affecting the adoption of mobile payment systems: an empirical analysis i̇kram daştan yalova university | ikram.dastan@yalova.edu.tr cem gürler yalova university | cem.gurler@yalova.edu.tr abstract the world witnessed a rapid growth in the e-commerce in the recent years. widespread use of mobile devices in the ecommerce has a role in this augmentation. associated with growth of trading volume and the introduction of new devices, new products and solutions emerge and they diversify concerning online payments. consumer attitudes and behaviors may change according to these developments. the purpose of this study is to investigate the factors effecting adoption of mobile payment systems by the consumer. 225 individuals were surveyed online through convenience sampling method. a research model was developed and proposed relationships were tested using structural equation modeling. the empirical findings point out that perceived trust, perceived mobility and attitudes positively affect the adoption of mobile payment systems (mps); perceived usefulness and perceived ease of use have no effect on adoption of mps. furthermore, perceived reputation is positively related to perceived trust and finally environmental risk is negatively related to perceived trust. keywords: mobile payment systems, m-payment, mobile payment adoption, mobile technologies, adoption of mps new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.95 | http://emaj.pitt.edu | mailto:ikram.dastan@yalova.edu.tr mailto:cem.gurler@yalova.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.95 | http://emaj.pitt.edu i̇kram daştan, cem gürler emerging markets journal | p a g e |17 factors affecting the adoption of mobile payment systems: an empirical analysis i̇kram daştan cem gürler 1. introduction mobile technologies have not only become widespread rapidly, but they currently also have the advantage of reaching the customers for firms. mobile technologies have lots of advantages against other technologies, such as interacting with anybody in anywhere, being in use individualistically, customized information and services, and getting quick answers from users. according to the world factbook, 87% of the world’s population (6.8 billion people) were using mobile phones in 2013. moreover, mobile internet usage has been widespread day by day. in pursuant of a report published by statcounter (a web traffic analysis tool), the share of mobile devices (phones and tablets) internet usage was 35.3% in 2014 (statcounter, 2014). when taking the statistics of mobile usage into consideration, using mobile devices as a transactional device should not be a surprise (van der heijden, 2002). the use of mobile devices in payments can be regarded as a venture for investors and service providers. the enterprises, who noticed the venture, have continued investing in order to benefit from this situation. samsung generated its own mobile payment system (mps), samsung pay, and other market players have also tried to have a position in market. paypal (an online payment system) has bought paydiant in order to keep up with the competition. apple announced apple pay in the 2014 apple’s launch event, google purchased softcard in 2014, and android pay was announced by google in 2015 spring. these can be shown as evidences to those investments. on the basis of making such investments, google and apple expect consumers to shift their preferences from traditional payment systems to mps. when we compare mps against other payment systems, the most important feature of mps is that it brings mobility. individuals can make their payments independent of time and place. while the smartphone usage has been continuing to rise, mps will take over the traditional payments system and also will be future of payment systems. despite its age, mps is boosting its popularity each day. with reference to paypal research in 22 countries, 33% of online shopping has been carried out by smartphones. considering the history of smartphones, the 33% share shows the importance of mps and smartphones. ipsos ing’s research in 15 countries has shown that the 56% of participants from turkey has made online payments via mobile application at least once (ing, 2015). however, this percentage is just 33% in europe. the percentage of young people in turkey is higher than europe. the difference between these numbers could be derived from turkey’s youth bulge. this is probably because generation y can better keep up with new technologies comparison to generation x. mobility can be shown as an important factor affecting mps, but it is hard to state mobility as the only factor. for instance, the perceived trust factor is as important as mobility. trust in mps occurs differently than the physical payment. because, the consumer doesn’t contact with another person and the transactions are in progress between consumer and mobile devices. reasons, such as the uncertainty about how the transactions occur on background and ill-wishers, influence consumer trust in mps. however security certificates, mobile wallets and such factors can settle up issue of trust. mps may be evaluated as a future payment system. this paper aims to investigate the factors that affect the adoption of mps conceptually and empirically. in this context, in following section we examine the mps literature and its conceptual framework. the last section presents findings and discusses limitations as well as directions for future research. 2. literature and theoretical framework this study used the technology acceptance model (tam) to explain the factors affecting the adoption of mps. the tam was introduced by davis (1989) to explain and estimate the behavior of technology users (davis, 1989). nowadays, tam is widely used for foreseeing the individuals’ adoption of information technologies and intention to use. according to this model, perceived ease of use and perceived usefulness influence behavior developed by the user towards information systems. this behavior channels the individual’s intention and leads to acceptance (özer et al., 2010). the tam has become the most popular model to predict both as the use information technology and intention to use (lu et al., 2003). mobile technologies on the one hand make life easier progressively and have numerous advantages for the companies to reach customers (iab, 2010). features such as individual use, personalized information and services as well as feedbacks from users make mobile technologies superior (barnes, 2002; kannan et al., 2001). volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.95 | http://emaj.pitt.edu factors affecting the adoption of mobile payment systems: an empirical analysis page |18| emerging markets journal mobile technologies progress as a payment system. in recent years, there has been an increasing amount of literature on mps. mps can be defined as a payment system in which mobile devices are used to initiate, activate, and/or confirm any payment (karnouskos and fokus, 2004). in short, mps is a payment that is conducted with a mobile device, such as smartphones and tablets. combining these two definitions, mps is like a kind of electronic payment system, but when we compare mps with electronic payment systems, it has more mobility. there is a large volume of publications that describe the factors affecting adoption of mps; perceived ease of use, perceived usefulness, perceived cost (van der heijden, 2002), mobility, perceived trust, perceived expressiveness (zmijewska et al., 2004), relative advantages, compatibility, complexity, network externalities and costs (mallat, 2007). schierz et al. carried out a survey among 1447 individuals to investigate the factors affecting adoption of mps (schierz et al., 2010). results showed that, in comparison with other factors, perceived compatibility has more and more significant effect on adoption of mps. in korea, a research studied how the factors (innovativeness, m-payment knowledge, mobility, reachability, compatibility, convenience, perceived usefulness and perceived ease of use) affect the adoption of mps, and it has reported that the most important indicators of adoption of mps are perceived usefulness and perceived ease of use (kim et al., 2010). yang et al. found that behavioural beliefs, social influence and personal traits have direct and significant influence on the adoption of mps (yang et al., 2012). zhou (2013) showed that flow is the most important factor affecting continuance to use mps (zhou, 2013). in the same study, it is emphasized that quality of service is the most significant indicator of flow and trust. srivastava et al. demonstrated that, perceived reputation is the best predictor of trust and there is a negative correlation between perceived reputation and environmental risk (srivastava et al. 2010). because of the law numbered 6493 that is in effect at turkey, e-commerce companies and companies using virtual point of sale (pos) are not allowed to save and store the customer payment data, such as credit card number and personal data. the purpose of this law is to secure sensitive data and close some gaps about mps. in mobile systems, trust is one of the most important factors affecting adoption (mallat, 2007; chandra et al., 2010; zhou, 2013). perceived reputation and environmental risk are discussed as the indicators of perceived trust in this research. throughout this study, the term perceived reputation will refer to the evaluation of firm based on its performance. a number of studies have tested perceived reputation as an element of perceived trust (jin et al., 2007; moi and mohtashemi, 2002). in this paper, perceived reputation has been added to the research model as an indicator of perceived trust. h1: perceived reputation positively affects perceived trust. privacy and security concerns on online payment systems influence customer views. customers don’t have transaction processes in hand in online payment systems and this stimulates the uncertainty and causes mistrust. pavlou (2003) has stated that lack of authority on transactions would increase the risk perception of customers and influence trust negatively (pavlou, 2003). also, threat of hackers and possibility of customer information theft give rise to increased environmental risk. by taking such cases into consideration, it is hypothesized that; h2 environmental risk negatively influences perceived trust. besides outdated technologies, mobility has revealed more substantial and complicated problems (karnouskos et al., 2004). griffin has defined trust as the belief that a feature of an object, an event occur or a person’s behavior when faced with a risky situation, to achieve an intended purpose (demircan and ceylan, 2003). in the e-payment systems (also mps), context of perceived trust is consumers’ belief that e-payment transactions will be processed in accordance with their expectations (kim et al., 2010; mallat, 2007). due to mps containing environmental and operational uncertainty, customers may lack trust. these can negatively influence both the adoption of mps and intention to use mps. however, trust in vendors and service providers reduce risks of mps (mallat, 2007). h3: perceived trust negatively influences adoption of mps. davis (1989) defined perceived usefulness as a belief that, using a particular system would enhance job performance (davis, 1989). it can also be expressed as a belief about using a familiar product which is known before cash is used (tzou and lu, 2009). a considerable amount of literature has been observed to explain the relationship between perceived usefulness and adoption of mps (davis, 1989; adams et al., 1992; fenech, 1998). davis (1989) found that perceived usefulness has significant effect on intention to use. mps should be independent of time and place, so individuals could perceive mps useful. thus, h4 is developed accordingly. h4: perceived usefulness positively influences adoption of mps. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.95 | http://emaj.pitt.edu i̇kram daştan, cem gürler emerging markets journal | p a g e |19 davis (1989) also explained perceived ease of use as the degree to which a person believes that using a particular system would be effortless. there is a consensus among social scientists that perceived ease of use is an element of adoption of mps (davis, 1989; gefen and straub, 2000; venkatesh, 2000). a number of studies showed that, a system which is learned and managed easily satisfies individuals and increases intention to use the system (childers et al., 2001; szymanski and hise, 2000). also, some studies have confirmed that perceived ease of use has a strong effect on perceived usefulness (davis, 1989; gefen et al., 2003; deveraj et al., 2003). it is anticipated that, when individuals think ease of use of mps increases, intention to use also increases. from this point forth, h5 is tested to investigate how perceived ease of use affects adoption of mps, h5: perceived ease of use positively influences adoption of mps. one of the most important features that distinguish mps from traditional payment systems is mobility. in the mps literature, mobility tends to be used to refer to the individuals’ ability to make payments independent of time and place. people can’t be located more than one place physically with recent conditions. more clearly, people are unable to buy something from the mall or pay the bill when they are at work, at home or when travelling. however, people can make all the transactional processes through mps. based on the above discussion, hypothesis is proposed as follows: h6: mobility positively influences adoption of mps. attitude refers to the individuals’ tendency and feelings toward an object, an idea or a behavior (küçük, 2011). attitude is an indicator of behavior and it is formed just before behavior. attitude also brings to light the behavior (kalkan, 2011). for this reason, it can be said that there is a positive relationship between attitudes and intention to use. actually, studies have confirmed that proposition (yang ve yoo, 2004; kalkan, 2011, yılmaz vd, 2009). davis (1989) has found that attitude has a strong effect in comparison to other factors. in light of these findings and discussion, the h7 hypothesis is developed. h7: attitude positively influences intention to use mps. in this context, the proposed model of the present study is shown in figure 1. figure 1. research model 3. methodology 3.1 research objective the major objective of this study is to determine the direction of the effects of factors listed as perceived trust, perceived usefulness, perceived ease of use and perceived mobility on adoption of mps. 3.2 sampling and data collection data to answer the research questions were collected through surveys. the online questionnaire form was available on the relevant webpage almost for two months and every completed questionnaire was evaluated. at the same time, we have also collected data via convenience sampling. with the exclusion of missing and incomplete questionnaires, the research was applied to a total of 225 individuals. the first part of the questionnaire has included demographic factors such as age, gender, income statue and educational background. of all 225 participants, 125 were male (55.5%), and 100 were female (44.4%). 1.33% of individuals were under 17, 52.44% were between 18-24, 38.22% were between 25-34, 6.66% were 35-44, 2.88% were 45-54, and 0.44% were over 55 years old. %42.2% of individuals had income levels below tl 1000, 23.55% had income levels between $501-1000, 17.33% had income levels between $1001-1500, 12.88% had income levels between $15012000, 2.22% had income levels between $2001-2500, and 1.77% had income levels above $2500. 1.33% of participants were elementary school graduates, 6.25% were high school graduates, 3.12% had associate degrees, 71.42% were college graduates, 14.73% had post graduate degrees, and 3.12% were phd graduates. 3.3 data analysis prior to applying structural equation modeling, the measurement model was tested with the two-stage approach model of anderson and gerbing (1988). firstly, the confirmatory factor analysis was conducted to perceived reputation environmental risk mobility trust perceived usefulness perceived ease of use attitude intention to use volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.95 | http://emaj.pitt.edu factors affecting the adoption of mobile payment systems: an empirical analysis page |20| emerging markets journal test the validity and reliability of the measurement model. then, the research hypotheses were tested for the structural model. the variables of the proposed model are perceived trust, perceived usefulness, perceived ease of use, and perceived mobility respectively. the measurement model (figure. 1) was tested by employing the calculation of maximum-likelihood. test confirmatory factor analysis’ results indicated that (χ2=1442,660, p<.01, cmin/df = 3.044 gfi = 0.746 nfi = 0.793 cfi = 0.850, rmsea = 0.96), there is unacceptable fit between measurement model and data. upon analyzing item factor loads, standard error covariance coefficients and modification indicators problematic items were identified. in the measurement model, variables er1, er2 and er4 in environmental risk (er) factor, pt1 and pt3 variables in perceived trust (pt) factor; pu1, pu5 in perceived usefulness (pu) factor; peu2, peu3 and peu4 in perceived ease of use (peu) factor; att4 in att (att) factor; int2 in intension (int) factor were excluded due to their low factor loads or excluded since their low and insignificant (p>0.05) factor loads were highly correlated with the error terms of the problems in remaining variables. upon excluding these statements, the measurement model was finalized in format and confirmatory analysis was repeated. the fit indices (cmin/df = 1.866, gfi= 0.888, nfi= 0.917, cfi= 0.959, rmsea= 0.062) indicated that, there was acceptable fit between the data and the model. goodness of fit values for item factor loads and measurement model are shown on table 1 and table 2. table 1: measurement items & reliability construct average variance extracted (ave) cronbach alpha composite reliability (cr) perceived reputation 0,53 0,779 0,77 enviromental risk 0,56 0,719 0,71 perceived trust 0,80 0,924 0,92 perceived usefulness 0,69 0,899 0,87 perceived ease of use 0,79 0,887 0,88 perceived mobility 0,70 0,897 0,87 attitude 0,81 0,931 0,93 intention 0,63 0,780 0,77 it was revealed that composite reliability (c.r.) values were above 0.70 (hair et al., 1995; yap and khong, 2006), which is threshold value for all variables. it was then identified that cronbach alpha coefficients were also greater than the threshold value of 0.70, thus it was concluded that the scales were reliable (berthon, ewing and hah, 2005; kim, soon, et al., 2007). table 2: item-factor loads factor loads perceived reputation pr1: i believe this mobile service provider has a good reputation.. 0,70** pr2: i believe this mobile service provider has a reputation for being fair. 0,78** pr3: i believe this mobile service provider has a reputation for being honest. 0,71** environmental risk er3: i believe there is a high probability of losing a great deal in using mobile payment systems. 0,78** er5: i believe that overall riskiness of mobile payment systems is high. 0,71** percieved trust ptr2: i trust mobile payment systems to be secure. 0,92** ptr3: i believe mobile payment systems are trustworthy. 0,89** ptr4: i trust mobile payment systems. 0,88** perceived usefulness pu2: using mobile payment systems would improve my performance in making payments. 0,78** pu3: using mobile payment systems would enhance my effectiveness in making payments. 0,82** pu4: using mobile payment systems would make it easier for me to manage and make payments. 0,90** perceived ease of use peu1: learning to use mobile payment systems would be easy for me. 0,90** peu5: overall, i would find mobile payment systems to be easy to use. 0,88** perceived mobility pm1: i believe mobile payment is independent of time. 0,88** pm2: i believe mobile payment is independent of place 0,79** pm3: i can use mobile payment anytime while travelling. 0,84** attitude towards the use of mps att: using mobile payment services is a good idea. 0,94** att2: using mobile payment services is wise. 0,89** att3: using mobile payment services is beneficial. 0,88** intention to use of mps iu1: given the opportunity, i will use mobile payment services. 0,80** iu3: i will strongly recommend others to use mobile payment systems. 0,79** as the factor loads of questions are examined, it surfaces that all questions are loaded in a high and significant factor load to the factors to which they belonged; hence convergent validity was achieved. besides, the fact that explained variance coefficient for all scales is above 0.50 is another indicator of achieving convergent validity (fornell & lacker, 1981). volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.95 | http://emaj.pitt.edu i̇kram daştan, cem gürler emerging markets journal | p a g e |21 3.4 testing the hypotheses structural model created by latent variables to check the hypotheses of research was tested by utilizing the maximum-likelihood calculation technique. goodness of fit indices indicated an acceptable fit (χ2=317.187, cmin/df = 1.866, gfi= 0.888, nfi= 0.917, cfi= 0.959, rmsea= 0.062). upon conducting an overall analysis on the created model, the findings on the relationships promulgated in research hypotheses are as displayed on table 3. table 3: hypothesis testing 4. conclusion penetration of smartphones and entrance of 3g’s to our lives make a big change. mobil devices were only used for communication, but now they are observed in all areas of life. mobil devices are developing over time to mobile wallets and consumers can make their payment through these devices. the objective of this study was to find the factors affecting the adoption of mps and to find out how these factors affected the intention to use payment systems. the starting point of the research was to determine the factors affecting mps technologies’ rapidly emerging with present conditions. as a result of the analyses, it was revealed that perceived trust, perceived mobility and attitude factors have a positive effect on the adoption of mps. moreover, this study did not detect any significant evidence for perceived usefulness and perceived ease of use factors on the adoption of mps. another set of findings were the positive effect of reputation and the negative effect of environmental risk on perceived trust factor. one of the most striking results from the data is that, mobility has the biggest effect on adoption of mps compared to other factors. this study produced results that contribute to the findings of the previous work in this field (schierz et. al, 2010). the results of this study indicate that mps gives consumers freedom in terms of time and location, so consumers are disposed to use mps. businesses using online payment system should provide more mobility to reach more consumers. using mobile payment instruments when being on the move brings important advantages to customers. a number of factors were tested as the antecedents of trust in previous studies. in this paper, we have tested two of the antecedents of trust; reputation and environmental risk. with a fast digital conversion, the environmental risk is increasing. users of mps face with lose of information in some cases and these probable risk factors lead the users change their point of view about mps. furthermore, firm reputation is directly associated with adoption of mps. a negative relationship was found between environmental risk and perceived trust, and also a positive relationship was found between firm reputation and perceived trust. this means that, if environmental risk increases, it would cause a decrease in user trust and if firm reputation increases, it could increase trust. this study confirms that environmental risk and firm reputation are associated with trust (chandra et. al, 2010). the results of this study did not show any significant effect between the perceived ease of use and adoption of mps. tech-savvy individuals could use mobile payment applications, but others may experience difficulty. within this scope, the relationship between perceived ease of use and adoption of mps may be insignificant. there are different findings on the literature about perceived ease of use. some of the researchers have detected significant effect for perceived ease of use on adoption of mps (schierz et al., 2010; kim et al., 2010) and some others haven’t found any effect (chandra et al., 2010). the current study found that perceived usefulness has no effect on adoption of mps. however, the finding of the current study does not support the previous researches (chandra et al., 2010; schierz et al., 2010; kim et al., 2010). perceived usefulness has no effect on mps likewise. as a result, users’ perceived trust on mps and mobility perception creates positive attitude toward mps and this situation turn into intention to use mps. the present findings seem to be consistent with other research, which found that attitudes towards the use have a positive effect on intention to use mps (amoako-gyampah and salam, 2004; chau and hu, 2002; huang, 2005). 5. limitations of the research and recommendations for the future studies the generalizability of these results is subject to certain limitations. for instance, in the literature, there are plenty of antecedents of adoption of mps, but in this study only perceived trust, perceived usefulness, perceived ease of use and perceived mobility were analyzed. other factors affecting adoption of mps can be added to future research models. in addition, the effects of several mediator variables could also be analyzed within the scope of those models. the second limitation of this research is that since it would be a challenge to reach the entire population, the convenience sampling method was selected. a sample cannot possibly represent the entire population completely. consequently, it is not feasible to volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.95 | http://emaj.pitt.edu factors affecting the adoption of mobile payment systems: an empirical analysis page |22| emerging markets journal generalize the results obtained from this research. another limitation is that, due to limited budget the research was failed to encompass a wider territory. following this study, some suggestions may be offered for future studies. the research was conducted solely in turkey. in future studies, it is possible to conduct comparative studies in which other factors are included in the research. moreover, the research model might be tested by conducting intercultural research among individuals in various countries. references adams, d. a., nelson, r. r., & todd, p. a. (1992). perceived usefulness, ease of use, and usage of information technology: a replication. mis quarterly, 227-247. amoako-gyampah, k., & salam, a. f. (2004). an extension of the technology acceptance model in an erp implementation environment. information & management, 41(6), 731-745. barnes, s.,j. (2002). wireless digital advertising: nature and implications. international journal of advertising, 21, 399–420. berthon, p., ewing, m., & hah, l. l. (2005). captivating company: dimensions of attractiveness in employer branding. international journal of advertising, 24(2), 151-172. blöchlinger, m. (2012). mobile payment systems. internet economics vi, 41. bozkurt, m. (2011). i̇şletmelerin i̇tibar yönetimi faaliyetlerinin müşteri tutum ve tercihleri üzerindeki yansımaları. uşak üniversitesi sosyal bilimler dergisi,2011(7). chau, p. y., & hu, p. j. h. (2002). investigating healthcare professionals’ decisions to accept telemedicine technology: an empirical test of competing theories. information & management, 39(4), 297-311. childers, t. l., carr, c. l., peck, j., & carson, s. (2002). hedonic and utilitarian motivations for online retail shopping behavior. journal of retailing,77(4), 511-535. davis, f. d. (1989). perceived usefulness, perceived ease of use, and user acceptance of information technology. mis quarterly, 319-340. demircan, n., & ceylan, a. (2003). örgütsel güven kavramı: nedenleri ve sonuçları. yönetim ve ekonomi: celal bayar üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi, 10(2), 139150. devaraj, s., fan, m., & kohli, r. (2002). antecedents of b2c channel satisfaction and preference: validating e-commerce metrics. information systems research, 13(3), 316-333. fornell, c., & larcker, d. f. (1981). evaluating structural equation models with unobservable variables and measurement error. journal of marketing research, 39-50. http://dx.doi.org/10.2307/3151312 gefen, d., & straub, d. w. (2000). the relative importance of perceived ease of use in is adoption: a study of ecommerce adoption. journal of the association for information systems, 1(1), 8. gefen, d., karahanna, e., & straub, d. w. (2003). trust and tam in online shopping: an integrated model. mis quarterly, 27(1), 51-90. hair j.f., anderson r.e., tahtam r.l. and balck v.c.. (1995), multivarite data analysis with reading” prentice hall, international inc, a viacorn company, new jersey. huang, e. (2005). the acceptance of womencentric websites. the journal of computer information systems, 45(4), 75. iab (2010), $6.4 billion in q3 2010 sets new record for internet advertising revenues, retrieved from http://www.iab.net/about_the_iab/recen t_press_releases/press_release_archive/ http://www.iab.net/about_the_iab/recent_press_releases/press_release_archive/press_release/pr-111710 http://www.iab.net/about_the_iab/recent_press_releases/press_release_archive/press_release/pr-111710 volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.95 | http://emaj.pitt.edu i̇kram daştan, cem gürler emerging markets journal | p a g e |23 press_release/pr-111710 (access date: 03.03.2014) ipsos ing (2015) http://www.ing.com/web/file?uuid=fde 0bb20-c23c-4a70-9b587ed3d6ec95e2&owner=b03bc017e0db-4b5d-abbf003b12934429&contentid=33730 (access date: 10.11.2015) jin, b., yong park, j., & kim, j. (2008). crosscultural examination of the relationships among firm reputation, esatisfaction, e-trust, and eloyalty.international marketing review, 25(3), 324-337. kalkan, a. (2011). kişisel tutum, öznel norm ve algılanan davranış kontrolünün girişimcilik niyeti üzerindeki etkisi: üniversite öğrencileri üzerine bir uygulama. journal of süleyman demirel university institute of social sciences year, 2(14). kannan, p. k., chang, a. m., & whinston, a. b. (2001). wireless commerce: marketing issues and possibilities. in system sciences. proceedings of the 34th annual hawaii international conference on system sciences. ieee. karatepe, s. (2008). i̇tibar yönetimi: halkla ilişkilerde güven yaratma.elektronik sosyal bilimler dergisi, 23(23). karnouskos, s. (2004). mobile payment: a journey through existing procedures and standardization initiatives. communications surveys & tutorials, ieee,6(4), 44-66. karnouskos, s., hondroudaki, a., vilmos, a., & csik, b. (2004). security, trust and privacy in the secure mobile payment service. in 3rd international conference on mobile business (pp. 35). kim, b. g., park, s. c., & lee, k. j. (2008). a structural equation modeling of the internet acceptance in korea. electronic commerce research and applications, 6(4), 425-432. kim, c., mirusmonov, m., & lee, i. (2010). an empirical examination of factors influencing the intention to use mobile payment. computers in human behavior, 26(3), 310-322. kim, c., tao, w., shin, n., & kim, k. s. (2010). an empirical study of customers’ perceptions of security and trust in e-payment systems. electronic commerce research and applications, 9(1), 84-95. küçük, e. (2012). planlanmış davranış teorisi çerçevesinde mali müşavir (smmm) olma niyetinin altında yatan faktörlerin analizi. uluslararası yönetim i̇ktisat ve i̇şletme dergisi, 7(14), 145-162. lu, j., yu, c. s., liu, c., & yao, j. e. (2003). technology acceptance model for wireless internet. internet research, 13(3), 206-222. mallat, n. (2007). exploring consumer adoption of mobile payments–a qualitative study. the journal of strategic information systems, 16(4), 413-432. mallat, n. (2007). exploring consumer adoption of mobile payments–a qualitative study. the journal of strategic information systems, 16(4), 413-432.. mui, l., mohtashemi, m., & halberstadt, a. (2002, january). a computational model of trust and reputation. in system sciences, 2002. hicss. proceedings of the 35th annual hawaii international conference on (pp. 24312439). ieee. nakamoto, s. (2008). bitcoin: a peer-to-peer electronic cash system.consulted, 1(2012), 28. özer, g., özcan, m., & aktaş, s. (2010). muhasebecilerin bilgi teknolojisi kullaniminin teknoloji kabul modeli (tkm) ile incelenmesi. journal of yasar university, 3278, 3293. pavlou, p. a. (2003). consumer acceptance of electronic commerce: integrating trust and risk with the technology acceptance model. international journal of electronic commerce, 7(3), 101-134. ron, d., & shamir, a. (2013). quantitative analysis of the full bitcoin transaction http://www.ing.com/web/file?uuid=fde0bb20-c23c-4a70-9b58-7ed3d6ec95e2&owner=b03bc017-e0db-4b5d-abbf-003b12934429&contentid=33730 http://www.ing.com/web/file?uuid=fde0bb20-c23c-4a70-9b58-7ed3d6ec95e2&owner=b03bc017-e0db-4b5d-abbf-003b12934429&contentid=33730 http://www.ing.com/web/file?uuid=fde0bb20-c23c-4a70-9b58-7ed3d6ec95e2&owner=b03bc017-e0db-4b5d-abbf-003b12934429&contentid=33730 http://www.ing.com/web/file?uuid=fde0bb20-c23c-4a70-9b58-7ed3d6ec95e2&owner=b03bc017-e0db-4b5d-abbf-003b12934429&contentid=33730 http://www.ing.com/web/file?uuid=fde0bb20-c23c-4a70-9b58-7ed3d6ec95e2&owner=b03bc017-e0db-4b5d-abbf-003b12934429&contentid=33730 volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.95 | http://emaj.pitt.edu factors affecting the adoption of mobile payment systems: an empirical analysis page |24| emerging markets journal graph. in financial cryptography and data security (pp. 6-24). springer berlin heidelberg. schierz, p. g., schilke, o., & wirtz, b. w. (2010). understanding consumer acceptance of mobile payment services: an empirical analysis. electronic commerce research and applications, 9(3), 209-216. srivastava, s. c., chandra, s., & theng, y. l. (2010). evaluating the role of trust in consumer adoption of mobile payment systems: an empirical analysis.communications of the association for information systems, 27, 561-588. szymanski, d. m., & hise, r. t. (2000). esatisfaction: an initial examination.journal of retailing, 76(3), 309-322. tzou, r. c., & lu, h. p. (2009). exploring the emotional, aesthetic, and ergonomic facets of innovative product on fashion technology acceptance model. behaviour & information technology, 28(4), 311-322. ustasüleyman, t., & eyüboğlu, k. (2010). bireylerin i̇nternet bankacılığını benimsemesini etkileyen faktörlerin yapısal eşitlik modeli ile belirlenmesi.bddk bankacılık ve finansal piyasalar, 4(2), 11-38. van der heijden, h. (2002). factors affecting the successful introduction of mobile payment systems. bled 2002 proceedings, 20. venkatesh, v. (2000). determinants of perceived ease of use: integrating control, intrinsic motivation, and emotion into the technology acceptance model. information systems research, 11(4), 342-365. yang, h. d., & yoo, y. (2004). it's all about attitude: revisiting the technology acceptance model. decision support systems, 38(1), 19-31. yang, s., lu, y., gupta, s., cao, y., & zhang, r. (2012). mobile payment services adoption across time: an empirical study of the effects of behavioral beliefs, social influences, and personal traits. computers in human behavior,28(1), 129-142. yap, b. w., & khong, k. w. (2006). examining the effects of customer service management (csm) on perceived business performance via structural equation modelling. applied stochastic models in business and industry, 22(5‐6), 587-605. yılmaz, v., çatalbaş, g. k., & çelik, h. e. (2009). kredi kartı kullanma niyetini etkileyen faktörlerin yapısal eşitlik modeliyle araştırılması.bankacılar dergisi, 68, 20-29. zhou, t. (2013). an empirical examination of continuance intention of mobile payment services. decision support systems, 54(2), 1085-1091. zmijewska, a., lawrence, e., & steele, r. (2004, october). towards understanding of factors influencing user acceptance of mobile payment systems. in icwi (pp. 270-277). emerging markets journal fashion as a marketing tool and its communication aspect in developing markets dr. fatma engin alpat beykent university | e-mail: engin@beykent.edu.tr , alpat35@gmail.com dr. yusuf ziya aksu aktin | e-mail: yaksu@aktin.com abstract in this article the idenfication of a fashion product, its variability and the analyses of fashion as an industrial design will be discussed within the framework of fashion product marketing. the process of product creation is closely related to the economic, sociological and psychological factors considered, hence, sociologists and trend setters are working together because the concept of fashion product should be viewed as a determiner of status and power of a certain community. each group within the community should be defined within a certain status and therefore each status corresponds to a relevant fashion concept. the survival of the fashion designers within the industrial sector could only be plausable if fashion is firstly analyzed conceptually and then applied separately to each group of the community. keywords: fashion marketing, fashion business, fashion sociology, fashion and communication. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.56 | http://emaj.pitt.edu | mailto:engin@beykent.edu.tr mailto:alpat35@gmail.com mailto:yaksu@aktin.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.56 | http://emaj.pitt.edu fashion as a marketing tool and its communication aspect in developing markets emerging markets journal | p a g e |67 fashion as a marketing tool and its communication aspect in developing markets dr. fatma engin alpat dr. yusuf ziya aksu globalism’s repercussions on the textile industry and problems: the condition of the turkish textile industry and its future has long been an issue for textile exporters as well as the academics working on this field. the economic and social globalism and its formal repercussions on production have been forcing manufacturers and theorists to develop new theories and practices. these efforts also include the repercussions of the international competition that will become liberalized with the gatt (general agreement on tariffs and trade) agreements by the european union affairs and foreign relations department on textile industry, as well as the precautions to be taken. turkish textile industry will certainly be hit by international competition, especially regarding price levels. given the countries where wages and extra labor costs steer at lower levels than turkey, both the consumers and the manufacturers will be affected. faced with hardship already, manufacturers have been lowering their profit margins and disregarding cost of redemption and recession with an aim to exist in international markets. the turkish textile industry needs to develop new policies which will enable it to resist price competition, which will only become fiercer year after year. rationalization of production, uncompromising application of quality management principles, opening to new markets, and shifting production to eastern turkey are measures which only provide a temporary advantage in price competition. they will not be enough to close the wage disparity between turkey and countries that enter the market in the medium term. the turkish textile industry will be facing hardship in this new situation. new marketing tools in turkish textile industry: the turkish textile industry’s ability to develop new manufacturing and marketing strategies will determine if it can overcome the aforementioned hardships and make a fresh leap forward. it needs to find itself a new place in the global competition that escalates day by day. the problem consists of not only growing price competition but also a rise in supply. this is because developing countries that shift from national to international markets prefer the production and export of textile products. the foreign trade policies of developed countries which manufacture textile industry machinery also support these efforts. capital is the main problem in developing countries. this is solved directly by lending from developed countries and indirectly by the resources of world bank for textile industry investments. thus, an emphasis on price and cost aspects in international competition and continuously asking for government subsidies would indicate an error of only seeing a single aspect of the problem. precautions that are taken regarding only a single dimension can bring a short term solution, but will create new problems in mid and long terms while causing the country’s resources to shift to inefficient fields. instead of thinking with only one dimension, one needs to make sure to consider the situation with all its dimensions and propose long term solutions. 1) the fashion dimension of globalism: it is impossible to ignore the positive sides of globalism to turkish textile industry along with the negative. one positive aspect is the increased tendency for fashion and brands that comes with globalism. even though fashion was a socio-cultural phenomenon that existed before globalism and even shaped people on a national or even regional basis, it took a fast turn with globalism. it was transformed into a factor that deeply affects marketing strategies. from a sociological point of dr. fatma engin alpat, dr. yusuf ziya aksu p a g e |68| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.56 | http://emaj.pitt.edu view, fashion is a phenomenon that deals with consumers’ need to be different and to be perceived differently. the feelings of transformation and differentiation that exist within consumers’ and users’ egos manifest themselves an interest in fashionability. in pret-a-porter, conforming or not conforming to fashion is a character badge and highlight. fashion enables individuals who act collectively in a psychosociological and cultural context, to form individual approaches. in other words, individuals belonging to a certain society get the opportunity to express their personality and go beyond the formal structures that society has formed. thus, although defined as a abstract concept, it can also be observed as a concrete product with regard to fulfilling need. it is important to know the meaning and properties of the concept of fashion when marketing fashion products. a fashionable product is special and has distinct properties. for instance, fashionable products get popular fast but fade away quickly as well. every product exists within a series. fashion does not only bring changes to the look of a certain series, but bring changes to many different series. fashion is always a new product. fashion is an abstract concept based on thinking, but also a solid product that fulfills physical and mental needs. whereas technological progress is usually a slow process, fashion is as variable as society since it is influenced by public events, economy and social life. thus, anybody who has an interest in fashion, artisans, stylists, manufacturers big or small face complex problems. these problems occur due to the deep necessity to recognize the consumer and the market as well as the concepts that determine fluctuations and shifts in the market. it is a reality that political, economic, societal (psychological and sociological) events continously influence fashion. 1.1 the fashion phenomenon “a fashion product lives through 4 stages: market entrance, growth, maturity and decline. it is observed that consumers distinctly hesitate at the begining of fashion changes. ”1 “consumers want to follow fashion without taking any risks. consumer anxiety needs to be appeased by offering that the novelty does not clash with already existing system of values and that it is acceptable. the concept of collective understanding allows a psycho-sociological snapshot to be taken of the cultural society made up from individuals. basic or model personality can be defined as the total of the properties that are alleged to the individuals of a certain society. 2 materialistic culture in the act of consumption is merely a hidden element in collective understanding and basic personality. “aside from the observable parts of a product, consumers have mental designs that force them to see objects from a subjective point of view. material culture defines the objective aspect of a thought or a group of values. only products become a societal indicator and carriers of a statement. if a new material is to enter the market and we want it to be a ‘symbolic fashion’ we need to recognize which points to consider as preparation before design. individuals do not react only based on their environments or those who are around them. every individual has a dream share which exceeds his daily life. fashion creations provide opportunities for these attitudes to symbolically actualize via clothing style.”3 the community that the individual belongs to is created by the concious designs that he posesses regarding his own status. the community that the individual applies to stands opposite to the community that he belongs. the individual draws his ideal self within this community. the community that the individual applies to affects him in three ways: 1 moda olgusu, cem hakko i̇stanbul 1980 p.2 2arıkan, moda, kültür, kimlik i̇stanbul, 1997, p.35 3barthes roland, 1990, p. 62. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.56 | http://emaj.pitt.edu fashion as a marketing tool and its communication aspect in developing markets emerging markets journal | p a g e |69 a) affects his attitude and self-image by providing behavior and lifestyle models; b) the influence of the community to be applied increases when their consumption includes products or brands that are based on showing off. fashionable products provide the consumer with various opportunities in creating mental images. renewal of fashion, increase in forms and development of new products incessantly recommend various standings. the increasing success of industries that provide false opulence such as false jewelery, false leather, false entertainment and false luxury which satisfy the individual at least for the moment is based on the existence of communities to be applied. leading points that relate to the occurence of novelty in fashion: the novelty needs to be subject to an experiment to be compared and analyzed against various forces and demands within the individual. the product to be perceived and the perceiver, exist in a process of temporary deconstruction and reconstruction within a certain structure. finally, one ceases to see the novelty as ‘‘a thing’’ and identifies with it. being involved in a new behaviour makes it easy for the individual’s structure to change as well. it has been proven that fashion actualizes ongoing changes. 1.2. relationships between fashion productmarketing: it is especially important to define the word new by how it manifests itself rather than the techical meaning. fashion is the slave of imagination and just like in nostalgy movement it is inspired by the past as well as the future. “another characteristic of fashion is that its future often cannot be guessed or controlled. fashion is not based on mathematical equations, cannot be analyzed completely by science. fashion is an industry that faces unique obligations due to the variable character of industry standards.”4 it is a must to see the future in fashion industry and it is in a tight relationship with a modern understanding given this topic. for instance: 1) a fashion house can never develop through empricial means. 2) a fashion house has to renew fashion or create fashion following serious research. 3) it is necessary to know the markets and the reasons consumers change their taste in order to spread fashion products to the market. it is necessary to always be current with new investments and costs due to shifts in fashion leading to shifts in manufacturing. the price of a fashion product does not only depend on its cost. this fact does not change even when it is obvious that a certain profit margin is added on top of the cost. the selling price actually depends on the significance of the fashionable product, the apparent necessities and necessities that are yet to be realized, the supply and the quality provided by the competition. these factors also affect how strongly that fashion is established.”5 the price requested by a consumer depends on the quality desired of a certain product. quality does not have an absolute meaning for fashionable products. it is necessary to define the concept of quality based on the use of the product. a useful product that is sought for its utility and a show-off product desired for its aesthetic value can both be said to have quality. however, there are a limited number of products that carry both of these properties. 4 barthes roland 1990 p.63 5 hakko, cem, moda olgusu, i̇stanbul 1990 p.47 dr. fatma engin alpat, dr. yusuf ziya aksu p a g e |70| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.56 | http://emaj.pitt.edu for a fashion to catch on, the appropriate timing should be determined so that the conditions before an after a novelty make it clear which benefits a novelty will bring. the introduction of the novelty should only be started once the benefits that will be brought by the novelty have become a necessity for the audience, and once the societal arrangements that will have been made that will make such benefits possible. establishing the two way communication through which fashion is presented to the audience requires continuous feedback from the audience, so that the fashion is learned correctly. the adoption of the fashion by the audience should only be attempted after preparation using mass communication tools and live presentations. from a mass communication perspective, cinema is one of the fundamental phenomena of our time. it plays a fundamental role in the creation of contemporary legends. the legends that cinema creates, along with sports and fashion, occupies a more central place than religious beliefs, political ideologies or other value systems in many modern men and women’s worlds. interpersonal communication occurs when source and target units talk face to face. in mass communicaton, source and target units do not face each other. newspapers, magazines, film, radio, televison, graphic advertisements constitute mass communicaton. it is possible to reach a great number of targets given a large amount of time and place. mass communication differs from interpersonal communication in terms of feedback loops, communication media and constraints of exposure. that is to say, there exists only broadcast and the number of people that can be reached is unlimited. it is more effective in the transfer of knowledge. flow of information is achieved through visual, written or emotional means. in turkey’s societal transformation, mass communicaton plays an important role. criticism of mass communcation in our time is limited to the audience not liking what is given to them. the culture that is produced is criticised according to the masses. fashion is defined by the common tastes and temporary ways of living and feeling observed in a certain society. since it is people who prepare the status of fashion in mass communication, the abstract images given in mass communicaton tools, the transformation of the systems of communicaton between masses, social living, the general lifestyles of couples, the changes that arise in these interaction perform their jobs and enable a great cycle, transformation and circulation. since fashion is by nature changing and ambivalent, advertising in turn should not be monotonous. fashion always desires to be universal, it desires to see and to be seen, it is exhibitionistic. when presented in a medium that emphasizes novelty, fashion creates a great attraction in terms of the product’s success. people who adopt a fashionable concept help not only the fashion’s survival but also its propogation. advertising also undergoes certain turbulences along with the fasihonable products. the changes in advertising itself are the first signs of a changing fashion rather than the cause of its evolution. mass communication is a transformation that bends the rules of media and affects the way people communicate with each other. 1.3 mass communication tools and fashion: there is a three-way back and forth transmission between masses. media and fashion benefit from psychology and freud in regards to buying concepts. fashion is the least stable art of telling oneself of our century’s industries. it is for this reason that its marketing strategies are unique. fashion is also the process of change for behaviours, presumptions and uses in a certain community activity towards what is suggested. fashion is shot term and has visual translations. the basis for this fast evolution is the contagiousness of a way of thought or behaviour that acts as a model that makes itself adopted by force. addiction and availability can lead to fast and complete change. those who are volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.56 | http://emaj.pitt.edu fashion as a marketing tool and its communication aspect in developing markets emerging markets journal | p a g e |71 open to pressure, direct information can also make an impact. mass communication tools are the enablers of all of these psychological approaches. this requires professionality. communication is vital for fashionable products. fashion is also dominant on advertisements and brands. communication tools which enable fashion to spread (in order) are: traditional ads, promotions, direct marketing, a respectable public relations chain, display and counter arrangements, expos and fashion shows. the effective percentages of such communication methods in relation to fashion is as follows: ads and promotional stands on location: 45%, ads via mass communication tools and media: 25%, tv ads 12%, media and other communication tools: 17%. for the advertisements to be succesful, images which have an impulse of differentiation in a unique identity or ads which have an impact of getting closer or likening to a higher class are created. today, the great power of mass communication tools determine popular culture. a culture is created for the masses by experts via these means. according to roland barthes, presenting the people with happiness, luxury and welfare is a totaliatarian attitude. if people accept another way of thought, this attitude is not liked. the problem is not so much as that criticism is not made, but that it does not reach its target. cultural life is dived into elite and non-elite categories. also important is who rules the mass communication sources. these are in the hands of the private sector in the usa, and in government’s hands in russia. turkey has taken europe as an example in this matter. 1.4. semiotic language of fashion: to approach the matter in terms of fashion graphics and semiotics, semiotics can be deemed as the beginning of structuralism. as in graphics, symbols are in the form of index (marking) systems. an indicator has three meanings which are psychological, semantic and logical. fashion system is a language and it has a referential function towards us. relationship function establishes the communication function in the fashion system. cloth is a top language. it is provided, seen, perceived and understood. this entire order has the same system with graphic arts; the philosophy and basis of interior architecture are on the same ‘mode’ with graphic arts. fashion system is a terminological and semiological system. we show its terminological aspect through graphic and spoken or written language. social structure can be analyzed based upon fashion system and also mass communication methods suitable for the structure can be developed. a bilateral communication arises because semantic relationships vary socially and esthetically according to societies. a constant fashion discourse is a form belonging to fashion world, which means that the fashion has a unique, variable, indecisive, confused, inconsistent, attractive, alluring and effective world. history and fashion photography and all of them are included into the media system. fashion can expand insofar as economical aspects permit. it is a mistake to think that expensive materials will become fashion in periods where economical distress arises. fashion (1) is characterized by materials and techniques unique to every period in human progress, and (2) creates its own extraordinary set of values and unique ways of thinking in all periods. each successful period is founded on the successes of previous periods. these principles involve two common grounds of our era: (1) adaptation of design processes with production processes, and (2) arrangement of production according to artistic findings regarding to esthetic values. even though production processes are changed, insights which are effective in self-refreshing art will have a function to create fashion, together with the integration of esthetic ideas existing in human nature with the artistic findings, while fashion will also have a function to create manufacturer and the innovation. creation is performed in two phases which are mental and physical. mental creation presents fashion. fashion concept is the transfer of mental embodiment to the material to be used. in this way, physical form appears. in addition to the function that physical form is required to have, dr. fatma engin alpat, dr. yusuf ziya aksu p a g e |72| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.56 | http://emaj.pitt.edu there are also other factors as well as material and technology: 1) human happiness, 2) goal congruence, 3) change, 4) four dimensionality, 5) functional sort order. the requirement to interpret design properly aims to satisfy and make human happy. products which are the result of produced designs should be able to satisfy emotional requirements of human psychophysiologically. we are living in a world where social, political, economical and esthetic elements dominate. if we address them as a whole, changes and movements carried out within these elements determine, develop, make to expire and change fashion concept. as everything is evaluated according to human, and since human is a three dimensional entity, four dimensionality is the time affecting human. also this is a human factor affecting social, cultural, technological, economical, esthetic, and physical concepts. fashion is a process of change and it takes its form according to requirements of changing pleasures. fashion becomes a concept by integration of esthetic and economical factors with the art. although concept of fashion emerged due to economical conditions, it has been diversified by esthetic factors. despite the fact that fashions of particular periods followed each other due to economical factors, fashion has been regenerating itself in due course. the aspect of fashion depending on economical factors is the evaluation of fabric, dye and material needs by reconsidering. for world textile manufacturers, current general and economical conditions are of first priority. the world determines and decides fashion one year earlier. after opportunities within the determined process are equalized with the social and economical status of people, it is offered by enriching with esthetic elements. in this way, it is provided to influence people by the concept of fashion. people try to follow and catch the concept of fashion to some extent. except the fashion, economical factors affect a textile product beginning from the start of design process up to the delivery of product to consumer. when interpreting, a design within the context of economical conditions should be kept away from all kinds of extremism and wastage. today where it is aimed to produce the best with the lowest cost (the concept of ‘best’ is deemed as satisfying needs in the best way), the money spared by investors for fashion affects designer and creator substantially. therefore, the fashion and all personal pleasures and choices necessarily depend on economical factors. there is a communication between human and textile product. “communication research methods” are among the widest context of social sciences. social sciences address this communication type, rules, laws and systems models in pragmatic reviews and assert by qualitative and quantitative researches. communication types of human with other human beings and objects around have been addressed in terms of textile products. it has been found in the communication of an individual that there are thinking and acting, explanatoriness, responsibility, foresights, diversities, variation among individuals and characteristic or distinctive classifications, and all these elements affect the relationship of human with textile products. because human is a quite complex entity with various aspects such as body, thought, feelings and faith. on the other hand, physical appearance and personality are the constant and significant factors of human showing continuity for the entire life. inherited motives and desires of human, behaviors, the desire to maintain or change an identity, identity seek, roles turns textile product into a tool which will satisfy human ego instead of being just a need for such interactions. capturing and using this tool, and living within the concept of fashion are the source of psychological energy underlying human behaviors and engage as to pleasure principle. individual expect all his/her demands to be performed immediately while individual may not be aware of the impacts of these impulses. ‘the system of thought’ transforms human into the individual of society. it is seen that the terminology of fashion has been changed since the emergence of fashion. fashion has some aspects associated with identity and character; it has an eccentric and conventional language. the fashion is like the elocution, clothes of others come to our attention. it is seen that people may conceal their actual faces by clothes and display a fake image and behavior pattern. in the business life, the phrase “first image is important” highlights the importance of a presentable appearance. why people wear? the answer today is not similar with the one in first and middle ages anymore. the answer: creating a character, volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.56 | http://emaj.pitt.edu fashion as a marketing tool and its communication aspect in developing markets emerging markets journal | p a g e |73 distinguishing genders, defining an identity, and protecting our own interests. the concept of fashion prepares some roles for people, and also gives people the right of initiative. individuals take real roles during their entire lives because human life is real. we can say that there is both nothing and everything in fashion. a dancing dress states its own function. however, the function of a fashionable cloth is more complicated than the dancing dress. the rhetorical aspect of fashionable cloth is more than its other aspects. to say “short skirts are in fashion this year” means that short skirt is the indicator of the fashion this year. fashionable in terms of people and textile products relations is what is in fashion, of brand, mentioned about, written about and demonstrated; what not fashionable is what is not in fashion, not of brand, not mentioned about, not written about and not demonstrated. fashion creates the consumer potentiality that trade requires. at the present time fashion creates a good shot point or a starting point for earning revenues and consumer crises. therefore it creates a feeling of living before in people. in decoration fashions, art critics do not pay attention to the extraordinariness of the modern decoration, and actually modern design culture has not been analyzed in the strict sense. if the decoration objects are compared to the products of fashion wearing in terms of person textile product relation, we understand that decoration objects are aimed to be shown as systems that create a decorative effect extending the effect and intensity. textiles of high technology product at the present day are products of high performance, high resistance and high efficiency in terms of high functioning textile products. high appearance features, softness, molecular design and ordering control in the textile sciences of the future generation have gained importance. in the 21.century fiber science will cover raw material composition, structure and sensitive molecular arrangement in terms of textile products. people who will live in the future generations will find the textile products we are now using primitive. in the near future textile products of human sciences will be the products with high functioning and environmentally friendly. on the other hand there are natural raw materials. great natural fiber raw materials are obtained from them. development of the natural fiber functioning, reforms in the production technology with biotechnology and new and perfect natural fibers will be the textile materials that will be used in the textile products of the future generations. as the renewals are done by people, the textiles to be obtained will be paid attention to be “human friendly”. things that are needed will not only enable science to develop but also will enable the creative fashion creators to progress. in the 21. century quality more than quantity will be important for the capitalist textile industry. the industry is to adapt itself to the market. lll – the effect of fashion on marketing policies because of the fashion’s above mentioned original features, the need of reviewing the marketing policies of the companies participating to the international trade and their marketing tools; and the need of reassessment of the important points in itself reveal itself. in that case, the weight of the first two ps in the marketing policies classically named as 4 p ( promotion – product – price – place ) increase much more than others and especially the importance of communication before and after sales that is placed in promotion concept increases. it becomes in evitable that works to develop products for fashion gains a very fast functionality and respond to the fashion demand by product diversification. conclusion we have examined human and the behaviour of human to others in terms of textile products: and to create various roles for himself/herself and for the other people by creating different feelings on his/her skin, different images since centuries starting from the moment they have realized that clothing like dress and garments they put on themselves make them seem beautiful; to live his/her life in a nice way; to get rid of a monotonous life; to have the chance to try any kind of new clothes, developments of technological clothes at anytime, anywhere and at any status by having a lot of dr. fatma engin alpat, dr. yusuf ziya aksu p a g e |74| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.56 | http://emaj.pitt.edu clothes and clothes of different styles and thus by having a lot of and different outlooks; as long as people believe that they will have the chance to try they will change their clothes, interior decoration of the places they live even if they do not physically wear out, they wear our visually, psychologically, functionally, technologically, aesthetically and as a result people turn towards the products offered to him/her as new and try them and will continue to try. this mentioned approach is about daily life. the textile products used in technological and industrial fields do not have to be aesthetically “beautiful”. however, its adaptation to the industry branch, sector or natural surface figures it is used is its design aspect and it is important that it carries out the desired function. humanity has always aimed to progress forward as world, technology and industry. these developments will bring about new developments, new products, new fields and thus, as textile products are used in various and different fields they bring about new textile products, new experiment fields, new materials, new products in parallel with the developments and progress. also, as in the present day changing fashion products are easier to access and address to more masses increasing demand categories are formed. slow or green textiles which are ecological, nature and human friendly have their places as the current that is increasing and aims to keep the world clean. as it is people who establish this sector and industry technologies, it is also people who have new experiences with textile products in each field, and who develop products by renewing them in terms of aesthetics and function by uniting the products that are new experienced with new technology and scientific developments and by using new technological and scientific developments in the textile products. therefore, a textile product requires for a person to live several experiences in terms of psychology, technology, industry, economy, social activity and sports, fashion of the time and communication. in that respect textile design departments of universities should have important roles. in that field the importance of the cooperation of industry and university is increasing. references adanir, oğuz, semioloji, dokuz eylül üniversitesi yüksek lisans ders notları, 1991. arikan, özden, davis fred fashion, culture, identity, press by university of chicago 1992, (moda, kültür, kimlik) yapı kredi kültür sanat yayıncılık tic. ve san. a.ş. i̇stanbul, 1997. barthes, roland, translated by ward, matthew & howard, richard, originally published in french, system de la mode, fashion system univesity of california press ltd. london, england. 1990. bohdanowitcz janet and clamp liz, fashion marketing routledge ltd. london-newyork, 1994. bowers w. john & courtright a. john, communication research methods scott foresman and companiy, cleveland state university pres. usa, 1984. brazzi, andrea, the qestion of decoration, annual tessuti, i̇taly, 1992. colors, june-september 2000 verona / italy. craik, jennifer, the face of fashion cultural studies in fashion, routledge ltd., 1995, london and new york. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.56 | http://emaj.pitt.edu fashion as a marketing tool and its communication aspect in developing markets emerging markets journal | p a g e |75 cüceloğlu doğan, i̇nsan ve davranışı, psikolojinin temel kavramları, remzi kitapevi i̇stanbul 1996. encyclopedi̇a of mitology, octopus book ltd., london, 1975. evans, helen marie, man the designer, mc millan company newyork, 1973. freud,sigmund,totem ve tabu,çev:berkes, niyazi, remzi kitabevi, i̇stanbul, 1971. goldman, lucien. çev: avşar, timuçin ve aymuksa, füsun. i̇nsan bilimleri ve felsefe. i̇sbtanbul, mart, 1977. guiroud, pierre, çev: teri̇mce, mehmet, gösterge bilim, m.s. özel yayını, önder matbaacılık, sivas, 1977. hakko, cem. moda olgusu, toplumsal ve ekonomik bilimsel bitirme tezi, vakko yayınları, i̇stanbul, 1980. hallen, bary, toward a history of the carpet, annual tessuti, i̇ntemi annual, roma, 1992. herald, jacqueline, fashions of a decade, the seventies, b.t. batsford ltd. hong kong, 1994. hürri̇yet gazetesi̇, 2000, p.14. i̇nternational textiles interior, no: 2 september 1990, london. international textiles, i̇nterior, contract market retail report 1987 trends no: 2 1986 september. london, v.k. jarnow jeanette & guerrio miriam, inside fashion business, toronto, ny, 1991. lawer, james, costume and fashion c.s. graphics singapore, 1995. lurie, alison, the language of clothes, bloomsburry publishing ltd. london, 1992. martinich josef s., production and operation management, printed by john willey and sons. inc. new york 1997. oskay, ünsal, toplumsal gelişmede radyo ve televizyon (geri kalmışlık açısından olanaklar ve sınırlar) ankara üniversitesi, siyasal bilgiler fak. basın ve yayın yüksekokulu yayınları, no: 5. oskay, ünsal (metodoloji açısından) sosyal bilimlere giriş (2. basım) duverger, m. bilgi yayınevi kavaklıdere, ankara, kasım, 1980. oskay, ünsal estetize edilmiş yaşam, benjami̇n, walter, dost kitabevi yayınları, yenişehir, ankara. dr. fatma engin alpat, dr. yusuf ziya aksu p a g e |76| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.56 | http://emaj.pitt.edu oskay, ünsal. kitle haberleşme teorilerine giriş. seçilmiş parçalar, 2. baskı, ankara üni. siyasal bilimler fakültesi yayınları, sevinç matbaası ankara, 1973. read, herbert, sanat ve endüstri. çeviren: dr. nigar beyazıt i̇stanbul teknik üniversitesi matbaası. i̇stanbul, 1973. ronan colin, the universe explained, thames and hudson, printed and bounded in italy, 1994. woodham m. jonathan, twentieth century design, oxford history of art, oxford university press, 1997, printed in hong kong. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu investment portfolios in an emerging economy: what drives portfolio’s diversification? pedro luiz albertin bono milan eaesp-fgv, gvcef: finance research center | bonomilan@gmail.com william eid jr. eaesp-fgv, gvcef: finance research center | william.eid@fgv.br abstract this study sheds light on the investment portfolio’s decisions through behavioral insights. the study intends to identify personal characteristics that drive the level of diversification and lead investors to allocate resources in risky assets in an emergent economy, deepening the discussion about investment decisions and bringing some behavioral insights to the debate. the study has a unique and heterogeneous database of individual financial allocations from brazil, one of the largest emergent economies. the characteristics of brazilian investors play an important role in investment decisions, high educated and married investors tend to display diversified portfolios. to invest in risky assets, male investors have a 43% greater likelihood of investing in risky assets than females, highlighting the discussion on gender and investment decisions. moreover, married investors tend to exhibit conservative portfolios. we observed that traditional investors are underdiversified, allocating primarily in traditional and safety assets. the results suggest that the investment decisions can be subject to psychological biases defined in behavioral finance theory. keywords: investment portfolios, diversification, risky assets, behavioral finance. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.120 | http://emaj.pitt.edu | mailto:bonomilan@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.120 | http://emaj.pitt.edu investment portfolios in an emerging economy: what drives portfolio’s diversification? page |1| emerging markets journal investment portfolios in an emerging economy: what drives portfolio’s diversification? pedro luiz albertin bono milan william eid jr. 1. introduction the growth of the financial market in recent years has led to greater availability of financial products and services in order to meet a new range of customers and investors. among the new products, those intended for financial allocation require special attention because they offer new diversification possibilities and financial strategies for investors. according to modern theory of finance, which has been built since the 1970s, when several investment opportunities are available in the financial market, investors diversify their investments mitigating risks and maximizing rates of return (markowitz, 1952). modern theory of finance analyzes the investors’ decisions based on assumptions, among them, the market efficiency and individual rationality, where investor decisions are perfectly rational based on the correct analysis of available information (fama, 1970; shiller, 1999). however, it is noteworthy that the vast majority of investors do not have diversified portfolios, and many invest without regard to the risk-return relationship. noting the dissonance between the practice and the modern theory of finance, some studies have begun to question investors’ rationality in presenting psychological factors affecting financial decisions and, furthermore, the emotional factors leading investor decisions. a pioneering study from 1979 states that financial decisions based on emotions or psychological influences can lead investors to allocate their financial resources in higher-risk investments and underdiversified portfolios (kahneman and tversky, 1979). the discussion of the rationality of investors in the finance literature leads to the concept of behavioral finance, which analyzes investors’ decisions under psychology and finance theories highlighting the factors that drive financial decisions. the brazilian financial market has a crescent number of investors and several investment possibilities, offering conservative investments ranging from savings and fixed income funds to risky investments via capital markets and structured products. through the prism of the modern theory of finance, brazilian investors should allocate their financial resources in a rational and diversified way. on the other hand, according to behavioral finance theory, brazilian investors can make decisions under psychological bias when choosing underdiversified or risky portfolios. few empirical studies analyze brazilians’ investment decisions and the intrinsic characteristics that lead to portfolio diversification and the investment in risky assets. considering the size and sophistication of the financial market in brazil, it is important to analyze what drives investment decisions to provide new subsidies to improve the financial education process of brazilians and provide new tools for market participants to develop better products for investors. in this context, the main objective of our study is to analyze how brazilian investors are investing their financial resources among several possibilities available in the market and to seek the factors that can influence the level of portfolio diversification and the financial allocation in risky assets. the paper is organized as follows: the first presents the motivation. the second part debates the underlying literature of financial theories and behavioral influences. the third presents the data and the methodology applied. the fourth discusses the results. the fifth part of the study is devoted to the conclusion. 2. underlying theories the modern theory of finance states that investors act rationally, seeking to minimize risks and maximize returns through the process of the diversification of their investments. the theory departs from a neoclassical microeconomic approach whose central paradigm is the rationality of economic agents (yoshinaga et al., 2008). in this sense, individuals who operate in the financial markets must have the ability to process the information available and to make rational decisions consistent with the concept of expected utility (von neumann, 1947). however, over the course of thirty years, many studies have presented evidence of investors allocating financial resources in under-diversified portfolios and unbalanced portfolios concentrated within an average of volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.120 | http://emaj.pitt.edu pedro luiz albertin, bono milan, william eid jr. emerging markets journal | p a g e |2 two or three assets (blume and friend, 1978) (barber and odean 2000) (polkovnichenko, 2005; goetzmann and kumar, 2008). thus, a new theoretical approach to finance goes considers the individual's behavior in the investment decision. in this context, the behavioral finance theory has the aim of improving the modern theory of finance through psychological and behavioral approaches (lintner, 1998) (kimura, basso and krauter, 2006). moreover, cultural differences shape the psychological aspects and play an important role in making economic and financial decisions. levinson and peng (2007) suggest that a systematic difference affects financial and economic decisions, whether rational or irrational, often assumed to be universal. the authors conducted an empirical study in the united states and china to examine how cultural background affects economic decision-making and test the framework, information morality and outside groups influence the judgments of financial value and the property across cultures. important studies that have incorporated behavioral finance theory present investor decisions driven by psychological needs, following maslow's hierarchy of needs. the hierarchy of needs is a concept of motivational behavior, one of the most important motivation theories in psychology studies. in this concept, human actions and decisions are explained by five levels of human needs, ranging from basic physiological needs to the highest level of needs: selfactualization (maslow, 1943), as presented in figure 1. at each level of the hierarchy of needs, the human being receives internal and external psychological influences that affect their decisions, adding the set of needs that man seeks to meet throughout life. figure 1. maslow's hierarchy of needs source: hierarchy of needs, maslow (1943). prepared by the authors. in the context of investments arises the concept of behavioral portfolio theory, which is visually presented in figure 2, connecting maslow's hierarchy of needs with traditional financial theories (shefrin and statman, 2000), (de brouwer, 2009). figure 2. behavioral portfolio theory source: prepared by the authors. the connection between the theory of behavioral finance and the traditional theory of finance results in three approaches that investors can use in the investment decision-making process (shefrin e statman, 2000). the first approach is the safety-first portfolio theory, whereby investors essentially receive the influence of the second level of maslow's hierarchy. in the safety-first approach, the investor aims to minimize the likelihood of financial distress pr(w<s), where the investor aims to maintain its level of wealth (w) above the subsistence level (s), i.e., above the first level maslow's hierarchy of needs. investors concentrate their investments in under-diversified portfolios allocated primarily on traditional and low-risk assets. the second is the ps/a (theory, security, potential and aspiration theory). the second theory follows the concepts of safety-first theory, adding the intrinsic potential of the investor. the potential is the individual aspiration to achieve the highest level of maslow's hierarchy of needs. security is the major guide of financial decisions, but the investor receives an input from the need to self-actualize. this potential and aspiration lead the investor to create a target point of wealth, a desire for higher levels of wealth. the central difference in this second approach is in the interpretation of the variables. specifically, the subsistence level (s) replaced by a more general aspiration level (a). based on this approach, the investor can allocate portions of its investments in risky assets by seeking higher returns. even though an investor has a potential aspiration for wealth, it keeps a major fraction of its wealth in traditional and low-risk assets. the third and final approach, bpt-as (theory, security, potential and aspiration theory + prospect theory), complements the two previous approaches to prospect theory (kahneman and tversky, 1979). the investor’s motivation is the security instincts, but invest in different assets by seeking higher rates of return and higher levels of wealth. the difference in this approach is the addition of all cognitive biases in financial decisionmaking. cognitive biases in investment interfere in mental processes, generating decision biases that may violate the axioms of rationality and leading investors to allocate their resources in investments that generate lower rates of return or assume higher levels of risk. among the biases are: loss aversion, anchoring, volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.120 | http://emaj.pitt.edu investment portfolios in an emerging economy: what drives portfolio’s diversification? page |3| emerging markets journal availability, herd behavior, local trends and overconfidence (kahneman and tversky, 1979), (de bondt e thaler, 1994). loss aversion may be present only when the investment has improved, imposing a desire to preserve the achieved return. in investments facing losses, investors tend to take greater risks because they believe they can recover past losses by relocating in riskier assets (köbberling and walker, 2005). psychological biases can affect self-control, misleading their comprehension about their actions. anchoring is a behavioral bias that biases decisions toward initial values, i.e., a limitation in the decision-making process, leaving the investor tied to a past target return, the result of a payoff from a past time (jacowitz and kahneman, 1995). furthermore, the individual may invest based on available information, called availability bias, whereas investors do not examine other alternatives or additional information to allocate financial resources. individuals evaluate the chance that some event will happen from the comparable events that have occurred previously (barberis and thaler, 2003). herd behavior drives investors to replicate the decisions made by other investors. the belief is that other investors invest with more information; thus, when an individual makes a decision based on what the other investor did, he undervalues the information available in the market (bikhchandani and sharma, 2000). local knowledge can also be present as an investment decision bias if the investor chooses to allocate its resources only in markets in which it already has a level of information and greater familiarity (coval and moskowitz, 1999). the overconfidence bias could lead investors to believe that they have a comparative advantage in the analysis and valuation of assets relative to the market, holding losing positions (plous, 1993). few empirical studies seek to understand the behavior of brazilian investors in light of behavioral finance. the discussion in the literature is intriguing and stimulates research to understand whether brazilian investors allocate their financial resources following the model of rationality or whether they decide by psychological factors. in the united states, several studies have analyzed the portfolio diversification and investments in risky assets of individual investors. the theories of diversification do not appear to describe investors’ decisions properly, given that u.s. investors, analyzed based on the survey of consumer finances 1983, have under-diversified portfolios (kelly, 1995). as a possible explanation for investor behavior, the overconfidence bias can affect investment decisions and lead investors to less-diversified portfolios and a greater exposure to risky assets. kelly (1985) tests the effect of various investors’ characteristics in the level of portfolio diversification, among them: age, education level, occupation, and risk profiles. however, none of the personal characteristics is significant to improve the understanding of investors’ decisions. a complementary study using data from the survey of consumer finances between 1992 and 2001 seeks to find the determinants of equity investment in the u.s. market (shum and faig, 2006). shum and faig (2006) include investors’ characteristics to understand their financial allocation. authors note a great heterogeneity in the financial allocation, identifying that the decision to hold equities in investors’ portfolios positively correlated with an investor’s total investment, age, risk attitude and reasons for saving, such as retirement. investors aged up to 50 years old tend to have more equities in their portfolios. as investors surpass the age of 50, they reverse this tendency, leading to a reduction in the number of equities. in addition, the total investments and savings have positive effects on equities held in a portfolio. a study conducted in 2008 analyzes american investor behavior and observes poorly diversified investment portfolios (goetzmann and kumar, 2008). the authors note that a low level of diversification is associated with young investors with lower income, less education and less sophistication. from the perspective of behavioral finance, goetzmann and kumar (2008) state that investment decisions are consistent with overconfidence bias, trend behavior and local bias. following, grable et. al. (2004) attempt to explain why individuals exhibit behaviors that do not maximize the expected utility. the study explores how the projection behavioral bias can shape financial risk tolerance attitudes. the results suggest that changes of gender, income, and stock market prices, analyzed by market indices, help to explain the risk attitudes. tolerance appears to be risk elastic and attitude changing over time. international studies provide a strong base of empirical support for our testing and allow us to compare the investment portfolios of brazilians, their level of diversification and investment in risky assets. 3. data and methods we use a novel and heterogeneous database composed of 500 brazilian investors and 2,224 investment observations to attend our empirical investigation. our database provides sufficient details to deepen the discussion of the investment decisions of brazilians. we construct our database based on the brazilian supreme electoral court (tse-tribunal superior eleitoral) website. the tse website maintains volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.120 | http://emaj.pitt.edu pedro luiz albertin, bono milan, william eid jr. emerging markets journal | p a g e |4 the investment portfolios of candidates for the political positions of mayors and councilors in the year 2012 for all brazilian states. investors are brazilians with heterogeneous occupations not based on political occupation. by opting for the candidacy for a political position in brazil, the candidate must release all of its assets and investments in the supreme electoral tribunal website. while we understand that there may be a selection bias in the study sample, to our knowledge, it is the only database publicly available. moreover, we believe that the impact is minimum by the sample size, the heterogeneity in the occupations of these people and the differences in their investment portfolios, serving as a good proxy for the investment portfolios of brazilians. our database reports detailed allocations in different assets with at least 17,000 reais and at most of 11 million reais of investments, and we account for personal characteristics such as age, gender, marital status, education level, residence in the capital city or countryside and total investment. the total investment of each investor is in natural logarithm to capture the variation between investment portfolios without distorting the results. the average age of investors, presented in table 1, is 53 years old, with a minimum of 30 years and a maximum of 87 years old. these investors allocate their resources in four different types of assets on average, with a minimum investment of 1 and a maximum of 13 different assets. observing the number of investments, we can determine that the average brazilian investor is under-diversified. among all investors, 435 are men and 75 are women, 344 are married, 391 have higher education, and 56% of them reside in capital cities. table 1: summary statistics of investors’ characteristics age (years) total investment (r$) number of investments mean 53 731,669.55 4.45 median 54 462,067.64 4 std. dev. 11 988,523.13 1.76 min 30 17,577.52 1 max 87 11,186,074.14 13 n 500 500 500 n % man 425 85% woman 75 15% married 344 69% not married 156 31% higher education 391 78% no higher educ. 109 22% residence in capital 282 56% residence in countryside 218 44% source: tse – tribunal superior eleitoral 2012. prepared by the authors. table 2 shows the allocation of brazilian investors in different assets. investors allocate most of their investments in residential real estate, followed by vehicles and urban land. table 2 shows the underdiversified portfolios and a conservative allocation with approximately 70% allocated to traditional and low-risk assets. it is important to highlight the resources allocated in vehicles, durables that traditionally do not generate positive financial returns. financial investments represent approximately 15% of the total polarized in fixed income assets, reinforcing the evidence of conservative investor profiles. table 2: asset allocation (% participation) source: tse – tribunal superior eleitoral 2012. prepared by the authors. figure 3 graphically presents the main investments made by investors. figure 3. asset allocation (% participation) source: tse – tribunal superior eleitoral 2012. prepared by the authors. the black vertical bars represent non-financial investments; the gray vertical bars represent financial investments. stratifying the sample by total investments, we observe that there is a thin shift in asset allocation. as total investments increase, allocations in residential real estate and vehicles decline, and allocations in rural properties and entrepreneurial and financial allocations increase. however, investor portfolios remain underdiversified. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.120 | http://emaj.pitt.edu investment portfolios in an emerging economy: what drives portfolio’s diversification? page |5| emerging markets journal table 3: allocation of the main investments by total investment (in r$) source: tse – tribunal superior eleitoral 2012. prepared by the authors. figure 4 graphically presents the changes in asset allocations as total investments increase. figure 4. changes in asset allocations as total investments increase source: tse – tribunal superior eleitoral 2012. prepared by the authors. 3.1. diversification metrics to estimate the level of portfolio diversification, we follow the diversification metric presented by blume and friend, 1978. the metric analyzes investor allocations compared to a market portfolio. blume and friend, 1978 analyze the stock portfolios of u.s. investors using the capital market index as a benchmark to measure the diversification index. whereas brazilian investors allocate little financial resources in stocks and the absence of a market benchmark for these investors, we adjust the metric creating a market portfolio based on the mean and median allocations of all investors in our database. our adaptation analyzes the deviation of the individual allocation of each asset compared to the mean and median allocations of each asset among all investors in the sample. thus, assuming that the mean and median portfolios are a good representation of the portfolio allocation of brazilians, the mean and median of all investments in each asset are the benchmark in our study. we understand that our adaptation can indicate a specification error because there is not a benchmark publicly available; however, examining how individual investors differ from the mean and median allocation of all investors can be a good starting point to understand the factors leading brazilian investors to diversify their portfolios. according to the metric, the lower the index measured by equations 1 and 2, the greater the portfolio diversification. thus, the level of portfolio diversification follows equation (1) and equation (2): where: dimeani is the diversification index using the mean of investor i dimediani is the diversification index using the median of investor i n is the number of securities held by the investor wi is the portfolio weight assigned to investment type i in the investor portfolio wbenchmeani is the mean weight assigned to an investment type i in the benchmark portfolio wbenchmediani is the median weight assigned to an investment type i in the benchmark portfolio 3.2. metrics of investment in risky assets whereas brazilian investors have concentrated portfolios in low-risk assets, we seek to understand what drives investors to take a divergent allocation. we use higher-risk investments and p personal characteristics to pursue factors that can lead investors to allocate financial resources in different assets. stocks, equity mutual funds and entrepreneurial investments are risky investments in our study. we measure the level of allocation in risky assets via two procedures: the first procedure considers the weighted sum of risky assets contained in each individual portfolio. the (1) (2) volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.120 | http://emaj.pitt.edu pedro luiz albertin, bono milan, william eid jr. emerging markets journal | p a g e |6 formula allows us to observe the relative percentage of total investments allocated in risky assets. equation (3) presents the formula for measuring the level of risk allocation: where, iriski is the risk-taking index of investor i wriski is the sum of all risk investments of investor i totali is the sum of all investments of investor i the second procedure to measure the allocation in risky assets follows shum and faig (2006), adding a dichotomous variable that takes the value of 1 if investors invest in risky assets or 0 if the investor has no risky assets in its investment portfolio. finally, to find the factors that influence investors to adopt a more diversified portfolio, we developed an ols regression model using the diversification index measured by equation (1) and equation (2) as explained variables. as explanatory variables, we use the investors’ characteristics: age (ω), gender (λ), level of education (δ), residence (θ) (capital city or countryside), marital status (ξ) and total investment (ψ). the objective of this regression model is to capture the intrinsic characteristics that lead to diversified allocations. the regressions relied on the application of a robust white matrix. equation (1) as an explained variable follow the ols equation 4: equation (2) as an explained variable follow the ols equation 5: similar to equations 4 and 5, to find the factors that influence investors to allocate resources in risky assets, we developed two regression models to verify the impact of age (ω), gender (λ), level of education (δ), residence (θ) (capital city or countryside), marital status (ξ) and total investment (ψ) on the decision to allocate financial resources in risky assets. the first regression is an ols regression and has the explanatory variable measured by the first risk metric procedure, equation 3. the second regression, conducted under the second risk metric procedure, has dichotomous explained variables; therefore, we adopted a probit model. the regressions relied on the application of a robust white matrix. equation (3) as an explained variable follow the ols equation (6): procedure (2) as a dichotomous explained variable follow the probit equation (7): 4. results our results provide new insights about how brazilian investors allocate their financial resources. the results indicate that investors have under-diversified portfolios concentrated mainly in traditional and low-risk assets. the average rate of diversification estimated by equation 1 is 0.2153. the diversification index using the benchmark portfolio composed by the median allocations, equation (2) presents an average diversification rate of approximately 0.5023. despite the difference between the two models, we observe that the difference extends to all individual portfolios in proportional magnitude, preserving the comparative power between the models. table 4 shows diversification rates in quartiles, and quartile 1 (q1) indicates investors with higher levels of diversification. the diversification index becomes smaller as we move from the second quartile to the fourth quartile. there is a significant difference between investors with high diversification index, first quartile, and investors located in the fourth quartile for both metrics diversification. however, the differences must to be statistically significant to give consistency to the inferences. to test for significant differences between the investors with greater diversification rates and investors with smaller diversification rates, we conducted a t-test of means between the q1 and q4 groups. risk investment index if risky assets ≠ 0 variable value = 1 if risky assets = 0 variable value = 0 (3) (4) (5) (6) (7) volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.120 | http://emaj.pitt.edu investment portfolios in an emerging economy: what drives portfolio’s diversification? page |7| emerging markets journal table 4: descriptive statistics of diversification rates dimean q1 q2 q3 q4 mean 0.2153 0.0560 0.1103 0.2037 0.4911 median 0.1536 0.0582 0.1070 0.2019 0.4385 std. dev. 0.1926 0.0157 0.0204 0.0315 0.1849 min 0.0192 0.0807 0.0807 0.1537 0.2719 max 0.9124 0.1534 0.1534 0.2709 0.9124 n 500 125 125 125 125 dimedian q1 q2 q3 q4 mean 0.5023 0.2934 0.4193 0.5270 0.7697 median 0.4673 0.2992 0.4172 0.5227 0.7796 std. dev. 0.1865 0.0531 0.0286 0.0370 0.1062 min 0.1584 0.1584 0.3695 0.4673 0.6113 max 10.000 0.3694 0.4672 0.6094 10.000 n 500 125 125 125 125 source: prepared by the authors the t-test compares the rates of portfolio diversification in the first quartile, which has higher diversification rates, with the lower diversification rates located in the fourth quartile. the test revealed a statistically significant difference at 1% with t-stat <0.000 for both models, ensuring that investors distributed in the first quartile had significantly different portfolios than investors located in the fourth quartile. this t-test validates the inferences for each group in the regression models. the regression models intend to identify aspects that can lead investors to increase their diversification levels and characteristics that can drive investors to increase investments in risky assets in their portfolios. table 5 presents the results of the four regression models. columns (1) and (2) identify the characteristics of investors that can lead to a more diversified portfolio. columns (3) and (4) present the characteristics that lead investors to invest greater financial resources in risky assets. table 5: results of the four regression models source: prepared by the authors notes for table 6: regression table for models of diversification and investment in risky assets. (1)(2) ols regression model with a diversification index measured by equation 1 and equation 2 as an explained variable and the variables age (ω), gender (λ), education level (δ), residence (θ) (capital city or countryside), marital status (ξ) and total investment (ψ) as explanatory variables. (3)(4) regression models to verify the impact of age (ω), gender (λ), education level (δ), residence (θ) (capital city or countryside), marital status (ξ) and total investment (ψ) in risky assets. regression (3) is an ols regression has explained the variable measured by equation 3. regression (4) is a probit model that analyzes the impact of the explanatory variables on the level of investment in risky assets. the regressions relied on the application of a robust white matrix the results displayed in table 5 indicate the effects of investor characteristics on the level of portfolio diversification as well as the propensity to invest in risky assets. the characteristics of brazilian investors play an important role in investment decisions, and the results support the findings in international studies. higher education influences investors to higher levels of portfolio diversification. the result has statistical significance and follows evidence found by goetzmann and kumar (2008) for american investors. marital status also positively affects the level of portfolio diversification. married investors tend to have more diversified portfolios than single investors do. goetzmann and kumar (2008) observe more diversified portfolios in the united states as total investment increases, contrary to our finding for brazil. in brazil, higher financial resources do not necessarily lead to more diversified portfolios. in the presence of new financial resources, the brazilian investors maintain volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.120 | http://emaj.pitt.edu pedro luiz albertin, bono milan, william eid jr. emerging markets journal | p a g e |8 their resources in the same types of investments. if the investor allocates its resources in residential real estate, land and savings, he will not necessarily allocate its resources in other assets, and in the presence of new financial resources, an investor will allocate more resources in the same types of assets. comparing the results concerning investment in risky assets, we observe that a greater number of personal characteristics affect the investment decisions of brazilian investors. the equations in models 6 and 7 seek the characteristics of investors that lead them to invest in risky assets. for both models, shown in columns (3) and (4) of table 6, age may indicate higher risk exposure. the evidence accompanying the results found in the study of shum and faig (2006) in the united states shows that younger investors tend to invest more in risky assets. the model also shows that male investors have a 43% greater likelihood of investing in risky assets than female investors, highlighting the discussion on gender and investment decisions. married investors tend to exhibit less risk and maintain conservative portfolios. as expected, as total investments increase, the greater the investment in risky assets will be, once more in line with the results of shum and faig (2006). following international studies, our results suggest that brazilian investors in our dataset cannot follow the complete model of rationality assumed by the modern finance theory. evidence suggests that their investment decisions are subject the psychological interference defined in behavioral finance theory, leading to poorly diversified portfolios. in addition, behavioral biases can lead the investor to allocate resources in risky assets regardless of the risk factors. analyzing the study by shefrin and statman (2000), our results suggest that brazilian investors make financial decisions that are consistent with the bpt-as theory approach (theory, security, potential and aspiration theory + prospect theory). investors can move essentially by security instinct, but a potential aspiration to higher levels of wealth can lead the investor to invest a portion of its assets in risky assets, seeking higher rates of return. the results that present brazilian investors as less diversified with a high concentration of traditional and low-risk assets in their portfolios and a fraction of their resources in risky assets support the possibility that these investors may be subject to psychological biases in financial decisions. personal characteristics that lead investors to take greater risk suggest individual overconfidence, a behavioral bias that leads investors to believe that their ability to process information is better than that of other investors, leading to greater exposure to risk. age can play a strong role to overconfidence, given that younger investors tend to take greater risks. goetzmann and kumar (2008) and kelly (1985) indicate overconfidence bias as an important factor that affects financial decisions. married and high-educated investors are more conservative and invest less in risky assets. the results reinforce the theory of safety first. in addition, underdiversified portfolios that are concentrated in traditional assets may follow the herd effect, a psychological bias that leads investor to invest only in well-known assets and local assets. although our results are in line with the results of international studies that examine investors in the united states, there is a significant difference between brazilian and american investors in terms of the allocation of resources. most american investments are concentrated in financial assets, while most brazilians investments are concentrated in non-financial assets. the federal reserve bulletin 2012 reveals that american investors mainly focused on financial investments. table 6 and figure 5 present investor allocation in the united states. table 6: asset allocation held by investors in the united states (% of portfolio) source: federal reserve bulletin 2012. prepared by the authors. figure 5. percentage allocation of the major investments held by us investors source: federal reserve bulletin 2012. prepared by the authors. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.120 | http://emaj.pitt.edu investment portfolios in an emerging economy: what drives portfolio’s diversification? page |9| emerging markets journal the black vertical bars represent non-financial investments and the gray vertical bars represent financial investments. 5. conclusion this empirical study examines the level of portfolio diversification of brazilian investors, focused on aspects that can influence portfolio diversification and the intrinsic characteristics that can lead investors to allocate financial resources in risky assets, furthering the discussion on the investment decisions within an emerging economic context. moreover, the study sheds light on the possible cognitive influences built by behavioral economic theory. from a new and heterogeneous database composed of 500 brazilian investors and 2,224 observations of investments, it became clear that brazilian investors allocate their resources in underdiversified portfolios concentrated in only four different types of investments on average. in addition, investors allocate approximately 92% of their resources in low-risk assets. brazilians investments concentrate investments in fixed-income assets, reinforcing the conservative investor profile. the results suggest that the characteristics of investors studied can play an important role in brazilian investment decisions. the results indicate that investors endowed with higher education tend to have a higher rate of portfolio diversification. in addition, married investors tend to have more diversified portfolios, distributing their resources in different assets. the investment decisions of brazilians lead to low portfolio diversification allocated primarily in lowrisk assets, and they suggest the limitations of investor rationality theory advocated by the modern theory of finance. economic, sociological and psychological concepts may play an important role in explaining the economic decisions in real life. thus, investment decisions may be subject to behavioral influence as defined in the behavioral finance literature. among the characteristics that lead investors to allocate resources in risky assets are age, gender, marital status and education level. although this study achieves the proposed objectives, there are caveats that need to be identified, such as the possible bias generated by the investment database and the benchmarks adopted. these issues do not invalidate the evidence obtained during this study, but they serve as a warning to the possibility of new evidence by the improvement in the dataset. future studies should apply or develop models that best explain the relationship between investment decisions and the effects of psychological biases defined by behavioral finance theory. new studies can contribute significantly to understand the purpose of this study, and we recommend a replication of the study with the inclusion of a larger number of investor portfolios. references arzac, e. r., & bawa, v. s. (1977). portfolio choice and equilibrium in capital markets with safety-first investors. journal of financial economics, 4(3), 277-288. barber, b. m., & odean, t.. trading is hazardous to your wealth: the common stock investment performance of individual investors. the journal of finance, 55(2), 773-806. barberis, n., & thaler, r. (2003). a survey of behavioral finance. handbook of the economics of finance, 1, 1053-1128. bikhchandani, s., & sharma, s. (2000). herd behavior in financial markets. imf staff papers, 279-310. blume, m., & friend, i. (1978). the changing role of the individual investor: wiley new york. coval, j. d., & moskowitz, t. j. (1999). home bias at home: local equity preference in domestic portfolios. the journal of finance, 54(6), 2045-2073. de bondt, w. f., & thaler, r. h. (1994). financial decision-making in markets and firms: a behavioral perspective: national bureau of economic research. de brouwer, p. j. (2009). maslowian portfolio theory: an alternative formulation of the behavioural portfolio theory. journal of asset management, 9(6), 359-365. fama, e. f. (1970). efficient capital markets: a review of theory and empirical work*. the journal of finance, 25(2), 383-417. goetzmann, w. n., & kumar, a. (2008). equity portfolio diversification*. review of finance, 12(3), 433-463. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.120 | http://emaj.pitt.edu pedro luiz albertin, bono milan, william eid jr. emerging markets journal | p a g e |10 grable, j., lytton, r., & o'neill, b. (2004). projection bias and financial risk tolerance. the journal of behavioral finance, 5(3), 142-147 jacowitz, k. e., & kahneman, d. (1995). measures of anchoring in estimation tasks. personality and social psychology bulletin, 21, 1161-1166. kahneman, d., & tversky, a. (1979). prospect theory: an analysis of decision under risk. econometrica: journal of the econometric society, 263-291. kelly, m. (1995). all their eggs in one basket: portfolio diversification of us households. journal of economic behavior & organization, 27(1), 87-96. kimura, h., basso, l. f. c., & krauter, e. (2006). paradoxos em finanças: teoria moderna versus finanças comportamentais. revista de administração de empresas, 46(1), 4158. köbberling, v., & wakker, p. p. (2005). an index of loss aversion. journal of economic theory, 122(1), 119-131. levinson, j. d., & peng, k. (2007). valuing cultural differences in behavioral economics. icfai journal of behavioral finance, 4, 32-47. lintner, g. (1998). behavioral finance: why investors make bad decisions.the planner, 13(1)7-8. markowitz, h. (1952). portfolio selection*. the journal of finance, 7(1), 77-91. maslow, a. h. (1943). a theory of human motivation. psychological review, 50(4), 370. plous, s. (1993). the psychology of judgment and decision making: mcgraw-hill book company. polkovnichenko, v. (2005). household portfolio diversification: a case for rank-dependent preferences. review of financial studies, 18(4), 1467-1502. shefrin, h., & statman, m. (2000). behavioral portfolio theory. journal of financial and quantitative analysis, 35(02), 127151. shiller, r. j. (1999). human behavior and the efficiency of the financial system. handbook of macroeconomics, 1, 1305-1340. shum, p., & faig, m. (2006). what explains household stock holdings? journal of banking & finance, 30(9), 2579-2597. von neumann, j. (1947). morgenstern, 0.(1944) theory of games and economic behavior. princeton: princeton up. yoshinaga, c. e., de oliveira, r. f., da silveira, a. d. m., & barros, l. a. b. d. c. (2008). finanças comportamentais: uma introdução. rege revista de gestão, 15(3), 25-35. emerging markets journal firm, country and macroeconomic determinants of capital structure: evidence from turkish banking sector dr. nuri baltacı gümüşhane university | e-mail: nbaltaci@gumushane.edu.tr dr. hasan ayaydın gümüşhane university | e-mail: hayaydin61@gumushane.edu.tr abstract this study explores the significance of firm-specific, country, and macroeconomic factors in explaining variation in leverage using a sample of banks from turkish banking sector. the analysis is based on quarterly firm-level data from turkish banking sector in 2002–2012. we aims to contribute to the empirical capital structure literature in the following ways. our first contribution comes from assessing the importance of firm-specific factors, country-level factors and industrial factors for capital structure decisions in turkish banking sector. second, we employ appropriate and advanced dynamic panel data estimators, blundell and bond’s (1998) generalized methods of moment’s estimators (gmm system). we find that leverage is significantly and positively associated with average industry leverage, firm size and gdp growth. we find also that leverage is significantly and negatively associated with tangibility, profitability, inflation and financial risk. the regression results for leverage are both theoretically and empirically plausible for banks in turkey. moreover, tangibility, profitability and gdp growth are consistent with the predictions of the pecking order theory, while firm size is consistent with the predictions of the trade-off theory. our findings suggest that the capital structures of financial and non-financial firms are ultimately determined by the same drivers. keywords: capital structure, turkish banking sector, trade-off theory, pecking order theory, gmm system estimation new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu | mailto:nbaltaci@gumushane.edu.tr mailto:hayaydin61@gumushane.edu.tr http://econpapers.repec.org/scripts/search/search.asp?kw=sector http://econpapers.repec.org/scripts/search/search.asp?kw=gmm http://econpapers.repec.org/scripts/search/search.asp?kw=estimation http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu firm, country and macroeconomic determinants of capital structure: evidence from turkish banking sector emerging markets journal | p a g e |47 firm, country and macroeconomic determinants of capital structure: evidence from turkish banking sector dr. nuri baltacı dr. hasan ayaydın 1. introduction capital structure decisions affect a firm in two ways. firstly, firms of the same risk class could possibly have higher cost of capital with higher leverage. secondly, capital structure may affect the valuation of the firm, with more leveraged firms, being riskier, being valued lower than less leveraged firms. thus, capital structure is an important decision for it could lead to an optimal financing mix which could maximize the market price of the firm (lim, 2012). studies on capital structures of corporations have a long history, dating back to the nineteen fifties with the appearance of the works of lintner (1956), hirshleifer (1958) and modigliani and miller (1958). theoretical and empirical studies that followed subsequently form an extremely large body of literature. modigliani and miller (1958) showed that in the perfect financial market, under certain assumptions, the value of a company is independent of its financing choice. firm capital structure is irrelevant in efficient financial markets as shown by modigliani and miller (1958). the issue of a given capital structure that may increase the shareholder value is one of the most important discussions in the finance field, both theoretically and empirically (kayo and kimura, 2011). since modigliani and miller’s (1958) “capital structure irrelevance” propositions, we have been witnessing the development of many theoretical points of view in this arena. subsequent theoretical work has taken into account the imperfections of financial markets and has shown that firm capital structure emerges from firm-specific and macroeconomic factors. the preponderance of the studies on capital structure mainly focuses on the analysis of certain firm characteristics–e.g., profitability, tangibility, size, etc.–as determinants of leverage. for example, frank and goyal (2009), lemmon et al. (2008) evaluate the contribution of firm-specific factors to leverage variation of u.s. firms. the empirical studies on the capital structure choices of firms that started appearing in the eighties (marsh, 1982; jalilavand and harris, 1984; titman and wessels, 1988) and continued later are mostly based on data from developed countries. bevan and danbolt (2002) use data from the u.k. and gaud et al. (2005) analyzed data from swiss companies. recent and growing research has incorporated country-level characteristics into the traditional firm-level determinants to explain a firm's leverage. several studies analyze the role of countries and industries on financing policies. these authors (booth et al., 2001; demirguckunt and maksimovic, 1999; hanousek and shamshur, 2011; rajan and zingales, 1995; giannetti, 2003; jõeveer, 2005; de jong et al., 2008; bancel and mittoo, 2004; antoniou et al., 2008; beck et al., 2008; psillaki and daskalakis, 2009; gropp and heider, 2010; gungoraydinoglu and oztekin, 2011; kayo and kimura, 2011; oztekin and flannery, 2012; joeveer, 2013 and drobetz et al, 2013) suggest that, along with firm characteristics, country-specific factors may also influence firm capital structure. these studies compare the capital structure of firms from different countries, taking into account factors such as gross domestic product (gdp), inflation, development of stock markets, etc. country characteristics influence firms' costs and benefits in determining their capital structure. countries differ in the quality of institutions that may potentially affect the trade-off among the bankruptcy costs and tax benefits, agency costs, and information asymmetry costs imposed on firms (gungoraydinoglu and oztekin, 2011). subsequent to the departures from modigliani and miller (1958)’s irrelevance proposition, there is a long tradition in corporate finance to investigate the capital structure decisions of non-financial firms. it is easy to find studies that analyze firm characteristics as determinants of capital structure, but, the literature often neglects the role of industry and country in banking sector. an early investigation of banks’ capital structures using a corporate finance approach is marcus (1983). he examines the decline in capital to asset ratios dr. nuri baltacı, dr. hasan ayaydın p a g e |48| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu of us banks in the 1970s. barth et al. (2005), berger et al. (2008) and brewer et al. (2008) observe that the levels of bank capital are much higher than the regulatory minimum. banks may be optimising their capital structure, possibly much like non-financial firms, which would relegate capital requirements to second order importance (gropp and heider, 2010:590). flannery (1994), myers and rajan (1998), diamond and rajan (2000) and allen et al. (2011) develop theories of optimal bank capital structure, in which capital requirements are not necessarily binding. but what determines banks’ capital structures in turkey? to answer the question, we analysis firm, industry, country and macroeconomic determinants of capital structure in turkey. turkish banks have become the focus of attention recently. firm, country and macroeconomic determinants of capital structure is a subject of attention. this paper aims to contribute to the knowledge of capital structure by examining the determinants of capital structure across a large panel of banks and by focusing on both the characteristics of the bank and macroeconomic factors. in this article, we contribute to the empirical capital structure literature in the following ways. our first contribution comes from assessing the importance of country-level factor for capital structure decisions and evaluating the relative importance of the country-specific factors in determining a firm's leverage compared with the firm-specific factors and industrial factors in turkish banking sector. second, we employ appropriate and advanced dynamic panel data estimators, blundell and bond’s (1998) generalized methods of moment’s estimators (system gmm, to estimate the determinants of capital structure. the paper is organized as follows: in the next section we provide an overview of the related research and capital structure theories. in section 3 we introduce the data and the estimation methodology. section 4 contains the results, followed by a concluding section. 2. capital structure theories and determinants of capital structure concerning firm-level determinants of leverage, two main theoretical approaches are particularly important: the trade-off theory and the pecking order theory. these offer several predictions regarding to firmspecific and country-specific factors affecting firm leverage. according to the trade-off theory, capital structure choices are determined by a trade-off between the benefits and costs of debt (kraus and litzenberger, 1973). classic arguments for this trade-off are based on bankruptcy costs, tax benefits, and agency costs related to asset substitution (myers, 1977), and overinvestment (jensen, 1986; stulz, 1990). each firm has a valuemaximizing target leverage ratio that it strives to reach (gungoraydinoglu and öztekin, 2011). as a result, although increased leverage mitigates the agency costs of equity, it exacerbates bondholder–shareholder conflicts (drobetz et al, 2013). the pecking order theory (also referred to as the information asymmetry theory), developed by myers and majluf (1984) and myers (1984), argues that the adverse selection costs of issuing risky securities, because of either asymmetric information (myers, 1984; myers and majluf, 1984) or managerial optimism (heaton, 2002), lead to a preference ranking over financing sources by creating a wedge between internal and external financing costs and by increasing the difficulty of issuing securities. to minimize adverse selection costs, firms first issue internal funds, debt, and then equity (gungoraydinoglu and öztekin, 2011). there is no concept of target capital structure for a firm in the pecking order theory. the explanation provided by myers for the pecking order theory is based on the assumption that firm insiders have more information than outsiders (chakroborty, 2010). the pecking order theory ranks financing sources according to the degree they are affected by information asymmetry. as a result, firms use internal funds in the first place. if they need external funds, they prefer to issue debt over equity (drobetz et al, 2013:4). in contrast with the trade-off theory, the pecking order theory does not predict that firms have well-defined target leverage (dang, 2013). these theories, in contrast to modigliani and miller’s (1958) assumption of a perfect market, suggest that several factors may determine firm leverage, either firm-internal or firm-external. a particular factor might be positive or negative depending on the theoretical lens. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu firm, country and macroeconomic determinants of capital structure: evidence from turkish banking sector emerging markets journal | p a g e |49 2.1. firm-level determinants among the firm-level determinants of capital structure, we discuss profitability, size and tangibility. 2.1.1. profitability there is no consensus regarding the influence of profitability on capital structure. according to the pecking order theory, firms use internal sources of financing first and then go for external sources of financing. firms with higher profitability will prefer internal financing to debt and hence a negative relationship is expected between profitability and leverage. most empirical studies confirm the pecking order theory (titman and wessels, 1988; rajan and zingales, 1995; booth et al., 2001; fama and french, 2002; chen, 2004; delcoure, 2007; daskalakis and psillaki, 2008; chakraborty, 2010; gropp and heider, 2010; kayo and kimura, 2011; oztekin and flannery, 2012; joeveer, 2013; chakraborty, 2013; dang, 2013). while profitability is frequently treated as a capital structure determinant, shyam-sunder and myers (1999) propose a more direct approach to test the pecking order, contrarily to the studies that show evidence that pecking order does not hold (frank and goyal, 2003; leary and roberts, 2010). according to the trade-off theory, more profitable firms are supposed to have more debt-serving capacity and more taxable income to shield. therefore, according to this theory, when firms are profitable they are likely to prefer debt to other sources in order to benefit from the tax shield. (chakraborty, 2010). the trade-off hypothesis states a positive relationship because low profitability may increase bankruptcy risk. hence a positive relationship is expected between profitability and leverage (kaya and kimura, 2011). a positive relationship would confirm the trade-off theory and a negative relationship would confirm the pecking order theory. 2.1.2. tangibility asset tangibility is a measure for the level of a firm’s collateralizable value. from a trade-off perspective, one expects that firms with a higher ratio of fixed-to-total assets are subject to lower costs of financial distress, as tangible assets suffer from a smaller loss of value in case of bankruptcy. in addition, tangible assets are easier to value for outsiders, resulting in lower information asymmetry, less pronounced agency costs of debt, and a higher debt capacity. therefore, the trade-off theory predicts a positive relationship between tangibility and leverage (drobetz et al, 2013). however, the pecking order theory predicts that firms with less collateral face higher information costs and, thus, prefers debt to equity. in other words, collateral and target leverage are negatively related (dang, 2013). some studies report a significant positive relationship between tangibility and total debt (titman and wessels, 1988; rajan and zingales, 1995; delcoure, 2007; chakraborty, 2010; gropp and heider, 2010; kayo and kimura, 2011; dang, 2013). wiwattanakantang (1999) and chen (2004) observes a positive relationship between tangibility and leverage respectively in thailand and china but booth et al. (2001) for ten developing countries and huang and song (2006), joeveer (2013), oztekin and flannery (2012) and chakraborty (2013) find a negative relationship. the pecking order theory recognizes a negative relationship between tangibility and leverage, whereas the trade-off theory defends a positive one. 2.1.3. firm size the effect of firm size on leverage is ambiguous. larger firms tend to be more diversified and, thus, less prone to bankruptcy. also, larger firms have better access to credit markets compared to smaller firms. in addition, larger firms have more diluted ownership leading to less control over managerial decisions (delcoure, 2007). larger firms with less asymmetric information problems should tend to have more equity than debt and hence have lower leverage (chakroborty, 2010). the larger firms face lower information costs and can raise equity capital more easily than the small firms. therefore, in the presence of asymmetric information, firm size and target leverage may have a negative relation. following the pecking order theory of capital structure, it is expected that the size of the firm will be negatively related to leverage. on the other hand, the trade-off theory suggests that large firms face lower financial distress and agency costs and, thus, are able to borrow more than small firms (dang, 2013). the implication follows that firm size has a positive effect on target leverage. some studies find positive relationship between firm sizes and leverage (booth et al., 2001; wiwattanakantang, 1999; huang and song, 2006; delcoure, 2007; daskalakis and psillaki, 2008; gropp and heider, 2010; kayo and kimura, 2011; lim, 2012; dr. nuri baltacı, dr. hasan ayaydın p a g e |50| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu oztekin and flannery, 2012; joeveer, 2013; dang, 2013), others observe that firm size is negatively related to leverage (rajan and zingales, 1995; bevan and danbolt, 2002; titman and wessels, 1988; chakraborty, 2010; gungoraydinoglu and oztekin, 2011; chakraborty, 2013). a positive relationship between firm size and leverage would confirm the trade-off theory and a negative relationship would confirm the pecking order. 2.2. country and macroeconomic determinants a remaining question is whether capital structure is driven by underlying macroeconomic factors which influence firms’ capital raising and induce them to choose different levels of leverage at different points (erel et al., 2012). the business cycle can affect financing choices and leverage ratios. the demand-forcapital mechanism is based on changes in information asymmetry between firms and investors over the business cycle. if the adverse selection costs associated with information asymmetry are negatively related to the business cycle, poor macroeconomic conditions will induce firms to issue less information-sensitive securities. therefore, they tend to use less equity and more debt (drobetz et al, 2013). the conjecture that macroeconomic conditions affect firms’ ability to raise capital seems particularly important for the banking industry that is affected by current financial crises around the world. hence, we added model of the study country and macroeconomic determinants of capital structure. following ferson and harvey (1994), de jong et al (2008), we use inflation rate, gdp growth rate in order to control for the effects of countries economic conditions on capital structure. 2.2.1. gdp growth rate joeveer (2013) suggests that macroeconomic conditions may affect the leverage through the fact that they proxy the growth opportunities in the overall economy. since equity financing is less common in eastern europe the investment opportunities will be mostly financed by debt and therefore they would expect gdp growth to be positively related to leverage (joeveer, 2013) and gdp growth has been found to be positively related to leverage. therefore, gdp growth rate indicates growth opportunities in the overall economy. that is, it is can be evaluated that gdp growth contexts the pecking order theory and trade-off theory. firms with higher growth opportunities would need more fund. according to the pecking order theory, there will be stronger preference for external financing, especially for debt (chakraborty, 2010). the pecking order hypothesis predicts that firms with higher growth opportunities indicate the greater demand of capital, thus external fund is preferred through debt financing (lim, 2012). rajan and zingales (1995), booth et al. (2001), chen (2004), delcoure (2007), daskalakis and psillaki (2008), frank and goyal (2009), gropp and heider (2010), gungoraydinoglu and öztekin (2011) and drobetz et al (2013) find positive relationship between growth and leverage. on the other hand, according to the trade-off theory firms with high growth opportunities are likely to suffer from financial distress and the debt overhang problem (myers, 1977). these firms have strong incentive to rely more on equity than on debt finance (dang, 2013). in addition, myers (1977) argued the negative relationship between growth and leverage from the perspective of agency costs. firms with greater growth potential have more flexibility to have suboptimal behaviors, thus transferring the wealth from debt holders to shareholders (lim, 2012). the findings of titman and wessels (1988), rajan and zingales (1995), kayo and kimura (2011), joeveer (2013) and öztekin and flannery (2012) confirmed trade-off theory. a negative relationship between gdp growth rate and leverage would confirm the trade-off theory and a positive relationship would confirm the pecking order. 2.2.2. inflation rate inflation is one of the main indicators of a country's stability. an increase in inflation rate brings about uncertainty in economic situation. this uncertainty causes firms' inability to repay their debts. higher inflation decreases the benefits of leverage because of higher bankruptcy costs of debt imposed on firms (gungoraydinoglu and öztekin, 2011). in this case, lenders demand a higher return for the risk they undertake. higher interest rate increases firm’s cost of debt expected, firms reduce debt ratios. in addition, in periods with higher inflation, firms use currently weak dollars to repay debt and lower their leverage ratios (drobetz et al, 2013). therefore, inflation has a negative effect on leverage. joeveer (2012) maintains that expected inflation is predicted to be positively related to volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu firm, country and macroeconomic determinants of capital structure: evidence from turkish banking sector emerging markets journal | p a g e |51 leverage due to higher real value of tax deductions on debt. demirguc-kunt and maksimoviç (1999), gungoraydinoglu and öztekin (2011), öztekin and flannery (2012), drobetz et al (2013) and joeveer (2013) find negative relationship between inflation and leverage. 2.2.3. financial risk the overall aim of the financial risk rating is to provide a means of assessing a country’s ability to pay its way. in essence, this requires a system of measuring a country’s ability to finance its official, commercial, and trade debt obligations. according to icrg methodology, the financial risk includes following: foreign debt as a percentage of gdp, foreign debt service as a percentage of exports of goods and services, current account as a percentage of exports of goods and services, net international liquidity as months of import cover, exchange rate stability (icrg, 2013). hence, we added also financial risk index the model. joeveer (2013) find negative relationship between country credit rating and leverage. to our knowledge, there are no studies on capital structure that consider financial risk as a determinant of leverage and this aspect is, we believe, one of the relevant contributions of our paper. lastly, we analyze the influence of financial risk on firm leverage using the financial risk index from icrg. 2.2.4. average industry leverage studies on capital structure often employ dummy variables to control the effect of industry on leverage. it would be reasonable to suppose that specific characteristics of a given industry could also influence the firm capital structure. therefore, following joeveer (2013) and frank and goyal (2009), we analyze the influence of industry on firm leverage using the average industry leverage. since the firm takes into account firms’ capital structure and leverage in the industry, average industry leverage is expected to be positively related to leverage. frank and goyal (2009), oztekin and flannery (2012) and joeveer (2013) find positive relationship between average industry leverage and leverage. 3. methodology and data prior research has examined the factors that determine leverage (flannery and rangan, 2006; frank and goyal, 2005, 2009; hovakimian et al., 2001, 2011). we follow the existing literature on the selection of the firm-specific factors affecting leverage but also incorporate country-specific macroeconomic factors that are theoretically important in a firm's determination of leverage (cook and tang, 2010; frank and goyal, 2009; korajczyk and levy, 2003). the lack of country-specific variability in their study, however, means that they are unable to measure macroeconomic factors, which is the focus of the present paper. the dynamic panel model in eq. (1), (2), (3) and (4) requires instruments for the endogenous transformed lagged dependent variable (baltagi, 2001) and other potentially endogenous explanatory variables. we use blundell and bond’s (1998) generalized methods of moments estimators (system gmm) methodology to estimate eq. (1), (2), (3) and (4). the choice of our econometric model is essentially based on the following set of concerns: (i) the potential endogeneity of domestic savings; (ii) the dynamic relationship between domestic savings and investment as both are impacted by the prior values of each other; and (iii) unobserved countryspecific effects. we estimate the following two transformed models: model 1a: lev1it=ɣlev1it1+β1ind1it+β2sizeit+β3gro wthit+β4infit+β5tangyit+β6roait+vit eq. (1) model 1b: lev1it=ɣlev1it1+β1ind1it+β2sizeit+β3gro wthit+β4infit+β5tangyit+β6roait+β7finriskit+vit eq. (2) model 2a: lev2it=ɣlev2it1+β1ind2it+β2sizeit+β3gro wthit+β4infit+β5tangyit+β6roait+vit eq. (3) model 2b: lev2it=ɣlev2it1+β1ind2it+β2sizeit+β3gro wthit+β4infit+β5tangyit+β6roait+β7finriskit+vit eq. (4) dr. nuri baltacı, dr. hasan ayaydın p a g e |52| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu where subscripts i and t indicate bank and time period, respectively. β0 that is common to all recipient banks. ind represents average industry leverage. we use two average industry leverage measures: ind1 and ind2. ind1 is defined as average deposits plus liabilities to total equities, while ind2 is defined as average deposits plus liabilities to total book assets, size is natural logarithm of assets as a proxy for the firm size, growth is growth rate defined as the rate of change in the gross domestic product, inf is inflation rate measured by rate of change in the consumer price index, tangy is tangibility by the ratio of fixed assets to total assets, roa is profitability defined as the ratio of net profit to total assets, finrisk is financial risk index from icrg. our sample consists of 39 banks covered in the turkish banking sector during the period between 2002 and 2012. there are several different leverage measures used in capital structure studies (see the discussion of leverage definitions in rajan and zingales, 1995). banks’ capital structure fundamentally differs from the one of non-financial firms since it includes deposits etc., a source of financing generally not available to firms. different rates in the banking sector are used to determine capital structure decisions. fallowing studies (nacour and goaied, 2001; bashir, 2003; pratomo and i̇smail, 2006), we use two leverage measures: lev1 and lev2. the two leverage measures used in this study differ from each other. lev1 is defined as deposits plus liabilities to total equities, while lev2 is defined as deposits plus liabilities to total book assets. the all data are on quarterly basis. the all firm-specific data used in this paper are taken from banks association of turkey (bat). the country and macroeconomic variables are obtained from a variety of sources. gdp growth is obtained turkey statistical institute (tsi). inflation is taken from cbrt electronic data delivery system general statistics. financial risk index data is taken from international country risk guide (icrg). table 1 provides descriptive statistics of all variables. the two measures of leverage differ sharply during the entire period 2002–2012. during the entire period 2002–2012, lev1 is 0.492 whereas lev2 is 0.586. as can be seen from table 1; we get similar pictures for the industry leverage from the two alternative measures. size variable is a value between "0.7 "and "8.2”. financial risk index value is changed "27.5" and "36.5" and the average value of its is "32.4". table 1: descriptive statistics table 2 reports the correlation coefficients between the variables. the two alternative measures of leverage are highly correlated, as the correlation coefficient is 0.639. table 2: correlation coefficients between variables variables o obs. m mean s std. dev. m min m max lev1t-1 1 560 4 .4923 3 .8549 3 .8549 4 7.6026 lev2t-1 1 560 . 5867 . 3045 . 3045 6 .9392 inds1 1 560 . 6507 . 0022 . 6474 . 6536 inds2 1 560 . 5847 . 0006 . 5837 . 5860 size 1 560 5 .5728 1 .7425 . 7009 8 .2306 growth 1 560 5 .3875 5 .5005 14.7 1 2.6 inf 1 560 1 46.66 3 3.7394 9 6 2 07.5 tangy 1 560 . 0213 . 0272 . 0002 . 3547 roa 1 560 . 0110 . 0449 .6323 . 3221 finrisk 1 560 3 2.4500 1 .8336 2 7.5 3 6.5 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu firm, country and macroeconomic determinants of capital structure: evidence from turkish banking sector emerging markets journal | p a g e |53 among the explanatory variables, inf and size are highly correlated with inds 1, 2 (correlation coefficients are 0.9632 and 0.988, 0.639 and 0.559). moreover, size is highly correlated with two alternative measures of leverage, lev1 and lev2 (correlation coefficients are 0.270 and 0.252). a bank’s leverage correlates positively with size, growth and negatively with inds, inf, tangy, roa and finrisk variables. 4. empirical results and discussion table 3 reports the empirical results from our estimations of target leverage, modeled by equation 2, 3. all coefficients on firm-specific variables have expected signs. the results of all the model (model 1a, b and model 2a, b) are parallel to a large extent. firm size variable is not statistically significant in model 1a, b, while financial risk variable is not statistically significant in model 2a, b. table 3: empirical results from estimations of target leverage the models. independent variables model 1a model 1b model 2a model 2b lev1t-1 0.603*** (0.0522) 0.595*** (0.049) lev2t-1 0.236** (0.114) 0.232** (0.113) inds1 1.334*** (0.410) 2.133*** (0.604) inds2 0.991*** (0.222) 0.980*** (0.220) size 0.291 (0.099) 0.049 (0.095) 0.008* (0.004) 0.007* (0.004) growth 0.034*** (0.008) 0.053*** (0.013) 0.001*** (0.0004) 0.001*** (0.0004) inf -0.019*** (0.006) -0.019*** (0.006) -0.001*** (0.0003) -0.001*** (0.0003) tangy -47.477*** (18.019) 48.247** (18.262) -2.087** (0.939) -2.104** (0.941) roa -3.661** (1.749) -3.428** (1.620) -0.466** (0.212) -0.475** (0.216) finrisk -0.113*** (0.035) 0.0003 (0.001) ar(2) 0.7236 0.7402 0.2540 0.2532 wald chi2 2116.03 2283.61 352.07 472.09 f prob. 0.0000 0.0000 0.0000 0.0000 observations 1521 1521 1521 1521 banks 39 39 39 39 instruments 785 786 785 786 robust ses of coefficients is reported in parentheses. *, ** and *** indicate the coefficient significant at the 10, 5 and 1% levels, respectively. the coefficient on average industry leverage is positive and statistically significant meaning that specific characteristics of a given industry influence the firm capital structure. this finding is consistent with the previous empirical evidence (e.g. frank and goyal, 2009; oztekin and flannery, 2012 and joeveer, 2013). the results for turkey banks show that leverage is significantly and positively associated with firm size. this finding is consistent with the trade-off theory that large firms face lower financial distress and agency costs and, thus, are able to borrow more than small firms. empirically, this finding is consistent with the previous empirical evidence (e.g. booth et al., 2001; wiwattanakantang, 1999; huang and song, 2006; delcoure, 2007; antoniou et al., 2008; daskalakis and psillaki, 2008; gropp and heider, 2010; kayo and kimura, 2011; lim, 2012; oztekin and flannery, 2012; joeveer, 2013; dang, 2013), tangibility enters with negative and significant signs in the lev1 and lev2 regression. the negative influence of tangibility suggests that the collateral aspect of fixed assets is an important leverage driver for the countries in our sample. this finding is consistent with dr. nuri baltacı, dr. hasan ayaydın p a g e |54| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu the pecking order theory view that firms with less collateral face higher information costs and, thus, prefers debt to equity. empirically, our finding is consistent with previous empirical evidence (e.g. rajan and zingales, 1995; brooth et al., 2001; huang and song, 2006; antoniou et al., 2008; de jong et al., 2008, joeveer, 2013; oztekin and flannery, 2012; and chakraborty, 2013). the coefficient on profitability is negative and statistically significant meaning that the more profitable firms are likely to have less debt. this finding appears to be most consistent with the pecking order theory’s prediction that firms with large profits and sufficient retained earnings are less likely to rely on debt financing. empirically, our results are in line with the welldocumented international evidence on the relation between leverage and profitability (e.g. titman and wessels, 1988; rajan and zingales, 1995; booth et al., 2001; fama and french, 2002; chen, 2004; delcoure, 2007; daskalakis and psillaki, 2008; frank and goyal, 2009; chakraborty, 2010; gropp and heider, 2010; kayo and kimura, 2011; oztekin and flannery, 2012; joeveer, 2013; chakraborty, 2013; dang, 2013). gdp growth has positive signs in both leverage regressions. this finding appears to be consistent with the pecking order theory’s prediction that firms with higher growth opportunities would need more fund and that firms with higher growth opportunities indicate the greater demand of capital, thus external fund is preferred through debt financing. our finding is consistent with previous empirical evidence (e.g. rajan and zingales, 1995; booth et al., 2001; chen, 2004; delcoure, 2007; daskalakis and psillaki, 2008; frank and goyal, 2009; gropp and heider, 2010; gungoraydinoglu and öztekin, 2011 and drobetz et al, 2013) the inflation and financial risk index have negative signs in both leverage regressions confirming the predictions. the negative influence of inflation suggests that an increase in inflation rate brings about uncertainty in economic situation. this uncertainty causes firms' inability to repay their debts. higher inflation decreases the benefits of leverage because of higher bankruptcy costs of debt imposed on firms. lenders demand a higher return for the risk they undertake. higher interest rate increases firm’s cost of debt expected, firms reduce debt ratios. our results are in line with the international evidence on the relation between leverage and inflation (demirguc-kunt and maksimoviç, 1999; gungoraydinoglu and öztekin, 2011; öztekin and flannery, 2012; drobetz et al, 2013; and joeveer, 2013). in sum, the regression results for leverage are both theoretically and empirically plausible for banks in turkey. moreover, tangibility, profitability and gdp growth are consistent with the predictions of the pecking order theory, while firm size is consistent with the predictions of the trade-off theory. 5. conclusions in this paper we study the importance of firmspecific, country and macroeconomic factors for determining the capital structure of banks. the analysis is based on firm-level data from turkish banking sector in 2002–2012. we use two measures of leverage in this paper. this paper aims to contribute to the knowledge of capital structure by examining the determinants of capital structure across a large panel of banks and by focusing on both the characteristics of the bank and macroeconomic factors. in this article, we contribute to the empirical capital structure literature in the following ways. our first contribution comes from assessing the importance of country-level factor for capital structure decisions and evaluating the relative importance of the country-specific factors in determining a firm's leverage compared with the firm-specific factors and industrial factors in turkish banking sector. second, we employ appropriate and advanced dynamic panel data estimators, blundell and bond’s (1998) generalized methods of moment’s estimators (system gmm), to estimate the determinants of capital structure. we find that leverage is significantly and positively associated with average industry leverage, firm size and gdp growth. we find also that leverage is significantly and negatively associated with tangibility, profitability, inflation and financial risk. empirically, our results are in line with the well-documented international evidence on the relation between leverage and determinants. the regression results for leverage are both theoretically and empirically plausible for banks in turkey. moreover, tangibility, profitability and gdp growth are consistent with the predictions of the pecking order theory, while firm size is consistent with the predictions of the trade-off theory. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu firm, country and macroeconomic determinants of capital structure: evidence from turkish banking sector emerging markets journal | p a g e |55 our findings suggest that the capital structures of financial and non-financial firms are ultimately determined by the same drivers. in addition, our results have important managerial implications: they show that bank’s managers should focus a significant part of their attention on firm characteristics and cannot ignore the importance of external environments (e.g., industry, country, macroeconomics) when making financing decisions. references allen, f., carletti, e., marquez, r. 2011. “credit market competition and capital regulation, review of financial studies 24(4), 983-1018. antoniou, a., guney, y., paudyal, k., 2008. “the determinants of capital structure: capital market-oriented versus bank-oriented i̇nstitutions”. journal of financial and quantitative analysis 43, 59–92. baltagi, b.h., 2001. “econometric analysis of panel data”. wiley, west sussex. bancel, f., mittoo, u.r., 2004. “crosscountry determinants of capital structure choice. a survey of european firms”. financial management 33, 103–132. barth, j., caprio, g., levine, r. 2005. “rethinking bank regulation: till angels govern”, cambridge university press, cambridge and new york. bashir, a. h. m. 2003. “determinants of profitability in islamic banks: some evidence from the middle east”, islamic economic studies, 11(1), 31-57. beck, t., demirgüç-kunt, a., maksimovic, v., 2008. “financing patterns around the world: are small firms different?. journal of financial economics 89, 467–487. berger, a., de young, r., flannery, m., lee, d., oztekin, o. 2008. “how do large banking organizations manage their capital ratios?”. journal of financial services research 34, 123–149. bevan, a.a., danbolt, j., 2002. “capital structure and i̇ts determinants i̇n the uk-a decompositional analysis”. applied financial economics 12, 159–170. blundell, r. w. and bond, s. r. 1998. “initial conditions and moment restrictions i̇n dynamic panel data models”. journal of econometrics, 87, 115–43. booth, l., aivazian, v., demirgüç-kunt, a., maksimovic, v., 2001. “capital structures in developing countries”. the journal of finance 56, 87–130. brewer, e., kaufman, g., wall, l. 2008. “bank capital ratios across countries: why do they vary?, journal of financial services research 34, 177–201. chakraborty, i. 2010. “capital structure i̇n an emerging stock market: the case of india”, research in international business and finance 24, 295–314. chakraborty, i. 2013. “does capital structure depend on group affiliation? an analysis of indian firms”. journal of policy modeling 35, 110–120. chen, j. j., 2004. “determinants of capital structure of chinese-listed companies”. journal of business research 57, 1341–1351. cook, o.d., tang, t., 2010. “macroeconomic conditions and capital structure adjustment speed”. journal of corporate finance 16 (1), 73–87. dang, v.a. 2013. “testing capital structure theories using error correction models: evidence from the uk, france and germany”, applied economics 45, 171–190. dr. nuri baltacı, dr. hasan ayaydın p a g e |56| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu daskalakis, n., psillaki, m. 2008. “do country or firm factors explain capital structure? evidence from smes i̇n france and greece”. applied financial economics 18, 87–97. de jong, a., kabir, r., nguyen, t.t., 2008. “capital structure around the world: the roles of firmand country-specific determinants”, journal of banking and finance 32, 1954–1969. delcoure, n. 2007. “the determinants of capital structure i̇n transitional economies”. international review of economics and finance 16, 400-415. demirgüç-kunt, a., maksimovic, v., 1999. “institutions, financial markets, and firm debt maturity”. journal of financial economics 54, 295–336. diamond, d., rajan, r. 2000. “a theory of bank capital, journal of finance 55, 2431–2465. drobetz, w., gounopoulos, d., merikas, a., schröder, h. 2013. “capital structure decisions of globally-listed shipping companies”, transportation research part e: logistics and transportation review 52, 49–76. erel, i., brandon, j., woojin, k., michael s.w. 2012. “macroeconomic conditions and capital raising”. review of financial studies 25, 341–376. fama, e.f., french, k.r. 2002. “testing trade-off and pecking order predictions about dividends and debt”, the review of financial studies 15, 1–33. ferson, w. e., harvey, c.r. 1994. “sources of risk and expected returns i̇n global equity markets”. journal of banking and finance 18, 778–803. flannery, m. j., rangan, k. p. 2006. “partial adjustment toward target capital structures”, journal of financial economics 79, 469–506. flannery,m. 1994. “debt maturity and the deadweight cost of leverage: optimally financing banking firms, american economic review 84, 320–331. frank, m., goyal, v. k. 2009. “capital structure decisions: which factors are reliably i̇mportant?, financial management 38, 1–37. frank, m.z., goyal, v.k. 2003. “testing the pecking order theory of capital structure”, journal of financial economics 67, 217–248. gaud, p., jani, e., hoesli, m., bender, a., 2005. “the capital structure of swiss companies: an empirical analysis using dynamic panel data. european financial management 11(1), 51–69. giannetti, m., 2003. “do better i̇nstitutions mitigate agency problems? evidence from corporate finance choices. journal of financial quantitate analysis 38, 185–212. groop, h., heider, f. 2010. “the determinants of bank capital structure”. review of finance 14, 587–622. gungoraydinoglui, a., oztekin, o. 2011. “firmand country-level determinants of corporate leverage: some new i̇nternational evidence”. journal of corporate finance 17, 1457– 1474. hanousek, j., shamshur, a., 2011. “a stubborn persistence: is the stability of leverage ratios determined by the stability of the economy?” journal of corporate finance 17(5), 1360–1376. heaton, j.b., 2002. “managerial optimism and corporate finance”, financial management 31, 33–45. hirshleifer, j., 1958. “on the theory of optimal i̇nvestment decision”. journal of political economy 66 (4), 329–352. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu firm, country and macroeconomic determinants of capital structure: evidence from turkish banking sector emerging markets journal | p a g e |57 hovakimian, a., li, g., 2011. “in search of conclusive evidence: how to test for adjustment to target capital structure”. journal of corporate finance 17 (1), 33–44. hovakimian, a., opler, t., titman, s., 2001. “the debt-equity choice”. journal financial and quantitative analysis 36 (1), 1–24. huang, g., song, f.m., 2006. “the determinants of capital structure: evidence from china”. china economic review 17, 14–36. icrg (2013), http://www.prsgroup.com/icrg_methodology.aspx #finriskrating, 05.03.2013. jalilavand, a., harris, r.s., 1984. “corporate behavior i̇n adjusting to capital structure and dividend targets: an econometric study”. journal of finance 39, 127–145. jensen, m.c., 1986. “agency costs of free cash flows, corporate finance and takeovers”. american economic review 76, 323– 339. joeveer, k. 2013. “firm, country and macroeconomic determinants of capital structure: evidence from transition economies”, journal of comparative economics 41(1), 294–308. joeveer, k., 2005, what do we know about the capital structure of small firms? cerge-ei working paper, 283. http://papers.ssrn.com/sol3/papers.cfm?abstract_id= 1148201(10.03.2013). kayo, e. k., kimura, h. 2011. “hierarchical determinants of capital structure”, journal of banking and finance 35, 358–371. korajczyk, r.a., levy, a., 2003. “capital structure choice: macroeconomic conditions and financial constraints. journal financial economics 68, 75–109. kraus, a. and litzenberger, r. h. 1973. “a state preference model of optimal financial leverage”. journal of finance 28, 911–22. leary, m., roberts, m. 2010. “the pecking order, debt capacity, and i̇nformation asymmetry”, journal of financial economics 95, 332–355. lemmon, m. l., roberts, m. r., zender, j. f. 2008. “back to the beginning: persistence and the cross section of corporate capital structure”, journal of finance, 63, 1575–608. lim, t.c. 2012. “determinants of capital structure empirical evidence from financial services listed firms in china. international journal of economics and finance 4(3), 191-203. lintner, j., 1956. “distribution of i̇ncomes of corporations among dividends, retained earnings and taxes”. american economic review 46 (2), 97–143. marcus, a. 1983. “the bank capital decision: a time series-cross section analysis, journal of finance 38, 1217–1232. marsh p. 1982. “the choice between equity and debt: an empirical study”. journal of finance 37, 121-144. modigliani f., miller m.h. 1963. “corporate income taxes and the cost of capital: a correction”. american economic review 53, 433443. modigliani, f., miller, m. h. 1958. “the cost of capital, corporate finance and the theory of investment, american economic review 49, 261–97. myers, s. c. 1984. “the capital structure puzzle, journal of finance 34, 575–92. myers, s. c. 2001.” capital structure”. journal of economic perspectives 15, 81–102. dr. nuri baltacı, dr. hasan ayaydın p a g e |58| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.46 | http://emaj.pitt.edu myers, s. c., majluf, n. s. 1984. “corporate financing and i̇nvestments decisions when firms have i̇nformation that i̇nvestors do not have, journal of financial economics 13, 187– 221. myers, s., rajan, r. 1998. “the paradox of liquidity”, quarterly journal of economics 113, 733–771. myers, s.c., 1977. “determinants of corporate borrowing”. journal of financial economics 5, 147–175. myers, s.c., majluf, n.s., 1984. “corporate financing and i̇nvestment decisions when firms have i̇nformation that i̇nvestors do not have. journal of financial economics 13, 187– 224. naceur, b. s. ve goaied, m. 2001. “the determinants of the tunisian deposit banks’ performance”, applied financial economics, 11(3), 317-319. oztekin, o., flannery, m.j. 2012. “institutional determinants of capital structure adjustment speeds”, journal of financial economics 103, 88–112. pratomo, w.a and ismail, a.g. 2006. “islamıc bank performance and capıtal structure”. m.p.r.a-munich personal repec archive. mpra paper no. 6012 posted 29. http://mpra.ub.unimuenchen.de/6012/. rajan, r.g., zingales, l., 1995. “what do we know about capital structure? some evidence from i̇nternational data”, the journal of finance 50, 1421–1460. shyam-sunder, l., myers, s.c. 1999. “testing static tradeoff against pecking order models of capital structure”, journal of financial economics 51, 219–244. stulz, r.m., 1990. “managerial discretion and optimal financing policies”. journal of financial economics 26, 3–27. titman, s., wessels, r., 1988. “the determinants of capital structure choice”. journal of finance 43, 1–19. wiwattanakantang, y., 1999. “an empirical study on the determinants of capital structure of thai firm”. pacific-basin finance journal 7, 371–403. article volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu organizational culture types and their effects on organizational performance in turkish hospitals dr. a.zafer acar okan university, | e-mail: a.zaferacar@gmail.com, zafer.acar@okan.edu.tr | pınar acar okan university, | e-mail: pinar.akinci@okan.edu.tr | abstract nowadays a cultural transformation is seen in healthcare industry in turkey because of important structural changes due to implemented exchange programs and liberalization policies on national basis. in this condition hospitals, as a business, make an effort to gain above average returns while serving the health services. according to the literature, one of the substantial intangible forces that affect performance is organizational culture. thus, this study aims to identify the dominant organizational culture types of private and public hospitals while make a comparison between their effects on business performance. to examine the research questions a questionnaire survey performed, and data collected from 512 employees of 99 hospitals which are located in large cities of turkey are analysed by using spss 15 program. keywords: organizational culture; healthcare industry; hospitals; business performance. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu | mailto:a.zaferacar@gmail.com mailto:zafer.acar@okan.edu.tr mailto:pinar.akinci@okan.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu organizational culture types and their effects on organizational performance in turkish hospitals emerging markets journal | p a g e |18 organizational culture types and their effects on organizational performance in turkish hospitals dr. a. zafer acar pınar acar introduction the effects of globalization, developments in information and communication technologies, and increase in the variety of products/services according to the customer expectations are the most important dynamics in today’s economy. every firm uses some strategies whether explicit or not while competing to gain competitive advantage in this harsh environment, and in the competitive struggle of each product/service market, some firms are successful with achieving competitive advantage while others fail (walker, 2009: 1). competitive advantage is reflected in superior economic performance compared to rivals. thus, one of the most fundamental questions in the field of strategic management field is why some firms in the same industry have systematically performed better than others (crook et al., 2006; teece, pisano, and shuen, 1997). in business world, it is considered that usually a well planned strategy brings the company success. this idea led many organizations to imitate the strategies of successful businesses. however, time, technology, market and competition rules are changing. so, a firm’s strategy must shift to meet them (walker, 2009: 15), and this changing must be continuously (fleisher, and bensoussan, 2003: 2). therefore, it has already emerged that, to imitate competitors’ strategies is not the only way to compete and to gain competitive advantage. according to porter’s (1996) perspective, the strategy is based on unique activities. to be successful against rivals, a business has to select different set of activities and should provide a unique value. the sustainability of this competitive advantage depends on obtaining the economic value which was created by competitors’ capabilities (fleisher and bensoussan, 2003: 2). in today’s fast and continuous environmental changes and intense competition, the contribution of the employees is key determinant for the success of the organization. for businesses, their employees’ work performance with great effort and combining their own personal goals with organizational purposes are crucial to create most of the valuable, rare, inimitable and nonsubstitutable capabilities. beyond the contribution of the employees those rapid changes need to respond automatically. and, according to developments in external environment these strategic situations need adoption of organizational culture with a continuous perception, evaluation, implementation and revision within the balance of internal dynamics rather than a topdown planning. so, this perspective gives general patterns of behaviour to organizational culture to deal with and solve the problems encountered of the employees in the organization within the socialization process. at this point, orders and directives are no need to be too detailed. on this account, the response of organizations to situations which are emerged due to pressures of external environment and internal dynamics will vary according to their organizational culture. in this context, it is expected that, as a result of the methods of response to the external environment as proactive or reactive, the obtained performance vary according to different organizational culture. especially, the needs on qualitative aspects of manpower for labor-intensive and one-to-one customer relationships, organizational culture in service industry has become a strategic value which placed in business. healthcare, as a service industry, experienced one-to-one contact with customers and has large impact of organizational culture on customers’ performance perceptions. healthcare industry, especially hospitals, consist an important part of the service sector. as hospitals play a crucial role in diagnosis of illness, they effect on human life and their well-being directly. thus, they are different from the other service industries. besides the important role of hospitals on public health, healthcare industry also plays an important role in the economy. the industry determines the gdp (gross domestic production), exports status, capital investment of any country. turkey’s annual healthcare spending in 2009 was usd 38 billion, representing 6.2 percent of total gdp, and annual healthcare spending per one person in 2012 was 600$. the healthcare system in turkey is being developed under the 2003-2013 health transformation program. moreover healthcare industry is getting more competitive due to those liberal policies of governments in turkey. both public and private sector hospital numbers have been growing rapidly in recent years. as of 2011, the number of hospitals and total number of beds are 1,439 and 194,504, respectively (deloitte, 2011). despite the importance in national economy, dr. a.zafer acar, pınar acar page |19| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu healthcare industry is typical in service industries. and, organizational culture is one of the important determinants of business performance in service industries. thus this study is performed on hospitals which represent healthcare industry. as the other industries, healthcare industry tends to be more competitive. especially in turkish context competitiveness is scaling up with implemented exchange programs and liberalization policies on national basis. this conditions force the health services. so, while serving the health services, hospitals, as a business, have an effort to achieve basic economic objective. although the literature abound of evidences that the organizational culture, as an intangible force, is one of most important factors that affect performance, managers try to change the current organizational culture which based on public economy era to others which appropriate with liberal economy. so, because of those structural changes on the industry and on a hospital itself from public base to liberal economy a “cultural transformation” (scott et al., 2003) is seen. it’s easily said that every hospital as an organization has a corporate culture. and, as a living organization, people make a hospital work and its cultures ties people together, giving meaning and purpose to their day to day activities and lives (arnold, capella, and sumrall, 1987). the need to diagnose and manage corporate culture is growing in importance, partly because of an increasing need to merge and mold different corporate cultures as structural changes have occurred such as consolidation, capitalism, and merger of hospitals (cameron and quinn, 1999). according to these reasons, current study aims to reveal the organizational culture types of private and public healthcare institutions in turkey and identify the dominant organizational culture within public and private hospitals while make a comparison between them. than examine the effects of organizational culture on organizational performance. in this context, organizational culture concept is explained according to the literature. then hypotheses were developed about the effects of current levels of health institutions within the framework of these concepts on business performance. in order to test developed hypotheses in the healthcare industry, as a universe of our research, employees of private and public hospitals in large cities of turkey are selected. for our research, a total of 99 hospitals are accepted to be the subject of this research and a total of 480 questionnaires were collected from participants. hypotheses were tested with principal component and regression analysis by using spss 15 program. we expected that the results of this study will bring different perspectives on performance dynamics of organizations in increasingly liberalized health industry. in this framework this study consists of four parts. in the following part the concept of organizational culture and its effects on organizational performance will be explained according to the literature. then the developed hypotheses about the effects of current levels of healthcare institutions within the framework of these concepts on business performance will be given. sampling, data collection, scale validity and reliability, and analysis of the research question can be seen in the third part. finally, the paper will be ended with discussing and synthesizing the empirical findings and implications to researcher and professionals will be in this last part. we expected that the results of this study will bring different perspective on performance dynamics of organizations in competitive and increasingly liberalized healthcare industry. literature review and theoretical framework the concept of culture has principally stemmed from the study of ethnic and national differences in the varied disciplines of social sciences. organizational culture is claimed that one of the main factors required for understanding organizations. thus, the concept of organizational culture has examined many times by management and organizational scholars over the last decades. according to this interest, there have been many academic studies about organizational culture from various perspectives. organizational culture denotes a wide range of social phenomena which help to define an organization’s character and norms, including an organization’s customary dress, language, behaviour, beliefs, values, assumptions, symbols of status and authority, myths, ceremonies and rituals, and modes of deference and subversion (scott et al., 2003). although there is a considerable overall agreement as to the general definition of organizational culture, most of the academics prefer to use various definitions that differing according to approach to the concept. so, it will be better to express here the most known definition of organizational culture, besides it’s appropriate definition with current study. schein (1997) defined organizational culture as a pattern of shared basic assumptions that the group learned as it solved its problems that has worked well enough to be considered valid and is passed on to new members as the correct way to perceive, think, and feel in relation to those problems. according to the organizational behaviour literature the concept of organizational culture has four key characteristics. first, organizational culture is a shared phenomenon (schein, 1997: 8; wilson, 2001; organizational culture types and their effects on organizational performance in turkish hospitals emerging markets journal | p a g e |20 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu baumgartner, 2009). second, organizational culture has visible and less visible levels (schein, 1997: 17; wilson, 2001; baumgartner, 2009). third, each new member of the organization learns the culture (wilson, 2001; baumgartner, 2009) especially with socialization. finally, culture tends to change slowly over time (wilson, 2001; baumgartner, 2009) the synergistic structure formed by employees of the organization who shared same values, beliefs and moving towards common goals. according to cameron and quinn (1999), organizational culture is defined as an enduring set of the core values, assumptions, interpretations and approaches that characterize organizations and their members. in general, it has been claimed by many researchers that, success-oriented organizational culture increases organizational effectiveness (deal and kennedy, 1982; furnham, 1997; kotter and heskett, 1992; peters and waterman, 1982; schein 1997; denison, 1990). in this context the effect of organizational culture on organizational performance is studied within different constructs in several studies (e.g. gordon and ditomaso, 1992; ogbonna and harris, 2000; poll, 2000). even it is determined that, organizational culture created competitive advantage (e.g. scholz, 1987; krefting and frost; 1985). in some studies in our country (e.g. eren, alpkan, and ergün, 2003), it has been identified that culture has an effect on organizational performance through internal integration and external focus. cameron and quinn (1999), in their study, investigated the contribution of developed organizational culture on organizational effectiveness of organizational success. in that study, it is claimed that each of the organizational culture types may contribute to organizational success depending on the needs of external environment and strategic orientation of organization. accordingly in current study, organizational performance has taken as dependent variable and organizational culture types were considered as independent variables. according to cameron and quinn (1999) typology, culture in an organization can be seen between two dimensions: a focus on internal maintenance (smoothing and integration) versus external relationships (competition and differentiation), and a focus on organic processes (flexibility and dynamism) versus mechanistic processes (stability and control). in competitive values framework (cvf) model, the four dominant organizational culture types – hierarchy, market, clan and adhocracy emerge from the intersection quadrants of those axes of the framework. clan (cooperative) culture is shaped between the dimensions of organization focus and flexibility/dynamism. the clan culture possesses high affiliation and concern with teamwork and participation (quinn and spreitzer, 1991). organizational commitment is a culture type which has seen in organizations, acting as family and has social features as trust, solidarity and unity. successful japanese firms with effective team structure are typical examples of this culture (berrio, 2003, cameron and quinn, 1999; erdem, 2007). hierarchy (control) culture is located between internal organization focus and stability/control dimensions. the hierarchical culture reflects values and norms associated with bureaucracy (quinn and spreitzer, 1991). this is an organizational culture type which the leadership is effective because it is in mechanical and bureaucratic organizations that give importance to order and rules. this culture can be seen in global companies like mcdonald’s and ford motor co. leads to worker alienation, purposelessness and decrease in the sense of autonomous (berrio, 2003, cameron and quinn, 1999; erdem, 2007). although there is an external focus/orientation, market (competitive) culture occurs at the time of stability and control. this is a rational culture which emphasizes efficiency and achievement (quinn and spreitzer, 1991). employees in these culture types are success-oriented. they give importance to personal interests rather than organizational goals and emphasis on the concepts of planning, performance and efficiency. global businesses which have effective relationship between suppliers, customers and external stakeholders are examples of this organizational culture (berrio, 2003, cameron and quinn, 1999; erdem, 2007). adhocracy (creative) is a developmental organizational culture which is based on risk taking, innovation and change (quinn and spreitzer, 1991). it refers to the culture of an organization in entrepreneurial, flexible, innovative and creative areas with its externaloriented and dynamic structure. employees can take the initiative, supported with new discoveries and freedoms so they feel satisfied, happy and successful in this environment (berrio, 2003, cameron and quinn, 1999; erdem, 2007). organizations, doing business over the internet which is defined as ‘new economy’, using advanced technology are examples of this culture. based on these foresight and findings from the literature, depending on traditional roots of the public and private sector, it is predicted that there are different types of organizational culture of the companies in these two sectors. in this context the first hypothesis is expressed as follows: h1: there is a significance difference between organizational culture types of public and private sector. arnold and colleagues claimed that corporate culture has a powerful influence throughout a hospital on such matters as who gets promoted, what decisions are made, and even how employees act (arnold, capella, dr. a.zafer acar, pınar acar page |21| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu and sumrall, 1987). in the literature, it is expressed in different ways that organizational culture is one of the hidden powers of business performance. however, it is revealed that the difference between the types of organizational culture at the same time lead to different performance outcomes. in this context the following hypotheses are expressed as follows: h2: adhocracy culture has direct and positive effects on business performance. h3: clan culture has direct and positive effects on business performance. h4: hierarchy culture has direct and positive effects on business performance. h5: market culture has direct and positive effects on business performance. as a result of liberalization of healthcare industry, public hospitals had to compete against private hospitals. also variety of financial audits put into practice forced managers of public hospitals to demonstrate performance-oriented management. however, it is expected that there are performance differences among public institutions and private sector organizations which the survival is depending on the level of income and profitability. in this context the following hypothesis is expressed as follows: h6: there are significant differences of the effects of organizational culture types on performance outcomes depending on the different types of hospital ownership. methodology it is difficult to evaluate corporate culture because of beliefs, values and assumptions that shared in an organization are not always explicit (schein, 1997). so, qualitative approaches are advantageous in detailing the environmental factors influencing this socialization process (klingle et al., 1995). thus, to reveal the corporate culture in the hospitals and to test the above hypotheses qualitative approach is used and a questionnaire survey was performed. data gathered from chosen sample were evaluated by the help of spss v.15 statistical package program. after reliability of our scales is confirmed factor, correlation and regression analyses are conducted to investigate the relationships among variables. measurement instrument multi-item scales that used in this survey are adapted from previous studies to structure measurement scales. the validity and reliability of those scales are confirmed in related studies in the international arena. thus theoretical background of the current scales which explain below is very strong. scott and colleagues (2003) studied 13 measurement instruments that used to assess organizational culture. organizational culture instruments have been vary according to its typological approach, power of theoretical and conceptual provenance, scope of dimensions and exploring the deeper manifestation of culture (scott et al., 2003). in current study a constructivist approach is accepted, so a typological tool is preferred. however choosing the constructivist approach, there are many classifications of organizational culture and it’s vary according to the researches’ choices of theoretical models based on their studies. the equilibrium between pressures of organization’s external environment and the dynamics of internal environment are the basis of classification in our study. on this context, scott and colleagues (2003) offer the competing values framework (cvf), which is specially designed to represent the balance of different cultures within the same organization, to the researchers who take more constructivist approach. thus we decided to use the revised model of the organizational culture assessment instrument (ocai) based upon the cvf (cameron and quinn, 1999; cameron et al., 2007; helfrich et al., 2007; goodman, zammuto, and gifford, 2001; öztop, 2008; quinn and kimberly, 1984) to determine the cultural dimensions. on the other hand, most of the measurement instruments examine the employee perceptions and opinions about their working environment (the so-called “climate” of an organization, but the cvf tries to examine the values, beliefs and unspoken assumptions that guide attitudes and behaviours (scott et al., 2003). the cvf clarifies the complex nature of organizational culture and provides taxonomy of cultural values that reflect preferred structural characteristics and desired modes of operation. the structure of cvf was designed to differentiated organizational culture according to two dimensions: internal/external focus, and stability/flexibility. using these two dimensions, four quadrants occur as representing clan (team), adhocracy (entrepreneurial), hierarchical, and market (rational) cultures. we took into consideration the output of business performance within three factors that evaluate the perceived, customer and financial performance of the businesses. those performance scales used in this questionnaire are taken from most commonly used scales in the literature (venkatraman and ramanujan, 1986; baker and sinkula, 1999; antoncic and hisrich, 2001; zahra, neubaum, and el-hagrassey, 2002; chang et al., 2003; rozenzweig, roth, and dean jr., 2003) and also taken form models previously applied on turkish organizational culture types and their effects on organizational performance in turkish hospitals emerging markets journal | p a g e |22 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu companies (acar, 2010; acar and zehir, 2009; altındağ, zehir, and acar, 2011; zehir, altındağ, and acar, 2010). these scales were translated by the authors, then a bilingual academics back-translated the instrument. through interviews with various academics and managers, it is questioned whether there is disorder or ambiguity of the expression. any discrepancies were rewritten to be cleared and then back-translated once again (brislin, 1970). in the final stage, with using 5point likert-type scales ranging from “strongly disagree” (1) to “strongly agree” (5), the final shape was given to scale and applied to corporate executives. sampling the aim of this study is to reveal the organizational culture types in the hospitals and examine the relationships between organizational culture and business performance. in order to test the developed hypotheses current study was carried out in healthcare industry in turkey. in this research, questionnaire survey technique has been used as a method of data collection. first, private and public hospitals are chosen as sample of our research. but the exact population of the hospitals in turkey is 1439. according to the ministry of health (2011) database 490 of them are private and 949 of them are public hospitals in turkey. with the purpose of getting appropriate data to test the research model the research universe is narrowed in respect of geographical regions. in this stage we selected random sampling, and applied to 300 private and public hospitals in i̇stanbul, i̇zmir, bursa, antalya, samsun, malatya and kocaeli provinces due to availability of the data easily. this quantity holds more than 20% of turkey’s hospital population. also, this regions occupies nearly 1/3 portion of turkey’s population. 37 private and 62 public hospitals accepted to be subject of this research. it means 7,5% of private and 6,5% of public hospitals, totally 6,9% of turkey’s hospital population. we sent the questionnaire forms to the executives with a cover letter. after gathering the data we eliminated some questionnaire because of faulty inputs. then a database was formed with the 512 returned questionnaires of those 99 hospitals. we compared early and late respondents to evaluate the non-response bias. no significant differences were found between early and late respondents on all variables. after the elimination of some questionnaire forms because of excessive data hiding, 480 clear questionnaires were taken to the analysis stage. also, a comparison was made between the eliminated surveys and those chosen for analysis in terms of means, firm size and firm age, and it was seen that there is no difference between them in a statistical sense. after gathering the data, the basic features of the data were described with statistics to provide simple summaries about respondents. according to the descriptive analysis; 64,37% of the respondents are female and 35,63 % are male, 24,37% were graduated vocational school and below, while 75,63% of them have university and higher degrees. 32,5% of the participants are under 30 years of age and 31,46% is in the 30-39 age range, which are the vast majority of our respondents. in addition, 17,71 % of the participants are doctors, 14,58% of them are managers, 18,54% are administrative staff and 49,17% of them are nurses. this data shows that the sample represents young, middle-level educated and dynamic audience and the close proportion of the staff in hospitals. additionally the portion of nurses to the doctors is appropriate to the suggestion of scott and colleagues (2003). thus, it is considered that this sampling will positively affect the accuracy of our research, due to their basic knowledge about the concepts of the research. some descriptive results are given in the table 1. table 1: descriptive statistics of the sample gender age freq. % freq. % valid % female 309 64,37 20 – 29 156 32,50 37,96 male 171 35,63 30 – 39 151 31,46 36,74 total 480 40 – 49 65 13,54 15,82 status 50 + 43 8,96 10,46 freq. % total 411 84,46 100,00 doctor 85 17,71 missing 65 13,54 manager 70 14,58 total 480 100,00 admin. staff 89 18,54 nurse 236 49,17 tenure total 480 freq. % valid % education 1-5 118 24,58 26,20 freq. % 610 107 22,29 23,80 primary sch. 5 1,04 11-15 87 18,12 19,30 high sch. 64 13,33 15-20 84 17,51 18,80 vocational sch. 48 10,00 20 + 53 11,04 11,90 under graduate 271 56,46 total 449 93,54 100,00 master & ph.d. 92 19,17 missing 31 6,46 total 480 total 480 100,00 scale validity and reliability in current empirical study, all items and components are tested by comprehensive reliability analyses. at first, it’s analyzed the alpha reliability test; overall scale reliability coefficient has been determined a satisfactory level such that α = ,955; this value is quite over the recommended 0,70 threshold (nunnally, 1978; nunnally and bernstein, 1994). reliability coefficients of the main scales in our research model are identified as; organizational culture scale 0,932 and business performance scale 0,955 respectively. these findings informed us that the results are reliable. dr. a.zafer acar, pınar acar page |23| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu in the variable analysis, there is no item founded which has low value of corrected inter-item correlation, squared multiple correlation and/or impair the scale reliability. in the exploratory factor analysis procedure, kaiser-meyer-olkin (kmo) and bartlett’s test results were examined. the results showed that, data are suitable for the principle component analysis (pca), reliable and validity of the construct is provided. then, the principle factor analysis was applied to identify the components of the factors having eigenvalues greater than one. during the factor analysis, varimax rotation was applied with taking into account the generalization of the results. in the data reduction procedure, those variables having a factor load of 0.500 and above were taken into the account. this application maximizes the sum of the variances necessary for the factors matrix (hair et al., 1998: 110). according to the pca findings all items separated to their estimated factorial components without any cross loading. factor loading values are found out between 0,540 and 0,859. the results of principal component analysis of the organizational culture scale can be seen in table 2. table 2: the results of principal component analysis of the culture scale market adhocracy clan hierarchy c01 ,781 c02 ,825 c03 ,776 c04 ,737 c05 ,722 c06 ,620 c07 ,721 c08 ,707 c09 ,716 c10 ,744 c11 ,821 c12 ,859 c13 ,601 c14 ,544 c15 ,540 c16 ,802 c17 ,803 c18 ,809 c19 ,798 c20 ,808 kmo: ,917; x2: 7348,55; p<0,001; total variance explained: 72,18 % before examining the relationships among the factors in our research model, as one of the most important criteria in which we would evaluate the validity of the results, the data was examined to determine if it had normal distribution. for this purpose, the scale structure that was obtained with factor analysis was evaluated with the kolmogorov-smirnov test, and it was seen that t values of all of the variables were at the sufficient level for our sample (t min = 3,702; p<0,001). these findings prove that the distribution of the data is statistically normal. furthermore, considering the fact that the validity and the reliability of the items we used in the current research scale have been tested in previous studies, the confirmatory factor analysis procedure was not applied. during the principal component analysis of performance scale, the factor structure of 12 variables scale is divided into three components instead of two components as expected. however, while evaluation of the factor structure, it has seen that all components are significant between them and named as service, financial and perceived performance. the results of principal component analysis of the performance scale are shown in table 3. table 3: the results of principal component analysis of the performance scale service perf. financial perf. perceived perf. 1. increase in the number of employees ,808 2. increase in the level of satisfaction of employees ,804 3. increase in the level of loyalty of employees ,727 4. increase in the number of patient ,617 5. decrease in the patient complaints ,753 6. patients’ satisfaction level ,793 7. increase in the level of loyalty of available patients ,777 8. image and effects on society ,682 9. increase in service quality ,679 10. financial success of new services offer to the market ,796 11. position in the competitive environment and market ,832 12. the overall level of success in terms of finance ,770 kmo: ,914; x2: 3599,44; p<0,001; total variance explained: 72,287 test of the research question this research aims to reveal the mostly seen organizational culture types in hospitals of turkey, and to state what kind of effect of those different organizational culture types and their effects on organizational performance in turkish hospitals emerging markets journal | p a g e |24 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu organizational culture types and ownership have on the performance of healthcare institutions. for this purpose a questionnaire survey was performed and a database was composed. based on the psychometric properties of the constructs of the database it was determined that the measures were sufficient and could be employed in hypotheses. then to reach research aim, primarily descriptive statistical analyzes were conducted. according to the descriptive analyzes which is done by regulation of the data obtained by survey based on business, within the framework of our sample, the most common organizational culture type in hospitals in our country is founded as hierarchy culture both in private and public sector. and it is followed by market culture. the most common organizational culture types in hospitals and the distribution according to the ownership differences are shown in table 4. table 4: common organizational culture types seen in hospitals general (480) private (254) public (226) mean std. dev. mean std. dev. mean std. dev. hierarchy 3,627 0,947 3,880 0,812 3,342 1,008 market 3,434 1,096 3,730 1,041 3,101 1,062 clan 3,306 1,200 3,683 1,069 2,882 1,199 adhocracy 3,284 1,224 3,613 1,051 2,916 1,300 h1 hypothesis is composed whether organizational culture types significantly differ between public and private sector hospitals? to analyze this hypothesis, independent t-test is conducted (see appendix 1). the results showed that there is a significant difference between the variances of organizational culture in public and private hospitals except market culture. thus, hypothesis h1 is supported. before testing the direct relationships correlation analysis is conducted to test the relationship between variables in the research model. results of correlation analysis revealed that all constructs which differed from each other as components are mutually correlated with each other positively and significantly (p < 0,01). the results of the correlation analysis and the cronbach’s alpha coefficients of the dimensions can be seen in table 5. table 5: mutual relationship between variables of the research model components 1 2 3 4 5 6 7 adhocracy 1(,827) clan ,766** 1(,826) hierarchy ,508** ,500** 1(,820) market ,340** ,331** ,523** 1(,835) perceived perf. ,353** ,364** ,436** ,452** 1(,826) service perf. ,311** ,319** ,436** ,457** ,640** 1(,829) financial_perf ,368** ,348** ,440** ,444** ,578** ,692** 1(,826) ** all mutual relations p<0,01 (two-sided) level is significant subsequently to examine the mutual relations of the factors in the research model, a predicted linear relationship in hypotheses was tested by regression analysis. regression analysis is used to describe the relationship between dependent variable and independent variable which assumed to have an effect on it. as a result of the analysis, to find the percentage of total change in the dependent variable which is explained by independent variable, r2 is used which defines the rate of variation on data set (hair et al., 1998). the results of the regression analysis related with h2 h5 hypotheses are shown in table 6. explanatory power of the regression model statistically means that organizational culture has a significant effect on the emergence of the business performance. according to the regression analyses h2 and h3 hypotheses are partially supported while h4 and h5 hypotheses are supported. table 6: the effects of organizational culture on business performance (all scale) perceived performance service performance financial performance beta t beta t beta t h2 adhocracy ,061 0,984 ,033 0,520 ,132* 2,100 h3 clan ,124* 1,996 ,082 1,314 ,051 0,803 h4 hierarchy ,189*** 3,643 ,216*** 4,142 ,199*** 3,789 h5 market ,288*** 6,176 ,303*** 6,445 ,275*** 5,839 r2: 27,9; f: 45,278; p<0,001 r2: 26,9; f: 42,976; p<0,001 r2: 27,6; f: 43,644; p<0,001 *** p<0,001; ** p<0,01; * p<0,05 in order to solve the hypothesis h6, at first, the differences of the performance variables in the data set according to changes in ownership is examined by an independent t-test (see appendix 2). according to the findings, it is revealed that, even the performance values of private hospitals on those three business performance sub-factors are higher than public hospitals the dr. a.zafer acar, pınar acar page |25| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu differences between those two groups are not statistically significant. thus, the effects of organizational culture differences on business performance in regard of both public and private hospitals are not calculated. however, data set is divided into two as public and private and the effects of organizational culture on business performance are re-examined. according to the analyses, the effects of organizational culture on the business performance of public hospitals are shown in table 7. table 7: the effects of organizational culture on business performance (public) perceived performance service performance financial performance beta t beta t beta t adhocracy ,139 1,442 ,135 1,345 ,166 1,667 clan ,115 1,243 ,004 0,046 ,036 0,378 hierarchy ,177* 2,450 ,247*** 3,283 ,285*** 3,794 market ,227*** 3,436 ,172** 2,511 ,096 1,408 r2: 25,8; f: 18,917; p<0,001 r2: 19,9; f: 13,560; p<0,001 r2: 22,5; f: 15,471; p<0,001 *** p<0,001; ** p<0,01; * p<0,05 the effects of organizational culture on the business performance of private hospitals are shown in table 8. table 8: the effects of organizational culture on business performance (private) perceived performance service performance financial performance beta t beta t beta t adhocracy ,019 0,248 ,052 -0,684 ,101 1,312 clan ,126 1,593 ,128 1,628 ,052 0,646 hierarchy ,190** 2,651 ,132 1,852 ,049 0,683 market ,329*** 5,079 ,415*** 6,426 ,441*** 6,744 r2: 28,0; f: 23,722; p<0,001 r2: 28,5; f: 24,308; p<0,001 r2: 27,7; f: 22,998; p<0,001 *** p<0,001; ** p<0,01; * p<0,05 according to the results of the analyses that shown in table 7 and 8 the differences between public and private hospitals in regard of the effect of organizational culture on their business performance are as follows:  although, the effects of hierarchy culture on service and financial performance are seen in public hospitals, the same effect couldn’t be ascertained in private hospitals.  although, the effects of market culture on financial performance are seen in private hospitals, the same effect couldn’t be ascertained in public hospitals. discussion and conclusion the purpose of the current study was to identify the dominant culture and empirically explain the relationships among organizational culture types and business performance in hospitals as a healthcare service firms. however as yield in the literature, culture is ambiguous, often slippery, and difficult to measure, qualitative approaches are advantageous to study on such kind of this socialization process. thus, it is decided to perform a questionnaire survey. during the literature review process, it is seen that organizational culture instruments have been vary according to its aim, scope, and theoretical approach. in this qualitative study, to reveal the organizational culture of hospitals revised model of the organizational culture assessment instrument (ocai) based upon the cvf is used. and, a multi-item business performance scale which is adapted from previous studies is used. data collected from 512 employees of 99 hospitals of majors cities in turkey. according to the descriptive statistics it is found out that the dominant organizational culture in the turkish healthcare industry is hierarchy and it is followed by market and clan cultures. however it is limited by the sample, this finding can be interpreted as corporate culture in turkish healthcare industry bases on stability, order and control. even every case in hospitals is different from the others this result is surprising because of these kinds of organizations which are effective in emphasizing stable, predictable, and mechanistic processes. corporate culture has a powerful influence throughout a hospital on many aspects. while evaluation of studies of organizational culture and organizational performance concepts, it is emerged that organizational culture is directly linked to the performance of an organization (e.g. denison, 1990). our study provides additional empirical evidence from healthcare services in turkey to the research stream on organizational culture. ogbonna and harris (2000) offer that an internally oriented organizational culture may prove comparatively disadvantageous when compared to the advantages possible with externally oriented cultures. nevermore, according to the findings of the current study, it’s hard to reach superior performance in service and financial performance aspects with clan culture. however, these results also partially supported the results of ogbonna and harris’ (2000) study. but current study demonstrates organizational culture types and their effects on organizational performance in turkish hospitals emerging markets journal | p a g e |26 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu that turkish healthcare organizations are mostly in a hierarchical culture. in this sense, in the case of internally oriented cultures, little evidence is found to support claims of a link between cultural strength and performance. on the other hand, according to findings of current research it’s found out that organizational culture which considers stability, order and control behaviours dominantly are comparatively in advantageous position with the organizations which are in flexibility, discretion and dynamism. this paradox should be the main problem to solve by professionals in healthcare industry in turkish context. in respect of to these findings, it can be said that, private hospitals in turkey have not yet transformed a competitive and innovative structure keeping pace with dynamic market conditions and showed a controlled and organization focused approach in line with incoming past experience from public hospitals. on the basis of public and private hospitals, the significance difference between the effects of organizational culture on business performance couldn’t be ascertained. this finding supports our prediction about the creation of cultural structure of private hospitals by public experienced personnel, however, it still needed to be tested. moreover, the obvious differences between public and private hospitals and the effect of market culture in public hospitals on financial performance were not observed within the framework of our sample. conversely, the relation is seen as positive in private hospitals. hence, it is statistically supported that competitive structure of the private sector calls forth positive financial results. despite the effects of hierarchy culture on service and financial performance seen in public hospitals, the same effect couldn’t be ascertained in private hospitals. so, in our opinion, this can be the most important finding in our research. this finding means that hierarchy culture still dominates in private hospitals and institutions have to slowly give up this structure. thus, performance differences in public and private hospitals are not founded statistically significant therefore, our forecast is needed to be tested. the findings and results of this study need to be reviewed critically in light of several limitations. it should be noted that the findings of this study were a result of a small sample size. scott and colleagues (2003) offered that in a particular hospital the proportion of managers to doctors is 1:4 and of doctors to nurses is 1:3, then the sample from that hospital might comprise 3 managers, 12 doctors, and 36 nurses. according to the findings, we collected approximately five questionnaires from each hospital. thus the use of the small number of participants in each hospital in the study, acts to decrease the generalizability of the findings. lastly, this is not important to identify just the corporate culture of hospitals. but, as hood and colleagues (2003) expressed before it is also necessary to manage it in order to achieve sustainable change in care delivery and, hence; improved outcomes. so, further studies might perform to reveal the antecedents of the corporate culture in the hospitals. moreover, it can be examined within a large database that whether ownership, location leadership style differences or stakeholder priorities have effect on corporate culture. references acar, a. z. 2010. “lojistik yeteneklerin, strateji performans ilişkisi üzerindeki rolü: kobi̇’ler üzerinde bir saha araştırması” (the effect of logistics capabilities on the relationship between strategy and performance: an application on smes). atatürk üniversitesi i̇i̇bf dergisi, 24(4): 1-21. acar, a. z., and zehir, c. 2009. “krizden çıkışta kobi̇’lerde temel işletme yeteneklerinin rolü ve işletme performansına etkileri” (the effects of business capabilities on business performance of smes during out of crisis). 6ncı kobi̇’ler ve verimlilik kongresi, 323333, 17-18 kasım 2009, kültür üniversitesi, i̇stanbul. altındağ, e., zehir, c., and acar, a. z. 2011. “strategic orientations and their effects on firm performance in turkish family owned firms”. eurasian business review, 1: 16-34 antoncic, b., and hisrich, r. d. 2001. “intrapreneurship: construct refinement and cross-cultural validation”. journal of business venturing, 16: 495-527. arnold, d., capella, l., and sumrall, d. 1987. “organization culture and the marketing concept: diagnostic keys for hospitals”. journal of health care marketing, 7(1): 18-28. baker w. e., and sinkula, j.m. 1999. “the synergistic effect of market orientation and learning orientation on organizational performance”. journal of the academy of marketing science, 27(4): 411-427. dr. a.zafer acar, pınar acar page |27| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu baumgartner, r. j. 2009. “organizational culture and leadership: preconditions for the development of a sustainable corporation”. sustainable development, 17: 102-113. berrio, a. a. 2003. “an organizational culture assessment using the competing values framework: a profile of ohio state university extension”. journal of extension, 41(2), http://www.joe.org/joe/2003april/a3.php brislin, r. w. 1970. “back-translation for crosscultural research”. journal of cross-cultural psychology, 1: 185–216. cameron, k. s., and quinn, r. e. 1999. diagnosing and changing organizational culture: based on the competing values framework. reading. ma: addison-wesley. cameron, k. s., quinn, r. e., degraff, j., and thakor, a. 2007. competing values leadership: creating value in organizations. ma: edward elgar publishing. chang, s.-c., lin, n.-p., yang, c.-l., and sheu, c. 2003. “quality dimensions, capabilities and business strategy: an empirical study in high-tech industry”. total quality management, 14(4): 407-421. crook, t. r., bratton, v. k., street, v. l., and ketchen, d. j. 2006. “has strategic management shed the normal science straightjacket?: revisiting bettis’ (1991) critiques”. journal of managerial issues, 18(3): 409-23. deal, t. e., and kennedy, a. a. 1982. corporate cultures the rites and rituals of corporate life. new york: addison-wesley. deloitte 2011. turkish healthcare industry report. republic of turkish prime ministry, www.invest.gov.tr denison, d. r. 1990. corparate culture and organizational effectiveness. new york: john wiley & sons. erdem, r. 2007. “örgüt kültürü tipleri ile örgütsel bağlılık arasındaki ilişki: elazığ i̇l merkezindeki hastaneler üzerinde bir çalışma” (the relationships between types of organizational culture and organizational commitment: a study on hospitals at city center of elazig). eskişehir osmangazi üniversitesi i̇i̇bf dergisi, 2(2): 63-79. eren, e., alpkan, l., and ergün, e. 2003. “kültürel boyutlar olarak işletmelerde içsel bütünleşme ve dışsal odaklanma düzeylerinin performansa etkileri” (the effects on the managerial performance of the levels of internal integration and external orientations cultural dimensions within the firms). doğuş üniversitesi dergisi, 4(1): 55-70. fleisher, c. s., and bensoussan, b. e. 2003. strategic and competitive analysis. new jersey: prentice hall. furnham, a. 1997. the psychology of behavioural work. brighton, new york: psychology press ltd. gordon, g. g., and ditomaso, n. 1992. “predicting corporate performance from organizational culture”. joumal of management studies, 29(6): 783-98. goodman, e. a., zammuto, r. f., and gifford, b. d. 2001. “the competing values framework: understanding the impact of organizational culture on the quality of work life”. organization development journal, 19(3): 5868. hair, j. f, anderson, r. e., tatham, r. l., and black, w. c. 1998. multivariate data analysis (5th ed.). upper saddle river, nj: prentice-hall. helfrich, c. d., li, y-f., mohr, d. c., meterko, m., and sales, a. e. 2007. “assessing an organizational culture instrument based on the competing values framework: exploratory and confirmatory factor analyses”. implementation science, 2: 1-14, doi: 10.1186/1748-5908-2-13. hood, j., smith, h., and waldman, j. 2003. “corporate culture: the missing piece of the healthcare puzzle”. hospital topics: research and perspectives on healthcare, 81(1): 5-14. organizational culture types and their effects on organizational performance in turkish hospitals emerging markets journal | p a g e |28 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu klingle, r. s., burgoon, h. m., afifi, w. a., and callister, m. (1995). “rethinking how to measure organizational culture in the hospital setting: the hospital culture scale”. evaluation and the health professions, 18: 166-186. kotter, j. p., and heskett, j. l. 1992. corporate culture and performance. new york: free press. krefting, l. a., and frost, p. j. 1985. “untangling webs, surfing waves, and wildcatting: a multiple metaphor perspective on managing organisational culture”. in: frost, p. j. et al (eds) organizational culture. london: sage. nunnally j. 1978. psychometric theory. new york: mcgraw-hill. nunnally, j. c., and bernstein, i. h. 1994. psychometric theory (3rd ed.). mcgraw-hill, new york. ogbonna, e. and harris, l. c. 2000. “leadership style, organizational culture and performance: empirical evidence from uk companies”. international journal of human resource management, 11(4): 766-788. öztop, i̇. 2008. “the relationship between leadership styles and culture styles and the impact of this relationship on the qualitative performance (liderlik tarzlari ve örgüt kültürü tipleri arasindaki ilişki ve bu ilişkinin nitel performans üzerine etkileri). master’s thesis, gyte, kocaeli. peters, t. j., and waterman, r. h. 1982. in search of excellence: lessons from america's best-run companies. new york: harper and row. poll, s. 2000. “organizational culture and its relationship between job tension in measuring outcomes among business executives”. journal of management development, 19(1): 32-49. porter, m. e. 1996. “what is strategy?” harvard business review, 74 (nov.-dec.): 61-78. quinn, r. e., and kimberly, j. r. 1984. “paradox, planning, and perseverance: guidelines for managerial practice”. in kimberly, j.r. and quinn, r.e. (eds.), managing organizational transitions, 295–313. homewood, il: dow jones-irwin. quinn, r. e., and spreitzer, g. m. 1991. “the psychometrics of the competing values culture instrument and an analysis of the impact of organizational culture on quality of life”. research in organizational change and development, 5: 115-142. rosenzweig, e. d., roth, a. v., and dean jr., j. w. 2003. “the influence of an integration strategy on competitive capabilities and business performance: an exploratory study of consumer products manufacturers”. journal of operations management, 21: 437-456. schein, e. h. 1997. organizational culture and leadership (2nd ed.). san francisco: josseybass. scholz, c. 1987. “corporate culture and strategy the problem of strategic fit”. long range planning, 25 (winter): 3-16. scott, t, mannion, r., davies, h., and marshall, m. 2003. “the quantitive measurement of organizational culture in health care: a review of the available instruments”. health services research, 38 (3): 923-945. teece, d. j., pisano, g., and shuen, a. 1997. “dynamic capabilities and strategic management”. strategic management journal, 18(7): 509-33. venkatraman, n. ,and ramanujan v. 1986. “measurement of business performance in strategy research: a comparison of approaches”. academy of management review, 11(4): 801-814. walker, g. 2009. modern competitive strategy (3rd ed.). singapore: the mcgraw-hill. wilson, a. m. 2001. “understanding organizational culture and implications for corporate marketing”. european journal of marketing, 35: 353-367. dr. a.zafer acar, pınar acar page |29| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu zahra, s. a., neubaum, d. o., and el-hagrassey, g. m. 2002. “competitive analysis and new venture performance: understanding the impact of strategic uncertainty and venture origin”. entrepreneurship theory and practice, 27(1): 1-28. zehir, c., altındağ, e., and acar, a. z. 2010. “aile şirketlerinde stratejik yönelim düzeyleri ve firma performansı i̇lişkisi” (strategic orientations in family owned business and its relationship with business performance). 18nci ulusal yönetim organizasyon kongresi, 538546, 20-22 mayıs 2010, çukurova üniversitesi, adana volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu organizational culture types and their effects on organizational performance in turkish hospitals emerging markets journal | p a g e |30 appendixes appendix-1: independent samples test levene's test for equality of variances t-test for equality of means f sig. t df sig. (2tailed) mean difference std. error difference 95% confidence interval of the difference lower upper adhocracy equal variances assumed 24,341 ,000 -6,488 477 ,000 -,69751 ,10751 -,90876 -,48626 equal variances not assumed -6,412 432,964 ,000 -,69751 ,10878 -,91132 -,48370 clan equal variances assumed 9,152 ,003 -7,721 476 ,000 -,80123 ,10377 -1,00514 -,59731 equal variances not assumed -7,669 451,965 ,000 -,80123 ,10447 -1,00654 -,59592 hierarchy equal variances assumed 22,513 ,000 -6,451 476 ,000 -,53762 ,08334 -,70138 -,37386 equal variances not assumed -6,371 429,842 ,000 -,53762 ,08439 -,70348 -,37175 market equal variances assumed 1,162 ,282 -6,531 476 ,000 -,62910 ,09632 -,81836 -,43984 equal variances not assumed -6,524 467,163 ,000 -,62910 ,09643 -,81860 -,43961 dr. a.zafer acar, pınar acar page |31| emerging markets journal volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.47 | http://emaj.pitt.edu appendix -2: independent samples test levene's test for equality of variances t-test for equality of means f sig. t df sig. (2tailed) mean difference std. error difference 95% confidence interval of the difference lower upper employee perf. equal variances assumed 3,351 ,068 -3,443 471 ,001 -,31006 ,09005 -,48701 -,13312 equal variances not assumed -3,460 470,536 ,001 -,31006 ,08962 -,48617 -,13395 quality perf. equal variances assumed 2,234 ,136 -5,315 471 ,000 -,34778 ,06544 -,47637 -,21920 equal variances not assumed -5,287 452,181 ,000 -,34778 ,06578 -,47705 -,21852 financial perf equal variances assumed 1,406 ,236 -5,859 462 ,000 -,46387 ,07918 -,61946 -,30828 equal variances not assumed -5,844 450,122 ,000 -,46387 ,07938 -,61987 -,30788 microsoft word 26-268-1-sm.doc volume 1 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu problems and solution proposals for smes in turkey sarp kaya lütfihak alpkan e-mail: kaya.sarp@yahoo.com.tr e-mail: alpkan@gyte.edu.tr abstract the purpose of this project is to present the problems the smes' encounter during providing management and financial requirements, probe how they can solve mentioned problems with as less help as possible within their own organization and offer the employer solutions in micro dimensions. while the smes' definitions will be located in the second part, the third part will include the weighting of their advantages and disadvantages. in addition to that, the fourth part will introduce suggestions to solve the problems in question that the smes come across. rounding off, part five will discuss the selection of financial instruments during the stage of providing financial requirements for the smes, the mistakes done during their application and offer further solution offers for mentioned problems. keywords: sme, the mistakes, solution offers, management, financial requirements this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu problems and solution proposals for smes in turkey emerging markets journal | p a g e | 31 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu problems and solution proposals for smes in turkey sarp kaya lutfihak alpkan i. introduction   kobi̇ (sme) refers to the small and medium sized enterprises and such kind of businesses generally have the biggest shares in their countries’ economies as well as they have vital places for the developed countries and developing countries and in each development plan, the most important roles and responsibilities have been provided to the smes. in this direction, in turkey where the economic instability pervades, it is more than important to develop and support smes that are accepted as the economic stability even in the crisis situations indeed. due to the fact that most of the smes in turkey are individual companies far from institutionalism, it makes economic development based on the managerial skills of the business owners obligatory. because of this reason, it is also very important not to repeat the failures of the business owners until today. the biggest obstacles in front of the business owners in turkey are misusing the capital, managerial problems, difficulties for meeting the finance requirements and lack of marketing activities. the purpose of this article is to examine the problems that smes in turkey face with in the stage where the managerial and finance requirements have been provided and how to solve these problems within their own organizations by minimum support and to provide solutions towards business owners in the micro scale. ii. description  of  sme   as is seen in entire world, smes do not have unique description in turkey. many unities and organizations could describe themselves in some certain criterion. this case has derived from separation of qualitative and quantitative specifications that show differentiation within the bodies of smes in accordance with the support provided to smes by organizations and foundations indeed. on the other hand, in spite of the fact that both qualitative and quantitative specifications could not be sufficient to measure the size of smes, it is also difficult to understand them by using only one description. the general quantitative specifications of smes could be defined as follows: independent management, the person who takes risk are entrepreneur, the competition power in the current markets, the marketing power in the active market, close cooperation between business owner and staff, cost of business and composition of the expenditures of business owner, low profile of experting level. the quantitative specifications are given below. • independent management, the decisions taken in smes have been taken by entrepreneurs and it states that other businesses or individuals do not have any effect on management. to be independent, in other words, purposes of smes have been defined by the business owners. • if the person undertakes the risk called as entrepreneurs and the implementations have been carried out by the entrepreneurs, the responsibilities brought by the decisions are fully belonged to the entrepreneurs. in other words, the person who combines production factors to produce goods and services and undertakes the risk is called as entrepreneur. • the competition power in the active markets states that the competition powers of smes are lower than big businesses. depending on the low of competition power, it is very important to increase the competition in the markets if more than shares have been provided than encouragements and supports. • the marketing power in the active markets defines the advantage that is provided in problems and solution proposals for smes in turkey emerging markets journal | p a g e | 32 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu accordance with the price, amount and terms conditions together by the firms in the active fields of smes. when comparing with largescale firms, such kind of advantage is very little. • the close relationship in terms of business owners and their staff refers that business owners have established very close relations with their staff apart from business depending on that numbers of staff and managers in smes are low. • combination of business costs and expenditures of business owners refer that the income obtained from smes or credits that have been used are used in the firm and personal expenditures of the business owners as well. • low profile of experting in the management states that the education level of the managers in smes are generally low and in order to reorganize this case, the budget has not been allocated for both staff and business owners and the management understanding that is not professional has been still continuing. if we should state general qualitative specifications of smes; these are number of staff in the firm, the capacity size, capital amount, endorsement, the value of machine park and the rate of export and import. these rates are completely used to measure the size of firm. generally, when reviewing the definition of sme, the easiest standards that have been faced are the numbers of staff and endorsement. in order to show the differences in the definition of sme, the definitions of smes in turkey are as follows: sme definitions in turkey in accordance with the cabinet decree issued in official gazette dated 18.11.2005 and numbered 25997 in turkey, the sme is defined as follows. (http://www.resmigazete.gov.tr, 2005). table2.1:classification of sme in official gazette tl annual net sales revenue or financial statement number of staff micro c<1,000,000 0-9 small business 1,000,001<c>5,000,000 10-49 mediumsized business 5,000,001<c>25,000,000 50-249 source: official gazette dated 18.11.2005 and numbered 25997 on the other hand, in the definition of tüi̇k (turkish statistical institute), quadruplet classification has been made in small and medium sized business. according to this, the businesses that recruit 1-9 staff are called as micro sized business; the businesses that recruit 10-49 staff are called as small sized business; the businesses that recruit 50-99 staff are called as medium sized business and the businesses that recruit more than 100 staff are called as large sized business (müftüoğlu, 2007). according to the turkish eximbank, whatever its legal status, sme is belonged to one or more than one real or legal persons and it recruits less than 250 staff who work annually and its financial budget and annual net sales income does not exceed twenty five million ytl and it is called as independent business and has manufacturer, manufacturer-exporter specifications and the micro, small and medium sized business are called as “sme”. the classification of sme has been done in parallel to the cabinet decree. (http://www.eximbank.gov.tr, 2011). additionally, turkish republic prime ministry undersecretariat of foreign trade defines the sme as the business that acts in the manufacturing industry and employs between 1-200 staff and keeps the account as well as it is called as the business whose fix capital amount does not exceed tl in correspondence with 2 million usa problems and solution proposals for smes in turkey emerging markets journal | p a g e | 33 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu dollars as of net balance sheet value except land and building (atıcı, 2006). various criterions have been used by the chambers in turkey such as number of staff, sales amount, capital amount, working field, salary distribution, manufacturing amount in the sme and almost all chambers have sme definitions. the commonly used criterion within these definitions is number of firm’s staff and endorsement of the firm. the most well-known definition of smes that have been constituted almost all businesses in turkish economy has been done by kosgeb (small and medium industry development organization) and the sme is called as the companies that employs between 1 and 250 staff and whose shares not more than 25% do not have belonged to large businesses. (http://www.kobilerim.com 2009). iii. advantages  and   disadvantages  of  smes  in   turkey   due to the fact that smes have more advantages than large scaled firms, they have also disadvantages. the said advantages and disadvantages are given below. advantages of smes smes that follow the markets closely, know the requirements of their customers well and could establish close coordination with their staff are more flexible than large scaled firms in the subjects of manufacturing, marketing and services. due to the fact that such kind of flexibility provides flexibility for the changes occurred in external environment on time and place, smes could slur over many negativeness by less disadvantage (akgemci, 2001). although the product range and production amount of smes are limited in comparison with the large scaled businesses, this production and product range could be carried out by less investment if compared with large-scale businesses. in spite of the fact that the smes could sustain their activities by less product and production in proportion to large businesses, they could be less affected against negativeness even if they lose markets. on the other hand, depending on the limit on the product, the costs arising from storing and product problems shall be lower than large scaled firms. by the way, since therefore small sized enterprises have been mostly carried out their activities by limited productions, they could present supply in the sectors where the demands are limited. in accordance with the size of smes and depending on that they have attempted to carry out their activities by less technology, smes could have latest technological products by lower costs than large scaled enterprises. if the investment cost is low for smes, the entrepreneurship of the business owners could be increased. according to the obtain finance of smes, european union and governmental supports are ready and this situation provides advantage for obtaining finance for smes to be newly established. depending upon that the entrepreneur has been carried out duties such as human resources, production manager, business manager, foreman, marketing manager and in accordance with the goods and service providing capacity of smes and thanks to investment possibility at lower cost and number of staff to be recruited than large scaled enterprises, they could make low costed investment. on the other hand, due to the fact that the number of staff is less, the management in smes is easiest than large scaled enterprises. as per to practical activities, when the number of recruited staff has been increasing in the business place, the efficiency has been decreasing. the decision taken by the coordinator or group who does not have any sufficient information about the goods and products and attempt to find a solution in this way could be wrong and the appropriate solutions could not be found accordingly. the decisions in smes have been taken mostly in consultation with the negotiations made by active participants of production and if these decisions are applied, the success rate of such kind of decisions could be increased (ekinci, 2003). problems and solution proposals for smes in turkey emerging markets journal | p a g e | 34 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu due to the limited number of staff in smes, the relations between the business owner and staff could be promoted and developed so the cooperation mechanism could be strengthened when comparing with the large scaled enterprises. disadvantages of smes many disadvantages of smes are also composed of problems at the same time. the problems of smes shall be respectively reviewed under the headline of “problems that smes have faced with”. in this headline, the conspicuous disadvantages of the smes shall be shortly stated. the problem has been faced to recruit qualified staff. due to the fact that they have limited production capacity, the costs are high. in spite of the fact that their managerial style is traditional, the decisions could be emotional. this case causes some problems in terms of managerial and organizational senses. they have been carried out labor-intensive manufacturing and they have not performed sufficient investment for technology so that they could not benefit from the advantages of technology. they could not follow up the commercial developments in international markets and domestic markets. due to the fact that there is lack of training and they have been far away from international markets, their products could not be produced in western standards and they could face with customer loss. this case has also resulted from limited activities towards exportation. because of tax, they have been directed to black economy and they could face with sanctions and legal penalties in the future on the other hand, in spite of the fact that the educational level is low, they are open to negativeness because they could not keep the financial records regularly. because of limited capitals of smes, the contents of the investments could be limited. owing to the fact that certain parts of incomes earned from businesses have been used in the individual expenditures of business owners, they do not have any efficient financial plans. they have faced some difficulties to find resources to cover their investment and financial requirements as against large scaled firms. their competition powers are not sufficient in comparison with the large scaled enterprises. they could face with troubles to meet the conditions of state tenders if we compare with the large scaled enterprises. iv. problems  faced  by  the   smes  in  turkey   the most important qualitative specifications of small and medium sized enterprises are that the entrepreneurship, management and ownership of these enterprises have been collected by the same person. that person is the business owner and these specifications of those businesses have collected together the most important problem of smes. it is not right to expect that the person having required financial possibilities must be good entrepreneur and manager (müftüoğlu, 2007). in this direction, it is possible to review the problems under the headlines such as managerial problems, problems to meet financial requirements that smes have faced with and problems that smes have faced in domestic and international markets. managerial problems reasons of managerial problems the non-professionalize is the most important problems in the management. in spite of the fact that the business ownership in the smes and management has been implemented by the same person and the business owner is the unique authorized person in the decision making process and due to the limited applications to organizational consultancy, the problem could be occurred. another factor in this problem is the requirement for development and ambition. sometimes, smes problems and solution proposals for smes in turkey emerging markets journal | p a g e | 35 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu ownerships do not want to develop themselves because of some reasons such as not to want to leave the management to the professional managers and not to take into the consideration of the risks resulted from the development and they continue to carry out their production by their limited capacity. it is not easily accepted situation for the business owner who directly established the company by great endeavors and devotion and reached the business from small scaled to medium scaled enterprises to instutionalize his/her business. the enterprises that delay this decision and do not hand over the management of the business to the professional managers have faced difficulties indeed (müftüoğlu,1993). in the first establishment process of the smes, due to the fact that it does not have sufficient capital and the market place is not clear and the vicinity of the domicile of the business owner could be seen as criterion, the problem for smes could be occurred to select the place. this problem could be seen as a minor problem for the business owner however, at that time, the business owner could face with some problems particularly in the process of storing and it could affect the activities of smes in terms of cost and marketing share accordingly. in spite of the fact that there are not any preventive approaches for the problems, then, the minor problems could cause major problems. the business owners do not get any managerial and technological support from out of the businesses because of additional costs. however, when the problems increased, the cost has also raised for the businesses and the continuation of the business activities have been negatively affected respectively. the feasibility activities could not be carried out before investment and any professional support could not be obtained regarding this matter. due to the additional costs and feasibility studies for smes, it could not be preferred by smes. smes do not make any periodical plans then they could not make any estimation about the income resources or problems that could face with in the future. planlessness is one of the biggest obstacles in front of the smes for the development. on the other hand, owing to the fact that human resources have not been greatly considered, each staff could carry out each activity, terms of references have not been defined and due to the fact that there is not any hierarchical structure and the organizational schemes have not been organized by professionals, the structural problem for smes could be occurred. besides, staff has been looking for new jobs and because of staff circulation; the continuation of the works and businesses could be interrupted. because, the decisions have been taken by the business owners and their relatives and the views and proposals of the staff could not be taken into the consideration, the problems could be occurred in the production processes and lack of communication has been faced. depending on the activity area, the staff and business owner do not have any professional training out of the company and they could not develop themselves in the relevant subjects and there is lack of qualified and experienced staff so that the training problems could be observed for the smes. by virtue of the smes are generally family companies and they spend money for their individual needs by using firm incomes, the intensive fund expenditures could be occurred and the continuation of the firm’s activity could be affected indeed. when the smes could not be supported by external auditing, they could not observe their failures within the firm and this causes auditing problems within their own bodies and companies as well. solution proposals towards managerial problems due to the fact that the business ownership and managements in the smes have been collected by the same person and the business owner has the unique authorization in the decision making process, the requirements towards external management and organizational consultancy support have been increased. the business owners problems and solution proposals for smes in turkey emerging markets journal | p a g e | 36 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu should have been supported periodically by the consultancy firms in the private sector. smes could be professionalized in their own sector and they should have become professional in their own organizations. in this direction, the business manager should work together with the human resources manager and finance manager in the first stage. in the establishment process of the business, the ultimate attention must be paid for the selection of business place. in this direction, the feasibility must be carried out indeed in the process. by this means, stocks costs could be decreased and activity expenditures could be minimized. the smes could hasten to perform their projects. in this direction, the feasibility activities should be carried out before performing the project through the support provided by business and consultancy firms. due to the fact that any preventive approached could not be provided for the problems to be occurred, the small problems could become major problems indeed. in this direction, it is essential to follow up and monitor not only its own sector but also domestic and international sectors. the bulletins, research articles, economy programs should be closely monitored and observed and the close negotiations and contacts must be established together with other firms in the sector regarding this issue. the best solution formula for the smes that could not easily employed qualified staff is to train their own employers. in this direction, the business owners should abstain from recruiting or employing their own relatives and close friends who do not have any experience and qualifications as well. on the other hand, if the business owners employ their own relatives and families, the managerial problems could be occurred and the balance could be broken. in accordance with the activity subject, the budget must be allocated for professional training for the staff and business owners and in the activity area, they should develop themselves and they should participate in the trainings to train the qualified personnel indeed. although the smes are generally family companies, the individual expending should not be made by the firm incomes and in this direction, the fund should not be removed from the firm. v. problems  faced  in   finance  requirements   generally, while talking about the problems of smes, one of the first things comes to mind is financial problems. the reason is that one of the most important factors is finance for the business to act. the smes could face with some problems when procuring this factor. when the smes could face with some difficulties regarding financial resource procurement, they could experience input procurement, manufacturing, marketing and training problems extensively (ekinci,2003). although the smes have financial advantages such as independency and benefiting from encouragements, some factors such as lack of financial information, insufficient observation in the financial systems development and business owners are responsible for the individual assets, credit volume and credit cost could create some financial disadvantages for smes. under the direction of this information, the reasons and solution proposals for the problems arising as a result of covering the financial requirements in the smes are given as follows: financial information problem and solution proposals of business owners financial information problem of business owners the most important reason for the smes to face with the financial problems is arising from the business owners. particularly, when the business owners as the business manager undertake all activities and works, the problems could be problems and solution proposals for smes in turkey emerging markets journal | p a g e | 37 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu increased. although the professional management requires the experting, in the first establishment stage, such kind of possibility could not be possible. in the first stage, the situation that could be considered as normal will leave its location to another place where the specialization is subject. because, due to the fact that the business owners do not have sufficient information in terms of financial management so that it could be seen as short term problem, this problem has long term affect indeed. as a result of this lack of information, there could be some negativeness so that the qualifications in the customers could not be defined well, the risk undertaken in the credited sales could not be well assessed and the effective collection policy could not be monitored (ekinci, 2003). the negativeness arising from lack of financial information belonged to the business owners are given below: depending on that any respective finance departments have not taken part in the smes, the finance resources could not be found by the experts and the cost effective ones among the resources could not be evaluated indeed. smes that mostly use the labour intensive technology could not be benefited from auto finance that has been provided by means of the amortization. (tutar and küçük, 2003). the external accouters have been prepared a balance sheet for the income and expenditures rather than showing the failures of the firm and they could provide support to firm for financial resources. because of insufficient financial information, the business owners could not understand the position of the firms over the balance sheet in terms of financial meaning and they could not take necessary precautions previously. due to the lack of information, the business owners could face with some problems in the taxes. although mainly business account summary has been recorded, they cannot benefit from legal possibilities because they do not use the amortization methods in accordance with the balance sheet basis and they do not make provisions against doubtful receivables. on the other hand , lack of financial information affects the activities that have been carried out together with the banks negatively. in spite of the fact that the credit types that are not related to covering the requirements have been preferred and the ultimate attention has not paid to reimburse the installments, the credibility of the firm has been negatively affected in the coming periods. however, it is essential to pay attention to reimbursement of the firms to both individual and commercial credits. additionally, if the business owners use the credit under the direction of bankers’ targets instead of their own financial structure, the cash flow of the firm could be damaged and the sustainability of the activities could be endangered. depending on the black economy in turkish economy, the attitude of the business owners could cause foreshorten in the financial term and the credit institutions could assess the firm negatively. on the other hand, because of black economy, the legal penalties have been faced and the support coming from the credit institutions have been interrupted and as a result of legal sanctions, the firms could go bankrupt. solution proposals a separate finance department must be established in smes and professional managers should be recruited in this department. due to the lack of financial information, depending on that the business owners could not understand the position of the firms over the balance sheet financially, the business owners should be short term trained in the fields of financial analysis and balance sheet reading techniques. in order not to damage the cooperation with the bank and other financial organizations, the business owners should pay ultimate attention to the credit reimbursement of the business and individual payments and a system must be established to follow up the credit terms. problems and solution proposals for smes in turkey emerging markets journal | p a g e | 38 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu problems related to the capital structures and solution proposals problems related to the capital structures the capital structures of smes are composed of two types. the first one is the initial capital occurred in the establishment of the businesses. the initial capital is generally accepted as the first investment amount. it is possible to convene the initial capital resources of the smes in turkey in two items. the first one is the individual savings of the business owner and the second one is the debt provided by the close friends. owing to the fact that business owners do not want to enter into the interest obligation, their individual savings are composed of primary capital in the establishment of the business. however, they could face with the limited equity capital problem. although they consider performing the project having maximum profitability rate, they could not carry out such kind of project by using their limited equity capitals (ekinci, 2003). in addition to this, this capital is not sufficient depending on covering the primary finance by the equity capital. in other words, lack of equity capital is very important problem in this sense. as a result of unplanning the primary capital and wrong calculation of the primary investment, the business owners will be faced with great problems in the future. generally, the businesses have been conflicted with the primary capital and business capital and as a result of this, they could experience serious problems. for this reason, the difference between these two capital types must be defined well and the regular plans must be developed towards the operation of these capitals (ekinci, 2003). the working capital refers to the investment that has been made economic values to transform into the money in the calculation period. in the balance sheet, the returned values (current actives, returned values, circulation currency and economic values), current money, free securities (short term financial assets) , receivables and stocks business capitals are composed of the business capital (sarıaslan, 1994). one of the most important failures that have been done in the establishment processes of the smes is to disregard the working capital amount while the investment amount has been defined. one of the important parts of the limited capital has been depending on the fixed assets; the working capital could not be considered well for the sustainability of the business activities. however, in terms of investment success, it is more than important to define the investment amount as much as to distribute them between the returned values (düzce, 2007). solution proposals since the first finance requirements in the smes have been covered by equity capitals, it is very well known that it is not sufficient. it means that lack of equity capital is very important problem. in this direction, the partnerships must be established to initiate new projects where the equity capital will be sufficient and to increase the equity capitals accordingly. business owners could face with troubles in the future if they could not use this initial capital with the plan and if they wrongly calculate the first investment amount. in this direction, the fixed and floating assets must be distributed balancedly. the problems regarding the inflation and solution proposals problems regarding the inflation while the position of smes has been defining in the inflationary environments, it would be easier to understand the problems by taking into the consideration of the relations between saving and credit. because of the inflation, the section that practices economy shall demand for the real interest to protect the saving against inflation. however, these high interests could be reflected as high credit cost automatically. off course, this case has dissuasive effect on the firms that plan to make new investments. apart from the import input prices because of the inflation, if the prices of the domestic inputs have increased then the firms shall be forced to engrossing but at the same direction, the requirements of the firms regarding business capital have been increased and the liquidity has been negatively affected. because, if the input prices are increased but the product prices are not increased problems and solution proposals for smes in turkey emerging markets journal | p a g e | 39 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu respectively, the auto finance possibilities of the smes could be restricted and they could face with financial difficulties. besides, if the procurements are made in cash but the sales activities are made in installments, the cash balances of these firms could be highly destroyed (düzce, 2007). such kind of negativeness because of the inflationist environments have resulted from melting the low capitals of smes and the external resource requirements could be necessary as well as the business owners could face with serious dangers in the management of the firm and the financial crisis could be occurred. solution proposals it is more than important for smes to turn the disadvantages of the inflation to advantage so that the smes should define the discount very well in the installments selling and should also define the stock management indeed. in this direction, a good price strategy should be defined in the installment selling and the stockpile should be performed especially in the period where the prices are decreased respectively. against the price escalation based on the inflation, the credits should have been kept as inactive in the periods where the low rate interest policies have been carried out and the cash credit utilization should be prevented in high interest period. credit interest, guarantee and date problems and solution problems credit interest, its guarantee and date problem as we have mentioned previously, the main problem in the businesses is that they do not have any separate finance department and the business owners do not have finance experience or information. on the other hand, it could cause problems for the smes in the banking activities. the main problems are composed of credit interest, warranty and date. one of the biggest problems of smes is that they could not become indebted to low interest. when reviewing the reasons of this, the following reasons could be observed. • based on the scales of smes, they could have low production capacity and lack of sustainability principle, • although the smes are using the credit for their business capitals, it could be a risk factor for creditor depending on the individual requirements of some part of the credits, • they do not have sufficient deposit money to bargain with the banks, • they do not have enough information to bargain with the banks in terms of finance, • due to the fact that they have some troubles to find external resources, they could not compete with the banks. another problem of the smes is the issue of credit warranty. when reviewing the reasons of this, the following reasons could be observed. • in case of bankruptcy, the small scaled business owners could lose their assets in the business and also all their individual assets. the business owners who do not want to take such kind of risk could hesitate to use credit, • because of the size of smes and the vulnerability in their management, the credit organizations could see them risky and against the credit to be used, they could demand for material warranty to protect them accordingly, • due to the fact that business owners have registered their properties that have been obtained through the business, instead of the registered properties on the firm, the firms could warranty against their own risks, • in the stage where the properties that have material warranty value have been provided as guarantee, they could not be used efficiently and effectively, • the engineering vehicles and machines that the businesses have been operated their activities could not be considered to have material value by the credit institutions or these could be assessed as lack of warranty values. problems and solution proposals for smes in turkey emerging markets journal | p a g e | 40 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu • the business owners could provide memory warranty to credit institutions for other firms and for this reason, other firms could undertake the resource risk against the debts of other firms, • against the commercial activities, the dates of the cheques provided by debitor are long termed and the credit institutions could not see the long termed cheques as warranty as well as the smes could not create any finance against the cheques. on the other hand, one of the subjects that the smes could face with difficulties financially is the due date in the credits. although the due date problems in the debts could not be taken into the consideration mostly, when the debits arrive to maturity, the cash problem could be occurred in the firms and the sustainability of the firms could be under risk accordingly. when reviewing the reason of this problem, the following reasons are taken into the consideration. the due date of the future collection that has been done by the businesses could be dispersed so this situation could delay the reimbursement of the debts. • due to the fact that the businesses have organized reimbursement plan for their commercial debts and these debts are closed to the reimbursement time, the cash problem are occurred, • regarding the mid-term reimbursement issue of the short term credits, they do not have any sufficient information, • the long-term investments such as business place investment, vehicle procurements, businesses capital expenditures that will not be returned will be carried out by short-term debts. solution proposals rather than the activity expenditures, the highest expenditure items of the smes are composed of the unpaid interests. in this direction, the smes should work with several credit institutions and should get in touch with many credit institutions. in this direction, they should increase the possibility to benefit from low rate interest advantages accordingly. even if the smes have used credit for the business capital, due to the fact that a part of the credits have been used for the individual needs, these could be a risk factor for the lenders so the business owners should not take funds for their individual requirement in any way. when they use the individual credits for their individual requirements, they could easily control their individual expenditures and in this case, there will not be any fund outflow from the businesses and credit institutions will trust the enterprises indeed. if the real estates shall be procured by the interest obtained from the enterprises or by income, such real estate should be registered on the firm. at that time, the real estates will be based on the warranty of the credits and the business owners shall not be forced to provide individual warranties. the businesses should stay out of cheque and bill processes that have been known as memory document in the markets that will affect negatively the cash flow. the businesses should not use the shortterm credit utilization that will exceed 25 percent of their endorsement. in case of intensity of the shortterm credits, in accordance with the priority of the dates, they should strengthen the cash flow by expanding the short term credit risks to long term. on the other hand, the vehicle purchasing for the businesses should not be short termed. the marketing problems that the enterprises faced in the domestic markets regardless the fact that the crisis in the international markets affects turkey directly and the intervals of such kind of crisis have been decreased and their effects have been growing, if the structures or organization of the smes in their current models could not be changed, there would be serious dangers. based on this, the smes should spare no effort to minimize the effects of the crisis in the domestic markets. problems and solution proposals for smes in turkey emerging markets journal | p a g e | 41 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu the initial problems faced in the procurement of the resources from the domestic markets are occurred if the smes’ procurement department could not act effectively so that the low quality and expensive rough materials procurement could be faced. on the other hand, the limited possibilities of the marketing researches should also play important role in this direction. the smes have procured the necessary input to produce material through the private sector, kit and abroad. because of increasing the exchange rates, the import activities are expensive and the additional charges done by the private sector firms that have provided input have forced the smes. by this way, the interest rate of the smes has been decreasing because of expensive rough materials. in spite of the fact that the production of the smes are in the few amount, the prices in the rough material and intermediate goods and other procurement conditions have not been affected in the favor of the smes. they are forced to buy the said inputs by high prices. in other words, monopolistic effects have affected the performance of the smes negatively. one of the problems in the procurement of essential rough materials and intermediate good refer that the rough materials could not be purchased on time and the desired goods could not be provided on time. this case are directed the businesses to the rough material storage and as a result of this, the resources have been wasted. the smes do not have serious organizations regarding the establishment of the marketing. there are some failures in searching, looking and evaluating the target markets. because of economic reasons, the qualified marketing staff could not be employed. there are some failures in searching for the sales, development, advertisement and promotional efforts as well as planning them. they could face with some difficulties in the price determination. as we have mentioned in the previous subject, when the increasing in the cost and these could not be reflected into the prices, the smes could not have profit or less profit accordingly. the strategic faults could be done when defining the customers. in order to take the order, it is also a fault to wait for the customer to sell the goods (http://www.hydra.com.tr 2011). the smes like big companies do not benefit from the discount when they cover their rough materials requirements based on the serial and mass production. marketing problems faced in the foreign markets it is inevitable reality that the export activities are very important for the country economy and institutions. the exports play very important role in the development of the country’s economy. based on this, it is more than important that smes composed of 99% of the country’s economy should be successful in the export activities. however, nowadays, the share taken by the smes in the export activities are very small. the factors that affect the success of the business in the international markets are as follows: the enterprises want to take part in the international markets, their produced goods and services should be compatible, they should have sufficient financial and human resources, they should have concrete marketing approach in the international sense. in order to get into the market, an enterprise should have sufficient manufacturing capacity, technical and commercial information, qualified staff towards capital and finance. on the other hand, the relevant amendments should be performed in the manufacturing, sales policies and distribution system (karadal, 2001). essentially, the chronical problems of smes in the export are resulted from the unenforceability of the export marketing thought and approach. the export problems of the smes could be handled in two different groups as “the problems that the smes could face in the national and business level” (akgemci, 2001). the problems of smes in the international levels are as follows: problems and solution proposals for smes in turkey emerging markets journal | p a g e | 42 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu • the smes do not follow up a planned strategy to develop their export activities, • the purposes to develop the small industry sector and to increase the contribution of this sector to the export activities should not be defined well. • the current purposes should not be directed towards the performing the export of the small industry sector, • even if there is a target defined to support the smes, the precaution taken and applications are not in accordance with this purpose, • there is not any organization to coordinate the demand markets for the smes. • the domestic marketing conditions are more attractive than the international markets, • the current applications in the export are not in favor of the smes. • bureaucratic obstacles, • lack of encouragement precautions, • incoordination of the smes. the problems of the smes in the business level are as follows: • difficulties to find credit for the financing of the production towards export,, • difficulties to find cheap and qualified rough material. • the export marketing activities could not be covered because of limited resources, • sales development and promotional activities are very expensive, • lack of quality • falsity in the external pricing. • failure marketing strategies, • the electronic trade could not be used sufficiently. vi. conclusion   depending on that the investment cost is low for the smes and the business owners could have possibility to become entrepreneur, the smes are composed of 99% of the country economy and additionally, they have some advantages rather than the big businesses as well as it is well known that if these advantages could be used, there will be great benefit and contribution to the country’s economy. the smes that could follow up the markets closely know the requirements of the customers very well and could establish close relations with their staff are more flexible than the large scaled firms in terms of production, marketing and service. such kind of flexibility provides adaptation to the changes that will occur in the external environment on time and on place. due to the fact that the sustainability of the activities of the smes could be provided by less product and production rather than the large scaled enterprises, they are less affected by the negative circumstances even if they lost markets and the cost arising from storing and product problems are lower than the large scale enterprises. by using this advantage, the business owners are in the position that they could compete with the large scaled enterprises. depending on the lack of educational level of the smes, the budget must be allocated for the training activities for the staff and business owners and they should be supported and encouraged to develop themselves in their activity field as well as they should participate in the trainings to increase the qualified staff so that the sme’s contribution will increase in the country economy. they could not follow up the commercial developments in the international markets and domestic markets and they could stay regional to the developments. on the other hand, depending on the lack of training and far away from the international markets, they could not catch the western standards so they could loss the customers. in this direction, the organizational recoveries should have been performed to cope with the relevant problems. in comparing with the large scaled enterprises, their competition capacities are weak and they have trouble to carry out the principles of state tenders and these are the obstacles for the smes to develop themselves. the smes and business owners should come together and make a deal in the partnership issue. because of that the business ownership in the smes and the management activities are collected by the same person that person is the problems and solution proposals for smes in turkey emerging markets journal | p a g e | 43 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu business owner and these specifications of those businesses have collected together the most important problem of smes. it is not right to expect that the person having required financial possibilities must be good entrepreneur and manager. it is more than important for the smes to train their own staff because they face with some problems for the requirement process. in this direction, the business owners should abstain from recruiting or employing their own relatives and close friends who do not have any experience and qualifications as well. on the other hand, if the business owners employ their own relatives and families, the managerial problems could be occurred and the balance could be broken. a separate finance department must be established in smes and professional managers should be recruited in this department. in order not to damage the works with the bank and other financial institutions, the business owner should pay ultimate attention their individual expenditures and their reimbursement as well as a system should be established to follow up the date of the credits. apart from the activity expenditures, the smes’ highest expenditure item is composed of unpaid interests. in this direction, the smes should work together with several credit institutions and should get in touch with many credit institutions. then, the possibility to be benefited from the low rate advantages could be increased. the businesses should not use the shortterm credit utilization that will exceed 25 percent of their endorsement. in case of intensity of the shortterm credits, in accordance with the priority of the dates, they should strengthen the cash flow by expanding the short-term credit risks to long term. on the other hand, the vehicle purchasing for the businesses should not be short termed. generally, in the stage where the managerial and finance requirements of the smes in turkey, it is seen that the problems to be faced is based on the information and ability of the business owners. problems and solution proposals for smes’ problems in turkey emerging markets journal | p a g e | 44 volume 1 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu vii. references   1. akgemci, t., 2001. kobi'lerin temel sorunları ve sağlanan destekler. ankara: kosgeb yayınları. 2. ekinci, m. b., 2003. türkiye’de kobi̇’lerin kurumsal gelişimi ve finansal .sorunları. i̇stanbul: askon yayınları. 3. kargül, d., 1997. türkiye’de küçük ve orta ölçekli işletmelerin yönetim sorunları.ve çözümleri. i̇stanbul: i̇stanbul ticaret odası yayınları 4. müftüoğlu, t., 2002. türkiye’de kobi̇’ler: sorunlar-öneriler. 5. baskı. ankara: turhan kitapevi. 5. müftüoğlu, t., 2007. türkiye’de küçük ve orta ölçekli işletmeler kobi̇’ler. 6. baskı. ankara: turhan kitapevi. 6. sarıaslan, h., 1994. orta ve küçük ölçekli işletmelerin finansal sorunları: çözüm için bir finansal paket önerisi. ankara: tobb yayınları. 7. şakar, b., 2009. banka kredileri ve yönetimi. 2. baskı. i̇stanbul: beta yayınevi. 8. tutar, h. ve küçük o., 2003. girişimcilik ve küçük işletme yönetimi. ankara: seçkin yayıncılık. 9. akbıyık, e., 2010. faktoring, http://www.belgeler.com [erişim tarihi 31 aralık 2011]. 10. ankara serbest muhasebeci mali müşavirler odası, 2011, http://www.asmmmo.org.tr [erişim tarihi 31 aralık 2011]. 11. atıcı, g. b.., (2006). küçük ve orta ölçekli işletmelerin, ekonomik gelişime etkileri, finansman kaynakları ve kobi̇’lerin büyümesi sağlayan faktörlere ilişkin karşılaştırma. doktora tezi. i̇stanbul: i̇stanbul üniversitesi sbe. 12. banka bülteni, 2011. http://www.bankabulteni.com [erişim tarihi 31 aralık 2011]. 13. çondur, f., 2008. finansal yenilikler kapsamında leasingin kobi̇’lerde kullanımına i̇lişkin bir araştırma. ekonomik ve sosyal araştırmalar dergisi. 4 (2), ss. 1-26. 14. düzce, ç., (2007). türkiye’de kobi̇’lerin finansal sorunları ve alternatif finansman …….kaynakları. yüksek lisans tezi. i̇stanbul: i̇stanbul üniversitesi sbe. 15. eximbank, 2011. http://www.eximbank.gov.tr [erişim tarihi 08 ekim 2011]. 16. finansmortgage, 2011. http://www.finansmortgage.com [erişim tarihi 31 aralık 2011]. 17. gezginadam, g., (2008). operasyonel leasing ve uygulama. yüksek lisans tezi. sakarya: sakarya üniversitesi sbe. 18. hydra uluslar arası proje ve danışmanlık, 2011. http://www.hydra.com.tr [erişim tarihi 22 kasım 2011]. 19. karadal, h., 2001. kobi̇'lerin uluslararası pazarlara açılmasını etkileyen faktörler .üzerine bir araştırma, i. orta anadolu kongresi: kobi̇'lerin finansman ve pazarlama sorunları, kosgeb, nevşehir, 18-21 ekim, ss. 189-199. problems and solution proposals for smes in turkey emerging markets journal | p a g e | 45 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.26 | http://emaj.pitt.edu 20. kobi̇ rehber ve i̇ş geliştirme platformu, 2009. http://www.kobilerim.com [erişim tarihi 16 kasım 2011]. 21. öker, a., (2007). ticari bankalarda kredi ve kredi riski yönetimi bir uygulama. doktora tezi. i̇stanbul: marmara üniversitesi sbe. 22. t.c.resmi gazete, yönetmelik, 2005. http://www.resmigazete.gov.tr [erişim tarihi 08 ekim 2011]. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi | http://emaj.pitt.edu innovation driven emerging technology from two contrary perspectives: a case study of internet mehmet lutfi arslan istanbul medeniyet university, department of business, | email: lutfi.arslan@medeniyet.edu.tr sadi evren seker istanbul medeniyet university, department of business, | email: academic@sadievrenseker.com cevdet kizil yalova university business administration department in english, | email: cevdetkizil@yahoo.com abstract internet is a well, organized technological achievement of human being and a rapidly improving medium through time. all the novel technological achievements like web 2.0 or web 3.0 are new epochs of internet technology and internet is spreading in multiple dimensions, reforming the paradigm, and innovating the technology in a selfrenewing fashion. in this paper, the technological construction of internet and the social paradigms are discussed from two contrary perspectives. either as “problem solvers” or “technical experts”, the characteristics of incumbents of technological positions seems very problematic in terms of their roles in shaping technology. are they so disinterested and unbiased on creation of technology? can we reduce their roles as such? how can we make sure that they are neutral? if we put their roles that way, what about freedom of individual decision-making? keywords: internet, technology, innovation, web, internet history new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu | mailto:lutfi.arslan@medeniyet.edu.tr mailto:academic@sadievrenseker.com mailto:cevdetkizil@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu dr. mehmet lutfi arslan, dr. sadi evren seker and dr. cevdet kizil p a g e |87| emerging markets journal innovation driven emerging technology from two contrary perspectives: a case study of internet dr. mehmet lutfi arslan dr. sadi evren seker dr. cevdet kizil 1. introduction in 1945, dr. vannevar bush, director of the office of scientific research and development, wrote an article about the application of science to warfare. as a coordinator of the activities of leading american scientists, he called for a new relationship between science and scientist. to him, “for many years inventions have extended man's physical powers rather than the powers of his mind.” now, “instruments are at hand which, if properly developed, will give man access to and command over the inherited knowledge of the ages. the perfection of these pacific instruments should be the first objective of our scientists as they emerge from their war work.”1 some 40 years later, langdon winner proposed a similar perspective to technology. while establishing technological systems, he urged us to reflect upon the potential consequences of such systems. if we cannot interfere at the beginning of designing and developing a right system which means a right world we live in, then, we would not be able to deal with the outcomes. “because choices tend to become strongly fixed in material equipment, economic investment, and social habit, the original flexibility vanishes for all practical purposes once the initial commitments are made.”2 bush’s view of science is optimistic, because he has a very naïve faith in the power of science and scientists. according to this view, science acts in circumstances of scientists’ own making and choosing. what we have is our work and development. by the same token, what we prospect is our plans and 1 vannevar bush, “as we may think”, atlantic monthly, 1945, http://www.csi.uottawa.ca/~dduchier/misc/vbush/awm t.html. 2 langdon winner, the whale and the reactor a search for limits in an age of high technology, the university of chicago press, 1986, chapter 1. designs. it is a formation of ordinary science work and thus outcomes are determined. this sort of science view implies not only a positivist and enlightened world paradigm but also a hidden agenda of imposing power from an ivory tower in which scientists live. winner has a sort of pessimistic perspective towards the role of technology in the society. if it is possible to determine the outcomes, then there is no possibility to have uncertainty, which is the must of a democratic regime. winner attempts to avoid undesirable outcomes of technological advances, yet at the expense of freedoms. both winner and bush are acceptable, in terms of having positive perceptions of science or avoiding negative effects of technology. however, it seems that efforts to control the negative effects of technology or to have positive effects of it to extend the power of mind, as is bush’s attempt, are to threaten or to restrict freedoms of society. yet, the very nature of science and particularly technological advancements stems from the freedom of individual decision-making. this is a value that fosters the development of societies and individuals. if, people want technological developments and positive contributions of science to their lives, even if they also want to have their freedoms and individually take their own decisions with their consequences either positive or negative, the question that whether it is possible to have both simultaneously raises another issue: what are the roles of decision makers in shaping the technology? an intense debate over the role of technology in society in late 1960s between emmanuel mesthene and john mcdermott inspired me to deal such an issue. mesthene, director of harvard program on technology and society at that time, argued that technology, neither an alloyed blessing for man nor an unmitigated curse, is a selfcorrecting system. on the other hand, to mcdermott, technology had its own politics. focusing on the nature of contemporary application of technology like in vietnam war, he defined technology as “systems of rationalized control over larger groups of men, events, and machines by small groups of technically skilled men operating through organized hierarchy.”3 though the debate was based upon the different perspectives of rightist and leftist politics, their opposite definitions of decision makers in shaping the technology highlight a fundamental point to my argument: the positions and roles of decision makers in creation of technology. 3 john mcdermott, “technology: the opiate of the intellectuals”, in albert h. teich (editor), technology and future, st. martin’s press, fifth edition, ny, 1990, p. 110. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu innovation driven emerging technology from two contrary perspectives: a case study of internet emerging markets journal | p a g e |88 our chief interest lies in the question of whether they could be a determinant factor. in order to deal such an ambiguous issue, we are specifically interested in exploring this concern in a new technological form, internet, whose construct is shaped by a high level of commitment of its pioneers. so, in final analysis, figuring out what is the role of decision makers of technology in shaping the nature of that technology, we argue that if internet, as a newest technological form is so far maintaining both freedom of individual decision making and virtues and advantages of technology, it is possible because of the fact that from the very beginning its pioneers, designers, and architects are eagerly committed to do so. we will investigate the theoretical basis of this idea, and discuss the early history of the internet in terms of the commitment of its pioneers, decisionmakers and potential decision-makers that affect the development of the internet. as long as decentralized, interoperable, and open nature of internet technology survives, we assert that this would be possible if only there are committed designers, architects and organizations that can elevate themselves in such a position that they exhibit no drive for commercial or political power.4 paper proceeds in the following ways: first, comparing and contrasting two opposite views of decision makers of technology, we derive some specific guidelines that are helpful in determining the characteristics of decision-makers of technological advancements. then, particularly in the example of internet, we try to reveal the commitment of pioneers of the internet to open, free and decentralize structure of that new technological form, which otherwise would not be possible. we examine their positions, as well as present efforts in terms of individual decision making and politics of technology. 4 having said that, i have to admit that my view on internet as free and open architecture could be seen a bit naïve by some. for instance, one who sees global economy as a “hegemonic order” and how it deploys the "control utility of network technology" to produce that order or the "universal homogeneous state" would think that “new information and communication technology has not been to free and empower ordinary people but to tighten the screws and make their global economic and political rulers richer and less visible than ever before.” likewise, “insofar as they bolster the already formidable control of capital over the means of power, computer networks are an essentially conservative, not revolutionary, technologyconservative, that is, of the prevailing liberal and capitalist order.” see darin barney, prometheus wired: the hope for democracy in the age of network technology, chicago: university of chicago press, 2000, p. 188. 2. two edge roles of technology we can understand the premise of technology’s role over society in two opposite ways: as a self-correcting system by mesthene and as a form of life by mcdermott. while the former implies that technology has advantages as well as disadvantages and this does not have to do with our freedom of decision-making since it is almost neutral system, the latter asserts that it is not an arbitrary choice, but an imposition concerning the way we should live with and thereby a tool of suppression of humanity. since two views are based on and augment certain definitions and characteristics of decision-makers of technology, these two edges about technology’s role over society provide us a heuristic tool. according to mesthene, technology is “the organization of knowledge for practical purposes.” this “organized knowledge” motors social change in creating simultaneously positive and negative effects. in order to understand the impact of technology, we should not isolate either of them and take both at the same time. in fact, what we see as problems or negative effects of technology could be messengers of potential technological advances. even institutional structures and cultural attitudes of society are subject to that notion: they could offer new opportunities. yet, since our society depends on individuals and firms, which are looking out new opportunities and they benefit to do so, we cannot realize external benefits embedded in new technologies. these externalities could be either negative or positive. though positive opportunities are eagerly looked out, there is no way to know what negative externalities are, because “it has not been anybody’s explicit business to foresee and anticipate them”. 5 technological advances create new opportunities and thereby the alteration of social structures. negative externalities are because of older structures since they are inadequate to serve new purposes. individual purposes, thus, without concentrating to what costs we will have at the end, constitute “the institutional fabric” of the society. the negative externalities, that we face is a sort of cost of our individual freedom to pursue our goals whatever their consequences are. in this regard, technology is like a religion: positive or negative outcomes are not inherent in the technology, yet they depend on “what man will do with technology.”6 actually, we cannot attempt to measure or control negative externalities, because these attempts often appear to threaten our freedoms of decision making. if we continue to have positive effects of technology, we should learn to live with negative externalities which would be solved by technology soon. in the long run, that is for sure, technology would maintain general welfare. in this 5 emmanuel g. mesthene, “the role of technology in society”, in teich, ibid, p. 85. 6 mesthene, ibid, p. 90. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu dr. mehmet lutfi arslan, dr. sadi evren seker and dr. cevdet kizil p a g e |89| emerging markets journal context, mesthene maintains that since ours is a knowledge society, incumbents of technocratic roles as problem solvers get decision making power. as long as they use “organized knowledge for practical purposes”, they would be able to get decision making power. so there is no need to worry about misuse or fraud of authority, because they would be able to take reliable decisions based upon reliable knowledge. whereas, mcdermott thinks that this view, he calls laissez-innover, is simply to keep positions of those who are in power. the reason is that, technology is a way of “rationalized control over large groups of men, events, and machines by small groups of technically skilled men.”7 the very notion of negative externalities is a “production” for having technology’s benefits while avoiding its costs. he thinks that defining technology “the organization of knowledge for practical purposes” is problematic. attributing to technology “so much flexibility and ‘scientific’ purity” is taking market as long-term solution for economy. by coining the term laissez-innover, he criticizes the idea that “if the technology or innovation is allowed, will the maximum social good be realized?”8 he thinks that concentrating on negative externalities as temporary technical problems creates a ruling technocrats class. those who got the power as incumbents of technological decision making positions not by their, say, patrimonial characteristics, but by technological skills as problem-solvers are in charge for our own good. they have a bias against ideologies since they are committed to scientifically deal with problems. what it means that we can trust them because of their specific training and professional commitment. to mcdermott, this is “an air of mystification around technology’s managers.”9 at this point, he rearticulates the functions of technology decision makers. in fact, they are technical and scientific elites who have highly sophisticated training and education since technology requires doing so. they consist of a ruling class to control masses. so, that enforces the separation between ruling technocrats class and lower classes, a separation enhanced by technological advances and laissezinnover ideology. besides, the point of “problem solvers” is to assert that technological systems in fact could operate without intervention of human factor. they are resistant to such intervention and do make sure that it is minimal which otherwise would not be “classified” and eventually trusted. in this regard, mcdermott argues that technology creates its own politics. therefore, he lessens the importance of decision makers of technology by calling “technical experts”, who make the system rational and efficient, by filtering out the “nonrational” or “nonefficient” elements.10 7 mcdermott, ibid, p. 110. 8 mcdermott, ibid, p. 115. 9 mcdermott, ibid. 10 mcdermott, ibid, p. 110. in fact, both views implicitly propose a role definition of decision maker of technology. when this role is defined as “problem solver”, we should be persuaded that this role model does not misuse technology, because otherwise that would not be elevated to such a position. the incumbents of this model are isolated from ideological or political thinking in reshaping technology since they use organized knowledge in a centralized (which means controllable) and institutionalized way. at first glance, it seems that this model has power in terms of determining and reshaping technology because they are elevated and granted to do so. yet, the very definition of “problem solvers” implies a secondary and complementary function, not a preliminary and determinant factor. further, the premise of practical purposes is vague. it appears that technology, as a self-correcting system, settle on the practical purposes, not the work force of technology. on the other hand, when we take our role models as technical experts, we are persuaded that this role model is used to control masses. by acquiring skills and sophisticated education, they are elevated into ruling class whose interests determine technology. again, this model, yet negatively looking, appears to adore decision makers of technology in terms of determining technology. however, it still praises the organized system and disregards the personal freedom of choice. thus, it does not make room for individual decision making, reducing the politics of technology into a traditional class conflict base. either as “problem solvers” or “technical experts”, the characteristics of incumbents of technological positions seem very problematic in terms of their roles in shaping technology. are they so disinterested and unbiased on creation of technology? can we reduce their roles as such? how can we make sure that they are neutral? if we put their roles that way, what about freedom of individual decision making? next section tries to determine specific guidelines in order to deal with these questions. 2. useful guidelines for “job specifications” of technology decisionmakers inspiring two contradictory views outlined above, now, we try to propose two specific guidelines for investigating specifications of technology decision makers, attitudes and positions as well as for having some reference points with which we can evaluate the decision makers of the internet. the first guideline refers to “problem solver” as distinctive characteristic of decision makers. this characteristic requires that decision makers place within brackets their personal beliefs and values about the use of technology, including the “bias” that technology has its own politics. since they volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu innovation driven emerging technology from two contrary perspectives: a case study of internet emerging markets journal | p a g e |90 achieve to get their positions through a selective process, they have already been able to think ideologically-unbiased. that is why they are called “problem solvers”. once we take them as problem solvers, then, we accept the notion that there is no misuse of technology. yet, it does not still abandon our need to define the very purpose of use of technology. indeed, it needs a certain definition, because it is unclear to determine “practical purposes” on which decision makers build technology. how do we know they are unbiased or “ideology-free”? being aware of these challenges, mesthene proposes a new term “institutional innovation”. to deal with the new problems because of new technologies and perhaps to make “practical purposes” understandable, he offers to enlarge public decision making. this enlargement has two consequences. first, we should have reliable knowledge and base our decisions on a particular model of society since all decisions are interrelated and thereby affect the whole society. second consequence is the need of what he calls “institutional innovation”. this is to restructure decision making process. is it a new way to be able to determine the effects of society so that enlarging the positive effects of society? though it is not clear, the term “institutional innovation” seems not to support that decision makers of technology are only problem solvers. rather, it undermines individual decision making, by alternating a motor of technological advancements with a static, determined and proposed mechanism that allows allegedly public to join decision making process. this raises an apparent paradox already embedded in the conception of “problem solvers”. if we establish a mechanism socalled “institutional innovation”, would not it be at the expense of individual decision making? more importantly, taking them as such is reducing their role into a static and non-innovative way, by assuming them reactive not proactive. thus, it should be clear that such use of the term “problem solvers” implicitly undermines the freedom of individual decision making and minimize the role of decision makers of predetermined set of assessments. second guideline refers to “technical experts” as distinctive characteristic of decision makers. this characteristic requires that decision makers are highly specialized workforce employed to make sure that the system works well, which is the domination of a ruling class over masses. technology and its workforce, in this regard, are not but the agencies of highly centralized and intensive social control. technology has not only its own politics, but also creates its own working and managing classes. recalling to return class-based politics, this interpretation of politics of technology seems to ignore the potential contributions of so-called technical experts inherent in their decision making process. indeed, it is not absolute to argue that the only motivation for technocrat class is to keep their positions intact. seeing technology as a tool used to control lower classes is, to some extent, ignoring the innovative and entrepreneurship characters of workforce of technology. as a matter of fact, the incentive and motivation for advancement of technology cannot be simply reduced into class conflicts or power relations. this model, to some degree, can work fine, for instance, for explaining the relationship between complex structures of technology and highly skilled and educated workforce in terms of social organization of modern technology, but some of the early motivations that create new technologies, in particular freedom of individual decision making and innovation, make clear that technocrat class do not necessarily exist to control lower classes and thereby their purpose of technological advancements to keep the status quo. actually, the term technical expert and understanding what underlies this term is far away to explain what motivates the pioneers of technology. is it reasonable to diminish of keeping class domination, a vaguely proposed claim? at this point, the term selffulfillment that mcdermott uses, being only reward of technocrat ruling class is also insufficient in explaining the motivations behind the early history of new technologies. it appears that, consequently, two contradictory views of politics of technology offer heuristic tools with which we can have some points about the relation between individual decision making and virtues of technology, even though they lack absolute explanations. simply summarizing, first view is an optimistic one, appraising technocrat class for their knowledge and skills, yet reducing their roles into static and standardized patterns. although we cherish the positions of decision makers of technology, we, actually, miss their individual freedom on decision making process. on the other hand, second view is a pessimistic one, blaming that class about using technology for their interests, yet ignoring totally thereby missing real motivations embedded in the formation of new technologies. again, we cherish their positions yet we do not only dislike their misuse of power but also oppose the notion that they are only motivated to control masses and keep status quo. by having these in mind, now, let us look at how the politics of newest form of technology, the internet, is shaped? 3. the politics of a new technology: internet the politics of the internet in terms of guidelines that we offer above requires a historical overview of this revolutionary information infrastructure. but before this, as a technological form, what characteristics of the internet and its inventors allow us to criticize two views of technology of politics? what uniqueness of the internet and its inventors make possible for us a “reverse reading of technology” by arguing that the internet and particularly its first pioneers do not fit the continuum volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu dr. mehmet lutfi arslan, dr. sadi evren seker and dr. cevdet kizil p a g e |91| emerging markets journal ranging from mesthene to mcdermott? answers to these questions proceed in the following set of arguments: 1. the internet as a technological form has unique characteristics that challenge the notions of technology, which are used by either mesthene or mcdermott. 2. that the very nature of the internet is partly, if not mostly, shaped by the characteristics of inventors of the internet as free-thinkers is apparent. the first argument is based on the fact that unlike other all mediums before, the internet allows anyone to communicate instantly with others worldwide. as a network of networks operating “on the basis of multiple implementations of accepted, non-proprietary protocols, standards and interfaces”,11 it transcends national borders and eliminates barriers to the free flow of information. likewise, there is no central unit in the structure.12 another difference from other forms of communication is its multi-multi character; actually the internet allows responsive communication from one-to-one, from one-to-many, and from many-to-one. it permits everyone easily to join itself.13 rather, “the digitization of information and the ability to transmit it over the telephone network, combined with the decentralized nature of the internet, mean that the internet has essentially unlimited capacity to hold information.”14 it allows not only users to choose their contents, but also develop their standards and adapt them without changing and affecting the nature of the infrastructure. thus, current nature of the internet, open and decentralized, exhibits a unique character amid other forms of communications ever created. this uniqueness of the internet has shattered not only the domination of traditional forms of communication in terms of freedom of voices, but also the intentions of control over media. according to newhagen, “the very architecture of the net will work 11 regardless of frontiers, protecting human right to freedom of expression on the global internet, global internet liberty campaign, http://www.cdt.org/gilc/regardlessoffrontiers.html. 12 having no control unit would be made possible by dividing messages into separate packets each of which had been individually authorized. that was because of the assumption that network would always be seen as unreliable. yet, to some, it has become its main strength. see robert kahn, “evolution of the internet”, chapter 11, revolution in us information structure, national academy press, www.nap.edu. 13 it is so important that, according to kapor, “future generations will be indebted to this community for the wisdom of building these types of open systems.” see mitchell kapor, big dummy's guide to the internet, http://www.umich.edu/~archive/linguistics/bigdummy sguidetotheinternet. 14 regardless of frontiers, ibid. against the type of content control these folks (the masters of mass media) have over mass media”15 in fact, “they have yet to grasp that the internet can never be merely another profit center in their dreams of empire”, because “the net is built to smash monopolies.” 16 even there are some attempts to monopolize the internet, there will be always "unpaved" portions of cyberspace, “thereby opening the door to a genuine cultural and political renaissance.”17 this is so obvious that discussing the freedom of internet is not an issue: “that seems guaranteed.”18 what is the origins of uniqueness of the internet? what makes possible to have an open, and decentralized information structure? according to kahn, there are initially two reasons: “far-sighted investment by the united states government and the active involvement of the research community.” 19 regarding the government’s role in forming and reshaping the structure of the internet, the supports of united states government, defense advanced research project agency (darpa) initially, and later the national science foundation (nsf), the department of education (doe) and other agencies and departments are obvious. especially the projects and research focused on new information infrastructure that became a base for the internet in 1960s and 1970s were not enough attractable for private computer companies.20 government’s not only dedications to highly advanced projects but also successful handling of this issue in terms of management and operation have paved the way of the internet. further, some decisions by the fcc have critical impacts on the development of the internet. for example 1968 carterfone decision, determining that customers of the at&t could connect their own equipment to the telephone network so long as the equipment did not in fact harm the functioning of the 15 john newhagen and sheizaf rafaeli, “why should communication researchers study the internet: a dialogue”, journal of communication, vol. 46, no.1. 16 steven levy, how the propeller heads stole the electronic future, nyt magazine, sept 24, 1995. 17 quoting from flowers, 1995: robert w. mcchesney, the internet and u. s. communication policy-making in historical and critical perspective, http://www.robertmcchesney.com/articles.htm. 18 robert w. mcchesney, the internet and u. s. communication policy-making in historical and critical perspective, http://www.robertmcchesney.com/articles.htm 19 kahn, ibid, p. 158. 20 in fact, in the early 1970s, the government wanted to sell off the arpanet to the private sector. private sector declined it, reasoning that that technology was incompatible with their network. see cass sunstein, republic.com, princeton university press, 2001, p. 132. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu innovation driven emerging technology from two contrary perspectives: a case study of internet emerging markets journal | p a g e |92 network, opened the door to the improvement of the modem. the second reason of the unique nature of the internet comes from pioneers of new information infrastructure. their commitment to open, decentralized and free cyberspace, as we argue, has not only made their positions exclusive in terms of freedom of decision making, but also had their products, the internet, an unprecedented effect, breaking the ground where technology challenges human life, threatening its freedom. 4. pioneers inspired to change the world according to rheingold, “the most important parts of the net began as dreams in the imaginations of a few specific people, who acted on inspiration rather than orders.” neither national defense concerns nor profit motive, but diligent scholars, enthusiastic researchers, and keen teenagers have created the internet, willing to change the world.21 if there is a need to classify those who pioneered, the very first pioneer of the internet’s pioneers may be vannevar bush. considering a future device called memex, he was first to describe the very nature of the information infrastructure. memex, according to bush, is “a device in which an individual stores all his books, records, and communications, and which is mechanized so that it may be consulted with exceeding speed and flexibility.” it consists of a desk, which can be operated from a distance, screen, keyboard, and sets of buttons and levers. its contents would be recorded on microfilms. 22 by having this visionary mind, he did not only inspire many, but also had a key role in establishing a team of pioneers (later developed the arpanet), which initiated many projects that changed information infrastructure, “bringing the government, military and elite academic researchers into a closer embrace than ever before.”23 publishing a number of papers related with human and computer interaction in the early 1960s, j. c. r. licklider is another pioneer. his “galactic network” concept proposing a globally interconnected set of nodes through which everyone could quickly access data and programs from any site was very alike of the internet. he was the first head of the computer research program at darpa. though his funding was very limited and computer industry was not ready to 21 howard rheingold, the virtual community, chapter 3, http://www.rheingold.com/vc/book/3.html 22 vannevar bush, “as we may think”, atlantic monthly, 1945, http:// www.csi.uottawa.ca /~dduchier/misc /vbush /awmt.html 23 g. pascal zachary, endless frontier: vannevar bush, engineer of the american century, the free press, 1997. the idea of time sharing in machine resources, his vision and persistence made the projects going. he chose most of the first pioneers of information infrastructure project.24 while directing darpa, he also helped to the formation of computer science departments at many universities.25 in his 1968 paper, "the computer as a communication device," written with robert taylor, licklider defined four principles for human and computer interaction: 1. communication is defined as an interactive creative process. 2. response times need to be short to make the "conversation" free and easy. 3. larger networks form out of smaller regional networks. 4. communities form out of affinity and common interests.26 defined as “prophet of the net” by one scholar, licklider’s vision is seen in the same paper clearly: “the collection of people, hardware, and software the multi-access computer together with its local community of users will become a node in a geographically distributed computer network. let us assume for a moment that such a network has been formed.... through the network of message processors, therefore, all the large computers can communicate with one another. and through them, all the members of the super-community can communicate with other people, with programs, with data, or with selected combinations of those resources.”27 the creators of networking protocol of tcp/ip, bob kahn and vinton cerf are living examples of the internet pioneers. they both worked at darpa on networking projects. at the beginning, kahn was working alone. in 1972, he gave a demonstration of a network called arpanet, connecting 40 different computers at the international 24 robert w. taylor, in memoriam: j. c. r. licklider 1915-1990, digital systems research center, ca. august 1990. 25 j.c.r. licklider, http://www.columbia.edu/~jrh29/years.html 26 michael hauben and ronda hauben, “netizens: on the history and impact of usenet and the internet”, first monday, http://www.firstmonday.dk/issues/issue3_7/index.htm 27 j. c. r. licklider and robert w. taylor, "the computer as a communication device ' reprinted in in memoriam: j. c. r. licklider 1915-1990, digital systems research center, ca, august 1990; originally published in science and technology, april 1968. http://memex.org/licklider.html volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu dr. mehmet lutfi arslan, dr. sadi evren seker and dr. cevdet kizil p a g e |93| emerging markets journal computer communication conference. that was the first time when the net project gained widely interest. in 1973, vinton cerf joined kahn on this project. they worked on data communications across packet radio networks. they then studied on the development of a standard open-architecture network model, where any computer could communicate with any other. following statement of cerf reflects his thoughts about the project: “i had certain technical ambitions when this project started, but they were all oriented toward highly flexible, dynamic communication for military application, insensitive to differences in technology below the level of the routers. i have been extremely pleased with the robustness of the system and its ability to adapt to new communications technology. one of the main goals of the project was "ip on everything." whether it is frame relay, atm, or isdn, it should always be possible to bring an internet protocol up on top of it. we've always been able to get ip to run, so the internet has satisfied my design criteria. but i didn't have a clue that we would end up with anything like the scale of what we have now, let alone the scale that it's likely to reach by the end of the decade. it seems likely that the internet will continue to be the environment of choice for the deployment of new protocols and for the linking of diverse systems in the academic, government, and business sectors for the remainder of this decade and well into the next.”28 in 1980, tcp/ip, a co-production of kahn and cerf, was decided that it would be used in the preferred military protocols. yet, that was not turning point. the turning point was a perfect example of freedom of individual decision making. in cerf’s own words, it is: “in 1988 i made a conscious decision to pursue connection of the internet to commercial electronic mail carriers. it wasn't clear that this would be acceptable from the standpoint of federal policy, but i thought that it was important to begin exploring the question.”29 kahn’s early goals on this project are remarkable in terms of a perspective of a decision maker of technology, as well. four basic rules, namely network connectivity, distribution, error recovery and black box design, affected kahn's thinking: 1. each distinct network would have to stand on its own and no internal changes could be required to any such network to connect it to the internet. 2. communications would be on a best effort basis. if a packet didn't make it to the final destination, it would shortly be retransmitted from the source. black boxes would be used to connect the 28 vinton cerf, “how the internet came to be” the online user's encyclopedia, by bernard aboba, addison-wesley, november 1993. 29 cerf, ibid. networks; these would later be called gateways and routers. 3. there would be no information retained by the gateways about the individual flows of packets passing through them, thereby keeping them simple and avoiding complicated adaptation and recovery from various failure modes. 4. there would be no global control at the operations level.”30 similarly, same sort of vision is reflected in the thinking of tim bernard lee who invented www in march 1989. his project initially had two main goals: first, like kahn's design for tcp/ip, www hypertext system should have an open architecture, and second, it should be distributed over a communications network. in his “the world wide web: a very short personal history” lee summarizes his efforts to standardize an “universal document identifier", mentioning how his boss supported his experiments.31 www was the realization of lee’s dream of creating a “common information space in which we communicate by sharing information”. the remaining part of the dream was yet to come. it was web’s realistic mirror function that “once the state of our interactions was on line, we could then use computers to help us analyze it, make sense of what we are doing, where we individually fit in, and how we can better work together.” will it happen so? “(it) has yet to happen, but there are signs and plans which make us confident. the great need for information about information, to help us categorize, sort, pay for, own information is driving the design of languages for the web designed for processing by machines, rather than people. the web of human-readable document is being merged with a web of machine-understandable data. the potential of the mixture of humans and machines working together and communicating through the web could be immense”32 tracking the dreams and decision making processes of first pioneers, douglas engelbart, developer of the graphical user interface, first working hypertext system and first mouse, is also a key figure. interestingly, his first motivation came from vannevar bush's article about his vision for the "memex". subsequent years, he published a paper called, "augmenting human intellect: a conceptual framework", visioning his own information 30 a brief history of the internet barry m. leiner, vinton g. cerf, david d. clark, robert e. kahn, leonard kleinrock, daniel c. lynch jon postel, larry g. roberts, stephen wolff, http://www.isoc.org/internet-history/brief.html 31 tim bernards lee, the world wide web: a very short personal history, http://www.w3.org/people/bernerslee/shorthistory.html 32 tim bernards lee, ibid. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu innovation driven emerging technology from two contrary perspectives: a case study of internet emerging markets journal | p a g e |94 infrastructure. next excerpt is notable vision of this inventor: “my professional motivations are strongly oriented toward maximizing the benefit which society might derive from the advancements in the computer field. i might say then that my professional interests are toward the application of automatic informationhandling equipment for helping human society, in the most significant way possible.”33 a bit different perspective can be seen on ray tomlinson, first sender of e-mail. when asked what inspired his invention, he said that "there was no directive to 'go forth and invent e-mail.'" and added: "mostly because it seemed like a neat idea". setting out to adapt cypnet to use sndmsg to deliver messages to mailboxes on remote machines, through the arpanet, he feels in a humble way, citing that was “just a minor addition to the protocol."34 regarding the outstanding contributions of first pioneers of the internet to the uniqueness of it, it should be emphasized that these key figures have not only played important role in development of the infrastructure, but also they have been -and still are very and closely interested in policy and technological changes that could affect the very nature of it. they do so by either participating in government organs or forming their own organizations. the example of former is national research council’s computer science and telecommunications board (cstb) committee chaired by leonard kleinrock, one of the pioneers of digital network communications, and helped build the early arpanet. being active in policy making with the government, kleinrock has affected the formation of current framework with his influential 1994 report realizing the information future; the internet and beyond. pursuing the idea that “the nature of the services and styles it (the internet) can produce is limited only by the imagination of its practitioners”, kleinrock is a typical example of the internet’s first pioneers who choose to keep the dream alive.35 in this regard, it could be said that some organizations and research projects funded by governments (the arpanet in the united states, the network of the national physical laboratory in the united kingdom, cyclades in france, and other 33 d. c. engelbart; memorandum-possibilities for teaching machine activity at sri; may 18, 1960, http://www.histech.rwthaachen.de/www/quellen/engelbart/b15_f4_teachmac h.html. 34 todd campbell, the first e-mail message, pretext magazine, march 1998. 35 university of california (ucla), leonard kleinrock's personal history/biography, the birth of the internet, http://www.lk.cs.ucla.edu. networks around the world) have prominent roles in fostering the development of new information infrastructure. yet, even in these organizations, we see same pattern of thinking rooted in decision making process of individual pioneers. though mcdermott thinks in a different way, hypothesizing that advanced technological institutions are agencies of highly centralized and intensive social control 36 , on the contrary, workforce of these organizations established primarily for military purposes37 could mostly achieve to determine the early goals and structure of the new information infrastructure in a more independent and free way. funded by government, these organizations were directed to highly complex research projects. yet direct control and coercion that would manipulate the researchers were not existent. thus, they became platforms of freedom of decision making. one of the reasons of this phenomenon may be the management and operation of these organizations. managed by visionary scientists, for example like j.c.r. licklider, these organizations were able to employ “unorthodox computer programmers and electronic engineers who wanted to redesign the way computers were operated.”38 it would be useful to look closely to a few of these organizations. surely, the most remarkable case is arpa. arpa (later became darpa) was the u.s. department of defense's advanced research projects agency (arpa). j. c. r. lick became head of arpa in 1962 for creating and managing a program for funding research. in 1966, larry roberts proposed the arpanet to arpa. while the very aim of the organization was militaristic since it was funded by military, robert’s proposal had a more technically focused purpose. it was to explore computer resource sharing and packet switched communications and had nothing to do with nuclear war or survivability.” 39 regarding the rumor that the internet was created by military to have survivability of information in a nuclear war depends upon a paper by paul baran. yet, arpanet started earlier than this paper, based on the 36 mcdermott, ibid, p. 121. 37 “bear in mind that the existing infrastructure was created for something else. it was created for reasons that you wish it hadn't been [military]. but without that impetus, the world wide web would never have happened. the fax machine would never have come about if it weren't for existing phone lines. phone lines were a technology that created opportunity.” (interview with vincent cerf) for full text of interview see erica rex, “the internet: past, present and future, javaworld, april 1997, http://sunsite.compapp.dcu.ie/ijug/javaone/index.htm l. 38 lawrence g. roberts, march 22 1997, http://www.ziplink.net/~lroberts/internetchronology.h tml 39 roberts, ibid. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu dr. mehmet lutfi arslan, dr. sadi evren seker and dr. cevdet kizil p a g e |95| emerging markets journal work licklider, kleinrock and roberts.40 nonetheless, it is difficult to argue that the government funding and military motivations have secondary importance.41 arpa has basically pioneered and sponsored three key projects: advanced research project agency network (arpanet), packet radio network, and packet satellite network. according to kahn, “each of these three networks was individually designed and implemented, but most importantly, the internet architecture was created to be independent of the detailed design or implementation of any of its constituent networks.” he thinks that the success of the internet lies “on the underlying computer communications technology that had been pioneered in the arpanet.” further, to him, two important characteristics of the internet as being no single entity responsible for the overall performance of network and layered host protocols are also aimed in the arpanet project.42 another key organization, though its contribution is accordingly limited, is a non-us research center called cernthe european laboratory for particle physics. when it was founded in 1954, cern was based upon the idea that atmosphere of freedom freedom to doubt, freedom to enquire and freedom to discoveris essential for scientific research. throughout years, cern has been “the world's largest research laboratory with over 50% of all the active particle physicists in the world taking part in over 120 different research projects. 3000 staff members, 420 young students and fellows supported by the organization and 5000 visiting physicists, engineers, computer experts and scientists specializing in a variety of front-line technologies are collaborating with cern from 40 countries and 371 scientific institutions.”43 not surprisingly, the researchers of this center have made significant contributions. the www project was originally developed by 40 roberts, ibid. 41 “arpa wouldn't have happened if what used to be the soviet union hadn't shaken a complacent u.s. awake with a tin can in the sky, sputnik. wars do wonders for the advancement of technology, and the cold one was certainly no exception. the way to get a technology advanced is to gather a lot of really smart people under one roof and get them to concentrate on a single project. of course, that takes some organization and money. where does that come from? but that's another can of worms to be opened with relish at a later date. in this case, it was the only body that had a stake in making sure the net worked the government.” (david hudson, “con.txt”, rewired: journal of a strained net, august 9th, 1996.) 42 kahn, ibid, p. 159. 43 net valley, http://www.netvalley.com/archives/mirrors/cernpr11_94e40thanni.htm researchers of cern in 1990.44 cern has also played an important role in development of the internet protocols. first internet protocol was used there during the second phase of the stella satellite communication project, from 1981-83, a project inspired by the arpa ip model.45 apart their supportive and directive roles through consultation to public and private sectors, the first pioneers of the internet have also formed critically functioning organizations in establishing standards and forming other components of the internet. among the examples of that kind of organizations are internet society, ietf, the world wide web consortium (w3c), the internet corporation for assigned names and numbers (icann), including commercial internet exchange (cix), aiming to facilitate the exchange of traffic among commercial internet service providers.46 they symbolize the ongoing efforts of the first pioneers of the internet. working together, these organizations make sure that the unique nature of the internet cannot be sacrificed. for example, the w3 consortium formed by tim bernard lee, the inventor of www, as an independent standards making body was to ensure universality of functionality across the industry. convincing michael dertouzos, the head of mit's laboratory for computer science, lee established w3c in 1994, in order to “oversee development of common web protocols and promote web interoperability.” 47 the formation and operation of the w3c is a manifestation of the internet as most open, decentralized and free medium of all times: before promoting their standards, w3 staff present a sample code, allowing everybody to raise any concern. then, they release the standards for the implementation to promote each of their standards. conclusion one scholar points out the historical significance of the internet: "instead of a small number of groups having privileged positions as speakers-broadcast networks and powerful newspapers-we are entering an era of communication of the many to the many. . .the nature of the technology itself has opened up a space of much greater democratic possibility."48 in this paper, we argue that this is because of the creative roles of first pioneers in the formation of the very structure of the internet. emphasizing their freedom of decision making in establishing the new information infrastructure, we build my argument in to context of two contradictory views of technology of politics. 44 cern, http://map.web.cern.ch/lhc/general/gen_info.htm 45 net valley, http://www.netvalley.com/intval2.html 46 kahn, ibid, p. 158-159. 47 the w3 consortium, http://livinginternet.com/w/wi_w3c.htm 48 mcchesney, ibid. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu innovation driven emerging technology from two contrary perspectives: a case study of internet emerging markets journal | p a g e |96 either as “problem solvers” or “technical experts”, we try to show that the defining characteristics of technology decision makers do not fit in to the frame of first pioneers of the internet. we never accept the idea that as technical experts or problem solvers, thereby being participators of decision making process, are not interested in shaping the technology. as a matter of fact, they cannot be neutral. in the example of the internet, we believe first inventors of the internet had their roles very positively. they always had same spirit, making the internet not only a positive technological contribution to humanity, but also a platform of choice, a mark of respect in terms of freedom of decision making, a spirit which is still alive today. it should be emphasized that, however, we are not still in a position where we can measure the outcome truly. this is because of the fact that the revolution or evolution whatever it is, is continuing. in a medium which moves speed of light, everything can change at the same speed. thanks to their ongoing efforts, most of the first pioneers are in charge and still trying to keep “dream” alive. this is a dream that can change the relation between human and technology in a positive way. references albert h. teich (editor), technology and future, st. martin’s press, fifth edition, ny, 1990. center for democray and technology, https://www.cdt.org/gilc/regardlessoffrontiers.html cern, http://map.web.cern.ch/lhc/general/gen_info.htm darin barney, prometheus wired: the hope for democracy in the age of network technology, chicago: university of chicago press, 2000. david hudson, “con.txt”, rewired: journal of a strained net, august 9th, 1996. d. c. engelbart; memorandumpossibilities for teaching machine activity at sri; may 18, 1960, http://www.histech.rwthaachen.de/www/quellen/engelbart/b15_f4_teachmac h.html. dublin city university, http://sunsite.compapp.dcu.ie/ijug/javaone/index.htm l emmanuel g. mesthene, “the role of technology in society”, in teich, ibid, pp. 85, 90. erica rex, “the internet: past, present and future, javaworld, april 1997, http://sunsite.compapp.dcu.ie/ijug/javaone/index.htm l. g. pascal zachary, endless frontier: vannevar bush, engineer of the american century, the free press, 1997. howard rheingold, the virtual community, chapter 3, http://www.rheingold.com/vc/book/3.html internet society, http://www.isoc.org/internethistory/brief.html j.c.r. licklider, http://www.columbia.edu/~jrh29/years.html j. c. r. licklider and robert w. taylor, "the computer as a communication device ' reprinted in in memoriam: j. c. r. licklider 19151990, digital systems research center, ca, august 1990; originally published in science and technology, april 1968. http://memex.org/licklider.html john mcdermott, “technology: the opiate of the intellectuals”, in albert h. teich (editor), technology and future, st. martin’s press, fifth edition, ny, 1990, pp. 110, 115. john newhagen and sheizaf rafaeli, “why should communication researchers study the internet: a dialogue”, journal of communication, vol. 46, no.1. langdon winner, the whale and the reactor a search for limits in an age of high technology, the university of chicago press, 1986. lawrence g. roberts, march 22 1997, http://www.ziplink.net/~lroberts/internetchronology.h tml michael hauben and ronda hauben, “netizens: on the history and impact of usenet and the internet”, first monday, http://www.firstmonday.dk/issues/issue3_7/index.htm net valley, http://www.netvalley.com/ archives/mirrors/cern-pr11_94e40thanni.htm net valley, http://www.netvalley.com/ intval.html net valley, http://www.netvalley.com/ intval2.html regardless of frontiers, protecting human right to freedom of expression on the global internet, global internet liberty campaign, http://www.cdt.org/gilc/regardlessoffrontiers.html. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.54 | http://emaj.pitt.edu dr. mehmet lutfi arslan, dr. sadi evren seker and dr. cevdet kizil p a g e |97| emerging markets journal robert kahn, revolution in us information structure, national academy press. cass sunstein, republic.com, princeton university press, 2001, p. 158. robert w. mcchesney, quoting from flowers, the internet and u. s. communication policy-making in historical and critical perspective, 1995, http://www.robertmcchesney.com/articles.htm robert w. taylor, in memoriam: j. c. r. licklider 1915-1990, digital systems research center, ca. august 1990. steven levy, how the propeller heads stole the electronic future, nyt magazine, sept 24, 1995. todd campbell, the first e-mail message, pretext magazine, march 1998. the national academies press, http://www.nap.edu the w3 consortium, http://livinginternet. com/w/wi_w3c.htm tim bernards lee, the world wide web: a very short personal history, http://www.w3.org/people/bernerslee/shorthistory.html todd campbell, the first e-mail message, pretext magazine, march 1998. university of california (ucla), leonard kleinrock's personal history/biography, the birth of the internet, http://www.lk.cs.ucla.edu university of michigan, http://www.umich.edu/~archive/linguistics/bigdummy sguidetotheinternet university of ottawa, http://www.csi.uottawa.ca/~dduchier/misc/vbush/awm t.html vannevar bush, “as we may think”, atlantic monthly, 1945, http://www.csi.uottawa.ca/~dduchier/misc/vbush/awm t.html vinton cerf, “how the internet came to be” the online user's encyclopedia, by bernard aboba, addison-wesley, november 1993. intermediate appellate review of commercial law decisions in turkey dr. berna tepe attorney at law | email: bernatepe@gau.edu.tr abstract the judiciary in turkey is still preparing for the expected intermediate appellate review (istinaf) mechanism in turkey although the official date for its functioning is yet to be specified. under turkish law, a first instance court decision can be appealed not because an assertion or a claim is rejected, but due to a substantive or procedural norm of law which should have been applied during the proceedings in an accurate manner. the scope of such review also covers the suitability of the first instance court’s decision. there are nonfunctional aspects to the judicial review as specified in the 2011 code of civil procedure of which a major column of novelties consist of the suspended mechanism of dual appellate review. however, the 2011 code of civil procedure regulates the intermediate appellate review as a series of procedural acts and steps. the reasons to appeal a first instance court’s decision can rather be deduced from the provisions of 2011 code of civil procedure. in order to structure the reasons and stages of the intermediate appellate review in turkey, a distinction is made in the present article between (i) review over the appeal’s conditions of admissibility, (ii) review of the decision’s legality, (iii) review of the decision’s legitimacy. rationally, the reasons for intermediate appellate review should be construed as to accomodate at least the grounds for higher appellate review as well as the extraordinary judiciary review. as different areas of private law are based on different principles, it is noteworthy that cases referred to herein pertain to commercial law. finally, due to the parallelism between the turkish and the french legal systems, references to decisions given by the french jurisdiction on commercial matters are made throughout the present article. keywords: judicial review, appeal, turkish law, code of procedure, procedural law, court of appeal, appellate review, commercial code, joint and several liability, joinder of lawsuits new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu | mailto:bernatepe@gau.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu dr. berna tepe p a g e |59| emerging markets journal intermediate appellate review of commercial law decisions in turkey dr. berna tepe introduction the dual appellate review has been introduced by the 2011 (revised) code of civil procedure as to replace the ordinary type of reviews currently both conducted by the court of cassation.1 with the effective establishment of the intermediate appellate review, while the court of cassation’s organisation is not expected to change in a significant manner, the jurisdiction of each main court of appeal would cover a certain geographical area of turkey.2 inspired by the current preparations in that vein, the present article is based on the 2011 code of civil procedure’s provisions on appeal regulating how intermediate review is to be conceived in turkey; the appellate column of the code will enter into effect when the courts of appeal start functioning. the right to judicial review is considered to be important by the actors of the juridical system including the european court of human rights. that being said, an empirical research conducted in 2006 and 2007 revealed that only seventeen percent of the istanbul district courts’ decisions (subject to judicial review)3 were in fact appealed before the court of cassation; in addition, it 1 the provisions related to judicial review of the 2011 code of civil procedure will enter into effect when the courts of appeal are established. that being said, it has been announced by the minister of justice in june 2013 that the courts of appeal will hopefully start to function in 2014 because organisational preparations are reportedly concluded. anadolu ajansı, “i̇stinaf mahkemeleri için hazırlıklar tamam” web-based article of 19 june 2013, available at www.aa.com.tr. in 2012, even a regulation concerning rules of expertise to the courts of appeal was issued in 2012. “bölge adliye mahkemesi adli yargı adalet komisyonlarınca bilirkişi listelerinin düzenlenmesi hakkında yönetmelik”, resmi gazete (official gazette) of 8 april 2012, no. 28258. 2 “bölge adliye mahkemelerinin kurulmasına i̇lişkin karar”, resmi gazete (official gazette) of 5 june 2007, no 26543, and see also act no. 5235 “adlî yargı i̇lk derece mahkemeleri ile bölge adliye mahkemelerinin kuruluş, görev ve yetkileri hakkında kanun”, resmi gazete (official gazette) of 7 october 2004, no. 25606. 3 note of b. tepe was also evaluated that the judicial review by the court of cassation absorbs a significant amount of time.4 it is noteworthy that the district courts used to be the primary first instance court before 2011 commercial code and the 2011 code of civil procedure entered into effect. some actors of the juridical system in turkey are anxious that the disposition periods (between the filing and definite resolution of a case) as a primary indicator of the efficiency of a juridical system would be critically affected once the courts of appeal start functioning.5 in turkey, the reasons to appeal a first instance court’s decision can rather be deduced from the provisions of 2011 code of civil procedure. intermediate appellate review in turkey is the review of a first instance court’s decision by a court of appeal as a judiciary body independent from the first instance court. it is to be initiated by a party having a legitimate interest in appealing. a major step to clarify intermediate appellate review in a structural manner for commercial matters is comparing the two ordinary types of judicial review according the 2011 code of civil procedure, i.e. intermediate appellate review before a court of appeal and higher appellate review before the court of cassation: 4 i̇. elveriş, g. jahic, s. kalem, “i̇stanbul asliye hukuk mahkemelerinde yargılama süreci”, i̇stanbul bilgi university publications, 2009, p. 9 ff. 5 for regular reports on the administration of justice in the member states of the council of europe including turkey on – inter alia data based on the two primary indicators of the efficiency of the juridical systems, see, european commission for the efficiency of justice (cepej) of the council of europe, reports entitled “evaluation report on european judicial systems”, council of europe, available at www.coe.int . http://www.aa.com.tr/ http://www.coe.int/ volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu intermediate appellate review of commercial law decisions in turkey emerging markets journal | p a g e |60 table 1: intermediate appellate review and higher appellate review comparison it is noteworthy that both in turkey and france, the higher appellate review is characterized by its purpose to reach unity and accurate application of law on a countrywide basis. the higher appellate review by the french court of cassation focuses on the “legal basis” and “rationale” of decisions submitted for review. by institution of intermediate appellate review, the turkish court of cassation should be able to concentrate its review on that primary mission. it calls for clarification albeit basic that judicial review is initiated not because an assertion or a claim was rejected, but due to a substantive or procedural norm of law which should have been applied during the proceedings in an accurate manner; suitability of the first instance decision to the case is also reviewed. intermediate appeal devolves the lawsuit to the court of appeal: (i) the decision is reviewed in terms of suitability and observance of legal norms, (ii) the pleadings as well as the defence and evidentiary items “can” be discussed over before the court of appeal, (iii) unless not in conformity with the specific rules or nature of intermediate appellate review, all procedural acts can be performed during intermediate appellate review. reasonably, recourse to review can only be made upon notification of the decision stating the reasons and rationale of the court to a party. therefore, the prescribed period within which requests for appellate review can be made starts upon receipt of the reasoned decision of a court; for any exception to apply, the exception should have been made explicit in black letter by the legislator.6 6 however, in practice, the exception has become the norm; lawyers used to automatically file a simple declaration about their intention to apply to judicial review. it was peculiar to file it upon the court’s short declaration of an unfavorable decision in a generalized manner aiming to suspend such period in order to protect rights to judicial review. intermediate appellate review higher appellate review purpose of judicial review review of the decisions of the first instance courts from factual and legal standpoints as to secure accuracy in judgement and an accurate application of the norms and rules pertaining both to procedural and substantive law. review of judiciary decisions as to secure conformity with norms of procedural and substantive law as well as to reach an harmonious application of law within turkey . timing and prescribed period of appeal upon receipt of the reasoned final decision of the court on the subject-matter and within a period of two weeks upon receipt of the reasoned final decision of the court on the subjectmatter and within a period of one month. concentration of appeal if there are various reasons to take the decision to the intermediate appellate court, they should be set forth jointly and upon the final decision which terminates the first instance proceedings. if there are various reasons to take the decision to the intermediate appellate court, they should be set forth jointly and upon the final decision which terminates the first instance proceedings. impact of appeal the decision cannot get definitive. the decision cannot get definitive. intermediate appeal per se does not suspend implementation of the decision unless such suspense is decided upon deposit of a caution in accordance with the act on implementation and bankruptcy. higher appeal does not suspend implementation of the decision unless a caution is deposited according to the act on implementation and bankruptcy. intermediate appeal devolves the litigation to the court of appeal either in a definite manner or by resumption of proceedings before a first instance court, depending on the appellate decision. the litigation is merely reviewed as concerns the applicable norms and rules of law. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu dr. berna tepe page |61| emerging markets journal i. decisions subject to intermediate appellate review table 2. decisions subject to intermediate appellate review materiality criteria intermediate appellate review higher appellate review restriction on types of decisions decisions subject to appeal are: (i) final decisions of a first instance court (of general or specific competence) if not definitive, issued through contentious or noncontentious proceedings; (ii) decisions rejecting a request for provisional measure or provisional seizure; (iii) decisions given upon objection to a ruling for injunctive relief or provisionary seizure to secure assets7. decisions subject to higher appellate review comprise of : (i) final decisions of the courts of appeal if not definitive, excluding the following: -decisions concerning temporary protective measures, decisions concerning noncontentious issues, ruling of a court of appeal as concerns a conflict of jurisdiction or competence between various first instance courts, ruling to determine a competent court having jurisdiction, ruling for assignment of another court over a lawsuit in case of legal or factual impediment of a competent court with jurisdiction to hear the dispute; (ii) decisions given upon a request for 7 decision given upon objection to a ruling for injunctive relief was not considered among “final” decisions which could be appealed (before the court of cassation). (turkish) court of cassation, 13. civil chamber, decision dated 24 january 1992, no. 10317/395. the same stance has been taken as concerns a decision on an objection to a ruling for provisionary seizure to secure assets. (turkish) court of cassation, 11. civil chamber, decision dated 7 october 1991, no. 5057/5179 rescission of an arbitral award. pecuniary threshold for definiteness of a decision subject to appeal for a final decision not to get definite, a pecuniary threshold applies to decisions concerning pecuniary interests. for a court of appeal’s final decision not to get definite, a pecuniary threshold greater than the appellate threshold is applicable where a value is attributed to the dispute. if the threshold is relevant, it applies depending on the appellant. as concerns a party8, the threshold applies to the value of the measurable legitimate interest he has in appealing the decision9. as concerns others, the threshold is to apply by reference to the entirety of the value that the cause suggests.10 if the threshold is relevant, it applies depending on the applicant. as concerns the parties, the threshold applies to the value of the measurable legitimate interest he has in applying against the decision. for others, the threshold is to apply by reference to the entirety of the value that the cause suggests (application of the pecuniary threshold to cases where more than one person stand as a party depends on the severability of a liability.) (application of the pecuniary threshold to cases where more than one person stand as a party depends on the severability of a liability.) 8 the term “parties” (for contentious proceedings) is used to cover also interested persons as cocnerns noncontentious proceedings. 9 in a similar vein, see c. akil, “i̇stinaf kavramı”, university of ankara, 2008, phd thesis available at www.yok.gov.tr, p. 303 10 this is an interpretation of the intricate provision of the 2011 code of civil procedure, article 341. such intricacy could be due to an intention to prevent misuse of strategies by various actors in judiciary actions. this double-sided evaluation could also solve unregulated matters related to the application of the threshold. http://www.yok.gov.tr/ volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu intermediate appellate review of commercial law decisions in turkey emerging markets journal | p a g e |62 the pecuniary threshold for higher appellate review by the court of cassation is to apply in the same manner as that applicable to intermediate appellate review. the decision under judicial review of the turkish court of cassation is the “decision of the court of appeal” while the threshold should apply to the value of the legitimate interest a party has in taking the court of appeal’s decision to higher appellate review. according to the wording of the 2011 code of civil procedure, article 314, as concerns third persons, the threshold is to apply by reference to the entirety of the value that the cause suggests. it is noteworthy that in france, despite the french court of cassation’s rigorous observance of the rules restricting the possibility to appeal a decision, it is also strongly acknowledged that the law enables appeal as a general principle; when a decision cannot be appealed, such should be based on an explicit wording of the law.11 the stated approach makes sense under turkish law as well. finally, due regard should be paid to commercial courts’ decisions which are definite by explicit wording in the 2011 commercial code although such is critizable because it cannot be said that the practices of the courts are unified at a nationwide basis. ii. parties to the intermediate appellate review table 3. parties to the intermediate appellate review persons who can appeal intermediate appellate review higher appellate review principal appeal principal appeal can be lodged by those who hold a legitimate interest in appealing the decision. those who hold a legitimate interest in applying; others who may hold a legitimate interest in higher appellate review are not explicitly stated by the code of civil procedure. counterappeal counterappeal is enabled while the pecuniary threshold is not applicable in case of counterappeal. counterappeal is enabled without regard to the pecuniary threshold. 11 see, j. héron, t. le bars “droit judiciare privé”, montchrestien, 2011, p. 574 et seq. joint appeal (joining the principal appeal is not specificially regulated) (joining the principal application is not specifically regulated) to be able to appeal a first instance court, it is a prerequisite to hold a legitimate interest in appealing. the legitimate “interest” is assessed with reference to the decision given by the first instance court. a declaration of the french court of cassation is noteworthy in assessing such “interest” by reference to the date the relevant decision was appealed. evaluating a subsequent decision for judiciary liquidation against an appelant party, the french court of cassation stated that “ existence of an interest to appeal a decision is assessed as of the date of appeal and the admissibility of such appeal would not depend on circumstances which occur later”. that being said, the french higher appellate court added that “such circumstances could have been depriving the appeal of its subject-matter”.12 the point evokes the distinction under turkish law between a condition of action and the subject-matter of the dispute which can be transferred, be conditional on the resolution of another dispute, get out of the control of the defendant, or otherwise change; such distinction is consequential upon the appellate proceedings, also as concerns the division of expenses to be borne by the parties. other than the parties to the first instance proceedings, various scenarios exist as concerns the possibility of a third person to hold a legitimate interest in appealing a decision. an indirectly related novelty of the 2011 code of civil procedure is its article 27 establishing a right to be heard in favor of the parties, those who intervene and any other interested person. the term “interested person” is a term used in various contexts within the 2011 code of civil procedure, viz. collective action in article 113, minutes of verbal declaration in article 154, access to the court file in article 161, noncontentious matters in article 384, appealing decisions over noncontentious matters in article 387 and objection to a decision for injunctive reief in article 394, alinea 3 and 4 of the 2011 code of civil procedure.13 if construed in a flexible manner, an interested person is a person who holds a legitimate interest in performing or being involved in the 12 (french) court of cassation, 2. civil chamber, decision dated 6 april 2006 (04-12.803). (translation by b. tepe) 13 cf. a.c. budak (2011) “hukuk muhakemeleri kanunu’nun getirdiği başlıca yenilikler”, conference held at bakırköy center of the istanbul bar association on 14 may 2011, published by the istanbul bar association: b. kuru, a.c. budak, “hukuk muhakemeleri kanunu’nun getirdiği başlıca yenilikler” in istanbul barosu dergisi, vol. 85, no.5, 2011, p. 33 f. , available at www.istanbulbarosu.org.tr http://www.istanbulbarosu.org.tr/ volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu dr. berna tepe page |63| emerging markets journal proceedings. however, if construed in a rigid manner, the context of a specific provision should explicitly permit a person holding a legitimate interest to perform or be involved in the relevant procedural act. 14 at the final analysis, since the relevant provision excludes a person from intervening to the appellate review and permits those who (should) have been involved to the first instance to be involved in the appellate review, whether and to which extent another interested person’s right to be heard can be asserted during the appellate review depends on the specific context of the provision underlying his involvement. the right of appeal of the person who has filed an intervention to the first instance proceedings depends on whether the relevant type of intervention is principal or auxiliary. as concerns the “principal” type of intervention (asli müdahale), since it is asserted that the third party has a right as concerns the subject-matter in dispute and not only a legitimate interest in intervening to the dispute, a certain independency from the parties to the action should be secured as to grant the possibility to appeal independent from the parties. indeed, grounds of legitimate principal intervention provides an independent area of maneuver during the proceedings. principal intervention (asli müdahale) entitles the person to appeal the final decision. 15 otherwise, with respect to auxiliary intervention (feri müdahale), the (turkish) court of cassation has expressed that, “since the relevant party has not had recourse to the court of cassation, a third person who has filed an auxiliary intervention in a party’s favor is not entitled to appeal a decision (to the court of cassation)“. 16 if a third person’s request for intervention has been rejected by a first instance court, it is acknowledged that such decision can be challenged (before the court of cassation) at higher appellate review in an independent manner17; the (turkish) court of cassation has declared that rejection of requests for intervention can be appealed both in respect of principal intervention and auxiliary 14 according to the relevant article 6 of the european convention of human rights to which turkey is signatory, “(i)n the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.” 15 b. kuru, r. arslan, e. yılmaz, “medeni usul hukuk”, yetkin publication house, 2008, p. 641 16 (turkish) court of cassation, 12. civil chamber, decision dated 11 june 1991, no. 621/7619. (translation by b. tepe) 17 (turkish) court of cassation, 11. civil chamber, decision dated 29 november 1982, no. 5996/4999. intervention.18 the issue is equally important as concerns the timing of an eventual appeal and who would hold a legitimate interest to appeal a court’s decision in respect of the request for intervention. considering that the rejection of an intervention may have “irreversible” effects and that intervention to the appellate review is not permitted19, such rejection could be appealed in a seperate manner especially when the significance of principal intervention to a dispute is taken into account. the right to be heard introduced by the 2011 code of civil procedure reinforces such stance as to enable a person to appeal a court decision rejecting his request to intervene to the first instance. as concerns the timing or appeal and the possibility of a party appealing a decision on auxiliary intervention, the practice is noteworthy that the courts avoid declaring an explicit decision especially about auxiliary intervention. the courts should be considering that the decision on intervention can only be reviewed along with the appeal of the final decision resolving the main dispute20. as concerns counterappeal, it is noteworthy that the court of cassation first seeks the admissibility of a principal appeal for the admissibility of a counterappeal.21 the absence of a specific provision as concerns judgements affecting more than one person is or as concerns dependency between parties is noteworthy; the appeal by one of the parties may influence another especially if he is jointly liable. similarly, according to the 2011 commercial code, article 7, joint and several liability is presumed for an obligation of commercial nature. on the other hand, according to the 2011 commercial code, article 557 which sets forth a rule of variable (differentiated) joint liability, “(i)n case more than one person is responsible to compensate the same prejudice, each is severally and “jointly” liable for the same prejudice in varying degrees depending on the extent the consequential damage can be imputed on each.”22 the provision sets forth joint and several liability at varying degrees. the plaintiff is entitled to initiate an action holding more than one person liable for the entirety of the claim and request the court to determine the extent of liability for each defendant”.23 according to the legislative clarifying statement of 2011 commercial code, article 557, the group of persons who are imputed liability for the same prejudice are to be considered as a party in a joint manner. it is further stated that a result of such interpretation, the plaintiff would not need to assume the expenses if the action was rejected in respect 18 (turkish) court of cassation, civil general assembly, decision dated 1 april 1987, no. 1987/259 19 infra, re 2011 code of civil procedure, article 357 20 see, h. konuralp, “medeni usul hukuku”, anadolu university, 2006, p.81 21 (turkish) court of cassation, 2. civil chamber, decision dated 27 october 2000, no. 12203/13092. 22 translation by b. tepe 23 translation by b. tepe volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu intermediate appellate review of commercial law decisions in turkey emerging markets journal | p a g e |64 of a number of defendants, but others were still held liable. however, the provision’s wording is consequential not only as concerns judiciary expenses, but in order to qualify the type of co-existence between the parties in a more general manner. in general joint action/joint defence (dava arkadaşlığı) is founded and the types vary according to three elements: (i) whether the joint nature is mandatory according to the law or is optional, (ii) the procedural stage at which joinder can be effected, (iii) the type of procedure. the provision does not set forth a strict substantive rule of codependency between defendants. considering the two main types of joint action, i.e. mandatory joint action and joint action by choice, the mandatory joint action under the first type arises from substantive law. mandatory joinder by reasons of substantive law requires a connection between grounds of action which appears as a prior relationship between the defendants, generally independent of the dispute; it is enabled in order to prevent incoherence and leads to a strict procedural codependency. overall, due to potential conflicts of interest, article 557 cannot be construed as to allow mandatory substantive codependency between such defendants (maddi zorunlu dava arkadaşlığı), but can well require procedural codependency for the facts of the case to be revealed in a complete and accurate manner. article 557 of the commercial code is built on a norm of substantive law, namely “joint liability” for joinder, but suggests a connection rather for procedural reasons and in order to provide means for the facts of the dispute to be revealed in a complete and accurate manner. if there is a prejudice and if the plaintiff requests that prejudice to be recognized, assessed and compensated for, every person who can be held liable jointly with others even if severally, but in varying degrees, conflicts of interest may arise between defendants; each defendant should be able to act independently throughout the same proceedings for efficiency in attaining justice. joint action by choice is a type of joinder instituted for reasons of procedural economics.24 taking into account the general principle enabling parties’ control under the law of procedure, the commercial code, article 557 can be conducive both to mandatory procedural dependency (usuli zorunlu dava arkadaşlığı) and joint action by choice (ihtiyari dava arkadaşlığı) between defendants. under both types of joinder, each defendant may still appeal the first instance court’s decision in an independent manner. 25 24 ö. ulukapı, regulation of co-action under the law of civil procedure”, university of ankara, 1990, thesis available at www.yok.gov.tr, p. 38 and p. 356 25 the legislative clarifying statement is even more noteworthy in this respect because it refers to a decision of the german federal court where the said high court has reportedly considered its parallel provision under german law to be applicable only during the first instance proceedings. iii. scope of intermediate appellate review table 4. scope of intermediate appellate review intermediate appellate review higher appellate review scope of review review as concerns conformity with appellate procedure; review as concerns conformity of proceedings before the first instance court in respect of the norms and rules of procedural and substantive law; review of the accurate application of law covering the suitability of the decision to the case. review as concerns conformity with higher appellate procedure; review of the accuracy in respect of the the law or the agreement applicable between the parties to the case; conformity of proceedings in respect of the norms and rules of procedural and substantive. adversariality: whether the reasons of appeal restrict the judicial review in principle, the course of intermediate appellate review is restricted by the points of appeal that the appellant party asserted. however, the courts of appeal are empowered to take into consideration concerns of public order for its review in case of an obvious nonobservance. in principle, course of higher appellate review is restricted by the reasons asserted by the appellant party. however, the court of cassation is empowered to take into consideration explicit legal norms for its review in an exceptional manner for obvious violation of such. proscription to introduce new assertions, defence or evidence in principle, the parties can neither present new assertions, claims or defences, nor submit any new evidentiary item for intermediate appeal. exceptions to the mentioned principle are as follows: in case a court of appeal exceptionally needs to consider a point of law in an ex officio manner, the judicial review could be inclusive of a new claim, defence, assertion or evidentiary item; http://www.yok.gov.tr/ volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu dr. berna tepe page |65| emerging markets journal a court of appeal can exceptionally examine evidentiary items which could not be submitted due to force majeure26. under turkish law, it is the decision given by the first instance court which is under review, focusing on whether the decision can be “objectively erroneous”27. the institution of appeal as a judicial review mechanism under turkish law is characterized by its narrow scope28 as specified by the legislative clarifying statements of the code of civil procedure.29 the intermediate appellate review is narrow in its conception in turkey for various statutory reasons. in principle, it is not permited to present a new assertion, claim, defence or evidence which has not been brought before the court of first instance unless any such needs to be taken into account ex officio by the court of appeal according to the code of civil procedure, article 357. moreover, it is also proscribed to lodge a counterclaim, to intervene to the proceedings, or to resume the proceedings which is practically the primary exception to the proscription to expand the assertions or defence according to the code of civil procedure, article 176 et seq. based on the foregoing nonpermissive provisions, the code of civil procedure expects the parties to have drawn a picture representing the dispute as of the date of filing, for the court to make a conciliatory painting to fit to the frame set by the laws while the court of appeal is to check whether its colors are harmonious or if the frame is the one suitable to the final picture. however, law is quite often the result of traditions, of social expectations; legal rules are applied according to national pre-understanding.30 although civil procedural law is characterized by formality, to what extent should 26 the concept of “force majeure” in the related procedural context should be distinguished from the concept of “force majeure” within the framework of the (turkish) code of obligations. for an evaluation questioning the practicality and suitability of the concept of force majeure within its immediate context, see c. akil, “i̇stinaf kavramı”, university of ankara, 2008, phd thesis available at www.yok.gov.tr, p. 277 ff. 27 c. akil, “i̇stinaf kavramı”, university of ankara, 2008, phd thesis available at www.yok.gov.tr, p. 316 ff. 28 op. cit,. kuru et al., “medeni usul hukuk”, 2008, p. 637 29 ibidem, p. 639 30 p. gottwald, “ comparative civil procedure” in ritsumeikan law review”, 2005/3, no. 22, p.25; translation republished as “karşılaştırmalı medeni usul”, in “prof. dr. saim üstündağ’a armağan” adalet publication house, 2009, p.282. law support it so that formality is not conducive to an artefact? if the formality of procedural law introduces a high level of artificialness with rigidity, such would understate the features of the intermediate appellate review. two major features distinguish the intermediate appellate review. firstly, its focus on the “suitability” of the decision reviewed to the case and not just on the accurate application of the norms of applicable law. secondly and due to the same perspective, principle of adversariality which should be maintained during intermediate appellate review. 1. suitability of the decision the intermediate appellate review cannot aim to commence the proceedings over as if replacing the first instance proceedings.31 in some countries like france, a tension is being witnessed as to whether the review over the facts should be a evaluation, a reevaluation of the facts of the dispute or simply be restricted to legal reframing of facts when necessary as to preserve the supreme discretion of the first instance court over the filed facts. therefore, during the interpretation of each precedent and statutory exception permissive of a a new assertion, defence or evidence, the french doctrine also reminds that intermediate appeal is, at the final analysis, is a recourse for “review” of the first instance court’s decision.32 it is remarked at some of the decisions of the french court of cassation that a distinction is made between “evaluation of facts”, “evaluation of the evidentiary value and effect of proofs”, and the “exposure of an evidentiary item to the consideration of the other party or discussions during the proceedings”. the french court of cassation perseveres in repeating that the evaluation of facts is an issue within the power of evaluation of the first instance court.33 however, the french court of cassation also reviews how evidence is weighed; it specified that “if the writing (over a document) was contested by its supposed author (party to the lawsuit), the judge must confirm its authenticity unless he could decide without taking the related document into account”.34 according to the 2011 (turkish) code of civil procedure, a court of appeal can exceptionally examine an evidentiary item which has 31 on the legal and financial reasons for proceedings not to be repeated during the intermediate appellate review, see, t. akkaya, “medeni usul hukukunda i̇stinafa başvuru, i̇stinaf i̇ncelemesi ve i̇stinaf mahkemesinin verebileceği kararlar” university of anadolu (eskişehir), 2008, phd thesis available at www.yok.gov.tr , p.60 f. 32 op. cit., j. héron, t. le bars, “droit judiciare privé”, p. 607 et seq. 33 (french) court of cassation, commercial chamber, decision dated 13 decembre 2011 (application no. 10-27.799) 34 (french) court of cassation, commercial chamber, decision dated 28 january 2006, no. 293. (translation by b. tepe) http://www.yok.gov.tr/ http://www.yok.gov.tr/ volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu intermediate appellate review of commercial law decisions in turkey emerging markets journal | p a g e |66 been omitted by the first instance court. the provision does not evoke the proscription to expand evidence simply because it covers a situation where an evidentiary item has been introduced during the first instance proceedings. however, the limited power of evaluation held by the appellate courts over weighing of evidence is conducive to judging whether an omitted or contested evidentiary item is significant for the decision; such depends on the court of appeal’s evaluation of the “suitability” of the legal reframing under review. it is noteworthy that the french court of cassation repeatedly reaffirms its negative stance against evaluating the value and effect of an evidentiary item by rejecting to conduct a “higher” appellate review over a decision from such aspect. a stance as the last stated leaves ample room to a court of appeal’s review. moreover, such autonomous evaluation (appréciation souveraine) of the first instance court does not exclude the exercise of an evaluation by the court of appeal if the first instance court’s evaluation could be reframed in a more accurate manner or the first instance court could be led to applying the rules of submission of evidence in an accurate manner. the number of french court of cassation’s references to the “autonomous” evaluation of the court of appeal are significant. a court of appeal’s power to evaluate the evidentiary value of a fact has been recognized in a case where the court of appeal has rejected to deduce ill-intention from an irregularity.35 in another case, the french court of cassation recently reevaluated that if the amount of damages awarded in the appellate decision is not founded on concrete evidence, the court of appeal’s decision is deprived of a legal basis; the french high court still stated at its same decision that the court of appeal has rightfully exercised its power of evaluation as concerns the confusion which had been consciously created between two trademarks conducive to the commercial problem a party has suffered, and also in respect of the resulting amount of damages albeit relatively modest.36 another recent decision of the french court of cassation is noteworthy in that it did not sustain the judgement of a court of appeal which is consequential to having the burden of proof reversed (as burden of proof upon the other party).37 2. principle of adversariality it calls for evaluation how the principle of adversariality should relate to the statutory proscription to introduce new assertions, defences or evidence to the intermediate appellate review. such proscription reminds the proscription to expand assertions, defence and 35 (french) court of cassation, commercial chamber, hearing of 8 october 2013 (application no. 12-23343) 36 french) court of cassation, commercial chamber, hearing of 24 september 2013 (application no. 12-13250) (translation by b. tepe) 37 (french) court of cassation, 2. civil chamber, hearing of 7 november 2013 (application no. 1225437) evidence. overall, it is the other party which can evoke the proscription if a party does not observe the requirements of the proscription. before suggesting any exception to the proscription to expand assertions, defence and evidence can be relevant, there is a number of situations where the mentioned proscription is considered to be irrelevant.38 such a situation which is relevant also to intermediate appellate review may occur upon an expert examination or investigation especially on the spot. ideally, a fact or a type of damage or loss other than that asserted may be revealed during an examination or an investigation. that being said, the general proscription to expand the assertion or defence motivates the court of first instance to determine the scope of an expert’s examination for instance by way of questions notified to the expert(s) or even determine the aim of its own investigation on the spot beforehand. in addition, the code of civil procedure provides a number of exceptions to the proscription to expand the assertion and defence in a general manner, for cases of which the amount or value of the claim cannot be determined, it is permitted that a party files a figurative minimum claim and later modifies its claim as an exception to the proscription to expand the filed claim. within the situation covered, the claim could not be determined generally because the plaintiff does not have enough of elements to assess the pecuniary value of a claim; either because“it cannot be expected from the plaintiff to determine the amount or value to be claimed or it is (objectively) impossible to determine such an amount or value”.39 as such, it is rather the claim which is modified in a predictable manner rather than the assertion itself. secondly, the nature of the exception cannot readily accomodate the case where a pecuniary value cannot be attributed to the result sought, e.g. for termination of a contract or rescission of a decision issued by the general assembly of a company. in practice, it is rare that the court sets out whether it has rejected a certain assertion or defence because a party has reasserted the proscription to expand claims and defence, or because the court has reframed the facts or evaluated the evidence in a certain manner as to produce the resulting decision. therefore, for a functional evolution of intermediate appellate review, it is significant to set legitimate standards applicable to the review in black letter, but also to have the standards of procedural law applied in practice during the first instance, primarily in terms of maintaining discussions on assertions, defences and evidentiary items presented by the parties, finally reflecting such and the court’s evaluation in minutes. indeed, the 2011 code of civil procedure imposes on the courts not only to conduct ground work in order to explicitly state the issues contested by a party and the points over which the parties agree, but also to draft elaborate minutes during the proceedings. it is noteworthy that in france, it constitutes 38 see, ç. a. çelik, “tazminat ve alacak davaları”, bilge yayınevi, ankara, 2012, p.173 ff. 39 2011 code of civil procedure, article 107 (translation by b. tepe) volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu dr. berna tepe page |67| emerging markets journal a principal reason underlying the appellant’s success if the first instance has failed to allow any assertion, defence or evidentiary item for consideration of the other party in a realistic manner; the french court of cassation assertively leads the courts to take an active role for an assertion, defence or evidentiary to be discussed between the parties, especially if it has significance. 40 adversariality is sustained when it comes to restraining the intermediate appellate review to reasons declared by the application. to express within a more accurate framing, the principle of adversariality constrains the effect of appeal in devolving the subjectmatter to the court of appeal: tantum devolutum quantum appellatum.41 moreover, the proscription against new assertions, defence or evidence is a distinct and explicit proscription included in the 2011 code of civil procedure, article 357, para.1 and not by a statutory reference to the proscription against expanding assertions, defence and evidence. can the provision be indicative as to whether the proscription against new assertions, defence and evidence is to be asserted by the other party or to be authorizing the court of appeal to assert it in an ex officio manner? it is explicitly specified in its legislative clarifying statement that the proscription is to be applied by the court of appeal in an ex officio manner.42 rationally, the court of appeal cannot be more restricted in its review than the court of cassation is in the higher appellate review. therefore, it is noteworthy that according to the 2011 code of civil procedure, article 367, the court is not bound by the reasons set forth in the application for review and may take into account issues which are not in conformity with explicit provisions of law. a first distinction is made between explicit provisions of law and, e.g. the terms of a contract. otherwise, the provision allows certain norms of law to be considered by the court in an ex officio manner. in addition, any evolution of the dispute with impact on a condition of legality can be set forth during the appellate review without considering whether such is a reason stemming from public order or not. finally, where the first instance court can depart from the specific request, the suitability of a decision can be challenged by the relevant party by taking the decision to the intermediate appellate review. 40 “the report issued by an expert who was not actually assigned by a court (nonjudiciary expertise report) can have evidentiary value” and “ that the court of appeal must take into consideration such an expertise report and evaluate the report once it’s been brought into the discussions between the parties although the court cannot base its decision exclusively on such a report”: (french) court of cassation, combined chamber, decision dated 28 september 2012, no.271. (translation by b. tepe) 41 op. cit. héron, le bars “droit judiciare privé”, 2011, p. 594. 42 ibidem, p. 953 for instance, according to the 2011 commercial code, article 531, the minority shareholder(s) may file a request to the court for dissolution of the relevant jointstock company by asserting rightful reasons. pleadings within the framework of the relevant article 531 of the new commercial code could arise from various situations: recurrent abuse by majority shareholder(s), continuous argument between the shareholders as to sabotage eventual achievement of the company’s object(s) of activity, systematically violating – inter alia a financial right, a voting right or privilege, the rights to information or the rights of examination. however, the court has discretion to decide for the sale of the plaintiff’s stock at its true value valid at a time close to the expected decision date of the court, or to resolve the dispute by any other suitable and acceptable means adequate to the situation rather than dissolving the joint-stock company. therefore, the court could decide for dissolution or pull the plaintiff shareholder out of the company depending on whether the situation affects the plaintiff or rather obstructs the company from functioning. if the first instance court decides that squeezing the plaintiff shareholder out of the company would retrigger the company’s functioning, the plaintiff may well appeal the decision for its suitability to the dispute. can the plaintiff be expected to have submitted assertions and evidence to the first instance court contrary to probable decisions of the court before the decision? a party with legitimate interest in appealing a decision should be able to bring new assertions/evidence and evidence as to why the decision given by the first instance court is not “suitable” to the case and the other party should be able to oppose the appellant in that vein. the proscription should not apply in such cases. another adverse possibility arises if the court decides for sale of the shareholder’s shares at a value which significantly changes until the date of the decision. would it be possible to prove such change before the court of appeal without introducing new evidence? in such situations as mentioned above, it cannot be objectively expected from a party to have previously filed complete assertions/defence or evidence to the first instance proceedings in support of the appellate declaration subsequent to the decision. finally, the 2011 code procedure provides for two exceptions to the application of the principle of adversariality: (i) the court of appeal has to take into consideration concerns of public order for its review in case of an obvious nonobservance, and (ii) a court of appeal can exceptionally examine evidentiary items which could not be submitted to the first instance court due to force majeure. force majeure is generally defined as an incidence which occurs out of a person’s control while the person has no prior or subsequent control over the incidence.43 when an occurrence is qualified as force majeure, it is considered to be conducive to nonobservance of a liability. however, proceedings do 43 cf., c. akil, “i̇stinaf kavramı”, university of ankara, 2008, phd thesis available at www.yok.gov.tr, p. 278 (translation by b. tepe) volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu intermediate appellate review of commercial law decisions in turkey emerging markets journal | p a g e |68 not presume or create a liability in a similar sense.44 according to the legislative clarifying statement of the provision, evidence of which the submission was late without any fault imputable to a party can be presented as well.45 rationally, the intermediate appellate review should readily accomodate new evidence for the submission of which a person with legitimate interest can initiate the extraordinary judicial review in accordance with the code civil procedure, article 374 et seq. deduced from the referred article 375, para. 1, alinea (ç), it is possible to submit a new document which was obtained after a first instance court decision for reasons not related to the party who was held liable by the decision. iv. structuring intermediate appellate review intermediate appellate review can be structured into three stages (i) review on conditions of admissibility of the appeal, (ii) review of legality of the first instance court’s decision, and (iii) review of legitimacy of the first instance court’s decision. the intermediate appellate is first subjected to a preliminary examination of “admissibility” during which it is examined whether requirements of appellate procedure were met or subsequently complied with: table 5. structuring intermediate appellate review preliminary examination intermediate appellate review higher appellate review conditions for admissibility of appeal all applications are subject to conditions of admissibility to confirm that: -the decision must not be definitive; -the appeal must have been filed within the prescribed period; -the prerequisites of application for appeal must have been met; -reason(s) or explanation(s) of appeal must have been declared. all applications are subject to conditions of admissibility: the decision must not be definitive; the appeal must have been filed within the prescribed period; the prerequisites of appeal must have been met; reason(s) or explanation(s) of appeal must have been declared. 44 such a liability can be relevant rather within the context of duties of the representing lawyer vis-àvis his client. 45 tbmm tutanak dergisi (review of the minutes of the turkish parliament’s sessions), dönem 22, 5. sayısı, 152, yasama yılı 1, p. 11, cited by m. a. tutumlu, “medeni yargılama hukukunda delillerin i̇leri sürülmesi”, 2007, p. 954 condition incumbent on the first instance court the assigned chamber must be the right chamber to conduct the review. the assigned chamber must be the right chamber to conduct the review. the distinction between legality and legitimacy is significant both in theory and practice of law. review of “legality” focuses rather on the legal underpinnings of a decision according to which judicial authority can attributed to a decision. table 6. review of legality review of legality intermediate appellate review higher appellate review review of legality of the decision subsequent to a mere examination of the file, the court of appeal can decide to have the proceedings resume before a first instance court in case one of the following has occurred: a judge who’s proscribed from hearing the case has given the relevant decision of the first instance court; a judge who has been rightfully rejected was sitting at the first instance court; the first instance court’s has rejected to hear the case for absence of competence or jurisdiction in an unjustifiable manner; the first instance court has decided on the case despite not having competence or jurisdiction; nonobservance of other general conditions sought for judiciary action; undue nullification of judiciary action; erroneous decision for joinder or separation of action; error at declaring another court competent; the first instance court has decided without collecting any of the declared evidentiary items or without considering any of the evidentiary items. review on conditions of judiciary action. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu dr. berna tepe page |69| emerging markets journal condition incumbent on the appellant if the relevant first instance court is not within the jurisdiction of the court of appeal, proceedings would resume before a first instance court.46 the subsequent stage of intermediate appellate review which constitutes of the review of legitimacy is rather concerned with conformity to norms of law whether procedural or substantive. table 7. the subsequent stage of intermediate appellate review review of legitimacy intermediate appellate review higher appellate review full examination of the file without hearing if as a result of a full examination of the file in respect of its merits, the court of appeal can decide, -to reject the appeal in case of conformity with all applicable norms of procedural and substantive norms subject to a pecuniary threshold (applicable to the applicant’s interest), a single hearing may be organised generally upon the demand of a party, or exceptionally, ex officio. 46 as it is, the context where relevant clause of the code of civil procedure, article 353, alinea (a/3) is worded appears problematic. while other reasons for resumption of proceedings at a first instance court suggest illegality of the first instance court’s decision, resumption, e.g. for an erroneous wording of the aimed court of appeal is conducive to a resut out of proportion. the legislator’s intention could be pragmatic, simply to have the court of appeal return the file to the original first instance court for the issue to be dealt with by the author of the application rather than having the courts resolve the issue in an ex officio manner. konuralp (2006) emphasized that the jurisdiction of each court of appeal is a matter of public order. (h. konuralp, “medeni usul hukuku”, anadolu university, 2006, p.181). moreover, kuru et alias (2008) asserted that an error in the indication of the competent regional court of appeal could be rectified by the first instance court. (b. kuru, r. arslan, e. yılmaz, “medeni usul hukuk”, yetkin publication house, 2008, p. 643 f.) and rules; -to rectify itself the decision if, despite an erroneous application of the law or an error within the court’s rationale, it is not necesssary to resume the proceedings; -on the substance of a case, after a deficiency which was detected is made up for. the pecuniary threshold is not relevant if the decision to review concerns, -dissolution of a legal entity (corporation); or -rescission of a general assembly decision; -the property of real-estate. possibility for a hearing during judicial review no pecuniary threshold exists for a hearing upon demand. single hearing other norms of procedure the type of procedure applicable to the first instance would govern the appellate proceedings without prejudice to any other provision included in the related section of the code of civil procedure . the procedural norms are specific to higher appellate review and established in the relevant section of the 2011 code of civil procedure. overall, if the appeal succeeds the conditions of admissibility to intermediate appellate review, then at a next step, the points in focus concern the “legality” of the first instance court’s decision. if the decision fails the legality test, it constitutes the reason for the proceedings to resume before a first instance court subsequent to obliteration of the reviewed decision. the reason why the points in focus at that stage evoke legality is because they relate to the underpinnings of the decision, e.g. the composition of the court and other major nonobservance of procedural norms. that being said, the second aspect of legality is more formal because it requires observance of the general conditions of judiciary action. according to the code of civil procedure, article 114, (general) conditions of judiciary action require, viz., jurisdiction of the courts of the republic of turkey, competence of the specific court, jurisdiction of the court if jurisdiction is attributed to a court in a mandatory manner, appropriateness of the type of judiciary forum, capacity to initiate action, representatives’ due and sufficient power of representation, legal power to obtain the requested decision, payment of advance for costs, compliance with any ruling for deposit of caution, legitimate interest in initiating the judiciary action, being the first and single judiciary action on its subjectvolume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu intermediate appellate review of commercial law decisions in turkey emerging markets journal | p a g e |70 matter.47 failure from the first aspect of legality can rather be imputed to the specific court. if the appeal fails the test of admissibility and if the failure cannot be restored, the right of appeal is exhausted. in case the decision fails the test of legality, the first instance court’s decision is obliterated and proceedings are to resume before a court of first instance. if the proceedings resume before the same first instance court or even the proceedings start over at another first instance court, it cannot be said that the right of appeal is exhausted because a new first instance court is expected to render a new decision, but frequently between the same parties re the same cause. finally, if the court of appeal examines the application as to review the merits of the first instance decision, the right of appeal is exhausted because the court of appeal is to resolve the subjectmatter. therefore, it cannot be deduced that appeal automatically exhausts the right of appeal over the subject-matter. subsequently, the 2011 code of civil procedure, article 360 provides that the type of procedure applicable to the relevant first instance is to govern the intermediate appellate review; the type of procedure can be adopted by intermediate appellate review to the extent a norm specific to intermediate appellate review is not contrary to the applicable norm of such general procedure.48 the types of procedure established by the 2011 code of civil procedure comprise of written procedure and simplified procedure which are essentially applicable to first instance proceedings. therefore, their norms can be relevant to appellate review when there is no other procedural norm applicable to the intermediate appellate review; absent any procedural norm regulating the intermediate appellate review, the norm to apply during the intermediate appellate procedure is that of the procedure which (should) have governed its first instance proceedings. as such the same procedural norm as concerns the declaration of the final decision is to govern the declaration of the appellate decision; 49 according to a flexible construction of the provision, the court of appeal can also decide for temporary protective measures during the appellate proceedings even more so since it is not among acts proscribed for intermediate appellate review. 50 in this vein, it is noteworthy that the 2011 commercial code provides for simplified procedure to govern various types of commercial law requests; such 47 by law, the stated provision is without prejudice to specific provisions on conditions of judiciary action by other acts as applicable. 48 op. cit., kuru et al., “medeni usul hukuku”, 2008, p. 654 49 i̇. ercan, “medeni usul hukuku”, themis publication house, 2011, p. 387 50 op. cit, t. akkaya, “medeni usul hukukunda i̇stinafa başvuru, i̇stinaf i̇ncelemesi ve i̇stinaf mahkemesinin verebileceği kararlar”, p. 361 ff. occurs when it is explicitly stated that the “simplified procedure” would govern the relevant proceedings, or due to the reference of the 2011 code of civil procedure, article 316 alinea (b) and (g), when the court is conferred discretion to resolve an issue by examining the file and/or where the law provides for examination on file; if the legislator intends to put forth a way to proceed with the action, examination on file effectively becomes a procedure other than the (regular) written procedure provided by the 2011 commercial code in which case the “simplified procedure” is to govern the proceedings. the same applies for proceedings on noncontentious commercial issues which are governed, according to the 2011 code of civil procedure, article 385, para.1, by simplified procedure to the extent the nature of proceedings is compatible with simplified procedure. in principle, noncontentious issues are also subject to intermediate appellate review. v. types of appellate decisions depending on the leads or aspects of the first instance court’s decision which have been appealed, the intermediate appellate review can be favorable or unfavorable to the appeal: table 8. types of appellate decisions results of review intermediate appellate review higher appellate review types of appellate decisions favorable to the appeal appellate decision for resumption of the lawsuit for nonobservance in respect of conditions of legality; appellate decision favorable to a point of appeal after rectifying the decision if, despite an erroneous application of the law or an error within the court’s rationale, it is not necesssary to resume the proceedings; appellate decision partially or completely accepting the request(s) of an appellant, subsequent to a fullscale appellate review. appellate decision quashing the first instance court’s decision partially or entirely in case of an erroneous application of the law or the contract between the parties, or nonobservance of a condition for judiciary action. types of appellate decisions unfavorable to an appeal appellate decision rejecting the appeal for inadmissibility of appeal; -appellate decision partially or completely rejecting the requests of an appellant party; approval of the first instance court’s decision when the first instance court’s decision is in conformity with norms of procedural law as well as substantive law; approval of the first volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.51 | http://emaj.pitt.edu dr. berna tepe page |71| emerging markets journal instance court’s decision after rectifying an erroneous point in the court’s rationale, identification of a party, wording, calculation or a phrasing contained in the decision if it is not necesssary to have the proceedings resume for such error; . decision rejecting the appeal for nonobservance of a rule of admissibility for higher appellate review. references a.c. budak (2011) “hukuk muhakemeleri kanunu’nun getirdiği başlıca yenilikler”, conference held at bakırköy center of the istanbul bar association on 14 may 2011, published by the istanbul bar association: b. kuru, a.c. budak, “hukuk muhakemeleri kanunu’nun getirdiği başlıca yenilikler” in istanbul barosu dergisi, vol. 85, no.5, 2011, available at www.istanbulbarosu.org.tr b. kuru, r. arslan, e. yılmaz, “medeni usul hukuk”, yetkin publication house, 2008 “bölge adliye mahkemelerinin kurulmasına i̇lişkin karar”, resmi gazete (official gazette) of 5 june 2007, no 26543, and see also act no. 5235 “adlî yargı i̇lk derece mahkemeleri ile bölge adliye mahkemelerinin kuruluş, görev ve yetkileri hakkında kanun”, resmi gazete (official gazette) of 7 october 2004, no. 25606. c. akil, “i̇stinaf kavramı”, university of ankara, 2008, phd thesis available at www.yok.gov.tr ç. a. çelik, “tazminat ve alacak davaları”, bilge yayınevi, ankara, 2012 european commission for the efficiency of justice (cepej) of the council of europe, reports entitled “evaluation report on european judicial systems”, council of europe, available at www.coe.int . h. konuralp, “medeni usul hukuku”, anadolu university, 2006 i̇. elveriş, g. jahic, s. kalem, “i̇stanbul asliye hukuk mahkemelerinde yargılama süreci”, i̇stanbul bilgi university publications, 2009 i̇. ercan, “medeni usul hukuku”, themis publication house, 2011 j. héron, t. le bars, “droit judiciare privé”, montchrestien, 2011 ö. ulukapı, regulation of co-action under the law of civil procedure”, university of ankara, 1990, thesis available at www.yok.gov.tr p. gottwald, “ comparative civil procedure” in ritsumeikan law review”, 2005/3, no. 22, p.25; translation republished as “karşılaştırmalı medeni usul”, in “prof. dr. saim üstündağ’a armağan” adalet publication house, 2009 tbmm tutanak dergisi (review of the minutes of the turkish parliament’s sessions), dönem 22, 5. sayısı, 152, yasama yılı 1, p. 11, cited by m. a. tutumlu, “medeni yargılama hukukunda delillerin i̇leri sürülmesi”, 2007 http://www.istanbulbarosu.org.tr/ http://www.yok.gov.tr/ http://www.coe.int/ http://www.yok.gov.tr/ emerging markets journal volume 1 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu developing marketing strategy for electronic business by using mccarthy’s four marketing mix model and porter’s five competitive forces siamak azadi elham rahimzadeh iranian academic center for education, iranian academic center for education, culture and research (acecr),kermanshah culture and research (acecr),kermanshah iran, | e-mail: azadibox@yahoo.com iran, | e-mail: e_rahimzadeh77@yahoo.com abstract e-commerce is growing worldwide and is considered one of the modes and methods of business. this initiative led to the creation of new firms has several advantages over using benefits and this is the motivation for this phenomenon. while ecommerce success in attracting customers for their goods and services, due to systematic scientific principles and techniques that utilize the marketing strategies say . marketing strategies in electronic markets, it is one of the important issues in the field of new market research has been discussed. but in this very diverse field of view is presented. on the other hand, given that little research has been done in this area , so consider this strategy has increased the importance of, entering the world of electronic commerce and the use of modern tools and technology in new areas of business, firms will be forced to employ new business strategies, to prepare for their new competitive pressures. the results show that in the domain of e-commerce, two porter 's five competitive forces and mccarthy ' s four marketing mix model been instrumental in the formulation and development of marketing strategies. and variables used in the model to identify and prioritize and execute marketing strategies in the field of e-commerce is essential. keywords : marketing, strategies, e-commerce, porter's five competitive forces ,mccarthy's four marketing mix model this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.25 | http://emaj.pitt.edu mailto:azadibox@yahoo.com mailto:e_rahimzadeh77@yahoo.com http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://emaj.pitt.edu/ developing marketing strategy for electronic business by using mccarty’s four marketing mix model and porter’s five competitive forces emerging markets journal | p a g e | 47 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.25 | http://emaj.pitt.edu this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press developing marketing strategy for electronic business by using mccarty’s four marketing mix model and porter’s five competitive forces siamak azadi elham rahimzadeh i.introduction marketing and marketing strategy in the history of his own times, heavily influenced by technology and technology has been. with the advent of the printing press and radio and television and computer and etc. marketing has played its own role and try to use these technological tools, so in order to achieve their goals. innovative use of technology has had a significant impact on trade. using innovative technology, the kind of change that affect the processes and components of commercial systems generally have positive effects on leave. the innovative use of the internet and electronic devices, especially in the trading system . ebusiness innovation and change is that the organization has several advantages , this is why many companies are willing to use it . on the other hand, as porter says, now an e-commerce application form is mandatory and not optional firms are forced to employ the . (10 ) today, the emergence and rapid growth of information technology has transformed its entire marketing strategy. many service organizations and etc. under these technologies make marketing strategies in a way designed to make optimal use of its competitive advantage from it. markets and market today as internet markets virtual considered that these markets are quite different in nature from the physical markets and electronic markets, it requires an understanding of their style is. this could be the best strategy to gain competitive advantage in these markets will develop. on the other hand highly efficient and low-cost tool for emarketing strategies for entering new markets has been and easy entry of low-cost, low-risk and at the same time to provide foreign markets. unprecedented changes in trading conditions and competition in the world competing in the new global business landscape that companies are forced to think back on their marketing strategies. developments in world trade had a major role in creating this change. thus, the authors try to investigate the role of marketing strategies (with different aspects of porter's five forces and marketing mix mccarthy) to examine the development of e-commerce. the next part of this paper is devoted to theoretical research in the first part of this section, the interpretation of porter's competitive forces and the second part of the marketing mix mccarthy's commentary and the third part deals with the definition of e-commerce. the next section of the paper examines the role and impact of each variable on the two models of research in the field of e-commerce has the right http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx developing marketing strategy for electronic business by using mccarty’s four marketing mix model and porter’s five competitive forces emerging markets journal | p a g e | 48 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.25 | http://emaj.pitt.edu strategy. finally the conclusion to the discussions of the role models for the electronic commerce has focused on the development of marketing strategies. ii.theoretical research porter rivalry powers the environmental keyaspects of a company are a kind of industry in which companies compete there. the foundation of a company has a significant role in understanding the rules of competition. competition in every industry seeks its root not only in rival's performance, but also in basic economic foundation of industry (9). researches have shown that there is a directrelation between environmental considerations and the company's profit (1). the environment of every industry consists of many challenges that lead to acquire sufficient resources to obtain profit (1) . so there are different forces that form the competition in industry. every industry has a rudimentary foundation that forms the rivalry forces (8). porter describes the rivalry forces in an industry in which the whole power of these forces determine the amount of profit that an industry can make (9). 1the competition among industrial companies: this factor is also considered as a race among rivalry companies (3). it has the most powerful influence among other elements. the most prevailing elements that increase the sense of rivalry among companies of an industry are as follow: slow growth of industry, high fixed costs, lack of diversity in productions,the large number of rivals and the risk of impediments to exit(1). 2the threat of new rivals: the more new rivals can enter in an industry, more easily prices and profits decrease. forces that stop entering of new rivals and retain the current rivals are called entering problems. they are saving standards, high level of investments on equipment, high level of diversities in productions, the high cost to exit, limited access to distribution channels, governmental rules and lack of threat (1). 3the threat of productions and replacement services: this threat is also called indirect rivals(1). in many industries, companies compete with producers of replacement productions (which belong to other industries). if the price ratio of replacement productions and costs decrease , wherever replacement productions are, the competition is more challenging and as a result there will be more pressure (3). so it is obvious that close replacement productions can be used to determine the price (1). 4providers bargaining ability: if providers have more power, they can affect industrial profit in a way that the industry can’t compensate the increase of costs by increasing prices.the power of every provider depends on the conditions of market and itstrade with industry depends on its activities (8) . the bargaining ability of providers can be increased by factors such as limited number of providers, limitedsimilarproducts and services, independence of providers from the increase of sale, assurance of providers that producers need them, and the excellent performance of providers can improve the bargaining ability in an industrial environment (1). 5-buyers bargaining ability: another environmental force in industry is buyers bargaining ability. it refers to any situation that customer has more power than seller. in the following situations customers have more power to bargain: limited number of customers, large volume of purchase, quick access to information about the amount of demand and cost of sale in industry, the power of buyer to choose or change the provider, the existence of standard products and large number of providers (1). developing marketing strategy for electronic business by using mccarty’s four marketing mix model and porter’s five competitive forces emerging markets journal | p a g e | 49 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.25 | http://emaj.pitt.edu mccarthy's marketing mix: years ago, harvard business school professor neil borden the group's activities to identify any products that may affect the buyer. borden says that these "marketing mix" to make. companies need the right combination of factors in the market in terms of cost savings and profitability are maximized. marketing mix is like a box of tools at our place and we'll find it easier. the marketing mix is a collection of tools that can be controlled by combining them, there is the possibility of responding to the target market and audience. (6) in other words, the marketing mix includes all product manufacturer or service provider typically do measures to systematically affect the market demand for a product or service. 4p marketing mix is also referred to as the equivalent english words beginning product, price, place and promotion have been. 1product the production of goods( and palpable physical phenomenon) or services( or the idea of a non-touch) which is supplied to the market to meet the needs and demands of their customers (6). the product is a set of facilities that benefit the customer is presented. audiences should be aware that there is a problem with goods or service is the right solution for the problem then use it to modify their behavior in order to walk. 2price what the customer pays to obtain the desired product, the price is called )7(. price may be money or a waste of time and energy, anxiety and worry or lose her pleasure shows)6(.for the customer to buy a product or service should benefit from lower product prices. if the price of the product or service and the customer's income level is low, low product demand will come )4 ( . sometimes the low price ( such as providing certain services and products free of charge) in the customer's mind is associated with poor quality of products in order to reduce the interest rate.)7( 3place where information and education about the ideas or behavior of their customers are, where they are included)7(. in the case of tangible products, where the distribution system for nontangible goods, but where it is possible to obtain customers for the product , the location is considered. 4promotion the use of advertising, public relations, media support, and individual and similar activities that are central to creating and sustaining demand for the product or service received by the customer, including the extension)7(.in other words, activities that the service provider or the manufacturer of the goods does that in order to provide useful information to customers and to encourage customer to buy the product )11(. to promote a product suitable information channels should be selected )2 (. e-commerce: do all e-commerce businesses with a master of computer networks, particularly the internet. e-commerce is a kind of paperless trading. ecommerce by buying and selling exchange data and information necessary for the transportation of goods, with less effort and more momentum will perform banking transactions. companies will have to communicate with each other and their relationship to the current constraints together easier and faster done. customers can also contact the vendor to be one with each customer. in other words, the general name for a range of e-commerce software and systems that provide services such as information search, mobility management, account status, credit, payment for on-line reporting and billing management in the internet . these systems provide the basic infrastructure for internet-based developing marketing strategy for electronic business by using mccarty’s four marketing mix model and porter’s five competitive forces emerging markets journal | p a g e | 50 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.25 | http://emaj.pitt.edu activities. the use of e-commerce, is offering a new way of doing business. by this method, traders are able to shape their products and services all the time and all the buyers around the world regardless of geographic boundaries and nations to offer. many people, unique e-business buying and selling over the internet know, but it makes up only a small part of e-commerce and this concept is now a wide range of commercial and economic aspects is taken. easily to any business and international financial institutions and individuals in the area of embedded electronics (5). another way to exchange information and conduct e-commerce business transactions is an electronic bridge between business centers are created. electronic commerce with less volume of information that is not necessarily the same as the general population to be exchanged, deals. electronic commerce in its beginnings, the business was nothing more than a simple notification, and everyone could have their own products to advertise on the internet using web pages. figures show that about 34 percent of the 500 companies in 1995 and 80 percent in 1996, the technique has been used to advertise their products. the end of 2010 more than 220 billion dollars in financial transactions conducted over the internet by hundreds of commercial sites (5). peat of e-commerce is the buying and selling of goods, services and information via computer networks including the internet. ecommerce chafy different views are expressed as follows: community perspective: transmissions of information goods, services or payment by electronic means. perspective when buying and selling goods in a timely service perspective tool to simultaneously increase the speed and quality is made. business process perspective: the buying and selling of goods and timely manner. organization for economic cooperation and development (oecd) has defined ecommerce: trade in goods and services via the world wide web (www) or those offering goods and services that are delivered via the world wide web, and whether those features are not there. the ec is javsky and ryprot and technological exchanges between sectors (individuals or organizations) and inter-organizational and interorganizational electronic exchange that would facilitate(5). examine the role and impact of competitive factors in the business and marketing strategies in the field of e-commerce using porter's five competitive forces: the first factor (competition among firms in the industry): the area, like other areas of commerce and industry is essential to assess competition in the target market. the output of the analysis can lead to the selection of relevant business models in ecommerce and select the appropriate marketing strategies. the second factor (the threat of new competitors entering): ease of entry into the industry by new entrants, it is considered a serious threat to the current owners and can adversely impact the performance of their businesses in different sectors affect. type in e-commerce business model determines the intensity, or weakness of the due to the easy accessibility for customers in the field of ecommerce it seems that in this area (compared to a traditional business), the sensitivity and the impact of these factors on the business further. the third factor (threat of substitute products or services ): developing marketing strategy for electronic business by using mccarty’s four marketing mix model and porter’s five competitive forces emerging markets journal | p a g e | 51 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.25 | http://emaj.pitt.edu the quantitative and qualitative factors in determining the competitiveness of e-commerce is very effective. indirect competitors customers can choose to reasons such as lower prices or better terms, they refer to themselves. ease of access to sensitive information in e-commerce has this factor more than any other area. the fourth factor (the bargaining power of suppliers): increase the bargaining power of suppliers is a serious threat to any business. in the field of ecommerce, but also that there seems to be an easy relationship with suppliers in the virtual space, reduced power suppliers and the exclusive nature of some of them can be adjusted. the fifth factor (the bargaining power of buyers): no more purchasing power in determining prices and conditions of the manufacturer of the initiative will reduce the sales process. factors such as ease of access, high-level information in virtual spaces and increasing in cyberspace suppliers, customers in the area of e-commerce has led to increased power appropriate strategies for dealing with it must be made in advance . the role and influence of marketing mix based on four factors mccarthy's four marketing mix model: using the four elements of marketing (mccarthy's four marketing mix model) in the field of e-commerce marketing strategies is very important and in fact inevitable. product components: due to this element in the development of e-commerce marketing strategy will determine the business focus is on what product or products communities .in fact, the element type, and how much product diversity (homogeneous or heterogeneous) strategies and establishes priorities in this regard. price components: determine the characteristics of the ebusiness revenue models, methods, policies and product pricing policies related promotional products, including the results of the element in the formulation of marketing strategies in the area of electronic commerce. place components: this element of the e-commerce business, and how to transport the product to the customer defines. using appropriate strategies regarding product distribution and support of appropriate policies in this regard, the role of marketing strategies is essential. promotion components: how to promote appropriate strategies for product introduction and adoption of e-commerce is the result of the element. great variety of possible strategies for the promotion of e-commerce, the need for attention to this element and all factors in determining the proper strategy in the field of electronic commerce, more than any other basin is necessary to dispose. iii.result every business needs to survive and develop appropriate strategies to implementing them. in the field of e-commerce in developing the current competitive climate requires more appropriate strategies (preferably in marketing) is to develop and promote. porter's five competitive forces model as a tool for making decisions about entering or not entering certain areas of e-commerce and marketing strategies are very useful in business. this model is relatively comprehensive assessment of the status of developing marketing strategy for electronic business by using mccarty’s four marketing mix model and porter’s five competitive forces emerging markets journal | p a g e | 52 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.25 | http://emaj.pitt.edu the business and a good measure for choosing a marketing strategy is possible. mccarthy's four marketing mix model is also a good tool for formulating marketing strategies and efficiency at the operational level (marketing mix) is. the four main elements of this model enables the formulation of marketing strategies in the areas of marketing (product, price, place and promotion) provide. meanwhile, according to what was said in the previous sections, two models of the nature of the businesses in the area of electronic commerce, in the formulation and development of marketing strategies will be most effective. developing marketing strategy for electronic business by using mccarty’s four marketing mix model and porter’s five competitive forces emerging markets journal | p a g e | 53 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.25 | http://emaj.pitt.edu iv.references 1. a'arabi,s.m.(2008),a handbook of sterategic planning,cultural research bureau pub,iran. 2. birkinshaw m. social marketing for health. who press; 1993. 3:8. 3. david ,f.r.(1997).strategic management, prentice hall,uk. 4. davis da, thomson ma, oxman ad, haynes rb. evidence for the effectiveness of cme: a review of 50 randomized controlled trials. jama 1992; 268(9): 1111-1117. 5. hosseini, seyed hamid khodadad, shahriar azizi hassan mir-hosseini (2005), e-commerce business,publisher side.iran. 6. kotler p, armstrang g , assets mrketting(1999) ,translate prsaúaan,ali. publisher adabestan.iran. 7. kotler p, roberto e l. social marketing for changing public behavior. new york: free press; 1989: 24. 8. pearce,j.and robinson, r. (2007), strategic management, mc graw – hill, ny. 9. porter,m.e.(1998),competitve strategy:techniquse for analyzing industries andcompetitors,free press ny. 10. porter, m. e. (2001, march). strategy and the internet. harvardbusiness review, 79(3), 62−78. 11. thomson o'brien ma, freemantle n, oxman ad, wolf f, davis da, herrin j. continuing education meetings and workshops: effects on professional practice and health care outcomes. cochrane database of syst rev 2001; (2). the effects of justice oriented service recovery on customer satisfaction and loyalty in retail banks in ethiopia efrem sisay assefa debre berhan university, debre berhan, ethiopia, | email: efremsisay@gmail.com abstract the principal objective of this study is to investigate the effects of justice oriented service recovery on customer satisfaction in retail banks in ethiopia. it also attempts to assess how recovery satisfaction in turn affects customer loyalty. in order to realize the research objectives, data were collected through survey questionnaire from a total of 400 customers who have experienced service failures and recovered by the banks during the past one year. the study utilizes the instrument developed by tax et al. (1998). findings reveal that, perceived justice namely procedural justice, interactional justice and distributive justice were found to be positively related to recovery satisfaction. recovery satisfaction is also positively related with customer loyalty. keywords: perceived justice; service recovery; recovery satisfaction; customer loyalty; retail banks new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.45 | http://emaj.pitt.edu | mailto:efremsisay@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.45 | http://emaj.pitt.edu efrem sisay assefa emerging markets journal | p a g e |49 the effects of justice oriented service recovery on customer satisfaction and loyalty in retail banks in ethiopia efrem sisay assefa 1. introduction service organizations endeavor towards ‘a zero defect’ service or to the ability ‘to get things right the first time’ [1, 2]. however, in all contexts, whether customer service, consumer services, or business-to-business services, service failure is inevitable [3]. failure is inevitable as a result of the unique characteristics of the service itself i.e. specially, co-production and the inseparability of production and consumption makes it impossible to ensure 100 percent error-free services [4]. failures happen even to the best of firms with the best intentions and even to those with world-class service system [5]. such failures can be costly for firms, as customers often to switch to other service providers after such dissatisfactory experiences [6]. though it is unlikely that service firms can eliminate all service failures, they can learn to effectively respond to failures once they do occur. this response is often referred to as service recovery and is defined as the process by which a firm attempts to rectify a service delivery failure [7]. a good service recovery strategy has several positive impacts. studies have demonstrated strong links between effective service recoveries and customer satisfaction, customer loyalty, repurchase intentions, and long-term relationships [2, 6, 8]. however, developing a successful service recovery is the most difficult task for service organizations, especially when it comes to the banking industry. data from technical assistant research programs revealed that 63 percent of customers who complained were dissatisfied with the banks recovery efforts [9]. similarly, [10] discovered that 61 percent of customers who complained were not pleased with the banks’ recovery efforts because they were not treated fairly and the recovery efforts were far away from adequate justice. the above arguments reveal a general consensus in the literatures regarding the inevitability of service failures and the difficulty of developing successful justice oriented recovery strategy. the lack of academic interest in the field of service recovery is also depicted on the limited empirical studies that have been conducted over the issue. [11, p. 15] confirmed "given the acknowledged importance of service recovery, it is surprising that so few large-scale field studies have focused on this topic." similarly, [12, p. 121] stated, “…limited attention is given to recovery, little is known about how customers evaluates recovery efforts, what constitutes successful recovery and the potential (and limit) of recovery to convert customer dissatisfaction to satisfaction”. furthermore, [13] have suggested few empirical studies have focused on service recovery and customer loyalty. bearing this in mind, this paper endeavors to contribute to this neglected field by investigating the effects of justice oriented recovery on customer satisfaction and loyalty in retail banks in ethiopia. in particular, how the three dimensions of perceived justice affects customers’ recovery satisfaction and how recovery satisfaction in turn affects customer loyalty will be examined. based on the above argument the objectives of this research are the following;  to examine how justice oriented recovery efforts affect customer satisfaction in retail banks in ethiopia,  to examine how recovery satisfaction in turn affects customers’ loyalty in retail banks in ethiopia.. this paper is organized as follows; first, a comprehensive review of the existing literature on service recovery, justice theory, recovery satisfaction and customer volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.45 | http://emaj.pitt.edu the effects of justice oriented service recovery on customer satisfaction and loyalty in retail banks in ethiopia page |50| emerging markets journal loyalty. second, the research methodology used is provided. third, the data analysis, hypotheses testing and the discussion of results are presented, while, finally, the conclusions along with the basic implications of the main findings of the study, its limitations and the directions of future research are offered. 2. literature review 2.1. service recovery the necessity of service recovery is brought about by the inevitability of service failure. service failure is inevitable due to the unique features of the service itself [3]. to effectively handle failures, organizations should develop effective service recovery programs. service recovery is defined as the action taken by the service provider to address a customer compliant regarding a perceived service failure [14], and to pacify dissatisfied customers through appropriate actions in order to reduce potential damage to customer relationship caused by service failures [15]. 2.2. justice theory service recovery related literature attributes the social exchange and equity theory for providing the theoretical frame work for studies exploring customers’ evaluation of service recovery efforts [16]. [16] proposed that in every exchange that takes place, people weigh the inputs (the perceived contributions) against the outcomes (the perceived rewards received) and compare them with others in similar situations. in the case of service recovery, customers input could be the costs associated with a service failure such as economy, time, energy, physiological costs and physical costs [17]. the outcomes could include specific recovery tactics used such as cash refund, apology, and replacement and so on. the outcomes must be perceived to be fair or just by the customers in order for them to be satisfied with the service recovery. in the event that there is an equal balance between the inputs and the outputs, the exchange is considered as ‘fair’, but if the outcomes do not meet with the person’s expectations, then the result is inequity. consequentially, inequity is expected to result in both dissatisfaction and disloyalty. thus, customers often use the perceived justice component of equity theory to evaluate the service recovery effort. it will let customers determine whether a recovery attempt was fair or not. the perceived justice has three dimensions which are proposed by [18]. its dimensions are:  procedural justice (extent to which the policies and procedures used to achieve the final outcome are perceived as fair),  interactional justice (extent to which one’s personal interactions with a firm’s employees are perceived as fair) and  distributive justice (the extent to which the final outcome is perceived as fair). 2.3. dimensions of perceived justice procedural justice focuses on the process that is undertaken to arrive at the final outcome [19]. [20] refer to procedural justice as the perceived fairness of policies, procedures and criteria used by decision makers in arriving at the outcomes of a dispute or negotiation. [18] described five elements of procedural justice including process control, decision control, accessibility, timing/speed, and flexibility. fair procedures are consistent, unbiased and impartial representative of all parties’ interest and are based on accurate information and ethical standards. prompt strategies were much more likely to be associated with higher satisfaction and customer retention rate than their delayed counterpart. it has also been found that procedural justice is important in service recovery as consumers who might be satisfied with the type of recovery strategy offered but still could be unhappy if the process endured to seek redress were unsatisfactory [18]. however, [20] found that in a retailing setting, procedural justice (timeliness) did not volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.45 | http://emaj.pitt.edu efrem sisay assefa emerging markets journal | p a g e |51 have a significant effect on customers’ repatronage intentions nor their negative word-of-mouth intentions. the second dimension of perceived justice, interactional justice, is defined by [18, p. 62] as “dealing with interpersonal behavior in the enactment of procedures and the delivery of outcomes”. hence, interactional justice refers the manner in which the recovery process is operationalized and recovery outcomes presented. interactional justice has been operationalized as courtesy and politeness as exhibited by personnel, empathy, effort observed in resolving the situation, and the firms willingness to provide an explanation why the situation occurred. this component of the perceived justice is essential as [20] found that people might view the procedure and outcome to be fair and yet felt being unfairly treated as a result of interactional factors. other research has shown that the manners in which managers and employees communicate with customers [21] and efforts taken to resolve conflicts [22] affected customer satisfaction. for instance, when employees apologized for their mistakes, customers often ended up feeling more satisfied. [23] also confirmed that display of empathy, being polite and willingness to listen to customers were critical elements in service encounters. [20] also discovered that interactional justice had the strongest effect on subjects’ repatronage and negative word ofmouth intentions in their experimental study. distributive justice, the third component of perceived justice, focuses on the specific outcome of the firm’s recovery effort. in other words, what specifically did the offending firm offer the customer to recover from the service failure, and did this outcome (output) offset the costs (inputs) of the service failure [24]? some oftenquoted distributive outcomes include compensation in the form of discounts, coupons, refund, freegift, replacement, apologies and so on [17, 18, 20]. the assessment of whether the compensation is fair may be also affected by the customer’s prior experience with the firm, knowledge about how other customers were treated in similar situations and perception of the magnitude of his or her own loss [18]. [20] found that in a retaail setting, distributive justice had a significant effect on customers’ satisfaction and loyalty. 2.4. loyalty [25] oliver (1997) describes loyalty as “a deeply held commitment to rebuy or repatronage a preferred product or service consistently in the future, thereby causing repetitive same-brand or same-brand set purchasing, despite situational influences and marketing efforts having the potential to cause switching behavior” (p. 392). a service organization’s long-term success in a market is essentially determined by its ability to expand and maintain a large and loyal customer base [26]. customer loyalty has definite financial benefits since the cost to attract a new customer is significantly higher than retaining an existing one [3]. [1] also reported that a service company could boost profits by 100 percent just by increasing customer retention rate by 5 percent. retention is believed to be a function of existing customers’ level of satisfaction. other studies have also shown that an important variable that contributes to customer and employee commitment is satisfaction [13, 27]. when a firm develops a good system of resolving customer complaints, it leads to greater customer loyalty [28]. on the other hand, [18] discovered that as dissatisfaction with complaint handling increases, commitment would decrease. similarly, [29] also affirmed that satisfaction with service recovery had a strong impact on customer loyalty. 3. research model and hypotheses based on the preceding literature review, a model linking the key variables in this study is presented in figure 1. two main categories of variables are examined in this model. variables that affect customers’ recovery satisfaction, and recovery satisfaction and loyalty volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.45 | http://emaj.pitt.edu the effects of justice oriented service recovery on customer satisfaction and loyalty in retail banks in ethiopia page |52| emerging markets journal 3.1. the three dimensions of perceived justice and recovery satisfaction previous studies have suggested that perceived justice has positive impact on customer satisfaction. [18] argue that procedural justice, interactional justice, distributive justice strongly affect customers evaluation of service recovery, and [30] also found that positive perception of procedural justice, interactional justice, distributive justice are all significantly related with service recovery satisfaction. based on the above discussion this study proposes the following hypotheses: hypothesis 1: procedural justice oriented recovery has positive relationship with customers’ recovery satisfaction in retail banks in ethiopia hypothesis 2: interactional justice oriented recovery has positive relationship with customers’ recovery satisfaction in retail banks in ethiopia hypothesis 3: distributive justice oriented recovery has positive relationship with customers’ recovery satisfaction in retail banks in ethiopia 3.2. relationship between recovery satisfaction and customer loyalty it has been shown that recovery satisfaction is an important antecedent of customer loyalty. according to [30] word of mouth and purchase intentions are the result of recovery satisfaction showing that better service recovery has a significant effect on customer loyalty. [29] confirmed that effective service recovery ensures the longterm loyalty of complaining customer. therefore, it is believed that recovery satisfaction has a significant relation with customer loyalty, and this study proposes this hypothesis: hypothesis 4: recovery satisfaction has positive relationship with customers’ loyalty in retail banks in ethiopia. 4. research methodology 4.1. sample and data collection data were collected from customers of retail banks located in addis ababa, ethiopia. the only condition for the inclusion of respondents was that they must have experienced service failure and recovered by the banks during the past one year. the respondents were approached at different branches of retail banks by 20 undergraduate students of addis ababa university from june to july 2012, while they were waiting for their services. the instrument used in this study was adopted from [18], and translated in to a local language – amharic. four linguistic professionals (i.e. two from english department and two from amharic department) were involved in the translation volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.45 | http://emaj.pitt.edu efrem sisay assefa emerging markets journal | p a g e |53 process. to make sure, whether the translation is reliable or not, back translation (translation re translation) was conducted and the same meaning was obtained. a total of 400 questionnaires were collected from the customers of 19 retail banks in addis ababa, ethiopia. 4.2. measures the questionnaire has five parts. the initial part of the questionnaire requested respondents to provide their background information. the second part was intended to measure the three dimensions of perceived justice using a seven point likert scale starting from (1) “strongly disagree” to (7) “strongly agree”. the third part examined customers’ satisfaction with the bank’s recovery efforts. customers rated their satisfaction from (1) “very dissatisfied” to (7) “very satisfied”. finally, customers’ decision whether to stay with the bank or to switch to competitors was evaluated in the fourth part of the questionnaire on a seven point likert scale, from (1) “strongly disagree” to (7) “ strongly agree”. a total of 37 items used to capture the five constructs. 4.3. validity and reliability the validity and reliability of the instrument was tested using cronbach’s alpha and the coefficient values which was at 0.910, 0.90, 0.898, 0.96 and 0.97 for procedural justice, interactional justice, distributive justice, recovery satisfaction and loyalty respectively. the instrument is considered as very valid, reliable and acceptable as the values are greater than 0.7 [31]. 5. the main findings 5.1. descriptive statistics respondents’ demographics: the total population was composed of 69.2% males and 30.8% females. the age of the majority group represented was 30-35 (29.8%). the second largest group was 36-40 (28.8%). the least respondent group was 18 – 25 (2.9%). the highest frequency monthly income was 1441 – 2300 (35.6). the lowest frequency of monthly income was less than 500 (7.7 %). for educational level, the highest number of respondents had obtained university degrees and above (55.8%), whereas only 17.3 % of respondents had an educational level of high school and below. this means that most respondents in this study were well educated. for occupation, about 29.8 % of the respondents were merchants, while only 15.4 % of the respondents were teachers. 5.2. perceived justice and recovery satisfaction multiple regression analyses were used to establish the relationship between perceived justice and recovery satisfaction. this was followed by an examination of how satisfaction in turn could have affected customer loyalty. specifically, all the three dimensions of perceived justice (procedural justice, interactional justice, and distributive justice) were regressed on satisfaction with service recovery. subsequently, the impact of satisfaction on customer loyalty would be established. the complete results are tabulated in table i. the coefficient of determination (r2) of the first regression model was 0.837, suggesting a very good fit of the model. this confirms that, recovery satisfaction was significantly affected by the three dimensions of perceived justice (procedural justice, interactional justice, and distributive justice). in other words 83.7% of the variation on recovery satisfaction is explained by the three dimensions of the perceived justice and the remaining 16.3 % of the variance on recovery satisfaction was due to unidentified factors. the t – values were respectively, 20.509, 22.116, 17.275. these values suggest that each dimension of the perceived justice independently affect recovery satisfaction (t >2) [30]. the value of vif (variance inflated factors) for all dimensions was 1.000 indicating the non-existence of co-linearity. the standard beta coefficients were respectively, 0.897, 0.910, and volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.45 | http://emaj.pitt.edu the effects of justice oriented service recovery on customer satisfaction and loyalty in retail banks in ethiopia page |54| emerging markets journal 0.863. these confirm that interactional justice makes the strongest contribution while distributive justice contributes less. 5.3. recovery satisfaction and customer loyalty consequently, how recovery satisfaction could have affected customer loyalty was examined. the regression analysis result indicates that recovery satisfaction affects customer loyalty. the r2 value was 0.237 indicating recovery satisfactions was able to explain 23.7% of the variance. this confirms that, its effect is not strong because 76.3% of the variation on loyalty explained by other factors. the t value was 5.627. this indicates that customer satisfaction independently affects customer loyalty (t >2) [31]. the value of vif is 1.000, implied the non-existence of co-linearity. 6. hypotheses testing hypothesis 1: predicted procedural justice has positive relationship with recovery satisfaction in retail banks in ethiopia. findings of the regression analysis show that procedural justice has significant and positive relationship with recovery satisfaction (β = 0.897, p <0.01). hence, h1 is supported. hypothesis 2: predicted interactional justice has positive relationship with recovery satisfaction in retail banks in ethiopia. findings of the regression analysis show that interactional justice has significant and positive relationship with recovery satisfaction (β = 0.910, p < 0.01). thus, h2 is supported. hypothesis 3: predicted distributive justice has positive relationship with recovery satisfaction in retail banks in ethiopia. findings of regression analysis suggest that distributive justice is also positively related to recovery satisfaction (β = 0.863, p < 0.01). hence, h3 is supported. hypothesis 4: predicted recovery satisfaction positively related with customer loyalty in retail banks in ethiopia. analysis of the data also indicated that service recovery satisfaction positively related to customer loyalty (β = 0.487, p < 0.01). hence, h4 is supported. however, as it is shown in table 1 above recovery satisfaction has not strong positive relationship with customer loyalty, (r2 = 0.237) implied, only 23.7 % of the variation on loyalty explained by recovery satisfaction. 7. discussions and conclusions the findings of this study confirm that interactional justice has significant and positive relationship volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.45 | http://emaj.pitt.edu efrem sisay assefa emerging markets journal | p a g e |55 with recovery satisfaction. compared to other dimensions of perceived justice, interactional justice has the biggest effect on satisfaction implying that customers view empathy, politeness, effort, explanation during the interaction with the service provider in the provision of financial services to be the most important component. this finding is consistent with results of previous studies suggesting that recovery satisfaction increase when higher level of interactional justice is experienced; e.g., [32] reported that customers were more satisfied when service providers were friendly and polite. procedural justice and distributive justice are also significantly and positively related to satisfaction with recovery satisfaction. this finding is consistent with that reported by different prior researchers where procedural and distributive justices were found to be positively related to recovery satisfaction. for instance, [10] found that hotel guests who perceived the hotel’s recovery procedures to be fair were more likely to be satisfied with the outcomes of the recovery. [30] found distributive justice is significantly and positively related to satisfaction with service recovery and customers view fairness of outcome in the provision of mobile phone service to be the most important component. similarly, [2,10] had come up with similar findings. findings also indicated that satisfaction with recovery is positively related to loyalty. [30] affirmed that the extent of the impact of recovery satisfaction on customer loyalty is not strong. in contrast, [32] found that satisfaction with service recovery had strong impact on customer loyalty. the finding of this study is similar with that discovered by [30]. this study reveals that, recovery satisfaction has moderate positive relationship with customer loyalty. this is due to the perceived risk involved in the consumer decision-making process. because services are intangible and non-standard, more risk would appear to be involved in the purchase of service than the purchase of goods [3]. due to this reason, not all dissatisfied customer defect to competitors. 8. implications several important managerial implications emerge from this study. first, the importance of justice oriented service recovery cannot be disregarded. in the case of the provision of financial services, it is noted that in the case of service recovery, customers are more particular of the interaction although they also care for procedural and distributive justice. some of the interactions looked out by the respondents “very concerned employees to my problem”, “polite employees”, “a reasonable explanation as to why the original problem occurred”, and so on. similarly, retail banks should train their employees, specially, frontline employees to effectively handle customers complaints because front line employees (tellers) are easy to access and customers can voice their complaints with a minimum effort. second, although, satisfaction with service recovery positively related to loyalty, it is not strong. this implies volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.45 | http://emaj.pitt.edu the effects of justice oriented service recovery on customer satisfaction and loyalty in retail banks in ethiopia page |56| emerging markets journal that retail banks should explore and implement other factors that could have strong impact on customer loyalty. 9. limitations and future research although the research findings add something on the existing stock of knowledge, especially, on how justice oriented service recovery affects recovery satisfaction and loyalty in retail banks, this study just like other studies suffers from several limitations. the study is conducted based on the data obtained from a single source (i.e. customers). however, it would be better if multiple sources (i.e. both customers and managers) were used. this study is conducted on only one industry (the retail banking industry), it would be better to investigate if customers of other services would display the same behavior. references adams, j.s. (1965), “inequity in social exchange”, in berkowitz, l. (ed.), advances in experimental social psychology, vol. 2, academic press, new york, ny, pp. 267-299. alexander, e. c. (2002), “consumer reactions to unethical service recovery”, journal of business ethics, 36 (3), 223-237. blodgett, j.g., hill, d. j. and tax, s. s. (1997), “the effects of distributive justice, procedural and international justice on post complaint behavior”, journal of retailing, vol. 73 no. 2, pp. 185-210. casado.a, nicolau.j and mas.f (2011) “the harm full consequence of failed recoveries in the banking industry”, international journal of banking, vol 29 no1, p.32-49. chang yu-wei and chang yu-hern (2010) “does service recovery affect satisfaction and customer loyalty? an empirical study of airline service” journal of air transport management, vol. 16, p. 340-342. duffy. j and miller. j and bexley. j (2006) “banking customers varied reaction to service recovery strategies”, journal of bank marketing, vol. 24 no, 2, pp. 112-132. fisk, r.p., broun, s.w. and bitner, m. j. (1993), “tracking the evolution of the services marketing literatures”, journal of retailing, vol. 51, fall, pp. 124 136. gilliland, s.w. (1993), “the perceived fairness of selection systems: an organizational justice perspective”, academy of management review, vol. 18 no. 4, pp. 697 – 734. goodwin, cathy and ivan ross (1992), “consumer responses to service failures: influence of procedural and international fairness perceptions” journal of business research, 25 (september), 149-63. greenberg, jerald (1990), “organizational justice: yesterday, today and tomorrow”, journal of management, 16 (june), 399 – 432. groonroos, c., (2000), “service management and marketing, a customer relationship hayes & dredges. 1998. heskett, j. l., sasser, w. e. j and schlesinger, l.a. (1997), “the service profit chain: how leading companies link profit to loyalty, satisfaction and value”, free press, new york, ny. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.45 | http://emaj.pitt.edu efrem sisay assefa emerging markets journal | p a g e |57 hoffman, d.k. & kelly, s.w. (2000), “perceived justice needs and recovery evaluation: a contingency approach”, european journal of marketing, vol. 34, no. 3/4, pp. 418-428. johnston, r. (1994), “service failure and recovery: impact, attributes and process”, advances in services management and marketing, vol. 4, pp. 211-28. kandampully, j. (1998). service quality to service loyalty: a relationship which goes beyond customer service. total quality management, 9(6), 431-443. kelly, s. and m. davis, (1994), “antecedents to customer expectations for service recovery”. j. acad. mark. sci., 22(1): 52-61. kelley, s. w., hoffman, d. k. and davis, m. a. (1993), “a typology of retail failures and recovery”, journal of retailing, vol. 69 no. 4, pp. 429-52. kuenzel. s. and katsaris (2009) “critical analysis of service recovery process in the hotel industry” tmc academic journal, vol. no, pp. 14-24. lewis, b. r., & spyrakopoulos, s. (2001), “service failure and recovery in retail banking: the customers’ perspective”. international journal of bank marketing, 19(1), 37-47. loh .w and kau. a (2006) “the effects of service recovery on customers satisfaction: a comparison between complaints and non-complaints”, journal of service marketing, vol. 2 no 1, pp. 101-11. mccullough, m.a. and bharadwaj, s.g. and yadaw, m.s. (2000). “an empirical investigation of customer satisfaction after service failure and recovery”, journal of service research, vol. 3, pp. 121-137. mohr, l.a. and bitner, m. j. (1995), “the role of employee effort in satisfaction with service transactions”, journal of business research, vol. 32 no. 3, pp. 239-52. oliver, r. l. (1997). satisfaction: a behavioral perspective on the consumer. london: mcgraw-hill. potulari, r. and mangnale, v. (2011) “critical factors of customer satisfaction in ethiopian service sector” journal of business management, vol. 1 no 1, pp. 1-7. press, i. ganey, r. f, and hall, m. f. (1997), “what’s most important to customer satisfaction?”. aba banking journal, vol. 89 no. 9, pp. 73-4. reichheld, ff. and sasser, e.w. (1990), “zero defects: quality comes to services”, harvard business review. vol. 68, september – october, pp. 105 -101. smith, a. k., bolton, r.n., & wagner, j (1999), “a model of customer satisfaction with service encounters involving failure and recovery”, journal of marketing research, vol. 36, no. 3, pp. 356-372. spreng, r.a., harrell, g.d. & mackoy, r.d. (1995), “service recovery: impact on satisfaction and intentions”, journal of services marketing, vol. 9, no. 1, pp. 15-23. tax, s.s. & brown, s.w. (1998), “recovering and learning from service failure”, sloan management review, vol. 40, no. 1, pp. 75-88. tax, s.s., brown, s.w. & chandrashekaran, m. (1998), “customer evaluations of service complaint experiences: implications for relationship marketing”, journal of marketing, vol. 62, no. 4, pp. 60-76. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.45 | http://emaj.pitt.edu the effects of justice oriented service recovery on customer satisfaction and loyalty in retail banks in ethiopia page |58| emerging markets journal zeithaml, v. a., & bitner, m. j. (2003),”services marketing: integrating customer focus across the firm”. mc graw-hill higher education. zemke, r. (1994), “service recovery”, executive excellence, vol. 11 no. 9, pp. 17-18. microsoft word gold.docx volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.28 | http://emaj.pitt.edu the case for gold revisited: a safe haven or a hedge ? sudi apak vedat akman beykent university beykent university e-mail: akmanvedat@yahoo.com serkan çankaya sıtkı sönmezer beykent university beykent university e-mail: serkancankaya@hotmail.com e-mail: sitkisonmezer@beykent.edu.tr abstract this paper attempts to analyze the relation among gold prices and other macroeconomic and financial variables and addresses the question whether gold is a safe haven or a hedge for investors. the study investigates the relationship by using an econometric analysis for top gold exporter and importer countries, for a sample period of 11 years from 2000 to 2011. the results are twofold (i) return of silver, usd returns and change in the volatility index influences gold returns positively whereas, swiss franc and canadian dollar returns influence gold returns negatively regardless of presence of the 2008 crisis. (ii) in times of stress, our findings indicate that swiss franc, norwegian krone and canadian dollar function as haven whereas, on average, swiss franc, canadian dollar and 10 year us treasuries function as a hedge against gold but the results show no evidence for the us dollar. keywords: exchange rates, gold, hedge, safe haven, garch this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.28 | http://emaj.pitt.edu the case for gold revisited: a safe heaven or a hedge ? emerging markets journal | p a g e | 1 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.28 | http://emaj.pitt.edu the case for gold revisited: a safe heaven or a hedge ? sudi apak vedat akman serkan çankaya sıtkı sönmezer i. introduction   gold is used as a standard measure up until the termination of bretton woods system by president nixon in 1971 and as a precious metal for centuries throughout the world. not more than a decade ago, gold was undermined as an investment by the investors and funds due to its relative poor return performance; most of the funds have chosen not to allocate any funds to gold and the ones that invest in gold have considered the slight diversification benefit it has offered and thus, have allocated a tiny portion of their portfolios. turnaround for gold emerged with the global crisis of 2008 and it has gained value steadily at a period when precipitous falls in the stock markets were ubiquitous; interest rates were unattractive; the rumors about the european countries were rampant, increasing the eminent default risks. inevitably, gold has almost tripled its value in us dollar terms and gold market train and its possible route became the center of attention for the majority of investors. despite the fact that gold prices are set internationally in foreign exchanges, countries like india and turkey have significant cultural and psychological rationale in demanding gold. india, solely contributes almost one third of the world demand for gold as of jewellery, total bar and coin (world gold council, 2012). therefore it may be necessary to incorporate financial data of both gold producer countries and gold consuming countries when gold prices are under study. this paper attempts to analyze the relation among gold prices and other macroeconomic and financial variables and addresses the question whether gold is a safe haven or a hedge for investors. ii. literature  review koutsoyiannis (1983) finds a strong relation between gold prices and the state of the us economy. similarly, us money supply and ppi announcements’ impacts on gold prices have been evidenced in the study of tandon and urich (1987). especially, unanticipated growth in money supply increases the gold price volatility (bailey, 1988). according to christie-david et al. (2000), gold prices react strongly to cpi, unemployment rate, gdp and ppi announcements but not to federal deficit announcements. cai et al. (2001) have investigated the factors that move the gold market and have found that employment reports, gdp, cpi and personal income have an important role in moving the prices of gold. baker and van-tassel (1985) show evidence that price of the gold is determined by the future inflation rate. levin et al. (2004) demonstrated that price of gold rises over time at the rate of inflation and be an effective hedge against inflation. however, lawrance (2003) have found no significant relationship between gold prices and inflation, gdp and interest rates. existence of psychological barriers in gold prices has been examined and it is also stated that traditions play an important role in determining the demand for gold and as a store of value especially during crisis (aggarwal and lucey, 2007). xu and fung (2005) have used a bivariate asymmetric garch model to examine the information flow across the us and japanese markets for gold, platinum and silver future contracts and proved that volatility spillover among the markets is strong but us market was more dominant. nakamura and small (2007) showed that gold prices and crude oil prices exhibit a random walk. tully and lucey (2007) have examined the effect of macroeconomic shocks on the case for gold revisited: a safe heaven or a hedge ? emerging markets journal | p a g e | 2 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.28 | http://emaj.pitt.edu gold prices with apgarch models and show evidence that us dollar has significance on the gold price volatility. zhang and wei (2010) have examined the co-integration, causality and price discovery between the gold market and crude oil market for the time period of 2000-2008. in this period, the correlation of them was significant, 0.9295, and crude oil price change linearly granger causes the volatility of gold price but no evidence is found for the reverse. their results also show that the influence of crude oil on global development is wider than gold and crude oil is a more interesting investment option for the investors for the period under study. joy (2011) defines an asset as haven when it is uncorrelated or negatively correlated to an underlying asset in times of stress. whereas when it is uncorrelated or negatively correlated to an underlying asset on average, it is called a hedge. he has studied the period between 1986 and 2008 and has used the dcc-garch model to indicate that gold is a hedge against the us dollar especially in the recent times of the study but provide no evidence of gold being the safe haven for us dollar. baur & lucey (2010) investigated the existence of a hedge and a safe haven in us, uk and german stock and bond prices and returns and their relationship with gold prices. they found that gold is a hedge against stocks and gold is a safe haven in extreme stock market conditions and lastly gold is a safe haven for stocks only for 15 trading days after an extreme shock occurred. capie, mills and wood (2005) analyzes the role of gold as a hedge against the dollar and found a negative relationship between gold and other foreign exchange rates. iii. data  and  methodology   3.1 data data consists of daily gold prices per ounce as a dependent variable and to explain the change in the dependent variable, a set of exchange rates of top gold exporter and gold importer countries, a subset of alternative assets including bond returns, return of oil prices and silver prices, and credit default swaps of some emerging countries are used. independent variables are refined after eliminating the insignificant ones. two periods are used: one had 2768 observations, between 24.10.2000 – 07.10.2011; and the other period starts with the global crisis up until 07.10.2011 with 1074 observations. this study employs currencies of countries that are the leading gold exporters and importers. namely, india, china, turkey, russia, usa, indonesia, euro zone countries, switzerland and uk are among the top gold demanding countries whereas, china, australia, usa, south africa, russia, canada and indonesia are among the significant producers in world gold production according to the reports of world gold council (2011). our data are sourced from thompson reuters. closing prices are used for the independent variables and daily returns are analyzed in natural logarithms as follows: rj,t = ln (pj,t/pj,t-1) (1) where rj,t is the return of variable j at time t and pt is the price of variable j at time t. 3.2 methodology garch (1,1) model has been applied for both of the periods as both the model assumes volatility arising from innovations in the market is symmetrical (tully and lucey, 2007) and a likelihood ratio test supports this model. tables 3 and 4 are derived from the garch(1,1) model. the garch model is a general autoregressive conditional heteroskedastic model. garch regresses on lagged terms. the conditional variance is dependent upon its own lags. the equation for garch(1,1) is: (2) the case for gold revisited: a safe heaven or a hedge ? emerging markets journal | p a g e | 3 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.28 | http://emaj.pitt.edu where is the weighted long run variance and the updated forecast of variance is a function of the most recent variance forecast , and the most recent squared prediction error, . in this case, if there is an unexpectedly large increase or decrease in asset return at time t then this will generate an increase in the expected variability in the next period. in this study, stata ®software is used to compute the summary statistics and the garch models. iv. result   4.1 summary statistics summary statistics of the data are displayed in table 1 for the entire period and for the crisis period. augmented dickey-fuller test has been conducted for the unit root test and stationary of the data are evidenced for both of the periods. normality tests show that data is normal and kurtosis amounts are reasonable. 4.2 results: 2000 – 2011 tests have been applied to select the significant currencies either among major currencies or among the leading gold importing/exporting countries and credit default swaps (cds) of emerging countries; russian and south african credit default swaps’ returns are found to be significant and are incorporated into the model whereas, swiss franc’s, us dollar’s, norwegian krone’s, canadian dollar’s, chinese yuan’s and south african rand’s returns are incorporated into the model with a similar fashion. the remaining significant independent variables were namely; return of 10 year us treasury bonds, return of oil prices, return of silver and a volatility index, vix. table 2 garch model estimation results for the 2000-2011 period number of obs = 2768 wald chi2(10) = 1994.88 log likelihood = 9067.567 rusdgold coef. std. err. z p>|z| ruscds -0.00933 0.005779 -1.62 0.106 rsacds 0.01109 0.006310 1.76 0.079 rus10tr -0.09258 0.039239 -2.36 0.018 roil 0.01637 0.006376 2.57*** 0.010 rsilver 0.13094 0.008498 15.41*** 0.000 rvix 0.01250 0.002904 4.31*** 0.000 rchfusd -0.33795 0.049016 -6.89*** 0.000 rusd 1.22207 0.197929 6.17*** 0.000 rnokusd -0.06396 0.042051 -1.52 0.128 rcadusd -0.10465 0.033691 -3.11*** 0.002 rcnyusd -0.22568 0.197633 -1.14 0.253 rzarusd -0.01852 0.016136 -1.15 0.251 cons 0.00018 0.000153 1.22 0.221 arch arch l1. 0.08053 0.006760 11.91 0.000 garch l1. 0.90720 0.008064 112.49 0.000 cons 1.41e-06 3.14e-07 4.48 0.000 * indicates statistical significance at the 10% level ** indicates statistical significance at the 5% level *** indicates statistical significance at the 1% level a garch (1,1) model shows us the estimated coefficients in table 2. silver, as a substitute, has the largest influence on the gold prices with a z-statistic of 15.41 (99 % significant). usd returns are conforming to the earlier studies and it is the most influencing currency on gold prices with a z-statistic of 6.17 (99 % significant). volatility index is also significant with a z-statistic of 4.31 (99 % significant) which may indicate that at times of uncertainty, gold prices gain value. return of oil prices with a z-statistic of 2.57 is hardly significant at 99 % but south african cdss with a zstatistic of 1.76 is significant at 90 %. swiss franc has the most significant negative coefficient with a z-statistic of 6.89 (99 % significant), canadian dollar has a significant (99 %) negative coefficient of -3,11 and the case for gold revisited: a safe heaven or a hedge ? emerging markets journal | p a g e | 4 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.28 | http://emaj.pitt.edu 10 year us treasuries has a significant negative coefficient of -2,36 (95 %). 4.3 results: 2008 – 2011 similarly, numerous tests have been applied to select the significant currencies either among major currencies or among the leading gold importing/exporting countries and credit default swaps (cds) of emerging countries; russian and south african credit default swaps’ returns are found to be significant and are incorporated into the model whereas, swiss franc’s, us dollar’s, norwegian krone’s, canadian dollar’s, chinese yuan’s and south african rand’s returns are incorporated to the model with a similar fashion. the remaining significant independent variables were namely; return of 10 year us treasury bonds, return of oil prices, return of silver and a volatility index, vix. table 3 garch model estimation results for the 2008-2011 period number of obs = 1074 wald chi2(10) = 773.82 log likelihood = 3393.523 rusdgold coef. std. err. z p>|z| ruscds 0.0207681 0.0118665 1.75* 0.080 rsacds 0.0157120 0.0118541 1.33 0.185 rus10tr 0.0355800 0.6220940 0.57* 0.056 roil 0.0237889 0.0144552 1.65* 0.100 rsilver 0.1797550 0.0133826 13.43*** 0.000 rvix 0.0139063 0.0051861 2.68*** 0.007 rchfusd -0.2967927 0.0657169 -4.52*** 0.000 rusd 1.4345070 0.2602825 5.51*** 0.000 rnokusd -0.1988765 0.0661018 -3.01*** 0.003 rcadusd -0.2547862 0.0605062 -4.21*** 0.000 rcnyusd -0.5694361 0.2606366 -2.18** 0.029 rzarusd -0.0277312 0.0351942 -0.79 0.431 cons 0.0003865 0.0002850 1.36 0.175 arch arch l1. 0.0783626 0.012625 6.21 0.000 garch l1. 0.9071669 0.0145162 62.49 0.000 cons 1.76e-06 6.31e-07 2.78 0.005 * indicates statistical significance at the 10% level ** indicates statistical significance at the 5% level *** indicates statistical significance at the 1% level a garch (1,1) model shows us the estimated coefficients in table 3. silver, as a substitute, has the largest influence on the gold prices with a z-statistic of 13.43 (99 % significant). usd returns are conforming to the earlier studies and it is the most influencing currency on gold prices with a z-statistic of 5.51 (99 % significant). volatility index is also significant with a z-statistic of 2.68 (99 % significant) which may indicate that at times of uncertainty, gold prices gain value. oil prices with a z-statistic of 1.65 and russian cdss with a z-statistic of 1.75 are also significant yet, 90 %. it is worth to note that for hedging purposes, swiss franc, norwegian krone and canadian dollar have significant (99 %) negative coefficients -4,52, -3,01 and -4,21 respectively and chinese yuan has a significant negative coefficient of -2,18 (95 %). v. conclusion   this paper has examined the fit of the garch model for gold returns and provides evidence that return of silver, usd returns and change in the volatility index influences gold returns positively whereas, swiss franc and canadian dollar returns influence gold returns negatively regardless of presence of the 2008 crisis. in times of stress, our findings indicate that swiss franc, norwegian krone and canadian dollar function as haven whereas, on average, swiss franc, canadian dollar and 10 year us treasuries function as a hedge against gold but we provide no evidence for the us dollar therefore our findings support the study of joy (2011). the case for gold revisited: a safe heaven or a hedge ? emerging markets journal | p a g e | 5 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.28 | http://emaj.pitt.edu vi. references   1. koutsoyiannis, a.: a short-run pricing model for a speculative asset, tested with data from the gold bullion market. applied economics. 15, 563-581(1983) 2. tandon, k., and t., urich.: international market response to announcements of us macroeconomic data. journal of international money and finance. 6, (1987) 3. levin, e.j., p. macmillan, r.e. wright and d. ghosh.: gold as an inflation hedge? studies in economics and finance. 22(1),1-25 (2004) 4. baker s.a. and van-tassel, r.c.: forecasting the price of gold: a fundamentalist approach. 12(4), 43-51 (1985) 5. baur, dg and lucey, bm.: is gold a hedge or a safe haven? an analysis of stocks, bonds and gold. financial review. 45, 217–229, (2010) 6. capie, f., t. c. mills and g. wood.: gold as a hedge against the dollar. journal of international financial markets, institutions and money. 15(4), 343-352, (2005) 7. david, h., d. paul and f. robert.: do precious metals shine? an investment perspective. financial analysts journal. 62(2), 98, (2006) 8. w. bailey.: moneysupply announcements and the ex ante volatility of asset pricesj. money, credit banking. 20, 611–620, (1988) 9. rohan christie–david, mukesh chaudhryb, timothy w. koch.: do macroeconomics news releases affect gold and silver prices? journal of economics and business. 52(5), 405–421, (september–october 2000) 10. cai, j., cheung, y. -l., & wong, m. c. s.: what moves the gold market? journal of futures markets. 21(3), 257–278, (2001) 11. stephan a. baker, roger c. van tassel,: forecasting the price of gold: a fundamentalist approach. atlantic economic journal. 13(4), 43-51, (1985) 12. lawrence, c.: why is gold different from other assets? an empirical investigation, world gold council, london (2003) 13. world gold council, gold demand trends 2012 q1 report, 2012, http://www.gold.org/investment/research/regular_reports/gold_demand_trends/, accessed 27 may 2012 14. aggarwal, r. and b.m. lucey,: psychological barriers in gold prices? review of financial economics. 16 (2), 217–230, (2007) 15. xu, x., and fung, h.: cross-market linkages between u.s and japanese precious metals futures trading. international financial markets, 15(2), 107-124, (2005) the case for gold revisited: a safe heaven or a hedge ? emerging markets journal | p a g e | 6 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.28 | http://emaj.pitt.edu 16. t. nakamura and m. small: tests of the random walk hypothesis for financial data. physica a, 377, 599-615, (2007) 17. tully, e. and b.m. lucey,: a power garch examination of the gold market, research in international business and finance. 21(2), 316–325, (2007) 18. zhang, y.j. and y.m. wei: the crude oil market and the gold market: evidence for cointegration, causality and price discovery, resources policy. 35(3), 168-77, (2010) 19. mark, joy,: gold and the us dollar: hedge or haven?, finance research letters. elsevier, 8(3), 120-131, (september 2011) the case for gold revisited: a safe heaven or a hedge ? emerging markets journal | p a g e | 7 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.28 | http://emaj.pitt.edu table 1 summary statistics summary statistics for the entire period (2000-2011) summary statistics for the crisis period (2008-2011) variable obs mean std. dev. min max skewness kurtosis obs mean std. dev. min max skewness kurtosis ruscds 2768 -0.000435 0.0382 -0.2885 0.4330 0.000   0.000   1074 0.001184 0.0479 -0.2885 0.4330 0.000 0.000   rsacds 2768   -3.87e-06 0.0337 -0.2716 0.2805 0.000   0.000   1074 0.000928 0.0441 -0.2716 0.280 0.019 0.000   rtrcds 2768   -0.000185 0.0343 -0.2363 0.2281 0.000   0.000   1074 0.000212 0.0389 -0.2363 0.2241 0.084 0.000   rus10tr 2768   0.000085 0.0043 -0.0262 0.0353 0.000   0.000   1074 0.000171 0.0050 -0.0262 0.0353 0.600 0.000   roil 2768   0.000444 0.0245 -0.1872 0.1796 0.001   0.000   1074 0.000320 0.0251 -0.1670 0.1796 0.305 0.000   rsilver 2768   0.000676 0.0209 -0.1732 0.1392 0.000   0.000   1074 0.000822 0.0255 -0.1692 0.1392 0.000 0.000   rvix 2768   0.000144 0.0631 -0.3505 0.4960 0.000   0.000   1074 0.000512 0.0737 -0.3505 0.4054 0.000 0.000   rusdgold 2768   0.000641 0.0124 -0.0794 0.0771 0.000   0.000   1074 0.000842 0.0144 -0.0794 0.0771 0.001 0.000   rusd 2768   0.000159 0.0062 -0.0373 0.0346 0.000   0.000   1074 -0.000024 0.0066 -0.0373 0.0346 0.000 0.000   rjpyusd 2768   0.000025 0.0071 -0.0495 0.0519 0.000   0.000   1074 -0.000435 0.0086 -0.0495 0.0519 0.031 0.000   rdkkusd 2768   -3.61e-07 0.0008 -0.0180 0.0179 0.001   0.000   1074 -2.79e-07 0.0001 -0.0012 0.0005 0.000 0.000   rsekusd 2768   0.000019 0.0039 -0.0227 0.0265 0.032   0.000   1074 -3.17e-06 0.0047 -0.0227 0.0265 0.012 0.000   rnokusd 2768   -8.60e-06 0.0041 -0.0393 0.0245 0.072   0.000   1074 -0.000016 0.0048 -0.0393 0.0245 0.008 0.000   rrubusd 2768   0.000214 0.0065 -0.0355 0.0517 0.005   0.000   1074 0.000197 0.0074 -0.0331 0.0517 0.000 0.000   rtryusd 2768   0.000519 0.0135 -0.1016 0.3916 0.000   0.000   1074 0.000325 0.0087 -0.0638 0.0438 0.039 0.000   raudusd 2768   -0.000063 0.0066 -0.0429 0.0525 0.000   0.000   1074 -0.000135 0.0077 -0.0429 0.0525 0.000 0.000   rbrlusd 2768   0.000134 0.0129 -0.1053 0.0809 0.000   0.000   1074 -0.000048 0.0116 -0.0680 0.0665 0.001 0.000   rcadusd 2768   0.000018 0.0061 -0.0339 0.0278 0.010   0.000   1074 -0.000042 0.0064 -0.0339 0.0278 0.029 0.000   rcnyusd 2768   0.000065 0.0062 -0.0369 0.0335 0.000   0.000   1074 -0.000184 0.0065 -0.0369 0.0335 0.000 0.000   rhkdusd 2768   0.000159 0.0064 -0.0359 0.0325 0.024   0.000   1074 -0.000026 0.0073 -0.0359 0.0325 0.113 0.000   ridrusd 2768   0.000137 0.0093 -0.1030 0.7560 0.000   0.000   1074 -0.000056 0.0087 -0.0476 0.0756 0.000 0.000   rinrusd 2768   0.000182 0.0067 -0.0444 0.0279 0.000   0.000   1074 0.000168 0.0076 -0.0444 0.0279 0.000 0.000   rkrwusd 2768   0.000155 0.0106 -0.0878 0.0834 0.000   0.000   1074 0.000212 0.0112 -0.0878 0.0834 0.000 0.000   rmyrusd 2768   0.000096 0.0095 -0.1403 0.1406 0.003   0.000   1074 -0.000101 0.0085 -0.0382 0.0362 0.043 0.000   rnzdusd 2768   -0.000072 0.0069 -0.0332 0.0418 0.000   0.000   1074 -0.000022 0.0076 -0.0332 0.0418 0.000 0.000   rsgdusd 2768   0.000052 0.0052 -0.0305 0.0258 0.065   0.000   1074 -0.000162 0.0048 -0.0267 0.0258 0.062 0.000   rzarusd 2768   0.000170 0.0104 -0.1000 0.0771 0.000   0.000   1074 0.000085 0.0096 -0.0585 0.0759 0.000 0.000   rgbpusd 2768   0.000131 0.0047 -0.0430 0.0290 0.000   0.000   1074 0.000232 0.0055 -0.0430 0.0290 0.000 0.000   rplnusd 2768   0.000046 0.0068 -0.0382 0.0534 0.007   0.000   1074 0.000136 0.0074 -0.0373 0.0335 0.006 0.000   rchfusd 2768   -0.000072 0.0037 -.02460 0.0515 0.000   0.000   1074 -0.000270 0.0053 -0.0246 0.0515 0.000 0.000   the case for gold revisited: a safe heaven or a hedge ? emerging markets journal | p a g e | 8 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.28 | http://emaj.pitt.edu note: the letter “r” at the beginning of each variable stands for the term “return”. the abbreviations used for the variables are: ruscds: the us credit default swaps (cds), rsacds: the south african cds, rtrcds: the turkish cds, rus10tr: us 10 year treasury, roil: oil, rsilver: silver, rvix: vix index, rusdgold: usd and gold, rusd: usd, rjpyusd: japanese yen to usd, rdkkusd: danish krone to usd, rsekusd: swedish sek to usd, rnokusd: norwegian kroner to usd, rrubusd: russian ruble to usd, rtryusd:turkish lira to usd, raudusd: australian dolar to usd, rbrlusd: brazilian real to usd, rcadusd: canadian dollar to usd, rcnyusd: chinese renminbi to usd, rhkdusd: hong kong dollar to usd, ridrusd: indonesian rupiah to usd, rinrusd: indian rupee to usd, rkrwusd: south korean won to usd, rmyrusd: malaysian ringgit to usd, rnzdusd: new zealand dollar to usd, rsgdusd: singapore dollar to usd, rzarusd: south african rand to usd, rgbpusd: british pound sterling to usd, rplnusd: polish zloti to usd, rchfusd: swiss francs to usd emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu organizational change for the environmentally sustainable airport management vildan durmaz anadolu university | e-mail: vkorul@anadolu.edu.tr abstract air transportation industry is a globally growing industry. as an inseparable part of this industry, airport management is also becoming more crucial issue to be dealt with. airports offer economic and social benefits to the society, but also environmental impacts of airport operations are increasing due to high traffic growth. while airport capacity is increasing, airport operators are being responsible for mitigating environmental constraints. today to implement airport environmental management system is seen as a critical way of solution. to ensure effective implementation of this system, an organizational change with definite roles, responsibilities and structure are needed. this study illustrates a way of organizational response to market forces and national regulations guiding the achievement of sustainable airports by determining the structure and the roles in an airport organization.. keywords: airport management, sustainability, organizational change this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu mailto:vkorul@anadolu.edu.tr http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://emaj.pitt.edu/ organizational change for the environmentally sustainable airport management emerging markets journal | p a g e | 13 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu organizational change for the environmentally sustainable airport management vildan durmaz i. introduction today’s business environment produces change in the workplace more suddenly and frequently than ever before. the ability to adopt the changing environment is a key for organizational survival (fnl, 2009). explaining how and why organizations change has been a central and persistent theme among scholars in public administration, sociology, psychology, and other social science disciplines. many researchers have examined the organizational change theories; organizational and environmental factors; capacity of organizations to readily and successfully change (kasten, 2006). competitive pressures caused by globalization, deregulation, and discontinues technological changes seem to have forces many organizations into considering radical change as a way of surviving and growing (huy, 2002). although much research has been done on organizational change, little has been done on changing organization to reach environmentally sustainable airport management. ii. organizational change every organization needs to change to survive in a developing and competitive environment. in the past, managers aimed for success in a relatively stable and predictable world. however, in the hyper turbulent environment of the 21st century, managers are confronting an accelerating rate of change. they face constant innovation in computing and information technology and a chaotic world of changing markets and consumer lifestyles. today's learning organization must be able to transform and renew to meet these changing forces (oswick et.al., 2005). organizational change can simply be defined as new ways of organizing and working (dawson, 2002). the concept of organizational change is in regard to organization-wide change might include a change in mission, restructuring operations (e.g., restructuring to self-managed teams, layoffs, etc.), new technologies, mergers, major collaborations, "rightsizing", new programs such as environmental management system, total quality management, re-engineering, etc. (mcnamara, 2009). as a growing area of study, organizational change consists of elements both within and outside an organization. some of the main external factors are; government laws and regulations (world agreements and national policies on pollution and the environment), globalization of markets and the internationalization of business (the need to accommodate new competitive pressures both in the home and overseas), major political and social events (for example, september 11), advances in technology (new generation aircraft), organizational growth and expansion (increasing air travel demand causes the need for increasing capacity and expansions). four internal triggers to change that are generally identified as; technology (computerization of management accounting, scheduling, and information systems), primary task (for example, in shifting away from the main service of a company into a new major field of core business), people (development of new human resource management or training programmes), and administrative structure (restructuring authority relationship and responsibilities) (dawson, 2002). organizational change for the environmentally sustainable airport management emerging markets journal | p a g e | 14 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu change management becomes increasingly important for organizations in an environment where competition and globalization of markets are ever intensifying. it could be argued that many organizations face a problem situation in which they either “change or die” (cao & mchugh, 2005). changing could have two meanings; first the changes to be managed lie within and are controlled by the organization. the second, is the response to changes over which the organization exercises little or no control (e.g., legislation, social and political upheaval, the actions of competitors, shifting economic tides and currents, and so on) (nickols, 2007). during the last decade, researchers concerned with organizations and the natural environment have investigated why firms respond to ecological issues. several studies have identified motives for corporate greening such as regulatory compliance, competitive advantage, stake pressures, ethical concerns, critical events and top management initiative (bansal & roth, 2000). iii. sustainable airport management growing travel demands have resulted in many airports reaching capacity, leading them to initiate expansion plans. it is, however, becoming increasingly difficult to secure planning approval for new infrastructure airports because of the many conflicts with the requirements of environmental regulators and concerns of local residents. growth in airports means more pollution and energy consumption, leading to greater operating costs and new emerging capacity threats. hence, it is necessary to look for new measures to reduce the environmental impacts and improve energy efficiency for future developments (avail corporation, 2008). congestions, attributed to airport capacity constraints, result in extra energy consumption and generate unnecessary increases in aircraft emissions. expansion is often fraught with additional costs such as relocation compensation, environmental degradation and land limitations etc. hence, apart from meeting future growth in air traffic, good long term planning is necessary to minimize the impact and costs of current and future expansions, especially on the environment. thus, cost efficiency and addressing environmental needs share a common platform where strong correlation amongst the two entails that success in either goals is not mutually-exclusive, but rather, is mutually reinforcing (cai, 2008). sustainable airport development is an exercise in balancing the demands of the varied strands of sustainability – i.e. economic, social, environmental and ecological. it falls within the overall concept of sustainable transport, can be defined as ‘satisfying current transport and mobility needs without compromising the ability of future generations to meet these needs’. it is a concept that broadly applies to all areas of effectively running an airport – including finance, operations, human resources, community and investor relations, the environment et cetera. to attain its goals, sustainability as applied to transport has to meet the following basic conditions: (1) the rates of use of renewable resources not exceeding their rates of generation; (2) the rates of use of non-renewable resources not exceeding the rate at which sustainable renewable substitutes are developed and (3) the rates of pollution emission not exceeding the assimilative capacity of the environment (amaeshi & crane, 2006). airport sustainability practice is a broad term that encompasses a wide variety of practices applicable to the management of airports. such as: (acrp, 2008) • protection of the environment, including conservation of natural resources. • social progress that recognizes the needs of all stakeholders. organizational change for the environmentally sustainable airport management emerging markets journal | p a g e | 15 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu • maintenance of high and stable levels of economic growth and employment. the growth of air travel and the consequential need for expansion of many airports, together with heightened press and public awareness of environmental issues mean that the aviation sector is under heightened scrutiny; day-today activities as well as more ambitious projects often become high profile. however, the industry has proactively responded through individual activities as well as through the development of the sustainable aviation initiative, which is an industry endorsed comprehensive program to reduce aviation’s negative impacts (aoa, 2006). airport operators around the world share the same business goals – to provide a safe, secure and sustainable operational efficient environment. on the one hand they want the capability to detect and respond to threats more quickly; to mitigate risk. on the other, they want to drive productivity improvement and reduce costs. regardless of location and size, airport operators share the same business agenda how to do more with fewer resources? (has, 2007) airports are now aware of the importance of being environmentally friendly. the major forces driving the environmental programmes at airports can be divided into three categories –community, government and internal. and although all are very different, none can really be viewed without taking into account the context of the others and different pressures tend to act on different environmental issues (oh, 2008). neighbouring communities: in some regions, communities and society at large can have a very keen sensitivity to environmental issues and may take a proactive stance against developments perceived to make a significant contribution to an environmental issue. such environmental pressure on an airport operator is usually most prevalent when planning permission is required for infrastructure development, such as a new terminal or runway. recent developments, such as anticlimate change protesters may adversely affect airport operations (aci, 2009). aircraft noise when it comes to environmental pressure from the community; it remains the primary concern for most people living near airports in all regions of the world. most airports have dedicated call lines for noise complaints and many have dedicated staff and sophisticated noise management schemes. the community is an important stakeholder and a level of partnership must be fostered on an on-going basis. internet tools were also developed to allow residents to examine flight patterns and noise levels in fine detail. the importance of neighbourhood and properly informed community are more likely to take into account the benefits of aviation when it comes to assessing aviation infrastructure proposals (oh, 2008). government pressure: mandatory requirements and other regulation can take a variety of forms from international agreements and national legislation to conditions attached to local planning permission permits. at the time of writing, regulations in many jurisdictions are evolving and substantial development should be expected in upcoming years. a range of regulatory requirements mandates an airport operator to tailor the airport’s program according to international, national and sometimes local requirements (aci, 2009). as regulators, governments often target airports for environmental effects that are not apparent to the public. pollution of the air, water and soil are generally in the forefront of concern and are subject to standards and laws on local air quality and water and soil contamination. governments can require that airports demonstrate compliance with local pollution limits, impose penalties for non-compliance and require the implementation of mitigation programmes (oh, 2008). organizational change for the environmentally sustainable airport management emerging markets journal | p a g e | 16 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu internal pressure: airports operating under a responsible business model also set their own environmental targets and strive to achieve them. saving energy and the associated emissions can be a direct cost saving and the implementation of smart building technology might mean reductions in whole-life-cycle costs. in many cases there is a strong economic case for using environmentally friendly technologies. wildlife mitigation and water management programmes, equipment modernisation and habitat land-care work can require significant spending without financial returns. these may be needed as a result of government requirements or as environmental conditions attached to a planning consent, but in today’s environmentally conscious world, an everincreasing number of airports are volunteering such mitigation programmes as an integral part of a project proposal (oh, 2008). iv. research the goal of this paper is to make airport operators to understand the role of air transportation in a sustainable society. this paper could be a guide to the achievement of environmentally sustainable development at air transportation by setting a standard for airports in relation to environmental issues; stimulating further improvements in environmental performance by determining the roles and responsibilities in an airport organization. the aviation sector has been relatively free of major environmentally driven regulation, in part because the sector is considered a key contributor to driving the global economy and the only mode of rapid trans-national travel on offer to customers. projected growth in air travel and the associated environmental impacts mean that policy makers are turning their attention to the aviation sector (aoa, 2006). in this study, data were collected via semistructured interview with the responsible person at state airport authority and the i̇stanbul, atatürk airport executive. questions were try to evaluate how much the airport operators aware the changing world needed organizational adaptation and to illustrates the structure of organizational change for environmentally sustainable airport either mandated by legislation or market forces. management of turkish airports and mission of regulation and control of turkish airspace are performed by general directorate of state airports authority (dhmi). dhmi that has to perform its undertaken tasks according to international civil aviation rules and standards is in this sense a member of international civil aviation organization (icao), which was launched according to civil aviation agreement that entered into force to ensure safety of life and property at international aviation and to provide regular economic working and progress (dhmi, 2010). directorate general of state airports authority (dhmi) provides necessary terminal and passenger services to about 35 million domestic and international flights passengers preferring airway for their travels, and air traffic services to local airline companies as well as more than 361 foreign commercial airline companies. as part of air navigation and airport management services by general directorate of state airports authority (dhmi), traffic of airplanes and passengers, which are offered service, has increased significantly in recent years. especially, there has been significant progress at international flight airplane and passenger traffic of the international airports. dhmi operates 40 airports, as seen in exhibit 1, istanbul/ataturk airport is among the leading airports of europe due to increase in the international traffic (dhmi, 2010). organizational change for the environmentally sustainable airport management emerging markets journal | p a g e | 17 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu exhibit 1 airports operated by dhmi source: www.dhmi.gov.tr the research results show that, airports under the control of dhmi does aware of the importance of to be environmentally sustainable. however, today they focus on economic prosperity, quality improvement; in the future they are planning to identify environmental sustainability and corporate social responsibility practices. as environmental issues are voluntaryand airports have monopolistic power in their region, internal factors are not encourage the airport operators to change their organizations structure focusing on environmental practices. if they are affected to cgange by internal factors the changes can be under the control of the organization. the external factors, especially government regulations, may force the airport operators to the organizational change for the environmental performance. airport operators do not have a department specifically responsible for the environmental programs. aircraft noise, wildlife protection, water and soil resources protection issues are accomplished under the different departments’ responsibilities. the implementation of sustainability practices at airports is needed to be determined for each operation and given under the responsibility of a department with specialized personnel. the answer for the question of the reasons behind the no/slow implementation of environmentally sustainable practices are given as; first lack of funding, then lack of management support and the lack of trained personnel. as a result of this situation the organization does not train its staff and tenants yet. additionally, they do organizational change for the environmentally sustainable airport management emerging markets journal | p a g e | 18 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu not have environmental (annual) report for the airport operations’ environmental performance. it is found that the regulatory adoption is the key factor for the organizational change at airports for the environmental performance implementation. v. conclusion the global trend of privatization and commercialization rises the growing awareness among airports of the concept of sustainable development with environmental programs. it is found that organizational response to environmental impacts of the airport operations including the market forces on organizational change mandated by national /international regulations.organizational change driven by regulatory agencies is relatively easy to accomplish because of the direct effects of policies on organizations. organizational resistance to change may be caused by poorly planned implementation of change initiatives, funding barriers, lack of staff, lack of environmental culture, time and technology. for the future, not only regulatory forces but also global issues, community/stakeholder pressures, ethical concerns and top management initiatives will be the motives for organizational change with responsible roles at appropriate departments. when the airport operators have a department with overall responsibility for environmental sustainability they will have environmental manager, environmental program, environmental culture, environmental training program, environmental reports to the stakeholders and research and development contributions. these changes are essence for the environmentally sustainable airport management. organizational change for the environmentally sustainable airport management emerging markets journal | p a g e | 19 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu vi. references 1. aci. 2009. airports council international world environment standing committee. 1st edition. guidance manual: airport greenhouse gas emissions management. available from: http://www.airports.org/aci/aci/file/aci_priorities/environment/2009/aci%20guidance%20manual%20 %20airport%20greenhouse%20gas%20emissions%20management.pdf 2. acrp. (2008), airport cooperative research program synthesis 10, airport sustainability practices a synthesis of airport practice, project 11-03, topic s02-02, transportation research board washington d.c.: usa. 3. amaeshi, kenneth m. and andrew crane. (2006), stakeholder engagement: a mechanism for sustainable aviation, corporate social responsibility and environmental management, 13, 245–260. 4. aoa. (2006), airport operators association. environmental guidance manual for airports. available from: http://www.aoa.org.uk/publications/aoa_final_nov2006.pdf 5. avail corporation. (2008), sustainable airport management. available from: http://www.cleanairports.com/reports/bejingagenda%20_2_.pdf 6. bansal, p. and roth, k. (2000), why companies go green: a model of ecological responsiveness, academy of management journal, vol. 43, no. 4, pp.717-736. 7. cai, 2008 changi world, issue 01 caiaviation economics unit. available from: www.cai.org/brochure/newsletter003.pdf 8. cao, guangming and marie mchugh. (2005), a systemic view of change management and its conceptual underpinnings, systemic practice and action research, vol. 18, no. 5. 9. dawson, patrick. (2002), understanding organizational change: the contemporary experience of people at work, london, gbr: sage publications ltd. dhmi, 2010 available from: http://www.dhmi.gov.tr/dhmipageen.aspx?pageid=34 10. fnl, (feapnewsletter). (2009), managing organizational change, a series of educational articles. available from: www.healthsystem.virginia.edu/internet/feap/newsletters/managing-org.-change.pdf 11. has. (2007) honeywell airport solutions. airport operations and system integration. available from: http://www.airport-int.com/article/airport-operations-and-systems-integration.html 12. huy, q.n. (2002), emotional balancing of organizational continuity and radical change: the contribution of middle managers, administrative science quarterly, vol. 47, no. 1,pp.31-69. 13. kasten, jennifer murphy. (2006), determinants of organizational change: the impact of institutional and market forces on compliance with federal regulations in opioid treatment programs. north carol ina organizational change for the environmentally sustainable airport management emerging markets journal | p a g e | 20 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu state university, raleigh. available from: http://www.lib.ncsu.edu/theses/available/etd-10302006164956/unrestricted/etd.pdf 14. mcnamara, carter. (2009), basic context for organizational change. available from: http://www.managementhelp.org/mgmnt/orgchnge.htm 15. nickols, fred, (2007), change management 101 a premer. available from: http://home.att.net/~opsinc/change.pdf 16. oh, xavier. 2008. special report: the environment. airport world. 17. oswick, c., david grant, grant michelson, nick wailes. (2005), looking forwards:discursive directions in organizational change, journal of organizational change management, vol.18, no.4. emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.year.id | http://emaj.pitt.edu introducing iso 9000 to the kazakhstan banking industry : a case study hatice akdağ ph.d kadir has university | e-mail: hatice.akdag@khas.edu.tr abstract banks in kazakhstan have experienced a lengthy period of political stability and economic growth. together with rational approach to banking and finance policy, this has helped to push kazakhstan’s banking system to a higher level of development. it is now widely known that the kazakh market is highly attractive to foreign investors. the scope for profits is growing, and country risk is comparatively low. as the kazakh banks face a shortage of long-term funds and access to existing resources is influenced by political factors, capital drawn from the international markets will play a decisive role in their growth. this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.2 | http://emaj.pitt.edu mailto:hatice.akdag@khas.edu.tr http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ hatice akdağ ph.d p a g e | 12 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.2 | http://emaj.pitt.edu introducing iso 9000 to the kazakhstan banking industry a case study hatice akdağ ph.d i. introduction banks in kazakhstan have experienced a lengthy period of political stability and economic growth. together with rational approach to banking and finance policy, this has helped to push kazakhstan’s banking system to a higher level of development. it is now widely known that the kazakh market is highly attractive to foreign investors. the scope for profits is growing, and country risk is comparatively low. as the kazakh banks face a shortage of long-term funds and access to existing resources is influenced by political factors, capital drawn from the international markets will play a decisive role in their growth. at the same time heavy competition in the domestic market is forcing kazakh banks to actively seek out opportunities in other cis countries (world bank, 2008). given this trend, investments in the kazakh banking sector are to some extent “transitory”. for international investors this has two negative implications. the first is that kazakhstan country risk is compounded by other, less well-defined risks, when investors prefer to choose their own level of risk. the second negative implication is that kazakhstan banks have only limited experience in managing risk outside their country’s borders, and in the past their response to crises has been weak. according to the spero news kazakhstan has been hit hard by the recent banking and real estate crisis. kazakhstan’s gdp grew by 10.6 percent in 2006 but slowed to 8.7 percent in 2007, and according to the forecasts of local analysts, will slow even further to 6 percent in 2008. inflation at the same time grew from 8.6 percent in 2006 to 18.8 percent in 2007. the main factor that led to worsened economic conditions was the local credit factor triggered by the summer’s sub prime woes in the united states and the subsequent global liquidity crunch. the crisis has hit hard kazakhstan’s praised banking sector and exposed its reliance on cheap foreign credit and overexposure to the speculative construction and real estate sectors. as the market boomed and reached its peak in the summer of 2007, the presence of the bubble was obvious and widely discussed (spero news, 2007). after the crisis hitting the country h.e. nursultan nazarbayev, president of republic of kazakhstan, stressed on the need of an establishment of an effective mechanism for systematic and prompt government responses to any threats of financial instability and the severe need of bolstering the international markets’ confidence in kazakhstan’s economy. he continued his speech by listing some major corrections and needs in the system. one of the most important issue was that as well as the national bank and the ministry of finance, the financial supervision agency should be improving the competitiveness and stability of the nation’s financial system, particularly in banking sector. meanwhile, the process of regulatory intervention should be extremely transparent and predictable to the entire banking sector. the president continued his speech by stressing the importance of developing a system of rapid response measures for contingencies (turkish weekly, 2008). this paper aims to explore the best practice for kazakhstan banking industry. according to the research the banks in kazakhstan face two major problems; one is the level of satisfaction of customers and the second problem is deterioration of service quality. both of these problems lead to a huge loss in the bank’s quality and continuous improvement. this paper reports on the results of a pilot stuffy conducted among a sample of banks within the city almaty. this paper aims to answer the following questions: introducing iso 9000 to the kazakhstan banking industry : a case study emerging markets journal | p a g e | 13 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.2 | http://emaj.pitt.edu 1. which quality management practices determine the bank’s quality strategy? 2. what is the relationship between implementation of quality management practices and iso 9000 certification? 3. what is the relationship between implementation of quality management practices and believing that iso 9000 certification guarantees the quality of the product or service supplied? ii. analysis of method in order to achieve a proper understanding of the current situation of kazakhstan banking sector a literature review has been carried out. in addition to the literature a questionnaire was constructed and used in this study. the questionnaire was adopted from the article written by quazi and padibjo (1998), which report on sme’s in singapore. the questionnaire uses the “5lickert scale”. the sample group for this paper was chosen to be the banking industry of kazakhstan. the questionnaires where translated to russian language to help better understanding of the questions and to increase the respondent rate and quality of data. fifteen banks out of eighteen banks were reached. using primary data techniques and face-to-face interviews with key personnel within the banking industry collected total of 38 questionnaires. the questionnaire is structured in three parts. the first part is related to the general position of the bank, the second on 42 variables associated with quality management practices, which were also divided into eight subheadings, and the last part on information concerning the respondent. a factor and reliability analysis is used for the analysis of the 42 variables associated with quality management practices. factor analysis; is a method of transforming the original variables into new, non-correlated variables, called factors (malhotra, 2007). this is used to identify key points emerging from the questionnaire; the reliability analysis tests the validity of these key points, which are then used to formulate a number of hypotheses. in addition, regression analysis is also used to evaluate the direction and effect of the relationship between iso 9000 and the key points resulting from the factor analyses relating to the quality management practices. iii. methodology general profile of the banks included in the research the general profile of the banks included in the research is given in table i. unfortunately none of the banks have experienced the iso certificate. even though no bank has the certificate 89.5% of the responses show that they to believe in that iso 9000 standard guarantees the quality of service supplied in banks. the quality management practice criteria had a general reliability (cronbach ), which relates to the variation of 76.47%. 3.1 results of the factor analysis related with quality management practices the 42 variables associated to quality management practices were reduced into a new set of salient variables by the factor analysis. factors with eigenvalues greater than 1.0 are retained. inspection of scree plot and eigenvalues enabled the analysis to reduce the 42 quality management variables into 11 factors. the factors and corresponding quality management practices are shown in table ii. vedat akman ph.d p a g e | 14 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.year.id | http://emaj.pitt.edu variables n % variables n % certification date 1998-2000 2001-2003 2004-2006 no certification missing answer total 0 0 0 38 0 38 0.0 0.0 0.0 100.0 0 100.0 certification time less than 1 year 1-2 year 2-3 year more than 3 years no certificate missing answer total 0 0 0 0 38 0 38 0.0 0.0 0.0 0.0 100.0 0.0 100.0 variables n % variables n % quality certificate iso 9001 iso 9002 iso 9003 iso 14000 no certificate owned total 0 0 0 0 38 38 0.0 0.0 0.0 0.0 100.0 100.0 iso 9000 guarantees quality yes no missing answer total 34 4 0 38 89.5 10.5 0 100 variables n % variables n % table i: general profile of the responding firms factor quality management practices factor 1 mpq6 (0.805) i always incorporate quality factors in my product/service design cs1 (0.731) i collect data to monitor changes in my customer satisfaction cs2 (0.737) i systematically ask a customer what they expect in my product/service cs3 (0.848) i systematically ask my customers if they are satisfied with the product/service they purchased from me cs5 (0.725) i look for the cause when i lose a customer factor 2 sp3 (-0.913) my strategic plan is linked to quality values hr4 (0.665) i reward staff who help improve my product and service quality introducing iso 9000 to the kazakhstan banking industry : a case study emerging markets journal | p a g e | 15 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.2 | http://emaj.pitt.edu qr2 (0.693) if we implement a new business/operational procedure, we collect and monitor information to determine the extent to which it is better that the previous procedure qr4 (0.672) i can document the financial performance of my business compared to otherbusinesses in the same industry factor 3 in1 (0.613) i carefully collect data on all facets of my business mpq1 (0.771) i continually make improvements in my products and services mpq2 (0.672) in the past year i have introduced at least one new product/service to my customers mpq3 (0.790) i have improved at least one feature of my product/service in the past year mpq4 (0.801) i monitor all production processes and introduce continuous improvement whenever possible factor 4 l3 (0.750) i enforce total quality commitment to all my staff in all operations sp2 (0.770) my business has clear quality goals factor 5 sp1 (0.874) i do regular strategic planning qr1 (0.615) i can document the technical quality of my product/service as compared to other competitors factor 6 hr3 (0.738) i encourage personal growth of my staff hr5 (0.706) each member in my business is encouraged to develop new ways to do theirjob better hr6 (0.625) all staff in my business understand how their tasks fit into an overall plan of things hr7 (0.686) i ensure that all my staff are focused on continuous improvement effort in all areas factor 7 bus1 (0.884) the profitability of my business has increased in the past three years primarily due to our quality consciousness factor 8 l5 (-0.803) i am trained in total quality management mpq5 (0.666) i use statistical control to monitor my production processes factor 9 l1 (0.615) i personally conduct regular reviews of quality performance on my product/service in3 (0.781) key performance figures are always available to my managers for decision making factor 10 l4 (0.779) i give quality issues top priority as criteria when making decisions factor 11 hr8 (0.767) all my staff receive appropriate training and are able to do more than one task table ii. quality management practices and corresponding factors according to the rotated component matrix and the table quality management practices corresponding factors (table ii) the factors were formalized as follows: factor 1: customer satisfaction as shown in table ii the most frequent components are piled up under the customer satisfaction topic. also the highest loading is given to cs4 (refer to table ii.), which indicates that the employees in the banking sector systematically ask their customers if they are satisfied with the product/service they have purchased from them. on the other hand the second highest loading was given to the component related with the management process quality and states that they always incorporate quality factors in their product/service design. factor 2: quality results hatice akdağ ph.d p a g e | 16 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.2 | http://emaj.pitt.edu the highest loading is given to the statement “if we implement a new business/operational procedure, we collect and monitor information to determine the extent to which it is better than the previous procedure”. the interesting point with this factor is that there is a negative loading, which refers to an adverse relationship with the factor. that is while taking care of the quality results the strategic planning is not linked to it. factor 3: management process quality the third factor is related with the management process quality as four highest loading s where given under this topic. the highest loading is stating that the respondents monitor all production processes and introduce continuous improvement whenever possible. factor 4: strategic planning and leadership this factor has only two components, where one is related to strategic planning and is the highest load. the second one is related with leadership. the components of this factor state that their business has quality goals plus they enforce total quality commitment to all the staff in all operations. factor 5: strategic planning and quality results the fifth factor also mentions about strategic planning but this time it is supporting the quality results. factor 6: human resources this factor states that they encourage personal growth of the staff, each employee is encouraged to develop new ways to do their job better, all staff understand how their tasks fit into an overall plan of things, they ensure that all staff are focused on continuous improvement effort in all areas. factor 7: business outcome comparative the seventh important factor is related with the business outcome comparative. there is only one component included in this factor, which is stating that the profitability of the business has increased in the past three years primarily due to their quality consciousness. factor 8: leadership in the eighth factor the leaders point out that they are trained for total quality but there is no evidence for that training. factor 9: information analysis: the information analysis is mentioned in the ninth factor where it is clear that this topic is supported by the leadership. as the components included in this factor are “i personally conduct regular reviews of quality performance on my product/service” and “key performance figures are always available to my managers for decision making”. factor 10: leadership2 this factor is supporting factor 8. there is only one component listed in this factor. the factor stresses on that they give quality issues top priority as criteria when making decisions. factor 11: human resources 2 this is a support to factor 6. similar to factor 10 this factor also has only one component listed which infer that all their staff receive appropriate training and are able to do more than one task. introducing iso 9000 to the kazakhstan banking industry : a case study emerging markets journal | p a g e | 17 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.2 | http://emaj.pitt.edu 3.2 multiple regression analysis multiple regression analysis was used to figure out the relationship between implementation of quality management practices and believing that iso 9000 certification guarantees the quality of the product or service supplied. so the dependent variable used in this analysis is the idea that iso certification guarantee’s quality and the independent variables are the resulting factors. the hypothesis tested in this paper is listed and analyzed as follows: hypothesis 1: h0: there is no relationship between implementation of quality management practices and believing that iso 9000 certification guarantees the quality of the product or service supplied. h1: there is a relationship between implementation of quality management practices and believing that iso 9000 certification guarantees the quality of the product or service supplied. hypothesis 2: h0: there is no relationship between implementation of quality management practices and iso 9000 certification. h1: there is a relationship between implementation of quality management practices and iso 9000 certification. 3.2.1 evaluation of hypothesis 1: according to table iii (anova table)) the significance value (0.068) is slightly greater than 0.05, which means that the independent variables (factors) do not explain the total variation very well according to the dependent variable (belief in iso guaranteeing quality). table iii: anova table for banks’ belief in iso certificate guaranteeing quality. anovab 1.650 11 .150 2.022 .068a 1.929 26 7.419e-02 3.579 37 regression residual total model 1 sum of squares df mean square f sig. predictors: (constant), regr f actor score 11 for analysis 1 , regr factor score 10 f or analy sis 1 , regr f actor score 9 f or analysis 1 , regr f actor score 8 f or analy sis 1 , regr f actor score 7 f or analysis 1 , regr f actor score 6 for analysis 1 , regr f actor score 5 f or analysis 1 , regr f actor score 4 for analysis 1 , regr f actor score 3 f or analysis 1 , regr f actor score 2 for analysis 1 , regr f actor score 1 f or analysis 1 a. dependent variable: beleif in isob. hatice akdağ ph.d p a g e | 18 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.2 | http://emaj.pitt.edu according to the coefficients table shown in table iv, factor 5, factor 9 has a t-value greater than +2 and factor 8 has a t-value greater than –2. factor 5 relates to strategic planning and quality results, which infer that they do strategic planning, and they do compare their quality results with their competitors. factor 9 is related with information analysis and it states that they regularly review quality performance of their service. on the other hand factor 8 is related with leadership, which indicates that they are trained for total quality management. these three factors are contributing to the 11.946% variance totally. the estimated regression equation for banks believing in iso certificate guaranteeing quality is: belief in iso= 1.105+ (0.111f5-9.12e02f8+0.119f9) coefficientsa 1.105 .044 25.015 .000 4.927e-02 .045 .158 1.100 .281 1.724e-02 .045 .055 .385 .703 5.935e-02 .045 .191 1.325 .197 -4.97e-02 .045 -.160 -1.110 .277 .111 .045 .355 2.469 .020 -5.77e-03 .045 -.019 -.129 .898 -1.66e-02 .045 -.053 -.371 .714 -9.12e-02 .045 -.293 -2.036 .052 .119 .045 .382 2.656 .013 -2.87e-02 .045 -.092 -.640 .528 8.746e-03 .045 .028 .195 .847 (constant) regr factor score 1 f or analy sis 1 regr factor score 2 f or analy sis 1 regr factor score 3 f or analy sis 1 regr factor score 4 f or analy sis 1 regr factor score 5 f or analy sis 1 regr factor score 6 f or analy sis 1 regr factor score 7 f or analy sis 1 regr factor score 8 f or analy sis 1 regr factor score 9 f or analy sis 1 regr factor score 10 f or analy sis 1 regr factor score 11 f or analy sis 1 model 1 b std. error unstandardized coef f icients beta standardi zed coef f icien ts t sig. dependent variable: beleif in isoa. introducing iso 9000 to the kazakhstan banking industry : a case study emerging markets journal | p a g e | 19 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.2 | http://emaj.pitt.edu table iv: coefficients table for banks belief in iso certificate guaranteeing quality. 3.2.2 evaluation of hypothesis 2: the second hypothesis was tested by using multiple regression analysis but unfortunately as there is no bank certified by iso the test was deleted and the statistics could not be computed. iv. conclusion and implication for further research the aim of this paper was to explore the best practice for kazakhstan banking industry. in order to follow the aim three important questions were analyzed. these were to determine which quality management practices determine the bank’s quality strategy, to figure out the relationship between implementation of quality management practices and believing that iso 9000 certification guarantees the quality of the product or service supplied and to find the relationship between implementation of quality management practices and iso 9000 certification. the first question was answered by using the factor analysis. factor analysis reduced the 42 quality management practices into 11 important factors, which were used to determine which quality management practices determine the bank’s quality strategy. customer satisfaction was the first and most important factor and human resources and leadership the least. this was not a common result in quality management. as it is clear that leadership should be in highest priority. the second and third questions were answered by the multiple regression analysis. two hypotheses were used to evaluate each relationship stated in the paper. the first evaluation from multiple regression analysis identified that application of the quality management practices slightly depend on the belief of iso certificate guaranteeing quality. there were three factors, which were found to have relation with this belief. these factors were strategic planning and quality results, leadership and information analysis. the rest had no relationship, where this was not that surprising as none of the banks had the iso certificate which means that they are not aware of its advantages. the last question unfortunately could not be tested, as there is no bank certified by iso the test was deleted and the statistics could not be computed. that is why this paper could not answer whether if there is a relationship with iso certificate and application of quality management practices. according to the findings above there could only be a recommendation to the banks in kazakhstan should at least start to learn about quality by getting the appropriate iso 9000 certificate. this will be the first step for understanding, learning and meeting the term hatice akdağ ph.d p a g e | 20 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.2 | http://emaj.pitt.edu quality. even though customer satisfaction was found to be the most explained factor still it had no relationship with application of quality management practices. another interesting finding was that leadership factor was listed down below the list of factors as it can be said that leadership is not also well defined and supportive in this industry. for any company to compete in the world market they should at least have the initial process of quality. so this paper recommends the banking industry to at least start climbing the quality steps to satisfy the external and internal customers with the help of iso certificate. regarding implication for further research the findings can be compared with other world banks that are certified and see if there is any difference between each type. v. reference list 1. malhotra, n. k. (2007), marketing research, an applied orientation, 5th edition, prentice hall, new jersey, pp. 505. 2. quazi, h.a. & padibjo, s.r. (1998) “a journey toward total quality management through iso 9000 certificationa study on small-and medium-sized enterprises in singapore”, international journal of quality & reliability management, vol. 15, issue 5, pp. 489-508. 3. spero news, (2007) “lessons from kazakhstan’s real estate crisis” available from www.speroforum.com/site/article (accessed 13.02.2008). 4. turkish weekly, (2008) “speech of h.e.nursultan nazarbayev to the nation”. available from www.turkishweekly.net (accessed 13.02.2008). 5. world bank news release, (2008) “the world bank issues the statement on recent economic developments in kazakhstan”, available from www.worldbank.org.kz (accessed 10.02.2008). http://www.speroforum.com/site/article http://www.turkishweekly.net/ http://www.worldbank.org.kz/ emerging markets journal heuristic clustering algorithms in ad hoc networks dr. nevin aydın artvin çoruh university | e-mail: nevin.aydin@gmail.com abstract the clustering allows the geographical region to be covered into small zones in which each zone can be handled with a powerful node called clusterhead. the clusterheads have direct communication link with each of its members whereas the member nodes of a cluster must go through the clusterhead to communicate with each other. since choosing clusterheads optimally is an np-hard problem, existing solutions to this problem are based on heuristic (mostly greedy) approaches. in this paper, we present three well-known heuristic clustering algorithms: the lowest-id, the highest-degree, and the node-weight. keywords: clustering algorithms, clusterhead, heuristics, ad hoc networks new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.39 | http://emaj.pitt.edu | mailto:nevin.aydin@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.39 | http://emaj.pitt.edu heuristic clustering algorithms in ad hoc networks emerging markets journal | p a g e |77 heuristic clustering algorithms in ad hoc networks dr. nevin aydin i. introduction wireless networks provide support for two types of network topologies: infrastructured and infrastructureless. the cellular networks, as an example for an infrastructured network, have emerged as the most widely used wireless networks that can support mobile users. the limitations of the infrastructure networks initiated the need for wireless networks without fixed infrastructures. such networks are called mobile multihop radio networks, or ad hoc networks or peer-to-peer networks. these are in contrast to wireless networks that depend on a pre-existing fixed infrastructure of base stations (as in the case of cellular networks) (see figure 1). in ad hoc networks, there is no such infrastructure and these networks are created dynamically on-the-fly in an ad hoc way. they play a critical role in places where a wired (central) backbone is neither available nor economical to build, such as law enforcement operations, battle field communications, disaster recovery situations, and so on. these situations demand a network where all the nodes including the base stations are potentially mobile, and communication must be supported untethered between any two nodes. a multi-cluster, multi-hop packet radio network architecture for wireless systems should be able to dynamically adapt itself to the changing network configurations. certain nodes, known as clusterheads, are responsible for the formation of clusters each consisting of a number of nodes (analogous to cells in a cellular network [6]. clusterheads are also responsible for maintenance of the topology of the network. unlike the base stations which are static entities, the clusterheads are mobile. clusterheads are responsible for managing the nodes and doing the resource allocation to all the nodes within that cluster, just as a bs of a particular cell in a cellular network. the remainder of the paper is organized as follows: section 2 provides the concept of clustering in ad hoc networks while section 3 discusses the heuristic clustering algorithms in detail. the paper is concluded in section 4. ii. clustering figure 1. cellular network. dr. nevin aydın p a g e |78| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.39 | http://emaj.pitt.edu the concept of dividing the geographical region to be covered into small zones has been presented implicitly as clustering in the literature [10]. any node can become a clusterhead if it has the necessary functionality, such as processing and transmission power. nodes register with the nearest clusterhead and become members of that cluster. two nodes can communicate if they are within the transmission range of each other. these nodes are called neighbors of each other. clusters may change dynamically, reflecting the mobility of the underlying network. due to the dynamic nature of the mobile nodes, their association and dissociation to and from clusters perturb the stability of the network and thus reconfiguration of clusterheads is unavoidable. this is an important issue since frequent clusterhead changes adversely affect the performance of other protocols such as scheduling, routing and resource allocation that rely on it. since choosing clusterheads optimally is an np-hard problem [3], existing solutions to this problem are based on heuristic (mostly greedy) approaches and none attempts to retain the stability of the network topology [3, 7]. we believe that a good clustering scheme should preserve the graph structure as much as possible when nodes are moving and/or the topology is slowly changing. otherwise, re-computation of clusterheads and frequent information exchange among the participating nodes will result in high computation and communication overhead. iii. heuristic clustering algorithms there are several heuristics proposed for selecting clusterheads in ad hoc networks. the most well-known ones include: (1) the highest-degree heuristic, (2) the lowest-id heuristic, and (3) the node-weight heuristic. the lowest-id and the highest-degree were the two clustering algorithms that were based on the link-cluster architecture. figure 2. lowest-id and highest degree heuristics example. iii-1. the lowest-id heuristic the lowest-id, also as known as identifierbased clustering, was originally proposed by baker and ephremides [1, 2, 8]. this heuristic assigns a unique id to each node and chooses the node with the minimum id as a clusterhead. thus, the ids of the neighbors of the clusterhead will be higher than that of the clusterhead. a node is called a gateway if it lies within the transmission range of two or more clusterheads. gateway nodes are generally used for routing between clusters. figure 2 shows nodes 1 and 3 as clusterheads since both hold the lowest node id in their clusters and node 14 is a gateway node. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.39 | http://emaj.pitt.edu heuristic clustering algorithms in ad hoc networks emerging markets journal | p a g e |79 iii-2. the highest-degree heuristic the highest-degree, also known as connectivity-based clustering, was originally proposed by gerla and parekh [9, 11]. here the degree of a node is computed based on its distance from others. each node broadcasts its id to the nodes that are within its transmission range. a node x is considered to be a neighbor of another node y if x lies within the transmission range of y. the node with maximum number of neighbors, that is, maximum degree is chosen as a clusterhead and any tie is broken by the unique node ids. the neighbors of a clusterhead become members of that cluster and can no longer participate in the election process. since no clusterheads are directly linked, only one clusterhead is allowed per cluster. figure 2 shows a 15 node example, where nodes 1 and 3 are clusterheads since both have the highest number of neighbors. iii-3. the node-weight heuristic basagni et al. [4, 5] proposed two algorithms, namely the distributed clustering algorithm (dca) and the distributed mobility-adaptive clustering algorithm (dmac). in their approach, each node is assigned a weight (a real number >= 0) based on its suitability of being a clusterhead. a node is chosen to be a clusterhead if its weight is highest among all of its neighbors; otherwise, it joins a neighboring clusterhead. the smaller node id is chosen in case of a tie. the dca makes an assumption that the network topology does not change during the execution of the algorithm. thus, it is proven to be useful for ``quasi-static'' networks (when the nodes are either static or move very slowly). the dmac algorithm, on the other hand, adapts itself to the network topology changes and can therefore be used for any mobile network. iv. conclusions and future work in this paper, we have discussed the heuristic clustering algorithms in mobile ad hoc networks. clustering is essentially means partitioning the network into different clusters and allows these clusters to communicate with each other in a wireless medium efficiently in order to achieve a connected network for data communication. each cluster would be managed by a superior node called ``clusterhead'' and the election of these special nodes is similar to leader election algorithms in distributed systems. the heuristic algorithms discussed include the highest-degree heuristic, the lowest-id heuristic, and the node-weight heuristic. references baker, d.j. and ephremides, a. (1981) ``a distributed algorithm for organizing mobile radio telecommunication networks," proceedings of the second international conference on distributed computer systems,”april, pp. 476-483. baker, d.j. and ephremides, a. (1981), ``the architectural organization of a mobile radio network via a distributed algorithm," ieee transactions on communications com-29(11), november, pp. 1694-1701. basagni, s., chlamtac, i., and farago, a. (1997) ``a generalized clustering algorithm for peer-to-peer networks," proceedings of workshop on algorithmic aspects of communication (satellite workshop of icalp). dr. nevin aydın p a g e |80| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.39 | http://emaj.pitt.edu basagni, s. (1999) ``distributed clustering for ad hoc networks," proceedings of international symposium on parallel architectures, algorithms and networks, june, pp. 310-315. basagni, s. (1999) ``distributed and mobilityadaptive clustering for multimedia support in multihop wireless networks," proceedings of vehicular technology conference, vtc 1999-fall, vol. 2, amsterdam, september 19--22, pp. 889-893. black,u. (1999) mobile and wireless networks, prentice hall. chlamtac, i. and farago, a. (1999) ``a new approach to the design and analysis of peer-to-peer mobile networks," wireless networks, vol. 5, no. 3, may, pp. 149-156. ephremides, a., wieselthier, j.e., and baker, d.j. (1987) ``a design concept for reliable mobile radio networks with frequency hopping signaling," proceedings of ieee, vol. 75, no. 1, january, pp. 56-73. gerla, m. and tsai, j.t.c. (1995) ``multicluster, mobile, multimedia radio network," wireless networks, vol. 1, no. 3, pp. 255-265. joa-ng, m. and lu, i.-t. (1999) ``a peer-to-peer zone-based two-level link state routing for mobile ad hoc networks," ieee journal on selected areas in communications, august, pp. 1415-1425. parekh, a.k. (1994) “selecting routers in ad-hoc wireless networks,” in proceedings of the sbt/ieee international telecommunications symposium, august. emerging markets journal volume 1 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu interaction between the economic growth and the construction industry: a time series analysis on turkey (2000-2012) bilal kargı aksaray university e-mail: bilalkargi@gmail.com abstract in this study the relation between the economic growth and the construction industry has been tackled. while the growth the rate of the construction industry in the developing countries is more than the gdp growth rate, it is detected that the percent age it takes in the gdp of developed countries relatively diminishes. on the other hand the construction industry’s growth in the economic fluctuation periods, in the aftermath of a recession, is more than the gdp. these two proposals are tested by the quarterly data of 2000:01-2012:03 for turkey. additionally the relation between the economic growth and the construction industry is subjected to the granger causality test. keywords: economic growth, construction industry, time series analysis. this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://emaj.pitt.edu/ interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 20 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu interaction between the economic growth and the construction industry: a time series analysis on turkey (2000-2012) ph. d. bilal kargı i. introduction growth and progress sustain each other. while theoretically they can relatively grow apart in the long run, they have to complete on another to develop humane living conditions. while for the developed economies the continuation of growth and its effect on the improvement of the life quality of society are aimed; the production of capital stock that is necessary for the growth in the progress theory should be concentrated on. economic growth is defined as the increase of total output and to this end gross domestic product (gdp) data which is the indicator of everyone’s total income, is used (mankiw, 2010:191). the factors that affect the increase of total output according to solow (1956) are the accumulation of capital, technological advancements, and the rise in labor-force. economic growth is used generally about the improvement of humane living conditions and specifically for the economies where the accumulation of capital is not sufficient enough and the developing economies. accumulation of capital is a prerequisite for the geometric growth of economy which was dubbed as “take-off” by rostow (1960). the construction industry consists of every kind of building that is necessary for the physical needs of humans from dwelling to the structures that meet the economic need of humankind like roads, bridges, and harbors. in the developed world, especially in the aftermath of the world war ii, the construction industry had become a crucial economy policy to rebuild europe, its housing and infrastructure (lopes, 2011).the construction industry makes a hefty contribution to the economy as a whole as well as having an extensive connection to the other sectors of the economy (khan, 2008:281). while modern life keeps on recruiting people to the cities, the construction industry try to maintain an array of sustainable qualities. concordantly, bon and hutchison (2000) emphasize that the construction industry receives input from all manners of sectors mesoeconomically and underlines the construction industry’s sustainability as an assembly tier of this wide spectrum (for a general chart of these relationships see wibowo, 2009). “the inter-industry relationship” term was first coined by hirschman (1958). the forward and backward linkages of the construction industry are quite powerful. that is why it is closely related to the economic growth. in the traditional keynesian economy, investments -at least construction investmentsplay a role in the total demand and the sustainability of the economic growth in the short run (wigren and wilhelmsson, 2007:339). on the other hand, the construction industry is a labor-intensive industry when compared to others (hillebrandt, 2000; giang ve pheng, 2011). there are two fundamental hypotheses regarding the analysis of the relationship between the economic growth and the construction industry. the first one is as follows: “as the economy develops the slice that is occupied by the construction industry in the gdp decreases.” the second one is that “the parcel of construction industry in the gdp of developing countries increases.” additionally the third hypothesis, “ when talking about the periods of crisis in all country groups, the percent of construction industry in the gdp goes down in recession while it goes up in the aftermath of recession” can be tested. therefore it suggests a compliance with the general trend in the economy. but when these relationships are tested in different countries and in different country groups, the outcomes of the studies can both overlap with these hypotheses or contradict them. interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 21 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu ii. construction sector and turkey the empirical studies conducted on the developing countries have indicated that the construction industries in the said economies grow continuously. in the countries of this status, the constructions consist of a wide variety from industrial buildings to dwellings, from energy plants to state infrastructure investments. as an economy in this category, especially after 1980’s the construction industry in turkey has been continuously growing and developing. when tackling the period after 2000, the increase of gdp can be detected in the construction industry. it can also be detected that both the state’s and the private sector’s expenditure for construction increase. the economic crisis that took place in the beginning of 2000’s had a deep impact on all sectors including the banking industry and the construction industry. the economy that was contracted 3.35% year-on-year basis in 1999 had shown a 6.73% growth in 2000 and again went through a deeper trauma with a 5.68 % contraction in 2001. after the political pull these traumas in succession created, there was a growth trend up until 2008. in the same period the consumer price index relatively reached a stability compared with the previous periods and hovered around the 8-10% year-on-year basis. therefore in the period at hand, economy was relatively stable. the construction industry is handled as having three fundamental components: new buildings, renovations and materials. for each of these components there is plenty of input. input for the construction industry consists of many different materials, some supplied from turkey and some imported. in turkish economy the construction materials are exported to 200 countries (the biggest markets are iraq, germany, uae, great britain and usa) and the biggest percent consists of iron-steel products. while the industry’s worth was 4.1 billion us dollars in 2002, the export volume in 2011 was 19.7 billion us dollars. the industry lived through its biggest fluctuation in 2009 and contracted 33 % compared to 2008, its volume dropped down to 15.7 billion us dollars. in the importation of construction materials, the first is iron-steel with 2.2 billion us dollars; the second is cooling and heating units with 1.1 billion us dollars and third is electrical equipment with 1.1 billion us dollars. while turkey imports construction materials from 176 countries, the leading commerce partners of turkish economy are china, germany, italy and france. this continuously growing industry’s 2011 volume was 8.8 billion us dollars (data: tuik). according to the data, turkish economy in 2011 has a surplus in the construction material foreign trade. in 2010, the leader countries in the exportation of construction materials were usa with a volume of 70.8 billion us dollars; germany with a volume of 45.7 billion us dollars; and china with a volume of 33.1 billion us dollars making up the first three. turkey had been 30th in this ranking. in the importation of construction materials the first three countries were as follows: china with a volume of 109.5 billion us dollars; germany with a volume of 86.5 billion us dollars; italy with a volume of 51.8 billion us dollars. turkey was the 7th in the importation ranking (data: trademap). therefore because when the construction industry livens up, the material industry should also perk up, an effective improvement in the economy can be detected. therefore the construction industry has a pull force/ drag force for the material industry. to put in other words, the construction industry creates indirect employment together with the direct employment in the production of the buildings. from 2009(1) to 2012(3), the employment in the construction industry had increased 78.71%. the relationship of the construction industry that consists of primary expenses of cement, iron-steel, paint, other stones, timber, glass, ceramic and plastic materials (classification: tuik) and the gdp can be interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 22 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu observed in graph-1 (appendix-1). from 2002(1) to 2008(3) the growth continued even if there were slight fluctuations and a peak was reached. with the global recession turkey’s economy commenced a period of contraction after 2008(4). still in the 2012(3), the gdp in the period of 2008(3) couldn’t be reached. in this period up until 2008(3), the construction industry followed the same route as the gdp and it increased continuously. after the contraction in the 2008(4), the peak in 2008(3) was achieved once in 2011(2) but still the stability prior to 2008(3) couldn’t be attained. the relationship between the construction industry and the gdp is shown in the ratio change in graph-2 (in another illustration graph-3. appendix-2 and appendix-3). from the 51 quarters in the period, in 31 quarters the construction industry shows a higher growth ratio than the gdp. at the same time, the two variables moved in the same direction in 35 quarters. the best quarterly performance of gdp is 32.37% in 2003(3) (in the same quarter the construction industry grew 21.03%) and the worst quarterly performance of gdp is -30,20% (in the same quarter construction industry contracted by 28,53%). while the construction industry exhibited its best quarterly performance in 2000(2) with a growth of 41,63% (in the same quarter gdp was 6,10%,) and the worst quarterly performance of construction industry was in 2008(4) when it contracted 28,53% (in the same quarter gdp was -30,20%). in short the construction industry is highly susceptible to the gdp. the fluctuations in the gdp and the construction industry overlap. these relationships can be analyzed more efficiently with an econometric model. iii. literature review the models pertaining to the relationship between economic development and the growth of construction industry are generally created without taking into account (1) the development level of the countries (2) the general trend of the economy (3) temporal relations (the time span between the beginning and the end of construction) and different relations are made apparent. this study focuses on the first two models. in developed economies, while construction of residences and/or infrastructure and other building investments have direct effects on the investments, it is also purported that these have indirect effects on the economic growth. in western europe, while the volume of the construction industry in the gdp in the year 1980 was 10%, in 2004 this percentage dropped to 7%. (wigren and wilhelmsson, 2007:449). on the other hand, pietroforte and gregori, in their study of the developed six (australia, canada, denmark, france, germany and holland), reached the conclusion that the role of the construction industry in the national economies of these countries have decreased. lopes (2003), in a study on portuguese economy, arrived at the conclusion that in the long run the construction industry in this country grows steadily. however, in his analysis of the portuguese economy, he argues that as the development level increases, the role of construction industry in the economic growth tends to decrease. lopes, oliveira and abreu (2011), emphasize the significance of the construction industry in socioeconomic growth level, in other words, development level and purported that during the first phases of economic development the per capita income level and the construction industry manifest a parallel tendency towards increase. as the countries reach a certain level of growth, the development of construction industry takes place at a slower pace than the economic development. dlamini (2012) has concluded that there is not a strong relationship between the construction industry and the economic growth. he also underlines that in the short run, the construction industry has a potential of positive impact on economic growth but it’s an important component in the investment programs in developing economies interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 23 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu like south africa. in their study of the indian economy mallick and mahalik (2008:381) have concluded that the growth rate of the construction industry is an important marker on the real growth of economy. additionally they have reached the conclusion that with the growth of employment in the construction industry the total output of economy increases. in his study, bon (1992) reached the conclusion that the percentage of the construction industry in the national production creases in the early period of development in economies, yet in the long run, its share in the national product decreases proportionally and with certainty. in the study of lopes, ruddock and ribeiro (2002:158-159) which was conducted on 16 african economies, the share of the construction industry in the gdp and the economic growth only exhibits a consistent relationship in times of crisis. according to them in the first instances of improvement in the aftermath of an economic recession, the gdp increases faster; whereas in the periods of sustainable economic growth and development, the same general growth rates can be detected. the construction industry is vastly affected by the economic growth trends and the fluctuations in these trends. because the process of the economic growth is closely related especially to the sufficiency of the public infrastructure investments even if there are fluctuations (giang and pheng, 2011:123). these relationships can be summarized in three scenarios: a) when the infrastructure was previously built, it is enough for the growth; b) if the infrastructure had been previously realized in an exorbitant style, there would be an unexpected fall in the economy; c) when an unexpected economic growth happens, the infrastructure would be inefficient to support the growth. spence and mulligan (1995:291) point out that because of the space it use sand its input, the construction industry has an intense relationship with nature, therefore the input should be diminished and the sources should be utilized in a productive manner. in their study for 34 countries, jin and lu (2002) have concluded that there is a nonlinear relationship between the gdp and the construction output. in their study on the hong kong economy yiu, lu and jin (2010:344) have reached the conclusion that between the gdp and the growth of the construction industry, there is granger causality. iv. data and analysis these variables have been selected to analyze the relationship between the construction industry and the economic growth: 1gdp (gdp), 2gross fixed capital formation (gfcf), 3inflation (cpi), 4the construction expenditure in the gross domestic product-public sector (cegdpps), 5the construction expenditure in the gross domestic product-private sector (cegdpprs) 6istanbul stock exchange national 100 index (imkb100), 7istanbul stock exchange non-metal minerals index (xtast), 8the construction expenditure in the gross domestic producttotal (cegdptot), the data concerning all the variables had been acquired from the electronic data distribution system (edds) of the central bank of the republic of turkey (cbrt). these are the quarterly data (n=51) pertaining to the 2000:01-2012:03 period, and it was accepted as the then current value of the aforementioned period and it was converted to us dollars using the exchange rate of the said period. the graphs were prepared in excel, and the analysis was calculated by the eviews software. a four-step analysis process was pursued. first, the variables were subjected to the correlation analysis (table-1. appendix-4) with the level values. in the second step, the unit root analysis of the series was done by dickey-fuller test (1979) (table-3. appendix-6). after using the first difference, it was re-subjected to the correlation analysis (table-2. appendix-5). in the third step, the stationary series was subjected to the granger causality test (1969) (table-4. appendix-7). in the fourth and final step, the interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 24 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu regression models (table-5. appendix-8; table-6. appendix-9; table-7. appendix-10; table-8. appendix 11) which are below (5th, 6th, 7thand 8th equations) were tested. these are the regression models that were tested: uxtastbbimkb  10100 (5) ucegdpprsbcegdppsbcpibgdpbbgfcf  43210 (6) uxtastbcegdpprsbcegdppsbgfcfbbgdp  43210 (7) ucegdpprsbcegdppsbimkbbgfcfbgdpbbxtast  443210 100 (8) in the process of this analysis, the relationship between the economic growth of turkey and the fluctuations of the economy, and the construction industry is tackled. at the same time, this study tried to tackle the influences that affect the non-metal minerals index (xtast) which is observed to be the indicator of the construction industry. additionally in this paper, the efficiency of the public and the private construction expenditure in the gdp is tried to be laid down reciprocally and the efficiency of the gross fixed capital formation which also includes the construction industry is tried to be explicated. v. findings by way of analyzing the outcome of the correlations in respect to the level values of the variables (table-1. appendix-4), a strong correlation between all the variables except the gdp and the inflation can be detected. inflation has a negative moderate correlation with all the other variables. a positive high correlation was detected between all the variables except inflation. yet because the series is not stationary, the correlations were calculated by applying first differences. in respect to the correlation (table-2. appendix-5) to the first difference, there is a strong correlation (0.658037) between the gdp and the overall construction expenditure. yet the private sector’s construction expenditure (0.280526) has a stronger correlation with the gdp than the public sector’s construction expenditure (0.671524). while the gdp has such a strong relationship with the construction expenditure, the construction sector doesn’t exhibit a correlational relationship with the inflation (0.008394). additionally the sector does not exhibit a remarkable correlational relationship with the imkb100. but a strong correlational relationship between the fixed capital formation and the overall construction sector (0.890529) has been detected. the relationship has a stronger correlation for the private sector (0.70807) than it has for the public sector (0.535929). finally there is a strong correlation (0.747157) between the overall construction sector and the private sector’s construction expenditure. again there is a strong correlation (0.89927) between the imkb100 and the non-metal minerals index. with the results of the adf test (table-3. appendix-6) that the series were subjected to, it had been derived that the series were not stationary and that they included unit roots. the test statistics (adf) that were calculated in respect to the levels of the variables showed that while the inflation data were stationary, the other variables contained unit roots. when the first difference was applied to the series (δ), all series became stationary. moreover the r2 values for all the variables have been obtained were lesser than durbin-watson (dw) test statistics. interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 25 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu the series which were rendered stationary by applying the first difference was then subjected to the granger causality test and according to the test results (table-4. appendix-7) with a confidence level of 5%, it is detected that overall there are 23 causality relationships but not between each and every variable. all variables are in a causality relationship with at least one other variable. the variables that had the most causality relationships with other variables are as follows: gfcf (5 variables), imkb100 (4 variables), and xtast (4 variables). the mutual causality relationship happened between the “cegdpprs-gdp” and the “cegdptot-cegdpprs” causality pairs. at the final stage, four regression models were tested. because in each and every regression model the dw statistics are more than the r2 value (dw>r2) the regressions are not fake regressions and they do have a meaning. especially where the imkb100 (0.804700), gfcf (0.780628) and xtast (0.873179) are “dependent variables,” it is detected that the regressions have a rather high r2 value. for the other variable gdp (0.521584), a relatively lower r2 value was calculated. vi. conclusion in turkish economy the construction industry exhibits the same distinctive feature as it did in the studies conducted on the economies of other developing countries and the process of growth supports the construction industry. the susceptibility of the construction industry to the gdp exhibits the private sector’s construction investments and especially the public sector expenditure on the infrastructure move in conjunction with the growth process. the increase in the public sector’s infrastructure expenditure is expected in the developing countries. the susceptibility of the construction industry towards the gdp indicates that the growth in this industry is not excrescent. especially the relationship between the gdp and the construction industry after 2008 supports this thesis. yet even if the public sector’s expenditure weighs more in the overall expenditure of the construction industry the private sector’s insufficiency should not be overlooked. at the same time the construction industry has exhibited a negative susceptibility towards inflation. in respect of stock market, the construction industry has a strong relationship with the imkb100 index. correlation (level=0.909787; first difference=0.89927) relationship informs us of the strength of the forwardbackward linkages of the sector. interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 26 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu vii. bibliography 1. bon, r (1992), ‘the future of international construction’: secular patterns growth and decline’, habitat international, vol.16, 3, pp.119-128. 2. dickey, d. a., fuller, w. a., (1979). “distribution of the estimators of autoregressive time series with a unit root”, journal of the american statistical association, vol.74, pp.427-431. 3. dlamini, s. (2012). “relationship of construction sector to economic growth”, international congress on construction management, canada. 4. giang, t. h. ve pheng, l. s. (2011). “role of construction in economic development: review of key concepts in the past 40 years”, habitat international (35), pp.118-125. 5. granger, c. w. j., (1969). “investigating causal relations by econometric models and cross-spectral methods”, econometrica, vol.37, no.3, pp.424-438. 6. hillebrandt, p. m. (2000). economic theory and the construction industry (3rd ed.). basingstoke, hampshire: macmillan. 7. hirschman, a.o. (1958). the strategy of economic development, yale university press, new haven, ct. 8. jin, w, lu, x. and he y. (2003). “a regression model of the growth path of construction industry (in chinese)”, chinese civil engineering journal vol. 36(3), pp.105–109. 9. khan, r. a. (2008). “role of construction sector in economic growth: emprical evidence from pakistan ekonomy”, first international conference on construction in developing countries. pakistan. pp.279-290. 10. lopes, j (2003) “the relationship between construction outputs and gdp: long-run trends from portugal”, in: greenwood, d j (ed.), 19th annual arcom conference, 3-5 september 2003, university of brighton. association of researchers in construction management, vol.1, pp.309-317. 11. lopes, j. (2011). “construction and economic growth in developing countries of africa: evidence from data of the last thirty years”, cib world building congress. salford-reino unido. interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 27 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu 12. lopes,j. p., oliveira r. a. ve abreu, m. i. (2011). the construction industry and the challenges of the millennium development goal. management and innovation for a sustainable built environment, amsterdam. 13. lopes, j. ruddock l. & ribeiro f. r. (2002): “investment in construction and economic growth in developing countries”, building research & information, vol.30:3, pp.152-159. 14. mallick, h. ve mahalik, m. k. (2010). “constructing the economy: the role of construction sector in india’s growth”, journal of real estate finance and economics. vol.40, pp.368-384. 15. mankiw, n. g. (2010). macroeconomics. worth publishers, new york. 16. pietroforte r., gregori t. (2003). “an input-output analysis of the construction sector in highly developed economies”, construction management and economics, vol.21:3, pp.319-327. 17. ranko bon & keith hutchinson (2000). “sustainable construction: some economic challenges”, building research & information, vol.28:5-6, pp.310-314. 18. rostow, w. w. (1960). the stages of economic growth: a non-communist manifesto. cambridge university press, cambridge. 19. solow, r. (1956). “a contribution to the theory of economic growth”, quarterly journal of economics, vol.1 no.70. pp.65-94. 20. spence r. ve mulligan, h. (1995). “sustainable development and the construction industry”, habitat international, vol.19, no.3. pp.279-292. 21. wibowo, m. a. (2009). “the contribution of the construction industry into the economy: a systemic approach”, international seminar, cib 107, utm, malaysia. 22. yiu, lu ve jin (2010). “a longitudinal analysis on the relationship between construction output and gdp in hong kong”, construction management and economics, vol.22:4, pp.339-345. interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 28 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu appendi̇xes appendix: 1 source data set: cbrt, edds. graph 1: gdp and the construction expenditure in the gross domestic producttotal interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 29 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 30 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 31 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 32 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 33 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu interaction between the economic growth and the construction industry:a time series analysis on turkey (2000-2012) emerging markets journal | p a g e | 34 volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.37 | http://emaj.pitt.edu microsoft word emaj-çelik 35-56.docx   volume 1 (2012)| issn2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu economic barriers to democratization in mena ahmet alkan çeli̇k, phd. abstract the literature on regime change in the mena region had claimed the occurrence of political liberalization and democratization during the 1990s, foreseeing a transition from the dominant authoritarianism in the region to politically more liberal regimes. these analyses neglect the state of permanent authoritarian political regimes with the centralized economic power and their role as periphery states in the world system. in this paper, we have reassessed the existing literature on regime change in the mena region taking into account the economic and political impacts of rentier economies, with a close look at the countries in the region where popular uprisings took place to overthrow authoritarian leaders during the first half of 2011. we have followed schlumberger's (2002) method of classification and comparative approach in order to pinpoint a correlation between the authoritarian regime's economic power based on resource allocation, its political dominance and the leaders' role in neo-liberal global political economy. this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 | http://emaj.pitt.edu     economic barriers to democratization in mena emerging markets journal | p a g e | 35 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu economic barriers to democratization in mena ahmet alkan çeli̇k, phd.   introduction middle east and north africa (mena) is the only region in the world in which most of the states have different types ofauthoritarian regimes and have not experienced a transition to democracy for the last four decades; in other words since decolonization of the states. on the other hand, states of the mena region control almost two third of proven world oil reserves while growth of local economies is not significant. western institutions use big sums of funding to conduct researches for implementing policies for democratization and economic liberalization in the region while aid money flows to the authoritarian regimes of the region for 'development'. the attempts for democratization in mena have supposed that the regime change with fair distribution of income would happen from top to bottom. existing literature on rentierism in the mena region provides us with different approaches to find a correlation between authoritarian political regimes and economic dependence on rent revenues gained from the export of natural resources. in their discussions, while some academics have been trying to prove the existence of resource curse in empirical and theoretical frameworks, the others have argued the other way around based on sole empirical datasets. by the end of year 2010, popular uprisings started to occur in the arab countries of the mena region demanding a revolution for regime change. sparked by the tunisian protests that have started in december 2010 (kareem, 2001), popular uprisings have spread to egypt, syria, yemen, algeria, bahrein, jordan and libya; the latter of which has transformed into a civil war. all these countries of the same region have a commonality: their economies are dependent on ‘rents’ from natural resources (financial times, 2011)or 'rent equivalents' from aid money and financial support (schlumberger, 2006)which provide most of the export earnings and state revenues. in this paper, the literature is revisited with a close look at the current anti-authoritarian popular uprisings (a.k.a. arab spring) in the region and the major role of external actors in the build-up of the situation. it is aimed to provide a holistic1 approach that takes into account area specialization with socio-political dynamics to explain the existence of authoritarian political regimes in rentier economies. the role of external actors is especially excavated within the context of the current civil war in libya. also in the same context, tillyan reflections on the analogy between war-making and state making from a european experience are explored in order to distinguish the internal and external factors in mena region since decolonization from the european experience of a couple of hundred years ago. 1 throughout the paper, “holistic” and “overall” approaches are used interchangeably     economic barriers to democratization in mena emerging markets journal | p a g e | 36 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu a majority of western attempts for democratization, regime change and economic liberalization in the arab countries have lacked a holistic perspective and previewed solutions to be applied from top to bottom -i.e. structural adjustment policies, partial representation, and good governance programs. however, given the patriarchal social fabric in the states of the region (eckstein 1992; eckstein and gurr 1975) and economic power attributed to the leader who claims control over the rent revenues, expecting reforms towards a democratic political regime initiated from the polity is rather unrealistic if not naive. according to beblawi a rentier state has three significant qualities; “(1) the rents come from abroad, (2) the rents accrue to the government directly and, (3) only a few are engaged in the generation of this rent (wealth), the majority being only involved in the distribution or utilization of it” (1990: 87-88). there are two main categories of claims about the rentier state: claims suggesting oil wealth is incompatible with democratic regime type2 and that suggesting it is incompatible with economic development.3 we will examine the rentier states of the mena region where the arab spring revolts spread out as of end 2010 in terms of their place in the global resource politics, will show why democracy cannot be compatible with oil dependent economies and will question whether resource curse exists due to the existence of excess resources. first of all, we will follow schlumberger's (2002) method of classification and comparative approach in order to pin point the correlation between economic power based on resource allocation given to the authoritarian leader and his political dominance that have urged the people to take collective action. schlumberger's modal of comparison gives a practical framework in order to asses the openness of the regimes for democratization in the mena region according to their regime types and natural resources which generate the rent income. the uniqueness of individual cases is respected; however, it is more relevant to look at the region in categories rather than in single case given the regional uprisings of 2011 and historical dynamics in the region that give us the obvious similarities between the states. schlumberger (2002:10) provided us with a matrix that classifies the arab regimes according to their regime types (traditional authoritarian/bureaucratic authoritarian) and economic positions (resource-rich/resourcepoor)4. category a includes the resource-rich countries with traditional-authoritarian regimes i.e. saudi-arabia; bahrain; oman; quatar; united arab emirates. category b includes the resource-rich countries with bureaucraticauthoritarian regimes i.e. iraq; libya; algeria. category c includes resource-poor countries with traditionalauthoritarian regimes i.e. jordan; morocco. category d includes resource-poor countries with bureaucraticauthoritarian regimes i.e. egypt; tunisia; syria. the countries where the arab spring spread fit into this matrix as follows: bahrain in category a; libya and algeria in category b; jordan in category c; egypt, tunisia and syria in category d5. this exercise clearly shows us that in all of the resource-poor countries with bureaucratic 2 given the authoritarian nature of rentier states in mena 3 resource curse theory 4 the modal shows the ideal types of arab regimes prior to the late 1980s. however, we are using this information as “given” to build up onto. 5 although there has been demonstrations in iraq and marocco during the arab spring, they didn't have a systematic revolutionary demand in nature. thus, they are not included in the matrix in order to avoid biased arguments.     economic barriers to democratization in mena emerging markets journal | p a g e | 37 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu authoritarian regimes under category d experienced the popular uprisings, not a surprising outcome, considering their political histories with different public revolts against the regime. the interesting part of the outcome is first of all, the public revolts in bahrain, a resource-rich traditional-authoritarian regime under category a; secondly the civil war in libya6, a resource-rich bureaucratic-authoritarian regime under category b regarding to the extreme stability in its political history. countries under category d are resource-poor rentier economies as most of their revenues are generated from indirect rent income in other words rent equivalents such as military and development aid money with financial aid from international financial institutions7. the historical dynamics of resource-poor rentier states are especially important as these countries are relatively more vulnerable and dependent on rent revenues. while more than half of the government’s revenues in saudi arabia, bahrain, the united arab emirates, oman, kuwait, qatar, and libya come from the sale of oil, the governments of resource-poor countries such as jordan, syria, and egypt earn large locational rents from payments for pipeline crossings, transit fees, and passage through the suez canal. moreover, workers’ remittances have been an important source of foreign exchange in egypt, yemen, syria, lebanon, tunisia, algeria, and morocco, although these rents go to private actors instead of the state8. economic dependence on locational rents and foreign exchange renders the political economy of these countries fragile since there is a big reliance on the global financial market; therefore, global resource politics. background when we are talking about possibilities for economic development and the rentier forms of economy in the mena countries we should also consider the contemporary history of the politics driven by their economies. schlumberger states that korany (1986); speaks of a regional system of ‘petrolism’ in mena from ca. 1973/1974 onwards which is characterized not only by high levels of rent income for the major oil-exporting countries, but also by an intra-regional transfer of oil revenues to resource-poor economies, in exchange of labor export to the less densely populated oil-rich countries, mainly on the gulf peninsula.9 the legitimacy-lacking governments of the region could gain some public credibility as the economies boosted. however, oil-prices peaked in real terms in 1981 and steadily fell until the end of 1990s, they never again reached the levels they gained during the 1970s (schlumberger, 2005). as oil and gas revenues of the oil-rich 6the situation in libya will be discussed in depth in the following sections of the paper with a close look at the dynamics of rentier economy and the role of external actors in the current civil war. 7 schlumberger, 2005: 17 8ross, 2001: 329 9schlumberger, 2005.     economic barriers to democratization in mena emerging markets journal | p a g e | 38 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu countries diminished, the transfers and the demand for labor, which brought foreign exchange, to the oil-poor countries started to fade away. in addition to the remarkable changes in oil prices which brought the states into fiscal crises, the political wind shift of the 1990s marked by the end of cold war had negative consequences on the oil-poor economies' rent income widening into financial crises. due to the geo-strategical importance of the region in the cold war, states could benefit from the bipolar world order by gaining military and development aid (luciani g. 1990) from their allies on the two sides of the war. these aids were important sources of rentequivalent income, especially for the resource-poor states of mena. the significant dependence of the resourcepoor states on the intra-regional transfer of oil income with 'strategic-aid' money coming from super-power allies rendered the already-legitimacy-seeking states weak, in terms of state power. “petrolism” of 1970s has allowed oil-rich states of the region a relative economic prosperity that came with tight fiscal policies and almost total dependence on oil revenues. since dependence driven prosperity resulted in a lack of ability to diversify economies, when the oil prices dwindled by the end of 1980s-90s, transports to resource-poor countries were immediately cut to stabilize the economies of oil-rich ones. reduced aid money after the cold war with the cuts of transports from oil-rich neighbors, resource poor countries of mena found themselves in a financial crisis situation for which the 'cure' came from the west: structural adjustment policies (saps) along the lines of washington consensus. saps previewed as a cure to financial crisis by the western institutions are far from being custom-made ignoring the existing political infrastructures and regime type. real implication of saps poses enormous threats to incumbent, existing authoritarian regimes' absolute political power (schlumberger, 2006: 3). therefore, trying to implement saps in a regime where the leader anddepending on the regime type, the elites around the leader or close to absolute power-, only encourages the government to become less transparent. since the leader and the elites around him do not necessarily have to report to some other authority or the public, they have quite some space for political maneuver when it is needed to fit into western policies10 compared to democratic regimes. especially because the saps are imposed by the rent provider states, the leaders of the rentier states do anything to show that they are fulfilling what have been asked. the irony is that the more flexible autocrats are to attract rent income, the less they are legitimate to their public; and the less they are legitimate, the stronger repressive policies they apply to keep the public obedient. it is a vicious circle that contains and empowers the autocrats of a rentier state, renders them more stable and gives the public less freedom of expression. thus, the rent revenues do construct a state class but rather a shadow state (william reno, 1998; hartmut elsenhans , 1981; 1996) who doesn't have enough legitimacy among its population and so needs to adopt repressive policies to stay as a regime. western academics have previewed a link between economic liberalization and democratic regimes among the mena region states. some have argued that liberal economic orientation would open up to democracy. however, they have missed the political history of these states where dependence on external revenues have empowered the stable autocratic regimes and the possibility to have economic liberalization is not possible in real 10although we disagree with culturalist approach, which tends to analyze the mena region, from a narrow angle, as one permanent culture of anti-democratic regimes with strong patriarchal fabric, we take this fact into account to have a clear view on why this has been the case for centuries and how it influences the political economy of today.     economic barriers to democratization in mena emerging markets journal | p a g e | 39 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu terms as it would again be a minority of the elites who would run a competitive market among each other and make sure that the state class remains in its place. another argument has suggested that an increase in the level of tax revenues would provide legitimacy to the state and, therefore, democratic demands of the public could be taken into account changing the shadow state to a strong state. however, the cases of contemporary tunisia and saudi arabia prior to the period of petrolism raise questions against this suggestion. the data on the level of tax revenues on government revenues gives a percentage of 24,8 % of tax revenues on government revenues for the year 1998 (schwarz 2004: 23). in saudi arabia, in 1949-1950 taxes accounted for 67% of saudi state revenues (with 37% coming from direct taxes). the fact is that when the autocratic regime type with a significantly high level of repression is given, the level of tax collection doesn't make the state more democratic as the citizens are not given any other chance than doing what is asked for. it is true that level of tax collection indicates a legitimate state, but only when the tax payers do it voluntarily to participate in the state expenditures. today, the resource-poor arab economies are neither adequately perceived as rentier economies, nor as transformed into market economies on an economic systems level. however, they are characterized by the essential lack of key defining elements that guarantee the welfare benefits of market orders such as the openness of markets, including openness for the entry of new competitors, secure contract and property rights, equal access to information, equitable application of laws, institutions that guarantee competition and prevent the emergence of monopolies and cartels and thus the creation of non-market gains (schlumberger 2006: 4-5). in many cases where large amounts of rent accrue to the state and are distributed as jobs and welfare benefits; ordinary people become highly dependent on the state for their livelihoods, and not being required to pay taxes, they are deterred from mobilization to demand representation. at the same time, the dependence of regimes on external sources of rent, whether petroleum revenues or aid, have attached the interests of elites to external markets and states which also buffered them from accountability to their populations (anderson, 2001). moreover, it can be argued that during almost two golden decades of petrolism and military aid the societal expectations assumed the governments as the primary responsible for the economic well-being of the individuals which have not existed since the end of 1990s (alnasrawi 1991: 175–7, 184). it is also one of the reasons why islamism appeared in certain states as a driving force to legitimize the ruling parties, although it got out of control and has put the rulers in an uncomfortable position in the global political environment in the age of “terrorism”, basically the period starting from 9/11 that is still going on. as schwarz states, “[t]he large and considerable amount of state revenues accruing to rentier states in the form of external rents gives the state additional resources and serves thus to reduce the state’s need to extract money from its society” (schwarz 2004: 23). since the state elites have the control over the flow of rent revenues, taxation is not a reliable tool that we can count on when speaking of citizen participation in state-making. this creates the shadow states with low legitimacy and weak institutions which in turn renders the states dependent on the rent revenues. therefore, rentierism should be the central factor in analyzing the state formation processes and regime change dynamics in the post-colonial mena states (schwarz 2004: 25-26).     economic barriers to democratization in mena emerging markets journal | p a g e | 40 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu imposed democratization: the role of global resource politics in 1990s, many scholars have identified a move towards democratization in the mena states (hinnebusch), 2006). since then the reversal of democratization experiments has been documented by kienle, and by ehteshami and murphy (brynen, korany and noble, 1995; salame, 1994; norton, 1995). maye kassem and william zartman have shown how, paradoxically, party pluralization can reinforce authoritarian rulers. david pool warned that enforcement of economic liberalization and austerity might require authoritarian power (kienle,2001; ehteshami and murphy, 1996; kassem, 1999; zartman, 1993). as it is discussed previously, the democratization attempts have been imposed to the states of the region with the idea that economic liberalization would eventually lead to systematic regime change. however, just like the imposed economic liberalization attempts have not worked properly in the resource-poorstates of the region, imposed good governance and democratization attempts have not achieved much either. today, it is crucial to identify the role of mena region in the global politics to understand stable autocratic regimes as they are dependent on external revenues and autocratic governments are flexible enough to adjust their internal policies according to the foreign policy goals of the revenue providers. hand in hand with the neo-liberal financial 'solutions' imposed, democratization attempts from outside i.e. rent paying stateshave been constructed according to their own foreign policies. for instance, the us has spent hundreds of millions of dollars on democracy and good governance in egypt over the past decade. on the other hand, an annual expenditure of more than one billion in military aid dwarfs the former sum and raises questions as to the prioritization of different or even contradictory foreign policy goals (schlumberger & brunell, 2010:8 ; bermeo 2009). these goals are based on 'stability' of the region as a bulk of world's energy resource is under the control of autocratic states of mena. in this regard, 'stability' means the control over oil does not shift to certain groups that could choose different customers than the existing ones. rentier economic system and authoritarian political regime reinforce each other in the context of mena region where historically the strongest classes have been powerful landlords and tribal oil sheikhs (hinnebusch 2006: 379). external incentives for democratization and social development have previewed systematic political reform to happen against all indicative empirical evidence. as far as democracy promotion strategies are centered according to western foreign policies -very similar to economic liberalization attempts in line with the washington consensus, they are far from bringing a democratic regime to the region. likeliness of a systematic regime change is close to zero, for the oil-rich rentier economies, as the authoritarian elites have abundant resources and enough repressive infrastructure to suppress any oppositions to it (schlumberger 2006). for the resource-poor states of mena, schlumberger suggests that; “economic and political reform can only be assumed to significantly alter currently prevailing power structures if they go hand in hand, and if they are based on a sound assessment and knowledge of the specific traits of middle eastern political regimes, societies and economies”, and he adds “rational gains-maximizing behavior does not imply successful competition in an open market so much as competition for the establishment of personalist ties (tying in with the surrounding society, where rent-seeking behavior has become endemic)” (2006: 8-9). on the other hand, one should not forget the 'security' issue as a dynamic considering the geo-strategic importance of the region. being politically dependent on the western foreign policies, after the attacks of 9/11, arab leaders of the resource-poor countries,     economic barriers to democratization in mena emerging markets journal | p a g e | 41 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu who are already indebted to the international monetary fund (imf) and the world bank (wb) with the inflow of aid money from the us, took over the mission to make sure no terrorist movements spring in their boundaries and played the 'stabilizing' role11 in the region. 9/11 attack has set the stage for a rejection of a long standing realist policy that sought to protect western geo-strategic interests by abetting autocratic rule. the assumption behind this policy was that autocracies could secure the domestic and regional stability required for defending a regional balance of power that deterred radical states and non-state actors from destabilizing pro-western governments. led by egypt, saudi arabia, jordan and pakistan12, these regionally pivotal states were to defend a range of overlapping u.s. geo-strategic, military and economic interests. these states were labeled as “moderate” states no matter how well their ruling elites represented their own population. when western geo-strategic interests are analyzed; they included arab-israeli peace (and/or deterring attacks on israel), protecting the free flow of oil to the gulf and its export to the west, and facilitating the infrastructure of u.s. military aid, assistance and/or defense in the middle east and south asia (brumberg et. al. 2010:50). both economic integration into the neo-liberal market and growing domestic legitimacy deficits pressured the states toward ‘omni-balancing’ or bandwagoning (hinnebusch 2011: 230) with the west. moreover, when the role of mena countries are questioned globally euro-mediterranean partnership initiative (empi), an outcome of the barcelona declaration in 1995, as well clearly demonstrates the periphery role given to the mena countries in europe's mediterranean policy. the initiative to build an inter-regional cooperation with the arab world was taken by the eu, in the second half of 1970s, with energy and security concerns. in the immediate post cold-war period, the eu got officially involved in the regional stability projects in the arab mediterranean (crawford, 2003: 3). at the heart of this empi lies the need for economic liberalization (nonneman, 2001: 157) and containment of political islam both for security and assurance of energy resource flows to the eu. on the other hand, from the realistic point of view, euro-mediterranean partnership is not possible due to a big imbalance of power between the “core” and the “periphery”, as crawford (2003) argues. such efforts are far from applying the leverage effect (schlumberger and brunell, 2001; levitsky and way, 2005) on economic development and regime change prospects, but they push the periphery states more to the margins getting them dependent on the core states' foreign policies (joffè 1999). according to levitsky and way (2005), the degree of leverage one state has over the other is high if and when three conditions are met: 1)the addressed state is economically and militarily weak and dependent; 2) the ‘levering’ state has no significant other (potentially conflicting) policy goals or interests apart from achieving political change in the addressed country; 3) other regional powers do not play a major role in the political game between the two countries concerned (burnell and oliver schlumberger (2010:6) 11 as this has been a role of egypt since 1977, egypt-israel peace treaty where egypt would be the first arab state to recognize israeli state in the middle east and in return receive an annual sum of 1.3 billion usd of military aid from the us. see sharp (2010) us foreign assistance to the middle east 12 between 2004-2008, egypt, jordan, pakistan, bahrain, tunisia have received significant amounts of us foreign military finances (fmf)     economic barriers to democratization in mena emerging markets journal | p a g e | 42 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu since the two latter conditions have never existed in the mena case, any external initiative13 for economic liberalization and regime change in the region will be an unbalanced barter. moreover, they will reinforce the existing elites of the regime liable to an undersigned partnership agreement making them less credible to their population increasing the anti-western feelings among the public. 'gulf security' has at its heart the interlinked components of domestic stability and perceived regional threats (nonneman, 2001: 141). any kind of social upheaval is not desired by neither the ruling elite of the authoritarian states nor by their “strategic” western partners. therefore, the arab spring in both oil-rich and oilpoor rentier economies will most probably not be leading to a democratic regime change as long as the geostrategic importance of the autocratic states remains at the periphery, bound tightly to the liberal economic system and foreign policies of the center. war making and state keeping: military interventions for “democracy”? tillyan (1985) explanation of the close link between war making and state making in european history gives the contemporary scholars an accurate line of events to follow and apply in the global conjuncture. although, the connection between the two is absent from most state formation processes in the third world, as schwarz (2004:4) argues, the role of western military interventions in forming the state class, most of the times risking a civil war is still significant. there are numerous examples -not only in the region but in the third worldof military intervention by the world powers occurred with the argument of “bringing democracy” and demolishing a ruling dictator, where real democracy never came to being but only a new class of state elites. keeping in mind the support of the very same powers for the authoritarian leaders, when their own policy interests in “stability” were at stake, periodic military interventions in the mena region to bring down the regime and these raise questions about the particular interests of world powers in democratization of the region. today, it is libya, before it was iraq, and afghanistan, iran are on the agenda. when the amount of arms exports to conflict areas by the western powers are taken into account, the big picture becomes even more complicated. documentation of libyan paramilitaries with fn harstelone of the biggest light arms company in europemachine guns (lesoir, 2011), at the time of nato intervention in libya to bring down gaddafi, raised even more questions on the western incentives for the regime type in the region. economic historian frederic lane argued that “governments are in the business of selling protection ... whether people want it or not” (tilly, 1985: 175). lane argued that the very activity of producing and controlling 13examples of other such initiatives taken by the us are: usaid, middle east partnership initiative (2002), freedom agenda (2003)     economic barriers to democratization in mena emerging markets journal | p a g e | 43 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu violence favored monopoly, because competition within that realm generally raised costs, instead of lowering them. the production of violence, he suggested, enjoyed large economies of scale. therefore, one can argue that the only way to demand democracy and human rights for overwhelmingly suppressed populations of dictatorships if public upheavals which would destabilize the region. however, repressive dictators in oil-rich -relativelysmall rentiers have enough military infrastructures to suppress the possible uprisings against the regime given the arms exports and rentier revenues. at this moment, it is important to realize the likeliness of instability and civil war in a rentier state with illegitimate ruling elites, and the role of intervening actors -who are more or less sure of having stronger military infrastructure than the intervenedto further destabilize the situation to achieve stability in the end. stability, for the external actors, means a state infrastructure -ideally a shadow state to be flexible enough that is able to conform to the foreign policy interests of the intervening actors. collier and anke hoeffler (1998) found that resource rents had a parabolic effect on civil war onset and intensity: increasing reliance on resource rent increases the likelihood of civil war up to a point, after which that likelihood drops off again. james fearon (2003, 2005) demonstrated that of resource-reliant states, only oil-reliant states are more prone to civil war (lotz 2008: 109). oil-reliant states in mena are the ones tightly interdependent with the core states being strong energy providers, not only maintaining the control over world's major resource of energy but potentially have significant impact on financial markets. states that have come into being through decolonization or through reallocations of territory by dominant states have acquired their military organization from outside. to the extent that outside states continue to supply military goods and expertise in return for commodities, military alliance or both, the new states harbor powerful, unconstrained organizations that easily overshadow all other organizations within their territories (tilly 1985: 186). civil wars are not difficult to be previewed in the formerly colonized, oil-rich states of the region and military interventions are used to create a form of state that would ensure compliance in the interests of the core, continuing the exchange of commodities with revenues and military infrastructure. given the fact that regime change from top to bottom is not possible in rentier states of the mena, one might ask whether democratic movements can succeed in any way. any democratic movement to come out in an authoritarian regime would create a political and economic instability. alesina and perotti (1996), hibbs (1973), and blomberg (1996) have established that political instability is negatively correlated with economic growth, where the relationship between democracy and growth is more uncertain. minier (2003:125) explains three types of political instability that democratic movements involve: first, […] by its nature indicates instability: a sizable part of the population wants to change the form of government. widespread strikes, protests, demonstrations, and even riots often accompany democratic movements. second, many interpretations of political instability address actions taken by the government against its citizens. when a democratic movement is repressed, governments often take actions, such as imposing martial law, curtailing freedoms of assembly and the press, or, in extreme cases, taking military action against demonstrators. the third type of political instability is associated with the transition between regime types if the movement is successful. alesina and perotti (1994, 359), in a summary of related literature, conclude that “transitions from dictatorship to democracy, being associated with political instability, should typically be periods of low growth.”     economic barriers to democratization in mena emerging markets journal | p a g e | 44 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu partly, they argue, this is due to social demands that have been repressed suddenly surfacing; additionally, collapsing dictatorships are likely to leave behind economic problems. revisiting the first section of this article, schlumberger's classification of rentier states in mena, the arab spring is not very likely to change the regime types in the states of categories a14 and b15. in bahrain, a category a state, such a political instability would not be allowed to happen as it is the home port of the us fifth fleet, neighboring saudi arabia. libya, a category b state with iraq, seems to go through a similar kind of regime change process with iraq (2003) which has already turned into a war to stabilize the instability to have a partner state to global interests. in egypt, a category d state, the popular uprisings succeeded to overthrow the authoritarian leader omar mubaraq. however, the strategic importance of egypt with its established role in the western foreign policies and its debts to imf and the wb is difficult to overcome with a new leader keeping these dynamics the same. syria, another category d state, is currently going through bloodshed to suppress the popular uprisings for regime change. first of all, the existing large bourgeois class created by and on the side of the state in syria is far from supporting a political opening for regime change. secondly, syria has been the closest ally of contemporary islamic republic of iran, and iranian administration would not allow the syrian state to be overthrown neither by a popular uprising nor by western military intervention (hinnebusch). conclusion first of all, we have explained that the geo-strategical importance of the mena rentier states which own most of the world's oil resources and ruled with autocratic tradition pushes the states of the region to the periphery providing resources and military alliance, both in some cases, for the core. secondly, imposed economic liberalization attempts in line with neo-liberal policies and democratization attempts conforming to core states' foreign policies have not/cannot lead to a regime change neither in the resource-rich, nor resource-poor states is elaborated. then, we have indicated that oil-rich states are economically dependent on oil revenues coming from abroad and the oil-poor ones even more vulnerable, being dependent on military and development aid of imf and the wb credits. that the economic liberalization does not necessarily bring economic development and political openings for regime change in mena as ruling elites are not willing to go for a shift towards democracy is also elaborated in detail. however, being economically dependent on the core, renders these states politically dependent as well which fits into the core's interests in the region. when the arab spring of 2011; a series of revolutions, uprisings and strikes, with vacillated demands between ‘constitutional monarchy’ and ‘overthrow of the current regime’, and mostly aiming at changing or diminishing the present nature of the governments and demanding democracy, with a few social and economic concerns; is under discussion, it is true that thousands of people have participated in the demonstrations and attracted the worldwide attention to the mena region (khair 2011: 113-114). moreover, it would be erroneous to overgeneralize these events as ‘revolution’ as most of them only lead to a cosmetic change restricted to their 14 resource-rich, traditional-authoritarian regimes 15 resource-rich, bureaucratic-authoritarian regimes     economic barriers to democratization in mena emerging markets journal | p a g e | 45 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu existing ruling regime. khair (khair 2011: 117) divides them as ‘popular revolutions’ as in the case of egypt and tunisia and ‘popular uprisings’ for those in yemen and libya; as most of the classes of society have participated in the events. hence, bottom-top democratization attempts, arab spring of 2011 that will leave a historical mark whatever the outcomes will be, are less likely to succeed in oil-rich authoritarian rentiers as they would create an immense instability that neither the core nor the periphery would like, once they succeed. thus, they rather turn into civil wars with the military intervention of the core (in the libyan case) or their neighbors (possible outcome for the bahraini case) to find the stability again in order to conform to stability interests of the core. for the oilpoor states, arab spring can succeed in the beginning (cases of egypt and tunisia) with democratic intentions. these movements mostly initiated by weak unorganized civil societies and these movements occurred mostly in the countries which might be labeled as ‘strong states’ and weak societies’ (migdal, 1988). it would be wrong to make overgeneralizations and to treat arab uprisings as a single movement as the patterns and demographics of the movements varied widely, but it is certain that in all, the countries’ future missions will also be very challenging, it would not be easy for these countries to build an organized new system in their countries (dupond 2011: 447-451). their already established vulnerable position with fiscal deficit and 'moderate' partners of the core might leave them weak to establish new-democratic regimes. so, there are still obstacles and challenges lying ahead of these countries to tackle and time will show their ability to persevere against the inner and outside forces and conflicts, yet it still seems very unlikely for these movements to fulfill their objectives. references abbas alnasrawi (1991), arab nationalism, oil, and the political economy of dependency, greenwood press: new york. alberto alesina and roberto perotti (1994), the political economy of growth: a critical survey of the recent literature, world bank economic review, 8(3), 35 1-71. amaney jamal (2002), democratic citizens in non-democratic nations: civic participation and associational life in the west bank, ph.d. dissertation, university of michigan. amir azarvan (2011), terror, oil and repression in algeria, the journal of north african studies, 15: 2, 231 253. anoushiravan ehteshami (1999), is the middle east democratizing ?, british journal of middle eastern studies, 26 (2).     economic barriers to democratization in mena emerging markets journal | p a g e | 46 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu charles tilly (1985). war making and state making as organized crime, in: peter b. evans, dietrich rueschemeyer, and theda skocpol (eds.), brining the state back in. cambridge: cambridge university press. pp. 169-191. charles tilly (1990), coercion, capital and european states, ad 990-1990, oxford: basil blackwell. catalina amuedo-dorantes and susan pozo (2004), 'workers' remittances and the real exchange rate: a paradox of gifts', world development vol 32, pp. 1407–1417. ce´dric dupont and passy florence (2011) , the arab spring or how to explain those revolutionary episodes?, swiss political science review 17(4) pp. 447–451. daniel brumberg et. al. (2010), in pursuit of democracy and security in the greater middle east united, states institute of peace group report working paper. daniel brumberg (2002), the trap of liberalized autocracy, journal of democracy, 13 (4), october 2002: 56-68. daron acemoglu (2008), income and democracy, the american economic review, vol. 98, no.3 (june), pp. 808-842. d. yergin, d. and j. stanislaw (1993), the prize: the epic quest for oil, money, and power, simon & schuster adult publishing. douglas hibbs (1973), mass political violence: a cross-national causal analysis, new york: john wiley &. sons, inc. douglas a. yates (1996), the rentier state in africa, trenton, nj: africa world press. ellen lust-okar and amaney jamal (2002), “rulers and rules: reassessing electoral laws and political liberalization in the middle east,” comparative political studies , april. gene sharp (2011), from dictatorship to democracy: a conceptual framework for liberation, 4th us edition, may 2010 extracted from www.aeinstein.org/organizations/org/fdtd.pdf , 2002. libya, foreign affairs, may june, heinonline -90 /2.     economic barriers to democratization in mena emerging markets journal | p a g e | 47 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu gerd nonneman (2001), state of the art; rentiers and autocrats, monarchs and democrats, state and society: the middle east between globalization, human ‘agency’, and europe, international affairs 77, 1 141-162. giacomo luciani (1990), allocation vs. production state: a theoretical framework, in luciani g eds, the arab state, university of california press: berkeley pp.65-85. hazem beblawi (1990), the rentier state in the arab world, in luciani, g., the arab state, london, routledge, p.85-99. hartmut elsenhans (2003), state, class, and development, new delhi; london: radiant publishers, 1981. hossein mahdavy (1970), the pattern and problems of economic development in rentier states: the case of iran, in studies in the economic history of the middle east, ed. m.a. cook, oxford: oxford university press. jenny a. minier, democrats, dictators, and demonstrators, economic inquiry, oxford university press, vol. 41(2), pages 224-233. joel s. migdal (1988), strong societies and weak states: state society relations and state capabilities in the third world,. princeton: princeton university press. juan r.i. cole and deniz kandiyoti (2002), nationalism and the colonial legacy in the middle east and central asia: introduction, international journal of middle east studies 34, 189 – 203. katerina dalacoura (2012), the 2011 uprisings in the arab middle east: political change and geopolitical implications, international affairs 88: 1 pp.63–79. khair el-­‐din haseeb (2011), on the arab ‘democratic spring’: lessons derived, contemporary arab affairs, 4:2, 113-122. lisa anderson (1987), the state in the middle east and north africa, comparative politics, vol. 20, no. 1 (oct.), pp. 1-18. lisa anderson (2010), demystifying the arab spring parsing the differences between tunisia, egypt, and ghada fayad, remittances and dutch disease: a dynamic heterogeneous panel analysis on themiddle east and north africa region, february.     economic barriers to democratization in mena emerging markets journal | p a g e | 48 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu leonard wantchekon (1999), “why do resource dependent countries have authoritarian governments?”, extracted from www.yale.edu/leitner/resources/docs/1999-11.pdf. margaret levi (1996), “thinking about how democracy works,” politics and society, 24 (1), march: 7, 19, 45. mark j. gasiorowski (1995), economic crisis and political regime change: an event history analysis, the american political science review, vol. 89, no. 4 (dec.), pp. 882-897. micheal herb (2003), no representation without taxation? rents, development and democracy, comparative politics 37, no.3 (april 2005): 297-317. micheal l. ross (2009), does oil hinder democracy?, world politics, vol 53, april; pp.325–61, 2001 michael ross, oil and democracy revisited, extracted from www.sscnet.ucla.edu/.../ross/oil %20and%20democracy%20revisited.pdf. mick moore (2007), how does taxation affect the quality of governance?, tax notes int’l, july 2, pp. 79. mohammed iben sunitan et al. (2011), views from the arab gulf on the ‘arab spring’ and its repercussions, contemporary arab affairs, 4:4, 501-523. nevzat soguk (2011) uprisings in ‘arab streets’, revolutions in ‘arab minds’! a provocation, globalizations, 8:5, pp. 595-599. nichola cristine pratt, democracy and authoritarianism in the arab world, rienner publishing. okruhlik gwenn (1999), wealth, unruly law, and the rise of opposition: the political economy of oil states, comparative politics, vol. 31, no. 3 (apr.), pp. 295-315. oliver schlumberger (2002), transition in the arab world: guidelines for comparison, mediterranean programme series rsc no. 2002/22. oliver schlumberger (2005), rents, reform, and authoritarianism in the middle east, a paper presented to the workshop on “transforming authoritarian rentier economies” organized by the friedrich ebert foundation, the     economic barriers to democratization in mena emerging markets journal | p a g e | 49 volume 3 (2013) | issn2158-8708 (online) | doi 10.5195/emaj.2013.38 http://emaj.pitt.edu german development institute and the german overseas institute, 11th triennial general conference of the european association of development research and training institutes, bonn, september 22-23. pablo a. acosta et al. (2009), remittances and the dutch disease, journal of international economics, sept, vol.79 (1), pp.102. emerging markets journal determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries dr. mehdi mili isg sousse | e-mail: milimehdi@gmail.com prof. jean-michel sahut geneva school of business administration, university of applied sciences | e-mail: jmsahut@gmail.com abstract this paper focuses on the transmission of bank liquidity shocks in loan and deposit in emerging markets. first, we attempt to identify factors affecting the credit strategy of foreign banks in emerging countries. second, we test whether depositors exert market discipline on foreign subsidiaries. by combining financial variables of subsidiaries and their parent banks and macroeconomic variables of host and home countries, we investigate the factors that may affect the behavior of depositors. our empirical approach is based on a partial least squares-path model that allows us to indentify the causal relationships between the various groups of variables. our results show that foreign bank lending is determined by the specific financial variables of the parent bank and macroeconomic variables of the country of origin. this support that the strategy's credit of foreign subsidiary is centrally managed at the parent bank and credit supply of subsidiaries depends primary on the financial situation of its parent bank. finally we find evidence of market discipline exercised over foreign subsidiaries in emerging countries. we show that market discipline is strongly affected by the specific characteristics of the subsidiary. keywords: foreign banks, credit supply, market discipline, emerging countries new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu mailto:milimehdi@gmail.com mailto:jmsahut@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries emerging markets journal | p a g e |29 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries dr. mehdi mili prof. jean-michel sahut i. introduction the world today is characterized by perfect capital mobility which has accelerated the transmission of shocks from developed to emerging countries. in the literature, it is argued that large banks have played an important role in the transmission of liquidity shocks through their subsidiaries established in foreign countries. thus, some studies have concluded that the existence of subsidiaries of foreign banks in emerging countries favor the transmission of liquidity shocks to banks from developed countries to emerging countries. haas and van lelyveld (2010) show that the strength of the parent bank is an excellent guarantee that attracts credit applications and deposits. in addition, the subsidiary is not completely autonomous and is part of a group where the parent bank centrally manages the liquidity of its subsidiaries. foreign banks have significantly expanded their range of activities in emerging economies. traditionally, they mainly offered financial services to international companies. however, since the 90s, they are increasingly attracted by the prospect of growing profits in local markets. basically, foreign banks has no longer a passive response quite changing needs of existing customers, but a dynamic exploration of new markets in the host country. the distress of many emerging banking systems has caused the phenomena of credit crunch, an extreme form of rationing behavior. the 2007-2009 crisis experienced by large international banks brings up the problem of destabilizing role of parent banks in host countries which leads to the vulnerability of their banking systems countries. pressures on liquidity and capital that international banks undergoing in the eu have affected national banking systems of central and eastern europe. in particular, liquidity problems in the parent companies have the incentive to reduce the funding of their subsidiaries in cee. data from the bis bank lending by foreign banks show that local currency loans granted by any subsidiaries of foreign banks cee declined from march 2008 to june 2008 in most emerging countries in central and eastern europe. for havrylchyk (2009), the decline of local debt was mainly due to the deprecation of the currency and cross-border debt is due to credit lines from their foreign subsidiaries decreased banks. there was instability and movement of bank capital and the role of developed countries of the european community in funding foreign banks proved risky. while the evolution of foreign bank participation in the development of investment opportunities and risks in emerging economies, increased competition in traditional markets has forced international banks to seek new areas of expansion. improved measurement and risk management has facilitated the development of financial institutions in emerging countries. on the one hand, they have learned to quantify and manage the market risks and credit support standard models. on the other hand, the consolidation of macroeconomic policy frameworks and increased reliance on market forces probably standardized nature of risks in relation to the developed world. dr. mehdi mili, prof. jean-michel sahut p a g e | 30| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu the aim of our paper is to identify factors affecting the credit strategy of foreign banks in emerging countries. as has been suggested by several researchers that one possible way for the reversal in lending is the financing of foreign banks, we extend our analysis to more focusing on market discipline. in particular, we investigate whether the characteristics of subsidiary and parent bank can explain the behavior of deposits. the problem of transmission of liquidity shocks has been widely discussed in the context of emerging countries. major studies in this context show that the strategy of credit may be affected by specific characteristics of both subsidiaries and parent banks. but it was also proved that the macroeconomic conditions of the country and the mother country home may also affect the credit subsidiaries. allen et al.(2012) show that foreign bank lending is determined by different factors in emerging markets and in developed countries. they show that parent bank fragility negatively affects lending by subsidiaries. among the macroeconomic variables, economic growth and exchange rate matter only for developing countries. furthermore, they also observe a significant impact of market structure on the lending growth in the developing countries. but one limit their models is that macro variables of emerging country can be themselves affected by macroeconomic variables of developed country. similarly, the home country macroeconomic variables can also affect specific characteristics of the parent bank which is located in a developed country. this presents a major problem of colinearity between the variables considered in the same model. in this study we remedy this limit by considering a type econometric approach pls path which will allow us to take account of interdependent relationships between different groups of variables. chin (2000) and esposito (2008) among other show that the pls has the important advantage is that that it requires no assumption on multinormality of the data. however, this condition is rarely met in finance. it is this advantage that has led us to favor this approach in the context of our practical application. the rest of the paper is organized as follow. section 2 presents a literature review on the role of foreign affiliates in the transmission of liquidity socks in emerging countries. the third section describes our methodology and the database used in this study. the following section provides a synthesis of the results. section 5 concludes. ii. lending shock transmission to emerging countries by bank subsidiaries and market discipline a. lending shock transmission by bank subsidiaries the last financial crisis and the need for sound banking systems have opened the opportunities to invest in financial institutions and to develop activities in emerging countries. monetary authorities in these areas attempted to overcome this crisis by accelerating the liberalization of their financial sectors to facilitate the recapitalization of banks and the concentration of the banking sector. the expansion of credit via foreign banks also poses problems of financial stability authorities of the host country. the invasion of the emerging country by foreign banks had direct effects on the transmission of credit shocks from developed countries to developing determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries emerging markets journal | p a g e |31 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu countries. the activity of foreign banks is strongly focused on lending through local institutions affiliated. the ratio of local claims in local currency on the total foreign claims (international and local currency) held by foreign banks has significantly increased in all emerging regions. bank subsidiaries may affect the economies of the emerging country in two ways. first, a crisis liability that often occurs as banking panic and is derived from the random nature of depositor’s withdrawals. this is based on the polarization of depositors’ expectations and surely marks the limits of the policy’s deployment banking strictly individual. second, a crisis of assets which is due to the irreversibility of the lending relationship: if a negative shock affects the profitability or chronic repayments for loans already made, then the bank is facing a liquidity risk, which itself may cause a race to liquidity. loans of subsidiaries contribute to the financing of the growing demand for domestic credit. heavy dependence on external capital exposes the foreign subsidiaries to the risk of non-renewal of funding, even at the risk of sudden withdrawal of capital. the experienced liquidity crisis by the global banking system during the financial year 2008-2009 had particularly affected muslim countries. financing difficulties of parent bank and risk premiums rising have reduced funding for subsidiaries. in addition, the deterioration of the general economic situation led foreign banks to re-evaluate the risks in host markets and tougher lending conditions abroad. arvai et al. (2009) present different two contagious channels that can be carried through inter-bank linkages and relationships’ parent / subsidiaries. the first channel, the problems of liquidity or solvency of a subsidiary may affect its parent, which feeds back on its other subsidiaries in other host countries through the channel of the common creditor. the parent banks of subsidiaries operating in host countries are in spin affected. a variant of this channel implies also that subsidiary wants to reduce its exposure, for reasons of portfolio diversification. this translates withdrawals of deposits or the rising cost of financing the subsidiary, which can cause liquidity problems and affect, through the money market, other banks in the host country, as well as their parent and the markets in which they are active. the second channel, the problems of liquidity or solvency of the parent affect its subsidiaries, which is propagated by inter-bank linkages or through distrust in the banking system, the banks of the host country, and, in turn, impact their respective parent companies. shnabl (2011) suggests that the efficient market theory suggests that as long as investment opportunities are constant, shocks to financial institutions in one market should not affect lending in other markets. then, if financing frictions prevent financial institutions from accessing alternative financing sources to cover shortfalls, then liquidity shocks in one market may affect lending in other markets. cetorelli and goldberg (2012) show that the critical description of the bank lending channel is that banks’ experience of a funding shock. if they cannot substitute liabilities with other external funding sources, such as by issuing certificates of deposit or attracting money market funds, the shock is transmitted to the asset’s side of their balance sheets. martinez peria et al. (2002) and haas and van lelyveld (2006, 2010) suggest that subsidiary banks do not change their lending strategies in times of local crisis. bernanke and blinder (1988) and bernanke and james (1991) tested the relationship between liquidity and changes in loans. they demonstrate that changes in the liquidity of real consequences on loan dr. mehdi mili, prof. jean-michel sahut p a g e | 32| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu strategies of banks. however, these studies have ignored a number of variables such as economy wide productivity shocks that affect both changes in supply and demand of loans at the same time. loupias, savignac and sevestre (2003) and gambacorta (2005) show that liquidity positions of banks affect how banks react to a monetary shock in several european countries. claessens et al., (2009) suggest that foreign subsidiaries may be a factor of a financial instability. in fact, the relaxation of restrictions on foreign bank’s entry can bring risks. particularly, by increasing competition and thereby lowering the profits of domestic banks, foreign entry may reduce charter values of domestic banks, making them more vulnerable. this may have a destabilizing effect on the financial system especially if the domestic prudential regulations and supervision are not sturdy. from a public policy standpoint, peek, j. and e. rosengren (1997) indicate that credit flows by global banks will is influenced by both domestic and foreign conditions. moreover, a bank’s capitalization will not be a sufficient statistic for predicting its willingness to lend. nonperforming loans, even those yet to be reflected in capital ratios or publicly disclosed, can alter the willingness of global banks to lend. based on a sample of 45 banking groups, de haas and van lelyveld (2010) tried to explain the supply of credit by banking subsidiaries of the macroeconomic environment in the host country by country the financial characteristics of the subsidiary of its parent company and other subsidiaries. their results support the existence of an internal capital market banking groups, in which the parent bank manages the supply of credit to their subsidiaries. they emphasize two effects: a substitution effect which arbitrates between the parent company and its subsidiaries, changes in financial support depending on the state of the host country and the expected returns and the effects of support (means effect) by which parent bank support weaker subsidiaries (capital and liquidity). thus, the subsidiaries would be protected against shocks from the host country and depends on the situation of the parent company and the country of origin. b. market discipline of foreign subsidiaries market discipline can be described as a situation in which depositors penalize riskier banks by withdrawing deposits. market discipline was stated by the basel regulatory framework as one of the three pillars required for the stability of the international financial system. market discipline is widely adopted by regulatory authorities to limit bank risk-shifting incentives that are exacerbated through a financial safety net. according to berger (1991), market discipline in the banking sector is generally interpreted as a situation where the costs incurred by the partners of the bank on the risk of bank risk and react on the basis of these costs. thus, the analysis of market discipline can be reclined through problems that may exist between agencies, mandating and agent. the applicant (which is the principal) wants to ensure that the bank (agent) protects its assets. thus, applicants will respond to any increased risk of the bank through prices or quantities, demanding higher interest rates on their deposits or withdraw completely. this leads to penalize banks following an excessive risktaking. we address this issue by asking the question whether depositors require controlling risk-taking by foreign subsidiaries in emerging countries. the last global financial crisis has sparked a debate on incentives that may assist depositors to determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries emerging markets journal | p a g e |33 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu discipline risk-taking by their banks. klapper and love (2002), mitton (2002) note that market discipline which is an essential factor for banking stability is low in emerging countries and remains under the influence of banking regulations. indeed, the regulatory and supervisory practices and institutional factors greatly influence and even alter the mechanisms of discipline. heavy dependence on external capital exposes subsidiaries in host countries to the risk of non-renewal of funding (funding risk), even at the risk of sudden withdrawal of capital. the liquidity crisis experienced by the global banking system in 2008-2009 has particularly affected muslim countries. financing difficulties of parent banks and rising risk premiums have reduced funding for subsidiaries. in addition, the deterioration of the general economic situation led foreign banks to re-evaluate the risks in emerging markets and tougher lending conditions abroad. depending on the funding strategy adopted, parents’ banks can delegate more responsibility to their subsidiaries in terms of collecting deposits in host country. consequently, parent banks isolate their foreign subsidiaries by reducing the available funding. in many countries, the reduction in funding foreign subsidiaries may have destabilized the entire system. according to herring (2007), the risk is even more severewhen the foreign subsidiaries with significant shares in host markets become systemically important, while at the same time, they are not so important for the parent bank because of their small size relative to multinational banking group. jacklin and bhattacharya (1988) and diamond and dybvig (1983) support that failure to respond to liquidity problems can cause bank insolvency in the short term and induce contagion effects. the risk undergoing by the banking system is that the failure of an insolvent bank can lead depositors of other banks to withdraw their deposits. allen et al. (2010) show that liquidity needs determine the change in deposits in developing economies, especially during the recent crisis whereas market discipline is relatively more dominant in developed countries. de la torre et al. (2003) evidence that bank fundamental indicators tend to be less important in explaining the evolution of deposits banks in emerging countries. the conclusions of our paper are relevant to the academic literature on market discipline in at least two dimensions. first, we show that market discipline in developing countries depends on the risk directly taken by the depositor. this is will be shown by the fact that the evolution of deposits depends on fundamentals of the subsidiary and also on macro-economic characteristics of the host country. the specific variables of the mother and the macroeconomic variables bank do not affect the behavior of depositors in emerging countries. second, market discipline is a fact that can characterized the banking sectors in emerging markets and regulatory authorities should establish prudential provisions necessary to strengthen discipline in their markets. this is especially necessary, when it is shown that this discipline depends on systemic risks that affect the fundamentals of banks. iii. methodology and data in this study we investigate the transmission of liquidity crises from developed to developing countries through foreign subsidiaries. de haas and van leyveld (2010) show that loan growth of foreign subsidiaries is not only determined by their own characteristics but also by the characteristics of their parent bank and the variables of host countries. following their dr. mehdi mili, prof. jean-michel sahut p a g e | 34| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu approach, we use the annual change of the logarithm of total loans of a subsidiary (δloans) as the variable that describe the loans strategy of the subsidiaries. in our work, we present a stylized model, which specifies the loan supply decision of bank subsidiaries in light of four blocks of exogenous latent variables; the two first groups are specific variables of subsidiaries and their parent banks. the third and the fourth groups are macroeconomic variables of origin and host country, respectively. specific financial variables banks for subsidiaries and parent banks include, return on equity (roe), equity to total assets (equity), assets liquid to total assets (liquidity) and we consider provisions for loan losses to net interest income (loan loss provisions) as a proxy for credit risk following. we expect that the capitalization of subsidiaries affect positively loan growth, since credit transactions are generally linked to effective and a real business which is based on risk sharing between the bank and its customers. however, nonperforming loans’ provision should have a negative sign, as banks reduce exposure in countries where they are experiencing problems. we include a variable size (size), as a variable control, defined as the logarithm of total assets. gambacorta (2005) shows that bank size is irrelevant; small banks are not more sensitive to monetary policy shocks than large banks. the same specific variables are used to describe the financial situation of the parent bank and to construct the latent variable parent fundamentals. the third and the fourth group of variables consist of macro-economic variables of host country of the subsidiary and the origin country of parent bank. we include the growth rate of gdp (gdp growth) and the real exchange rate of the u.s. dollar (real exchange rate). we expect that lending by foreign banks increase with the local gdp and appreciation of the local currency. the study of the effect of gdp on the credit supply is carried by the assumption that better economic conditions increase the investor’s optimism. a higher exchange rate results in higher imports prices and in turn, increases domestic prices. accordingly, a higher exchange rate reduces exports’ prices and thus leading to a higher demand for exports, kia and darrat (2007). as a result, the higher demand for resources creates a pressure on domestic prices and hence increases loans in islamic banks. in addition, to test whether the structure of the banking sector's liquidity affects the transmission of liquidity shocks we include the variable (concentration). the concentration of the banking sector implies the importance of local banks in the host country. we estimate that more high concentration lower the role of foreign subsidiaries in the transmission of liquidity shocks. in a following step, to test the existence of market discipline and to identify its mechanism, we use the change in bank deposits (δdeposits) as measure for market discipline. we assume that a double evaluation of risks by both the counter-party and the bank should help introduce a healthy discipline in the whole banking business and eliminate a range of undesirable lending practices. the sample used in this study focuses on banks' subsidiaries existing in emerging countries and whose parent banks are located in developed countries. we collect data on 590 foreign subsidiaries operating in emerging countries and that are associated with 270 parent bank which operate in developed countries. this paper combines financial data of subsidiaries and determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries emerging markets journal | p a g e |35 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu macroeconomic variables of both host and home countries to investigate determinants of loans shock transmission from developed to emerging countries. the financial information on subsidiaries was collected from bank scope data base. table1 provides descriptive statistics of our sample. the table shows that total assets of parent banks are on average much higher than those subsidiaries. however, liquidity and the roe subsidiaries exceed those of parent banks. table 1. summary statistics of all subsidiaries to test the impact of each group of variables on both credit strategy of foreign subsidiaries and market discipline exerted by the depositors in emerging markets, we apply a consistent econometric approach pls path that allows us to estimate complex causal relationship between latent variables measured themselves by called manifest observed variables. pls is a structured equation modeling technique that can analyze structural equation models (sems) involving multiple-item constructs, with direct and indirect paths. this approach is a method of analysis to study the impact of a number of blocks of variables on the same individuals (tenehaus, 1998). the pls method works by extracting successive linear combinations of the predictors and is effective in explaining both response and predictor variation. the pls path regression is a powerful approach for analyzing models because of the minimal demands on measurement scales, sample size, and residual distributions. the emphasis of pls is on predicting the responses as well as on understanding the underlying relationship between the variables. generally, groups of variable have some particular features such as high correlations. this leads to a problem of multicolinearity and makes it difficult predictive modeling using classical regression methods. hence, the use of structural equation models of latent variable. in our research we consider six groups of variables, each of which is determined by i manifest variables: let xij be the vector of i manifest variables of the latent variable j. each group variable is observable expression of a latent variable ξj whose average is denoted mj. a hierarchical classification of manifest variables is first performed to obtain blocks of variables representing the latent variables in the model to estimate. the causal relationships between these blocks are made with partial correlations. then, the external model is specified with the reflective mode to the extent that manifest variables were chosen so that they reflect the dimension to which they refer. we consider the following causal model: banks subsidiaries parent banks mean std. dev mean std. dev ∆ ioan 0.037 1.837 0.182 0.631 δbank deposits 0.169 1.521 0.071 2.998 total assets 3681 11.632 15972 23.061 loan loss 0.391 2.635 1.517 4.713 equity 0.422 2.641 0.572 8.671 roe 0.731 4.729 0.341 2.742 liquidity 0.389 2.631 0.277 3.974 interbank 5.363 0.644 2.731 6.370 dr. mehdi mili, prof. jean-michel sahut p a g e | 36| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu macro parent subsidiar ies fundame ntals δloa ns parent fundam entals δdep osits macro subsid iaries figure 1. the pls-pm model the estimation procedure consists of two types of estimates of latent variables and the estimation of structural equations. the estimation of latent variables: latent variables ξj are estimated in two ways: the yj estimated from the manifest variables xji and internal estimate zj derived from external estimates yi of ξi related to ξj. it is, therefore, an iterative algorithm, comprising the following steps: first, we estimate the latent variables based on the external model (each latent variable is estimated based on manifest variables of the block) where the coefficient represents the external weight. then, we estimate latent variables based on the internal model (each latent variable is estimated based on other latent variables that are related). where is the internal weight which is defined by choosing a schematic structural calculation. in a following step, we establish a relationship between the two types of estimates for determining the external final weight: wij = cov (xij, zj) we repeat theses three steps until convergence in the estimates of the latent variable. the estimation of structural equation once scores (external final estimate) are obtained, we estimate the coefficient of internal model using multiple regression classics (mco) or pls. indeed, the structural equations are estimated by replacing each latent variable by external estimate. in this study, the relationship of the pls algorithm is estimated using the pls regression instead of ols regression. indeed, for two blocks of variables x and y, the ols regression explains the variable y at the expense of variable x. it can produce aberrant signs and insignificant coefficients. contrary, pls regression explains both y and x. it solves the problem of multicollinearity with the construction of major components. iv. results and interpretation we perform pls-pm analysis involving only reflective indicators for the inner estimation. since each reflective block represents only one latent construct, it needs to be one-dimensional. this is why a preliminary exploratory analysis for verifying the composite reliability of blocks is required. two different measures are available to test block onedimensionality in pls-pm framework: dillon-goldstein’s rho and cronbach’s alpha. according to chin (1998), dillongoldstein’s rho is considered a better indicator than cronbach’s alpha as it is based on the results from the model rather than on the correlations observed between the manifest variables in the dataset. following werts et al. (1974), a block is determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries emerging markets journal | p a g e |37 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu considered homogeneous if this index is greater than 0.7 . the results of composite reliability test are resumed in table 2. since the dillon-goldstein rho index is always greater than 0.7 we can deduce that all six blocks of manifest variables can be considered one dimensional. table 2. composite reability another method of assessing the discriminant validity is to compare the square root of average variance extracted (ave) for each construct with the correlation between the construct and other constructs in the model. the measures are considered to have adequate discriminant validity if the square root of the ave for each construct is larger than the correlation between the construct and any other construct in the model. as shown in table 3, all constructs in the estimated model also fulfill this condition of discriminate validity. table 3. correlation among construct scores notes: the bold diagonal figures are the square root of the average variance extracted; the off-diagonal figures are the correlations of the latent construct once the composite reliability is verified, we may look at the relationships between each manifest variable and its own latent variable. in table 4 we present the weights of the relationships between each manifest variable and its own latent variable, together with the standardized loadings. on the same table we report also average communality index that measure the ability of each latent variable to explain its own manifest variables. since this index is always higher than 0.5, we can conclude that globally all the latent variables are powerful at explaining their own manifest variables. a low value in a loading factor suggests that the indicator has little relation to the associated construct. all indicators of a block of variables must reflect the same construct. the normalized weight measure the impact of the corresponding manifest variable in computing the latent variable latent variable s dimensio ns alpha de cronbac h rho de d.g. (acp) critical value eigenval ues macro subsidiar ies 3 0,890 0,888 1,685 0,844 0,099 macro parent 2 0,067 0,993 0,774 1,605 0,643 subsidia ries fundame ntals 5 0,917 0,829 1,811 0,714 0,403 0,227 0,054 parent fundame ntals 5 0,059 0,844 1,311 1,529 0,979 0,362 0,158 0,124 loan strategy 1 0,730 0,749 1,319 market disciplin e 1 0,106 0,857 1,135 1,477 macro subsidia ries macro parent subsidi aries fundam entals parent fundam entals loan strategy market discipli ne macro subsidia ries 0,251 macro parent 0,119 0,520 subsidi aries dpecific 0,101 0,238 0,210 parent specific 0,172 0,157 0,171 0,133 loan strategy 0,156 0,026 0,192 0,089 0,234 market discipli ne 0,034 0,162 0,081 0,116 0,153 0,490 dr. mehdi mili, prof. jean-michel sahut p a g e | 38| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu score as an index and the standardized loadings. the results show that the manifest variable gdp growth is the most important driver in computing the latent variable macro variables of host countries. the same occurs for manifest variable total asset with respect to the latent variable specific subsidiaries, and for latent variable parent specific with the two manifest variables total asset and roe. among fundamental variables of the subsidiary, only the variable exchange rate does not significantly affect the latent variable specific subsidiary. the variable loan loss provision has a significantly negative effect on the latent variables of the subsidiary. table 4. normalized outer weights and average communalities table 5. shows that the goodness of fit index1 for both the structural and 1a global criterion of goodness-of-fit (gof) can be given (espisit., 2008) by the geometric mean of the average communality and measurement models are satisfactory with an absolute gof value of 0.523 and an equal contribution of measurement model in constructing it. the relative gof is very high. so are inner and outer models gof. table 5. goodness of fit index for the hole model the average r2: variable latent manifest variables loadings normalized outer weights averagev communalit y macro subsidiaries sgdpgrow th 1,042 ** 0,905 sexchange 1,377 0,026 sconcentrat ion 0,010 * 0,055 0,541 macro parent pgdpgrow th 4,427 ** 0,833 crisis 0,077 * 0,166 0,628 subsidiarie s specific stotalasset s 4,981 ** 0,715 sequity 2,354 * 0,103 sloanloss 1,785 ** 0,037 sroe 2,982 * 0,103 sliquidity 1,254 0,040 0,587 parent specific ptotalasset s 3,258 ** 0,477 pequity 1,249 * 0,051 ploanloss 0,955 ** 0,097 0,721 proe 4,111 ** 0,131 pliquidity 1,281 * 0,041 loan strategy sioan 1,767 ** 1,000 0,591 market discipline sbankdepo sits 0,184 ** 0,136 0,570 gof gof (bootstrap ) borne inférieure (95%) borne supérieure (95%) absolu 0,523 0,526 0,515 0,584 relatif 0,842 0,844 0,811 0,876 modèle externe 0,869 0,869 0,848 0,882 modèle interne 0,978 0,9769 0,948 0,985 determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries emerging markets journal | p a g e |39 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu after checking the reliability and validity of the relationship between manifest and latent variables, we present in the following the results of the structural model and the relationships between latent variables. since the pls approach is distribution free, the nonparametric bootstrap procedure is used to estimate the t-statistics and the significance levels for the structural path coefficients (chin, 1998). let’s first study factors affecting loans strategy of subsidiaries in emerging market. the results of structural model with δloans as the dependent variable are summarized in figure 22. figure 2. results of pls estimation for the theoretical model (a) the regression coefficients and associated t-values are shown on the links (arrows) between exogenous and endogenous latent variables. the constructs in the model have both small and large effects on loans growth. the results show that the proposed model for loan growth has a r-square of 0.328. 2 to simplify the figure we do not present the regression results of exogenous latent variables on the variable δdeposit. additionally, the r-squares for the outcome constructs of parent and subsidiaries fundamentals variables are 0.262 and 0.231 respectively. a positive effect was found for the built variables parent and subsidiaries fundamentals on loans growth with coefficients of 0.329 and 0.271 respectively. this imply that the strategy of loans supply of subsidiaries in emerging countries depends more heavily on fundamentals of the parent bank rather than on specific variables of subsidiaries. we deduce that the liquidity of the subsidiaries is centrally managed at the parent bank and credit supply of subsidiaries depends primary on the financial situation of its parent bank. other relationships, that justifies our use of pls path approach, can be highlighted and falling multicollinearity problems between variables. in particular, the specific variables of the subsidiary appear strongly affected by macroeconomic characteristics of the home country. parent bank appears also strongly influenced by maco-economic variables of the let’s study the results of the structural model estimates. table 6 shows the correlation and regression path coefficients linking each exogenous latent variable to the endogenous loan strategy. the interpretation of this table should be done in conjunction with table 3 which presents the loading factors. we can conclude that all path coefficient estimates of the structural model are significant. looking at the path coefficients, we note that credit growth of the subsidiary mainly depend on macroeconomic conditions of the country of origin. (path coefficient = 0.564 and contribution to r² higher than 55%). this mean that changes in aggregate claims on home countries explain a significant share of the variance in the dependent variable country of origin. dr. mehdi mili, prof. jean-michel sahut p a g e | 40| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu table 6. impact and contribution of exogenous latent variables on the table table 7. goodness of fit index for the structural model endogenous δloans the variable gdp is the most important variable among the macroeconomic variables of the country of origin which is the most relevant group affecting credit growth of subsidiaries. this confirms that the transmission of liquidity shocks’ across countries is intensified by the foreign subsidiaries in emerging countries. this result contradict those of classens and horen (2009), who document that the income level of the home country does not significantly affect the supply of loans of conventional subsidiaries banks. from table 3 and 6, the manifest variable exchange rate also matter for the construct subsidiaries fundamentals but at lower degrees. this corroborates the results of cook and devereux (2011) who argue that the exchange rate exacerbates the impact of shocks in a liquidity trap for conventional banks that are increasingly affected by a systemic risk with the opening of capital markets. parent banks’ fundamental seems to be crucial in establishing the potency of the bank lending channel since loan growth is significantly related to specific variables of parent bank. especially bank capitalization of the parent bank positively affects credit growth of the subsidiary while loan loss provision has a negative effect on the latent construct parent fundamentals, which allows us to deduce that the financial situation of parent bank reduces loans of subsidiary in the emerging countries. the combination of the two results that credit growth of subsidiaries depends on the overall strategy of the parent bank and the fact that it also depends on the macroeconomic conditions of the country allow as deducing that credit supply in emerging markets may contract due to economic downturn in developed countries. accordingly, the foreign subsidiaries will result in a destabilizing role in the emerging country. these findings evidence the theoretical mechanisms of the relationship between foreign banks and economic stability of the host country who argue that subsidiaries of foreign banks depend heavily on the decision of their parent banks with a globally diversified portfolio of assets. indeed, in line with the results of stein (1997), parent banks can play the role of lender of last resort in times of crisis. it can also manage an internal capital market operations and centralized allocate capital and liquidity of its subsidiaries. this helps to stabilize the supply of credit by foreign banks in the host country when foreign branches are facing financial shocks. subsidiaries of foreign banks may be able to recover macro parent parent specific macro subsidiar ies subsidiar ies specific corrélati on 0,161 0,001 0,005 0,043 path coefficie nt 0,564 0,262 0,129 0,231 t-statistic 3,140 0,245 0,562 0,645 contribu tion au r² (%) 55,529 6,81 9,309 28,352 r² r²(bootstrap) ecarttype borne inférieure (95%) borne supérieure (95%) 0,524 0,527 0,034 0,518 0,557 determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries emerging markets journal | p a g e |41 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu relatively quickly, compared to domestic banks. the fact that macro-economic conditions of the host country doesn’t affect significantly credit supply of subsidiaries shows that in period of crisis in home country, parent bank can supports its subsidiary by providing necessary liquidity. in this case the subsidiary may play the role of stabilizer in the host country. foreign subsidiaries and market’s discipline to examine the existence of market discipline on subsidiaries in emerging markets, we use the same set of variables employed in the previous section. we measure market discipline by the manifest variable; δdeposits. the market must have the power to restore stability to the banking system through the behavior of depositors against the risk that outstanding. the reaction of depositors results in an effect on deposits of subsidiaries. figure 33 shows general results of structural model with δdeposit as endogenous variable. it’s shown that market discipline is strongly affected by the specific characteristics of the subsidiary (path coef = 0.579). the fundamental variables of the parent bank also significantly affect market discipline but at lower degrees. macroeconomic variables of the host emerging country have an impact on market discipline as opposed to macro variables of the country of origin which appear globally uninformative about the mechanism through which depositors exert market discipline on foreign subsidiaries in emerging countries. 3 in a concern of simplicity, only the regression results of exogenous latent variables on the variable deposit are shown in this figure. figure 3. results of pls estimation for the theoretical model (b) dr. mehdi mili, prof. jean-michel sahut p a g e | 42| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu the results of pls path regression of the structural model with market discipline as dependent variable are resumed in table 8. the results confirm the existence of market discipline exerted by emerging countries. it’s shown that the specific variables of the subsidiary depositors on their foreign subsidiaries in affect more significantly market discipline than the specific variables of the parent bank and contributes to 65% of the r-squard of the model. table 8. impact and contribution of exogenous latent variables on the endogenous δdeposits table 9. goodness of fit index for the structural model r² r²(boot strap) ecarttype borne inférieu re (95%) borne supérie ure (95%) 0,007 0,019 0,010 0,006 0,046 the construct specific variable of subsidiary appears the group that most affects the market discipline exerted on foreign subsidiaries. this means that depositors are more concerned with the risk taken by the subsidiaries in host country than risk taken by their parent banks. macroeconomic variables of parent bank, globally, have insignificant effect on market discipline of their subsidiaries. as the total equity positively affects the latent variable specific subsidiaries, then we can deduce that the capitalization of the subsidiary bank is a determining factor of deposit growth. this may be explained by the fact that strengthening the capital of the bank is likely to restore confidence of depositors and to insure convergence of interests with depositors. by the same, loan loss provision negatively affects specific variables of the subsidiaries (see table 3). so, high level of loan loss provision reduces deposits of subsidiaries. this may be due to the fact that problems encountered by the parent bank on its loan portfolio leads it to reduce its funding to its subsidiaries. thus, if the parent bank seeks to preserve its liquidity crisis in the country of origin, their subsidiaries generally experience a reduction in their deposits. on further analysis, an increase in loan loss provisions should be associated with a higher expected write-off and therefore should indicate a riskier institution. so, higher level of loan loss provisions is not viewed as a better protection. parent bank significantly affects deposit growth. this result challenges the limited role of the parent bank to support their subsidiaries in times of crisis in the receiving country. this finding is in line to that of allen et al. (2010) who show that in times of crisis, parent banks support their subsidia ries specific macro subsidiar ies parent specific macro parent corrélati on 0,070 0,020 0,026 -0,045 path coefficie nt 0,579 0,294 0,121 -0,017 t-statistic 2,350 3,713 2,297 0,215 contribu tion au r² (%) 65,019 21,748 8,721 4,512 determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries emerging markets journal | p a g e |43 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu subsidiaries in host countries which reassure depositors. parent banks facing difficult financial situations can engage their subsidiaries in gathering deposits more aggressively especially in times of crisis. similarly, we can infer that liquidity of parent banks it significantly increases the deposits in foreign subsidiaries in the period of crisis. this is may be explained by the fact that depositors can expect that the parent bank supports their subsidiaries by providing them with a sufficient liquidity in order to fulfill their obligations at maturity. being persuaded to withdraw their funds without incurring losses, the depositors increase their deposits in subsidiaries. from this synthesis we argue that financial sectors in emerging countries are relatively small compared to those of developed countries, if the subsidiary has a substantial market share in the host country, it will be more inclined to bailout to limit systemic consequences. this fact creates the permissive to increased risktaking by the subsidiary conditions. this situation is particularly damaging as the supervisor of the developed country is discharged of its responsibilities on the host country of the subsidiary and has little incentive to control the transfer of risk from the parent bank to its subsidiary. i. conclusion the presence of foreign banks in emerging countries can be a source of destabilization in emerging countries and may constitute a channel for the transmission of liquidity shocks. in this study our aim was to investigate factors affecting the credit strategy of foreign banks in emerging countries. we apply a pls-path model that allows us to indentify the causal relationships between the various groups of variables. an interesting result derived from our study that foreign bank lending is determined by the specific financial variables of the parent bank and macroeconomic variables of the country of origin. the internal capital market group can carry instability when the parent reallocates liquidity. this leads us to conclude that the expansion of credit via foreign banks can poses problems of financial stability authorities of the host country. our purpose was also to test whether depositors exert market discipline on foreign subsidiaries. we tried to identify factors that may explain the behavior of depositors. we show that specific variable of subsidiary is the group that most affects the market discipline exerted on foreign subsidiaries. this implies that the behavior of depositors is more affected by the risks taken by the subsidiaries in the receiving country. despite the fact that the parent bank affects the strategies of their subsidiaries in developing countries, it does not affect the behavior of depositors. one way to address weaknesses of banking sector in emerging countries is to submit banks to market discipline. this can be by promoting other financial intermediaries that will compete with banks or by developing efficient capital markets so that depositors receive information and their responses will be reflected on the share price of the bank on the market. dr. mehdi mili, prof. jean-michel sahut p a g e | 44| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu bibliography allen f., a.hryckiewicz, o.kowalewski & g.tümer-alkan. 2010. “transmission of bank liquidity shocks in loan and deposit markets: the role of interbank borrowing and market monitoring” wharton financial institutions center working paper 10-28 arvai z., driessen k. and ötker-robe i. 2009. “regional financial interlinkages and financial contagion within europe”, working paper, fmi, n° 09/6, janvier. berger, a., 1991. “market discipline in banking, proceedings of a conference on bank structure and competition, federal reserve bank of chicago, pp. 419-437. bernanke, b. and h. james 1991. “the gold standard, deflation, and financial crisis in the great depression: an international comparison,” financial markets and financial crises, r. glenn hubbard, ed., chicago: university of chicago press. bernanke, ben s & blinder, alan s, 1988. “credit, money, and aggregate demand”, american economic review, american economic association, vol. 78(2), pages 435-39, may cetorelli, n. and l.s. goldberg, 2012. “banking globalization and monetary transmission,” the journal of finance. volume 67, issue 5, pages 1811–1843, october 2012 chin, 1998, “the partial least squares approach to structural equation modeling. in:marcoulides ga (ed) modern methods for business research. lawrence erlbaum associates,mahwah, nj, pp 295–336 claessens, stijn and neeltje van horen, 2009, “learning by doing in foreign banking,” mimeo, dnb and imf de haas, r. and i. van lelyveld, 2010. “internal capital markets and lending by multinational bank subsidiaries,” journal of financial intermediation, vol. 19(1), 1-25. de haas, r. and i. van lelyveld, 2006. “foreign banks and credit stability in central and eastern europe. a panel data analysis,” journal of banking and finance 30, 1927– 1952. de la torre, a., levy yeyati, e., schmukler, s., 2003. “living and dying with hard pegs: the rise and fall of argentina’s. ” currency board. economia spring 2003, 43–107. diamond, douglasw., and philip h. dybvig. 1983. “bank runs, deposit insurance, and liquidity.” journal of political economy 91 (5): 401–19. efron b, tibshirani rj. 1993, “an introduction to the bootstrap. chapman and hall, new york,ny esposito vinzi, v. , 2008, “the contribution of pls regression to pls path modelling: formative measurement model and causality network in the structural model. ” in: joint statistical meetings (jsm) 2008, american statistical association, denver, colorado, united states of america, august 7th 2008. gambacorta, l. 2005. “inside the bank lending channel”, european economic review, 49, 1737-59. herring, r.j., 2007. “conflicts between home & host country prudential supervisors,” wharton financial institution center working paper 07-33. jacklin, charles j., and sudipto bhattacharya. 1988. “distinguishing panics and information-based bank runs: welfare and policy implications.” journal of political economy 96 (june 1988): 568–92. kia, amir and ali f. darrat 2007, “modeling money demand under the profit-sharing banking scheme: some evidence on policy invariance and long-run stability”, global finance journal, vol. 18, pp.104-123. klapper, l. f. and love, i., 2004, “corporate governance, investor protection, and performance in emerging markets. ” journal of corporate finance, 10, pp. 703-728. loupias c., f. savignac et p. sevestre, 2003. “monetary policy and the bank lending channel in france : are there asymmetries ?”, in monetary transmission in the euro area, eds i. angeloni, b. mojon et a. kashyap, cambridge university press. martinez peria, m.s., a. powell, and i. vladkova hollar, 2002, “banking on foreigners: the behavior of international bank lending to latin america, 1985–2000,” world bank working paper no. 2893. world bank, washington, dc. mitton, t. 2002, “a cross-firm analysis of the impact of corporate governance on the east asian financial crisis. journal of financial economics, 64, pp. 215241. determinants of loans and deposits strategies of foreign bank subsidiaries in emerging countries emerging markets journal | p a g e |45 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.42 | http://emaj.pitt.edu peek, j. and e. rosengren , 1997, “collateral damage: effects of the japanese real estate collapse on credit availability and real activity in the united states, ” american economic review 90, septembre 1987, p 495505. schnabl, philipp. 2011. “the international transmission of bank liquidity shocks: evidence from an emerging market.” journal of finance, volume: lxvii, issue: 3, pages: 897-932 stein, j. c. (1997), “internal capital markets and the competition for corporate resources.” journal of finance, vol. 52, pp. 111–133. tenehaus, m. 1998, “la régression pls: théorie et pratique”. editons technip, paris. (in french) werts ce, linn rl, jöreskog kg 1974, “intraclass reliability estimates: testing structural assumptions”. educ psychol meas 34(1):25– 33 emerging markets journal impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey dr. ayşe tansel çetin yalova university | e-mail: aysetanselcetin@gmail.com dr. cevdet kızıl yalova university | e-mail: cevdetkizil@yahoo.com halil i̇brahim zengin yalova university | e-mail: ibrahim0061@hotmail.com abstract the primary objective of this paper is to investigate the impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey. survey method is utilized in order to reach this goal and questionnaires are distributed to test the effect of mentoring on turkish accounting-finance scholars’ organizational commitment and job satisfaction. this paper contributes to the literature by pointing out the relationship among mentoring, organizational commitment and job satisfaction, which in turn leads to more efficient mentoring management and necessary measures in turkish accounting-finance community. * this paper won the best paper award at 6th asian business research conference organized by world academy of social sciences. we would like to express our special thanks to the attendants of our sessions and discussants in the 6th asian business research conference (bangkok, thailand) and 8th international strategic management conference (barcelona, spain). especially, the conference chair prof. dr. zia haqq deserves additional appreciation with his input, suggestions and academic critics. keywords: accounting, finance, mentoring, organizational commitment, job satisfaction new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu | http://emaj.pitt.edu mailto:aysetanselcetin@gmail.com mailto:cevdetkizil@yahoo.com mailto:ibrahim0061@hotmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 1 impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey dr. ayşe tansel çetin dr. cevdet kızıl halil i̇brahim zengin i. introduction mentoring at work is gaining importance and attracting attention every passing year. this is mainly because mentoring in the business life brings a number of benefits to organizations for several years (levinson, darrow, klein, levinson and mckee, 1978; roche, 1979). for instance job satisfaction, promotion and higher salary payment can be listed as significant benefits of mentoring (whitely, dougherty and dreher, 1991; dreher and ash, 1990; fagenson, 1989; turban and dougherty, 1994; chao, walz and gardner, 1992; whitely and coetsier, 1993). also, mentoring is considered as a key factor in the learning process of protégés and an influential element in the work identity, improvement and self esteem of younger individuals (levinson, darrow, klein, levinson and mckee, 1978). mentoring is indeed a tool for the planned career development of protégés and young professionals (zey, 1984) as well as being a locomotive career source for improving managerial talent (bernstein and kaye, 1986; ragins and scandura, 1994). past studies did also investigate the effect of mentoring on women and men protégés’ career advancement and revealed significant findings (tharenou, 2005). similarly, former research shows that mentoring is in a critical position in terms of career satisfaction, career commitment and turnover intentions (koberg, boss and goodman, 1998; noe, 1988, major, kozlowski, chao and gardner, 1995). additionally, mentors serve as a bridge enabling information exchange and enhancing knowledge acquisition (mullen, 1994). thus, mentors have an eye-catching role in organizational knowledge (kanter, 1993; ostroff and kozlowski, 1993). besides, mentors are thought to be assisting mechanisms of informational and instrumental social support (allen, mcmanus and russell, 1999). at this point, previous studies prove that employees with mentors learn about the workflow in an organization faster and more efficiently (ostroff and kozlowski, 1993; wilson and elman, 1990). another advantage of mentoring is that it fosters job enrichment since the mentor assigns many tasks to protégé through the mentoring process (hackman and oldham, 1976). moreover, mentoring has a key impact in reducing role ambiguity (sawyer, 1992) and increasing productivity (silverhart, 1994). concerning the accounting environment, mentoring is again very important for the business, clients, employees and other stakeholders. first of all, existence of mentoring in large-scaled public accounting firms provides feedback to protégés as well as improving their relations with customers and strategic partners (dirsmith et al, 1997). in regards to academics, role of mentoring should also be noted. according to past research, academic success increases parallel to mentoring, trust and commitment. for instance, former study shows that development of a professional relationship between a supervisor and a doctoral candidate based on specific variables such as trust and commitment fosters successful completion of a doctoral program. (mcphail and erwee, 2000). additionally, mentor becomes a role model in the academic environment, provides advice and access to the profession (blackburn et. al., 1981). a research run in turkey also supports this statement by focusing on mentoring for early career-stage and young academicians. the mentioned study revealed dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 2 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu that research assistants in anadolu university respected their mentors. however, they had low levels of admiration towards their mentors. moreover, according to the results of research, friendship factor was not highly received by research assistants. besides, level of interaction between mentors and research assistants outside the university environment was low. finally, a great majority of research assistants perceived a mentorprotégé relationship and considered mentoring as a career development tool parallel to the emphasized research (özkalp, kırel, sungur and cengiz, 2006). another research analyzing mentoring in the academic environment showed that mentoring did increase the success level of female assistant professors. tested mentoring program was found to be effective in increasing the grants received and raising the number of publications (blau, currie, croson and ginther, 2010). one study investigated the impact of mentoring on turnover ratios and skills of teachers working in new york city. the mentioned study determined strong relationships between measures of mentoring quality and teachers’ claims concerning the effect of mentors on their success in the classroom. however, effects on teacher absences, retention and student achievement were lower. furthermore, time spent working with mentor was significant to improve the teaching skills of teachers (rockoff, 2008). likewise, the impact of mentoring in higher education was studied. this study did also attract attention to the importance of mentoring in academics. according to findings, participants in formal mentoring programs were more productive in terms of publication output compared to nonparticipants. on the other hand, informal mentoring was not found to be effective in mentees’ publication performance (muschallik and pull, 2012). in addition, another research pointed out that there was no evidence indicating positive outcomes and improvement for female graduate students who had more female faculty members or female dissertation chairs. but, female faculty members had some limited positive effect on female graduate students’ graduation periods and completion rates in terms of mentorship (neumark and gardecki, 1996). despite the numerous listed benefits of mentoring and the presence of a mentor, positive outcomes are not observed in all circumstances since quality of mentorship is also very important. in other words, protégés are expected to experience favorable results with mentors, but this is tightly related to how mentoring is provided (ragins, cotton and miller, 2000). originally, the term “mentor” dates back to the ancient era and greek mythology. it is used to describe a relationship between a younger individual and an older, more experienced individual who assists the younger person to navigate the adult world and the world of work (allen, poteet, eby, lentz and lima, 2004). definitely, the terms mentor and mentoring have been used frequently since then and there is still a big debate on the most accurate definition of both terms. for example, according to another description of mentoring, it is off-line help by one individual to another in making important transitions in knowledge, work or thinking (megginson and clutterbuck, 1995). one detailed description of mentoring states that, it is an extensive interpersonal exchange between a higher experienced colleague (mentor) and a lower experienced junior colleague (protégé) in which the mentor presents support, direction and feedback concerning career plans and personal improvement (dalton, thompson and price, 1977; hall, 1976; levinson, darrow, klein, levinson and mckee, 1978). there are also short and simple definitions of mentoring, as mentioned in the records of renaissance time. mentoring is defined as the commonly accepted technique of educating young people in these records (wickman, 1997). another short definition states that mentoring is a improving relationship which involves organizational members of unequal status or, less frequently, peers (bozionelos, 2004). the aim and main idea of this research is to investigate the impact of mentoring on the organizational commitment and job satisfaction of accounting-finance academicians working in turkey. this study was run to answer the following volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 3 research questions: “does existence of mentoring relationship affect the accounting-finance faculty’s organizational commitment?”, “does existence of mentoring relationship affect the accountingfinance faculty’s job satisfaction?”, “what is the extent and degree of mentoring impact on organizational commitment and job satisfaction?” and “can we reach to a certain conclusion by measuring the impact of mentoring on organizational commitment and job satisfaction of accounting-finance professors working in turkey?” paper contributes to the fields of accounting and finance, since studies covering the subject of mentoring on academics is limited in turkey. moreover, mentoring is currently a leading subject for several researches, which makes it a hot topic for organizations, business sectors, educational institutions and generally the nations. mentoring relationships do determine the success of all these mentioned stakeholders. definitely, this paper also serves as a guide for turkish universities and accounting-finance instructors. the research is intended to assist related parties better managing their mentoring relationships. this is achieved by presenting a general mentoring interaction observed in the turkish accounting-finance academy. it is believed that research can motivate accounting-finance academicians and universities in turkey to take necessary measures for mentoring relationships and come up with more efficient mentoring management systems. mentoring is especially important in academics since the quality of mentorprotégé relationship determines the improvement and success of academicians. in other words, mentoring is a vital part of academic culture. data for this research are gathered from an online questionnaire located at http://www.surveey.com/. the mentioned questionnaire collects data on likert scale basis. research analyzes individual responses to questionnaire by testing the relationship among independent and dependent variables via running regression and correlation analyses. next sections of this research cover the literature review, theoretical research model, measure development, data collection, descriptive statistics, factor analysis, correlation analysis, regression analysis, conclusion and results, limitations and recommendations for future research and references. 2. literature review the inter-relationships among mentoring, organizational commitment, organizational justice, job satisfaction and job performance have been researched for decades. several scientific articles have studied and analyzed the inter-relationships among mentioned dimensions. mentoring research did state evidence on links between mentoring relationships and enhanced organizational commitment (aryee et al, 1996; scandura, 1997; baugh, lankua and scandura, 1996; orpen, 1997). one example is researchers showing a relationship between normative commitment and mentorship (higgins and kram, 2001). additional research points out that effective mentoring relationship did require commitment from potential mentors and protégés (kram, 1988). other research reported that formal mentoring programs were ineffectual (covaleski et al, 1998) and informal mentoring programs were more likely to create bonding and commitment compared to formal mentoring programs (ragins and cotton, 1999). this finding is supported by an additional work, underlining that personnel with informal mentors were a source for commitment compared to personnel with no mentors (colarelli and bishop, 1990) in contrast, another research explained that protégés in formal mentorships were tend to report higher organizational commitment compared to protégés in informal mentorships (heimann and pittenger, 1996). other research also exists which underline the fact that positive mentoring relationships do increase organizational commitment (siegel and omer, 1995; baugh et al, 1996). in relation with mentioned finding, normative and affective commitments are dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 4 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu determined to be positively correlated (allen and meyer, 1990; hackett et al., 1992; meyer et al., 1993). studies focusing on the relationship between mentoring and job satisfaction indicated that mentoring relationships did create positive job results in terms of higher job satisfaction (chao, waltz and gardner, 1992; whitely and coetsier, 1993; siegel and omer 1995; baugh et al, 1996). besides, employees with informal mentors were subject for higher job satisfaction compared to employees with no mentors (fagenson, 1989; chao, walz and gardner, 1992). research showed that this was the same for personnel with formal mentors since they were also reporting higher job satisfaction compared to personnel with no mentors (seibert, 1999). in addition to mentioned studies, mentoring relationships were found to help understanding unique contributions for explaining protégés’ job satisfaction (scandura, 1997). link between organizational justice and organizational commitment was also explored and it was reported that procedural justice was related to organizational commitment (masterson et. al, 2000). also, the relationship between organizational commitment and organizational culture was analyzed in turkey by implementing the survey method on hotel personnel working in kuşadası. the research found that normative commitment of hotel personnel as a dimension of organizational commitment was higher compared to emotional commitment and continuance commitment (çavuş and gürdoğan, 2008). similarly, ties between organizational justice and job satisfaction were examined, reaching to results such as justice distribution was predicting job satisfaction (mcfarlin and sweeney, 1992; sweeney and mcfarlin, 1993) and procedural justice was contributing to job satisfaction in a greater extend compared to distributive justice covering a study of canadian armed forces enlisted personnel (lind and tyler, 1988; lind, lissak and mendes, 1983). a parallel study supported this finding by emphasizing that procedural justice was more important than distributive justice in regards to supervisor evaluations by bank employees (mcfarlin and sweeney, 1992). other research defended that distributive justice was explaining more variance than procedural justice in estimating commitment and turnover for sales studies (roberts, coulson and chonko, 1999; brashear, manolis and brooks, 2005). plus, studies supported that distributive justice and procedural justice were positively correlated with job satisfaction (alexander and ruderman, 1987; lind and tyler, 1988; mcfarlin and sweeney, 1992). also, relationship between mentoring and organizational justice was researched and it was found from a sample of australian managers that protégés received more procedural justice compared to nonprotégés. however, no difference concerning distributive justice was observed. the study did also put forward that mentoring functions were positively correlated with perceptions of organizational justice (scandura, 1997). another research showed that procedural justice leads to a higher job satisfaction than distributive justice (lind and tyler, 1988). related research also indicated that organizational commitment and job satisfaction were positively linked to each other (rasch and harrell, 1990; aranya and ferris, 1984). plus, in accordance with relative literature, job satisfaction precedes organizational commitment in general (farkas and tetrick, 1989; curry et al, 1986; bateman and strasser, 1984). another study belonging to the accounting literature did investigate the relationship between organizational commitment and organizational culture in turkey. results showed that academicians in selçuk university of turkey were emotionally committed to their organization. however, same study also revealed that approximately half of the mentioned academicians had low organizational commitment to their institution (yüceler, 2009). moreover, a research was conducted in turkey to examine the relationship between organizational commitment and job burnout of accountants. this study indicated that a negative correlation did exist between the burnout level and organizational commitment of accountants working in ankara, turkey. same study also found that, as accountants volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 5 start to feel their individual success is getting lower, their organizational commitment becomes weaker (öztürk, koçyiğit and bal, 2011). concerning the accounting literature, studies focusing on organizational justice are limited. one study analyzed organizational justice in the sense of budget participation (libby, 1999; lindquist, 1995). additionally, the link between organizational justice and mentoring in public accounting firms was researched (siegel, reinstein and miller, 2001). besides, the relationship between organizational justice and acceptance of voluntary peer reviews in accounting firms was examined in another study (ehlen and welker, 1996). also, one research conducted on certified public accountants and interns did point out that procedural justice in the context of organizational justice was positively related to job satisfaction. on the other hand, same study stated that procedural justice in the context of organizational justice and intentions to quit were negatively correlated (özer and günlük, 2010). 3. theoretical research model research model of this study has three independent variables, which are career development, social support and role modeling (mentoring variables). also, the research model includes affective commitment, continuance commitment, normative commitment, professional commitment and job satisfaction as dependent variables. gender and age are control variables. figure i . theoretical research model 4. measure development in this study, we did collect data on a five point likert scale. most statements had response categories ranging from ‘strongly disagree’ (1) to ‘strongly agree’ (5). mentoring consists the dimensions of career development, role modeling and social support. in order to measure mentoring, twenty five questions were adapted from barker, monks and buckley 1999 and viator 2001. organizational commitment has four subdimensions; affective commitment, continuance commitment, normative commitment, and professional commitment. also, organizational commitment was assessed by twenty eight items adapted from bryant (2007). lastly, job satisfaction was measured by eight questions adapted from pasework and viator 2006, and viator and pasework 2005. the research also includes questions related to control variables in addition to personal questions for each respondent. 5. data collection in order to test the hypothesis, data were collected from accounting and finance academicians in turkish public and private universities. as a result of the study, 90 responses were gathered from accounting and finance faculty via the questionnaire. data were assessed through spss 13.0 for windows. we prepared a web link for the questionnaire. the survey questionnaire form was published at www.survey.com and also emails were sent to academicians who were interested in the accounting and finance area. the characteristics of the sample are are provided on the table below. first of all, 68.9% of the sample are males and 31.1% are females. this is equivalent to 62 males and 28 females. 31,1% of respondents belong to 20-30 age interval, while 40% are between 31-40 ages, 21.1% are between 41-50 ages and 7.8% are 51 and over. 28.9% of respondents are married and 71.1% are single. also, 43.3% of academicians taking the questionnaire do not have children. but, 23,3% have 1 children while 28.9% have 2 and 4.4% have 3 children. concerning the education level, the highest majority belongs to ph.d. graduates (70%). then, dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 6 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu 23.3% of respondents have graduate and 6.7% have undergraduate degrees. 90% of respondents work in a public university and 8.9% work in a private university. the remanining 1.1% represents other respondents who did not want to provide information about this question. 34.4% of survey takers did work in a different university before in their career, while 58.9% have never worked in a separate institution formerly. rest of the respondents who represent 6.7% did not answer this question. moreover, 23.3% of respondents are research assistants, 17.8% are lecturers, 37.8% are assistant professors, 12.2% are associate professors and 7.8% are full professors. finally, 1.1% of respondents did not answer the mentioned question about their titles. table i. characteristics of the sample characteristics frequency percent gender male 62 68.9 female 28 31.1 age 20-30 28 31.1 31-40 36 40 41-50 19 21.1 51 + 7 7.8 marital status married 64 28.9 single 26 71.1 number of children no 39 43.3 1 21 23.3 2 26 28.9 3 4 4.4 education undergraduate 6 6.7 graduate 21 23.3 phd 63 70 university type public university 81 91 private university 8 9 missing 1 1.1 academic title research assistant 21 23.3 lecturer 16 17.8 assistant prof. 34 37.8 associate prof. 11 12.2 full professor 7 7.8 missing 1 1.1 6. descriptive statistics descriptive statistics for the variables used in measuring mentoring, organizational commitment and job satisfaction are presented on table 2. the means, medians, standard deviations, minimum and maximum values for independent variables as well as dependent variables are also shown on the mentioned table. table 2. descriptive statistics for mentoring, organizational commitment and job satisfaction mean median std. dev. min. max. career develop ment 2.963 3 1.176 1 5 role modeling 3.090 3.286 1.235 1 5 social support 2.648 2.667 1.119 1 5 volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 7 affective commit ment 3.380 3.5 1.036 1 5 continua nce commit ment 2.931 3 0.866 1 5 normati ve commit ment 2.966 3 0.910 1 5 professio nal commit ment 4.259 4.333 0.729 2 5 job satisfacti on 3.767 3.8 0.668 2.2 5 7. factor analysis in order to determine the factor structure of variables, we conducted an exploratory factor analysis with varimax rotation. this study had factor analysis separately for variables. the results of mentoring variables factor analysis revealed a three-factor structure as expected, which are career development, role modeling, social support. total variance explained by the mentioned three factors was 80,41 %. four factors were obtained as a result of organizational variables factor analysis, which are affective commitment, continuance commitment, normative commitment and professional commitment. total variance explained by the emphasized four factors is 72,184 %. we conducted an exploratory factor analysis for the job satisfaction variable. one factor was obtained as a result of dependent variables factor analysis, which is job satisfaction. the total variance explained by emphasized one factors was 56,465%. the factor loadings supported the internal consistency, since all factor loadings are greater than 0.3 (kim et al, 2004 and aydin et. al 2007, tansel cetin et al, 2012). in addition, research used the cronbach’s alpha coefficient for reliability analysis. cronbach’s alpha, a measure for testing the internal consistency or reliability of a set of two or more scale indicators (cronbach, 1951), was computed for each set of measurements. the reliability coefficients for career development, role modeling, social support, affective commitment, continuance commitment, normative commitment, professional commitment and job satisfaction were 0.96, 0.92, 0.97, 0.94, 0.83, 0.82, 0.62, 0.80 respectively. all of the cronbach’s alpha values were greater than the recommended level of 0.60 by nunnally, 1978. (nunnaly 1978). this rate is accepted to be sufficiently reliable in the literature. this research also used the the kaiser-meyer-olkin (kmo) to measure the sampling adequacy and to show that factor analysis is valid. in other words, the kaisermeyer-olkin (kmo) is a test, which measures if the sample size is sufficient. mentoring, organizational commitment and job satisfaction’s variables’ kmo’s measure of sampling adequacy were 0.94, 0.81 and 0.74. these ratios are accepted in the literature. the ratios showed that, the sample size is sufficient to do factor analysis. according to literature, kmo must be greater than 0.60 (norusis, 1993; hair et al., 1998). in this case, sample size is appropriate for factor analysis. besides, the initial requirement to run a factor analysis is the existence of some relationship among variables. related with this, the barlett test indicates whether there is an adequate relationship among variables. if the p value of barlett test is lower than 0,05 significance level, then there is an adequate level of relationship among variables to do factor analysis. since the all p value in this research were 0,000, variables are suitable for analysis. dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 8 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu table 3. results of the mentoring factor analysis factor loadings cronbach α career development 0.96 my mentor did show a real and special care for my career 0,737 my mentor included me as a team member for important tasks 0,683 my mentor did provide me special training and gave me advices concerning my profession 0,820 my mentor gave me recommendations for promotion and advancing opportunities in my career 0,640 my mentor assisted me in coordinating my professional goals 0,757 my mentor spared some serious time and showed a real interest in my career 0,783 my mentor supported me to have responsibilities in the university, which did strengthen my relations with managers of the faculty 0,754 my mentor supported me by assigning tasks, which did teach me new capabilities and improved my expertise in a spcial field 0,792 role modeling 0.92 i try to model my behaviors parallel to my mentor 0,670 i admire my mentor’s talent in motivating other professionals 0,716 i respect my mentor’s knowledge on his profession 0,800 i respect my mentor’s talent of training and developing other professionals 0,810 i try to model my mentor’s behaviors and do my best to display similar actions 0,769 i respect my mentor and admire him/her 0,803 when i have a similar position to my mentor in the future, i will show effort to be like him/her 0,731 social support 0.97 i share my personal problems with my mentor 0,677 i engage in social activities and chat with my mentor after work 0,844 i consider my mentor as a friend 0,757 i frequently go to lunch with my mentor 0,688 my mentor encouraged me to talk straight about concerns and fears, which affect my performance negatively 0,537 my mentor showed empathy for the concerns and fears i shared with him/her 0,566 volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 9 4. organizational commitment and job satisfactions’ factor analysis factor loadings cronbach α affective commitment 0.94 i feel very committed to my university 0,915 i will be very happy to spend the rest of my career in this university 0,856 this university has a great personal and emotional meaning for me 0,834 i feel like “part and member of the family” in this university 0,906 i am happy to discuss and mention my university with others, who are not a member of my institution 0,880 i really consider and feel the problems of my university like they are my own problems 0,821 continuance commitment 0.83 it would be very difficult for me to leave my organization now, even if i wanted to do this. 0,508 if i decide to leave my university now, my life will probably be affected negatively to a large extent 0,796 continuing to work in my university right now is a result of my needs and necessisities, as much as my desires. 0,775 i believe that i have very limited options for considering to leave my university 0,781 one of the few negative outcomes of leaving my university would be that, i could be short of alternatives 0,785 one of the main reasons for me to continue working in this university is that, resigning will require so much personal sacrifice. another university may not generally provide me the same benefits and advantages i have in my current university 0,557 professional comitment 0.82 i definitely want and target an ideal career for me in this profession 0,760 if i had a chance to go over everything in my life, i would choose my profession once again. 0,898 i recommend others a career in my profession 0,848 normative commitment 0.62 i was taught to believe that, being commited and loyal to an institution is important and valuable. 0,798 it was much better in those days, when people spent the majority of their career in a single university 0,826 job satisfaction 0.80 dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 10 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu i am very happy with my current tasks and responsibilities 0,774 my current job and responsibilities are very parallel to the ideal jobs and reponsibilities in my mind 0,901 my currently tasks and responsibilities are pretty similar to the desired profession i had in my mind when choosing this career 0,880 my profession is suitable for my talents 0,538 generally, i really love my profession 0,586 8. correlation analysis in order to test the relationship among variables, we conducted pearson correlation analysis for this research. results of correlation analysis showed that, career development, role modeling, social support, affective commitment, normative commitment and professional commitment were positively related to each other. social support and professional commitment were positively related to job satisfaction. moreover, other variables (career development, role modeling, social support, continuance commitment, and normative commitment) were not related to job satisfaction. the results of pearson correlation analysis are displayed on table 5. table 5. correlation analysis **correlation is significant at the 0.01 level (2tailed), *correlation is significant at the 0.05 level (2tailed). 9. regression analysis the purpose of this article is to investigate the effects of mentoring (career development, role modeling and social support) on both organizational commitment (affective commitment, continuance commitment, normative commitment and professional commitment) and job satisfaction. also, we did investigate the effect of organizational commitment on the job satisfaction. we did add gender and age to the model as control variables. in order to test the effect of independent variables on dependent variables, regression analysis was conducted using the spss 13.0 statistical package program. we developed three main regression models in order to test hypotheses in our study. regression models are as follows: organizational commitment= β0 + β1* career development + β2 * role modeling + β3* social support + β4 * gender + β5 *age + e job satisfaction = β0 + β1* career development + β2 * role modeling + β3* social support + β4 * gender + β5 *age + e job satisfaction = β0 + β1* affective commitment + β2 * continuance commitment + β3* normative commitment + β4 *professional commitment + β5 * gender + β6 *age + e volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 11 table 6. the effect of mentoring on affective commitment dependent variable: affective commitment collinearity statistics independen t variables  t sig. tolera nce vif 1.career developme nt 0.293 3.039 0.003* ** 0.861 1.162 gender -0.026 -0.107 0.915 0.868 1.151 age 0.021 1.720 0.089* 0.929 1.076 f 3.704*** adj. r2 0.084 2.role modeling 0.400 4.823 0.000* ** 0.926 1.080 gender -0.040 -0.182 0.856 0.911 1.098 age 0.017 1.503 0.137 0.951 1.052 f 8.283*** adj. r2 0.199 3.social support 0.331 3.460 0.001* ** 0.937 1.067 gender 0.018 0.075 0.940 0.909 1.100 age 0.018 1.470 0.145 0.953 1.050 f 4.633*** adj. r2 0.109 4.career developme nt -0.181 -1.061 0.292 0.241 4.154 role modeling 0.542 3.363 0.001* ** 0.247 4.042 social support -0.006 -0.037 0.970 0.285 3.504 gender 0.015 0.067 0.947 0.871 1.148 age 0.016 1.329 0.188 0.932 1.073 f 5.206*** adj. r2 0.193 *** coefficient is significant at 0.01; ** coefficient is significant at 0.05; * coefficient is significant at 0.10 model 1 did present the effect of career development, gender and age on affective commitment. the model was statistically significant (f=3.704, p<0.01). when model is examined, it was observed that career development (=0.293;p<0.01) and age have a statistically significant effect (=0.021;p<0.10) on the affective commitment. gender does not have statistically significant effect on the dependent variable. (p>0.10) model 2 investigated the effect of role modeling and control variables on the affective commitment. model’s f was statistically significant. (f=8.283,p<0.01) . role modeling had a positive and statistically significant effect on affective commitment. when beta coefficients were looked upon, it is understood that the increase in role modeling results to an increase in affective commitment. (=0.400;p<0.01). gender and age did not have a statistically significant effect on affective commitment. (p>0.10) in the context of model 3, social support, gender and age were independent variables and affective commitment was the dependent variable. here, social support had a positive and statistically significant effect on the affective commitment. (=0.331;p<0.01) control variables, which were gender and age did not have a statistically significant effect on the affective commitment. (p>0.10) model 4 indicated all variables included to the model, which are career development, role modeling, social support, gender and age. the model is statistically significant (f=5.206, p<0.01). when beta coefficients of model were taken into consideration, only role modeling had a positive dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 12 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu and statistically significant effect on the affective commitment. career development, social support, gender and age did not have a statistically significant effect on the affective commitment. concerning model 1, 2 and 3, it was observed that, all sub-dimensions of mentoring were significant when they were added to the model separately. however, when sub-dimensions of mentoring were included to the model (model 4) altogether, it is realized that impact of career development and social support no longer exists. this shows us that, when variables are included to the model altogether, they shadow each others’ effect. table 7. the effect of mentoring on continuance commitment dependent variable: continuance commitment collinearity statistics independent variables  t sig. tolera nce vif 5.career developmen t -0.005 -0.059 0.953 0.875 1.143 gender 0.387 1.975 0.051* * 0.872 1.146 age -0.033 -3.207 0.002* ** 0.944 1.059 f 5.975*** adj. r2 0.145 6.role modeling 0.052 0.725 0.471 0.931 1.074 gender 0.349 1.821 0.072* 0.916 1.092 age -0.031 -2.946 0.004* ** 0.958 1.044 f 5.551*** adj. r2 0.136 7.social 0.078 0.989 0.325 0.944 1.059 support gender 0.341 1.793 0.076* 0.914 1.094 age -0.032 -3.213 0.002* ** 0.961 1.041 f 6.369*** adj. r2 0.155 8.career developmen t -0.232 -1.569 0.120 0.245 4.076 role modeling 0.09 5 0.678 0.500 0.244 4.102 social support 0.18 2 1.280 0.204 0.290 3.452 gender 0.400 2.051 0.043* * 0.875 1.143 age -0.033 -3.134 0.002* ** 0.947 1.056 f 3.975*** adj. r2 0.146 *** coefficient is significant at 0.01; ** coefficient is significant at 0.05; * coefficient is significant at 0.10 table above shows the effect of mentoring (career development, role modeling, social support) and control variables (gender and age) on the continuance commitment. model 5 provides the effect of career development gender and age on the continuance commitment. the model was statistically significant (f=5.975; p<0.01). gender had a positive and statistically significant effect while age had a negative statistically significant effect on continuance commitment. thus, when age went up, continuance commitment went down. also, research revealed that female academicians had a higher continuance commitment. but, career development did not have a statistically significant effect on continuance commitment. volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 13 based on model 6, role modeling, gender and age were independent variables and continuance commitment was the dependent variable. model 6 was statistically significant (f=5.551, p<0.01). when coefficients were examined, it was observed that gender had a positive and statistically significant effect on continuance commitment (=0.349;p<0.10) and age had a negative and statistically significant effect (=-0.031;p<0.01) on the dependent variable. however, social support did not have statistically significant effect on the continuance commitment. (p>0.10) model 7, which shows the effect of social support. gender and age on the continuance commitment was statistically significant. (f= f=6.369,p<0.01). gender and age had a statistically significant effect on continuance commitment. but, gender had a positive effect (=0.341;p<0.10) while age had a negative effect (=-0.032;p<0.01) on the continuance commitment. additionally, social support did not have a statistically significant effect on the dependent variable. lastly, for model 8, we investigated the impact of mentoring’s all variables (career development, role modeling, and social support) and effect of control variables (gender and age) on the continuance commitment. this model was statistically significant (f= 3.975, p<0.01). moreover, gender and age had a statistically significant effect on the dependent variable. but, we found that no dimension of mentoring had an effect on continuance commitment. when variables were included to the model separately, their effect was statistically significant. on the other hand, when all variables were included to the model altogether, their effect did not exist on the dependent variables. we believe that variables shadow each other’s impact. table 8.the effect of mentoring on normative commitment dependent variable: normative commitment collinearity statistics independent variables  t sig. tolera nce vif 9.career developmen t 0.257 3.171 0.002*** 0.865 1.155 gender 0.396 1.938 0.056** 0.873 1.146 age 0.012 1.097 0.276 0.936 1.068 f 6.446*** adj. r2 0.157 10.role modeling 0.256 3.450 0.001*** 0.926 1.080 gender 0.436 2.203 0.030** 0.911 1.098 age 0.010 0.958 0.341 0.951 1.052 f 7.122*** adj. r2 0.173 11.social support 0.252 3.053 0.003*** 0.931 1.074 gender 0.454 2.262 0.026** 0.912 1.096 age 0.009 0.863 0.390 0.954 1.049 f 6.176*** adj. r2 0.150 12. career developmen t 0.072 0.467 0.642 0.241 4.154 role modeling 0.166 1.147 0.255 0.247 4.042 social support 0.049 0.330 0.742 0.285 3.504 dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 14 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu gender 0.409 2.004 0.048** 0.871 1.148 age 0.011 1.011 0.315 0.932 1.073 f 4.305*** adj. r2 0.158 *** coefficient is significant at 0.01; ** coefficient is significant at 0.05; * coefficient is significant at 0.10 regarding model 9, normative commitment was the dependent variable and career development, gender and age were independent variables. this related model was significant (f=6.446,p<0.01). when the model parameters were looked upon, career development and gender were statistically significant on the normative commitment. so, as career development increases, normative commitment also increases. furthermore, female academicians had a higher normative commitment. age did not have a statistically significant effect on the normative commitment. model 10, which displays the effect of role modeling, gender and age on the normative commitment was statistically significant. (f=7.122,p<0.01). likewise, role modeling and gender had a positive and statistically significant effect on the normative commitment. however, the effect of age on the normative commitment was not statistically significant. the next model (11) shows the impact of social support, gender and age on the normative commitment. model’s f value was statistically significant (f=6.176, p<0.01). similarly, social support and gender had a positive and statistically significant effect on normative commitment. on the opposite side, age did not have the significant effect on normative commitment. thus, when social support to academicians by their mentors did increase, their normative commitment also increased. last model of the table (model 12) examines the multiple effect of mentoring variables, which are career development, role modeling, and social support. model’s f value is statistically significant (f=4.305, p<0.01). parallel to other models, gender and age were added as control variables to the model. the result of the multiple regression analysis signaled that, when variables were included to the model altogether, their effect did no longer exist. gender was the only variable that had a statistically significant effect on normative commitment. table 9. effect of mentoring on professional commitment dependent variable: professional commitment collinearity statistics independent variables  t sig. tolera nce vif 13.career development 0.167 2.425 0.017*** 0.861 1.162 gender -0.049 -0.281 0.780 0.868 1.151 age -0.008 -0.905 0.368 0.929 1.076 f 2.756** adj. r2 0.056 14.role modeling 0.186 2.966 0.004*** 0.926 1.080 gender -0.036 -0.218 0.828 0.911 1.098 age -0.008 -0.881 0.381 0.951 1.052 f 3.589** adj. r2 0.081 15.social support 0.155 2.228 0.029** 0.937 1.067 gender -0.006 -0.033 0.974 0.909 1.100 age -0.010 -1.176 0.243 0.953 1.050 f 2.442* adj. r2 0.046 16.career development 0.007 0.056 0.956 0.241 4.154 volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 15 role modeling 0.188 1.532 0.129 0.247 4.042 social support -0.010 -0.083 0.934 0.285 3.504 gender -0.038 -0.216 0.829 0.871 1.148 age -0.008 -0.855 0.395 0.932 1.073 f 2.104* adj. r2 0.059 *** coefficient is significant at 0.01; ** coefficient is significant at 0.05; * coefficient is significant at 0.10 the table above shows the effect of mentoring (career development, role modeling, and social support), gender and age on the professional commitment. firstly, model 13 displays career development, gender and age’s impact on the professional commitment. the model which was developed for this purpose is found to be statistically significant. (f=2.756; p<0,05). the effect of career development on the professional commitment was positive and statistically significant. gender and age had a negative but statistically insignificant effect on the professional commitment. model 14 shows the effect of role modeling, gender and age on professional commitment while model 15 indicates the impact of social support, gender and age on the professional commitment. both models were statistically significant. (f=3.589,p<0,05; f=2.442,p<0,10). in model 14, role modeling and in model 15 social support had a positive statistically significant effect on professional commitment. these two models, gender and age did possess negative but statistically insignificant impact on the professional commitment. multiple regression analysis reflected that no variable had a statistically significant effect on the professional commitment. last model of the table (model 16) examines the multiple effect of mentoring variables (career development, role modeling, and social support) on professional commitment. models f value is statistically significant (f=2.104, p<0.10). the results of multiple regression analysis signal that when variables are included to the model altogether, their effect no longer exists. we believe that variables shadow each other’s impact. table 10. the effect of organizational commitment on job satisfaction dependent variable: job satisfaction collinearity statistics independent variables  t sig. tolerance vif 17.affective commitment 0,248 3,805 0,000** * 0,961 1,041 gender -0,063 0,430 0,669 0,936 1,069 age 0,012 1,479 0,143 0,917 1,091 f 6,339*** adj. r2 0,165 18.continuanc e commitment 0,154 1,720 0,089* 0,829 1,206 gender -0,060 0,377 0,707 0,908 1,101 age 0,025 2,743 0,008** * 0,856 1,168 f 2,860** adj. r2 0,063 19.normative commitment 0,017 0,200 0,842 0,921 1,086 gender -0,010 0,058 0,954 0,878 1,139 age 0,018 2,141 0,035** 0,949 1,054 dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 16 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu f 1,645 adj. r2 0,023 20.professional commitment 0,389 4,344 0,000** * 0,976 1,024 gender -0,050 0,351 0,727 0,942 1,062 age 0,021 2,718 0,008** * 0,937 1,067 f 8,082*** adj. r2 0,202 21.affective commitment 0,218 3,525 0,001** * 0,847 1,180 continuance commitment 0,212 2,698 0,009** * 0,754 1,326 normative commitment -0,127 1,775 0,080* 0,819 1,222 professional commitment 0,387 4,383 0,000** * 0,898 1,114 gender -0,122 0,888 0,377 0,851 1,175 age 0,026 3,306 0,001** * 0,818 1,222 f 8,753*** adj. r2 0,362 *** coefficient is significant at 0.01; ** coefficient is significant at 0.05; * coefficient is significant at 0.10 the table above displays the effect of organizational commitment (affective, continuance, normative, professional commitment) and control variables (gender and age) on the job satisfaction. the sub dimensions of organizational commitment were first included to the model separately. model 17 was statistically significant (f= 6.339,p<0.01). also, affective commitment had a statistically significant effect on job satisfaction. but, age and gender did not have the statistically significant effect. thus, an increase in affective commitment triggers an increase in job satisfaction. gender did not have a statistically significant impact on the job satisfaction. next model (model 18) shows the effect of affective commitment, gender and age on job satisfaction. the model was statistically significant. (f=2.860, p<0,05) we found that continuance commitment and age had a statistically significant effect on job satisfaction. however, gender did not have a statistically significant impact on the job satisfaction. the model also showed that, when continuance commitment increased, job satisfaction also increased. normative commitment, gender and age’s effect on the job satisfaction is presented by model 19 and the mentioned model was found to be statistically significant (f=1.645, p>0.10). age was the only variable that had a statistically significant effect on job satisfaction. other variables did not have a statistically significant effect on job satisfaction. after that, we investigated professional commitment and our control variables’ effect on the job satisfaction. model 20 was statistically significant (f=8.082,p<0.01). professional commitment and age had a statistically significant impact on the job satisfaction. however, gender did not have a statistically significant impact on the job satisfaction. organizational commitments’ all dimensions were included to model 21. this model was statistically significant. (f= 8.753,p<0.01 ) when the model parameters are observed, it is realized that affective, continuance and professional commitment had a positive and statistically significant effect on the job satisfaction. normative commitment was also statistically significant but had a negative effect on the job satisfaction. also, age had a statistically significant impact on the job satisfaction. the most effective variable on the job satisfaction was professional commitment. (b= 0,387) the second most effective variable was determined as affective commitment and the third one was continuance commitment. this means that, when professional commitment, affective volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 17 commitment and continuous commitment went up, job satisfaction accordingly went up. the fact that normative commitment had a negative and statistically significant effect on job satisfaction is an unexpected result. table 11.the effect of mentoring on job satisfaction dependent variable: job satisfaction collinearity statistics independent variables  t sig. tolerance vif 22.career development 0.090 1.385 0.170 0.857 1.167 gender -0.067 -0.406 0.686 0.862 1.160 age 0.019 2.273 0.026* * 0.919 1.088 f 2.128* adj. r2 0.039 23.role modeling 0.138 2.344 0.022* * 0.927 1.079 gender -0.085 -0.539 0.591 0.903 1.107 age 0.021 2.455 0.016* ** 0.944 1.059 f 3.574*** adj. r2 0.085 24.social support 0.089 1.352 0.180 0.931 1.074 gender -0.049 -0.301 0.764 0.897 1.115 age 0.018 2.153 0.034* * 0.943 1.060 f 2.096* adj. r2 0.038 25.career development -0.081 -0.678 0.500 0.250 4.006 role modeling 0.225 1.990 0.050* * 0.254 3.931 social support -0.037 -0.317 0.752 0.294 3.403 gender -0.056 -0.343 0.732 0.865 1.156 age 0.020 2.288 0.025* * 0.921 1.085 f 2.283** adj. r2 0.072 *** coefficient is significant at 0.01; ** coefficient is significant at 0.05; * coefficient is significant at 0.10 mentoring is composed of three different dimensions that are career development, role modeling and social support as mentioned previously. firstly, all these dimensions were included to regression analysis separately. for model 22, we examined the effect of career development and control variables (gender and age) on the job satisfaction. model 22 was found to be not statistically significant. (f=2.128, p<0.10). age was the only variable that had a statistically significant effect on the job satisfaction. other variables did not have a statistically significant effect on job satisfaction. concerning model 23, the influence of role modeling, gender and age on the job satisfaction was analyzed. model 23 was determined to be statistically significant (f=3.574, p<0.01). role modeling and age had a statistically significant effect on the job satisfaction. thus, as role modeling and age increased, job satisfaction also increased. the effect of gender on the job satisfaction had a negative beta coefficient, but the effect was not statistically significant. dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 18 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu in regards to model 24, social support, gender and age were independent variables and job satisfaction was the dependent variable. the model was not statistically significant (f=2.096,p<0.10). age was the only variable which had a statistically positive effect on the job satisfaction. other variables did not have a statistically significant effect on the job satisfaction. lastly, we examined the effect of career development, role modeling, social support, gender and age on the job satisfaction (model 25). this model was determined to be statistically significant (f=2.283,p<0.05). when model parameters were investigated, only role modeling and age had a statistically significant effect on the job satisfaction. other variables did not have a statistically significant effect on the job satisfaction. table 12.the effect of mentoring and organizational commitment on normative commitment dependent variable: job satisfaction collinearity statistics independent variables  t sig. tolerance vif 26.gender -0.073 -0.470 0.640 0.864 1.157 age 0.014 1.735 0.087* 0.883 1.133 career development -0.044 -0.382 0.704 0.247 4.053 role modeling 0.106 0.929 0.356 0.224 4.455 social support -0.036 -0.326 0.746 0.294 3.403 affective commitment 0.227 3.017 0.003* ** 0.749 1.335 f 3.617*** adj. r2 0.159 27.gender -0.105 -0.640 0.524 0.826 1.211 age 0.027 2.939 0.004* ** 0.843 1.186 career development -0.068 -0.561 0.576 0.247 4.053 role modeling 0 .235 2.080 0.041* * 0.250 4.007 social support 0.077 -0.660 0.511 0.293 3.411 continuance commitment 0.137 1.521 0.132 0.809 1.236 f 2.604** adj. r2 0.105 28.gender -0.037 -0.225 0.823 0.833 1.201 age 0.020 2.329 0.022* * 0.908 1.101 career development -0.078 -0.644 0.522 0.249 4.017 role modeling 0.232 2.033 0.046* 0.251 3.983 social support -0.033 -0.283 0.778 0.293 3.414 normative commitment -0.050 -0.570 0.570 0.799 1.252 f 1.940* adj. r2 0.064 29.gender -0.061 -0.403 0.688 0.865 1.156 age 0.021 2.690 0.009* ** 0.918 1.089 career development -0.086 -0.773 0.442 0.250 4.006 role modeling 0.159 1.492 0.140 0.247 4.047 social support -0.032 -0.297 0.767 0.294 3.404 professional commitment 0.350 3.681 0.000* ** 0.886 1.129 f 4.466*** adj. r2 0.200 30.career development 0,003 0,027 0,978 0,242 4,130 role modeling 0,048 0,454 0,651 0,212 4,718 social support -0,065 -0,652 0,517 0,293 3,415 volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 19 affective commitment 0,214 3,140 0,002* ** 0,721 1,387 continuance commitment 0,216 2,646 0,010* ** 0,724 1,381 normative commitment -0,125 -1,652 0,103* 0,758 1,320 professional commitment 0,384 4,116 0,000* ** 0,832 1,202 gender -0,117 -0,817 0,417 0,801 1,248 age 0,026 3,199 0,002* ** 0,774 1,291 f 5,696*** adj. r2 0,340 *** coefficient is significant at 0.01; ** coefficient is significant at 0.05; * coefficient is significant at 0.10 the table above shows the effect of mentoring (career development, role modeling, and social support), gender, age and affective commitment on the job satisfaction. we did add affective commitment to the model. model 26 was found to be statistically significant (f= 3.617,p<0,01). the effect of age and affective commitment on the job satisfaction was positive and statistically significant. career development, role modeling, social support and age did not have a statistically significant effect. then, we added continuance commitment to the model besides affective commitment for model 27. this model was found to be statistically significant (f=2.604,p<0.05). result of the regression analysis showed that, age and role modeling had a positive and statistically significant effect on job satisfaction. other variables did not have a statistically significant effect on the job satisfaction. concerning model 28, the influence of career development, role modeling, social support, normative commitment, gender and age on the job satisfaction was analyzed. model 28 was determined to be statistically significant (f=1.940; p<0.10). when model parameters were investigated, role modeling and age had a statistically significant effect on the job satisfaction. other variables did not have a statistically significant effect on the job satisfaction. model 29 shows the effect of career development, role modeling, gender, age and professional commitment on the job satisfaction. model 29 was statistically significant. (f=4.466; p<0.0). the effect of age and professional commitment on the job satisfaction was positive and statistically significant. other variables did not have a statistically significant effect on the job satisfaction. concerning the last model (model 30), we investigated the impact of mentoring’s all variables (career development, role modeling, and social support), organizational commitment (affective commitment, continuance commitment, normative and professional commitment) and control variables (gender and age) on the job satisfaction. this model was statistically significant (f=5.696,p<0.01). results of the regression analysis reveal that, mentoring did not have a statistically significant effect on job satisfaction. in other words, no dimensions of mentoring had a significant effect on job satisfaction. however, organizational commitment’s all variables had a statistically significant effect on the job satisfaction. also, affective commitment, continuance commitment and professional commitment had a positive effect on job satisfaction while normative commitment had a negative effect on job satisfaction. finally, it is determined that age had a positive and statistically significant effect on the job satisfaction. conclusion and results study revealed several important results. first of all, according to the correlation analysis, career development, role modeling, social support, affective commitment, normative commitment and professional commitment were positively linked to each other. also, social support dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 20 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu and professional commitment were positively correlated with job satisfaction. moreover, career development, role modeling, social support, continuance commitment and normative commitment were determined to not have a relationship with job satisfaction. regression analysis of the research also presented significant results. it is found that career development and age have a statistically significant effect on the affective commitment. furthermore, role modeling had a positive and statistically significant effect on affective commitment. an increase in role modeling did lead to an increase in affective commitment. however, gender and age did not have a statistically significant effect on affective commitment. then, study indicated that social support had a positive and statistically significant effect on the affective commitment. but, gender and age did not have a statistically significant effect on the affective commitment. another eye-catching result of the research was that, when all variables which are career development, role modeling, social support, gender and age were included to the model together, only role modeling had a positive and statistically significant effect on the affective commitment. career development, social support, gender and age did not have a statistically significant effect on the affective commitment. this proved that, when variables were included to the model altogether, they did shadow each others’ effect. besides, regression analysis reflected that, gender had a positive and statistically significant effect while age had a negative statistically significant effect on continuance commitment. thus, when age went up, continuance commitment went down. also, research revealed that female academicians had a higher continuance commitment. but, career development did not have a statistically significant effect on continuance commitment. then, research shows that gender had a positive and statistically significant effect on continuance commitment while age had a negative and statistically significant effect on the continuance commitment. but, social support did not have statistically significant effect on the continuance commitment. then, findings indicate that, gender and age had a statistically significant effect on continuance commitment. however, gender had a positive effect while age had a negative effect on the continuance commitment moreover, social support did not have a statistically significant effect on the continuance commitment. when the impact of mentoring’s all variables (career development, role modeling, and social support) and effect of control variables (gender and age) on the continuance commitment were analyzed, the model was statistically significant. gender and age had a statistically significant effect on continuance commitment. on the other hand, no dimension of mentoring had an effect on continuance commitment. thus, when variables were included to the model separately, their effect was statistically significant. however, when all variables were included to the model altogether, their effect did not exist on the dependent variables. this means that variables shadow each other’s impact. furthermore, finding of the research present that, career development and gender were statistically significant on the normative commitment. additionally, female academicians had a higher normative commitment. age did not have a statistically significant effect on the normative commitment. also, the effect of role modeling, gender and age on the normative commitment is statistically significant according to the research. similarly, role modeling and gender has a positive and statistically significant effect on the normative commitment. the same cannot be said for age, since its effect on the normative commitment is not statistically significant. next, impact of social support, gender and age on the normative commitment is statistically significant. likewise, social support and gender had a positive and statistically significant effect on normative commitment. but, age did not have the significant effect on normative commitment. when the multiple effect of career development, role modeling, and social support on normative commitment was analyzed, it was found to be statistically significant. the result of the multiple volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 21 regression analysis showed that, when variables were included to the model altogether, their effect did no longer exist. gender was the only variable that had a statistically significant effect on normative commitment. additionally, research revealed results about the effect of mentoring (career development, role modeling, and social support), gender and age on the professional commitment. career development, gender and age’s impact on the professional commitment was found to be statistically significant. also, the effect of career development on the professional commitment was positive and statistically significant. gender and age had a negative but statistically insignificant effect on the professional commitment. besides, the effect of role modeling, gender and age on professional commitment and the impact of social support, gender and age on the professional commitment were found to be statistically role modeling and social support had a positive statistically significant effect on professional commitment. gender and age did possess negative but statistically insignificant impact on the professional commitment. multiple regression analysis reflected that no variable had a statistically significant effect on the professional commitment. also, the multiple effect of mentoring variables (career development, role modeling, and social support) on professional commitment was found to be statistically significant. the results of multiple regression analysis signal that when variables are included to the model altogether, their effect no longer exists. this is because variables shadow each other’s impact. in addition, research determined that effect of organizational commitment (affective, continuance, normative, professional commitment) and control variables (gender and age) on the job satisfaction was statistically significant. also, affective commitment had a statistically significant effect on job satisfaction. but, the same is not true for age and gender’s effect on job satisfaction. likewise, gender did also not have a statistically significant impact on the job satisfaction. plus, the effect of affective commitment, gender and age on job satisfaction was found to be statistically significant. also, continuance commitment and age had a statistically significant effect on job satisfaction. however, gender did not have a statistically significant impact on the job satisfaction. then, it was found that age was the only variable that had a statistically significant effect on job satisfaction. gender and normative commitment did not have a statistically significant effect on job satisfaction. following this, professional commitment and control variables’ effect on the job satisfaction was investigated. model was statistically significant and professional commitment as well as age had a statistically significant impact on the job satisfaction. however, gender did not have a statistically significant impact on the job satisfaction. also, research pointed out that affective, continuance and professional commitment had a positive and statistically significant effect on the job satisfaction. normative commitment was also statistically significant but had a negative effect on the job satisfaction. also, age had a statistically significant impact on the job satisfaction. the most effective variable on the job satisfaction was professional commitment. the second most effective variable was determined as affective commitment and the third one was continuance commitment. normative commitment having a negative and statistically significant effect on job satisfaction was an unexpected result. in the next step, effect of career development and control variables (gender and age) on the job satisfaction was examined. it was realized that the impact was not statistically significant. age was the only variable that had a statistically significant effect on the job satisfaction. the influence of role modeling, gender and age on the job satisfaction was alo analyzed and determined to be statistically significant. role modeling and age had a statistically significant effect on the job satisfaction. the effect of gender on the job satisfaction had a negative beta coefficient, but the effect was not statistically significant. dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 22 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu then, impact of social support, gender and age on job satisfaction was found to be not statistically significant. age was the only variable which had a statistically positive effect on the job satisfaction. also, role modeling and age had a statistically significant effect on the job satisfaction. social support and gender did not have a statistically significant effect on the job satisfaction. furthermore, it was realized that the effect of age and affective commitment on the job satisfaction was positive and statistically significant. but career development, role modeling, social support and age did not have a statistically significant effect. then, result of the regression analysis showed that, age and role modeling had a positive and statistically significant effect on job satisfaction. moreover, the influence of career development, role modeling, social support, normative commitment, gender and age on the job satisfaction was analyzed and model was determined to be statistically significant. role modeling and age had a statistically significant effect on the job satisfaction while other variables did not have a statistically significant effect on the job satisfaction. after that, the effect of career development, role modeling, gender, age and professional commitment on the job satisfaction was checked and model was statistically significant. the effect of age and professional commitment on the job satisfaction was positive and statistically significant, but the same was not determined for other variables. finally, the impact of mentoring’s all variables (career development, role modeling, and social support), organizational commitment (affective commitment, continuance commitment, normative and professional commitment) and control variables (gender and age) on the job satisfaction was analyzed. the model was statistically significant and results of the regression analysis revealed that, mentoring did not have a statistically significant effect on job satisfaction. this means that, no dimensions of mentoring had a significant effect on job satisfaction. but, organizational commitment’s all variables had a statistically significant effect on the job satisfaction. also, affective commitment, continuance commitment and professional commitment were identified to have a positive effect on the job satisfaction while normative commitment had a negative effect on job satisfaction. consequently, age had a positive and statistically significant effect on the job satisfaction. limitations and recommendations for future research research was subject to specific limitations. although the accounting and finance groups which were informed of our study were very supportive, academicians’ participation in the questionnaire was lower than expected. it is believed that the heavy workload, administrative duties and other responsibilities of academicians were influential at this point, since completing the survey requires some time and effort. thus, the emphasized situation caused the sample of research to be limited. it is advised for future researchers that, they analyze a larger sample, especially considering the fact that number of turkish public and private universities have increased seriously in the recent years volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 23 references allen natalie and john meyer (1990). “the measurement and antecedents of affective. continuance. and normative commitment to the organization”. journal of occupational psychology. vol. 63. pp. 1–18. allen tammy, mark poteet, lillian eby, elizabeth lentz and lizzette lima (2004). “career benefits associated with mentoring for protégés: a meta analysis”. journal of applied psychology. vol. 89. no: 1. p. 127. allen tammy, stacy mcmanus and joyce russell (1999). “newcomer socialization and stress: formal peer relationships as a source of support”. journal of vocational behavior. vol. 54. pp. 453–470. aranya nissim and kenneth ferris (1984). "a reexamination of accountants' organizationalprofessional conflict". the accounting review. vol. 59. no: 1. pp. 1-15. aryee samuel, yue wah chay and juniper chew (1996). “the motivation to mentor among managerial employees”. group and organization management. vol. 21. pp. 261–277. aydin serkan, ayse tansel cetin and gokhan ozer (2007). “the relationship between marketing and product development process and their effects on firm performance”. academy of marketing studies journal. vol.11. no:1. barker patricia, kathy monks and finian buckley (1999). “the role of mentoring in the career progression of chartered accountants”. british accounting review. vol. 31. pp. 297–312. bateman thomas and stephen strasser (1984). “longitudinal analysis of the antecedents of organizational commitment”. academy of management journal. vol. 27. pp. 95112. baugh gayle, melenie lankau and terri scandura (1996). “an investigation of the effects of protégé gender on responses to mentoring”. journal of vocational behavior. vol. 49. pp. 309– 323. bernstein beverly and beverly kaye (1986). “teacher. tutor. colleague and coach”. personnel journal. vol. 65. pp. 44–51. blackburn robert, david chapman and susan cameron (1981). "cloning in academe: mentorship and academic careers", research in higher education, vol. 15, no: 4, pp. 315-327. blau, francine, janet currie, rachel croson and donna ginther (2010). “can mentoring help female assistant professors? interim results from a randomized trial”, nber working paper, no: w15707. bozionelos nikos (2004). “mentoring provided: relation to mentor’s career success. personality and mentoring received”. journal of vocational behavior. vol. 64. no: 1. p. 25. brashear thomas, chris manolis and charles brooks (2005). “the effects of control. trust. and justice on salesperson turnover”. journal of business research. vol. 58. pp. 241-249. dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 24 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu chao georgia, pat walz and phil gardner (1992). “formal and informal mentorships: a comparison on mentoring functions and contrast with nonmentored counterparts”. personnel psychology. vol. 45. pp. 619–636. colarelli stephen and ronald bishop (1990). “career commitment: functions. correlates. and management”. group & organization studies. vol. 15. pp. 158-176. covaleski mark, mark dirsmith, james heian and sajay samuel (1998). “the calculated and the avowed: techniques of discipline and struggles over identity in big six public accounting firms”. administrative science quarterly. vol. 43. pp. 293-327. curry james, douglas wakefield and charles mueller (1986). “on the causal ordering of job satisfaction and organizational commitrnent”. academy of management journal. vol. 29. pp. 847-858. çavuş şenol and arzu gürdoğan (2008). “örgüt kültürü ve örgütsel bağlılık i̇lişkisi: beş yıldızlı bir otel i̇şletmesinde araştırma”. ticaret ve turizm eğitim fakültesi dergisi. no: 1. pp. 1834. dalton. gene, paul thompson and raymond price (1977). “the four stages of professionals’ careersa new look at performance of professionals”. journal of organizational dynamics. summer issue. pp. 19– 42. dirsmith mark, mark covaleski and james heian (1997). “structure and agency in an institutionalized setting: the application and social transformation of control in the big six”. journal of accounting. organizations and society. vol. 22. p. 15. dreher george and ronald ash (1990). “a comparative study of mentoring among men and women in managerial. professional and technical positions”. journal of applied psychology. vol. 75. pp. 539-546. ehlen craig and robert welker (1996). “procedural fairness in the peer and quality review programs”. auditing: a journal of practice and theory. vol. 15. pp. 38–52. fagenson ellen (1989). “the mentor advantage: perceived career/job experiences of prote´ge´s versus non-prote´ge´s”. journal of organizational behavior. vol. 10. pp. 309–320. farkas arthur and lois tetrick (1989). “a three-wave longitudinal analysis of the causal ordering of satisfaction and commitment on turnover decisions”. journal of applied psychology. vol. 74. pp. 855-868. hackett rick, peter bycio and peter hausdorf (1992). “further assessment of a threecomponent model of organizational commitment”. academy of management best paper proceedings. pp. 212-216. hackman richard and greg oldham (1976). “motivation through the design of work: test of a theory”. journal of organizational behavior and human performance. vol. 35. pp. 250–279. hair joseph, rolph anderson, ronald tatham and william black (1998). “multivariate data analysis with readings”. prentice hall. new jersey. hall. douglas (1976). “careers in organizations”. scott. foresman series in management and organizations. p. 1-236. volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 25 heimann. beverly and khushwant pittenger (1996). “the impact of formal mentorship on socialization and commitment of newcomers”. journal of managerial issues. vol. 8. no: 1. pp. 108–117. higgins monica and kathy kram (2001). “reconceptualizing mentoring at work: a developmental network perspective”. academy of management review. vol. 26. pp. 264–288. kanter rosabeth moss (1993). “men and women in the corporation”. basic books publishing. 2 nd edition. new york. usa. pp. 1416. kim moon-koo, myeong-cheol park and dong-heon jeong (2004). “the effects of customer satisfaction and switching barrier on customer loyalty in korean mobile telecommunication services”. telecommunications policy. vol. 28. no: 2. pp.145-159. koberg christine, wayne boss and eric goodman (1998). “factors and outcomes associated with mentoring among health-care professionals”. journal of vocational behavior. vol. 53. pp. 58–72. kram kathy (1988). “mentoring at work: developmental relationships in organizational life”. university press of america. p. 1-268. levinson daniel, charlotte darrow. edward klein. maria levinson and braxton mckee (1978). “seasons of a man’s life”. knopf publishing. new york. usa. p. 1-363. libby theresa (1999). “the influence of voice and explanation on performance in participative budgeting setting”. journal of accounting. organizations and society. vol. 24. pp. 125-138. . lind allen, robin lissak and henry mendes (1983). “organizational and nonorganizational influences on attitudes towards work”. university of illinois at urbana publications. p. 6. lind allan and tom tyler (1988). “the social psychology of procedural justice”. plenum press. new york. pp. 1-241 lindquist tim (1995). “fairness as an antecedent to participative budgeting: examining the effect of distributive justice. procedural justice and referent cognitions on satisfaction and performance”. journal of management accounting research. vol. 7. pp. 122-147. major debra, steve kozlowski, georgia chao and phil gardner (1995). “a longitudinal investigation of newcomer expectations. early socialization outcomes and the moderating effects of role development factors”. journal of applied psychology. vol. 80. pp. 418-431. masterson suzanne, kyle lewis, barry goldman and susan taylor (2000). “integrating justice and social exchange: the differing effects of fair procedures and treatment on work relationships”. academy of management journal. vol. 45. pp. 738-748. mcfarlin dean and paul sweeney (1992). “distributive and procedural justice as predictors of satisfaction with personal and organizational outcomes”. academy of management journal. vol. 35. no: 3. pp. 626-637. mcphail janelle and ronel erwee (2000). “developing professional relationships between supervisors and doctoral candidates”, australian journal of management and organisational behaviour, vol.3, no:1, p.76. dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 26 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu megginson david and david clutterbuck (1995). “mentoring in action”. kogan page publishing. london. united kingdom. p. 5. meyer john, natalie allen and catherine smith (1993). “commitment to organizations and occupations: extension and test of a threecomponent conceptualization”. journal of applied psychology. vol. 78. pp. 538–551. mullen ellen (1994). “framing the mentoring relationship in an information exchange”. human resource management review. vol. 4. pp. 257–281. muschallik, julia and kerstin pull (2012). “mentoring in higher education: does it enhance mentees’ research productivity?”, ssrn working paper, no: 2067003. neumark david and rosella gardecki (1996). “women helping women? role-model and mentoring effects on female ph.d. student in economics”, nber working papers, no: w5733. noe raymond (1988). “an investigation of the determinants of successful assigned mentoring relationships”. journal of personnel psychology. vol. 41. pp. 457–479. norusis marija (1993). “spss for windows: base system user’s guide”. release 6.0. spss inc. chicago. nunnally jum (1978). “psychometric theory”, mcgraw–hill publishing. 2nd edition. new york. orpen christopher (1997). “the effects of formal mentoring on employee work motivation. organizational commitment and job performance”. journal of learning organization. vol. 4. issue: 2. pp. 53-60. ostroff cheri and steve kozlowski (1993). “the role of mentoring in the information gathering processes of newcomers during early organizational socialization”. journal of vocational behavior. vol. 42. pp. 170-183. özer gökhan and mehmet günlük (2010). “the effects of discrimination perception on turkish public accountants”. african journal of business management. vol. 4. no: 8. pp. 15001509. özkalp enver, çiğdem kırel, zerrin sungur and aytül ayşe cengiz (2006). “the importance of mentoring on organizational socialization of the research assistants in anadolu university”, sosyal bilimler dergisi (journal of social science), issue: 2, pp. 55-70. öztürk veli, seyhan çil koçyiğit and emine çına bal (2011). “muhasebe meslek mensuplarının mesleki tükenmişlik düzeyleri ile i̇şe bağlılık arasındaki i̇lişkiyi belirlemeye yönelik bir araştırma: ankara i̇li örneği”. doğuş üniversitesi dergisi. vol. 12. no: 1. pp. 84-98. pasework william and ralph viator (2006). “sources of work-family conflict in the accounting profession”. journal of behavioral research in accounting. vol 18. pp. 147-165. ragins belle rose and john cotton (1999). “mentor functions and outcomes: a comparison of men and women in formal and informal mentoring relationships”. journal of applied psychology. vol. 84. pp. 529-550. volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu impact of mentoring on organizational commitment and job satisfaction of accounting-finance academicians employed in turkey emerging markets journal | p a g e | 27 ragins belle rose, john cotton and janice miller (2000). “marginal mentoring: the effects of type of mentor. quality of relationship. and program design on work and career attitudes”. academy of management journal. vol. 43. pp. 1177–1194. ragins belle rose and terri scandura (1994). “gender differences in expected outcomes of mentoring relationships”. academy of management journal. vol. 37. pp. 957–971. rasch ronald and adrian harrell (1990). “the impact of personal characteristics on the turnover behavior of accounting professionals’’. auditing: a journal of practice and theory. vol. 9. no: 2. pp. 90-102. roberts james, kevin coulson and lawrence chonko (1999). “salesperson perceptions of equity and justice and their impact on organizational commitment and intent to turnover”. journal of marketing theory and practice. vol. 7. no: 1. pp. 1-16. roche gerard (1979). ”much ado about mentors”. harvard business review. vol. 57. pp. 14–28. rockoff jonah (2008). “does mentoring reduce turnover and improve skills of new employees? evidence from teachers in new york city”, nber working papers, no: 13868. sawyer john (1992). “goal and process clarity: specification of multiple constructs of role ambiguity and a structural equation model of their antecedents and consequences”. journal of applied psychology. vol. 77. pp. 130-142. scandura terri (1997). “mentoring and organizational justice: an empirical investigation”. journal of vocational behavior. vol. 51. p. 58. 65. seibert scott (1999). “the effectiveness of facilitated mentoring: a longitudinal quasiexperiment”. journal of vocational behavior. vol. 54. pp. 483–502. sheldon alexander and marian ruderman (1987). “the role of procedural and distributive justice in organizational behavior”. social justice research. vol.1. no: 2. pp. 177-198. siegel philip and khursheed omer (1995). "mentoring as an antidote to stress during a regional cpa firm merger". journal of business and entrepreneurship. vol. 7. pp. 87-100. siegel philip, alan reinstein and cathleen miller (2001). “mentoring and organizational justice among audit professionals”. journal of accounting. auditing and finance. vol. 16. no: 1. pp. 1-25. silverhart todd (1994). “it works: mentoring drives productivity higher”. managers magazine. pp. 14–15. sweeney paul and dean mcfarlin (1993). “workers' evaluations of the 'ends' and the 'means': an examination of four models of distributive and procedural justice”. organizational behavior and human decision processes. vol. 55. pp. 23-40. dr. ayşe tansel çetin, dr. cevdet kızıl, halil i̇brahim zengin p a g e | 28 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.40 | http://emaj.pitt.edu tansel cetin ayse, mine aksu and gokhan ozer (2012). “technology investments, performance and the effects of size and region in turkish hospitals”. the service industries journal, vol.32, no:5, pp:747-771. tharenou phyllis (2005). “does mentor support increase women’s career advancement more than men’s? the differential effects of career and psychosocial support”, australian journal of management, vol. 30, no:1. pp. 77-109. turban daniel. and thomas dougherty (1994). “role of protégé personality in receipt of mentoring and career success”. academy of management journal. vol. 37. pp. 688-702. viator ralph (2001). “an examination of african americans’ access to public accounting mentors: perceived barriers and intentions to leave”. accounting, organizations and society journal. vol. 26. pp. 541-561. viator ralph and william pasework (2005). “mentorship separation tension in the accounting profession: the consequences of delayed structural separation”. accounting, organizations and society journal. vol. 30. pp.371-387. whitely william and pol coetsier (1993). “the relationship of career mentoring to early career outcomes”. organization studies. vol. 14. pp. 419–441. whitely william, thomas dougherty and george dreher (1991). “relationship of career mentoring and socioeconomic origin to managers’ and professionals’ early career progress”. academy of management journal. vol. 34. pp. 331–351. wickman floyd (1997). “mentoring”. publications of irwin professional group. new york. usa. pp. 1-191. wilson james and nancy elman (1990). “organizational benefits of mentoring”. academy of management executive. vol. 4. pp. 88–94. yüceler aydan (2009). “örgütsel bağlılık ve örgüt i̇klimi i̇lişkisi: teorik ve uygulamalı bir çalışma”. selçuk üniversitesi sosyal bilimler enstitüsü dergisi. no: 2. pp. 445-458. zey michael (1984). “the mentor connection: strategic alliances in corporate life”. dow-jones irwin publishing. new jersey. usa. p. 1-228. akredi̇tasyon, kurumsallaşma ve bi̇lgi̇ i̇leti̇şi̇mi̇ni̇n kali̇te i̇yi̇leşti̇rme ve çalişan performansina etki̇leri̇ni̇n i̇ncelenmesi̇ investigation of effects of accreditation, institutionalization and data communication on quality improvement and employee performance dr. didem rodoplu şahin kocaeli university | e-mail: didem.rodoplu@kocaeli.edu.tr tuna uslu gedik university | e-mail: tuna.uslu@gedik.edu.tr , tunauslu@gmail.com abstract this paper develops a framework for the investigation of individual employee performance, in the light of recent developments in structural empowerment. the authors of this article propose corporate governance, knowledge management, organizational upward and downward communication that may predict employee performance by the mediating effect of quality improvement. the results suggest that upward and downward communication positively influences quality improvement, and is in turn positively influenced by knowledge management and corporate governance. perceived quality improvement is also found to be a key variable between structural empowerment and employee perceptions. keywords: corporate governance, knowledge management, organizational communication, quality improvement, predict employee performance new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu | mailto:didem.rodoplu@kocaeli.edu.tr mailto:tuna.uslu@gedik.edu.tr mailto:tunauslu@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu investigation of effects of accreditation, institutionalization and data communication on quality improvement and employee performance emerging markets journal | p a g e |32 investigation of effects of accreditation, institutionalization and data communication on quality improvement and employee performance dr. didem rodoplu şahi̇n tuna uslu 1. introduction institutionalization, information management, quality improvement and accreditation in businesses, besides organizational outcomes, have a direct positive effect on employees. thanks to institutionalization tools such as standardization and accreditation, it is expected that the employees structurally strengthened. on the other hand, organizational communication channels and tools have important tasks such as improving the effectiveness of social interaction and communication between employees. with top-down and bottom-up management of organizational communication, it is also aimed that both the organizational and individual performances are improved. however, in terms of results that stage and compare the way the corporate applications and organizational communication influence the employees as individuals, there is lacking information in your writing. when the predecessors in the literature are examined, it is seen that structural and psychological empowerment applications appears to affect the perceptions of employee performance. however, there are limited number of studies conducted in turkey and in your writing regarding the individual effects of corporate applications and knowledge management tools. the aim of our research is to determine how the corporate applications, tools and standards to improve the quality first, then the reflection of the performance of your employees.the theoretical framework of this study is that the structural reinforcement tools will be effective on corporate processes and later on the employees. in this study, firstly, the emphasis is given on structural applications in institutions such as corporate governance, knowledge management, organizational communication, and quality improvement, then certification and accreditation applications from different sectors are illustrated. 2. structural applications in institutions. 2.1. corporate governance in recent years, the process of rapid change and development due to jumps in globalization, transportation and information technologies has led to the emergence of new approaches in business management that look like corporate governance (akyüz et al, 2008).businesses´ longer life expectancy, the continuous growth of the national economy, the development of international economic relations, aspects of growth and differentiation of international capital movements, the reduction of its stakeholders´ effects in management activities, the increasing importance of the decisions made by the company´s board of directors with the title of chairman of the board, and so forth, have been effective on the emergence and spread of the concept of corporate governance (koçel, 2003). the reasons why the corporate governance have become such an important subject are lack of foresight in corporation management, arbitrary management, failure, neglect, financial crises in developing markets(clark and demirag, 2002), private sector’s increasing and worrying role, economically increasing ties between the regions and the countries, and new competition conditions that the businesses are in(şehirli, 1999). corporate governance concept may be defined as staying true to the procedures, principles, standards and the rules with relationships and trades between the company’s volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n – tuna uslu p a g e |33| emerging markets journal stakeholders, members of the board of directors, professional managers, employees and other establishments, businesses and individuals that the company has a business relationship with (öztürk, 2004: 25). the world bank (world bank, 1999: 8) defines corporate governance as an establishment’s withdrawal of the human and financial capital, operating effectively while respecting the society that it belongs to, in the long term, the laws, regulations, codes and applications that provide possibilities for the stakeholder’s wellbeing.corporate governance has an effective role in standardizing the processes and the outputs, management of all the related information and documents, and the quality management philosophy by professionalizing the corporate governances, organizations, and establishments’ processes. on the other hand, when the corporate governance viewpoint is evaluated on the basis of humancenteredness, besides the traditional structure that aim to increase value in company’s business management processes, make profit, and distribute the profit made to the shareholders, just as it is encountered in the field of financial management, shareholders and other interested parties (employees, managers, providers, creditors, customers and society) aim to have their rights protected and along this framework, arrange the relationship structure between these interested parties. corporate governance, at the same time, is a type of management that brings out the ethical concepts such as social responsibility, accountability, transparency, and being fair. treating all the interested parties equally, sharing all the information equally and clearly with the shareholders, being accountable for the active orders, and respecting the rules that reflect the values of the society are the m in your writing, in most of the work done regarding the corporate governance, it is seen that these are studies that investigate the effects of corporate governance on the company processes, performance and values.. in similar studies conducted in turkey by the imkb (varis et al, 2001) and spk (2004), the effects of corporate governance have been examined on the company level. in your writing, even though the effects of corporate governance on its employees has not yet been researched, it was expected that the basic principles such as social responsibility, accountability, transparency, being fair and ethical would cause them to feel better about themselves, their work and company, dedicate themselves to their organizations, display organizational citizenship behaviors, feel stronger and improve their performance. 2.2. knowledge management: after the wars and the crises in the first half of the twentieth century, the technical processes that came about as a result of social, economic, and the structural developments have helped develop the information based products. the technological developments during this term in the field of informatics, information systems and transportation contribute to the processing and spreading data and information at first, then to the keeping, evaluating, and improving the information. together with this change, with time, information that has no monetary value, have been being added to the tools, processes and the products as added value (drucker, 1994). while drucker saw the information system as the only way that would lead the company’s to success, nonaka and takeuchi (1995) claimed that to continuously create innovations would be possible by creating a database on inner and outer information concepts. barutcugil (2002) defines knowledge management concept as creating the information, keeping it on hand, sharing, and developing. also, in order to acquire the organizational objectives in a better way, the author sees knowledge management as a new discipline that helps present, share and apply the information to all the agents (to the individuals, teams and the whole organization) collectively and systematically. thus, the author includes information communication concept and its applications in the management process. knowledge management concept, informatics and information technology have made strong changes in the work life just like in every aspect of life. the rapid development of information and communication technologies have been changing the organizational structure, business and work methods, manager and employee profile, and in general work life, and have been bringing out new models particularly in commnunication in inside and outside the organization. through the knowledge management systems, and informatics, the employees, who have been adequately informed of the institution’s strategy, general performance, and other units’ work, feel stronger and reach their individual and organizational volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu investigation of effects of accreditation, institutionalization and data communication on quality improvement and employee performance emerging markets journal | p a g e |34 objectives. sharing information and increasing cooperation, employees with more authority and autonomy, mutual communication opportunities, eased down organizational learning processes, increasing quality of work life and the balance of work-private life with the employees switching to their own autonomy, the destruction of traditional walls, and the formation of the sharing and cooperation culture with have positive impacts on the employees. as can be seen, interaction that forms as a result of sharing every single type of information, expectation, emotion and thought has both social and organizational functions. these functions can be classified as education and development, unified, innovation, persuasion, guidance, communication, coordination and conflict management(saal ve knight, 1988; özçağlayan, 1998). in order to bring the business to the target quality and for the decision making mechanism to work in a healthier way, the institution should relay all the information regarding job description and processes (uslu ve demirel, 2003: 176). the information being relayed to all the employees to make business more competitive is provided by an effective communication model with a feedback mechanism and infrastructure (uslu ve demirel, 2003). in the knowledge management activities, communication methods, techniques, and channels are heavily utilized, and because of this reason, in your writing, it is emphasized that the communication aspect has a stronger influence than the management aspect of knowledge management (çapar, 2002), meaning that knowledge management applications especially through communication influences outcomes. as a result of this, in order for the information to be shared in the institutions, managers who understand the importance of social interactions and communication with the employees and an institutional management are needed, because socialization of the individuals in the business is one of the dynamics of the knowledge management (nonaka ve takeuchi, 1995: 71). 2.3. organizational communication: in today’s institutions, communication, while seen as a key point in terms of institution’s functionality, can also be defined as the key to the change and development. in shaping institutional structures, the importance of acquiring new techniques and skills are discussed in your article (tucker et al, 1996). just as the communication can be regarded as a feature of the institution’s structure, on the other hand, it also comes out as a component with a strong unified effect (myers and myers, 1982), and three basic functions of the organizational communication is mentioned. these basis functions are defined as coordination and regulation of production activities, socialization of shareholders and innovation. together with the institutionalization of business structures with time, instead of organizational structures that are focused only on the rules and operation, single directions and traditional organizational structures that are defined with their top to bottom flows, dynamic and multidimensional structures have come out. in order to each institutional goals, employees follow an approach that takes into account their minds, emotions and intuitions as a whole, and that forms the socialization aspect of communication. effectiveness of the organizational communication is determined heavily by the under and above relationships. 2.3.2. vertical communication vertical communication is formed by a hierarchic system information flow in communication is provided first from top to bottom then from bottom to top (özarallı ve uslu, 2009). while the vertical communication represents the institution’s official channels, it plays an important role in forming its own exclusive definition. it also has an important function in conveying the objectives and the goals of the institution. it gives more information on institution’s structure than the individual’s personal qualities. in a study conducted by the goris et al, (2000) the effects of communication direction on employee-work adaptation and work income (performance and job satisfaction) has been examined. high performance and job satisfaction is a result of need for personal development and adaptation to work features. communication improves performance and satisfaction only to a point. when there is lack of harmony between the work and the individual, downward communication, in other words, managers forming dialogues with the employees and giving feedback, have become an effective tool in determining the job satisfaction and performance. (gibson ve hodgetts, 1991).. on the other hand, when the factors that prevent information flow are examined, single direction downward communication has been regarded as one of those volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n – tuna uslu p a g e |35| emerging markets journal reasons. among other factors, you can also mention that ignoring the importance of communication, avoiding the written documentation of the information, and acceptance by the managers that the knowledge they possess is understood the same way by the employees can be other reasons. 2.3.1.1. downward vertical communication: this is the type of communication that is formed by the managers who communicate with their employees and managers below their levels. in downward communication, messages are sent from one level to the levels below with this way, organizations objectives and policies, instructions and directives regarding the job, points that need special attention in work output and performance evaluations are conveyed richmond and mccroskey (2008) talks about five main factors of communication such as work related directives, logic, ideology, knowledge and feedback. based on social norms, it has been found that when it comes to setting up communication unconsciously based on intuition by the managers, increasing their awareness has positively influenced their decision making processes (jabs, 2005), in other words, unofficial monetary processes should be added to their own memory, and evaluated amongst the official and monetary outputs. 2.3.1.2. upward vertical communication: upward communication is conveying of complaints, work related problems and concerns, performance data, and following the contents of the information flow is made up of analysis, report, and data that are prepared in traditional structures. but in fact, upward communication provides information on how the employees perceive the work they do. there could be problems in information flow in traditional management structures that support single direction communication and are closed to feedback. likewise, conflicts between employees, their thoughts on decisions made in the institution, concerns regarding work related problems, hesitating to speaking out about neglect and improprieties could do serious damage to the organizations (morrison ve milliken, 2000). garnett et al. (2008), investigated the direct or indirect effects of communication on performance in mission-oriented and rule-oriented cultures separately. they also found that in mission-oriented institutions, directing tasks, feedback and upward communication has a positive impact on performance, nevertheless in rule-oriented traditional institutions, it has no positive impact on performance or it could negatively impact performance potential. how the employees perceive the institutional management and communication methods are the determining factors in terms of job and performance satisfactions (zhui ve diğerleri, 2004). when evaluated from the performance standpoint, it has been observed that the managers determine long term performance measures that are in line with the institutional objectives, and on the other hand, determined that these were more important than the short term performance goals and perceptions. as a result of this, there could be conflicts between the managers and employees in terms of having different ideas and objectives, and in order to reach their personal goals, the employees continue working in case they cannot express their viewpoints even though these wouldn’t be in line with the organizational objectives. therefore, if the upward communication is not managed right, performance related problems could arise. zhui et al, (2004) emphasized that valid and reliable information provided to the employee does not always positively impact job satisfaction. job satisfaction could only be improved if the information provided was adequately designed and suitable with the objectives. quality of communication and its effectiveness are improved when the upward communication is positive, timely, supports the institutional policies the updated institutional management and is directly in line with the persons or objectives (richmond ve mccroskey, 2008). 2.4. improving quality: in today’s world, amongst all the resources of businesses that aim institutilization, the most important one is the quality concept. making profit, increasing company value, and in order for businesses that run their activities for the public to stay in business are all dependent upon producing quality products and services (yılmaz, 2007: 1). the process of improving quality has positive results for both organizational and individual outcomes. besides organizational outcomes such as producing more products and services, increasing productivity, reducing absences and quitting work, and strengthening the relationships between departments and sections, it also has individual outcomes such as increasing self-confidence, fair distribution of the rewards, employees feeling better about themselves and having more authority. also, during the quality improvement process, the employee participation in the decision making process helps them boost their volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu investigation of effects of accreditation, institutionalization and data communication on quality improvement and employee performance emerging markets journal | p a g e |36 motivation towards their work, causes them to get stronger and take charge. human is the basic unit of the quality concept. appreciating his value, trusting him, taking care of his needs, being at the top of the needs hierarchy, and his happiness; briefly, being a “quality human being” in fact form the basic objective of the quality philosophy. amongst the predecessors of this transformation, comes the structural applications of the institution, meaning when the viewpoint of the board of directors could be explained to the employees and when this could be properly managed, we can then talk about a continuous quality improvement and quality human beings as individuals. because of this reason, quality objectives are hung in places that the employees can easily see, quality circles are formed, and the employees become a part of these processes. 2.5. relationship between quality and accreditation: quality is defined as the products and services being able to take care of the customers’ needs and expectations. when we examine the work on the sectors, quality is defined as “the degree of perfection or suitability to the standards of the service systems’ various components. another definition from the health sector says that both the patients and the medical personnel’s being equal in decision making, taking care of the accepted standards, and giving importance to the security of the patients” (kiymir, 1995: 5). in order for the quality improvement activities to be successful, it is necessary to form quality culture, and ensure that its principles are very well known. these principles; • meeting demands; meeting the needs of the employees and the customers as request • prevention; seeking permanent solutions that prevent reoccurrence of the problem instead of temporary solutions. • doing it right the first, identifying the mistakes and not repeating them. • participation; ensure that the employees are able to use their skills and capacities at the highest level • continuous development; continuation of the development in a fast-paced environment beyond maintaining standards. • team work; team work instead of individual work • measurement; services being measurable all of these accreditation and improvement efforts are to reach institutional structure because; • presence of differences of service quality in all the areas in which the services are provided • increasing the number of people who would like to utilize quality services. • thanks to rapid development in technology, the quality systems are brought to the foreground. • people who would like to receive services reaching the awareness of questioning the product quality • people receiving services questioning whether the pricing they received is at a fair level. • at the end of all of these expectations, service providers had to join in on providing quality services, or the fact that they will have to in the future makes institutionalization a necessity. to give you a sectorial example, in health facilities that reach institutional structure; • even if each incoming patient presents with different diagnosis and treatment characteristics, after sometime, the demand to the hospital now and in the future will be estimated accurately. • it will be possible to adapt to the demand changes for the hospitals in the short term • extreme division of labor and specialization in health facilities, the increase in labor costs along with the increase in quality personnel will be able to be overseen • the printouts of all health care delivered to the patient will be standardized. 2.5.1. what is accredication? turkish accreditation agency (türkak), for the purpose of accrediting institutions such as system certification, inspection, staff information, product / service certification bodies, mobile service providers, testing and calibration laboratories, is a legal entity concerning prime ministry that has administrative and financial autonomy by law no. 4458. established in 1999, türkak is the only conformity assessment organization in turkey. it’s duty is to make a systemic review of whether a product, process or service meets your specific rules or not. türkak’a göre akreditasyon; laboratuarların, muayene ve belgelendirme kuruluşlarının ulusal ve uluslararası kabul görmüş teknik kriterlere göre değerlendirilmesi yeterliliğinin onaylanması ve düzenli aralıklarla denetlenmesi demektir according to türkak, volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n – tuna uslu p a g e |37| emerging markets journal accreditation means that approving their adequacy, inspecting them in periodic intervals, and evaluating them according to criteria recognized nationally and internationally of the laboratories, inspection and certification bodies. (türkak, 2011:3). accreditation unlike evaluation, having a more limited purpose such as acceptance or rejection, and that evaluation usually including wider purposes and being a more comprehensive process is specified. when it comes to a system of accreditation standards, the standards may be included in a portion of the evaluation process or may not be included at all. another method that is used in providing quality assurance is benchmarking". while determining the minimum standards for accreditation program is expected to be fulfilled, during the benchmarking process, criteria of excellence meaning best practices are based on. benchmarking process can be operated without the need for any external criteria, and there are good examples here. while accreditation is a tool in ensuring quality assurance, the aim should be continuous sustainable quality improvement (aslan, 2009: 289). accreditation can also be defined as a determining process which is monitored at regular intervals by the voluntary, unofficial accrediation agency whether an institution or program meets predetermined criteria and standards or not. to be accredited means acquiring the official declaration of competence about the quality of a department/program as a result of academic evaluations which are done periodically and appropriate for the accepted quality standards, by the competent institution (erkuş ve özdemir, 2010: 119). the basic features of accreditation can be listed as follows: (mutlu, 2009: 9-12; akyurt, 2007: 23-27).  is an independent act from the state, service providers and the purchasing the service,  participation is optional. however, organizations could be directed directly or indirectly by the encouraging applications in practice,  the main source of income of the accreditation institution is the fees charged for the accrediation audit. also, other sources of income are derived from publications (articles, magazines, books), education programs that have been created for the process of accreditation, and the related consulting activities, thus, the accreditation bodies affect the business in positive way to become accredited.furthermore, it hosts encouraging factors inside and outside the institution. when we evaluate accreditation in terms of institution, employee and customer, the following conclusions can be reached. (mutlu, 2009: 9-12; akyurt, 2007: 23-27). an accredited institution;  develops itself and enhances public safety  provides the opportunity to define and identify the paying authority, state institution and the vendor.  entegre ve odaklı yönetim yapısının çerçevesini belirler ve sunumunu sağlamakta,  provide professional staff development,  gain job reliability,  provides a framework to combine quality development with "science" ,  provides a framework for professional monitoring and surveillance. an accredited business provides its employees (mutlu, 2009: 9-12; akyurt, 2007: 23-27):  give importance to their opinions and values,  measuring satisfaction levels,  increased interest in quality activities  enhancement of the security and the safety,  creating more prominent lines regarding authority and reliability issues,  strong emphasis on team work,  supporting training and advancement,  allows passage from the person variation to the process variation,  creates a strong and supportive leadership environment,  customer from the customer standpoint (mutlu, 2009: 9-12; akyurt, 2007: 23-27):  facilitate access to quality-oriented organization,  allows for protection and respect for their rights,  offers understandable education and communication ability based on all of these features, we can list the benefits of accreditation to businesses as follows:  complete teamwork and coherence within the team  standardization of policies set by the organization  integration of institution with the continuous quality agenda  achievement of the standards is doing selfevaluations for determining the inappropriate conditions for the accreditation and correcting activities. in the world, the accreditation applications are evaluated as an indicator of quality, and operate in the hospitals the most. in the accreditation volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu investigation of effects of accreditation, institutionalization and data communication on quality improvement and employee performance emerging markets journal | p a g e |38 applications regardless of the differences in the sector and similar factors as a result of the certification process evaluation, the documents of the participating companies were taken over a period of 7-12 months with a share of 40.3%. since the certification process of the turkak or internationally accredited institutions' cannot be said longer or shorter, from the business managers' attitude to the level of education of the staff, all the way down to the business's infrastructure, could be interpreted as it could be affected by many factors (mındıkoğlu ve duygu, 2006: 98). to give you examples of different sectors’ accreditation standards: 2.5.2. some special standards unique to specialization 2.5.2.1. iso 14001 environmental standards no matter from what industry, a business while maintaining its activities needs to make the best use of the natural resources, avoid waste production, decomposition of waste products, search for ways to recycle waste, dispose of waste appropriately, comply with the applicable laws regarding the environment, provide the employees with the environmental awareness, and be prepared for these situations by identifying emergency situations regarding the environment. iso 14001 standard specifies all the todo items regarding all of these such activities and presents an environment management system (ems) model (mındıkoğlu ve duygu, 2006: 98). 2.5.2.2. general medical council (gmc) studies with the "medical policy"that was prepared in 1858, general medical council was established in england. this council is a national authority that issues certifications to physicians regarding protecting, promoting and maintaining the public health and safety. the council, at the same time, prepares reports on a regular basis regarding these institutions' authority to provide medical education and on getting back those rights by checking their competencies and monitoring their development with the institutional visits. 2.5.2.3. jci (joint commission international) other than the iso 9000 as the quality assurance system in health care (bekaroğlu, 2005: 23), that sets standards for health care organizations in the united states since 1953 and its origins dating back to the beginning of the 1900s, the united accrediting commission of health care organizations (jcahojoint commission on accreditation of healthcare organizations), set the standards for the accreditation of hospitals, clinics and similar institutions. 2.5.2.4. abet (accreditation board for engineering and engineering technology) 2000 while abet is a system that has been developed for the accreditation of the engineering programs, in terms of being based on total quality management, gives you ideas about the quality management mechanism that can be applied in different disciplines. the basic approach of abet 2000 engineering programs is self-task (mission) and taking the views of the stakeholders in determination of the objectives and the creation of a system of continuous in-house development. in terms of graduated level quality targeted features, abet 2000 offers specific minimum criteria. these criteria are identified by consulting the stakeholders, especially the industry in america. abet 2000 approach, outside the united states, applied for the first time in turkey at the middle east technical university faculty of engineering. abet 2000, along with dealing only with the accreditation of the engineering programs, with its different approach that was based on the total quality management (tqm) philosophy that it adopted since 1996, not only gives ideas on the different disciplines of higher education institutions, but also on the quality management system that could be applied in primary and secondary schools. (ögel ve dursunkaya, 2001: 207) with the "academic assessment and quality improvement" regulation that was published in 2005, the work onthe main principles regarding the education in higher institutions, monitoring training and research activities with administrative services, evaluation, auality improvement, approval and recognition of their quality levels by the independent "external evaluation" process are organized. another goal of volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n – tuna uslu p a g e |39| emerging markets journal this research is to develop an accreditation standards scale that is free of sectors and "total quality management and process" oriented. on the other hand, siegler and pearson (2000), in their study, determined that an organizational climate that strengthens its employees has a significant effect on performance. institutional support and positive interventions associated with the business appear to have improved performace. (cameron et al, 2004). for this reason, institutional applications as mentioned can be assumed to be effectice on the employees who work directly and indirectly. 3. research model and hypotheses the institutional level of the management, thanks to the structural and organizational applications, will play a role in the improvement in quality and the employee performance. hypotheses: h1. there is a strong positive relationship between the corporate governance, knowledge management, upward and downward communication and quality improvement. h2. downward organizational communication will sometimes function as a variable between the corporate governance, knowledge management and the upward communication. h3. corporate governance and knowledge management will have a positive impact on quality improvement directly, and the downward communication will have a similar impact through the upward communication. h4. corporate governance will sometimes function as a variable between the knowledge management and the individual performance that is perceived through the upward and downward communication. consequently, the following model has been established in accordance with the variable hypothesesthat were formed in the light of these relationships figure 1: research model 3. methods employees of medium and large scale private and public institutions that are in the process of setting standards for the institutionalization and organization make up the main mass of our samples. a printed questionairre was created to collect data associated with the variables in the research. these forms were handed to the employees who were selected using the convenience sampling method and were actively involved in the working life. in this way, a total of 361 questionnaires were collected from istanbul and kocaeli. the questionnaire used in two parts: "demographic information form" (14 items), and the "corporate standards form" made up of 35 expressions, consists of a total of 49 questions. for other scales associated with institutionalization, jci accreditation standards for (joint commission international, 2010), organizational-oriented standards under the "quality improvement" (2010: 145-163), "leadership, governance, leadership and direction" (2010: 177193 ) and "communication and information management" section (2010: 229-245), were the main ingredients used (uslu and et al, 2010). “the survey that was created to measure the "vertical organizational communication" was formed by using an added expression to the 14 questions developed by postmes, tanis, and de wit (2001). in measuring the "perceived individual performance”, 3 expressions were used that were added to the sigler and pearson's (2000) inventory. a 6-item scale was presented to the respondents that would allow them to conduct evaluations regarding each entry. (1 = never, 6 = all the time). demographic analysis for the findings, factor and reliability tests and regression analyzes were performed with spss 17.0 statistical software package. factor analysis towards findings and progressive intermediary variable tests are carried out by verifying different models. for the purpose of volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu investigation of effects of accreditation, institutionalization and data communication on quality improvement and employee performance emerging markets journal | p a g e |40 determining the intermediation roles of the intermediary variables, a three-step method proposed by baron and kenny (1986) was adapted to our research. 4. findings within the framework of findings in our study, effects of institutionalization and psychological effects of standardization on the service sector employees, and their reflection on employee performance were determined. these effects have been identified as varied according to the division of public and private sector, and in the light of this variation, different models have been tested for the public and private sectors. as a result of our findings, critical sector-specific recommendations were presented to the service sector managers and employees. demographic characteristics of the sample used in this study are as follows: 45% of female respondents and 55% of males and the mean age was 43. of 53.7% bachelor's degree, of 36.8% master's degree / doctorate, and the remaining 9.4% portion of the participants were the elementary, middle school and high school graduates the average working time among the participants was approximately 8 years in this business, and they have been in working life for an average of 17 years. 4% of all participants that compose of 40% public and 60% private sector employees are in the executive positions. factor analysis of the scales is shown in tables 1 to 4. in order to determine the sub-dimensions of our variables and positive organizational behaviors, with varimax torsion in spss, exploratory (descriptive) factor and internal consistency analyses were performed. each scale was run through the factor analysis separately, and their reliability was tested with cronbach's alpha values, and the scales were translated in the following tables. table 1: corporate governance and internal consistency factor results corporate governance item weight explanatory factor institution's operators and the managers (responsible for the service or products) together are responsible for the preparation of plans and policies, definition of the institution's mission and its fullfillment. ,808 managers, who are responsible for the products and the services, plan and apply an effective institutional structure in order to use their authority and responsibilities. ,800 one or more quality individuals provide management for each section or service in the business. ,697 management’s responsibilities, authorities, and functions are documented in written form. ,674 a high level manager or a director complies with the institutional functions and the written procedures. ,674 explanatory factors (%): 69,396 cronbach alpha (%): 88,9 kaisermeyerolkin value: ,858 bartlett value: ,000 approxima te chisquare value: 694,845 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n – tuna uslu p a g e |41| emerging markets journal table 2: knowledge management factors and internal consistency results knowledge management item weight explanatory function all of the data and the information in the institution support the accomplishment of a product or service, institutional and quality management. ,812 my institution registers each work, service or product done and keeps these records appropriately. ,726 my institution plans and applies methods that would take care of the information needs of the people about the instititution for both all the managers and employees inside and outside the institution. ,685 explanatory factor (%):78,616 cronbach alpha (%):86,3 kaisermeyerolkin value: ,701 bartlett value: ,000 approximate chisquare value: 366,251 in your article regarding the"vertical organizational communication" scale, while sticking to the "downward" and "upward" vertical communication separation is divided into two. (table 3). table 3: knowledge management factors and internal consistency results vertical organizational communication item weight explanatory factor management listens to the employees’ views and recommendations (upward vertical communication) ,879 they provide adequate opportunities to the employees regarding discussing the institution’s management policies and giving recommendations on development (upward vertical communication) ,871 managers discuss institutional matters with their subs (downward vertical communication) ,853 management pays attention to employee complaints (upward vertical communication) ,851 employees are informed of the general performance of the institution (downward vertical communication) ,836 employees are informed of the institutional strategies (downward vertical communication) ,825 employees working in one department are informed of the other departments’ work (downward vertical communication) ,813 employees are informed of the personnel management of the institution (downward vertical communication) ,789 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu investigation of effects of accreditation, institutionalization and data communication on quality improvement and employee performance emerging markets journal | p a g e |42 employees participate in the decision making process (upward vertical communication) ,782 employees are informed of the changes in the institution (downward vertical communication) ,772 employees are informed of the mission and vision of the institution (downward vertical communication) ,759 employees are given information related to the work they do (downward vertical communication) ,733 i communicate with the management (upward vertical communication) ,715 if i have a criticism regarding the institution’s strategy, i know how to share my idea with the institution (upward vertical communication) ,713 i would receive a feedback for each work i have done (downward vertical communication) ,674 explanatory factor (%):79,099 cronbach alpha (%): 95,6 kaisermeyer-olkin value: ,912 bartlett value: ,000 approximate chisquare value: 1681,546 table 4: knowledge management factors and internal consistency results quality improvement item weight explanatory factor my institution, in accordance with the quality improvement principles, designs re-organized applications, systems and processes. ,860 management determines new scales in order to monitor the institution’s basic and managerial structures, processes and outputs. ,854 individuals who possess the appropriate experience, knowledge and the skills, systematically collect and analyze the data of the institution. ,833 improvement is reached and continued in quality and safety. ,807 people and management responsible for leadership participate in planning and monitoring a quality improvement program ,700 explanatory factor (%): 77,838 cronbach alpha (%): 92,7 kaiser-meyerolkin value: ,859 bartlett value: ,000 approxima te chisquare value: 1014,601 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n – tuna uslu p a g e |43| emerging markets journal table 5: knowledge management factors and internal consistency results individual performance item weight explanatory factor i am sure that the service i provide will more than meet the standards ,791 i reach my job related goals according to my co-workers ,779 when a problem arises, i find a solution right away ,771 the work i put out is closest to what is possible to achieve ,704 my individual effect is high on the positive results of the work i do. ,703 i finish my work on time ,699 i uygvdo work with the least available resources ,605 explanatory factor (%):64,424 cronba ch alpha (%): 90,7 kaisermeyer-olkin value: ,899 bartlett value: ,000 approx imate chisquare value: 895,658 quality improvement, knowledge management, organizational communication, and corporate governance consist of a single dimension. cronbach's alpha reliability coefficients of the scales were 0.80 and therefore the scales were found to be highly reliable. the averages of the variables and standard deviations given in table 1 and 5 and the relationships between them are shown in table 6. table 6: variable averages, standard deviations and their relationships (** p <0.01, significant value, cronbach's alpha coefficients in parentheses, n =361), according to pearson's correlation coefficients, our first hypothesis is supported (table 6). a high positive correlation was found between organizational communication, corporate governance, information management, and quality improvement. progressive intermediary variable tests towards the individual performance are performed with verification of different models with spss (table 7). v a r ia b le s a v e . s d 1 2 3 4 5 6 c o r p o ra te g o v e r n a n ce 4 ,1 8 1 ,1 2 (8 ,8 9 ) in fo r m a ti o n m a n a g em e n t 4 ,0 3 1 ,2 0 ,8 0 * * (8 6 ,3 ) d o w n w a r d c o m m u n ic a t io n 4 ,3 2 1 ,1 6 ,7 4 * * ,8 1 * * (9 1 ,7 ) u p w a r d c o m m u n ic a t io ın 3 ,8 6 1 ,2 4 ,6 5 * * ,6 9 * * ,8 8 * * (8 7 ,4 ) q u a li ty im p ro v e m e n t 4 ,8 3 0 ,7 4 ,7 9 * * ,7 7 * * ,7 7 * * ,7 2 * * (9 2 ,7 ) p e r ce iv e d in d iv id u a l p e r fo r m a n ce 4 ,8 3 0 ,7 4 ,3 3 * * ,2 9 * * ,2 6 * * ,2 8 * * ,3 4 * * (9 0 ,7 ) volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu investigation of effects of accreditation, institutionalization and data communication on quality improvement and employee performance emerging markets journal | p a g e |44 table 7: impact of corporate governance on performance and multiple regression models created for intermediate variables of quality improvement, organizational communication and information management. (*** p <0.00l, ** p <0.01, * p <0.05 significant value, standard errors in parentheses), dependent variables downward upward com, quality improvement, perceived individual performance, communication corporate governance and information management increase the effectiveness of downward (model 1) and upward (model 2) communication. however, when the downward communication joins the analysis as an independent variable, the effect of corporate governance and information management on upward communication is eliminated. (model 3), our second hypothesıs was supported. corporate governance, information management and downward vertical communication have a positive impact on quality improvement.(model 4). when the upward communication joins the analysis as an independent variable, only the effect of downward communication on quality improvement is eliminated. (model 5). this way, our 3rd hypothesis was supported. significant impact of corporate governance on perceived individual performance (model 6), when the structural applications and organizational variables are entered into regression analysis separately (model 7,8), are decreased and eliminated(model 9). corporate governance is quite effective on performance primarily through partial upward communication then quality improvement. when the quality improvement is added to the analysis, the effects of other precursors are completely eliminated (model 9) our 4th hypothesis has been supported. 5. results, discussion and limitations regarding the effects of corporate applications on individual performance in your article and the number of studies conducted in turkey are limited. besides the institutionalization, information management and organizational communication having a significant impact on quality improvement, the employee performance is affected through this channel albeit weak. our findinds attract attention to the way the organization and employees who work individually are affected by the corporate applications. in your academic and practical articles, when the information management practices and institutionalization are considered to have increasing importance, the results of this study are expected to constitute more value in the coming years. due to the fact that there is a high degree of positive correlation between the institutional standards such as quality improvement, information management and corporate governance, the way these variables are able to affect each other should be examined more detail. therefore, in future studies, structure, equivalence, and process models in which the quality and accreditation standards that will be established can be tested. ---- m o d e l 1 m o d e l 2 m o d e l 3 m o d e l 4 m o d e l 5 m o d e l 6 m o d e l 7 m o d e l 8 m o d e l 9 c o r p o r a te g o v er n a n c e ,2 6 0 * * * (0 ,5 5 ) 0 ,2 6 5 * * * (0 ,0 7 1 ) ,0 3 5 (, 0 4 9 ) ,4 0 3 * * * (, 0 5 2 ) ,3 9 3 * * * (, 0 5 2 ) ,2 6 9 * * (, 0 5 4 ) ,2 6 5 * * (, 0 5 6 ) ,2 5 8 * (, 0 5 7 ) ,1 7 5 (, 0 6 2 ) in fo r m a ti o n m a n a g e m e n t ,5 9 6 * * * (0 ,0 5 6 ) ,4 7 8 * * * (, 0 6 9 ) -, 0 7 0 (, 0 5 4 ) ,2 0 9 * * * (, 0 5 8 ) ,2 3 6 * * * (, 0 5 8 ) ,0 7 7 (, 0 5 2 ) ,0 6 9 (0 ,6 2 ) ,0 8 3 (, 0 6 3 ) ,0 3 8 (, 0 6 4 ) d o w n w a r d c o m m u n ic a ti o n ,9 1 4 * * * (, 0 4 5 ) ,3 0 1 * * * (, 0 4 8 ) ,0 9 9 (, 0 7 1 ) ,0 1 2 (, 0 5 2 ) -, 1 7 3 (, 0 7 7 ) -, 1 8 9 (, 0 7 7 ) u p w a r d c o m m u n ic a ti o n ,2 1 6 * * * (, 0 5 7 ) ,2 0 9 * (, 0 6 2 ) ,1 6 0 (, 0 6 3 ) q u a li ty im p r o v e m e n t ,2 0 5 * (, 0 5 9 ) n 3 5 5 3 4 7 3 4 3 3 5 5 3 4 3 3 1 9 3 1 4 3 0 7 3 0 7 f la t r 2 ,6 7 1 ,5 0 0 ,7 7 9 ,7 1 2 7 2 5 ,1 0 6 ,1 0 2 ,1 1 2 ,1 2 1 f 6 3 1 ,9 5 0 * * * 1 7 4 ,1 7 8 * * * 4 0 1 ,7 6 9 * * * 2 9 2 ,4 0 5 * * * 2 2 6 ,1 6 0 * * * 1 9 ,7 9 3 1 0 ,6 1 8 * * * 1 0 ,6 1 8 * * * 9 ,3 9 5 * * * volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n – tuna uslu p a g e |45| emerging markets journal references akyurt, n. (2007). “standards for accreditation of hospitals: a research study on to what extend the radiology managers of private hospitals in istanbul meet the standards, istanbul university, institute of social sciences, unpublished phd thesis akyüz, y., görmüş, a.s., ve bektaş, ç. (2008) “increasing the economic value of information to the information society in transition and its impact on businesses”, 17.01.2008, 1-10 http://www.paribus.tr.googlepages.com/akyuz2.doc aslan, b. (2009). “accreditation of higher education in different countries and improvements in turkish higher education”, journal of faculty of educational sciences, 42, 1, ss. 287-309 baron, r. m. ve kenny, d. a. (1986). “the moderator-mediator variable distinction in social psychological research: conceptual, strategic and statistical considerations,” journal of personality and social psychology, 51, ss. 1173–1182. barutçugil, i̇. (2002). “information management”, i̇stanbul: kariyer yayıncılık. bekaroğlu, ş. b. (2005) “the effects of possessing total quality management application and iso 9000 quality assurance on the performance of the hospitals: a study on private hospitals in istanbul”, akdeniz i̇.i̇.b.f. dergisi (9) cameron, k. s., bright, d. ve caza, a. (2004). “exploring the relationships between organizational virtuousness and performance,” american behavioral scientist, 47, ss. 766–790. çapar, b. (2002). “baskent university faculty of communications, department of information and records management ", i. unak general conference 10-12 october 2002, samsun 19 mayis university. drucker, p. (1994). “beyond capitalist society”, çev. belkıs çorakçı, i̇stanbul: i̇nkılap kitabevi. erkuş, l. ve s. m. özdemir (2010) “faculty of education faculty members' perceptions on the state of readiness assessment accreditation process, "journal of university faculty of education, 03, 38, ss. 118-133. garnett, j.l., marlowe, j. pandey, s.k. (2008). “penetrating performance predicament: communication as a mediator or moderator of organizational culture’s ımpact on public organizational performance”, public administration review, march/april, ss. 266–281. gibson, j.w., hodgetts, r.m. (1991). organizational communication a managerial perspective, 2nd edition. harper collins publishers: new york. goris, j. r., vaught, b. c., pettit j.d. (2000). “effects of communication direction on job performance and satisfaction: a moderated regression analysis”, journal of business communication, 37(4), ss. 348-368. jabs, l.b.(2005). “communicative rules and organizational decision making”, journal of business communication, 42(3), ss. 265–288. joint commission international (2010). joint commission international accreditation standards for hospitals, 4. baskı, joint commission resources, illinois, isbn: 978-1-59940-434-9 kiymir, b. (1995). “health care quality management ", 1 national institutes of health and the hospital management symposium, 4-7 may 1994, kuşadası, aydın, dokuz eylül üniversitesi, i̇zmir koçel, t. (2003). “business management”, i̇stanbul: beta basım yayım dağıtım. mındıkoğlu, b. ve a.e. duygu (2006). “iso 14001 environmental management system (ems) standard: a study on some businesses’ problems and challenges faced turkey”, http://dergiler.ankara.edu.tr/dergiler/47/1155/1359 5.pdf morrison e.w. ve milliken f.j. (2000). “organizational silence: a barrier to change and development in a pluralistic world”, academy of management review, 25, ss. 706–725. mutlu, s. (2009). “accreditation process and the role of human resources in health ", ankara university institute of social sciences, department of human resource management and career thesis. http://www.paribus.tr.googlepages.com/akyuz2.doc http://0-web.ebscohost.com.libunix.ku.edu.tr/ehost/viewarticle?data=dgjymppp44rp2%2fdv0%2bnjisfk5ie46bjorqe2sbck63nn5kx95uxxjl6nruqypbbirq%2besripr1kurj5oy5zyit%2fk8xnh6ueh7n%2fivaursk%2bxq65psa6khn%2fk5vxj5kr84lpgjoac8nnls79mpnfsvbgvte6yqlq%2b5oxwhd%2fqu37z4uqm4%2b7y&hid=105 http://0-web.ebscohost.com.libunix.ku.edu.tr/ehost/viewarticle?data=dgjymppp44rp2%2fdv0%2bnjisfk5ie46bjorqe2sbck63nn5kx95uxxjl6nruqypbbirq%2besripr1kurj5oy5zyit%2fk8xnh6ueh7n%2fivaursk%2bxq65psa6khn%2fk5vxj5kr84lpgjoac8nnls79mpnfsvbgvte6yqlq%2b5oxwhd%2fqu37z4uqm4%2b7y&hid=105 http://0-web.ebscohost.com.libunix.ku.edu.tr/ehost/viewarticle?data=dgjymppp44rp2%2fdv0%2bnjisfk5ie46bjorqe2sbck63nn5kx95uxxjl6nruqypbbirq%2besripr1kurj5oy5zyit%2fk8xnh6ueh7n%2fivaursk%2bxq65psa6khn%2fk5vxj5kr84lpgjoac8nnls79mpnfsvbgvte6yqlq%2b5oxwhd%2fqu37z4uqm4%2b7y&hid=105 http://dergiler.ankara.edu.tr/dergiler/47/1155/13595.pdf http://dergiler.ankara.edu.tr/dergiler/47/1155/13595.pdf volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.50 | http://emaj.pitt.edu investigation of effects of accreditation, institutionalization and data communication on quality improvement and employee performance emerging markets journal | p a g e |46 myers, m.t. ve myers. g.e. (1982). “managing by communication – an organizational approach”, mcgraw-hill book company: new york nonaka, i., takeuchi, h. (1995). “the knowledge creating company: how japanese companies create the dynamics of innovation”, new york: oxford university press. ögel, z. b. ve dursunkaya, z. (2001) “quality management in education: an example of abet accreditation process 2000 ", hacettepe university faculty of education magazine, 20, ss. 206–214. özarallı, n. ve t. uslu (2009). "public and private sector information sharing and analysis of communication channels”, international 7th knowledge, economy & management congress proceedings, yalova üniversitesi-i̇stanbul üniversitesi, fsm-i̇stanbul, isbn: 978-99440203-5-0, ss. 1528–1541 öztürk, m. b. (2004). “corporate governance practices of the european union harmonization process "iii. national central anatolia congress,kırşehir, 29–30 nisan. postmes, t. tanis, m. and wit, b. (2001). “communication and commitment in organizations: a social identity approach”, group processes intergroup relations, 4 (3), 227–246. richmond, v.p. mccroskey, j.c. (2008). “organizational communication for survival: making work”, work, 4th ed. allyn & bacon: birmingham özçağlayan, m. (1998). “new communication technologies and the change”, i̇stanbul: alfa basım yayım saal, frank e. ve patrick a. knight (1988). “industrial and organizational psychology, science and practice”, california: brooks state university. spk, sermaye piyasası kurulu (2004). “corporate governance practice survey results”, spk sigler, t.h., pearson, c. m. (2000). “creating an empowering culture: examining the relationship between organizational culture and perceptions of empowerment,” journal of quality management, vol.5, ss. 27-52. şehirli, k. (1999). “research report on corporate governance”, spk denetleme dairesi, sayı: 14 (4) tucker, m. l., dale, m. g. ve westerman, j.w. (1996). “organizational communication: development of internal strategic competitive advantage”, the journal of business communication, 33 (1), ss. 51–69. uslu, ş. ve demirel, y. (2003) “a study on problems of employees in smes ", the university of erciyes journal of social sciences institute faculty, 12, ss. 173–184 uslu, t., aydoğdu, c., gündoğdu şanlı, z. ve e. m. çam (2010). “examination of the effects of structural strengthening institutions, knowledge management and accreditation standards on phychological empowerment and employee performance through attitudes”, international 8th knowledge, economy & management congress proceedings, istanbul university faculty of economics, isbn: 978-9944-0203-7-4, ss. 14261439 varış, m., küçükçolak, a., erdogan, o. ve özer, l. (2001). “corporate governance principles of the capital markets,” i̇mkb dergisi özel sayısı, 5, 19, ss. 167-171. world bank (1999). ukrainian corporate governance manual. yılmaz, m. (2007). “impact of job satisfaction of the quality management system: an application in printing businesses with or without a quality certification", phd thesis, gazi university, institute of science, ankara, turkey. zhui, y., may, s.k. ve rosenfeld, l.b. (2004) “information adequacy and job satisfaction during merger and acquisition”, management communication quarterly, 18(2), ss. 241–270. emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.09 | http://emaj.pitt.edu impact of the global crisis on the governance structures of international financial institutions gökhan özkan yalova university | e-mail: ozkan.gkhnn@gmail.com abstract the global financial crisis dragged many countries into recession, demonstrated that the international financial system has structural problems and started discussions about restructuring of the international financial institutions. the main objective of this paper is to investigate the impact of the global financial crisis on the governance structures of the international financial institutions. to this end, studies made at different international platforms were evaluated. the debates and negotiations among the developed and developing countries about governance structures of the international financial institutions were analyzed. developing countries’ demand to reform the decision-making mechanisms of the bretton woods institutions, the imf and the world bank and developed countries’ reservations were investigated. it was concluded that the new shape of the international financial architecture and governance structures of international financial institutions will depend on international politics as well as the evolution of the global crisis and the economic dynamics. keywords: governance structures, international financial institutions, global crisis, international politics this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu mailto:ozkan.gkhnn@ http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 1 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.09 | http://emaj.pitt.edu impact of the global crisis on the governance structures of international financial institutions gökhan özkan i. introduction in recent years there has been a pressure from at the bretton woods conferences in 1944, international monetary system was determined as adjustable peg system tied to the u.s. dollar and gold, the imf and the world bank were established, and the bretton woods system was constituted. after the collapse of the bretton woods system in 1971; volatility in exchange rates, technological innovation, which has accelerated economic integration through virtual and physical time-space compression (harvey, 1989), and financial liberalization reforms, which led to an increase in levels of capital account openness and financial openness, (walter and sen, 2008: 122) increased and accelerated international capital movements and many developed and developing countries entered into financial crises. the global financial crisis, which started in the u.s., is the last and the largest of these crises. because of the degree of globalization in financial markets, global crisis quickly spread to other countries. (yunus, 2009: 6) the globalization of capital has been an integral part of the scale of the financial crisis. (legg and harris, 2009: 369) the global crisis started discussions about the restructuring of the international financial system. some scholars argue that significant transnational regulatory initiatives will advance as a result of the financial crisis. in the contrary, some scholars think the crisis is generating a reassertion of state authority over international financial markets. (helleiner, 2009a:1) nonetheless, it is generally accepted that international financial architecture, which is likened to oil in our cars that lubricates the engine of world growth (el-arian, 2009:88), is far from preventing crises. the developed countries, particularly the g-7 countries and the developing countries, particularly the bric countries (brazil, russia, india and china) tried to shape the restructuring process of the international financial system and the international financial institutions according to their interests. divergence between the perspectives of developed and developing countries transformed the restructuring process into a political process. it is expected that besides accelerating the restructuring of the international financial system, the financial crisis will have geopolitical reflections (burrows and harris, 2009) and the international balance of power will find a new equilibrium because of the crisis. (germain, 2009) this paper aims to investigate the impact of the global financial crisis on the governance structures of the international financial institutions within context of international politics. the article proceeds in the following manner. first, impact of the global financial crisis on the restructuring of the international financial system is examined. in the second section, role of the g-20 summits and international politics on the restructuring process is analyzed. in the third section, restructuring of the international financial institutions’ governance is evaluated. impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 2 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu ii. the global crisis and the international financial system the biggest financial crisis since the great depression, which originated in the us and spread quickly to other countries, clearly demonstrated that the u.s. and international financial architecture has structural flaws so that this is not just a crisis in the system, this is a crisis of the system. the crisis was a challenge; the three of the most seemingly effective international institutions (the world trade organization, the imf, and the international network of regulatory agencies) failed to meet. (zaring, 2010: 475) global financial crisis demonstrated that nations are still the most important actors of the international financial system. it was also clearly seen that g-7 countries cannot decide on global economic issues themselves; representation and participation of emerging countries in the decisiontaking mechanisms is needed. the crisis moved the center of gravity of the international economy towards emerging countries and the g-20 emerged as the legitimate platform to restructure the international financial architecture in terms of representation, international reserves and economic power. (bradford, 2009: 38) the g-20 countries together represent over 85 percent of world gdp, 80 percent of world trade, and two-thirds of the world’s population. (beeson and bell, 2009:68) in this connection, creation of the g-20 increases the possibility of effective policy coordination and increase the credibility and legitimacy. (germain, 2001) the global crisis also showed that the international financial system has expanded greatly in size, reach and liquidity and gained the potential to drag not only the developing but also the developed countries into crisis. (wade, 2008) even if the international institutional framework for international finance is seen as the most sophisticated of the global governance regimes (kerwer, 2005), the crisis showed that the systemic complexities of the 21st century networks should be better understood. (schweitzer et al., 2009) the international financial system has become so integrated and the global economy so interdependent that policy coordination at the global level is needed and to do that, international institutions must be reformed in a way that gives greater voice and representation to the emerging countries. (pisani-ferry and santos, 2009:12) according to the imf study (2009), synchronized recessions after financial crises tend to be deeper and last longer, which makes coordinated action and cooperation at the global level more urgent. as a result, the global governance concept, which is related to the emerging urgent global problems that cannot be solved by the national instruments of decision making, (potucek, 2009: 12) is pronounced more and more frequently. it is argued that a comprehensive supervisory and regulatory regime that monitors and assess systemic financial risks stemming from the poor corporate governance, riskmanagement and management of liquidity risk of all the banks and the shadow financial system should be constructed. absence of binding international standards to enhance financial transparency and accountability (abdelal, 2007) is seen as one of the most important factors that intensified the global financial crisis. it is argued that financial deregulation reforms, which opened up countries to the free flow of capital in and out of them, removed the regulations on financial institutions operating within countries, and removed the political controls from the central bank, made the financial sectors of nations parts of the international financial sector and increased countries’ vulnerabilities. (beder, 2009: 18) nonetheless, there are also views that worldwide drive to regulation is misconceived. (connolly, 2009:422) impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 3 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu even if the need for cooperation at the global level was clearly recognized, it was also seen that states are not ready for a global financial regulator and a central bank. in spite of the fact that a supranational regulator and international lender of last resort may be functional to stabilize international financial markets, it is also accepted that it is not easy to establish these institutions under current circumstances. so, until these kinds of supranational institutions are established, intensifying national regulations, enhancing international cooperation and redesigning the regulatory framework at the national and international levels are seen as short and middleterm options. it is expected that imf will continue to play the role of “quasi-lender of last resort”. iii. the g-20 summits, international politics and the restructuring process as the global crisis deepened in the first quarter of 2009, need for cooperation at the global level was clearly understood. nevertheless, developed and developing countries, with different points of view about the restructuring process, tried to shape the process according to their interests. the restructuring process turned into a political dispute among the developed and developing countries. g-20 meetings symbolized the changing balance of power in the international economy. (bradford, 2009:38) prior to the crisis, the g-7 summits were platforms where the most important decisions about the international economic order were taken. nonetheless, the global financial crisis necessitated more participation and representation of the developing countries. g-20 reflected the structural shifts in the system hereby power balances are being altered by the rise of emerging countries, particularly the bric countries (brazil, russia, india and china). (armijo, 2007) “the bric countries” concept gained a political meaning rather than a just economic term. putin had mentioned this in his munich speech in 2007: “there is no reason to doubt that the economic potential of the new centers of global economic growth (the brics) will inevitably be converted into political influence and will strengthen multipolarity” (lukyanov, 2009:130) g-20 is seen as an important step towards a reformed global economic governance regime. (schmidt et al., 2009) nonetheless, it is also argued that since g-20 is merely a gathering of national leaders, not a formally constituted international organization and lacks the capacity to enforce its decisions, it does not result in any fundamental changes to the system. (buckley, 2010) g-20 is likened to a non executive board of directors for the global system of governance than an executive management committee. (garrett, 2010: 38) g-20 declarations are also criticized on the basis that no preconditions are defined for more cooperation and no underlying principles are defined. (graaf and williams, 2009: 414) during the initial phases of the crisis, in november 2008, the g-20 countries convened with the agenda of taking measures to prevent the deepening of the crisis. g-20 countries convened again in april 2009 and took important decisions. finally, at the g-20 meeting in september 2009, the leaders declared that the g-20 became the main platform for international economic cooperation. g-20 meeting in april 2009 was successful at some extent. nonetheless, the meeting failed to reform the international financial system because of clash of interests among the anglosaxons, the europeans and the emerging countries. it is argued that the us blocked the reform of the international financial system and pushed for global fiscal stimulus. the europeans resisted fiscal stimulus and reform of the imf and the world bank since their voting power would be cut to create space for the emerging countries. they shifted the impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 4 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu focus from these issues to the regulatory reforms. meanwhile, emerging countries, particularly bric countries stressed the importance of the reform of the international financial and monetary system. at the end of the summit, it was declared that imf’s financial resources were increased threefold to $750 billion, which was seen useful to help stabilize financial sector in troubled regions of the world. (yunus, 2009:7) nonetheless, most of this amount consisted of commitments. only japan signed a $100 billion bilateral barrowing agreement with the imf. the e.u. and the u.s. committed $100 billion. china pledged to buy $50 billion imf bonds denominated in sdrs. russia, brazil, south korea and india also pledged to buy $10 billion imf bonds. canada and switzerland also committed $10 billion dollar. adding commitments of other countries, the total amount amounted to 423 billion dollars by early september. the european union increased its commitments by 78 billion dollars in september 2009 and in this way the $500 billion target could be reached before the g-20 summit at the end of the september. the g-20 meeting in april 2009 was not successful especially from developing countries’ perspectives in terms of reform of the international financial system. russia voiced its concerns with regards to the problems caused by the dominance of dollar and china, which is expected to provide more resources to the imf, proposed the reform of the international financial system with specific suggestions; nonetheless g-7 countries simply ignored. (stewart, 2009) it is argued china pledged to buy only $50 billion imf bond rather than giving long-term loan to give a massage that it wants faster reforms in decision-making mechanisms of the imf. (the economist, 2009: 79) other bric countries also refused to participate in the new arrangements to borrow (nab) or special arrangements, rather offered to purchase imf bonds. (woods, 2010: 59) even if fundamental reforms such as the rearrangement the quota system was postponed, some substantial changes were made such as trebling of imf’s financial resources to $750 billion, a $250 billion dollar increase in the special drawing rights (sdr), a new facility called flexible credit line (fcl), a change of conditionality that would let barrower countries to keep up social spending during crises, a doubling of the limit on the total amount each member country can barrow, softening of the core conditionality, better surveillance of risks created by individual countries to the international financial system, a change in the selection of managing directors towards merit-based process. (weissman, 2009:11) grabel (2010: 12) argues that g-20 representatives gave the imf pride of place in global efforts to respond to the crisis. the g-20 countries also agreed to reshape regulatory systems, to extend regulation and oversight to all systemically important financial institutions, instruments and markets. they decided to strengthen international cooperation by establishing the remaining supervisory colleges for significant cross-border firms by june 2009, building in the 28 already in place; by implementing the fsf principles for cross-border crisis management immediately. members of the imf met at the annual imf meeting in the last week of april and discussed how they will raise the funds that were agreed upon at the g-20 summit. they also discussed the reform of the decisionmaking mechanisms of the imf and the world bank. developing countries were not convinced that imf’s more powerful countries were serious about ceding any control. they warned that they would not provide financial resources without having more voice in the decision-making process. (prosser, 2009) alexei kudrin, russia’s finance minister, said at the meeting that, “we already meet a cool attitude and even resistance to reform the imf. the leading countries are not in a hurry… this was the main discussion, the nerve of the meeting.” brazilian finance minister stated that contributions made by the developing countries would be provisional, meaning that they may be withdrawn if impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 5 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu the imf’s decision-making process is not reformed. from the initial phases of the global crisis, bric countries tried to increase their influence in the restructuring process. in march 2009, before the g20 summit, bric countries came together and issued their first communiqué. in this communiqué, they called attention to the reform of the international financial institutions. taking into consideration the growing weights of the emerging countries in the global economy, they wanted reconsideration of the quotas and voting rights of the imf and the world bank. they wanted the reform of the international monetary system. bric countries came together again in june and issued another communiqué. similar to their march communiqué, they called for the reform of the international financial and monetary system. they called for a more diversified monetary system. they also called for a multipolar international system based on international law, equality, mutual respect, cooperation, coordinated action and collective decision-making principles. on june 29, 2009, the united nations ratified an action plan about the international financial system, according to which the member countries demanded an immediate reform of the bretton woods institutions. bric countries continued to criticize the international financial and monetary architecture at other platforms. at the g-8 summit held in july, china repeated its demand for a rational and more diversified international monetary system. russia also argued that an alternative global reserve currency should be included in the agenda of the g8 summit. the united nations trade and development conference supported bric countries’ arguments about the international financial and monetary system with a report in september. (unctad, 2009:10-13) according to arguments in report, dollar should be replaced with another international reserve currency issued by an international organization. it was argued that restructuring of the international financial system in this way would eliminate the problem of instability creating capital movements and would decrease speculation. the report specifically emphasized the sdr. it was argued that the sdrs could function as supranational reserve currency. meanwhile, some scholars argue that since the purchasing power of the sdrs is uncertain and since their liquidity is relatively insufficient, they are not suitable for countries with balance of payments surplus. (mckinnon, 2009:7) finance ministers of the bric countries came together in september before the g-20 summit issued a declaration and reiterated their demands about the reform of the international financial and monetary system. they stated that the most serious problem that damages the legitimacy of the imf and the world bank is unjust distribution of quotas and voting rights. they demanded a seven percent quota shift from developed countries to developing countries in the imf and a six percent voting rights shift in the world bank. they called for a more stable and predictable monetary system. they also demanded a transparent selection process for the imf and world bank presidents based on the merit, not on the nationality. g-20 summit in september has been a summit, which concrete results emerged from ongoing negotiations and discussions among the developing and developed countries in different platforms since the beginning of the global crisis. the leaders declared that the g-20 has become the main platform of international economic cooperation. developing countries’, particularly bric countries’ demands for the reform of the international monetary and financial system were met at some extent. at the g-20 summit, a shift of five percent quota shares from overrepresented developed countries to underrepresented developing countries in the imf and three percent voting rights shift in the world bank were agreed upon. impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 6 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu other important decisions about the international financial system were also taken. the g-20 leaders agreed to launch framework for strong, sustainable, and balanced growth. they agreed to address critical issues such as the size and composition of the executive board and ways of enhancing its effectiveness, the fund governors’ involvement in the strategic oversight of the imf, enhancing staff diversity and making the appointments of the heads and senior leadership of all international institutions through a transparent and merit-based process. the g-20 also agreed to reconsider the regulation system for banks and other financial institutions in a way that prevents excesses that lead to financial crisis, to improve international standards for bank capital, to make necessary arrangements about compensation to end practices that lead to excessive risk-taking, to make the overthe-counter (otc) derivatives more transparent, to regulate and supervise the hedge funds and credit rating agencies, and to make the regulatory and supervisory arrangements for the systematically important international financial institutions. at the imf-world bank annual meetings held in istanbul in october 2009, decisions that support and complement the decisions taken at the g-20 summit were taken. these “istanbul decisions” include: 1. enlarging the mandate of the imf in a way that includes all macroeconomic and financial policies, which affect the global stability. 2. providing insurance to more countries as the lender of last resort by using flexible credit line. 3. to expand the multilateral surveillance authority of the imf. 4. to shift a quota share of at least five percent from developed countries to developing countries. iv. restructuring the governance of the international financial institutions confidence to the international financial system diminished significantly as a result of the global financial crisis. it is argued that transparency and public accountability of international financial institutions and new complex financial instruments should be augmented to reestablish confidence to the financial system. (porter, 2009:8) since the world is not ready for a brandnew global financial regulator or a central bank after the global crisis, it is estimated that the global financial crisis will possibly lead to the restructuring of the international financial system in a way that enhances imf’s role in the global economy. the decision to increase imf’s financial resources at the g-20 meeting in april 2009 reflects increasing importance of the imf. imf’s role was being discussed extensively before the crisis. the fund was searching for a way to stay in business. (weissman, 2009:11) the fund had cut staff by about 13 percent but still faced a $300 million deficit over the next four years in 2008. (griesgraber, 2009: 179) there were few countries that had signed stand-by agreements with the imf in 2000s and it was argued that the fund could not even find money for its day-to-day activities. bank of england governor mervyn king (2006) had said this:”the fund’s remit is unclear. its lending activities have waned and its role in the international monetary system is obscure.” the global crisis changed international economic prospect for the imf fundamentally. it rescued the institution from its increasing irrelevance. (chorev and babb, 2009) nonetheless, to be a legitimate and effective institution, it is impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 7 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu argued that reforms must be implemented in four main areas including governance, economic philosophy, imf staff competencies and substantial increase in financing. (griesgraber, 2009: 180183) the other institution that will probably gain importance is the financial stability forum. the fsf was transformed at the g-20 meeting in april 2009 into the financial stability board. the g20 placed the fsb at the centre of intensified regulatory cooperation. (arner and taylor, 2009: 489) it includes all g20 countries, fsf members, spain and the european commission. the fsb will collaborate with the imf to provide early warning of macroeconomic and financial risks and the actions needed to address them. financial stability board was given important roles with regards to the international financial system such as: 1) assessing the weak points of the financial system and identifying the steps to address them. facilitating and enhancing co-ordination among the authorities responsible for the financial stability. 2) providing the regulatory policy recommendations about the market developments and their implications. 3) monitoring and assessing the practice of regulatory standards. monitoring the policy development work of international standard setting bodies and ensuring that their work is coordinated and focused on priorities and addressing gaps. 4) promoting contingency planning for cross-border systemic crisis management. conducting early warning exercises in collaboration with imf to identify the buildup of macroeconomic and financial risks. 5) establishing a supervisory college to monitor the systematically important international financial firms overseeing all systemically important financial institutions, instruments and markets including the hedge funds, which will have to register and report their strategy, debt and risk levels. 6) establishing a clearing house, through which credit derivatives, whose value is derived from an underlying asset, will be cleared. it is expected that fsb will have an important role in the restructuring process of the international financial system and will function like a global financial regulator. decision-making mechanisms of the international financial institutions such as imf and world bank are among the most critical and controversial issues of the restructuring process. developing countries demand larger quota shares and voting rights arguing that they are underrepresented. the u.s. has 17,09 percent quota share in the imf. this gives the us the veto power over crucial decisions since a majority of 85 percent is required. the european union countries have 32,09 percent quota share while china has 3,72 percent, russia 2,73 percent, india 1,91 percent and brazil 1,4 percent. according to experts, the recalculating quota is very slow because of political dynamics. it took very long negotiations for china to be awarded a “special” quota increase when it reabsorbed hong kong. in 2008, board of governors agreed to a process of change of quotas in small magnitudes. according to the agreement, us’s quotas would eventually reduce to 16,73 percent, while china’s quota would increase to 3,81, india’s to 2,34 and russia’s to 2,39. especially in recent decades, there has been a shift in the international economic balance of power towards east. this shift was not reflected in the quota shares and the voting rights of the imf and the world bank, which limited china’s contribution to the new financial resources for the imf. it is argued that china has pledged to buy only $50 billion imf bonds since its calls for greater representation were not met. it is also argued that china preferred to buy imf bonds rather than providing long-term financial sources to imf to show that it wants acceleration of the restructuring process of decision-taking mechanisms of the imf impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 8 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu and the world bank. (the economist, 2009: 79) in this connection, an expanded role for china in multilateral financial institutions is seen helpful for china’s cooperation with regards to the global financial crisis. (prasad, 2009:233) imf’s functions were determined in the bretton woods articles of agreement in 1944 and they were in harmony with the post-war conditions and with the preferences of the politically strongest countries, the us and the uk. (helleiner, 2009b: 191) its functions started to change in 1970s with the transformation of the international financial system. the us suspended the convertibility of the dollar to gold and the bretton woods system collapsed. technological developments, increasing mobility of capital, financial liberalization and deregulation gave the capital movements the potential to drag countries into financial instabilities and crises. imf’s main function transformed from providing balance of payments support to liquidity crisis management. imf signed agreements with many countries most of which were not successful. it was particularly criticized for its policies after the asian crises in 1997-98. in the first years of the 21st century, imf’s role seemed to diminish as less and less countries signed agreements with imf. the global financial crisis changed this picture totally. imf became almost the most important international institution of the international economy. imf’s financial resources were increased to $750 billion. new facilities such as short-term liquidity facility (slf), which provide more flexibility, were created. with shortterm liquidity facility (slf), imf will be able to channel funds quickly to eligible emerging markets with sound policies and sustainable debt burdens. it is expected that as imf’s effectiveness and influence in the international economy increase, reform of its decision-taking mechanism will be a more important issue. appointment process of the imf and world bank presidents is criticized. it is argued that the imf and world bank presidents are selected according to an informal agreement among the u.s. and the west european countries and as a consequence, all of the ten imf presidents since the establishment of both institutions were west european nationals while all of the eleven world bank presidents were u.s. nationals. (cogan, 2009: 209) a critical issue with regards to the governance of imf is the degree of control of the staff and management by the executive board. there may sometimes be conflicts of interest between the staff focusing on global public goods and the executive board that is controlled politically by member states, particularly ones with the larger quotas. it is argued that if there is no change in the structure of the executive board, the fund’s effectiveness in providing a high-level forum for international economic cooperation will decrease. (thimann, just and ritter, 2009: 188) v. conclusion the global financial crisis demonstrated that the international financial architecture has structural flaws. from the beginning of the crisis, debates and negotiations about restructuring of the international financial system and the governance of the international financial institutions continued in different platforms. since the international financial system is a complex system which consists of various institutions, rules and regulations; it is expected that the restructuring process will be a slow process. apart from the difficulties of the restructuring process stemming from economic factors and the complexity of the international financial system, there are also political dynamics that affect, slow down and harden the process. developing and developed countries have different perspectives and different political concerns about the governance structures of international financial institutions. developing countries want the reform of the decision-making mechanisms of the imf and world impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 9 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu bank in a way that increases the quota shares and voting rights of the developing countries. negotiations and debates among the developed countries, particularly the g-7 countries and the developing countries, particularly the bric countries continued in different platforms since the beginning of the global financial crisis. political agendas shaped the restructuring process as much as the economic concerns. the result was that along with the regulatory reforms, reforms about the decision-making process of the imf and the world bank were made in a way that gives more voice to the developing countries in the international financial institutions. it is expected that developed countries will try to slow down the restructuring process since their control on the decision-making processes of the imf and the world bank provides them various economic and political advantages. nonetheless, since they also recognize that international economic balance of power has changed in recent decades, they may accept some transfer of control. decisions taken at the g-20 summit in september 2009, according to which imf quota shares and world bank voting rights will be transferred from developed countries to developing countries, can be seen as a first step towards greater role of developing countries in the international financial system. meanwhile, the developing countries, particularly the bric countries, will probably press for faster reforms in the decision-taking mechanisms of the imf and the world bank. they will try to increase the amount of imf quota shares and the world bank voting rights that will be transferred to them. it is anticipated that the restructuring process will proceed slowly because of the complex relations between the international financial system and the international politics. impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 10 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.09 | http://emaj.pitt.edu vi. references 1. abdelal, rawi (2007), capital rules: the construction of global finance, cambridge, ma: harvard university press. 2. armijo, leslie e. (2007), “the brics countries (brazil, russia, india, and china) as analytical category: mirage or insight?”, asian perspective, 31(4): 7-42. 3. arner, douglas w. and taylor, michael w. (2009), “the global financial crisis and the financial stability board: hardening the soft law of international financial regulation”, university of new south wales law journal, 32 (2): 488-513. 4. beder, sharon (2009), “neoliberalism and the global financial crisis”, social alternatives, 28 (1): 17 -21. 5. beeson, mark and bell, stephen (2009), “the g-20 and international economic governance: hegemony, collectivism, or both”, global governance, 15 (1): 67-86. 6. bradford, colin i. (2009), “the g-20 financial summit: a new day for global governance”, current , january 2009: 38-39. 7. buckley, ross (2010), “resilience and global financial governance”, university of new south wales faculty of law research series paper 13, at http://law.bepress.com/unswwps/flrps10/art13. (07.04.2010) 8. burrows, mathew j. and harris, jennifer (2009), “revisiting the future: geopolitical effects of the financial crisis”, the washington quarterly, 32(2): 27-38. 9. chorev, nitsan and babb, sarah (2009), “the crisis of neoliberalism and the future of international institutions: a comparison of the imf and the wto”, theory and society, 38 (5): 459 -484. 10. cogan, jacob k. (2009), “representation and power in international organization: the operational constitution and its critics”, the american journal of international law, 103 (2): 209-263. 11. connolly, bernard (2009), “regulation: reform or revenge? the crisis, the eu and british financial markets”, law & financial markets review, 3 (5): 414-424. 12. el-erian, mohamed a. (2009), “shrinkage”, foreign policy, 172, p. 88. 13. garrett, geoffrey (2010), “g2 in g20: china, the united states and the world after the global financial crisis”, global policy, 1 (1): 29-39. 14. germain, randall d. (2001), “global financial governance and the problem of inclusion”, g lobal governance, 7 (4): 411-426. 15. germain, randall d. (2009), “financial order and world politics: crisis, change and continuity”, international affairs, 85(4): 669-687. http://law.bepress.com/unswwps/flrps10/art13 impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 11 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu 16. graaf, frank jan de and williams, cynthia a. (2009), “the intellectual foundations of the global financial crisis: analysis and proposals for reforms”, unsw law journal, 32 (2): 390 -415. 17. grabel, ilene. (2010), “productive incoherence in an uncertain world: financial governance, policy space and development after the global crisis”, political economy research institute working paper no. 214. 18. griesgraber, jo marie (2009), “reforms for major new roles of the international monetary fund? the imf post-g-20 summit”, global governance, 15 (2): 179-185. 19. harvey, david (1989), the condition of postmodernity: an enquiry into the origins of cultural change, oxford: basil blackwell. 20. helleiner, eric (2009a), “special forum: crisis and the future of global financial governance”, global 21. governance, 15 (1): 1-2. 22. helleiner, eric (2009b), “the development mandate of international institutions: where did it come from,” studies in comparative international development, 44 (3): 189-211. 23. imf (international monetary fund) (2009), world economic outlook april 2009: crisis and recovery, washington: imf. 24. kerwer, dieter (2005), “rules the many use: standards and global regulation?”, governance: an international journal of policy, administration, and institutions, 18: 611–632. 25. king, mervyn (2006), “reform of the international monetary fund”, speech at the indian council fo r research on international economic relations, new delhi, february, at http://www.bankofengland.co.uk/publications/speeches/2006/speech267.pdf. (24.10.2009) 26. legg, michael and harris, jason (2009), “how the american dream became a global nightmare: an analysis of the causes of the global financial crisis”, unsw law journal, 32 (2): 350 -389. 27. lukyanov, fyodor (2009), “putin's russia: the quest for a new place”, social research, 76 (1): 117 -150. 28. mckinnon, ronald (2009), “reconsidering sdrs”, harvard international review, 31(1), p. 7. 29. pisani-ferry, jean and santos, indhira (2009), “reshaping the global economy”, finance & development, march 2009: 8-12. 30. porter, tony (2009), “why international institutions matter in the global credit crisis”, global governance, 15 (1): 3-8. 31. potucek, martin (2009), “will global public policy arise from global crisis”, central european journal of public policy, 3 (2): 4-21. 32. prasad, eswar s. (2009), “effects of the financial crisis on the u.s. -china economic relationship,” cato journal, 29 (2): 223-235. impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 12 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu 33. prosser, david (2009), “row with emerging nations threatens imf’s cash call”, the independent, 27 april 2009. 34. schmidt, anna; arancibia, paz; kahlon, rakhil; komoto, nobuhiro; myers, john; munyi, mary; ngororano, tonaina; omandi, george and sepaha, prabal (2009), “geopolitics, global governance and crisis narratives”, ids bulletin, 40 (5): 89-100. 35. schweitzer, frank; fagiolo, giorgio; sornette, didier; vega-redondo, fernando; vespignani, alessandro and white, douglas r. (2009), “economic networks: the new challenges”, science, 325: 422–425. 36. stewart, heather (2009), “can the imf now feed the world?”, the observer, 26 april 2009. 37. the economist (2009), “finance and economics: promises, promises; the imf’s search for funds”, 13 june 2009. 38. thimann, christian; just, christian and ritter, raymond (2009), “strengthening the governance of the international monetary fund: how a dual board structure could raise the effectiveness and legitimacy of a key global institution”, global governance, 15 (2): 187-193. 39. unctad (united nations conference on trade and development) (2009), trade and development report overview, geneva: united nations. 40. wade, robert (2008), “the first world debt crisis of 2007-2010 in global perspective”, challenge, 51 (4): 23-54. 41. walter, andrew and sen, gautam (2008), analyzing the global political economy, princeton: princeton university press. 42. weissman, robert (2009), “a new life for the imf”, multinational monitor, 30 (2): 10 -13. 43. woods, ngaire (2010), “global governance after the financial crisis: a new multilateralism or the last gasp of the great powers?”, global policy, 1 (1): 51-63. 44. yunus, muhammad (2009), “economic security for a world in crisis”, world policy journal, 26 (2): 5 -12. 45. zaring, david t. (2010), “international institutional performance in crisis”, chicago journal of international law, 10 (2): 475-504. microsoft word 23-163-7-ce.doc volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.16 | http://emaj.pitt.edu determinants of growth in franchising contracts in emerging markets; evidences from turkey vedat akman beykent university | e-mail: akmanvedat@yahoo.com sitki sonmezer beykent university | e-mail: sitkisonmezer@beykent.edu.tr abstract this study aims to examine the franchise sector and determine the significant factors that contribute to an increase in the number of franchiser’s contracts in turkey. secondary data is used from the turkish franchise association and multivariate regression models are run for each sector. our models explain the change in the number of franchise contracts with r2’s varying between .6577 and .7549. we provide evidence that success factors in increasing the number of contracts change depending on the sector firms operating in and contracts may be designed thusly to pursue success. keywords: human capital, organizational performance, hotel chain this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.23 | http://emaj.pitt.edu determinants of growth in franchising contracts in emerging markets; evidences from turkey emerging markets journal | p a g e | 79 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.23 | http://emaj.pitt.edu determinants of growth in franchising contracts in emerging markets; evidences from turkey vedat akman sitki sonmezer i. introduction   emerging markets are developing rapidly in the last decade and firms that aim to be ubiquitous in these markets are utilizing mostly franchise contracts in order to exploit these markets. contracts may also be a useful tool to look at firms and their inter-organisational relations (williamson 2003). there are various types of contracts including joint ventures, venture capital, consortiums and franchising contracts. however, in this study, franchise contracts are only examined and the rest of the contracts are out of the scope of this study. among the various definitions of a franchise, stanworth et al (1995), define a franchise as a contractual relationship between a franchisee and a franchisor in which the former agrees to produce or market a product or service in accordance with an overall blueprint devised by a franchisor. franchising can also be defined as a network of interdependent business relationships that allows a number of people to share a brand, a successful method of doing business and a proven marketing and distribution system. franchisees are the ones that invest their assets in a system and get a licence in return to utilize the brand name, operating system and on-going support. la fontaine (1992) states that in a franchisee agreement,” the franchisee pays the franchiser for the right to sell the franchiser product and/or the right to use his trademark at a given place for a certain period of time.” however, plain descriptions of a franchise contracts doesn’t provide information about the details. some contracts provide wider flexibility to franchisees some don’t depending on the situation. our concern is to investigate the determinants of growth in the number of the franchise contracts of franchise chains in turkey. franchises can be broken down into two categories as traditional franchises and business franchises. traditional franchises give the right to the franchisee to sell a product or service in a certain location where as, the business format, a high level of monitoring and regulating of the activities of the franchisee exists in return for providing advertising, service methods and delivery models to the franchisee. montagu (2002) differentiates stand-alone franchises and fractional franchises as well. standalone franchises are the norm in the west: they exclusively promote the goods and services of the franchisor, for example, in a pizza hut restaurant; it is not allowed to sell the products of a competing restaurant. however in a fractional franchise, which is more likely the norm for micro franchises in developing countries, adds a franchised product or service to an existing business, creating additional income for the franchisee and using existing business assets such as shop space (sireau, 2011). ii. contractual   completeness   when a franchiser makes a contract with a franchisee; specific and residual rights have to be assigned among the contract partners. specific rights refer to the decision actions in the ex-ante period where as residual rights refer to the planning of decision procedures to decide on specific actions in the ex post period (hendrikse and windsperger 2011). in a complete contract every possible situation is covered comprehensively and all actions are specified. therefore there is no residual right in that contract. all rights are specific and clearly defined in the contract. the ratio of specific right to residual rights in a contract determines the degree of determinants of growth in franchising contracts in emerging markets; evidences from turkey emerging markets journal | p a g e | 80 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.23 | http://emaj.pitt.edu contractual completeness. in other words, the higher the ratio, the higher the contractual completeness. contractual completeness may be a significant factor in franchising contracts and may be investigated in a further study. iii. contractual   completeness   when a franchiser makes a contract with a franchisee; specific and residual rights have to be assigned among the contract partners. specific rights refer to the decision actions in the ex-ante period where as residual rights refer to the planning of decision procedures to decide on specific actions in the ex post period (hendrikse and windsperger 2011). in a complete contract every possible situation is covered comprehensively and all actions are specified. therefore there is no residual right in that contract. all rights are specific and clearly defined in the contract. the ratio of specific right to residual rights in a contract determines the degree of contractual completeness. in other words, the higher the ratio, the higher the contractual completeness. contractual completeness may be a significant factor in franchising contracts and may be investigated in a further study. iv. literature  review   despite numerous studies regarding with franchise contracts, we fail to find a study that provides evidence for the factors that are effective in increasing the number of franchise contracts of a firm within a sector of a particular market. from this perspective our contribution may be unique and shed light for further researches. past researches are grouped into three parts: franchising from many different perspectives, researchers have studied franchising contracts; management, law, economy, marketing and finance (dant and kaufmann, 2003). investment capital and the majority of management decisions belong to the franchisees which lead to new store expansions and this is one of the factors that have made franchising a successful business model. secondly, fixed costs are distributed across the franchisees and economies of scale are reached and finally franchisees have to work hard with a lower level of supervision as they bear their own risks (montagu, 2002). corts and singh (2002) have investigated turnkey and day rate price solutions seen in contracts of 1874 oil drilling projects and found that when the frequency of interactions increases between the parties involved, the likelihood that turnkey solution is been chosen decreases. furlotti (2007) have asserted that the contracting problem can be solved via an arrangement of proper set of incentives in franchise contracts. arrunada, garicano and vazquez (2005) have examined 23 franchising contracts in automobile distribution; they asserted that allocation of authority to the car manufacture is positively related with the possibility for dealers to damage brand reputation throw improper behaviour. even though numerous studies exist regarding with franchising, we couldn’t find any country and/or sector specific study examining the success of franchising chains and its determinants that may affect the demand of the potential franchisees. this study is unique from this aspect and may shed light to further studies. completeness of contracts regarding with complete contracts, two explanations exists for the presence of incomplete contracts; one is to reduce transaction cost, even circumstances can be verified, it may be too costly to describe it in a contract (williamson 1975). determinants of growth in franchising contracts in emerging markets; evidences from turkey emerging markets journal | p a g e | 81 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.23 | http://emaj.pitt.edu second explanation claims that the contract may fail to distinguish contingencies or specify some dimension of contractual performance (bernheim and whinston 1998). these arguments are for any contract but when the franchising is the case, the second argument is expected to be more relevant. an incomplete contract may be perceived as something negative. however, this may be an outcome of the desires of the parties involved as they want to reduce their transaction costs (saussier 2000). earlier crocker and reynolds (1993) have have analyzed 45 airplane engine purchasing contracts to prove that degree of contract completeness is endogenous to the relationship and also asserted that the degree of contractual completeness is a reflection of the will to minimize economic costs regarding with contractual exchange which makes it clearer that there is a trade-off between completeness and cost. moreover, more simple contracts maybe more smart and less costly when there is less danger in the nature of the contract (joskow, 1987). hansen and higgins, 2007, have asserted a direct relationship between contractual complexity and the allocation of the control rates in technology sourcing agreements by using the data of pharmaceutical and biotechnology firms. luo (2002) asserts that completeness of contracts is cure for motivation and incomplete commitment problems. determinants of complete contracts hendrikse and windsperger(2002) have examined a database which has 52 franchise systems in austria. they have used training days, trust, behavioral uncertainty, initial investments, contract design capabilities, environmental uncertainty and intangible system assets to explain completeness and found that behavioral uncertainty, trust and intangible system assets are significantly affecting completeness. reuer, arino and mellewigt (2004) have examined the factors that affect the contractual complexity via sending 257 questionnaires (response rate of 32%), in line with transaction cost theory in the german telecommunication industry. they provide evidence that entrepreneurial firms design more complex contracts the higher the cost of searching for a partner and the higher the strategic importance they assign to the alliance. they have used assets specificity, relational capital, search costs, strategic importance, alliance scope, multiple partners, and the firm being foreign and firm size as independent variables to explain contractual complexity. they show evidence that contractual complexity is driven by the cost of searching for a new partner and the strategic importance of the alliance. for environmental uncertainty which is represented by contract duration, is taken as a fundamental variable in the study of klein, crawford and alchian (1978). poppo and zenger (2002) had response from 152 computer executives for their main surveys and they have used 7point scale, to measure performance, relational governance, contractual complexity, asset specificity, technological change, measurement difficulty, duration of relationship and other control variables to prove that they are the significant determinants of contractual complexity. their results confirmed that assets specificity, tenure of the directors and magnitude of budget increase the level of contractual complexity reuer and arino (2007) received 91 responses (48 % response rate) to their mail surveys to firms that made alliances according to f&s countries index-europe. in order to explain contractual complexity, they have used assets specificity, prior ties, time bound, strategic importance, firm size, foreign ownership, horizontal alliance and equity as independent variables. they measure contractual complexity as: 8 contractual complexity (weighted) = 1/36 ∑ di i=1. where di equals i if the it provision2 was employed and zero otherwise parkhe (1993). determinants of growth in franchising contracts in emerging markets; evidences from turkey emerging markets journal | p a g e | 82 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.23 | http://emaj.pitt.edu their finding shows that contractual complexity differs from one alliance to another; assets specificity is a significant influencing factor for the complexity of the contract. 1the relationship between complexity and completeness has been discussed briefly in the study of hendrikse and windsperger (2002). they claimed that a more complex contract can be bought more or less complete; they are negatively related when the use of assets is costly and hard to specify in a contract, positively related when the use of assets can be specified. parkhe developed a series of indicators of contractual provisions that are namely; periodic written reports of all relevant transactions; prompt written notice of any departures from the agreement; the right to examine and audit all relevant records; designation of certain information as proprietary and subject to the confidentiality provisions of the contract; non-use of priority information; arbitration clauses and law suit provisions (reuer and arino 2007). v. data  and  methodology   this study has used secondary data from the dataset of turkish franchise association (ufrad) as it is less time consuming and easier to obtain. there are 126 firms that are members of ufrad as of 17 january 2012. however, we have eliminated the brand new chains that have just started operating and the ones with inadequate information and have reduced our sample to 106 which is categorized into three groups; namely, food with 53 firms, service with 33 firms and store with 18 firms. quantitative data such as the initial fees, average working capital, contribution for advertising, continuous franchising fee, number of employees within parent company, number of employees within franchise system, age of franchising and age of the parent company have been obtained from the databases of turkish franchise association. multi regression analyses are run for the clusters generated from the database. three main firm sets are formed depending on their type of businesses they are running; these business types are namely; food, service and store. three regressions are as follows: (1) noffood          =    ß0  +  ß1if  +  ß2sc  +ß3ac+   ß4orf+  ß5af  +  ß6ap  +  ß7ef    +  ß8cos  +  ß9ec     +  e   (2) nofservice    =    ß0  +  ß1if  +  ß2sc  +ß3ac+   ß4orf+  ß5af  +  ß6ap  +  ß7ef  +  ß8cos  +  ß9ec     +  e     (3) nofstore = ß0 + ß1if + ß2sc +ß3ac+ ß4orf+ ß5af + ß6ap + ß7ef + ß8cos + ß9ec + e number of franchise contracts (nof) is our dependent variable. initial fee (if), required start up capital (sc), advertising contribution (ac), ongoing royalty fee (orf), age of franchising (af), age of parent company (ap), number of employees in franchises (ef), company owned stores (cos) and number of employees in the centre (ec) are the independent variables that are examined to be effective in explaining the change in the number of franchising contracts in each sector. by intuition, the last two independent factors are expected not to be highly significant but still worth to examine as trust may be embedded in these two factors. vi. findings   multivariate regression for equation 1 is run (appendix 2) and after controlling for multicollinearity, an r2 of 0.6577 is attained. significant factors affecting the number of franchise contracts are as follows: company owned stores with a -2.99 t-statistics, 99 % significant; age of franchising with a 1.92 t-statistics, 95 % significant; determinants of growth in franchising contracts in emerging markets; evidences from turkey emerging markets journal | p a g e | 83 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.23 | http://emaj.pitt.edu initial start-up cost with a -1.79 t-statistics, 95 % significant; advertising contribution with a 2.57 tstatistics, 95 % significant; number of employees in the center with a 1.81 t-statistics, 95 % significant; most significant factor, number of employees in franchises with a 4.67 t-statistics, 99 % significant. turkey is an emerging market where labor costs are relatively low and in food sector, profit per employee may be higher than developed countries whereas, initial fee is interestingly, an insignificant factor in food business. age of franchising is also valued and this may be related to the trust attributed to the franchiser. investors value franchisers that invest in advertising but refrain from the ones that heavily invest on their own. multivariate regression for equation 3 is run (appendix 6) and after controlling for multicollinearity, an r2 of 0.7549 is attained. significant factors affecting the number of franchise contracts are as follows: initial fee with a -2,45 tstatistics, 95 % significant; initial start-up cost with a 2.19 t-statistics, 95 % significant; number of employees in the center with a 2.19 t-statistics, 95 % significant. despite the lower number of observations, our findings indicate that franchise contracts of stores only give importance to initial fee as investors may value relatively higher initial fees as a waste of resources. vii. conclusion   turkish franchise sector may well be a representative for emerging markets where labor is cheaper and population is higher and this study provides evidence for the factors affecting the growth in franchising. investors of food sector, service sector and stores have differing demands from franchisers and our inference is that this is partly due to the cost structure and presence of available financing in turkish market. franchisers that wish to expand their businesses via franchise contracts may be advised to offer their franchisees differing contracts depending on the sector they are operating and to be successful, they may design their contracts by taking our significant factors into consideration. determinants of growth in franchising contracts in emerging markets; evidences from turkey emerging markets journal | p a g e | 84 volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.16 | http://emaj.pitt.edu viii. references   1. aghion, p., m. dewatripont, p. rey (2004) transferable control, journal of the european economic association, 2, 115-138. 2. anderson, e. (1985) the sales person as outside agent or employee: a transaction cost analysis, marketing science, 4, 234 – 254. 3. armstrong j.s, overton t.s (1977) estimating non-response bias in mail surveys. journal of marketing research 14 (3): 396-402. 4. arrunada b., garicano l. and vazquez l. (2005) completing contracts ex post: how car manufacturers manage car dealers, review of law and economics: vol. 1. article 8. 5. bernheim, b. d., m.d. whinston (1998) incomplete contracts and strategic ambiguity, american economic review, 88, 902-32. 6. brickely, j.a., j.s linck, andc.w.smith (2003) boundaries of the firm: evidence from the banking industry. journal of financial economics, 70,351-383. 7. burney a. (2008) inductive and deductive research approach. 8. corts k.s., singh j. (2002) the effect of repeated interaction on contract choice: evidence from offshore drilling. journal of law, economics and organizations, 20, pp. 230-260. 9. crocker, k.j., reynolds, k.j., (1993)the efficiency of incomplete contracts: an empirical analysis of air force engine procurement. rand journal of economics 24, 126–146. 10. dant, r.p. and p.j. kaufmann, (2003) structural and strategic dynamics in franchising. journal of retailing, 79, 63-75. 11. furlotti m., (2007) there is more to contracts than in completeness: a review and assessment of empirical research on intern firm contracts. journal of management and governance, 11, 61-99. 12. gulati, r. and nickersonj., (2008) interorganizational trust, governance choice and exchange performance. organisational science 19: 688 – 708. 13. hansen, z. higgins, m.,(2007)the effect of contractual complexity on technology sourcing agreements. unpublished. 14. hendrikse g., and windspersger j., (2011) new development in the theory of networks, contibutions to management science, part 1, 13-30. 15. helfat, c.e., s. finkelstein, w.mitchell, m. a. peteraf, h. singh, d. j. teece, s. g. winter, dynamic capabilities: understanding strategies change in organizations, blackwell, oxford, 2007. determinants of growth in franchising contracts in emerging markets; evidences from turkey emerging markets journal | p a g e | 85 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.23 | http://emaj.pitt.edu 16. joskow, p. (1987) contract duration and relationship-specific investments: empirical evidence from coal markets. the american economic review, vol 77, no.1, pp 168-185. 17. klein b; crawford, v.p., alchian, a., (1978) vertical integration, appropriable quasi-rents and the competitive contracting process. journal of law and economics 21, 297-326. 18. lafontaine, f., (1992) agency theory and franchising: some emperical results. rand journal of economics 23:263-283. 19. luo y., (2002) contract, coorperation, and performance in international joint ventures.strategic management journal, 23, pp.903-919. 20. mellewigt, t., a. madhok and a.weibel (2007) trust and formal contracts in interorganizational relationships – substitutes and complements. managerial and decision economics 28: 833-847 21. montagu, d., (2002) franchising of health services in developing countries. health policy and planning; 17 (2): 121 – 130. 22. nonaka i.,(1994)a dynamic theory of organizational knowledge creation. organisation science 5 (1): 1437. 23. parkhe, a., (1993) strategic alliance structuring: a game theoretic and transaction costs examination of interfirm cooperation. academy of management journal 36: 794-829. 24. poppo and zenger (2002) do formal contracts and relational governance function as substitutes or complements? strategic management journal. 23: 707-725. 25. reuer j.j, arino a., mellewigt t., (2004) entrepreneurial alliances as contractual forms. pp 1-41. 26. reuer j.,arino a., (2007) strategic alliance contracts: dimensions and determinants of contractual complexity. strategic management journal 28: 313-330. 27. saussier, s. (2000) transaction cost and contractual incompleteness: the case of electricité de france. journal of economic behaviour and organization 42: 189-206. 28. sireau n., (2011) micro financing: how social entrepreneurs are building a new road to development. greenleaf publishing. 3, 1-7. 29. stanworth j, price s, porter c, swabe t, gold m. (1995) franchising as a source of technology transfer to developing economies.special studies series, no 7, ed. i.f.e. center.vol. 7.university of westminster press. 30. teece d.j. (2007) explicating dynamic capabilities: the nature and microfoundations of (sustainable) entreprises performance, strategic management journal, 28, 1319 – 1350. 31. williamson, o.e. (1975) market and hierarchies: analysis and antitrust implications, new york. determinants of growth in franchising contracts in emerging markets; evidences from turkey emerging markets journal | p a g e | 86 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.23 | http://emaj.pitt.edu 32. williamson, o.e. (2003) examining economic organization through the lens of contract. industrial and corporate change, 12 (4) pp 917-942. 33. yin, r. (1989) case study research: design and methods (rev. ed.). newbury park, ca: sage publishing. determinants of growth in franchising contracts in emerging markets; evidences from turkey emerging markets journal | p a g e | 87 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.23 | http://emaj.pitt.edu ix. appendixes appendix: 1 appendix: 2 determinants of growth in franchising contracts in emerging markets; evidences from turkey emerging markets journal | p a g e | 88 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.23 | http://emaj.pitt.edu appendix: 3 appendix: 4 determinants of growth in franchising contracts in emerging markets; evidences from turkey emerging markets journal | p a g e | 89 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.23 | http://emaj.pitt.edu appendix: 5 volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu the effect of relationship marketing on customers’ loyalty (evidence from zemen bank) cherinet boke chakiso lecturer, debre berhan university, college of business and economics, ethiopia | e-mail: chrnt.b@gmail.com volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu | abstract every firm without good marketing team and strategies is bound to fail. in order to be competitive and profitable in the industry, bankers should acquire and retain profitable customers. definitely this is done with relationship marketing. relationship marketing is a philosophy of doing business, a strategic orientation that focuses on keeping and improving current customers rather than acquiring new customers. the aim of this study is to investigate the influence of relationship marketing underpinning son customers‟ loyalty. the study also investigated the mediating role of top management commitment between relationship marketing and customers‟ loyalty. the study is based on information collected from both primary and secondary sources of data. the sample for this study is taken from customers of zemen bank in addis ababa. data analyses were done using frequencies, percentages, means, standard deviations, cross-tabulations, and tables followed by discussions. moreover, inferential statistics of bivariate correlations and simple as well as multiple regressions were used. findings of this study reveal that there is a significant and strong correlation between relationship marketing and customers‟ loyalty. moreover, the study reveals that there is significant effect of trust, commitment, communication, and gratitude on predicting customers’ loyalty. of these relationships, gratitude emerged as the strongest factor which influences customers’ loyalty while conflict management remained statistically insignificant and negligible influence on customers’ loyalty in the cumulative model. however, all underpinnings had statistically significant influence on customers’ loyalty as individual. moreover, management commitment had mediating effect between relationship marketing and customers’ loyalty. depending on the findings, practical implications of this study is, in order to ensure loyalty among bank customers; bankers should build a better relationship marketing strategy. therefore, banks competitiveness and profitability will depend on their ability to build strong relationship bonds with their customers continuously. furthermore, future research directions were also suggested on this study. keywords: relationship marketing, trust, commitment, conflict management, communication, gratitude, management commitment, customers loyalty. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu the effect of relationship marketing on customers’ loyalty (evidence from zemen bank) page |58| emerging markets journal the effect of relationship marketing on customers’ loyalty (evidence from zemen bank) cherinet boke chakiso 1. introduction 1.1 background of the study it is clear that customer is the only source of the companies’ present profit and future growth. and also creating loyal customers is at the heart of every business (keller and kotler, 2012). customers are central to all marketing activities all over the world. success and in turn profit is not unthinkable without customers. moreover, companies incur millions of dollars to attract customers and make them loyal. with the intense competition and increasing globalization of the financial markets, building customer loyalty has become a critical strategy for most financial institutions. the banking industry must develop strong relationships with their customers in order to compete successfully in the competitive retail banking environment (zhang, 2009). clow and kurtz, (2003) stated that banks profitability is closely related with customer‘s retention. they also claimed that, customer defection costs companies millions of dollars each year in lost revenue. in addition to lost revenue, defectors normally spread negative word of mouth communication which can influence other customers to purchase elsewhere. the longer a bank can retain a customer, the greater revenue and cost savings from that customer. customer loyalty is an important factor that contributes to an organization’s earning and profits. loyal customers normally establish stable relationship with an organization compared to non loyal customers. customer loyalty can contribute to an increase in a firm‘s revenue, reduce customer defection rate and develop new business through positive word of mouth advertising (zeithaml and bitner, 2003). thus, at the end of the day, the bank‘s assets are not only primarily registered on the balance sheet, but also related to the fact that customers have been successfully retained. in recent years, there has been a refocusing of marketing away from customer acquisition to that of customer retention. if the company is intended to benefit from retaining customers, customers also seek benefit from giving their loyalty to the company (mudie and pirrie, 2006). to achieve all the above mentioned goals of customer loyalty, firms devised a new strategy known as relationship marketing (mudie et al, 2006). several authors defined relationship marketing (rm) in different ways. to touch a few, morgan and hunt (1994), conceptualized relationship marketing as, ‟all marketing activities directed toward establishing, developing, and maintaining successful relational exchanges‟. on the other hand, mudie et al, (2006), defined rm as „‟ …relationship marketing is a philosophy of doing business, strategic orientation that focuses on keeping and improving current customers rather than acquiring new customers‟‟. this definition encompasses the planned action of a given organization to focus on building relationship with the existing customers than acquiring new ones. however, it is not to mean that a company which adopts relationship marketing strategy doesn‘t want to acquire customers. this new philosophy of marketing idea was first seen on marketing literature on 1983 (parvatiyar and sheth, 2000). after its idea of conception by berry in 1983, relationship marketing got the attention of several researchers. however, still now the field is growing in attention and underpinnings which can contribute for relationship building. beginners may think it as only retention marketing. however, its goal is far from retention marketing (mudie et al, 2006). well managed organizations work hard to develop relationships with desirable customers and to grow the volumes of business that they conduct. several studies are revealing the importance of relationship marketing than traditional or transactional marketing, because it may cost a firm five to six times as much to attract a new customer as it does to retain an existing one. in addition, common wisdom suggests that long-term customers have the strongest and highest-paying relationships (palmatier, 2008). the new paradigm has several debating studies and still now there is no conceptually agreed definition and boundary about relationship marketing (parvatiyar et al, 2000). the traditional marketing approach advocates the marketing mix principles and the quest for market share dominance through mass marketing techniques and focus on new customer acquisition. this approach has guided managers for decades, implementing their marketing strategies. several studies developed the trust, commitment, conflict handling and a few studies also raised empathy, and gratitude as building blocks of relationship marketing volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu cherinet boke chakiso emerging markets journal | p a g e |59 (anabila et al., 2012; ndubisi, 2005; ndubisi and madu, 2009; parvatiyar and sheth, 2000; morgan and hunt, 1994; kaur et al., 2012). this study focused on these variables as relationship marketing dimensions from customers‘perspective and their effect on customers‘loyalty by considering zemen bank as a case study. 1.2 statement of the problem service sector is leading gdp of the current trajectory economy of ethiopia followed by agriculture and industry with 45.5 %, 41.6 %, and 12.9 percent respectively (development bank of ethiopia report, 2012). gilmore, (2003) noted that like many businesses today, financial services take place in an ever-changing context. similarly, currently in ethiopia, we are observing financial institutions especially in banking industry. one evidence is that out of 19 (nineteen) currently operating retail banks in ethiopia, 9 (nine) of them are inaugurated and started working since 2008 (national bank of ethiopia report, 2012). this implies that almost half of the total banks in ethiopia established in the last four and half years. these enormous increases in banks create an opportunity for the customers to choose the banks they want. as a result, fewer new customers are being pursued by an increasing number of service providers. under those circumstances, firm‘s resources must be devoted to present customers, making them satisfied, loyal and returning clients. as the financial marketplace becomes more dynamic and competitive, banks also need to focus on retaining existing clients through effective relationship marketing. in this context, the benefits of long-term retention of existing customers, such as increased profitability, reduced costs in relation to the individual customer and word of mouth referrals from satisfied customers, become important (gilmore, 2003). retaining customers requires careful and creative work and planning which satisfies customers. service becomes more efficient when employees learn about what customers expect and how best to meet customer needs (clow and kurtz, 2003). although, zero defections should be the goal of all organizations, in reality, it probably will not be achieved. it requires finding out switching factors, calculation of customers life time value (clow et al, 2003), customers loyalty rate, and building lasting consumer relationship management (kotler p. et al., 1999). due to the above mentioned reasons, it is imperative to apply the modern paradigm shift in marketing called relationship marketing. grönroos (1994) pointed out that relationship building and management are a vital corner stone for service industries. this is achieved by a mutual exchange and fulfillment of promises. such relationships are usually but not necessarily long-term. establishing a relationship with a customer can be divided in to two parts: to attract the customer and to build relationship with that customer so that the economic goals of that relationship are achieved (grönroos, 1994). it is not a time to market in a transactional basis. as stated above, since the field of relationship marketing is new as recent innovation in the field of marketing literature, there are no in-depth studies conducted especially in developing economies like ethiopia. so, the aim of this study is to investigate the relationship marketing dimensions such as trust, commitment, conflict handling, communication, and gratitude of zemen bank, in order to assess whether these dimensions have had the intended strengthening effect on customers‘loyalty. for better investigation of the study, the following questions were raised: which selected relationship marketing dimensions affect customers‘loyalty? to what extent relationship marketing had influence on customers‘loyalty? does management commitment have mediating effect on customers‘loyalty? 1.3 objectives of the study 1.3.1 general objective the general objective of this study is to investigate the influence of relationship marketing dimensions on customers‘loyalty. 1.3.2 specific objectives the study has the following specific objectives: to measure the association between relationship marketing dimensions and customers loyalty. to assess the individual and cumulative effects of relationship marketing dimensions on customers loyalty. to point out the most and least important rm dimensions which have stronger influence on customers‘loyalty. 1.4 research hypothesis h1: trust has a significant and positive effect on customers‘loyalty. h2: commitment has a significant and positive effect on customers‘loyalty. h3: conflict handling has a significant and positive effect on customers‘loyalty. h4: communication has a significant and positive effect on customers‘loyalty. h5: gratitude has a significant and positive effect on customers‘loyalty. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu the effect of relationship marketing on customers’ loyalty (evidence from zemen bank) page |60| emerging markets journal h6: relationship marketing dimensions as a cumulative have a significant and positive effect on customers’ loyalty. 1.5 definition of key terms relationship marketing is a philosophy of doing business, a strategic orientation that focuses on keeping and improving current customers rather than on acquiring new customers (zeithaml and bitner, 2003). trust is partners‘confidence in an exchange partners reliability and integrity (morgan and hunt, 1994). commitment is an enduring desire to maintain a valued relationship (morgan and hunt, 1994). conflict is the overall level of disagreement between exchange partners (palmatier, 2008). communication is the amount, frequency, and quality of information shared between exchange parties (palmatier, 2008). gratitude is the emotional appreciation for benefits received, accompanied by a desire to reciprocate (palmatier et.al, 2009). a reciprocity norm is internalized patterns of behaviors and feelings that regulate the balance of obligations between two exchange partners. customer loyalty is a buyer‘s overall attachment or deep commitment to a product, service, brand, or organization (oliver, 1999). 1.6 methodology of the study 1.6.1 sampling techniques sample is a part or subset of a population taken to be representative of the population as a whole (john williams, 2004). the sample was drawn from bank customers to determine the effect of relationship marketing dimensions on customers‘loyalty. after a short interview with vice chairman of domestic banking transactions of zemen bank, he responded that recently (as of february, 2013), zemen bank has around 10,000 registered and known customers who are benefiting from different services of the company. among them the data were collected from 200 customer respondents using the sample determination method developed by carvalho (1984), as cited by ahmed kelil (2005), irrespective of their banking purpose, gender, occupation, income or age. 1.6.2 sources of data and data collection depending on objectives and research questions of the study; primary, secondary, and tertiary sources of data were used. the secondary data were collected from annual reports of organizations. on the other hand, tertiary data were collected from books, journal articles, full research papers, conference papers, and internet which discuss the theoretical framework of relationship marketing dimensions such as trust, commitment, conflict handling, communication, and gratitude, for the dependent variable customers’ loyalty. primary data were used to grasp current information from customers through survey questionnaire and semi-structure interview from assistant branch manager of domestic banking operations of zemen bank. the survey questionnaire contains two parts. part one describes the demographic profile of the respondents including gender, age range, education level, occupation, monthly income, duration they maintained zemen bank account, and whether they have bank account other than zemen bank and the reason if they have. the second part contains some descriptive questions under each underpinning dimensions of relationship marketing. in this part a number of questions were asked which can represent the construct. trust dimension consists 7 questions that are adopted from ndubisi and wah, (2005). the second dimension contains 6 questions which were adopted from ndubisi & wah (2005). similarly, under third dimension which is conflict management, there were 7 questions which are adopted from ndubisi & wah (2005). the fourth communication dimension comprises 6 questions which were adopted from tahir and abidin (2011), shifera bekela (2011) and developed by the researcher. the fifth dimension which is gratitude is comprised of 4 questions which were adopted from palmatier et.al, (2009). the mediating variablemanagement commitment dimension consists 5 questions which were adopted from tahir and abidin (2011) and the researcher. lastly, the dependent variable-customers loyalty is comprised of 8 questions which were adopted from ndubisi and wah (2005). the survey questionnaire in part two is developed with a five point likert scale format ranging from (strongly disagree to strongly agree). the values assigned for likert scale were 1=strongly disagree, 2=disagree, 3=neutral, 4=agree, and 5=strongly agree. in addition, questions for semi-structured interview were adopted from shifera bekele (2011), and developed by the researcher which can explain the intention and experience in relationship marketing and customers’ loyalty. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu cherinet boke chakiso emerging markets journal | p a g e |61 table 1: summary of questionnaire and its sources no. dimension number of items source/s/ 1 trust 7 ndubisi and wah, (2005) 2 commitment 6 ndubisi and wah, (2005) 3 conflict management 7 ndubisi and wah, (2005) 4 communication 6 tahir and abidin (2011), shifera bekela (2011), the researcher 5 gratitude 4 palmatier et.al, (2009) 6 management commitment 5 tahir and abidin (2011) and the researcher 7 customers loyalty 8 ndubisi and wah (2005) total 43 1.6.3 procedures of data collection the survey questionnaires were distributed for customers of the company inside the guest room when they came to get the service. otherwise, it is difficult to identify customers from non-customers. the data were collected from customers who were awaiting the service. before distributing the questionnaire, the researcher checked whether they maintained zemen bank account or not. they qualify to complete the questionnaire if they maintained zemen bank account. since there is no any criteria to differentiate one customer from another and the researcher expected that any results gained from the respondents cannot cause substantial difference, the researcher used convenience sampling technique. 1.6.4 reliability test bhattacherjee (2012) defined reliability as the degree to which the measure of a construct is consistent or dependable. reliability implies consistency, but not accuracy. cohen et al. (2007) stated that alternative measure of reliability as internal consistency is the cronbach alpha, frequently referred to as the alpha coefficient of reliability, or simply the alpha. the cronbach alpha provides a coefficient of inter-item correlations, that is, the correlation of each item with the sum of all the other relevant items, and is useful for multi-item scales. in this study, cronbach‘s alpha is used to measure the internal consistency of the items used. george and mallery (2003) provides the following rules of thumb: >0.9-excellent, >0.8-good, >0.7-acceptable, >0.6-questionable, >0.5poor, and <0.5-unacceptable (as cited in gleam and rosemary, 2003). table 2: reliability analysis: cronbach’s alpha value dimensions items cronbach’s alpha trust 7 0.756 commitment 6 0.840 conflict management 7 0.825 communication 6 0.798 gratitude 4 0.883 management commitment 5 0.788 customers’ loyalty 8 0.853 overall score 43 0.942 source: survey finding, (2013) based on the suggestion proposed by guielford (1965) cited by taleghani et al., (2011), the higher the cronbach‟s alpha value, the higher the internal consistency is. if a value was higher than 0.70, then it showed that the reliability of measurement was high. the above table 2 shows that the value of the cronbach’s alpha ranges from 0.756 to 0.942. this indicates a good acceptable internal consistency of the items in the scale for this study. 1.6.5 methods of data analysis after data are collected, it should be entered on a spreadsheet, database, text file, or directly into a statistical program like spss (bhattacherjee, 2012). in this study, data were entered on a popular software package of spss 16.0 software version. all quantitative analyses results were the output of spss 16.0 software version. depending on the collected data and the objectives, research questions, and hypothesis; descriptive and inferential statistical techniques were used. 1.6.6 descriptive statistics from descriptive statistics, frequencies with their respective percentages in a simplified tabulated format were used to discuss demographic profile of the respondents. those variables were analyzed using descriptive statistics of frequency and the mean was presented and summarized by using tables and analyzed and interpreted with simplified statements with tables and percentages followed by discussions. mean is perhaps the volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu the effect of relationship marketing on customers’ loyalty (evidence from zemen bank) page |62| emerging markets journal most widely used and reported measure of central tendency (marczyk, 2005). in addition, cross-tabulation was used to present the relationship between gender and bank account variety; and income and bank account variety. on the other hand, the results of semi-structured interview questions were analyzed qualitatively through narrative analysis. 1.6.7 inferential statistics in contrast to the above descriptive analysis for part one on the survey questionnaire; the second part contains some five-point likert scale questions under each underpinning of relationship marketing, mediating variable of management commitment and for customers‘loyalty. the relationship between independent variable relationship marketing (trust, commitment, conflict handling, communication, and gratitude) and the mediating effect of management commitment between relationship marketing and customers‘loyalty, and the dependent variable customers‘loyalty were analyzed using correlation and regression analysis. 1.6.7.1 correlation analysis field (2007) suggested that before conducting any correlation analysis, it is essential to plot a scatter plot to look at the general trend of the data. depending on this suggestion, the researcher did draw scatter plot to look the general trend of the data. that shows whether the independent and dependent variable has positive or negative slope or in turn positive or negative relationship. correlations are perhaps the most basic and most useful measure of association between two or more variables. expressed in a single number called a correlation coefficient (r), correlations provide information about the direction of the relationship (either positive or negative) and the intensity of the relationship (–1.0 to +1.0). furthermore, tests of correlations will provide information on whether the correlation is statistically significant (marczyk, 2005). correlation coefficients range from –1.0 to + 1.0. the sign of the coefficient represents the direction of the relationship. in general, correlations of .01 to .30 are considered weak, correlations of .30 to .70 are considered moderate, correlations of .70 to .90 are considered strong, and correlations of .90 to 1.00 are considered very strong. importantly, these are only rough guidelines. a number of other factors, such as sample size, need to be considered when interpreting correlations. the bivariate correlations procedure computes the pairwise associations for a set of variables and displays the results in a matrix. it is useful for determining the strength and direction of the association between two scale or ordinal variables. the pearson correlation coefficient measures the linear association between two scale variables (marczyk, 2005). in this study, pearson correlation coefficient is used to measure the strength of the association between relationship marketing dimensions and customer loyalty. 1.6.7.2 regression analysis like correlations, statistical regression examines the association or relationship between variables. unlike with correlations, however, the primary purpose of regression is prediction (marczyk, 2005). due to this, regression analysis is used to know by how much the independent variable i.e. relationship marketing explains or influences the dependent variable which is customer loyalty. both simple and multiple regressions were used in this study. in simple regression, we attempt to predict the dependent variable with a single independent variable. in multiple regressions, we may use any number of independent variables to predict the dependent variable (marczyk et al, 2005). in this study, simple regression is used to approve or disapprove hypotheses 1 up to 5; while, multiple regression was used to approve or disapprove hypothesis number 6. in both of the types, statistical significance was given due care at pvalue of 0.05. 1.6.7.3 multicollinearity if there is a high degree of correlation between independent variables, we have a problem of what is commonly described as the problem of multicollinearity kothari, c.r. (2004). if collinearity is discovered, (e.g. if correlation coefficients between variables are higher than .80) then one can either remove one of the variables or create a new variable that combines the previous two that were highly inter-correlated (cohen et al., 2007). cohen et al. (2007) cited that, in spss, one can find multicollinearity by looking at collinearity diagnostics in the statistics command box, and in the collinearity statistics one should look at the tolerance‘column on the output. he indicates that values will vary from 0 to 1 and the higher the value the less is the collinearity, whereas a value close to 0 indicates that nearly all the variance in the variable is explained by the other variables in the model. correspondingly, muge arslan, f. and altuna, o.k., (2010) cited that vif value above 10 and a tolerance value below 0.10 pose a multicollinearity problem. in this study, the result of collinearity statistics analysis shows variance inflation factors (vif). value ranges from 1.57 to 2.093. tolerance value ranges within the value of 0.478-0.637. in volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu cherinet boke chakiso emerging markets journal | p a g e |63 this study, these values (both vif and tolerance level) indicate that for this analysis, there is no serious multicollinearity problem. 2 general discussion and implications the main aim of this study was to investigate the effect of relationship marketing on customers’ loyalty. in this research, both practical (managerial) and theoretical implications were drawn. for this study, data were collected from 187 respondents and analyzed on two broad parts. the first part is demographic and general information pertaining to customer respondents. on this part, the first item was gender. here majority of the respondents were males and on the case of age, also majority of the respondents were detected in the age range of 20-40 years which means zemen bank comprises more of young population which creates an opportunity for the future of deep relationship with the customer. in the same vein, most of the customers of zemen bank were educated. this is also an opportunity for zemen bank. if they do the intended services well, they will get a big advantage, since educated peoples cannot choose services providers blindly. on the case of income, majority of the respondents have monthly income above etb 5000. however, even if the above opportunities are existent, there is one caveat that alerts zemen bank managers. this is that, majority of the respondents on this study replied that they had maintained bank account in more than one banks. so, there is no any guarantee to zemen bank to retain them. simply, the customers have much experience in banking and they can simply shift if better strategies like relationship marketing and better customer service are provided elsewhere. when compared with females, male have the greater tendency in diversifying bank accounts. this tendency can also relatively relate with their loyalty to bank. similarly, the finding of ndubisi (2005) shows that, there is significant gender difference in the trust-loyalty relationship. the researcher underlined that women are significantly more loyal than men at higher levels of trust in the bank. palmatier (2008) synthesized that, increased customer loyalty represents one of the most anticipated outcomes of rm efforts. but loyalty can be defined and measured in a plethora of ways. conversely, this study found that rm can influence customers’ loyalty. in addition, there is a strong association between rm and customers’ loyalty with r=0.80. the results of chaman et al. (2013) conducted on both government and private banks indicate that, four rm relationship, bound marketing strategy have a significant and positive impact on the loyalty of customers and preference of impact of these variables has been done as communication management, conflict management, commitment and trust. correspondingly, the results of ndubisi (2005) show that the four underpinnings identified on the study (namely trust, commitment, communication, and conflict handling) of relationship marketing are directly associated with customer loyalty. anibala et al. (2012) concluded that if a bank wants to achieve a high rate of customer loyalty, then rm has to be considered as a strategy. similarly, this study also cautions banks to build a better rm strategy to make customers loyal. specifically, the results suggest that in order to build loyal customers, banks should build better reciprocity norm, because gratitude has the highest influencing effect on customers’ loyalty. palmatier (2009) affirmed that “allowing a consumer to reciprocate a feeling of gratitude converts a short-term emotion into a long-lasting relational norm”. understanding and managing gratitude and its role in building and maintaining reciprocity norms appears to play an important part in effective relationship marketing. baron et al. (2010) asserted that, negative word of mouth comments about banks take all the income and profits away. this is in line with the interview response of the manager which stated as “we know how much goodwill of zemen bank will be affected if a conflict left unresolved through negative word of mouth communication from the customer”. palmatier (2009), also pointed out that “people pay more attention to negatives than to positives in rm; even hard-won relationships can suffer great damage because of conflict”. however, in this study, conflict management can influence customers’ loyalty as individual effect. contrariwise, conflict management had statistically insignificant and negligible influence on customers’ loyalty when it is regressed as cumulative. 3 conclusions and recommendations 3.3 conclusions baron et al., (2010) summarized that from a firm’s perspective, relationship marketing is based on two arguments: it is more expensive to win a new customer than it is to retain an existing one. the longer the association, the more profitable the relationship for the firm. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu the effect of relationship marketing on customers’ loyalty (evidence from zemen bank) page |64| emerging markets journal whilst it would depend on the individual, it is claimed that getting a new customer is five to ten times more expensive than retaining one. this research provides empirical evidence for the influence on customer loyalty of five underpinnings of relationship marketing: trust, commitment, conflict handling, communication, and gratitude. rm constructs are identified from the literature, integrated in the proposed model, and linked with customers’ loyalty. in addition, the mediating effect of top management commitment with rm and customers’ loyalty are also investigated. this study tries to validate that, in zemen bank; relationship marketing underpinnings had effect on customers’ loyalty. overall, all relationship marketing underpinnings such as trust, commitment, conflict management, communication, and gratitude have positive and moderate relationship with customers’ loyalty. moreover, when the rm underpinnings are linearly regressed, they had cause and effect relationship with customers’ loyalty at statistically significant p<0.01. however, when they are regressed as multiple, conflict management cannot predict customers’ loyalty since pvalue is not less than 0.05. this is an important finding for companies that need to emphasize the influence of rm constructs on customers, loyalty. on the other hand, as a mediating variable, top management commitment satisfied all the given conditions with statistical significance and criterion. therefore, management commitment had the mediating effect between rm underpinnings and customers loyalty. moreover, when evaluated in general, the factors that have the greatest impact on customers’ loyalty are gratitude and commitment. conflict management has a negligent and statistically insignificant positive effect. after validation, among the 6 hypothesis developed, all of them are approved. an interesting finding revealed that, gratitude is the key influencer of customers’ loyalty by preceding popular findings like commitment and trust in other several studies. however, palmatier, et al. (2009), claimed that marketing research that neglects gratitude and focuses exclusively on trust and commitment may fail to capture the full effects of rm and may systematically underestimate the true return on investment of rm activities. in addition, bankers should focus on developing gratitude by applying reciprocity norms (giving and receiving), because gratitude had strong correlation and prioritized effect on customers loyalty when compared to others. 3.4 recommendations as discussed earlier, flambard-ruaud (2005) stated that at the centre of the relationship marketing paradigm is the notion that makes existing clients essential for long-term profitability. several researchers’ agreed on the importance of rm as the influence of customers’ loyalty. every business organization is working for profit. so, retaining clients by developing relationships with them is crucial to establish and maintain a competitive advantage in the market. so, even if the data are collected from only zemen bank customers’, the recommendation can be applicable for ethiopian banking industry. this is also supported because majority of the customers have different banking experience. there is also an important finding for companies which signals that they need to emphasize relationship marketing underpinnings especially for males, since males had high tendency of testing services of different banks when compared to females. with respect to income, bankers should carefully segment customers depending on their income and deposit and give due attention for customers’ who have higher income since when compared to customers who have lower income, higher income customers had greater tendency to test services of different banks. specifically, zemen bank should focus on general points like branch variety. majority of the customers underlined one branch strategy of zemen bank as the problem. moreover, there are outlying questions whose means are too far from grand mean, which shows the relative neutrality than agreement on the questions. those include (1. the bank is flexible when its services change; 2. the bank shows attention to my financial needs, updates me about financial markets in time; 3. the bank communicates the intended services in media that i can be informed 4. atm machines of the bank are available at necessary places; 4. it would be difficult to change my beliefs about the bank 5. even if close friends recommended another bank; my preference for this bank would not change). so, on all those points (i.e. flexibility, communication of updated information on time, selection of promotion media and location of atms are important. by considering the loyalty impact on profit, bankers should build strong relationship strategies because all relationship marketing underpinnings such as trust, commitment, conflict management, communication, and gratitude have positive and moderate relationships with customers’ loyalty. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu cherinet boke chakiso emerging markets journal | p a g e |65 according to the results of this study, banks wishing to retain and develop loyal customers should be: trustworthy enough for their customers, since there is a significant and positive relationship between trust and customers loyalty. that means the bank should be careful about security of customers’ transactions and their promises should be reliable discharge obligations and fulfill promises should be clear. committed for the service. this means, banks should make adjustments to suit customer needs, be flexible when services are changed, and work with customers for the continual relationship.  working hard to reduce the overall level of disagreement between bank and customers.  communicating timely and accurately since there is significant and positive relationship between communication and customers’ loyalty. this means banks should communicate information like updated financial data, indicate how and where to complain, use a wide spectrum of communications like phone calls, e-mails, and personnel visits as well as discussions.  developing a better reciprocity norm with customers, because gratitude plays a vital role in making customers loyal, which can in turn leads to profitability. besides, management of the banks should be committed for overall activities of the bank since top management commitment had mediating effect between relationship marketing and customers’ loyalty. 3.5 limitations and future research directions like most of the survey studies, this study also has some limitations. firstly, the study is limited to only zemen bank; so, a larger empirical study would be useful to replicate the results in the banking as well as other services. in addition, this research focused on banking services only; so, further research in other sectors may be necessary before generalization can be made on the entire service industry. references achour, m. said, n.p. & boerhannueddin, a. (2009). customer loyalty: the case of mobile phone users in universiti utara malaysia, unpublished material. ahmed kelil, (2010). employees’ perception towards compensation and benefit policy: the case of some selected government higher education institutions in addis ababa, addis ababa university, mba thesis. ahmed, r. & buttle, f. (2001). customer retention: a potentially potent marketing management strategy, journal of strategic marketing 9, p 29–45 anabila, p narteh, b. tweneboah-koduah, e. (2012). relationship marketing practices and customer loyalty: evidence from the banking industry in ghana. european journal of business and management, vol 4, no.13 annual report of zemen bank, (2012). aryan hellas limited (2005). relationship marketing: understanding and implementing the concept. ibrh, athens. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu the effect of relationship marketing on customers’ loyalty (evidence from zemen bank) page |66| emerging markets journal ballantyne, d. christopher, m. and payne, a. (2002), relationship marketing: creating stakeholder value; butterworthheinemann, oxford, britain. ballantyne, d. christopher, m. and payne, a. (2003). relationship marketing: looking back, looking forward. marketing theory articles, volume 3(1): 159–166, www.sagepublications.com bekezela ncube, (2009). basic information about ethiopia. bhattacherjee, a. (2012). social science research: principles, methods, and practices, (2nd edition). the global text project brahmbhatt m. (2008). an assessment of service quality in banks. vol.2, issue 4, page no.37-41. brito, c. (2008). relationship marketing: from its origins to the current streams of research. fep working paper; university de porto. christopher lovelock and lauren wright (2006). principles of service marketing and management. chung lo s., (2012). a study of relationship marketing on customer satisfaction. journal of social sciences 8 (1): 91-94 clow k.e. and kurtz l.,(2003). service marketing, operation, management and strategy. (second edition) cohen, l. manion, l. and morrison, k., (2007). research methods in education. (6th edition), routledge taylir & francis publications group, london and new york. creswell j.w (2003). research design qualitative, quantitative, and mixed methods approaches. (2nd edition), customer loyalty programs, (2011). darley w.k, and blankson c, (2008). african culture and business markets: implications for marketing practices. journal of business & industrial marketing 23/6, 374–383, emerald group publishing limited dawkins, r. (2008) microsoft® encarta® 2009 [dvd]. redmond, wa: microsoft corporation. development bank of ethiopia report, (may, 2012). dongmei zhang (2009). customer switching behaviour in the chinese retail banking industry. research thesis, lincoln university, canterbury, new zealand volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu cherinet boke chakiso emerging markets journal | p a g e |67 dwyer, f. r., schurr, p.h., & oh, s. (1987). developing buyer-seller relationships. journal of marketing. field, a., (2005). discovering statistics using spss. (2nd edition). sage publications limited flambard-ruaud, s. (2005). relationship marketing in emerging economies: some lessons for the future. vikalpa; volume 30. george and mallery, (2003). business research methods, oxford university press, p19 gilmore, a. (2003). services, marketing and management. sage publications ltd grönroos, c. (1994). from marketing mix to relationship marketing: towards a paradigm shift in marketing. management decision, vol. 32 no. 2, 1994, pp. 4-20. mcb university press limited. hanover research, (june, 2011). customer loyalty programs. 1101 connecticut ave. nw, suite 300, washington, dc 20036 p 202.756.2971 f www.hanoverresearch.com hennig-thurau, h. & hansen, u. (2003). relationship marketing – some reflections on the state-of-the-art of the relational concept. university of hanover. izah mohd tahir, i.m. & zulkifli, z. (2011). a preliminary analysis of crm practices among banks from the customers’ perspectives. journal of public administration and governance . vol. 1, no. 1. izquierdo, c.c. cilla´n, j.g. & gutie´rrez, s.m. (2005). the impact of customer relationship marketing on the firm performance: a spanish case. journal of services marketing, volume 19, p.234– 244, emerald group publishing limited john williams, (2004). marketing research and information. elsevier ltd, great britain kanagal, n. (2009). role of relationship marketing in competitive marketing strategy. journal of management and marketing research. indian institute of management, bangalore volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu the effect of relationship marketing on customers’ loyalty (evidence from zemen bank) page |68| emerging markets journal kaur g., sharma r.d., and mahajan n., (2012). exploring customer switching intentions through relationship marketing paradigm. international journal of bank marketing vol. 30 no. 4, pp. 280-302, emerald group publishing limited. kidane assefa, (2012). relationship marketing in the hotel industry: the nexus between concepts and practices (a case of ghion hotel, addis ababa branch, ethiopia). unplished ma project. addis ababa university. kothari, c.r. (2004). research methodology methods and techniques. (2nd edition). new age international publishers, india. kotler, p. & keller k.l., (2012). marketing management. (14th edition). pearson education, inc., publishing as prentice hall, one lake street, upper saddle river, new jersey 07458 kotler, p. and keller, k.l. (2006). marketing management (12th edition). pearson education, inc., upper saddle river, new jersey liu, m.t. chu, r. wong, i.a. zúñiga, m.a. meng, y. & pang, c. (2012). exploring the relationship among affective loyalty, perceived benefits, attitude, and intention to use co-branded products. asia pacific journal of marketing and logistics, emerald group publishing limited. marczyk, g. dematteo, d. festinger, d. (2005). essentials of research design and methodology. john wiley & sons, inc., hoboken, new jersey. marshall, n.w. (2010). commitment, loyalty and customer lifetime value: investigating the relationships among key determinants. journal of business & economics research – . volume 8, no. 8. morgan, r. & hunt, s. (1994). the commitmenttrust theory of relationship marketing. journal of marketing; vol. 58, p20-38 mosavi, s.a. and ghaedi, m. (2012). a survey on the relationships between customer satisfaction, image, trust and customer advocacy behavior. african journal of business management vol. 6(8), pp. 2897-2910 volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu cherinet boke chakiso emerging markets journal | p a g e |69 muge arslan, f. and altuna, o.k. (2010). the effect of brand extensions on product brand image. journal of product & brand management 19/3 (2010) 170–180. emerald group publishing limited. mudie, p. and pirrie, a. (2006). services marketing management. (third edition). published by elsevier ltd. national bank of ethiopia report, 2012. ndubisi, n. o. and wah, c.k. (2005). factorial and discriminant analysis of the underpinnings of relationship marketing and customer satisfaction. international journal of bank marketing, vol. 23, no. 7, pp. 542-557. ndubisi, n.o. & madu, c.n. (2009). the association of gender to firm-customer relationship. international journal of quality & reliability management. vol. 26 no. 3, 2009 pp. 283-301, emerald group publishing limited ndubisi, n.o. (2005). effect of gender on customer loyalty: a relationship marketing approach. marketing intelligence & planning vol. 24 no. 1, 2006 pp. 48-61 emerald group publishing limited oliver, r. l. (1999). whence consumer loyalty? (special edition). journal of marketing, 63(5): 33-44. palmatier r.w., (2008). relationship marketing. published by marketing science institute, 1000 massachusetts ave., cambridge, ma 02138, usa. palmatier, r.w. jarvis, c.b. bechkoff, j.r. & kardes, f.r. (2009). the role of customer gratitude in relationship marketing. journal of marketing vol. 73. american marketing association parvatyar a. and jagdish, n.s (1999). hand book of relationship marketing. thousand oaks, ca. parvatyar, a. and jagdish, n.s (2001). customer relationship management: emerging practice, process, and discipline. journal of economic and social research 1-34 peter lok, john crawford, (2001). antecedents of organizational commitment and the mediating role of job satisfaction. journal of managerial psychology, vol. 16, pp. 594 – 613 volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.84 | http://emaj.pitt.edu the effect of relationship marketing on customers’ loyalty (evidence from zemen bank) page |70| emerging markets journal pezeshki, v. mousavi, a. and rakowski, r.t. (2005). profitability through customer relationship marketing. proceedings of the international conference on computer and industrial management, icim, october 29-30, bangkok, thailand. saiz, b.s. & pilorge, p. (2010). understanding customer behavior in retail bankingthe impact of credit crisis across europe. earnest and young. shifera bekele, (2011). the impact of relationship marketing on customer loyalty in banking industry, the case of bank of abyssinia. unpublished master’s thesis. addis ababa university. sorce p., (2002). relationship marketing strategy. printing industry center at rochester institute of technology. taleghani, m. gilaninia, s., and mousavian, s.j. (2011). the role of relationship marketing in customer orientation process in the banking industry with focus on loyalty (case study: banking industry of iran), international journal of business and social science vol. 2 no. 19. tyler, k. and stanley, e. (2007). the role of trust in financial services business relationships. journal of services marketing. 21/5 (2007) 334–344, emerald group publishing limited zeithaml, v.a. and bitner, m.j (2003). service marketing: integrating customer focus across the firm. (third edition). tata mcgraw-hill, india. zemen bank http://www.zemenbank.com/ zulkifli, z. & tahir, i.m. , (2011). a preliminary analysis of crm practices among banks from the customers’ perspectives. journal of public administration and governance. vol. 1, no. 1 the effects of eu customs union integration on turkish intra-industry trade dr. gulcin elif yucel istanbul technical university, istanbul, turkey | e-mail: gulcinelifyucel@gmail.com abstract eu is the major trade partner of turkey with a significant share in total trade flows. since turkey switched from import substitution strategy to export-led growth strategy in 1980, import restrictions were eliminated. in january 1996, customs union (cu) with eu countries was put into force, which is a turning point in turkey's foreign trade and is a considerable attempt towards trade liberalization. it is generally expected that intra-industry trade (iit) is greater in the countries that experienced an economic integration. in this paper, the relation between the integration process and the intensity of iit between turkey and eu countries will be examined by comparing before-and-after periods of turkey's cu membership. all calculations are made for the manufacturing sector by using turkish bilateral trade data for 1990-2009 period and 2digit isic rev. 3 data. keywords: customs union, intra-industry trade, turkey, manufacturing sector new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu | mailto:gulcinelifyucel@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu dr.gulcin elif yucel p a g e |17| emerging markets journal the effects of eu customs union integration on turkish intra-industry trade dr. gulcin elif yucel 1. introduction after the second world war, world trade has increased dramatically. since the distribution of world trade has changed between countries, traditional trade theories have been questioned and different new trade theories have emerged. one of these new theories is the intra-industry trade (iit) theory which has emerged after the observation of the rising pattern of international trade in the form of intra-industry trade. the development level of countries, the distance between countries and being a member of same bloc or having an economic integration with a country are some determinants of iit. the results of many studies show that iit is greater in the countries that experienced an economic integration. the importance of turkey-eu trade is especially marked after turkey has started to adopt the liberalization measures by implementing the export-oriented policies in 1980s. in other words, from 1980 onwards, turkey has changed its economic development policy from “import substitution” to “export-led growth” strategy. in 1996, turkey-eu relations has taken another step after the establishment of cu which is one of the most important developments affecting turkish economy. in january 1996, cu with eu countries was put into force. this integration process is a turning point in turkey's foreign trade since turkey has joined the large eu market which have high purchasing power and it is a considerable attempt towards trade liberalization. the cu between turkey and eu has strengthened the economic and commercial ties and promoted an increase in the trade volume of turkey with the eu. as stated by doganer gonel (2001), by entering a cu with the eu, turkey has become the first and the only country to enter such an advanced form of economic integration without being a full member. when exports by main sectors are examined there seems to be a steady decrease in the share of exports of agricultural products. on the contrary, export of manufactured products increased its share in total exports from 1990 to 2006. this share rose from 67.7 percent in 1990 to 84.7 percent in 2004. there was a significant development in exports of turkish manufactures, especially in the last 7 years (seymen and bilici, 2009). the empirical analyses mostly focus on the economic effects of the cu with the eu on turkey, especially changes in the volume of trade before and after cu. this paper is organized as follows. in the next section, the recent studies which investigate the effects of cu on turkey’s trade will be given. in the third section, turkey-eu relationship will be briefly summarized. then, the theoretical background of iit is reviewed in the fourth section. in section 5 and 6, our data, methodology, analyses and findings will be given, respectively. finally, section 7 points out the main findings and concludes the study. 2. literature survey as stated above, empirical analysis mostly focus on the economic effects of the cu with the eu on turkey, especially changes in the volume of trade before and after cu. the followings are some of these studies. by using a partial equilibrium model, halicioglu (1997) investigates the static effects of cu on turkey’s economy. trade creation and trade diversion effects are also estimated which stem from tariff cuts. she recomputes these effects in cases of different trade blocs. results show that cu is the second best after free trade. lohrmann (2002) examines turkey’s intra-industry trade with the eu in the 1990s. in this study sitc groups 5 to 8 are used and calculations are carried out for 1991, 1995, and 1999. as a result, the gl index shows an increase in iit during the 1990s for turkey vis-à-vis the eu, which should lead to the conclusion that adjustment costs of trade liberalization due to the cu might be tolerable. also, the results indicate that the bulk of turkey’s trade with the eu is vertical. finally, it is found that turkey’s trade with the eu is still disadvantaged in terms of quality. in their study seymen and utkulu (2004) use cointegration method with error correction and causality mechanisms to clarify the level of price competitiveness of the turkish firms towards the eu single market in aggregate level for the period 1963-2002. their findings show that both the long-run price and income elasticities of turkish exports to the eu are significantly reduced after the single market. in her paper, vatansever deviren (2004) uses 3 digit level of sitc between turkey and eu over the period 1993-2003 and classifies them according to either sitc manufactured product groups or technological structure. she concludes that iit related with manufactured products and all products between turkey and eu is below 0.50 value and because of that foreign trade between turkey and eu exhibits an iit structure. vergil (2004) examines the level and the structure of turkey’s iit and tests the impact of the cu on turkey’s iit level. the results reveal that the cu positively affects turkey’s iit level. karaman and ozkale (2006) aim to investigate turkey’s import demand function using an econometric panel data application. according to them a good reason for that is the removal of european community’s tariffs on its imports from turkey in 1971 while turkey waited the entering into force of the cu in 1996 for abolishing the trade barriers to the eu. their analysis involves 19 eu countries and 16 non-eu countries which represent the %81 of the total non-eu import for the year 2000. the chosen period is 1982-2004. their methodology utilizes random effects model for the estimation. their main findings show that turkey’s import demand is income elastic and price inelastic. their empirical findings also indicate that cu has trade creation effects among some sectors and trade diversion effects among some others, while no effects at all could be calculated for the remaining. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu the effects of eu customs union integration on turkish intra-industry trade emerging markets journal | p a g e |18 the study of yenilmez and kutlu (2005) aims to discuss the importance of iit between turkey and the eu countres. international trade flows between turkey and the eu are grouped as primary products and industry products according to the sitc rev.3 classification system and these groups are further divided into two groups to examine trade between turkey and the eu before and after the cu. aynagoz cakmak and yilmaz (2006) aim to find out foreign internal outsourcing exercised by turkish manufacturers before and after the establishment of the cu. the outsourcing activity of turkey with eu before and after the cu is calculated with the use of sitc revision 2 trade classification system. as a result they find that for the period under examination there is a steady rise in the turkish imports of parts and components from eu implying the neutrality of cu effect. although the total value of imports of parts and components in 2004 has increased three times in respect to 1995, they explain the upward trend by the general macroeconomic developments, such as changes in exchange rates and interest rates in turkish economy rather than the formation of the cu between turkey and eu. jackson (2007) presents an analytical framework, which has been applied to carry out an expost assessment of the impact of both shallow and deep integration elements of the turkey-eu cu. the framework allows to draw out some assessment of the impact of the cu in terms of shallow integration. these assessments are mainly the followings: there has been an increase in turkish imports originating from the eu suggestive of trade diversion; turkish preferential access to the eu market appears to be a significant source of welfare gain for turkey; turkey and the eu have different patterns of trade – the eu imports a range of products moderately, whereas turkey imports a fewer products some more intensively. the inclusion of turkey in common agricultural policy (cap) is the one remaining area for traditional trade gains for turkey. the study of kocyigit and sen (2007) explains the extent of iit in turkey’s foreign trade with the world and specialy its main trading partner, the eu. the results show that, as parallel to turkey’s trade with the world, turkey’s trade with the eu also getting towards to iit type trading. also, they find that the growth of iit between turkey and the eu shows the change of turkish industrial base from low technology products group to high technology industries, specially since the cu agreement with the eu has been put into effect in 1996. neyapti et al. (2007) estimate import and export functions of turkey with the eu and non-eu countries using panel data set. their empirical findings indicate that cu has not only positively impacted on turkey’s trade, but also led to changes in the behaviour of both exports and imports. they also observe that the income elasticity of both imports and exports are lower for the eu countries, especially for the cu period. adam and moutos (2008) provide an evidence that the eu–turkey cu has had asymmetric effects on the trade between the eu-15 countries. they argue that the current eu–turkey cu relation allows turkey only limited access to the eu’s internal market which implies that the larger part of the effects of goods market integration will materialise only after turkey becomes a member of the eu. the paper of seymen and bilici (2009) studies how the concentration of foreign trade between turkey and eu has been changed. in order to answer this question they use several trade concentration measures such as trade entropy index, concentration ratio, herfindahl-hirshman index and bilateral trade intensity index. also, they examine the long-run trade relations (1969-2008) to see both trade creation and diversion effects of the cu and other factors that might influence country concentration of trade. their emprical findings suggest that the effects of the cu on trade concentration of turkey with the eu seems very limited and country concentration of trade more likely depends on the eu enlargement process. 3. turkey and eu europe is turkey’s major trading partner of turkey with a significant share in total trade flows. the share of europe in turkey’s exports increased from 47 percent in 1980 to 50 percent in 1998, whereas the share of european imports increased from 33 percent to 52 percent in the same period. turkey’s principal trading partner in the community is germany, followed by italy, france, the united kingdom, and the netherlands. after implementing an export-oriented policy in 1980, turkey experienced a unique export boom. but imports have been always greater than exports. so, like other industrializing countries, turkey faces a trade balance deficit. after the cu was put into force, turkey’s trade liberalization process has dramatically increased (lohrmann, 2002). until the formation of the cu, turkish exports of textile and clothing products to the eu were subject to quota restrictions. as a result of the cu, the quotas facing turkish exporters of textile and clothing products were eliminated (togan, 2000). in a paper (lohrmann, 2002) ranges turkey’s main export items to the eu market like the following: apparel and clothing, electrical machinery and equipment, boilers, textile yarns, iron, and steel man-made staple fibers. main import items are machines, electrical machinery, road vehicles, plastics, organic chemicals, optical instruments, paper, and pharmaceutical products. turkey’s application for association with the european economic community (eec) was made in 1959. according to the ankara agreement which was signed in 1963, the association membership of turkey was to be implemented in three stages: a preparatory stage, a transitional stage and a final stage (togan, 2000). quantitative restrictions on import were eliminated and consequently import tariff rates were reduced in various steps. in orher words, turkey's tariffs and levies on imports of industrial products from the eu were eliminated. all tariffs from industrial products from turkey abolished in 1971 with some exceptions. a transitional period of twenty-two years was agreed upon for turkey. turkey could not follow the schedule for tariff reductions because of severe economic problems in the late 1970s, but in the 1990s, turkey made big efforts to complete the cu. they adopted the common external tariff on most industrial imports and eliminated most import surcharges (lohrmann, 2002).the cu between turkey and the eu has been in force since january 1996. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu dr.gulcin elif yucel p a g e |19| emerging markets journal gokalp and yildirim (2004) state that obligations arising from the cu were more than such a cu integration. the agreement embraces the liberalisation of tariffs and adoption of the eu’s common external tariff for industrial products and the industrial components of processed agricultural products by turkey and also a number of integration elements which includes the adoption of the community’s commercial policy towards third countries, the adoption of the free trade agreements with all the eu’s preferential trade partners; co-operation on the harmonisation of agricultural policy, mutual minimisation of restriction on trade in services, harmonisation of turkey’s legislation to that of the eu in the area of competition policy, intellectual and industrial property rights, public procurement and technical barriers to trade. the aim of association membership was to increase agricultural and industrial export to the eec market (seymen and bilici, 2009). 4. theoretical framework of iit since the 1960s, the traditional trade theories (absolute and comparative advantage) have come under major criticism because they fail to explain trade in which countries both export and import within the same industrial category. the traditional heckscher-ohlin (ho) theory, which is also known as factor proportions theory, cannot adequately explain the volume of simultaneous exports and imports within the same industry. thus, trade economists were in a search of a new trade theory in order to explain the phenomenon of this simultaneous international trade. xu (2002) states that, new trade theories which are based on imperfect competition and increasing returns to scale are specifically designed to explain the pattern of iit whereas traditional theories of comparative advantage account only for inter-industry trade. iit is a new area of research on international trade beginning in the 1960s and becoming important since 1980s. the “intra-industry trade” term was first used by balassa (1966).1 the expansion of trade flows between countries can be of iit type or inter-industry type. inter-industry trade is considered as a one-way trade since the exchanged products belong to different industries. on the other hand, iit is the two-way exchange of related products between nations with the same or similar factor intensities in production or that are close substitutes in demand. grubel and lloyd (2003) find this definition too restrictive and define iit as an exchange between nations of all kinds of products that are closely related in supply or demand. according to the results of empirical studies, it is observed that the share of iit is growing. this stimulates the theoretical and empirical research on iit. according to crespo and fontoura (2001), iit has captured an enormous effort of research in three main areas: measuring the magnitude of the phenomenon2, 1 balassa (1966), grubell (1967) and many other call this type of trade as iit. but iit has been called variously such as “two-way trade” (gray, 1973) and “trade overlap” (finger, 1975). 2 see, grubel and lloyd (1975) and brülhart (1994). developing theoretical explanations for its existence3 and finally evaluating the determinant factors arising from the theory4. in this study, based on our main purpose, the first and the last one has been covered. there are two forms of iit. the first one is hiit that distinguishes between the exchange of competing or substitute products. the other one is viit that is the exchange of products at different stages in the processing of a final product (grubel and lloyd, 1975). greenaway et al. (1994) make a common distinction between hiit and viit. the former is seen between different varieties of a product while the latter is about the different qualities or levels of service provided by a product.5 hiit is driven by economies of scale and occurs when products within similar qualities are differentiated. in this type of iit, consumers can express their preferences for product variety. on the other hand, viit is defined as the exchange of similar goods of different quality which is driven by comparative advantage. in general, hiit is seen between the two-way trade of developed countries whereas viit is seen between developing and developed countries. however, recent empirical studies show that viit is dominant as compared to hiit even among developed countries.6 also, empirical literature of iit points out the dominance of viit.7 5. data and methodology 5.1. data in this study, the iit structure of turkish international trade with selected trade blocs is tried to be examined based on 2-digit isic (rev.3) data. the data were obtained from turkish statistical institute (turkstat) database. the study covers a period between 1990 to 2009. all calculations are made for the manufacturing sector. there are 22 manufacturing sectors 3 see, krugman (1979) and falvey (1981). 4 see, helpman (1987) and greenaway et al. (1994). 5 hiit is derived from the “love of variety” model pioneered by krugman and “most preferred variety” type of model pioneered by lancaster (for details, see greenaway et al. 1994). in other words, based on the work of spence (1976) and dixit and stiglitz (1977) and popularized by helpman and krugman (1985), the love of variety (lov) model has become a standard textbook model for iit in horizontally differentiated products (for detail, please see xu (2002)). on the other hand, viit is derived from the models of falvey (1981) and others that emphasize product differentiation based on quality (for details, see grubel and lloyd, 2003). 6 see, greenaway et al. (1994), veeramani (1998), aturupane et al. (1999) and hu and ma (1999). 7 for these studies, please see greenaway et al. (1995), aturupane et al. (1999), durkin and krygier (2000), gullstrand (2002), mora (2002), crespo and fontoura (2004) and jensen and lüthje (2008). volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu the effects of eu customs union integration on turkish intra-industry trade emerging markets journal | p a g e |20 and their sector codes range between 15 and 36. all quantities are measured in kilograms and all trade data are in $us. 5.2. methodology grubel and lloyd (1975) state that there was a debate about the way in which iit flows should be measured. the appropriate index or statistics to measure this trade was one of the main issues in discussions. balassa (1966) was the first people who proposed the measure of the extent of intra-industry trade. in his measure exports of a given good are offset by imports of an equivalent good. bj= (1) is the value of the exports of commodity j by a country, and is the value of the “matching” imports. if there is no intra-industry trade ( = 0 or = 0), then =1. but if there is perfectly matching intraindustry trade then = and = 0. the measure of balassa has two drawbacks. first, it gives equal weight to all industries, that is irrespective of whether their share in total industry exports plus imports is large or small. second, there is no correction for the aggregate trade imbalance (grubel and lloyd, 1975). since balassa index has not been found much favour, most studies generally use other indexes. there are two well-known measures of iit both of which try to measure the trade overlap in a given sector. the grubel-lloyd (gl) index and fontagné-freudenberg (ff) index. in this study gl index is used to measure iit shares of turkey and its trade partners. grubel and lloyd (1975) proposed a measure of iit flows that is known as the gl index. the gl index is a simple modification of the balassa formula. it calculates the part of balanced trade (overlap between exports and imports) in all trade in a given industry j. the grubel-lloyd (gl) index is written as, = (2) gl index varies between zero and one. if there is no intra-industry trade (xj=0 or mj=0), it takes the value of zero and if there is perfectly matching intraindustry trade then gl index takes the value of one. after we calculate the shares of iit by using gl index, we divide iit into its horizontal and vertical components. in order to decompose iit, the quality differences in exports and imports of a country are used. since determining the qualities of commodities are very difficult, in empirical studies the product prices are generally used as indicators of quality. it is assumed that higher quality goods have higher prices (stiglitz, 1987). therefore, in order to determine the quality differences of exports and imports, export and import unit values are used. differences in prices (unit values) reflect quality differences. this assumption is only acceptable with the most detailed trade data, where aggregation of different products within one product category is minimized. there are two most widely used methods for decomposing vertical and horizontal iit: the first one is gl index which is adopted by greenaway, hine and milner (ghm) (1994) at first and the other way of measurement of viit and hiit is the ff index which is adopted firstly by fontagné and freudenberg (1997). both methods rely on the same assumption regarding the association of price (actually unit values) with the quality of traded products. in this study, the decomposition has been done by using ghm method. in the ghm case, a product exhibits hiit when unit values of exports and imports lie between the interval and exhibits viit in the opposite case. 1 1 1 1 it it it it it it x m x m x m uv uv hiit ghm uv uv or uv uv viit                (3) since 1 1 1      , in the ghm case, more products will be classified as viit (azhar and elliott, 2006). as α8 gets larger the difference between these two lower bounds will become larger.9 the vertical component of iit can be broken down into high quality viit (viith) and low quality viit (viitl). the lower bound of viit represents viitl whereas the upper bound represents the viith. traded products are considered to be similar (or horizontally differentiated) if the export and import unit values differ by less than 15%. the transportation and insurance expenditures are estimated to constitute approximately 15% of the product prices. therefore, in the calculations ±15% are used. if this range is defined broader, the share of horizontal iit will rise and the share of vertical iit will fall. 6. analyses here is the process of our analysis. initially, isic rev. 3, 2-digit foreign trade data obtained from turkstat have been merged in a single access database. 15-36 coded manufacturing industry data have been selected. then the missing sector name and code information in the data obtained from turkstat have been completed and sub-totals have been calculated. all records have been rearranged as to be totally in 23 main sectors from 15 to 36. all records in kg/number, kg/lt, kg/m, kg/m2, kg/m3, kg/pair, kg/gram etc. have been converted to kg in order to obtain unit integrity. records in volume units have been converted to kg multiplying them with an average density. records which are not suitable to convert to kg have been excluded. (3330-manufacture of watches and clocks; 3511 building and repairing of ships, 3512building and repairing of pleasure and sporting boats). then all records have been signed as eu and non-eu. grubellloyd index has been calculated for all records. finally, the type of iit is determined according to greenaway, hine and milner (ghm) (1994). 8 “α” is used as a “dispersion factor” by greenaway, hine and milner (1994). 9 see erlat and erlat, 2010 volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu dr.gulcin elif yucel p a g e |21| emerging markets journal 7. findings figure 1. manufacturing trade deficit (1990-2009) when we look at the import and export volume of eu-turkey manufacturing trade, we see that turkish imports from eu is greater than turkish exports to eu. so, turkish manufacturing trade has a trade deficit. as seen from the figure 1, especially in 1994, 1996 and 1997, manufacturing trade deficit with eu countries is approximately 9%-12%. on the other hand, there is a manufacturing trade surplus from 2004 to 2008. figure 2. the import and export ratio of eu countries to non-eu countries figure 2 shows the import and export ratio of eu countries to non-eu countries. the declining pattern of the blue line indicates that imports from non-eu countries increases more than imports from eu countries. figure 3 supports this situation. as seen below share of turkish manufacturing trade with eu countries decreases. in other words, trade with non-eu countries increases. figure 3. share of turkish total manufacturing trade with eu table 1 shows the top five eu countries for turkish manufacturing exports. for a 20-year period between 1990 and 2009, germany is the big export partner of turkey. the second and the third countries are always united kingdom, italy and france. only their rank changes. on the other hand, table 2 shows the top five eu countries for turkish manufacturing imports. as seen from the table the dominance of germany still holds. for this 20 year period, the second and the third countries are italy and france, respectively. table 3 shows the top five sectors for turkish manufacturing exports. for eu countries, the first three sectors are 18 (manufacture of wearing apparel; dressing and dyeing of fur), 17 (manufacture of textiles) and 15 (manufacture of food products and beverages), respectively, until 1999. beginning from 1999, the share of sector 34 (manufacture of motor vehicles, trailers and semi-trailers) has increased from 4,6% to 13,7% and from 2005 to now this sector takes the first place in turkish manufacturing exports. sector 15 (manufacture of food products and beverages), which has taken place in the top three sectors until 1999, does not take place in top five sectors until 2002. table 4 shows the top five sectors for turkish manufacturing imports. until 1999, sector 29 (manufacture of machinery and equipment n.e.c.) is the dominant sector in manufacturing imports with eu countries. after 1999, sector 24 (manufacture of chemicals and chemical products) takes the first place. on the other hand, import with non-eu countries concentrates on sectors 27 (manufacture of basic metals) and 24 (manufacture of chemicals and chemical products). for non-eu countries sectors 17 (manufacture of textiles) and 27 (manufacture of basic metals) have the highest share. when we look at both of the eu and noneu trade, sectors 15 (manufacture of food products and beverages), 17 (manufacture of textiles), 18 (manufacture of wearing apparel; dressing and dyeing of fur), 27 (manufacture of basic metals), 29 (manufacture of machinery and equipment n.e.c.) and 34 (manufacture of motor vehicles, trailers and semi-trailers) take part in top five of export and import. table 4 shows that imports from eu is approximately 60% of manufacturing trade. after 2004, imports decreases to 47%. on the other hand, until 2008, exports to eu is 50%-60% of total manufacturing trade. but after 2008, manufacturing exports to eu have declined to 46%. for export to eu, table shows that shares of sectors 15 (manufacture of food products and beverages), 18 (manufacture of wearing apparel; dressing and dyeing of fur) and 24 (manufacture of chemicals and chemical products) decline. on the other hand, the shares of sectors 25 (manufacture of rubber and plastics products), 28 (manufacture of fabricated metal products, except machinery and equipment), 29 (manufacture of machinery and equipment n.e.c. ) and 34 (manufacture of motor vehicles, trailers and semi-trailers) increase. the shares of sectors 16 (manufacture of tobacco products), 20 (manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials), 22 (publishing, printing and -15,0% -10,0% -5,0% 0,0% 5,0% 10,0% 1990 1993 1996 1999 2002 2005 2008 volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu the effects of eu customs union integration on turkish intra-industry trade emerging markets journal | p a g e |22 reproduction of recorded media), 30 (manufacture of office, accounting and computing machinery), 33 (manufacture of medical, precision and optical instruments, watches and clocks) and 35 (manufacture of other transport equipment) are very small and sometimes equal to zero. for imports from eu, table shows that shares of sectors 15 (manufacture of food products and beverages), 24 (manufacture of chemicals and chemical products) and 29 (manufacture of machinery and equipment n.e.c.) decline. the shares of sectors 24, 29, and 34 are the highest ones but their shares have declined after the second period of 2000s. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu dr.gulcin elif yucel p a g e |23| emerging markets journal volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu the effects of eu customs union integration on turkish intra-industry trade emerging markets journal | p a g e |24 table 3 volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu dr.gulcin elif yucel p a g e |25| emerging markets journal table 4 volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu the effects of eu customs union integration on turkish intra-industry trade emerging markets journal | p a g e |26 figure 4. gl index for eu the figure 4 above shows that the value of gl index is high for eu-turkey manufacturing trade. as seen from below, especially after 2001 the value of gl is between 85%-95%. also, the type of iit is low-quality viit to a large extent. 17 years out of 20 shows lowquality viit. table 5: type of iit (full period) year gl for eu v_h 1990 0,77 viit(l) 1991 0,79 viit(l) 1992 0,81 viit(l) 1993 0,69 hiit 1994 0,88 viit(l) 1995 0,80 viit(l) 1996 0,66 viit(l) 1997 0,65 viit(l) 1998 0,71 viit(l) 1999 0,78 viit(l) 2000 0,69 viit(l) 2001 0,92 viit(l) 2002 0,88 viit(l) 2003 0,87 viit(l) 2004 0,85 viit(l) 2005 0,86 viit(l) 2006 0,88 viit(l) 2007 0,93 viit(l) 2008 0,92 hiit 2009 0,91 hiit table 6: type of iit (3-period) in table 6, we divide 1990-2007 period into 3 sub-period. before and after customs union period the type of iit has not changed. the dominance of low-quality viit still holds for eu-turkey manufacturing trade. also, in table 7, the number of sectors for these 3 sub-period supports the dominance of low-quality viit. table 7: number of sectors period v_h sector number 1990-1995 viit(h) 5 viit(l) 17 hiit 1996-2001 viit(h) 1 viit(l) 16 hiit 5 2002-2007 viit(h) 3 viit(l) 17 hiit 2 figure 5. gl index (3-period) graph 5 shows the values of gl index of manufacturing sectors for 3 sub-periods. according to the gl index values, after customs union, in sectors 15 (manufacture of food products and beverages), 16 (manufacture of tobacco products), 20 (manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials), 22 (publishing, printing and reproduction of recorded media) and 24 (manufacture of chemicals and chemical products) iit is decreasing. in sectors 21 (manufacture of paper and paper products), 25 (manufacture of rubber and plastics products), 27 (manufacture of basic metals), 28 (manufacture of fabricated metal products, except machinery and equipment), 30 (manufacture of office, accounting and computing machinery), 31 (manufacture of electrical machinery and apparatus n.e.c.), 33 (manufacture of medical, precision and optical instruments, watches and clocks), 34 (manufacture of motor vehicles, trailers and semi-trailers), 35 (manufacture of other transport equipment) and 36 (manufacture of furniture; manufacturing n.e.c.) iit is increasing. table 8 shows the number of manufacturing sectors before and after customs union. according to the figures, in sectors 16 (manufacture of tobacco products) and 21 (manufacture of paper and paper products), lowquality viit has turned to be high-quality viit after customs union. conversely, in sectors 17 (manufacture of textiles), 22 (publishing, printing and reproduction of recorded media) and 35 (manufacture of other transport equipment), high-quality viit has turned to be lowquality viit. for the other sectors nothing have changed after customs union. period gl v_h 1990-1995 0,79 viit(l) 1996-2001 0,73 viit(l) 2002-2007 0,88 viit(l) volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu dr.gulcin elif yucel p a g e |27| emerging markets journal table 8: number of sectors before and after customs union period isic v_h period isic v_h 1990-1995 15 viit(h) 1990-1995 26 viit(l) 1996-2001 15 hiit 1996-2001 26 viit(l) 2002-2007 15 hiit 2002-2007 26 viit(l) 1990-1995 16 viit(l) 1990-1995 27 viit(l) 1996-2001 16 viit(h) 1996-2001 27 viit(l) 2002-2007 16 viit(h) 2002-2007 27 viit(l) 1990-1995 17 viit(h) 1990-1995 28 viit(l) 1996-2001 17 hiit 1996-2001 28 viit(l) 2002-2007 17 viit(l) 2002-2007 28 viit(l) 1990-1995 18 viit(l) 1990-1995 29 viit(l) 1996-2001 18 viit(l) 1996-2001 29 viit(l) 2002-2007 18 viit(l) 2002-2007 29 viit(l) 1990-1995 19 viit(l) 1990-1995 30 viit(l) 1996-2001 19 viit(l) 1996-2001 30 viit(l) 2001-2007 19 viit(l) 2002-2007 30 hiit 1990-1995 20 viit(h) 1990-1995 31 viit(l) 1996-2001 20 hiit 1996-2001 31 viit(l) 2002-2007 20 viit(h) 2002-2007 31 viit(l) 1990-1995 21 viit(l) 1990-1995 32 viit(l) 1996-2001 21 hiit 1996-2001 32 viit(l) 2002-2007 21 viit(h) 2002-2007 32 viit(l) 1990-1995 22 viit(h) 1990-1995 33 viit(l) 1996-2001 22 viit(l) 1996-2001 33 viit(l) 2002-2007 22 viit(l) 2002-2007 33 viit(l) 1990-1995 23 viit(l) 1990-1995 34 viit(l) 1996-2001 23 viit(l) 1996-2001 34 viit(l) 2002-2007 23 viit(l) 2002-2007 34 viit(l) 1990-1995 24 viit(l) 1990-1995 35 viit(h) 1996-2001 24 viit(l) 1996-2001 35 hiit 2002-2007 24 viit(l) 2002-2007 35 viit(l) 1990-1995 25 viit(l) 1990-1995 36 viit(l) 1996-2001 25 viit(l) 1996-2001 36 viit(l) 2002-2007 25 viit(l) 2002-2007 36 viit(l) volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu the effects of eu customs union integration on turkish intra-industry trade emerging markets journal | p a g e |28 *perfect inter-industry trade volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu dr.gulcin elif yucel p a g e |29| emerging markets journal red box shows the perfect iit. note: in these tables from 9 to 15, italic figures indicate very high values of gl indices which shows the strength of iit. blue figures show the eu membership period of these countries. orange boxes indicate the values of gl indices and the type of iit after customs union. after customs union, bilateral iit with germany becomes hiit. turkey-france, turkeydenmark trade becomes mainly low-quality viit after customs union. since bilateral manufacturing trade with italy, ireland, spain is always low-quality viit, nothing has changed after customs union. also, trade with united kingdom is mainly low-quality viit and it continues after customs union. on the contrary, trade with austria, romania and bulgaria is always highquality viit and it also continues to be high-quality after customs union. trade with netherlands has turned to be high-quality viit, especially after 2002. the values of gl index for finland, latvia and sweden indicate that iit is very low with finland which is also low-quality viit type. but after 2002 iit has increased and the type of iit has turned to be high-quality viit. before and after customs union, manufacturing bilateral trade with hungary and poland is mainly high-quality viit until 2004 when they become a member of eu. after their eu membership trade with hungary and poland has turned to be low-quality viit and hiit, respectively. 8. conclusion europe is turkey’s major trading partner of turkey with a significant share in total trade flows. the cu between turkey and eu has strengthened the economic and commercial ties and promoted an increase in the trade volume of turkey with the eu. in this study, the volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu the effects of eu customs union integration on turkish intra-industry trade emerging markets journal | p a g e |30 relation between the integration process and the intensity of iit between turkey and eu countries examined by comparing before-and-after periods of turkey's cu membership. the main conclusions of this study are the followings:  turkey’s principal trading partner in the eu is germany, followed by italy, france, the united kingdom, and the netherlands.  imports from eu is approximately 60% of manufacturing trade. after 2004, imports decreases to 47%. on the other hand, until 2008, exports to eu is 50%-60% of total manufacturing trade. but after 2008, manufacturing exports to eu have declined to 46%.  turkey’s main export items to the eu market are apparel and clothing, electrical machinery and equipment, textile yarns, iron, and steel man-made staple fibers. on the other hand, the main import items are machines, electrical machinery, road vehicles, plastics, organic chemicals, optical instruments, paper, and pharmaceutical products.  turkish imports from eu is greater than turkish exports to eu. so, turkish manufacturing trade has a trade deficit. on the contrary, there is a manufacturing trade surplus from 2004 to 2008.  turkish manufacturing trade with eu countries decreases. in other words, trade with non-eu countries increases.  for turkish manufacturing exports, sector 18, 17 and 15 are the very important ones. on the other hand, for turkish manufacturing imports, sectors 29, 24, 27 and 24 are the important ones.  for the non-eu countries sectors 17 and 27 are the dominant sectors in total manufacturing trade.  the value of gl index is high for eu-turkey manufacturing trade. especially, after 2001 the value of gl is between 85%-95%. also, the type of iit is low-quality viit to a large extent.  before and after customs union period the type of iit has not changed. the dominance of low-quality viit still holds for eu-turkey manufacturing trade.  after customs union, in sectors 15, 16, 20 and 22 iit is decreasing. in sectors 21, 25, 27, 28, 30, 31, 33, 34, 35 and 36 iit is increasing.  in sectors 16 and 21, low-quality viit has turned to be high-quality viit after customs union. conversely, in sectors 17, 22 and 35, high-quality viit has turned to be low-quality viit. for the other sectors nothing have changed after customs union.  after customs union, o turkey-germany trade becomes hiit. o turkey-france, turkey-denmark trade becomes mainly low-quality viit after customs union. o since bilateral manufacturing trade with italy, ireland, spain is always low-quality viit, nothing has changed after customs union. o trade with united kingdom is mainly low-quality viit and it continues after customs union. o trade with austria, romania and bulgaria is always high-quality viit and it also continues to be highquality after customs union. o trade with netherlands has turned to be high-quality viit, especially after 2002. o the values of gl index for finland, latvia and sweden indicate that iit is very low with finland which is also low-quality viit type. but after 2002 iit has increased and the type of iit has turned to be high-quality viit. o before and after customs union, manufacturing bilateral trade with hungary and poland is mainly highquality viit until 2004 when they become a member of eu. after their eu membership trade with hungary and poland has turned to be lowquality viit and hiit, respectively. references adam, a. and t. moutos (2008), “the trade effects of the eu–turkey customs union”, the world economy, pp. 685-700. al-mawali, n. (2005), “country-specific determinants of vertical and horizontal intra-industry trade of south africa: an empirical investigation”, south african journal of economics, vol. 73, no. 3, pp. 406-25. aturupane, c., s. djankov and b. hoekman (1999), “horizontal and vertical intra-lndustry trade between eastern europe and the european union”, review of world economics, vol. 135, no. 1, pp. 62-81. aynagoz cakmak, o. and s. yilmaz (2006), “outsourcing after the customs union between eu and turkey”, presentation at the european trade study group 8th annual conference,etsg 2006,vienna. azhar, a. k. m. and r. j. r. elliott (2006), “on the measurement of product quality in intra industry trade”, review of world economics, vol. 142, no. 3, pp. 476-495. balassa, b. (1966), “tariff reductions and trade in manufacturing among the industrial countries”, american economic review, vol. 56, no. 3, pp. 466473. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu dr.gulcin elif yucel p a g e |31| emerging markets journal brülhart, m. (1994), “marginal intra-industry trade: measurement and relevance for the pattern of industrial adjustment”, review of world economics/weltwirtschaftliches archiv, vol. 130, no. 3, pp. 600–613. crespo, n. and m. p. fontoura (2001), “determinants of the pattern of horizontal and vertical intra-industry trade: what can we learn from portuguese data?”, mimeo, iseg technical university of lisbon. dixit, a., and j. stiglitz (1977), “monopolistic competition and optimum product diversity”, american economic review, vol. 67, no. 3, pp. 297– 308. doganer gonel, f. (2001), “how important is intra-industry trade between turkey and its trading partners? a comparison between the european union and central asia turkic republics”, russian and east european finance and trade, vol. 37, no. 4, julyaugust, pp. 61-76. durkin j. t. and m. krygier (2000), “differences in gdp per capita and the share of intraindustry trade: the role of vertically differentiated trade”, review of international economics, vol. 8, no. 4, pp. 760-774. erlat, g. and h. erlat (2010), “measuring product quality in turkish intra-industry trade”, 30th annual meeting of the middle east economic association, atlanta, usa. falvey, r. (1981), “commercial policy and intra-industry trade”, journal of international economics, vol. 11, no. 4, pp. 495-511. finger, j. (1975), “trade overlap and intraindustry trade”, economic inquiry, vol. 13, no. 4, pp. 581-589. fontagné, l. and m. freudenberg (1997), “intra-industry trade: methodological issues reconsidered”, cepii working paper, no. 97-01. gokalp m.f., a. yildirim, (2004), “effects of the customs union on turkey and the eu relations”, avrupa birliği sürecinde türkiye, siyasal ekonomik ve toplumsal dönüşüm, sorunlar ve tartışmalar, (edt: t.uzun, s.özen), seçkin yayınevi, ankara, ss.263-288. gray, h. (1973), “two-way international trade in manufactures: a theoretical underpinning”, review of world economics/weltwirtschaftliches archiv, vol. 109, no. 1, pp. 19-39. greenaway, d., r. hine and c. milner (1994), “country-specific factors and the pattern of horizontal and vertical intra-industry trade in the uk”, review of world economics/weltwirtschaftliches archiv, vol. 130, no. 1, pp. 77–100. greenaway, d., r. hine and c. milner (1995), “vertical and horizontal intra-industry trade: a cross industry analysis for the united kingdom”, economic journal, vol. 105, (november), pp. 1505-1518. grubel, h. (1967), “intra-industry trade specialization and the pattern of trade”, canadian journal of economics and political science, vol. 33, no. 3, pp. 374-388. grubel, h. and p. lloyd (1975), intra-industry trade: the theory and measurement of international trade in differentiated products, the macmillan press ltd, london. grubel, h. and p. lloyd (2003), intra-industry trade, the international library of critical writings in economics series, 160. gullstrand, j. (2002), “does the measurement of intra-industry trade matter?”,review of world economics/weltwirtschaftliches archiv, vol. 138, pp. 317-39. halicioglu, f. (1997), “static effects of turkey – eu cu and its alternatives” (in turkish), i̇ü i̇ktisat fakültesi sosyal bilimler dergisi, no. 3, pp. 61-72. helpman, e. (1987), “imperfect competition and international trade: evidence from fourteen industrial countries”, journal of the japanese and international economics, vol. 1, no. 1, pp. 62–81. helpman, e. and p. krugman (1985), market structure and foreign trade: increasing returns, imperfect competition, and the international economy. cambridge, ma: mit press. hu, x. and y. ma (1999), “international intraindustry trade of china”. review of world economics/weltwirtschaftliches archiv, vol. 135, no. 1, pp. 82-101. jackson, k. (2007), “assessing the turkey-eu customs union shallow and deep integration”, presentation at the european trade study group 9th annual conference,etsg 2007,athens. jensen, l. and t. lüthje (2008), “country specific effects of differences in factor endowments on intra-industry trade”, global business and finance review, vol. 13, no. 1, pp. 35–46. karaman, f. n. and n. l .ozkale (2006), “measuring the static effects of european customs union on turkey's foreign trade”, presentation at the european trade study group 8th annual conference,etsg 2006,vienna. koçyiğit, a. and a. şen (2007), “the extent of intra-industry trade between turkey and the european union: the impact of customs union”, journal of economic and social research, vol. 9, no. 2, pp.61-85. krugman, p. (1979), “increasing returns, monopolistic competition and international trade”, journal of international economics, vol. 9, no. 4, pp. 469-479. lohrmann, a. m. (2002), “a dynamic analysis of turkey’s trade with the european union in the 1990s”, russian and east european finance and trade, vol. 38, no. 2, march–april,pp. 44–58. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.60 | http://emaj.pitt.edu the effects of eu customs union integration on turkish intra-industry trade emerging markets journal | p a g e |32 mora, c. (2002), “the role of comparative advantage in trade within industries: a panel data approach for the european union”, review of world economics/weltwirtschaftliches archiv, springer, vol. 138, (june), no. 2, pp. 291-316. neyaptı, b., f. taşkın., and m. üngör (2007), “has european customs union agreement really affected turkey’s trade?”, applied economics, vol. 39, pp. 2121–2132. seymen, d. and u. utkulu (2004), “trade and competitiveness between turkey and the eu: time series evidence”, turkish economic association discussion paper, no. 8. seymen, d. and ö. bilici (2009), “has customs union changed the country concentration of trade between turkey and the european union?”, presentation at the european trade study group 11th annual conference, etsg 2009,rome. spence m. (1976), “product selection, fixed costs, and monopolistic competition”, the review of economic studies, vol. 43, no. 2, pp. 217-235. stiglitz, j. e. (1987), “the causes and consequences of the dependence of quality on price”, journal of economic literature, vol. 25, pp. 1-48. togan, s. (2000), “effects of a turkeyeuropean union customs union and prospects for the future”, russian and east european finance and trade, vol. 36, no. 4, july-august, pp. 5-25. vatansever deviren, n. (2004), “intra-industry trade of manufactured products between turkey and eu”, (in turkish), i̇ktisat i̇şletme ve finans, eylül, pp.107127. veeramani, c. (2002), “intra-industry trade of india: trends and country-specific factors”, review of world economics/weltwirtschaftliches archiv, vol. 138, no. 3. vergil, h. (2004), “turkey’s intra-industry trade level after customs union” (in turkish), journal of faculty of business, vol. 5, no. 2. yenilmez, f. and e. kutlu (2005), “on the importance of intra-industry trade between turkey and the eu countries” (in turkish), i̇ktisat i̇şletme ve finans, nisan, pp.45-64. xu, y. (2002), "a comparison of two models of intra-industry trade", journal of international trade and economic development”, taylor and francis journals, vol. 11, (december), no. 4, pp. 405-427. appendix enlargement of the european union 1957 founding states belgium france germany italy luxembourg netherlands 1973 first enlargement denmark ireland united kingdom 1981 second enlargement greece 1986 third enlargement portugal spain 1995 fourth enlargement austria finland sweden 2004 fifth enlargement cyprus czech republic estonia hungary latvia lithuania malta poland slovakia slovenia 2007 sixth enlargement bulgaria romania volume 3 no 3 (2014) | issn 2158-8708 (online) | doi | http://emaj.pitt.edu the data of labor market in turkey and time series analysis on economic growth (2000:01-2013:03) dr. bilal kargı aksaray university | e-mail:bilalkargi@gmail.com volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.53 | http://emaj.pitt.edu | abstract in the present study, labor markets were analyzed, in particular, the reasons of low labor force rate to make sense based on the data of turkish economy. while in the advanced economies, the labor force rate is quite high and has small fluctuations around a certain extent over a long-term. in the turkish economy, it prominently falls in a long-term. turkey is 18th by population size and 17th by gdp in world ranking and although its population effectively provides labor force rate, it will be highly effective on its economic growth. the study that based on co-integration analysis with long-term of the labor data with respect to the economy of turkey concluded that labor variables concern with gdp and co-integration in a long-term. in particular, when the presence of strong relation between the growth and the non-institutional population is produced, it is emphasized that the present relation between the growth and the labor variable isn’t strong enough. keywords: population, labor force rate, economic growth. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. mailto:bilalkargi@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.53 | http://emaj.pitt.edu the data of labor market in turkey and time series analysis on economic growth (2000:01-2013:03) emerging markets journal | p a g e |98 the data of labor market in turkey and time series analysis on economic growth (2000:01-2013:03) dr. bilal kargı 1. introduction even if the relation between population growth and economic growth is a discussed subject in the tradition of the classical economics, it is still the issue that isn’t arrived at a consensus at the present time. the discussion base on the result is projected that if the population grows faster than gdp, the economy can’t supply with the population. first of all, the discussion that is revived by malthus (1798) made out the results in direction of population should be a controlled variable. yet, when the largest world economies are considered at the present time, it will be seen that the largest economies are the countries with the most population. by wb data, the largest 20 economies of the world and their populations is shown on table 1. accordingly, 15 countries of the largest 20 economies in the world are also the one of 30 countries with the highest populations in the world. turkey is ranked at 17 by its economic growth and at 18 by its population but turkey is ranked at 5th by unemployment rate among the largest 20 economies. and, it means that the unemployment rate is quite high but by its population structure. when the data of the labor force rate is examined, it has the lowest rate (with italy 49%). in short course, it may be based on that even the economy of turkey grows, the growth isn’t supported enough by the population growth. and even if the population grows, labor force rate is low. table 1: gdp & population in the world (2012) the list of econo my countr y gdp popula tion the list of popu lation unemp loyment lfp 1 us 16,244 317,626 3 6,7 73,1 2 china 8,227 1,360,7 20 1 4,1 71 3 japan 5,959 127,220 10 3,9 73,9 4 german y 3,428 80,586 16 5,2 77,1 5 france 2,612 65,820 21 10,8 71 6 uk 2,471 63,705 22 7,1 77,1 7 brazil 2,252 201,032 5 5,4 73,1 8 russia fed. 2,014 143,657 9 5,2 73 9 italy 2,014 59,917 23 12,7 64,6 10 india 1,841 1,240,0 00 2 8,5 56 11 canada 1,821 35,295 37 7,2 66 12 austra lia 1,532 23,372 52 5,5 65 13 spain 1,322 46,704 28 26,7 75,1 14 mexico 1,178 118,395 11 4,9 64,5 15 korea rep. 1,129 50,219 26 7,5 66,4 16 indone sia 0,878 249,866 4 6,1 68 17 turkey 0,789 76,667 18 9,8 54 18 nether lands 0,770 16,836 63 6,9 83 19 saudi arabia 0,711 29,994 42 12,1 52 20 switzer land 0,631 8,122 97 3,1 68 the most distinct effect on the labor market of turkey results from the seasonal weight of the agricultural sector. according to tsi, this effect is near to 30%. “in the peak periods of the agricultural activities, because the work force as an unpaid family worker take part in category of uninvolved to labor, labor force rate differ by the periods” (tsi 2012:31). but the data in the analysis, is used by purifying from the effect of season. also, according to tsi, there are two reasons about the low of labor force rate. the first of these, “generally, the educational level of the population is low. when the educational level is more, the labor force rate is high”. the second is, “the labor force rate of women is low.” (tsi 2012:32). in time, the reason of the fall of the labor force rate is based on the agricultural sector. it is said volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.53 | http://emaj.pitt.edu dr. bilal kargı p a g e |99| emerging markets journal that “in 1988, the labor force rate is 57,5 %, and in the same year, the share of the agricultural sector from the total employment is 46,5 %. in 2006, labor force rate falls to 48% by showing the continued downward trend, and the share of the agricultural sector from the total employment falls to 27,32%” (tsi , 2012:34). it is said that “the place in the business life of the women is limited so, labor force rate is low” by bagdadioglu (2010). in this study, it emphasized that the relation between unemployment, labor, labor force rate and non-institutional population variables that is the base data of labor market, and growth. the best discussed and the most frequently referred basic growth –employment and unemployment theories: it can be formed as classic, marxist, keynesian, neo-classic. malthus’s law of population is the most known in the classical theory, and it is the efficient approach to the classical theory. malthus (1798) emphasizes the necessity of population control because of the future imbalance among the arithmetical increase in production of the foodstuff, even the geometrical increase in population. and, in marxist approach (1976), the limiter of the labor demand is a capital stock. therefore, the future “request labor” as the basic characteristic of capitalism will apply pressure on the prices. in the end, the rate of surplus value that is confiscated by capitalist will increase. and, it is presented as a natural expectation aimed at labor supply increase in the capitalist system. in harrod (1948), domar (1946), singer as keynesian approach growth model, it is said that population growth will affect negatively growth. the high population growth will affect negatively the growth process because it will cause the fall of quota per capita disposals. finally, in neo-classical solow (1956) model, while the point in question the causality from the population to growth, the other way round is not valid. so, population growth increase the growth but the growth doesn’t cause to increase the population growth. although these theories that discuss the population as an exogenous variable, in intrinsic growth theories that suggest the growth theory as the intrinsic by concentrating the quality rather than the quantity value of population. the growth process can be supported as the intrinsic by the population with the investments such as education (romer, 1986; lucas, 1988), substructure (grossman and helpman, 1991) and r&d (romer, 1990a; 1990;b). the indirect relation between unemployment and growth rates is at issue since okun (1962), and there are many studies (amezaga, 2012; arigo, 2001;benigno, ricci and surico, 2010; lee, 2000; stock and ludwig, 2010; sögner, 2000; lang and peretti, 2009) that present the indirectly relation among the two valiables as the empiric. the studies (uçak, 2013; yılmaz, 2005; ceylan and sahin , 2010; demirgil, 2010; alancioglu and utlu, 2012; kesici,2010; günes,2005; yilmaz,2005; barisik, cevik and cevik, 2010; takim, 2010; muratoglu, 2011) that do about the relation between unemployment and growth in turkish economy, can present findings relating to entity of the indirectly relation. 2. data and method in this study, the data of turkish economy is used related to 2000:01-2013:03 period. data got from tcmb-evds and tsi. gdp growth data is rate of increase gdp as us dollar. from the variables, non institutional (pop) and labor (lab) variables are stated with the number of persons. and, labor force rate (lfp) and unemployment (une) variables that show modulating variation, are variables. the analysis is formed by two processes. in first process, introductive statistics and correlation relations relating to variables is shown. in second process, the variables are tested whether or co-integrate in a long-term by using time series. co-integration relation was made by using johansenjuselius co-integration. the prior condition for this test is to necessary “variables equal to stable”. therefore, principally for series, dickey-fuller and philips-perron unit root tests are in progress. for these tests; ] 2 )[(] 2 )[( )])([(),( ),( yyexxe yyxxe yx yxorv yxkor        (1) t m i ititt uyyty     1 1321  (2) tutrendtyty  2110  (3) tuptypatyaty  .....11 (4) the equations were used. 1 numbered equation for correlation relation among variables; 2 numbered equation for adf unit root test; 3 numbered equation for pp test; 4 numbered equation for jj tests. all variables were purged from the effect of season because of their quarters. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.53 | http://emaj.pitt.edu the data of labor market in turkey and time series analysis on economic growth (2000:01-2013:03) emerging markets journal | p a g e |100 3. findings as the first part of analysis, the introductive statistics were calculated relating to the data and value received was shown in table – 1. table 1: introductive statics variable average std. error median max. and min. gdp 23,46 4,27 24,10 30,9/16,6 lab 24404,9 1755,19 24030,31 28549/21933 une 10,17 1,75 10,18 14,89/5,89 lfp 48,49 1,63 48,73 51,64/45,71 pop 50373,55 2686,9 49916,98 55690,68/45927,41 while the labor force rate is 48,49% since the chosen period 2000:01-2013:03, average unemployment rate was calculated as 10,17%. and, while the non-institutional population is 45,927 in period 2000:01, it increased to 55,690 in period 2013:03. the acquired correlation coefficients were shown in table2 by using 1 numbered correlation equation. table 2: correlation coefficients variable gdp lab une lfp pop gdp 1 0,684224 0,263172 -0,02094 0,919314 lab 0,684224 1 0,073315 0,660036 0,866821 une 0,263172 0,073315 1 -0,37332 0,340008 lfp -0,02094 0,660036 -3,37332 1 0,226582 pop 0,919314 0,866821 0,340008 0,226582 1 correlation relation among series is shown in table-2. according to table-2, the strongest correlation relation is between gdp and non-institutional population variable (0,919314). so, there is a quite strong relation between population growth and gdp. other strong correlation relation between labor and kon (0,866821) and then between labor and labor force rate (0,660036). the results belonging to adf and pp tests are shown in table-3 by using 2 and 3 numbered equations. when the statics adf compared with the critical values for the semantic level 5% in brackets, it is seen unit root by the levels of all variables. yet, the acquired test statics adf is shown in adf column by taking difference 1, and when it compared with the critical values in brackets, it is seen that all series become constant. in the present case, it was reached that all series are the result of i(1) as a result of adf test. also, it was reached the same results for pp test and was shown that all series are i(1) again. table 3: the results of adf and pp unit root tests adf adf ∆ pp pp ∆ gdp -2,812154 (-3,496960) -5,596515 (-3,496960) -2,365321 (-3,495295) -5,596515 (-3,496690) lab -1,897907 (-3,495295) -7,705218 (-3,498692) -1,694650 (-3,495295) -18,38391 (-3,496960) une -2,588827 (-3,496960) -5,073635 (-3,496960) -1,958071 (-3,495295) -5,073635 (-3,496960) lfp -2,021531 (-3,495295) -7,265319 (-3,500495) -1,310260 (-3,495295) -9,543474 (-3,496960) pop -1,362025 (-3,176618) -7,070190 (-3,496960) -1,447779 (-3,495295) -7,070190 (-3,496960) prerequisite variables should be the same level constant to do the co-integration test. this condition was provided by doing adf and pp tests. 4 numbered equations were used for jj test and the results were given in table-4. table 4: the results of johansen-juselius (jj) cointegration test ho h1 eigen value trace stat. 0,05 maxeigen stat. 0,05 r = 0 r ≥ 1 0,731 345 174,2572 88, 80380 67, 03067 38, 33101 r = 1 r ≥ 2 0,637 833 107,2266 63, 87610 51, 79821 32, 11832 r = 2 r ≥ 3 0,427 308 55,42837 42, 91525 28, 42776 25, 82321 r = 3 r ≥ 4 0,263 989 27,00061 28, 87211 15, 63201 19, 38704 when table-4 analyzed, there are maximal three vectors that co-integrated variables in a long-term. the default curve was found as 2 based on akaike and schwarz criteria. co-integrative vector equations obtained like this: popunelbfgdp  00106,0214,30042,0 (5) volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.53 | http://emaj.pitt.edu dr. bilal kargı p a g e |101| emerging markets journal according to 5 numbered equation, 1 unity rise in labor increases gdp as 0,004 in a long-term. 1 unity rise in unemployment cause to fall of gdp as 3,214, and 1 unity rise in population cause to fall of gdp as 0,00106. 4. conclusion the economy of turkey (1987-2012 average 4,22%) that has the high growth rates, also has the high population growth rate (2,1%). yet, unemployment rate is also quite high as average 8,52 inter annual 19872012.although, the labor force rate in oecd countries is 70,93% since 2012, it seen that the labor force rate is very low in turkey. the labor force rate should be increased to accelerate the growth. therefore, the first suggestible aim is to increase the number of women to the working population. and, the growth rate will be supported with the variables cointegrate in a long term and with the politics based on increasing employment. in particular, the fall in gdp after the unemployment increased, and if the unemployment issue is solved in the economy of turkey (at least, fall to the natural unemployment level), it is shown that may be accessed to the high growth potential. 5. references alancioglu, a. and utlu, s., (2012). “employment and economic growth: the case of turkey”. ksu journal of social sciences, 9(2), 189-206. arico, f. r., (2001). “growth and unemployment: twards a theoretical integration”. journal of economic survey, 17(3), 419-455. barisik, s., cevik, e. and cevik, n., (2010). “okun’s law, asymmetry relationship and jobless growth in turkey: markov-switching approach”. maliye dergisi, 159, 88-102. benigno, p., ricci, l. a. and surico, p., (2010). “unemployment and productivity in the long run: the role of macroeconomic volatility”. imf working paper, no.259. ceylan, s. and sahin, b. y., (2010). “asymmetry in the erlationship between unemployment and economic growth”. dogus university journal, 11(2), 157-165. demirgil, h., (2010). “okun yasasi’nin turkiye icin gecerliligine dair ampirik bir calisma”. alanya isletme fakultesi dergisi, 2(2), 142-155. domar, e. d., (1946). “capital expansion, rate of growth and employment”. econometrica, 14(2), 137147. grossman, g.m., helpman, e., (1991). innovation and growth in the global economy. mit press, cambridge, mass. gunes, s., (2005). “population and economic growth relationship in turkey: an econometric analysis”. au., sbf dergisi, 60(3), 123-136. harrod, r. f. (1948). toeards a dynamic economics. macmillan, london. kesici, m. r., (2010). “in high growth phase of turkey economy employment and unemployment”. isguc industrial relations and human resources journal, 12(3), 7-26. lang, d. and peretti, c., (2009). “a strong hysteretic model for okun’s law: theory and preliminary investigation”. international review of applied economics, 23(4), 445-462. lee, j., (2000). “the robustness of okun’s law. evidence from oecd countries”. journal of macroeconomics, 22(2), 331-356. lucas, r. e. j., (1988). “on the mechanics of economic development”. journal of monetary economics, 22, 3-42. malthus, t. (1798). an essay on the principle of population. (http://www.esp.org). marks, k. ve engels, f., (1976). nufus uzerine. sol yayinlari, (çev. m. erdost). muratoglu, y., (2011). “the relationship between growth and employment: the case of turkey”. international conference on eurasian economies. okun, a. m. (1962). “potential gnp: its measurement and significance”. proceedings of the business and economics statistics section of the american statistical association. 98-104. romer, p. m., (1986). “increasing returns and long-run growth”. journal of political economy, 94(5), 1002-1037. romer, p.m. (1990a). “capital, labor, and productivity”. brooking papers on economic activity, microeconomics, (edt.) m. n. baily and c. winston, the brooking institution, 337-367. romer, p. m. (1990b). “endogenous technological change”. journal of political economy, 98(5), 71-101. singer, h. w. (1952). “the mechanics of economic development”, reprinte in international development: growth and change. mcgraw-hill. sogner, l. and stiassny, a., (2000). “a crosscountry study on okun’s law”, vienna university of economics and business administration working paper, no. 13. takim, a., (2010). “the relation between economic growth and unemployment in turkey: granger causality test”. dpu sosyal bilimler dergisi, 27, 315-324. ucak, a., (2013). “the growth dynamics of the turkish economy and its impact on the unemployment”. international journal of human sciences, 10(1), 202-223. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.53 | http://emaj.pitt.edu the data of labor market in turkey and time series analysis on economic growth (2000:01-2013:03) emerging markets journal | p a g e |102 yilmaz, o., (2005). “turkiye ekonomisinde buyume ile issizlik oranlari arasindaki nedensellik iliskisi”. ekonometri ve istatistik dergisi, 2, 11-29. the relationship between the budget deficit and current account deficit in turkey seyfettin erdoğan i̇stanbul medeniyet university | e-mail: seyfettin.erdogan@medeniyet.edu.tr durmuş çağrı yıldırım recep tayyip erdoğan university | e-mail: cyildirim81@gmail.com volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.52 | http://emaj.pitt.edu | this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. abstract one of the most debated topics in economics literature is the relation between budget deficit and current account deficit. the data obtained from the presence of this kind of relation is leading for policy makers in terms of determining the quality of the policy to be preferred and the economic policy to be pursued. in this study, the relation between budget deficit and current account deficit in turkey is analyzed for 2001q2-2012q2 period. according to the data obtained, budget deficit has negative and statistically meaningful effect on current account balance. on the other hand, budget deficit has negative effect on current account balance in short terms. keywords: budget deficit, current account deficit, twin deficit, co-integration analysis, ardl model. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. mailto:seyfettin.erdogan@medeniyet.edu.tr mailto:cyildirim81@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.52 | http://emaj.pitt.edu dr. seyfettin erdoğan, dr. durmuş çağrı yıldırım p a g e |81| emerging markets journal the relationship between the budget deficit and current account deficit in turkey dr. seyfettin erdoğan dr. durmuş çağrı yıldırım introduction the studies analyzing the relation between budget deficit and current account deficit focus on the validity of keynesian view and equivalence hypothesis. in terms of keynesian view, budget deficit affects current account deficit. in other words, there is a causality relation from budget deficit towards current account deficit. positive relation between budget deficit and current account deficit is explained with twin deficits hypothesis. unlike keynesian view, ricardian equivalence theory supports the idea that there is no relation between budget deficit and current account deficit. there are numerous studies analyzing the direction and presence of the interaction between budget deficit and current account deficit. some of the said studies obtained data that support keynesian view and some of them obtained data that support ricardian equivalence theory. the data from the said studies is leading for policy makers in terms of determining the quality of the policy to be preferred and the economic policy to be pursued. in this study, the relation between budget deficit and current account deficit in turkey is analyzed for 2001q2-2012q2 period. according to the data obtained, budget deficit has negative and statistically meaningful effect on current account balance. on the other hand, budget deficit has negative effect on current account balance in short terms. this study includes two sections. in the first section, there is literature research and in the second section, there is empiric analyze. literature research there is consensus between some of the data obtained from the studies analyzing the relation between budget deficit and current account deficit. some studies make twin deficit hypothesis valid and some of them have data on the contrary. some studies used a single country data and some of them used data from multiple countries. the data from some of the studies in literature is as follows: arora and dua (1993) researched about the effects of budget deficit on interest rates, investments and foreign trade. according to the data obtained, budget deficits exclude national investments and make foreign trade deficits grow bigger. vamvoukas (1999) conducted research on the relation between budget deficit and foreign trade deficit for 1948 – 1994 periods. obtained data showed that there is one way causality from budget deficit towards foreign trade deficit in both short and long terms. khalid and guan (1999) tested data from 5 different countries for 1952 – 1994 period and conducted research on the relation between budget deficit and current account deficit. data obtained from this research did not support any long-run relationship between the two deficits for developed countries while the data for developing countries did not reject such a relationship. results do not support any longrun relationship between the two deficits for developed countries while the data for developing countries do not reject such a relationship. fidrmuc (2003), took samples from industrialized and developing country economies and tested the data related to 1970 – 2001 period. although there are differences between 1980s and 1990s, he got proofs related to the validity of twin deficit hypothesis in some countries. pattichis (2004), used the data related to 1982 – 1997 term and analyzed the relation between budget deficit and foreign trade deficit in lebanon. the results support the conventional keynesian view. saleh, nair and agalewatte (2005), used 1970 – 2003 data of sri lanka and conducted research on the benefits of financial spread on current account instability. the results support the keynesian view. there is no long term relation between current account deficit and budget deficit. on the other hand, the direction of the causality is towards current account deficit from budget deficit. onafowora and owoye (2006) conducted research on the concept of twin deficit for nigeria. the results showed there is positive relation between foreign trade deficit and budget deficit for both long and short terms. salvatore (2006) tested the data of us, japan, germany, britain, france, italy and canada for 1973 – 2005 periods. according to the results, there are strong proofs for direct relation between budget deficit and current account deficit. however, this relation shows itself as delayed. chowdhury and saleh (2007) tested the data for 1970 – 2005 period of sri lanka. the results support the conventional view. kim and roubini (2008) investigated the effects of budget deficit on current account deficit and real exchange rate by data of usa for the period between 1973 – 2004. in the short-run, budget deficit shocks improve the current account balance and lead to the depreciation of real exchange rate. data is explained with“twin divergence” concept. boileau and normandin (2009) conducted research on the effect of tax shocks on budget deficit and foreign deficit by using data from 16 countries and for post 1975 era. the results show that tax shocks lead budget deficit and foreign deficit to move in a positive way. baharumshah, i̇smail and lau (2009), used volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.52 | http://emaj.pitt.edu the relationship between the budget deficit and current account deficit in turkey emerging markets journal | p a g e |82 data from five association of southeast asian nations (asean) countries and tested the validity of twin deficit hypothesis. according to the results, in malaysia, thailand and philippines, budget deficit plays an important role for determining current account deficit. according to the results, there is one way causality from current account balance towards budget balance. there is no data related to a causality from budget balance towards current account balance. holmes (2011), used data from 1947 – 2009 period of usa and analyzed the relation between current balance and budget balance with threshold cointegration view. results support the keynesian view. omoniyi, olasunkanmi and babatunde (2012) used data from 1970 – 2008 period and conducted research on twin deficit effects of nigeria. results show that there is dual relation between budget deficit and foreign trade deficit. ratha (2011), used data from india for 1998 – 2009 period and tested the validity of twin deficit theory. kalou and paleologou (2012) used 1960 – 2007 period data in order to explain the casual effect between budget deficit and current account deficit. in the study, the results show that there is a positive relation between tow deficits and the direction of the causality is from current account towards budget deficit. there are also studies from turkey analyzing the validity of twin deficit hypothesis: akbostancı and tunç (2002) tested data from 1987 – 2001 period and conducted research on the relation between budget deficit and foreign trade deficit. results support twin deficit hypothesis. kurtlar and şimşek (2001) tested data from 1984 – 2000 period. according to the results, conventional view is valid for both short and long terms. günaydın (2004), used data from 1987 – 2003 period and conducted research on the casual relation between budget deficit and foreign trade deficit. according to the results, there is one way casual relation between budget deficit and foreign trade deficit. the direction of the causality is from budget deficit towards foreign trade deficit. ümit and yıldırım (2008) tested data from 1987 – 2005 period in three-month terms in order to research the validity of twin deficits hypothesis for turkey and used var method. results show that twin deficits hypothesis is also valid for turkey. kılavuz and dumrul (2012) tested the relation between budget deficit and current account deficit in turkey by using border test, var analysis and granger causality test. in this study, the results show that there is no long term relation between current account deficit and budget deficit. model and data set in the present study, the validity of the twin deficits hypothesis is tested. the data used to test the hypothesis were obtained from the websites of the central bank of the turkish republic, treasury and imf (ifs) as three-monthly data. the analysis period includes 2001q2-2012q2 depending on the availability of healthy data. equation (1) is estimated to test the twin deficits hypothesis. tfaizkurbutcetcid   3210 (1) where cid denotes the rate of current account balance to gdp, butce denotes the rate of consolidated budget balance to gdp, kur is real exchange rate, and kur and faiz denote the interest rate of government debt securities. t is error terms. the existence of relationships among the series in equation (1) will be investigated by means of cointegration analysis. however, the stationarity of the series is important regarding the investigation of relationships among the series. the analyses carried out with non-stationary series can cause the problem of spurious regression. because of the spurious regression problem, the difference of series can be taken and series become stationary. however, the difference or taking their differences can cause loss of information. cointegration analysis is based on the assumption that longrun composition of non-stationary series can be stationary. cointegration analysis can also measure the availability of long-run relationships among the series that are stationary at the same level and even the rate (speed) of moving towards equilibrium in case of a deviation with error correction model (shittu, yemitan and yaya, 2012: 56). peseran et al. (2001) developed an alternative test for the necessity of the series to be at the same level. standard f statistic and t statistic are used for the lag levels of the variables in this test. the basic hypothesis for the analysis is that there is no long-run relationship among the series. if the basic hypothesis is accepted, it is concluded that there is no relationship among the series regardless of the stationarity levels of the variables (i(0) or i(1)) (peseran et al. 2001: 298). the peseran (2001) test has been used in this study since both level and difference stationary series can be analyzed together in the test developed by peseran et al. the test developed by peseran et al. (2001) consists of two stages. during the first stage, it is investigated whether there is a long-run relationship among the series included in the analysis. if it is seen there is a long-run relationship among the series, in the second stage the structure of long and short-run relationships are examined. when investigating cointegration relationship in the analysis, the basic and alternative hypotheses used are (akinlo, 2006: 447): 0: 6540  h 0: 6541  h in the test of peseran et al. (2001), regardless of the stationarity situations of the variables (i(0) or i(1)), it can be examined whether there is a relationship among the levels of the series. as a result of the analysis if f statistic (calculated value) drops out of the critical values, a definite result is reached. however, if f statistic falls between these http://tureng.com/search/philippines volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.52 | http://emaj.pitt.edu dr. seyfettin erdoğan, dr. durmuş çağrı yıldırım p a g e |83| emerging markets journal limits, a definite result cannot be reached. in this case, the cointegration relationship among the series should be known for a definite result (peseran et al., 2001: 289-290). empirical analysis before investigating the relationships among the series, the stationarity of the series will be examined. the stationarity of the series are shown in table 1. table 1: unit root test results for level values of the series series adf test statistics adf critical value (1%) value (%1) adf critical value (5%) value (%5) butce none -0.920 -1.948 -1.612 intercept -4.585 -3.571 -2.922 trend&int -4.674 -4.156 -3.504 cid none -0.898 -2.617 -1.948 intercept -2.031 -3.584 -2.928 trend&int -4.544 -4.175 -3.513 kur none 0.251 -2.613 -1.947 intercept -2.111 -3.571 -2.922 trend&int -3.236 -4.156 -3.504 faiz none -2.486 -2.617 -1.948 intercept -5.552 -3.592 -2.603 trend&int -4.654 -4.198 -3.523 dkur none -8.219 -2.614 -1.947 intercept -8.175 -3.574 -2.923 trend&int -8.102 -4.161 -3.506 while evaluating the unit roots of the series, since all the series have constant and trend effects, the results with constant and trend are taken into consideration for the unit root analysis results. it is seen that all other series except for kur series are level stationary. because kur series was not level stationary, its first difference was taken and unit root test was applied again. it was seen that the first difference of kur series was stationary. after investigating the stationarity of the series, cointegration relationship among the series can be examined. because the stationarity levels of the series are different, ardl test will be used. during the first stage of the test, in order to investigate the relationships among the series, f statistics obtained from equation (1) and critical values of peseran et al (2001) are compared. the results are indicated in table 2. table 2: limit test k f statistic lower limit* upper limit* 4 18.387 3.47 4.57 *peseran et al. (2001) critical values were selected for a significance level of 5%. it is concluded that there is a co-integration relationship among the series since the f-statistic value obtained from equation (1) exceeds the upper limit of the value in the table of peseran et al. therefore, shortand long-run relationships can be examined now. long-run relationship after it is found out that there is a long-run co-integration relationship among the series, the model in equation (2) has been estimated to investigate the long-run relationship among the series. t m i it kur i a m i it faiz i a m i it butce i a m i it cid i aa t cid              0 4 0 3 0 2 1 10 (2) schwarz criterion has been taken into account to select appropriate lag lengths for the estimation of the equation (2). the most suitable ardl model for the criterion selected has been determined as ardl (0,0,0,0). the results obtained from the model are indicated in table 3. table 3: results of long-run relationships variables coefficient t-statistic prob. budget -0.246 -2.990 0.004 interest 0.001 3.533 0.001 rate -0.001 -12.996 0.000 r-squared 0.571 durbin-watson stat 1.116 adjusted rsquared 0.551 when long-run coefficients are considered in table 3, it is concluded that budget deficit has a negative effect on current account balance. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.52 | http://emaj.pitt.edu the relationship between the budget deficit and current account deficit in turkey emerging markets journal | p a g e |84 short-run relationship after studying long-run relationships among series, shortrun relationships can be examined now. equation (3) will be used to examine short-run relationships. t m i it kur i a m i it faiz i a m i it butce i a m i it cid i a t eca t cid                     0 4 0 3 0 11 1 2 110 (3) table 4 results of short-run relationships variables coefficient t-statistic prob. ecm(-1) -0.540 -3.748 0.000 dbudget -0.176 -2.686 0.010 dinterest 0.000 0.801 0.427 drate -0.001 -0.959 0.342 r-squared 0.317 durbin-watson stat 1.873 adjusted rsquared 0.268 according to the results of the error correction mechanism in table 4 estimated to measure the time short term deviation among the series moves towards equilibrium, adjustment coefficient is seen to be -0.55. the adjustment coefficient, which is the coefficient of error term, is negatively marked and statistically significant. it is concluded that a disequilibrium among the series is eliminated after 1,8 periods. conclusion in this study, quarterly data from 2001q2-2012q2 period is used in order to test twin deficit hypothesis in turkey by using border test approach. in empirical analysis, firstly, coentegration relation is detected between series. after that, long term relations are researched and results show that budget deficit has negative effect on current account deficit in long term and this effect is statistically meaningful. when short terms relations are researched, there is instability between series but this instability disappears in short term. on the other hand, budget deficit has negative effect on current account balance in short term. current account deficit is an indicator in terms of macro-economic performance and expectations. expanding current account deficit effects expectations in a negative way and increase the financial crisis risk. this study shows that budget deficit has negative effect on current account balance. according to this situation, we need to avoid policy applications that have the risk of increasing budget deficit. in calm periods, increasing public expenses may be an option. however, when we see that public expenses may increase budget deficit, we should be cautious about implementing expanding fiscal policy. references akbostancı, elif ve gül i̇. tunç (2002). “turkish twin deficits: an error correction model of trade balance”. erc working papers. akinlo, a. enisan (2006), “the stability of money demand in nigeria: an autoregressive distributed lag approach”, journal of policy modeling, 28 445– 452. arora, harjit k and pami dua (1993). “budget deficits, domestic investment and trade deficits”. contemporary economic policy. 11, (1), 29 44. baharumshah, ahmad zubaidi, hamizun i̇smail and evan lau (2009). “twin deficits hypothesis and capital mobility: the asean-5 perspective”. jurnal pengurusan.29, 15-32. boileau martin and michel normandin (2009). “do tax cuts generate twin deficits? a multi-country analysis”. defi working paper. no.2009-5. http://onlinelibrary.wiley.com/doi/10.1111/coep.1993.11.issue-1/issuetoc volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.52 | http://emaj.pitt.edu dr. seyfettin erdoğan, dr. durmuş çağrı yıldırım p a g e |85| emerging markets journal chowdhury, k. and saleh. a.s. (2007). testing the keynesian proposition of twin deficits in the presence of trade liberalisation: evidence from sri lanka. university of wollongong economics working paper series. wp 07-09, 1-33. fidrmuc, jarko (2003). “the feldstein–horioka puzzle and twin deficits in selected countries”. economics of planning. 36, 13552. günaydın, i̇hsan (2004). “the relationship between budget and trade deficits: turkey)”. ekonomik yaklaşım. 15, (52-53), 143 60. holmes, mark j. (2011) “threshold cointegration and the short-run dynamics of twin deficit behaviour”. research in economics. 65, 271 77. kalou, sofia and suzanna-maria paleologou (2012). “the twin deficits hypothesis: revisiting an emu country”. journal of policy modeling. 34, 230 – 41. katırcıoglu, salih turan, sami fethi and meryem duygun fethi (2009). “twin deficits phenomenon in small islands: an empirical investigation by panel data analysis”. applied economics letters. 16, 1569 – 73. khalid, ahmed m. and teo wee guan (1999). “causality tests of budget and current account deficits: cross-country comparisons”. empirical economics. 24, 389402. kılavuz, emine and yasemin dumrul (2012). “the validity of twin deficits hypothesis: theory and practice”. atatürk university, the journal of faculty of economics and administrative sciences. 26, (3 4), 239 58. kim, s. and roubini. n. (2008).” twin deficit or twin divergence? fiscal policy current account and real exchange rate in the u.s.”. journal of international economics. 74, 362 – 93. kutlar, a. and şimşek. m. (2001). an econometric analysis of the effects of budget deficits on trade deficits in turkey: 1984 (4) 2000(2)”. dokuz eylül university, the journal of faculty of economics and administrative sciences. 16 (1), 113. omoniyi, oladipo samuel, oseni isiaq olasunkanmi, onakoya adegbemi babatunde (2012). “empirical analysis of twins’ deficits in nigeria”. ijmbs. 2, (3), 38 41. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.52 | http://emaj.pitt.edu the relationship between the budget deficit and current account deficit in turkey emerging markets journal | p a g e |86 onafowora, olugbenga a. and oluwole owoye (2006). “an empirical investigation of budget and trade deficits: the case of nigeria”. the journal of developing areas. 153 74. pattichis, charalambos (2004). “budget and trade deficits in lebanon”. applied economics letters. 11, 105-108. peseran, m. hashem, yongcheol shin ve richard j. smith (2001), “bounds testing approaches to the analysis of level relationships”, journal of applied econometrics, vol. 16, 3, ss. 28932. ratha, artatrana (2011), "twin deficits or distant cousins? evidence from india". economics faculty working papers. paper 5. saleh, ali salman, mahendhiran nair and tikiri agalewatte (2005). the twin deficits problem in sri lanka: an econometric analysis. south asia economic journal. 6, 221 39. salvatore, d. (2006). twin deficits in the g-7 countries and global structural imbalances”. journal of policy modeling. 28, 701 – 12. shittu, olanrewaju i., raphael a. yemitan ve olaoluwa s. yaya (2012), “on autoregressive distributed lag, cointegration and error correction model”, australian journal of business and management research, vol.2 no.08 pp:56-62 ümit, a.öznur and kemal yıldırım (2008). “twin deficits hypothesis”. i̇ktisat i̇şletme ve finans. 23, (267), 116 -32. vamvoukas, g. a. (1999). the twin deficits phenomenon: evidence from greece. applied economics. 31, 1093-1100. http://130.102.44.246/results?section1=author&search1=olugbenga%20a.%20onafowora http://130.102.44.246/results?section1=author&search1=oluwole%20owoye http://130.102.44.246/journals/journal_of_developing_areas http://130.102.44.246/journals/journal_of_developing_areas the role of cross selling in sme banking: an analysis from turkey hande karadag wharton school, university of pennsylvania, sol c. snider entrepreneurial research center, | email: hkaradag@wharton.upenn.edu vedat akman beykent university, istanbul | email: akmanvedat@yahoo.com abstract non-lending activities in sme financing is a phenomenon whose significance has recently been recognized. provision of different products and services to companies is becoming an important profit center for banks serving smes and the supply side of sme financing has been experiencing a shift towards fee-based products and services, mainly due to the risks and challenges associated with sme lending. despite these important developments in the industry, there are a limited number of studies that focus on the bank activities related with cross-selling to smes. this paper aims to address this gap in the literature, by investigating the role of cross selling in sme banking by analyzing the major business models and strategies both at international and local contexts. the study targets to make important contributions to sme finance and in particular sme banking literature, as it highlights the changing market structure in the supply-side of sme banking and pinpoints how best practices in international banking system can form examples for banks that prioritize growth in sme segment. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu | mailto:hkaradag@wharton.upenn.edu mailto:akmanvedat@yahoo.co#m http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu the role of cross selling in sme banking: an analysis from turkey page |82| emerging markets journal the role of cross selling in sme banking: an analysis from turkey hande karadag vedat akman 1. introduction sme concept gained popularity in academia and among regulators and practitioners particularly after 1980’s, as the focus in both the developed and developing economies shifted from large corporations to small and medium sized enterprises. although every economic region or country has its own sme categorization, smes and entrepreneurship are accepted “to be a key source of dynamism, innovation and flexibility in advanced industrialized countries, as well as in emerging and developing economies” (oecd, 2006:9). the role of sme’s in social and economic development has been “widely recognized in developed countries as well as developing economies” (oecd,2006:9), particularly after 1980’s. smes are called as the “backbone of the european economy” as they constitute 98% of all enterprises (20.7 million businesses) and “account for 67% of total employment and 58% of gross value added (gva) in eu, as of 2012” (ec,2012). as ardiç, mylenko and saltane stated, sme development is “closely linked with growth” (ardiç, mylenko and saltane, 2011), in their referrals to beck, et al. (2010) who found “a robust, positive relationship between the relative size of the sme sector and economic growth, even when controlling for other growth determinants” (ardıç, et al., 2011; beck, et. al., 2010:187). among several problems of smes, financial challenges have a unique situation. according to oecd reports, most problems of smes have a financial nature (oecd, 2004,2006) as finance “ is a key element in determining the growth and survival of smes in both developed and developing economies” (richard and mori, 2012:2). while there is a wealth of studies on sme finance and particularly sme lending, there have been relatively few academic studies related with the supply side of sme banking (rocha, et.al, 2011). the leading studies in this field were provided by beck,et.al (2008,2009), de la torre, et. al. (2010) and rocha et. al. (2011), who addressed the driving factors and challenges in sme banking, together with the evidence on recent trends and developments in the industry. however, the role of non-lending products and services in servicing smes has not been studied in depth, up to date. this paper aims to address this gap in the literature, by analyzing the supply side of non-lending practices to smes which is a concept that recently started to attract the interest of sme finance scholars (de la torre, et. al., 2010). at both international context and in turkish banking system. despite the unsaturated nature of sme segment in terms of provision of banking services, the banking system in turkey is regarded as “advanced” for servicing smes and other customers (oecd, 2014).therefore the analysis is expected to make an important contribution to the sme finance literature by analyzing the development of the concept of cross selling in sme banking and providing valuable information on the cross-selling practices of major banks operating in turkey, some of which are regarded as ‘best practices’ by ifc. the study is organized as follows. the first section briefly overviews the sme sector in international and local contexts. in the second part, the emergence and development of cross-selling concept in sme banking is investigated, in third section, major crossselling strategies and practices of market-maker banks in turkey are analyzed and the last section concludes. the context of smes small and medium-sized enterprises (smes) are generally described as “enterprises with a relatively small share of the market, managed by owners or part-owners in a personalized way, and not through the medium of a formalized management structure; and acting as separate entities, in the sense of not forming part of large enterprise or group” (storey, 1994). whether an enterprise is an sme or not can vary from one context to another, sometimes varying between institutions of the same country (özdemir, et.al, 2011). in turkey, smes are categorized in three groups of micro, small and medium sized enterprises with respect to their employee numbers and annual revenues, as regulated by the law on sme definition, which came into force on may 18, 2006 and was amended on november 4, 2012 (oecd, 2014). volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu hande karadag, vedat akman emerging markets journal | p a g e |83 table 1: sme categorization in turkey company categories number of employees annual turnover medium-sized < 250 ≤ usd 17.200.000* small < 50 ≤ usd 3.400.000 micro < 10 ≤ usd 430.000 source: oecd scoreboard, 2014, * figures are converted from tl to usd with the exchange rate of cb of turkey as of 12/15/2014. smes form a large part of economy and are seen as the drivers of socio-economic development. in high income countries smes contribute to 50% of gdp (ayyagari, et. al., 2007), while two-third of all employment in oecd and emerging markets are supplied by enterprises with less than 250 employees (stein,et.al, 2013; ardic, et al, 2012). the importance of smes have largely been recognized in the last decades with respect to their contributions to the economy and they are regarded as the “engines of growth” in developing economies, mainly due to the comparably less number of large corporations in these contexts (narteh, 2013; floyd & mcmanus, 2005). the large share of smes in every economy is much owed to their huge numbers, reaching to a height of 99.9% of all enterprises in many developing countries, including turkey (ari, 2013:36). smes are the most important sources of employment in turkey with 76,7% share (sahin & dogukanli, 2014), whereas 55 % of total value added and 65 % of total sales in the economy are supplied by smes (tobb, the union of turkish chambers and exchange commodities, 2014). as of 2009, there are 2.291.904 smes, dominated by the microenterprises with less than 10 employees (oecd, 2014) table 2: distribution of firms in turkey (2009) company categories number of firms % all enterprises 2.294.554 100 smes 2.291.904 99.9 medium-sized 12.338 0.5 small 20.504 0.9 micro 2.259.062 98.5 source: oecd scoreboard, 2014 due to this significant role, the availability and degree of sme financing have been the focus of various academic studies, as it has been underlined as a critical factor in the growth and development of the smes (abdulsaleh & worthington, 2013, norton, 2003; cook, 2001). as in most developing economies, commercial banks are still the most common sources of sme finance in turkey (öndeş & güngör, 2013; şahin, 2011; çetin, et,al, 2011; güler, 2010), mainly caused by the underdevelopment of venture capital and credit guarantee systems. however, smes face serious collateral, credibility and balance sheet problems which prevent them from utilizing the required amounts of bank loans, particularly when the enterprise is in the startup phase (uluyol, 2013; topal, et.al, 2006; arslan, 2003). challenges of sme lending has been the foci of scholarly studies of sme financing in turkey (koyuncugil & özgülbaş, 2008; topal, et. al, 2006; arslan, 2003), to date, leaving the supply side of sme banking largely under investigated. this study therefore aims to address two major research questions, namely “what are the main drivers behind the rising importance of cross-selling activities in sme banking” and “how are cross-selling activities being undertaken in turkish banking system?”. as lending to smes have been the main focus of scholars in sme finance literature, current study is expected to highlight the importance of the recent “non-lending in sme volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu the role of cross selling in sme banking: an analysis from turkey page |84| emerging markets journal banking” concept , by providing theoretical and empirical information on business models, strategies and best practices about the cross-selling of financial products and services to smes. cross selling in sme banking the financial resource constrains of smes with respect to larger corporations and the role of banks as major suppliers of financial resources are very well documented in the literature (narteh; 2013; abdulsaleh and worthington, 2013; roman and rusu; 2012; rocha, et. al, 2011; beck, et. al 2008). as smes face several challenges in accessing financial resources which are required for their survival and growth, external financing of smes and particularly relationship lending has been in the centre of scholarly analyzing various dimensions of sme financing studies (hernandez-canovas, et. al, 2010; de la torre, 2010; beck, et. al, 2006; berger and udell, 2006; petersen and rajan, 1994). recently, another stream of research emerged, discussing the financing of smes from a “beyond lending” perspective and focusing on the rising interest of banks for offering non-credit financial services to smes, which they see as “core and strategic business prospects” (ifc, 2012b; rocha, et. al 2011; de la torre, et. al 2010). as rocha, et.al stated “sme finance is much broader than sme lending, despite the tendency in literature to often equate the two” (rocha,et.al, 2011). the interviews conducted with the bank managers in central europe, south america, middle east and north africa by world bank and ifc researchers show that, as the attractiveness of the sme segment is more recognized, a variety of services and financial products are continuously introduced targeting smes, and the banks strategically aim to increase their existing market share and outperform their competitors in sme banking (abdulsaleh, et al, 2013; rocha, et.al, 2011; de la torre, et. al 2010, beck, et. al, 2008; stephanou and rodriguez, 2008). in the literature, the main factors behind this recent popularity of banking smes and particularly non-lending banking product/services are discussed from various aspects. first and foremost, smes form the majority of firms in every economy and most enterprises are smes (de la torre, et. al. 2010; hallberg, 2000). secondly, the segment of smes is perceived as “highly competitive” (de la torre, 2010) but still “unsaturated” and “promising” by the banks in most developed and developing economies (beck, et al, 2008). there is a general perception that smes are lacking appropriate financing and are in need of external sources of funds provided mainly by the banking system, which is backed up by several studies indicating that the sme segment is “underserved” by the banks (ifc, 2012). the estimates for the growth of bank revenues from smes in emerging markets is calculated to be around usd 367 billion in 2015, from a usd 150 billion in 2010 (stein, et.al., 2013: 11). thus, motivated by the low profitability of “corporate banking” segment and the intense competition and a comparably more saturated “retail” market, sme customers are now viewed as the new target customer segment by a majority of banks (ifc, 2012b; roman and rusu, 2012; de la torre, et. al 2010). this high focus is reflected in a recent survey conducted by the world bank with banks from both developing and developed economies, where almost all the interviewees stated ambitious growth targets, such as doubling the volumes of sme banking operations in 1-2 years (de la torre, 2010). besides the potential for gaining new customers who are “in need of receiving special assistance”, the most crucial motivation of the banks in this shift of interest is the “perceived profitability” of this segment (rocha, et.al, 2011; beck, et al, 2008; de la torre, et al 2010). this factor is evidenced by the survey of beck, et. al in 2008 covering 91 banks in 45 countries, in which 81% of banks from developed countries and 72% of banks from developing countries indicated the profitability impact as “the most important determinant for their involvement” in smes (beck et al, 2008). however, as every lending incurs the risk of default, the expected profits from sme segment can deteriorate when sme loans are not repaid (richard and mori, 2012; obamuyi, 2007). studies show that, the default risk of loans is greater for smes compared to larger companies (beck, et. al, 2008). in addition to default risk, sme lending has serious challenges as most smes have credibility and collateral problems (oecd, 2014; beck, et al, 2008; topal, et.al, 2006; arslan, 2003) as well as informality and opaqueness issues (de la torre, 2010). in addition to that, due to the recent crisis, banks are not as willing as the before-crisis period to lend loans to smes (durkin,et.al, 2013). combined together, these factors cause the focus of banks to be directed towards non-lending products and services that are suitable for the needs of smes, which is considered as a both easier and more profitable concentration area for the banks, as these services and products do not require complex scoring and follow-up procedures as the loan transactions and do not carry the risk of harming the profitability of the banks’ as happens in case of defaulted loans. studies show that, earnings from “other products and services” already amount to 32% of total revenues in developed countries, illustrating the importance of nonvolume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu hande karadag, vedat akman emerging markets journal | p a g e |85 lending activities for the banking system, and placing cross-selling “at the heart of banks’ business strategy” (de la torre, 2010). the provision of multiple non-lending services and products to smes not only has a positive impact on “return on limited capital” of banks, but it also makes possible for the banks to deepen their relationships with their sme customers. research shows that becoming the main bank of a customer increases the profitability per customer three times more than that of the non-main bank customer segments (ifc, 2012), which can only be attained through selling various financial products to the same client. in addition to that, cross selling strengthens the bond between the bank and the sme, which in turn increases the level of customer loyalty and facilitates the future lending activities (ifc, 2012; de la torre, 2010). as stated by de la torre, et. al (2010) another strategic advantage of cross selling from the banks’ perspective is enabling banks’ access to sme employees and employees’ families. through their technological infrastructure, banks are able to design payroll systems which opens new and utterly useful channels for gaining retail customers and selling of retail banking products (e.g. credit cards) to these newly acquired customers. ifc reports state that, best practices of cross selling in sme banking has eight common characteristics, as:  customer education  product bundling,  product portfolio management,  cross-unit sales and referrals,  event-driven marketing,  coverage model and account management,  optimized pricing strategies,  loyalty management (ifc, 2012:30). through educating customers, banks are able to position themselves as the main financial service providers of their customers, apart from the increased cross-selling opportunities caused by the creation of demand. product and service bundling, which can be described as “ a combination of products and services are offered in one package, typically at a discount with respect to the combined price of individual elements” is another best practice in sme banking cross selling activities (ifc, 2012:32). while this method has the clear advantage of “locking in clients”, the pricing strategy has a crucial importance as a mispriced bundle can destroy the existing profits of the bank. an efficient management of the product/service portfolio is another success factor for cross selling. the number of a typical portfolio can include up to 60 different products/services, however too many products have the risks of being unmanageable by the relationship managers in the branches and most of these services/products have no marginal contribution to profitability. thus, the best practices in cross-selling of sme banking products/services are found to be eliminating the 60 % of their product/service portfolios with profit contributions close to zero (ifc, 2012:35). new business models for increased cross selling segregating customer portfolio in terms of corporate, sme and retail customer bases is becoming a common practice both in developed and developing economies (ifc, 2012b; rocha, et.al, 2011; de la torre, 2010; beck, et, al, 2008). this “decentralization of the sales function” model basically involves employing specialized sme relationship managers in branches, therefore using the branch network as distribution channels for selling of financial products and services designed for smes (ifc,2012b; rocha, et.al, 2011, de la torre, 2010). in sme banking, large banks have several advantages in using sophisticated business models for rendering new products/services to smes, having more advanced it systems, technical know-how and diverse service platforms, with respect to their smaller competitors (de la torre, 2010). additionally, large banks are able to connect their sme customers with corporate and upper-mass segments, or even gain new smes through their interrelationships. for example, with the information provided by their corporate customers, banks can set up it based systems for linking the accounts of their corporate and retail banking customers to smes, such as automatic payment systems for the energy expenses of smes, which facilitates smes’ payments to their suppliers and enables the banks to reach a large number of new smes. like this case of payment/collections systems, much of these advanced business models are planned for meeting the demands of smes, who lack the facilities to efficiently manage and follow-up specific financial transactions, such as payment of wages or foreign trade activities. thus, banks highly utilize these activities outsourced to them by the smes and increase the cross selling of their various feebased services and products. as the requirements for customization of these products and services for smes is low, they can be sold to every sme customer as mass products in the branches, which is a highly profitable and a volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu the role of cross selling in sme banking: an analysis from turkey page |86| emerging markets journal risk-adverse way of rendering financial services, while the smes perceive these products/services as tailored according to their specific needs. technological improvements such as online banking also help fasten the cross selling processes to smes, as well as enabling the introduction of new products and services. typically, the design and strategic management of cross selling of the the wide array of services and products are carried out by the headquarters, and through their branch networks and specialized sme personnel, these are offered to smes, with the end goal of increasing the number of products/serviced used per an sme. the number of products/services used by an sme is a common measure for improving the profitability of sme segment in banks, and a minimum of 5 products/services is found to be necessary for an sme to pass the optimum point of becoming profitable. these products/services can range from checking/savings accounts and company credit cards, to insurance products and payment/receivable systems (such as tax payments), depending on the infrastructural facilities of the banks. cross selling to smes in turkish banking system in turkey, there are 49 banks operating with 12.033 branches as of march, 2014 (banking regulation and supervision agency of turkey, 2014). table 3: ranking of turkish banks source: the banks association of turkey (2014), * figures are converted from tl to usd with the exchange rates of cb of turkey, as of 31/03/2013 and 01/01/201331/03/2013 average (for net p/l values). servicing smes is one of the main strategic priorities of all banks in the sector, which is most clearly represented by the fast increase in sme loans. table 4: the development of sme loans in turkish banking system (millions usd) sme loans growth (%) dec-09 55.880 dec-10 81.150 47,3 dec-11 85.810 4,9 dec-12 111.460 29,1 dec-13 127.420 14,4 mar-14 132.490 3,9 source: banking regulation and supervision agency of turkey website, 2014, *figures are converted from tl to usd with the exchange rates of cb of turkey. between 2007-2012, the loans lent to smes by the banks rose at the rate of 156%, which is the greatest expansion in sme lending among oecd countries (oecd, 2014). as shown in table 2, the sme loans increased from usd 111,4 million at december 2012 to usd 127,4 million at december 2013 and usd 132,5 million usd at march, 2014 (banking regulation and supervision agency of turkey 2014). despite the significant developments in sme lending volumes, the sme segment still “remains underserved, and constrained access to finance is perceived as the single largest obstacle to growth by smes” (opic, 2014). the sme specific lending problems of informality, opaqueness and credibility, combined with macroeconomic instabilities form the major obstacles to supplying loans to smes by the banks (şahin, 2011). these challenges lead the banks to rely more heavily on fee based financial products and services in sme banking, as in case of most developing economies. the large size of the sme segment with approximately 3.2 million smes as well as 3 million farmers and agricultural producers, of which a large portion is still under banked, is another factor behind the recent concentration and increasing product/service sales activities of banks to sme segment (yapi kredi, 2013). volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu hande karadag, vedat akman emerging markets journal | p a g e |87 in turkey, the worldwide trend of setting up separate units for serving the sme segment, led by the multinational banks operating in local markets, is becoming a common practice. in this business model, the sales function of the financial products and services are decentralized and delegated to the branches, while loan approval procedures, risk management and recovery of defaulted loans are kept centralized (beck, et. al, 2008).the business models and major non-lending products/service practices offered to smes by the leading banks in turkey can be briefed as follows: is bankasi a.s: i̇ş bankasi is turkey’s largest bank of turkey, with respect to total assets, total loans and shareholders’ equity. it is also the leader in deposits among privately-owned banks. the bank manages its sme banking operations under commercial banking and its most differentiated service to smes in the market is the website istekobi (smes in is), followed by 56.000 smes in 2013. the bank uses its widespread branch network, consisting of 1.265 branches and employees customer relations managers and customer representatives for providing financial services to smes (is bankasi, 2013). ziraat bankasi a.s.: as the largest state-owned bank in turkey established with the mission of supporting the agricultural sector, the main strategy of ziraat bankasi for servicing smes is to provide loans to smes with facilitated credit conditions, particularly through its world bank and eib (european investment bank) partnerships. in 2012 and 2013, the bank completed its customer and branch segmentation efforts and the moved to portfolio management business model and also expanded its number of entrepreneurial banking branches (ziraat bank, 2013). garanti bankasi a.s.: garanti bankasi is the second largest private bank in turkey, with consolidated assets of us$ 104.5 billion as of december 31, 2013. having reorganized the head office and branches for the smes, the bank has a separate sme department in headquarters and pursues the strategy of being the “bank of smes” and the “future guarantee of tradesmen. for increasing its cross-selling activities, the bank has the goals of:  providing support the digital transformation of smes so as to help them use it technologies effectively,  design solutions for the needs of smes in various areas by establishing partnerships and collaborations with powerful brands and institutions,  offer diverse financing options to new entrepreneurs in need of fast and simple access to financial resources, and act as their solution partner on the basis of strong collaborations,  carry out agricultural banking focused on sector/product/region,  allow the product suppliers and firms taking place in the agricultural value chain to work with models that fit the relative cycles of sub-sectors in line with the demands and requirements that differ regionally (garanti bankasi, 2013). akbank t.a.s.: in the ranking of private banks, akbank has the third place in the sector in terms of its assets, as of december, 2013 (tbb, 2013). the bank conducts its sme banking activities with its 985 branches and 23 regional directorates across turkey. the main sme segment strategy of the bank is the developing of tailor made products, such as axess sme card, agriculture card, axess business and checkbook that could be requested with an sms, and ‘sme tariffs (kota)’ product that allows smes to choose the bundled product that best suits their banking transaction mix by paying a single fixed fee. in 2013, the bank also revised its ekopos product, which is the first installment pos in the sector. also, promotional campaigns offering complimentary devices were ran by the bank for customers who are obliged to use cash register pos with recently changed regulations. the non-financial services of akbank sme banking include the “craftsmen fraternity” launched to serve artisans and the “sme line” which is as a specific online service designed for meeting the information and service requests of smes and is available to all enterprises whether they are the bank’s customers or not (akbank, 2013). yapi ve kredi bankasi a.s. : yapı kredi is the 4th largest private bank in turkey with total assets of tl 182.0 billion and ranks 5th in total cash loans with 9.9% market share and 6th in total deposits with 9.8% market share. yapi kredi’s strategic business unit based service model consists of three major segments of retail banking (including individual, sme and card payment systems), corporate & commercial banking and private banking and wealth management. the bank serves its 911.000 sme customers in 842 branches with 1.583 relationship managers and has a wide range of product/service offerings, including product bundles, pos and merchant services, cash management products, investment products and commercial purchasing cards. yapi kredi was the first bank in the sector to introduce product bundles with a variety of basic banking products in a single package and these products are used by 155.000 sme customers as of december 2013, with the volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu the role of cross selling in sme banking: an analysis from turkey page |88| emerging markets journal new 51.000 customers gained in the last year. the bank’s major sme strategy in sme banking is new customer acquisition, supported by sme hunters, a special team formed in 2012 with the sole purpose of acquiring new customers (yapi kredi, 2013). turk ekonomi bankasi a.s.(teb): by ifc (international finance cooperation), teb was awarded as “one of the best three banks in the world” in the category of “offering non-financial services to smes” in 2012. with a strong sme focus, teb increased its sme customer base from 9.481 smes in 2005 to 657.335 smes in 2011. the bank offers several financial products and services tailored specifically for smes, including bundled sme support packages, which are determined by the analysis of most frequently performed transactions of the smes in the bank and are categorized as ‘support on credit package’, ‘daily support package’ and ‘virtual support package’. the sales activities of sme products and services are conducted through various distribution channels such as branches and sme support line. the bank also provides several award winning non-financial sme services such as sme club, sme academy, sme meetings, agriculture meetings and sme tv. in 2013, a separate enterprise banking unit inside the sme banking department and a consultancy center called as ‘enterprise house’ were set up for exclusively serving to ‘entrepreneurs’ (teb, 2013). as this review illustrates, while there is a clear and strong focus of all banks for the cross selling activities to smes, field applications can show variances between banks. most of the market maker banks currently run their sme banking operations through separate sme departments in their headquarters, where the sme strategies and products are developed. while some banks are more aggressive to offer the contemporary ‘product bundles’ to their sme customers, others continue to serve their financial services as ‘separate’ products or services, where smes pay a fee for each product or service. the most common channels of sales activities are the wide branch network and specialized sme relationship managers, however almost every bank has also active online sme services. some banks, such as garanti, are more technology oriented in new product developments, while others like teb focus on nonfinancial services for gaining new customers and deepening their existing relationships with the sme segment. conclusion banking smes is a topic which has been attracting the interest of academics and practitioners particularly within the last decades. as banks are traditionally regarded as the major funding sources of smes, the drivers and challenges of sme lending has been the main focus of academic studies, to date. however, with the recent developments in the industry, sme banking is shifting to a non-lending dimension, mainly due to the challenges and risks related with sme loans. thus, cross-selling of non-lending products is perceived as a major strategy for increased profitability by a majority of banks, which also indicates a strong need for scholarly interest to this field. in this analysis, we aimed to focus on the approach of banks operating in turkey to this recent phenomenon, by investigating their business models, strategies and implementation practices with respect to increasing the sales volumes of non-lending products/services to sme customers. the results of our analysis showed that, in turkey, banks serving smes have high expectations about the fast growth of the market and have carefully been following (and sometimes launching) best practices for increasing the number of products/services sold to an sme, such as decentralizing the sales activities to branches, deepening and strengthening customer relationships through non-financial services, evaluating the efficiency of customer and product portfolios and focusing on development of products for meeting the specific requirements of the smes. as this research area is newly developing, further studies can focus on the financial or overall performance results of the pursued strategies of the banks or cross-country evaluations, where the cross selling activities of banking industries in selected countries can be compared with each other. references: abdulsaleh, m.a.,and worthington, c.a.(2013). small and medium sized volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu hande karadag, vedat akman emerging markets journal | p a g e |89 enterprises financing: a review of literature. international journal of business and management. 8(14): 3543. akbank t.a.s. annual report, (2013). http:/ /www. akbank. com/ documents /akbank _an nual_report_2013.pdf ardic, o.; mylenko, n. and saltane, v. (2011). small and medium enterprises a cross-country analysis with a new data set. world bank policy research paper 5538. arı, a. (2013). kobi̇’ler, esnaf ve sanatkarlar özel i̇htisas komisyonu raporu. trakya kalkınma ajansı. http://www.trakya2023.com/uploads/do cs/09072013yl8aau.pdf. arslan, ö. (2003). küçük ve orta ölçekli işletmelerde çalışma sermayesi ve bazı finansal yönetim uygulamaları. cumhuriyet üniversitesi, i̇.i̇.b.f. dergisi, 4 (1): 121-135. ayyagari, m., beck, t., & demirguc-kunt, a. (2007). small and medium enterprises across the globe. small business economics, 29(4), 415-434. beck, t. (2010). sme finance: what have we learned and what do we need to learn? the financial development report: 187-195. berger, a. n., & udell, g. f. (2006). a more complete conceptual framework for sme finance. journal of banking & finance, 30(11), 2945-2966. bddk, banking regulation and supervision agency of turkey, (2014). http://www.bddk.org.tr/ websitesi/english/statistical_data/mo nthly_reports/monthly_reports.aspx. cook, p. (2001). finance and small and medium-sized enterprise in developing countries. journal of developmental entrepreneurship, 6(1), 17-40. çetin, a. c.; akyüz, y; & genç e. (2011). küresel kriz sürecinde imalat sanayi işletmelerinin finansal sorunlarının değerlendirilmesi uşak ili orneği. journal of suleyman demirel university institute of social sciences, 1(13): 55-68. de la torre, a., martínez pería, m. s., & schmukler, s. l. (2010). bank involvement with smes: beyond volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu the role of cross selling in sme banking: an analysis from turkey page |90| emerging markets journal relationship lending. journal of banking & finance, 34(9), 2280-2293. durkin, m., mcgowan, p., & babb, c. (2013). banking support for entrepreneurial new venturers: toward greater mutual understanding. journal of small business and enterprise development, 20(2), 420-433. european commission. (2012). annual report on small and medium-sized enterprises in the eu: eu smes in 2012: at the crossroads. floyd, d., & mcmanus, j. (2005). the role of smes in improving the competitive position of the european union. european business review, 17(2), 144150. güler, s. (2010). i̇stanbul menkul kıymetler borsası’na (i̇mbk) kayıtlı küçük ve orta büyüklükteki işletmelerin (kobi̇) sermaye yapıları uzerine bir uygulama. suleyman demirel university, the journal of faculty of economics and administrative sciences, 15(3): 353371. hallberg, k. (2000). a market-oriented strategy for small and medium scale enterprises (vol. 63). world bank publications. hernández-cánovas, g., & martínez-solano, p. (2010). relationship lending and sme financing in the continental european bank-based system. small business economics, 34(4), 465-482. ifc, international finance corporation (2012). customer management in sme banking: a best-in-class guide. ifc publications. ifc,international finance corporation (2012b). why banks in emerging markets are increasingly providing non-financial services to small and medium enterprises. ifc publications. mori, n., richard, e., isaack, a., & olomi, d. (2009). access to finance for smes in tanzania. african entrepreneurship and small business development: context and process, 1. narteh, b. (2013). sme bank selection and patronage behaviour in the ghanaian banking industry. management research review, 36(11), 1061-1080. norton, a. (2003), “‘basel 2 – sme 0’, another tricky hurdle for business?”, credit management, march, p. 40. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu hande karadag, vedat akman emerging markets journal | p a g e |91 oecd, organisation for economic cooperation and development (2014). financing smes and entrepreneurs 2014: an oecd scoreboard, oecd publishing. oecd, organisation for economic cooperation and development (2005). oecd factbook: economic, environmental and social statistics, oecd. oecd, organisation for economic cooperation and development (2006). the sme financing gap (vol. i): theory and evidence. oecd opic, overseas private investment corporation, (2014). http://www.opic.gov/projects/turkiyegaranti-bankasi. özdemir, s.; ersöz, h. y.; and sarıoğlu, h. i̇. (2011). küçük girişimciliğin artan önemi ve kobi̇’lerin türkiye ekonomisindeki yeri. sosyal siyaset konferansları dergisi, 12(3): 67-83 ondes, t. & gungor, n. (2013). kobi’lerin finansmani erzurum organize sanayi bolgesinde bir arastirma. ataturk university journal of economics and admistrative sciences, 27 (1). petersen, m. a., & rajan, r. g. (1994). the benefits of lending relationships: evidence from small business data. the journal of finance, 49(1), 3-37. rocha, r. d. r., farazi, s., khouri, r., & pearce, d. (2011). the status of bank lending to smes in the middle east and north africa region: the results of a joint survey of the union of arab bank and the world bank. world bank policy research working paper series, vol. roman, a., & rusu, v. d. (2012). the access of small and medium size enterprises to banking financing and current challanges: the case of eu countries. annales universitatis apulensis series oeconomica, 2(14). sahin, a., & dogukanli, h. (2014). the impact of foreign bank entry on sme loans: an investigation for turkey. journal of brsa banking and financial markets, 8(2), 39-73. stein, p., ardic, o. and hommes, m. (2013) closing the credit gap for formal and informal micro, small, and medium enterprises. international finance corporation, world bank group, washington dc. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.71 | http://emaj.pitt.edu the role of cross selling in sme banking: an analysis from turkey page |92| emerging markets journal stephanou, c., & rodriguez, c. (2008). bank financing to small and medium-sized enterprises (smes) in colombia. storey, d. j. (1994) understanding the small business sector. cengage learning emea. t. garanti bankasi a.s. annual report, (2013). http://www.garanti.com.tr /en/ our _ company /investor_ relations /financials_and_presentations/annual_r eports.page t. is bankasi a.s. annual report, (2013). http://www.isbank.com.tr/en/aboutisbank/investor-relations/publicationsand-results/annualreports/documents/i̇şbank%202013%2 0ing.pdf. tbb, the banks association of turkey, (2014). http://www.tbb.org.tr/tr/bankave-sektor-bilgileri /istatistikiraporlar/aktif_buyukluklerine_gore_b anka_siralamasi/1258 tobb, the union of turkish chambers and exchange commodities (2014). http://kobi .org.tr /index. php /tanimi/stats. teb, turk ekonomi bankasi a.s. annual report, (2013). http://www .teb. com.tr /document /yi/ faal_rapor/2013faaliyet/teb_annua l%20report%202013.pdf topal, y.; erkan, m.; elitaş, c. (2006). küçük ve orta boy işletmelerin finansal yönetim uygulamaları: afyonkarahisar orneği, süleyman demirel üniversitesi, i̇.i̇.b.f. dergisi, 11(1): 281-298. yapi ve kredi bankasi a.s. annual report, (2013). http://www. yapikredi. com.tr/en/ investor relations/financials.aspx?selecttab=ann uals t.c. ziraat bankasi a.s. annual report, (2013). http://www. ziraat.com.tr /en/investorrelations /financials/pages/annualreports.aspx emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu learning, entrepreneurship and innovation orientations in turkish family-owned firms erkut altindag cemal zehir beykent university | e-mail: erkutaltindag@gmail.com gebze institue of technology university | e-mail: zehir@gyte.edu.tr a.zafer acar okan university | e-mail: zafer.acar@okan.edu.tr abstract globalization is forcing family-owned companies need to be more flexible and faster organization structures to respond effectively to the customers’ growing various types needs on the certain line of producing high quality goods and services these days. with the start of a new paradigm era in strategic management field, familyowned firms began to choose different tools to maximize their sustainable performance against rivals. these tools include special strategic orientations including learning, entrepreneurship and innovation implications. our study tries to explore the effects of strategic orientations implications into firm performance and their effects on growth and financial performance in turkish family-owned companies. keywords: strategic orientations, family owned firms, firm performance, empirical study this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu mailto:erkutaltindag@gmail.com mailto:zehir@gyte.edu.tr mailto:zafer.acar@okan.edu.tr http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 36 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu learning, entrepreneurship and innovation orientations in turkish family-owned firms erkut altindag cemal zehir a.zafer acar i. introduction strategic management is the conduct of drafting, implementing and evaluating crossfunctional decisions that will enable an organization to achieve its long-term objectives. it is a level of managerial activity under setting goals and over tactics including some special tools like strategic orientations. these orientations involve both strategy formation called content and also strategy implementation called process (david, 1989; chaffee, 1985). during the last decades, strategic orientations in family owned firms have received increased attention among scholars. the heart of the strategic management process is to achieve the performance outcomes that allow firms, including family-influenced firms, to be competitive over time (habbershon, et al., 2003; pieper & klein, 2007). family businesses significantly affect to economy and the social life of a nation. the typical family business has been characterized as an organizational controlled and usually managed by multiple family members in general, management structure in the family business will determined by the top level manager. usually at least two generations of family are found in corporate governance. in the definition of the family company; spouse, siblings, mother / father and child may enter the partnership of the management board or support the capital as a shareholder (shanker & astrachan 1996; lunsber 1999). recent researches indicates that companies achieve their aims easily which are in family firm structure. family firms often have concentrated ownership and / or voting rights that might enhance performance (miller et.al., 2007). family businesses may offer particularly appealing circumstances for studying certain kinds of organizational phenomena (chrisman et al., 2003). the aim of this article is to develop a model of family business that accounts for the unique characteristics of family business, specify the diversity of orientation forms, and addresses the dynamics among family-owned business firm performance. it is hoped that this special research will contribute to filling this gap. ii. literature review family-owned firms the literature on family business is wideranging and it is difficult to find consensus on the exact definition of a family firm. however, the typical family business has been characterized as an organization controlled and usually managed by multiple family members (shanker & astrachan, 1996; lansberg, 1999), often from multiple generations (anderson & reeb, 2003; gomez-mejia et al., in press). family firms can be viewed as a contextual hybrid—a unique combination of two sets of rules, values, and expectations: the family's and the business's (flemons & cole, 1992; gersick et al, 1997;). family firms share certain characteristics that render them unique in terms of patterns of ownership, governance, and succession (chrisman et al 1999; steier, 2003). a family business is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business’ overall wellbeing. in some countries, many of the largest publicly listed firms are family-owned. a firm is said to be family-owned if a person is the learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 37 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu controlling shareholder; that is, a person (rather than a state, corporation, management trust, or mutual fund) can garner enough shares to assure at least 20% of the voting rights and the highest percentage of voting rights in comparison to other shareholders (chakrabarty, 2009). for instance, owner-families share the desire for ownership control and the continuity of family involvement in the firm. to fully appreciate these special characteristics, it is crucial to focus on family firms where the family is likely to have considerable impact on entrepreneurial activities. we therefore define family firms as firms where one family group controls the company through a clear majority of the ordinary voting shares, the family is represented on the management team, and the leading representative of the family perceives the business to be a family firm (naldi, et.al. ,2007). most of the research projects studying goals in family firms compare the goals of these types of firms to those of non-family firms in order to detect significant differences. results in relation to this subject are mixed. in family firms, goals related to family roles tend to be far more important than the traditional firm-value maximization goal (sharma et al., 1997). among those important family roles are survival, financial independence, family harmony and family employment (trostel & nichols, 1982; donckels & frolich, 1991; westhead, 1997). moreover, family firms are described as being more risk-averse and less growth-oriented. they focus less on technology, creativity and innovation (donckels & frölich, 1991). however, most of the family firm managers believe that they are operating in a hostile external environment (westhead, 1997). in the literature and organizational context, innovation may be linked to performance and growth through improvements in efficiency, productivity, quality, competitive positioning, market share, etc. all organizations can innovate, including for example hospitals, universities, and local governments. a convenient definition of innovation from an organizational perspective is given by luecke and katz (2003), who wrote: “innovation is generally understood as the successful introduction of a new thing or method; innovation is the embodiment, combination, or synthesis of knowledge in original, relevant, valued new products, processes, or services.” discussion of the innovation philosophy generally refers to issues such as new products, technology, and discontinuous improvement, while discussion of the marketing philosophy generally concerns matters such as customer service, customer satisfaction and customer focus. the tendency to see these philosophies as mutually exclusive is reinforced by the specialization of academics and consultants in one or the other area. some scholars, however, have paid attention to the need to integrate technology and market (berthon et al, 2004). an innovation-oriented knowledge structure is a set of organization-wide shared beliefs and understandings that guide and direct "all organizational strategies and actions, including those embedded in the formal and informal systems, behaviors, competencies, and processes of the firm" (simpson et al., 2006). most prior innovation research has focused on factors that affect innovations, primarily rate, speed and benefits. more recent research has examined innovation as a system-based, firm-wide orientation toward innovation. along with this broader perspective comes a need for understanding outcomes of the orientation, both positive and negative. the innovation literature to date has largely relied on a handful of specific, readily calculated outcomes of innovation, with few studies examining the link between a more comprehensive innovation orientation and its organizational effects (totterdell et al., 2002). though no known studies have empirically examined innovation orientation effects on consumers, schlegelmilch et al. (2003) make a compelling argument that a strategic innovation will yield 'proactive value creation' and totterdell et al. learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 38 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu (2002) find a relationship between novelty and greater perceived benefits to customers. with another orientation entrepreneurial activities in family firms do involve taking risks, but to a lesser extent than in non-family firms. if family firms generally are characterized by less internal and external formal monitoring, risk taking in family firms is likely to mean that these family firms make decision that are less bias on closely calculated risks; less grounded in a systematic, unbiased way; and with less incorporation of outsiders’ perspectives and opinions (schulze et al, 2001; naldi et al, 2007). in many global markets, speed of technological change is rapid. especially family firm-based companies have to adopt this turbulent environment as an organic organization. innovation-oriented firm focuses on developing key organizational competencies in resource allocation, technology, employees, operations and markets. most prior innovation research has focused on factors that affect innovations, primarily rate, speed and benefits (simpson, et al., 2006). organizations that are competent learners are called "learning organizations". garvin (1993) defined a learning organization as "an organization skilled at creating, acquiring, and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights". most scholars’ view organizational learning as a process, a cognitive enterprise, that unfolds over time, but they differ on other important matters. some believe that behavioral change is required for learning others insist that new ways of thinking are enough learning organization, an organization's implicit or explicit understanding of how things are done is often referred to as its theory in use. organizational learning occurs when members of the organization act as learning agents for the organization, responding to changes in the internal and external environments of the organization by detecting and correcting errors in organizational theory in use, and embedding the results of their inquiry in private images and shared maps of organization. there has been a new perspective for significantly increasing organizational learning by providing a greater understanding of related and required concepts of change, learning, collaborative work systems, teams, synergy and authentic teams, co-mentoring relationships and learning teams, and their implementation in organizations. learning orientation has four sub-dimensions in own structure. team orientation is about the group members and their success as working together. all members should complement each other and must serve the same purpose. system orientation means all departments and employees create an effective system with the high level of rationalizing. learning sub-dimension shows the degree of adapting to new circumstances and reaching success. at last, shared memory is the key element of organizational culture. all employees have a common history and their values are similar. these all sub-dimensions are about the increasing of firm efficiency when to be quickly adapted to the environment is necessary. having the knowledge to better link resources to customer needs and increasing the pace of change within the organization (pedler et al., 1997; baker et al, 2007). each strategic orientation has various effects on growth and profitability performance in family based businesses. in various studies, the positive way strong relationships were found between the active return rate, growth in sales, new product success, increasing market share and profitability performance indicators (narver & slater, 1990). in this research, family business’ financial and growth performance are tried to analyze by managers or chiefs’ perspectives. firm performance is connected to effective use of performance measures in the family firm. iii. method conceptual framework the purpose of this empirical study is to evaluate the effects of strategic orientations levels learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 39 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu on firm performance in family firms. in this connection, the hypothesis which we use in our study is improved by scientific literature and created a model that explains the causes of orientations over firm’s qualitative and quantitative performance. if the family owned firms restructure their organizations with strategic orientations; firms have the potential to gain superior financial and growth performance. we expect a direct relationship between strategic orientations and firm’s performance; with support of the modern literature, these hypotheses are expanded : h1: there is a positive, significant and direct relationship between innovation orientation and business performance h2: there is a positive, significant and direct relationship between entrepreneurship orientation and business performance h3: there is a positive, significant and direct relationship between learning orientation and business performance sampling and data collecting the aim of this study is to provide an explanation for the contradictory evidence in the literature regarding the performance of turkish family-owned firms. for this purpose, it’s evaluated the effects of strategic orientations levels on firm performance in family firms. in order to empirically investigate the hypothesis of the study, familybased firms are chosen in istanbul area. to collect the data some tools as e-mail, letter and face to face interviews are used. minimum two members from each firm was claimed to participate the research survey. total of 280 questionnaires have returned among over 130 firms. the descriptive statistics of the respondents are shown in table 1. all items were measured on a seven point likert-type scale where 1= strongly disagree and 7= strongly agree. data is evaluated by spss 16.0 statistical program. the relationships between the all variables are tested using factor, reliability, correlation and regression analyses. measures all constructs were measured with existed scales from previous literature. the first of these scales is the entrepreneurship orientation. this instrument designed by li et al. (2007), was used to measure the construct of entrepreneurship orientation level of the firms. second one is innovation orientation. this instrument is modified by hurley & hult (2004) and gatignon & xuereb (1997). the other scale is learning orientation used by hult et al in 2003. at last, firm’s performance scales in the questionnaire are taken from recent management studies (baker & sinkula, 1999; lynch et al, 2000; zahra et al., 2002). these items were measured on a seven point likert-type scale where 1= strongly disagree and 7= strongly agree. all questions are tested for linguistic and meaning errors and it’s controlled by brislin’s (1970) backtranslate method for the translation of questionnaires. scale validity and reliability in our study, all items and components are tested by comprehensive reliability analyses. as a beginning, it’s analyzed the alpha reliability test (croanbach); all the scale reliability coefficient has been determined a satisfactory level such that � =, 953; this value is quite over the recommended 0.70 threshold (nunnally 1978; nunnally, and bernstein 1994). the variables those exist in the scale are tested individually; some items are removed before the analyses process (e5 from entrepreneurship orientation, i7, i9 and i10 from innovation orientation, p3 and p9 from performance). later on this process, the cumulative reliability coefficient learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 40 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu value increased to � = ,964. this level is higher than the critical threshold value (0.700) that generally accepted in the literature. the scale structure that was obtained with factor analysis was evaluated with the kolmogorov-smirnov test, and it was seen that t values of all of the variables were at the sufficient level for our sample that prove that the distribution of the data is statistically normal. at next step, it’s examined the “corrected inter-item correlations” and “squared multiple correlations” in the item analysis stage. it was found that, except two items all of the resulting values were 0.500 and above. in pursuit of reliability and correlation analyze, it is determined the factor structures by basic component analyze. during this process, entrepreneurship and innovation orientations constituted only one component. learning orientation disintegrated as four components (team orientation, system orientation, learning orientation and shared memory orientation). test of the research questions after testing reliability and the factorial structure, correlation analysis of the research questions was begun with the purpose of examining the mutual relationship among the factors considered in our research model. it was determined that the four independent latent variables had mutually positive relationships (� <0.001) with each other and with business performance components (see table 3). as shown on the correlation table, all sub-factors of the learning orientation have not a strength mutual relationship between firm performances. especially the learning and shared memory sub-factors of the learning orientation have no significant effect on business performance of the firm. the pearson correlation coefficient indicates the strength of a linear relationship between two variables, but its value generally does not completely characterize their relationship. because of this, after reveal of the mutual relations of examining factors in the model, the linear relationship was tested with regression analysis. according to the analyses’ results (see table 4): learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 41 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu entrepreneurship (� : 0,182; ) and innovation (� : 0,225) orientations directly, positively and significantly affect to the firm’s financial (a) performance. so, h1a and h2a hypothesis are supported. (r2: ,130; f:6,768). consistent with our hypotheses, this construct that includes these orientations is also valid and relevant in the important organizational context of family owned firms. entrepreneurship (� : 0,231) and innovation (� : 0,341) orientations directly, positively and significantly affect to the firm’s growth (b) performance. h1b and h2b hypothesis are supported. (r2: ,248; f:14,950) learning orientation significantly impact reversely on financial and growth performance. this situation is not valuable for our empirical study. because of these findings, an h3a and h3b hypotheses are not supported. depending to the results given in table 4, we deduced that both entrepreneurship and innovation orientations have statistically significant direct positive effects on business performance with all dimensions of the firm. on the other hand, there is no significant prove of the affects of learning orientation with all sub dimensions on the firm performance. there is no correlation between learning orientations and firm performance. in other words, the raising the values of independent variables in the innovation and entrepreneurship make the firm performance increased. there is a linear relationship between the entrepreneurship and performance; innovation and performance. as a further invention, the high correlation between this two independent variables shows that this two orientations using together in the family owned firms. we also support these findings: although the learning orientation does not affect firm performance, two sub factors of learning orientations have a positive and significant effect on entrepreneurship and innovation orientation. hence this situation, learning orientation may affect the family-owned firm’s growth and financial performance indirectly. especially the sub factors named team and system orientation positively and significantly affect the entrepreneurship and innovation orientations which exist in learning orientation’s structure model. these findings also appropriate with the correlation analysis results. recorded as an unexpected discovery in our research (see table 5). learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 42 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu with this findings we can assume that employers of all levels (bottom to top) including stakeholders are they key facts for implementing innovation and entrepreneurship orientations. as a sub factor of learning orientation, system orientation is about the connection between all departments inside a firm. it’s related to added value of every employers and strategic business unit; system orientation is closely influenced into the entrepreneurship and innovation orientation. another sub factor is team orientation explains the system as a firm that enhancing individual growth as well as organizational growth. there is a strong believe to enhance coordination and communications between function departments. iv. discussion conclusion this study focuses on the effect of strategic orientations on the family based firms’ performance. our research findings provide some valuable notions. the results of our empirical study show that some strategic orientations including innovation and entrepreneurship are implementing by turkish family firms to achieve sustainablecompetitive advantage in turbulent markets. effects of strategic orientations evolve over time and that it is the implementation of the strategy which is truly important, rather than the classification of the strategic type. it may be possible for other strategic types to improve performance by altering their strategy profiles to be learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 43 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu more aggressive, more focused or time-consuming when implementing decisions. in this research, entrepreneurship and innovation orientations are connected to firm’s performance’s elements as profitability, revenues before taxes, growth rate in the market, employee number, new customers, innovative products or services and financial success. for instance, the success of innovative output affects to firm’s competitive advantage in a turbulent market. the organizational learning is a key determinant of manufacturing without errors and low costs. several managers change their management comprehension for creating a customer focused, market-driven strategies. our finding shows that the firms which use any strategic orientation are capable to be the better performers inmany markets. that’s what the reason of some family firms are successful. in the strategic management literature, as well as there are some researches who claim all strategic orientations effect positively on firm performance�(hult vd., 2003; olson et al., 2004), there are some dissidents (manu and sriram, 1996; noble etal., 2002). findings show that there is a meaningful and positive relationship between the innovation, entrepreneurship and firm performance. this finding can be evaluated as turkish family firms follow and integrate the modern management theories and global trends into their structure. these orientations have got same character; the high correlation between these two variables may be the evidence of it. they are both being used for competitive advantages for turkish family owned firms. the managers emphasize the innovation and entrepreneurship orientations to protect firm’s position and possess stronger composition than rivals. our results suggest that innovation orientation is also shown the faith to new products and services that interests of companies; entrepreneurship orientation leads various abilities including fast fight back and leading the new services and products in the market. the results indicate that the association between strategic orientation and performance varies depending on the type of orientation used. managers need to be able to assess the orientation of their organizations in this regard, and to consider carefully whether their assessment of the situation was that intended, and whether it is appropriate to the business environment (berthon, et.al., 2004). our study suggests that an entrepreneurship orientation is beneficial for improvement of new product development activities in a transitional economy; top managers of firms should incline toward choosing entrepreneurship as their main strategic orientation. as a general thing, our results call into question the usefulness of learning orientations. there’s no significant finding that these orientations with all dimensions affect to firm’s performance. by the way, learning orientations’ some subdimensions effect the innovation and entrepreneurship orientations and their implications for internal environment of the company and making a definitive system. this is also indirectly affects performance. once again, our empirical study is an important step in validating the relationship between strategic orientations and firm performance. also it provides that turkish family firms are tend to use modern management theories in their structural organization. in the findings in replications of our research support our findings, the message to the family firm managers is clear. in the competitive market, family firms must evaluate their performance and choose a suitable strategic orientation to achieve competitive advantage strategy. it’s a new way to achieve to the success for the family owned firms. the using of these orientations helps to increase family-owned business’ profitability and growth rate in turbulent markets. this conclusion has implications for managers and management professors. we recommend the following: the examined orientations must be used together as a combination of success. using the innovation andentrepreneurship orientations compatible with each other can be considered as a proof of this. it’s recommended that to specify the role of learning orientations which don’t directly effect learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 44 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu on to otherorientations to the academicians working on this issue. as a special finding, we found a strong relationship both system and team orientation affect the entrepreneurship and innovation orientation. a model which is designed to evaluate the sub dimensions of learning orientations’ effects on other strategic orientations can be useful for future researches. the managers can use both the innovation and entrepreneurship orientations to improve efficiency of the family-owned firms. new product success rate, degree of product differentiation, first to market with new applications, sales growth and customer satisfaction are some criterions to reach the firm’s vision by using strategic orientations (lee and tsai, 2005). family-owned firm managers should examine the other orientations that including customer, relationship and market as a new technique to achieve sustainable performance. limitations and future research directions our empirical study has several limitations that should be kept in mind. family firms differ on a range of dimensions and it is possible that different types of family firms show different patterns in terms of all orientations. our data consisted of turkish family firms and inference to other countries should be made with caution. national culture and tradition may influence especially entrepreneurship and learning orientation, which has implications for the generalization of our findings. in contrast, responses from more individuals within the firms would have given a more complete picture of the firm's situation and behavior. also our contributions tofamily business research open up possibilities for future researches. learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 45 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu v. references 1. baker w.e. and sinkula, j.m. 1999. the synergistic effect of market orientation and learning orientation on organizational performance. journal of the academy of marketing science, vol. 27(4), 411-427. 2. baker w.e. and sinkula, j.m 2007. does market orientation facilitate balanced innovation programs? an organizational learning perspective. the journal of product innovation management, vol.24, 316 -334. 3. berthon, p., hulbert, j.m. and pitt, l. 2004. innovation or customer orientation? an empirical investigation. european journal of marketing, vol.38 (9-10), 1065-1090. 4. brislin, r. w. 1970. back-translation for cross-cultural research. journal of cross-cultural psychology vol.1, 185–216. 5. celuch, k.g., kasouf, c.j. and peruvemba, v. 2002. the effects of perceived market and learning rientation on assessed organizational capabilities. industrial marketing management, vol.31 (6): 545 -554. 6. chaffee, e. 1995. “three models of strategy”, academy of management review, vol 10, no. 1, chakrabarty, s. 2009. the influence of national culture and institutional voids on family ownership of large firms: a country level empirical study. journal of international management, vol: 15(1) 7. chrisman, j.j., chua j.h. and steier, l. 2003. an introduction to theories of family business, journal of business venturing, 441-448. 8. chua, j. h., chrisman, j. j. and sharma, p. 1999. defining the family business by behavior. entrepreneurship theory & practice, summer, 19-39. 9. david, f. 1989. strategic management, columbus:merrill publishing company, 1989 10. donckels, r. and freilich, e. 1991. are family businesses really different? european experiences from stratos. family business review 4(2), 149-160. 11. drucker, p. 1994. the theory of the business, harvard business review, september -october, 39. 12. fındıkçı, i̇. 2008. aile şirketlerinde yönetim ve kurumsallaşma (3ncü basım). alfa: i̇stanbul. 13. flemons, d. g. and cole, p. m. 1992. connecting and separating family and business: a relational approach to consultation. family business review, 5(3), 257-269. 14. garvin, d. a. 1993. building a learning organization. harvard business review 71 (july-august), 78-91. 15. gatignon, h. and xuereb, j.m. 1997. strategic orientations of the firm and new product performance, journal of marketing research, vol.34, 77-90. 16. gebhardt, g.f., carpenter, g.s. and sherry jr., j.f. 2006. creating a market orientation: a longitudinal, multifirm, grounded analysis of cultural transformation, journal of marketing, vol. 70, pages 37 -55. learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 46 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu 17. gersick, k. e., davis, j. a., mccollom h. m. and lansberg, i. 1997. generation to generation: life cycles of the family business. harvard business school press. 18. gils, a.v., voordeckers, w. and heuvel, j.v.d., 2004. environmentel uncertainty and strategic behavior in belgian family firms, european management journal, vol:22, no:5, pages 588-595. 19. habbershon t.g., williams, m. and macmillan i.c., 2003. a unified systems perspective of family firm performance, journal of business venturing, 451-465. 20. kırım a. 2002. aile şirketlerinin yönetimi. i̇stanbul: sistem publications. 21. lansberg, i. 1999. succeeding generations, harvard business school press, boston, ma. 22. li, y, liu, y. and zhao, y. 2006, the role of market and entrepreneurship orientation and internal control in the new product development activities of chinese firms, industrial marketing management. 35, 336-347. 23. lumpkin, g. t., and dess, g. g. 1996. clarifying the entrepreneurial orientation construct and linking it to performance. academy of management review, 21, 135-172. 24. luecke, r., katz r. 2003. managing creativity and innovation. harvard business school press. 25. lynch, d.f., keller, s.b. and ozment, j. 2000. the effects of logistics capabilities and strategy on firm performance. journal of business logistics, vol. 21(2), 47-67. 26. miller d., breton-miller i., lester r. and cannella a. 2007. are family firms really superior performers? journal of corporate finance, 1-30. 27. narver, john c., slater, s.f. & tietje, b. 1998. creating a market orientation, journal of market-focused management, 2/3,pages 241-256. 28. naldi , l., nordqvist, m., sjoberg, k., wiklund, j. 2007, “entrepreneurial orientation, risk taking and performance in family firms, family business review, 33-47. 29. nunnally, j.c. 1978. psychometric theory (2nd ed.). new york: mcgraw hill. 30. nunnally, j. c. ve bernstein, i. h. 1994. psychometric theory (3rd ed.). new york: mcgraw-hill 31. pedler, m., burgogyne, j. and boydell, t. 1997. the learning company: a strategy for sustainable development. 2nd ed. london; mcgraw-hill. 32. pieper, t.m., klein, s.b. 2007. the bulleye: a systems approach to modeling family firms. family business review. 20 (4): 301-319 33. simpson p.m., siguaw, j.a. and enz, c.a. 2006, innovation orientation outcomes: the good and the bad. journal of business research, 1133-1141 . 34. sinkula, j.m., baker, w.e, noordewier, t. 1997. a framework for market-based organizational learning: linking values, knowledge, and behavior. academy of marketing science. no:25, 305. learning, entrepreneurship and innovation orientations in turkish family-owned firms emerging markets journal | p a g e | 47 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.11 | http://emaj.pitt.edu 35. shanker, m.c., astrachan, j.h. 1996. myths and realities: family business’s contribution to us economy – a framework for assessing family business statistics, family business review, 9-2, 107-123. 36. sharma, p., chrisman, j.j. and chua, j.h. 1997. strategic management of the family business: pa st research and future challenges. family business review 10(1), pages 1-35. 37. schulze,w.s., lubatkin, m.h., dino, r.n., & buchholtz, a.k., 2001. agency relationship in family firms: theory and evidence, organization science, 12 (2), pages 85-105. 38. toni, a.d., tonchia, s. 2001. performance measurement systems: models, characteristics and measures. international journal of operations& production management, vol:21, no:1/2 . 39. totterdell p., desmond l., kamal b., chris c., toby w. 2002. an investigation on the con tents and consequences of major organizational innovations. int j innov magazine vol:6, 3-68. 40. trostel, a.o. and nichols, m.i. 1982 privately-held and publicly-held companies: a comparison of strategic choices and management processes. academy of management journal 25, pages 47-62. 41. westhead, p. 1997. ambitions, external' environment and strategic factor differences between family and nonfamily companies. entrepreneurship and regional development 9, 127-157. 42. zahra, s.a., neubaum, d.o. and el-hagrassey, g.m. 2002. competitive analysis and new venture performance: understanding the impact of strategic uncertainty and venture origin. entrepreneurship theory and practice, vol.27(1), 1-28. microsoft word 17-264-1-ce.doc volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies michelle i. caron southern new hampshire university dr. aysun fiçici southern new hampshire university | e-mail: a.ficici@snhu.edu christopher l. richter southern new hampshire university abstract this article evaluates the relationship between the level of corruption in rapidly developing economies and corporate governance processes therein. previous literature illustrates a strong relationship between corporate governance and corruption and suggests that in countries with high levels of corruption, firms lack efficient corporate governance practices. similarly, countries with deficient corporate governance practices and low levels of compliance to these standards breed corruption leading to a wide range of transparency dilemmas. this study delves deeper through careful examination regarding the level of compliance with corporate governance standards and the pervasive effects of corruption on the governance processes of firms with specific regard to rapidly developing economies as well as offering comparisons and similarities of shared characteristics among these countries. keywords: corporate governance, corruption, rapidly developing economies, foreign direct investment, emerging markets, transparency. this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 21 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies michelle i. caron dr. aysun fiçici christopher l. richter i. introduction   the primary focus of this study is to examine the level of compliance with corporate governance standards and the pervasive effects of corruption on the governance processes of firms with specific regard to rapidly developing economies, henceforth rdes, as well offer comparisons and similarities of shared characteristics of firms in these countries. the methodology implemented to prove this correlation involves analyses and ranking of each profiled rde according to the degree of the perceived level of corruption reported by transparency international and the level of corporate governance standard compliance as reported by the estandards forum financial standards foundation which considers (a) macroeconomic policy and data transparency, (b) institutional and market infrastructure, and (c) financial regulation and supervision. this paper spotlights the following rdes; argentina, brazil, china, chile, hungary, india, indonesia, kuwait, malaysia, mexico, russia, thailand, turkey and united arab emirates as they represent the premier class emerging markets attracting foreign direct investment and increasing levels of gdp. these profiled rde countries represent the fastest growing emerging markets. rdes have the ability to attract foreign direct investment despite higher levels of corruption versus developed economies. the growth experienced by rdes, with regard to gross domestic product and foreign direct investment, come such obstacles and hindrances as corruption which may be dealt with through effective corporate governance. each one of the bric countries (brazil, russia, india and china) is considered rapidly developing economies due to their ever-increasing annual growth rates. what separates an emerging market (henceforth “em”) from a rde? the short answer is that rdes grow at faster rates than ems. according to arnold & quelch, there are three aspects of a country’s economy that make it so (arnold and quelch, 1998, p. 8): “first is the absolute level of economic development, usually indicated by the average gdp per capita, or the relative balance of agrarian and industrial/commercial activity. this overlaps with other categorizations such as ‘less developed countries’ (ldcs) or ‘third world countries’. second is the relative pace of economic development usually indicated by the gdp growth rate. third is the system of market governance and, in particular, the extent and stability of a freemarket system…”. rde countries were chosen as they represent the premier class of emerging markets, attracting significant foreign direct investment and increasing levels of gdp. with this growth come such obstacles and hindrances as crime and corruption and the challenges that come with implementing effective corporate governance practices. consequently, the purpose of this paper is to determine whether corruption will be lower in rdes that have higher levels of compliance to corporate governance standards. what sets this article apart from previous works is that the profiled countries represent rdes specifically. this research holds value to the field of international the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 22 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu business due to the aforementioned analysis of the degree of compliance with corporate governance standards as well as the extent to which these economies share similar characteristics. the paper concludes with a summary of the findings in the study as well as areas of future study with regard to corruption and corporate governance practices. ii. review  of  related   literature   previous literature illustrates a strong relationship between corporate governance and corruption and suggests that in countries with high levels of corruption, firms do not demonstrate good corporate governance practices. similarly countries with deficient corporate governance practices and low levels of compliance to these standards by firms breed corruption leading to a wide range of transparency dilemmas. [(modigliani and perotti (2000), hellman et.al. (2000), xun (2002), wei (2000), laporta et.al. (2000), kauffman and wei (2000), rose-ackerman (1997), and gambetta (2000)]. hence, in order to be able to better grasp and systematically examine the relationship between the level of corruption and corporate governance processes in rdes, it is important to integrate two strands of previous literature to this study, one on corruption and the other on corporate governance. first, let’s begin with corruption. known as “suborno” in portuguese, “huì” in mandarin, and “bribery” in english, corruption has been a major deterrent to prospective multinationals in rdes such as those identified on boston consulting group’s “top 100 global challengers”, which are profiled in this study: argentina, brazil, china, chile, hungary, india, indonesia, kuwait, malaysia, mexico, russia, thailand, turkey and united arab emirates as brazil, russia, india, and china (bcg, 2009). commerce secretary, mickey kantor, states that bribery and corruption represent the number one complaint of u.s. executives operating overseas (blustein, 2007). gambetta (2000) explains the word 'corruption' in several different ways, but in an ethical sense corruption refers to humiliation of agents due to the deficiency of moral principles. according to gambetta practices such as bribery or kickbacks are considered acts of corruption because of the virtues they display. in the practice of corruption, gambetta considers the involvement of three agents rather than two, the 'truster', the 'fiduciary', and the 'corrupter'. hence, corruption is multifaceted. “there are primarily three different types of corruption: bureaucratic corruption where officials take bribes; political corruption where politicians take bribes using their positions of power; and grand corruption meaning misuse of public power by heads of states, ministers and top officials for private, pecuniary profit” (osbourne, 1997, p. 10). corruption may also affect other areas such as such as threats to defense and national security, environmental degradation, and dissatisfaction with the system of democracy. there are many forms of corruption including bribery, kickbacks, extortion, and embezzlement to name a few. corruption is more prominent in countries where the anti-corruption laws are weak, such as emerging markets. managers are more tempted to pay off government officials to get what they want to close the deal. causes of such corruption are often directly related to the level of development within the country. emerging market countries typically have issues with poor economic policies, deprived civil society, low levels of education, and weak accountability of public institutions (world bank, 1997a, b). government contracts may be awarded to contractors who are unwilling or incapable of completing the work to comply with industry standards. this makes it hard for a country to grow and attract foreign direct investment if the infrastructure is not improving. the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 23 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu on the other hand, kaufmann and jin wei (2000) suggest that in the past, political scientists pointed out that corruption may improve efficiency, especially in developing countries since it is related to bribery and gradually leading to "lower effective red-tape." consequently, kaufmann and jin wei label the theory as the "efficient grease theory". however, other scholars propose that with corruption come a variety of consequences such as negative economic growth, foreign and domestic investment and so forth. shleifer and vishny (1993) point out that a country's regulatory significance can be exploited by corruption. similarly, in a world bank study on transition economies, corruption is defined as the "major institutional constraints on business” where conventionally, corruption is defined as the abuse of public office for private gain." (hellman, jones, kaufmann, and schankerman, 2000, p. 19). thus, previous studies find that corruption is a problem of governance. as a result, the second strand of previous literature in this paper is related to corporate governance. cochran and wartick describe corporate governance as an "umbrella term that includes specific issues arising from interaction among senior management, shareholders, board of directors, and other corporate shareholders” (cochran and wartick, 1988, p. 9). “corporate governance ensures transparency, full disclosures and accountability of companies to all its stakeholders” (fernando, 2009, p. 31). the importance of evaluating corporate governance becomes obvious when profitability is questionable due to disruptions in operations or having to incur additional unforeseen costs due to corruption. corporate governance is ‘typically perceived by academic literature as dealing with ‘problems that result from the separation of ownership and control’. from this perspective, corporate governance would focus on: the internal structure and rules of the board of directors; the creation of independent audit committees; rules for disclosure of information to shareholders and creditors; and, control of the management (fernando, 2009, p. 9, oecd, 1997). wu argues “corporate governance is among the important factors determining the level of corruption and shows that corporate governance standards can have profound impacts on the effectiveness of the global anti-corruption campaign.” (wu, 2007, p.152). corporate governance specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs (oecd, wu, 2007). a result of such studies has suggested that private firms are entwined in the process as they take advantage of administrative corruption, become involved in public procurement kickbacks and state capture due to the economic implications of corruption. generally, in weak states controlling the bureaucrats is almost impossible thereby furnishing an effectual rule of law becomes impossible as well. all of these elements encourage the spread of corruption. the authors further argue that having a large state intervention in the economy but not acknowledging that corruption does in fact exist creates the enigma of 'state-capture'. the authors define 'state-capture' as "the effects of firms to shape and influence the underlying rules of the game (i.e. legislation, laws, rules, and decrees) through private payments to the public." (hellman, jones, kaufmann, and schankerman, p.1, 2000). xun (2002) finds that poor corporate governance standards contribute to the proliferation of corruption due to damaging the interests of investors and reducing existing transparency. asset diversion, transfer prices and theft are all examples of preferential treatment of investors and insiders as a result of the corrupt practice of falsifying information. inevitably, impaired investor confidence, exacerbated by inferior corporate governance standards and corruption negatively the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 24 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu affects the operating performance, raises the cost of capital and reduces firm value. yet there are other components within the business practices of corporations that encourage corruption in rdes. in a study entitled "corporate ownership around the world," la porta, silanes, and shleifer (1998) reference the 1932 archetypal, "the modern corporations and private property," written by berle and means, to show the ownership structure of widely held corporations of the united states. in the theory of berle and means, although the capital was separated between small shareholders, the control was still concentrated within the management. despite the study being done for the united states' corporations, years later, this is still unequivocally the case within the corporations in rdes. the component of ownership structure brings in the issue of shareholder rights as well as the issue of transparency. albeit perotti and von thadden (1998) suggest that corporate transparency has both strategic advantages and disadvantages; in general the outcome of having transparency is usually positive. perotti and von thadden look at transparency from a competitive position affecting market liquidity and cost information; however, when shareholder rights are considered, more transparency supports incontestable outcomes. la porta, silanes, shleifer, and vishny (1998) in "agency problems and dividend policies around the world," suggest that shareholder protection and minority shareholders rights are not considered when there is less or no transparency and that the issue becomes the 'agency problem' between corporate insiders and outside shareholders. the interests of those who control the firm can differ from the interests of those who supply the firm with external finances. this problem is the principal agent problem that derives from the separation of ownership and control and from corporate outsiders and insiders. although there is no single model of corporate governance, the internal and external factors that influence firms together influence the creation of corporate governance systems. usually the factors mirror specific market structures, legal systems, regulations, and cultural values. these factors affect the efficiency and profitability of the firms. over the years many public and private entities attempted to establish standards and norms for bettering corporate governance practices. business practices and efficiency are greatly impacted by government policies towards crime and corruption. although crime and corruption are present in every country of the world, they are quite prevalent in emerging markets, henceforth ems, and rdes. dealing with corruption can be costly. the world bank “warns that corruption is the greatest obstacle for economic and social development in developing countries” (pacek, p. 492). “agency problems arise within a firm whenever managers have incentives to pursue their own interests at shareholder expense” (agrawal and knoweber, 1996, p. 377). undoubtedly, foreign direct investment would be adversely affected in areas in which crime and corruption were of great concern. growth rates would also decrease as participation in world trade and exports decline. rdes share these same characteristics as emerging markets (ems), but to a greater degree. ems share the following characteristics with rdes: rapid industrialization, modernization, privatization of state enterprises, robust private sector activity and entrepreneurship, liberalization of trade and investment, rapidly improving living standards, young population, and growing middle class with rising economic aspirations” (cavusgil, 2007, p. 15). according to the economist article, “the new titans”, such countries have a significant role on the global economy. these countries make up more than half of the world’s population, roughly 43% of gdp on a purchasing power parity basis, and greater than a third of the world’s energy the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 25 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu consumption and exports (and growing) to name some major components (economist, 2006). more countries are paying closer attention to corporate governance policies as a result of financial crises impacting countries to varying degrees on a global scale. not having efficient corporate governance can decrease efficiency of operations, increase the cost of a company’s funds, and open the door to more corruption. “nonetheless, the impact of corruption on business in particular and society in general is such that it diverts resources from productive to nonproductive sectors, and makes a few rich at the expense of others…apart from increasing risk and the cost of doing business, corruption damages investor confidence, stifles economic growth, and deters foreign direct investment. although the incidence of corruption varies among countries, most studies have ascertained that corruption is detrimental to society and business” (frisch, 1996, p. 68). for example, mauro (1995), kaufmann (1997), tanzi (1998), and wei, (1997) have demonstrated that corruption does have a negative effect on economic growth, business development, public expenditures, and domestic and foreign investment (zarb, 2007). “firms under the influence of low quality government tend to have complex organizational structures, poor transparency and weak corporate governance” (fan, joseph et. al. 2010, leuz and oberholzer-gee, 2006; fan, wong, and zhang, 2009; jiang, lee, and yue, 2010, p. 209). further studies (klapper and love, 2002) find a positive correlation between corporate governance structures and country level measures of investor protection. in addition, they suggest that it is crucial for firms located in countries with weak legal systems to adopt improved corporate governance practices. since firms located in developing countries may have weaker rules, black (2001) suggests that the corporate governance structures may have larger effects. corporate governance is related to firms and firms from these ems and rdes set standards in the economies of these nations. corporate governance mechanisms as well as ownership structure, dividend payout, cost of external finance, and market valuations have been significantly impacted due to variations in home country legal structure and the laws designed to protect investors, according to a growing body of literature valuations [(la porta, lopez-de-silanes, and vishny (1999); klapper and love, (2002)]. in some countries, firms may decline specific provisions causing investor protection laws to be nonbinding. american depository receipts (adr) issuing firms may improve the rights of investors through implementing additional provisions to facilitate increased disclosure, to institute more efficient and effective boards, and to enact disciplinary action to ensure the rights of minority shareholders. this type of protection and/or the responsibility towards the minority shareholders can be observed in the anglo-american system of corporate governance, which is usually referred to as “outsider system” where there is dispersed ownership and dispersed equity markets. although the “outsider system” encourages institutional investors to take part in the process, in this system the regulations are based on separation of ownership and control, the equity markets, and information disclosure to public (clarke, 2007). on the other hand, in western and eastern european as well as in asia pacific countries, the “insider system” dominates the scene where the system is a self-serving one in which there is evidence of a relationship based approach with concentrated ownership, bank finance, and representation of majority interest (clarke, 2007). hence, the agency problem is much more of an issue in this system. although in most parts of europe this system is evolving and becoming more converged and harmonized, in the ems and rdes family controlled pyramidal corporate governance the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 26 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu structures, and business networks still set the stage and create challenges for oecd standards of fairness, accountability, responsibility and transparency. however, it is also worth noting that there is a wide range of differences between corporate governance structures and standards in these countries depending on diverse social and economic circumstances. iii.  research  method   two key variables were utilized in order to determine the influence of corruption on corporate governance standards in rdes: the perceived levels of corruption present in the country as well as the standards compliance index rating. the corruption perception index, henceforth cpi, values represent the time period of january to december of 2009 (transparency international). the corporate governance factors to be examined in this study are compiled from a list of “12 key standards for sound financial systems”, which were developed by the estandards forum financial stability foundation in 1999 in response to a need for a global set of best practices. these standards are divided into three areas: macroeconomic policy and data transparency, institutional and market infrastructure, and financial regulation and supervision. the foundation monitors and reports economic, financial, and political conditions in countries across the globe to assess compliance utilizing the financial sector assessment program and reports on observance of standards and codes of international monetary fund the world bank launched the same year. the standards compliance index rating is converted to a numerical score or ranking in which higher scores represent the most compliance with these standards as reported by estandards. the process of a country implementing standards and codes is based on six categories: full compliance, compliance in progress, enacted, intent declared, no compliance, and insufficient information. the most desired category for any country to have is “full compliance” in which they have made all information public and transparent regarding each standard and the laws and regulations are enforced. the second most desirable category is “compliance in progress”, which deems that the country has made the relevant standards into laws or regulations and are making enforcement a priority. such information regarding these standards has been made publicly available and the country is working towards full compliance. acquiring “enacted” status means that most of the principles of the relevant standards have been made publicly available and have been made into laws or regulations, however, enforcing these laws and regulations is lacking. the “intent declared” category means that the country has stated that it will take the necessary steps to comply with the compliance of these standards and declare them into laws or regulations. the “no compliance” category means that the country has not incorporated any of the relevant standards into laws or regulations and no enforcement exists. the final category is “insufficient information” in which there simply is not enough information publicly available to assess the level of compliance. (estandards, 2010). based on these aforementioned categories, each country is given a score from 0 (representing insufficient information) to 10 (representing full compliance). to come up with an overall rating, the country is measured on the degree of compliance based on the following scale to come up with an overall rating: very high compliance 80100, high compliance 60-80, medium compliance 40-60, low compliance 29-40, and very low compliance 0-20. this would enable countries with insufficient information to still obtain a financial standards index score with regard to the level of compliance with the standards. the cpi values range from 0 (no corruption present) to 10 (rampant corruption), however, this rating was reversed to comply with the other variable, standard compliance index rating. this the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 27 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu index ranges from 1 to 100 in which higher scores are desirable and represent the best performance. in the case of cpi, lower scores are desirable; therefore a score of 2.0 depicting little corruption was reversed to 8.0 and multiplied by 8.3 to be on the same scale as the standards compliance index. iv. research  findings   a majority of the profiled rde countries have acquired “enacted” status: argentina, chile, hungary, india, indonesia, malaysia, mexico, russia, thailand, and turkey. acquiring “enacted” status means that most of the principles of the relevant standards have been made publicly available and have been made into laws or regulations, however, enforcing these laws and regulations is lacking. this is certainly a step in the right direction, but these countries need to do more to improve their level of compliance. there were no profiled rde countries with “full compliance” or “compliance in progress” status. developed countries are more apt to fit into these two categories: “enacted” or “intent declared”. acquiring either rating would certainly assist in making these countries more attractive to foreign investors. this study includes three profiled rde countries that have “intent declared” status: brazil, china, and the united arab emirates. the “intent declared” category means that the country has stated that it will take the necessary steps to comply with the compliance of these standards and declare them into laws or regulations. no profiled rde countries fell in the “no compliance” category, however, one country from this study falls under the “insufficient information” category, which is kuwait. this country does not have enough information publicly available to assess the level of compliance. kuwait is nevertheless included in the study as it still obtained a standard compliance rating based on the information it did provide albeit rather low despite high inward fdi and a predicted 2.4% growth rate as reported by the international monetary fund for 2010. kuwait is also included due to being identified as a “top global challenger” by the boston consulting group for 2009 as previously stated. (estandards, 2010). see table i on the following page. the profiled rdes have the following standards compliance ratings in order from best performance to worst performance based on the aforementioned criteria: hungary (60.83), india (58.33), chile (54.17), mexico (53.33), thailand (50.83), turkey (48.33), malaysia (46.67), indonesia (43.33), russia (42.50), brazil (37.5), argentina (35.00), china (25.83), kuwait (22.50), and the united arab emirates (20.83). based on these ratings, each country is ranked with a numerical value denoting their level of compliance: high, medium, low, or very low compliance. the only profiled country acquiring a high compliance rating in this study was hungary. countries acquiring medium compliance include: india, chile, mexico, thailand, turkey, malaysia, indonesia, and russia. low compliance countries included the remaining countries: brazil, argentina, china, kuwait and the united arab emirates. see table i below. the cpi scores for the profiled rdes from least corruption to most corruption based on a scale from 1-10 as reported by transparency international (2009) are: chile (6.7), united arab emirates (6.5), hungary (5.1), malaysia (4.5), turkey (4.4), kuwait (4.1), brazil (3.7), china (3.6), india (3.4), thailand (3.4), mexico (3.3), argentina (2.9), indonesia (2.8), and russia (2.2), as shown on table i below. table 1: compliance and corruption data for rdes the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 28 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu rde compliance level standards compliance index global compliance ranking cpi ifdi usd billion unctad argentina enacted 35 61 2.9 4.90 brazil intent declared 37.5 55 3.7 25.95 chile enacted 54.17 27 6.7 12.70 china intent declared 25.83 70 3.6 95.00 hungary enacted 60.83 11 5.1 -5.58 india enacted 58.33 18 3.4 34.61 indonesia enacted 43.33 48 2.8 4.88 kuwait insufficient info. 22.5 73 4.1 0.15 malaysia enacted 46.67 43 4.5 1.38 mexico enacted 53.33 28 3.3 12.52 russia enacted 42.50 49 2.2 38.72 thailand enacted 50.83 34 3.4 5.95 turkey enacted 48.33 40 4.5 7.61 u.a.e. intent declared 20.83 78 6.5 4.00 this table depicts the level of compliance, the standards compliance index rating 1/100, global compliance ranking, cpi for 2009, and inward foreign direct investment for 2009 in billions of u.s. dollars. an important goal of this study is to measure the influence of corruption on the level of compliance with the standards. each country was plotted on the following matrix as a result of their standards compliance index rating (estandards, 2010) and the cpi score (transparency international, 2009). this places each country in one of four quadrants in which comparisons and similarities may be drawn. the most desirable quadrant to attain is quadrant 4, held by chile. this quadrant represents the most compliance with corporate governance standards and the least corruption. see figure i below. figure i: conceptual matrix of the influence of corruption on corporate governance standards compliance the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 29 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu this matrix depicts the level of corruption (y axis) and compliance with corporate governance standards(x axis). the most desirable quadrant would be number 4 as it represents the most compliance and least corruption. on the other hand, the least desirable quadrant is number 1 as it represents the least compliance and most corruption. quadrant 1 this quadrant is characterized by having the most corruption and the least compliance with global standards and codes with regard to corporate governance thus making it the least desirable quadrant to be placed in. as illustrated in the above matrix, both china and kuwait are in quadrant 1. china holds “intent declared” status and kuwait holds “insufficient information” status. both countries have low compliance ratings. in china, a system of corporate governance has emerged as a result of enterprise, legal, institutional and regulatory reforms. in january 2001, the china securities regulatory commission (csrc) issued the code of corporate governance for listed companies in china. based on the "comply or explain" principle, the code has “strictly followed” the organization for economic cooperation and development principles of corporate governance. revisions to the company law and securities law in 2006 have also strengthened minority shareholder rights and disclosure requirements for listed firms. the publication of the basic standard for enterprise internal control in 2008, to be implemented over time, signals another important step towards enhancing corporate governance. however, highly concentrated ownership structure, the dominance of state-owned enterprises, and the resulting weak minority shareholder protection remain as major obstacles to develop a corporate governance culture in china. lu et al. also noted that the gap between good and poor corporate governance among listed companies is significant. various recommendations are being put forth to improve corporate governance in china, including speeding up share reform, shareholding diversification, reducing government intervention in state owned enterprises, improving minority shareholder rights, and enhancing board structure and responsibility. (estandardsforum, 2009) according to the imf, kuwait needs to address “serious gaps” with regard to corporate governance principles (2004), therefore, this country has been identified as having insufficient the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 30 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu information to establish compliance with the oecd principles of corporate governance. this report recommended “strengthening minority shareholders’ protection and raising awareness and understanding of standards of disclosure, governance, the liability of the board of directors, and the role of auditors” (imf, 2004). the central bank of kuwait’s listed firms has been acknowledged as having adequate basic governance arrangements. the assessment also raised the possibility of amending the commercial companies law. (estandardsforum, 2009) quadrant 2 a vast majority of the rdes hold quadrant 2: argentina, brazil, russia, indonesia, india, mexico, turkey, malaysia, hungary, and thailand. all of these countries have a medium or low compliance rating. brazil is the only country with “intent declared” status, while all others have “enacted” status. having enacted status may be a common component for this quadrant. this quadrant is characterized as having the most compliance with global standards and codes with regard to corporate governance however they also have high levels of corruption. argentina has achieved low overall compliance with international standards and codes and has “enacted” status. there have been serious concerns in the recent past about the independence of the central bank of argentina and doubts about the accuracy of inflation data. credible implementation of argentina's comprehensive legal framework for fiscal transparency remains one of the country's top priorities since local accounting standards differ from international financial reporting standards. in the area of corporate governance, the national securities commission mandated listed companies in october 2007 to annually disclose whether they comply with a minimum set of governance standards or to explain the reason for not doing so. (estandardsforum, 2009) brazil has “intent declared” (id) status and a low overall compliance with international standards and codes. the 2001 and 2009 reforms of the corporations law strengthened minority shareholders rights and improved standards for disclosure, with improved laws on tag-along rights, de-listing, non-voting shares, election of board members by minority shareholders and private arbitration. brazil has also declared a “comply or explain” policy for all listed companies, however, weaknesses still persist. the concentration of control in the hands of a few shareholders and issuance of preferred or non-voting shares is prevalent, which to a large extent is due to the family controlled ownership structure. other problems range from the poor functioning of boards, the disregard of minority shareholders' rights to the lack of adequate legal protection to investors. (estandardsforum, 2010) russia has achieved a medium compliance rating and “enacted” status. it has also adopted a “comply-or-explain” policy. the european bank for reconstruction and development (ebrd) had assessed russian corporate governance legislation to be in “high compliance” with oecd principles of corporate governance in 2004. however, it is important to note that there is still an exorbitant amount of state intervention in the economy and pervasive corruption in russia, which creates a difficult obstacle to overcome with respect to improving the country’s corporate governance as noted by the institute of international finance’s 2004 task force report on corporate governance. a significant regulation issued by the federal financial markets service (ffms) required listed companies to enforce the code of corporate governance conduct and publish financial statements that conform to the international financial reporting standards in an attempt at improving transparency. (estandardsforum, 2010) thailand also has “enacted” status and a medium compliance rating with a “comply-orexplain” approach. according to the asian the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 31 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu corporate governance association, the updated code follows recommendations by the world bank and the oecd and that the overall practices were at a satisfactory level. despite these improvements, however, it is still noted that the legal enforcement of the new codes remains a challenge. in march of 2006, a 2009 international monetary fund report emphasizes that the 2005 world bank recommendation on shareholder protection should be implemented into securities laws and that the enforcement authority of the securities and exchange commission should be strengthened. (estandardsforum, 2009) hungary is the highest performer out of all profiled rdes holding “enacted” status as well as a high compliance rating. in its 2003 corporate governance sector assessment project, the european bank for reconstruction and development (ebrd) observed that corporate governance legislation in hungary is in "high compliance" with the organization for economic cooperation and development (oecd) principles of corporate governance. a world bank assessment conducted the same year confirmed that the hungarian regulatory and legislative framework with regard to corporate governance is "robust." two more ebrd reports published in 2008 strike a similar note, finding that the hungarian capital market and corporate governance frameworks are in line with best international practice. nonetheless key deficiencies identified by the reports remain, especially regarding the enforcement of corporate governance provisions. for instance, per the ebrd reports, while minority shareholders receive equitable treatment, the enforceability of minority shareholders rights, related party transactions and efficiency of redress actions are areas of particular concern. (estandardsforum, 2009). malaysia has attained “enacted” status and is medium compliance with standards and codes. in the wake of the asian financial crisis, steps have been taken to improve accounting transparency and corporate governance in malaysia. according to the world bank's 2005 report on the observance of standards and codes (rosc) on corporate governance in malaysia, the incidence of concentrated shareholding is very pronounced in the malaysian market, particularly through pyramid structures. furthermore, companies are usually majority-controlled by a small group of relatedparties and managed by owner-managers. weaknesses exist with regards to the overlapping authority of the regulatory institutions governing the: securities market, the government's high level of equity ownership, low free float, weak protection of minority shareholders, and directors' accountability. in this regard, it was advised to: enforce disclosure and reporting requirements in a continuous and consistent manner, to strengthen directors' independence and accountability to investors, and to enhance the role of institutional investors and shareholder activism in the corporate governance framework. (estandardsforum, 2009) turkey has achieved a medium compliance rating and “enacted” status. turkish corporate governance is characterized by concentrated ownership with family-owned company groups and cross-ownership between companies. while corporate governance in turkey is improving, key issues remain as the ownership structure is still composited within the business groups (bgs) and the ownership is still pyramidal as well as consolidated within families, which are the primogeniture shareholders that dominate the decision-making process based on insider expropriation (yurtoglu, 2000). however, a joint study conducted by standard and poor's and the corporate governance forum of turkey in 2008 found that the legal and regulatory framework in turkey regarding corporate governance standards and their enforcement had drastically improved. overall the ebrd finds turkey’s law on the books to be “generally good,” but improvements are still needed, particularly in the areas of shareholder rights and the role of stakeholders in corporate governance. the report recommended that shareholders be enabled to participate more the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 32 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu effectively in meetings and that stakeholders be offered access to corporate information and specific independent committees. (estandardsforum, 2010) india has attained “enacted” status and is reported to be in medium compliance. the world bank in its 2004 report on the observance of standards and codes (rosc) on corporate governance practices in india acknowledged that considerable efforts had been made to reform the corporate governance framework and to improve the accountability/responsibility of insiders, fairness in treatment, board practices, and transparency. the establishment of the securities and exchange board of india (sebi) in 1992 has been described as the single most important event with respect to investor protection in india. however, significant weaknesses in the enforcement of provisions exist, particularly with respect to insider trading and related party transactions. this is, in part, attributed to some regulatory overlap between sebi and the ministry of company affairs. other weaknesses identified include constraints to participation in annual general meetings and the need for corporate governance codes for unlisted companies. (estandardsforum, 2009). in india, bank monitoring may also lead to less public transparency, which in turn encourages low level of trading liquidity and discourage aggregation of information by investors (perotti and von thadden, 1998). indonesia also has “enacted” status and medium compliance and has been described as having an elaborate system of corporate governance rules. the rosc notes that actual corporate governance practices in indonesia often fall short of oecd's recommendations. business culture in indonesia is based on relationships rather than rules, largely as a result of the high incidence of concentrated ownership, family-owned businesses, a weak capital market, and controlling shareholders. it further advised establishing nomination committees and a cumulative voting system, ensuring disclosure and transparency in annual reports and financial statements, and improving the roles and responsibilities of the audit committees. a 2006 oecd report, “implementing the white paper on corporate governance in asia” states that awareness of the importance of corporate governance has increased considerably in indonesia. regulations regarding roles of independent commissioners (supervisory directors) have been introduced to improve board practice and strengthen the protection of non-controlling shareholders. (estandardsforum, 2009) mexico has achieved medium compliance and “enacted” status. according to the world bank and the institute of international finance, major progress had been achieved by mexico in establishing a successful structure and culture for good corporate governance. the world bank rated most principles as either “largely observed” or “partially observed,” indicating either only minor shortcomings or a legal and regulatory framework that complies with the principles, but suffers from diverging practices and a lack of enforcement. the country was cautioned that real progress in corporate governance has to account for the concentrated ownership and control structure of many mexican firms. mexican business environment is still characterized by concentrated ownership, interlocked boards of directors, inadequate insider trading enforcement, and an overall poor protection of minority investors. (estandardsforum, 2010) quadrant 3 countries in quadrant 3 are characterized as having the least amount of corruption and the least amount of compliance to global standards and codes with regard to corporate governance. the united arab emirates (uae) is the only profiled rde country in this quadrant holding “intent declared” status and a low compliance rating. the united arab emirates code of corporate governance was created by the emirates securities and commodities authority for listed companies in may of 2007. the abu dhabi the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 33 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu securities exchange, the dubai financial market and the uae ministry of economy have produced and circulated draft corporate governance guidelines and regulations. corporate governance codes and guidelines are also promoted throughout the region. as the capital markets strengthen and mature in this country, the imf is encouraging their authorities to “allow foreign investors to fully access the securities markets by removing restrictions on stock ownership and board membership. it added that the authorities should foster the public listing of large, quasi-public companies on the stock exchanges to help develop the market” (imf, 2007). “a new companies and commercial activities law is expected to be introduced at the end of 2008, allowing 100 percent foreign ownership of companies in some sectors outside the free trade zones” (estandardsforum, 2008). quadrant 4 this is the most desirable quadrant, which is characterized by having the least corruption and most compliance to global standards and codes with regard to corporate governance. chile is the only profiled rde in this quadrant attaining “enacted” status and a high level of compliance. according to a 2003 world bank assessment of chilean corporate governance practices, chile scores well on the assessment on compliance with the organization for economic cooperation and development (oecd) principles. nonetheless, certain weaknesses were identified and the world bank made policy recommendations in three broad areas relating to legislative reform, institutional strengthening, and voluntary/private initiatives. the world bank recommended amending the legislative framework to achieve greater transparency and strengthening the market surveillance mechanisms. improvements in the general enforcement of investor property rights were also suggested. ownership is highly concentrated and that minority shareholder dissatisfaction is "substantial", however, chile has been taking initiatives to achieve greater convergence with international practices. law no. 19,705 known as the corporate governance law was introduced in 2000 with the main goal to protect minority shareholder rights in chilean companies, especially during changes in corporate control. (estandardsforum, 2008) v. concluding  remarks   entrepreneurship is abundant and even thriving in rdes despite obvious corruption and varying levels of compliance with corporate governance standards. the race to provide the infrastructure necessary for these businesses to prosper is well under way to ensure business efficiency. assurances of safeguards to protect valuable assets of multinationals must be in place in order to continue to attract and retain foreign direct investment in these countries. the organization for economic cooperation and development (oecd) and the report on observance of standards and codes (rosc) on corporate governance practices advise many of the profiled countries to enforce disclosure and reporting requirements in a continuous and consistent manner, to strengthen directors' independence and accountability to investors, and to enhance the role of institutional investors and shareholder activism in the corporate governance framework (estandardsforum, 2009). a majority of the leading firms in the profiled countries are family-controlled companies and have elaborate systems and rules governing their principles of corporate governance. the world bank also suggests improving the effectiveness of implementation and enforcement of legislation and regulations to improve the corporate governance framework (estandards, 2010). zarb’s study found that a relationship existed between corruption, credible financial reporting, as well as government intervention (2007). this emphasizes the necessity of adequate the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 34 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu disclosure and accurate financial records to ensure transparency. according to zarb, disclosure not only increases transparency, but also increases firm value which in turn increases stock prices and reduces agency costs. therefore, zarb asserts that increased disclosure levels may lead to increased credibility and less corruption (2007). “corruption is corrosive to development”, as stated by james wolfensohn, president of the world bank (gloster-coates & quest, p. 3). year after year the world bank and the international monetary fund have demonstrated the fact that corruption “deters investment and retards growth”, which rdes depend on (imf, n.p.). the key findings of this paper clearly demonstrate a relationship between levels of corruption and their effects on corporate governance practices present in rdes. corruption has not been consistently lower in rdes that have higher levels of compliance to corporate governance standards. also, it was evident that rdes, similar in many characteristics that endear them to such a term indeed cluster with specific regard to their level of such aforementioned compliance and levels of perceived corruption. the best way to maintain foreign direct investment to an already attractive location in terms of future growth, specifically rdes, would be to find a way to safeguard their investments against corruption and enact effective and efficient corporate governance standards. vi. future  research   future studies may involve researching the corporate governance structures of the leading firms identified as “top global challengers” by the boston consulting group, as well as, how the significance of these structures enable and/or sustain such growth. furthermore, future studies may also probe the evolution of insider and outsider corporate governance systems in eastern europe or asia, for example, and discuss the variations and differences in these structures as well as explore their standardization. the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 35 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu vii. references   1. agrawal, anup. and knoeber, charles r. “firm performance and mechanisms to control agency problems between managers and shareholders”. journal of financial and quantitative analysis, 31(1996): 377-397. 2. aguiar, marcos., et. al. “the 2009 bcg 100 new global challengers: how companies from rapidly developing economies are contending for global leadership”. boston consulting group, report.(2009) january: 1-38. 3. arnold, david, j. and quelch, john, a. “new strategies in emerging markets”. sloan management review. fall(1998): 7-20. 4. black, bernard, s. “the corporate governance behavior and market value of russian firms”. emerging markets review 2.2 (2001): 89-108. 5. blustein, paul. “pssst. here’s a little something that seems to slow growth”. the washington post. (2008). accessed june 20, 2009. http://www.lexisnexis.com/us/lnacademic/api/version1/sr?csi=8422&sr=headline%28pssst.+here%27s+a+ little+something+that+seems+to+slow+growth%29&secondredirectindicator=true . 6. cavusgil, tamer, s and knight, gary, and riesenberger, john. “regional economic integration”. understanding emerging markets. international business: strategy, management and the new realities, ed. david parker. (upper saddle river: pearson prentice hall, 2007). 222-253. 7. clarke, thomas. “international corporate governance: a comparative approach”. (london: routledge, 2007). 8. fan, joseph p.h. and wei, k.c. john., and xu, xinzhong. “corporate finance and governance in emerging markets: a selective review and an agenda for future research”. journal of corporate finance. 17(2) (2010): 207-214. 9. fan, joseph p.h. and wong, t.j. and zhang, tianyu. “institutions and organizational structure: the case of state-owned corporate pyramids”. chinese university of hong kong. working paper (2010): 1-61. 10. fernando, a.c. “corporate governance: an overview”. corporate governance: principles, policies and practices. (upper saddle river: pearson prentice hall, 2009). 3-32. 11. frisch, dieter. “the effects of corruption on development”. the courier. acp-eu no. 158, july-august (2010): 68-70. 12. gambetta, diego “mafia: the price of distrust”. trust: making and breaking cooperative relations. department of sociology, university of oxford, (2000) 158-175. 13. gloster-coates, patricia and quest, linda. “kleptocracy: curse of development”. international social science review 80.1-2 (2005): 3-20. 14. hellman, joel and jones, geraint and kaufmann, daniel. “are foreign investors and multinationals engaging in corrupt practices in transition economies?”. the world bank/the william davidson institute. (2000)1-4. 15. hellman, joel and jones, geraint and kauffman, daniel and schankerman, mark a. “measuring governance, corruption, and state capture: how firms and bureaucrats shape the business environment in transition economies”. world bank institute of governance, regulation and finance. 2312. washington d.c. (2000). the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 36 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu 16. “world competitiveness online”. imd. last modified 2008 oct.-nov. 17. “the new titans”. the economist. (2006) accessed september 14, 2009. http://www.economist.com/node/7877959. 18. jiang, guohua and lee, charles m.c. and yue, heng. “tunneling through intercorporate loans: the chinese experience”. journal of financial economics. 98 (2010): 1-20. 19. kaufmann, daniel and wei, shang-jin. “does ‘grease money’ speed up the wheels of commerce?”. the world bank and harvard university. working paper no. 2254. (1999) 1-19. 20. kaufmann, daniel and hellman, joel s and jones, geraint and shankerman, mark. “measuring governance, corruption, and state capture – how firms and bureaucrats shape the business environment in transition economies”. the world bank and harvard university. working paper no. 2312. (2000)1-47. 21. klapper, leora f and love, inessa. “corporate governance, investor protection, and performance in emerging markets”. journal of corporate finance. 10.5 (2002): 703-28. 22. laporta, rafael and lopez de silanes, florencio and shleifer, andrei. “corporate ownership around the world”. journal of finance. 54 (1999): 471-517. 23. laporta, rafael and lopez de silanes, florencio and shleifer, andrei and vishny, robert w. “agency problems and dividend policies around the world”. journal of finance. 55 (2000): 1-33. 24. laporta, rafael and lopez de silanes, florencio and shleifer, andrei and vishny, robert w. “investor protection and corporate governance”. journal of financial economics. 58(1-2) (2000): 3-27. 25. leuz, christian and oberholzer-gee, felix. “political relationships, global financing, and corporate transparency”. journal of financial economics. 81 (2006): 411-439. 26. mccahery, joseph and moerland, piet and raaijmakers, theo. (2000),. “convergence and diversity of corporate regimes and capital markets”. corporate governance regimes: convergence and diversity. (oxford university press, oxford, 2000). 27. modiglliani, franco and perotti, enrico. “security markets versus bank finance: legal enforcement and investors' protection”. international review of finance 1.2 (2000): 81-96. 28. “principles of corporate governance”. organisation for economic cooperation and development. accessed june 2, 2009. (2004) http:www.oecd.gov 29. osbourne, denis. “corruption as counter-culture: attitudes to bribery in local and global society”. kluwer law international. (1997) 9-34. 30. pacek, nenad and thornily, danny. “emerging markets: lessons for business success and the outlook for different markets”. the economist series. 2nd ed. (2007). 31. pacek, alexander c. “political culture resurgent”. international studies review. 6 (2004):492-495. 32. rose-ackerman, susan. “the political economy of corruption”. corruption and the global economy. institute for international economics, (1997) 31-60. 33. transparency international. cpi index. accessed june 2, 2009. http://www.transparency.org/policy_research/surveys_indices/cpi . the influence of corruption on corporate governance standards: shared characteristics of rapidly developing economies emerging markets journal | p a g e | 37 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.17 | http://emaj.pitt.edu 34. unctad. foreign direct investment database. country reports. accessed june 2, 2009. http://www.unctad.org/templates/page.asp?intitemid=1923&lang=1. 35. woochan, kim and black, bernard, s. and jang, hasung. “does corporate governance affect firms’ market values?” social science research network.(2003) last modified june 8, 2011. http://papers.ssrn.com/abstract=311275. 36. world bank. “helping countries combat corruption: the role of the world bank, poverty reduction and economic management”. (2007) accessed june 2, 2009. www.worldbank.org/publicsector/anticorrupt/corruptn/coridx.htm. 37. world bank. world development report 1997: “the state in a changing world”. (oxford: oxford university press, 2007). 38. wu, xun. “corporate governance and corruption: a cross-country analysis”. governance: an international journal of policy, administration and institutions. 18(2) (2005): 151-170. 39. yurtoglu, b. burcin. “ownership structure of turkish listed firms”. istanbul stock exchange finance award series. 1(2000): 55-84. 40. zarb, bert j. “do credible financial reporting and government intervention play a role in preventing corruption? a preliminary investigation of the european union”. journal of international business and economics. (2007) 149-163. emerging markets journal a simulation set-up to observe the effects of the emotional factor on capital markets belma ozturkkal ph.d kadir has universty | e-mail: belma.ozturkkal@khas.edu.tr abstract the study surveyed 74 student subjects from a major public university in the southern united states in a capital market experiment. this study investigates the link between profitability and the individual emotions present at the time of the experiment among managers and investors. this study is motivated by the shareholder and manager mechanism simulating a real market environment, where the individual self-reported emotions on a survey are analyzed by a least square regression analysis from the perspective of investors and managers. keywords: experiment, capital market, stock, investor, manager, behavioral finance, emotion this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu mailto:belma.ozturkkal@khas.edu.tr http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ a simulation set-up to observe the effects of the emotional factor on capital markets emerging markets journal | p a g e | 21 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu a simulation set-up to observe the effects of the emotional factor on capital markets belma ozturkkal ph.d i. introduction emotional aspects of decision-making process have been analyzed in the psychology quite in depth, however the analysis for financial decisions was not the point of concern until recently. in finance the analysis of the capital markets and the agency theory has been an important area of research, as the principal and the agent have different motivations since conflict of interest between two parties arises. shleifer (2000) models investor sentiment where investor deficiencies are present and points kahneman and tversky studies of representativeness, conservatism and so forth. shefrin (2002) reports mispricing, due to overconfidence and anchoring on investor reactions to new information of asset prices. investor’s interaction with emotions changes their tolerance to risk. we do not observe many experimental studies for the measurement of variation of behavior of the manager and shareholder. this study is motivated by the shareholder and manager mechanism on experimental set-up simulating a real market environment, where the individual self-reported emotions are analyzed from the perspective of investors and managers. the capital market environment is replicated with one asset on a 10 round finite market, where manager declares dividend and investor bids for the asset. the price of the asset is calculated by beckerdegroot marschak method, where the price of the asset is calculated with a random number and compared to the price bid by the investor. the asset is only purchased by the investor, if his price is higher than the random number generated in the auction, otherwise the investor does not purchase any shares and receives no dividends of future periods. there is quite a few research in psychology investigating the emotions and decision-making, hence there is not a link of these studies to finance. my contribution is that the emotions and financial decisions are investigated from a different perspective with this experimental study. this study is motivated by the urge to establish and prove a link for the basic emotions where such a relation was poven for “happiness”. the results show that there is statistically significant positive link between a person’s happiness and his profitability in capital market environment. this study analyzes the emotional aspect especially the “happy mood” of surplus division among managers and investors in an experimental set-up. the emotional state with the conflict of interest and power structures’ is analyzed, to see the effect of different payout mechanisms on willingness to pay (wtp). the aim of the study is to establish a directional link between emotions and profitability in capital markets than having a full fledged model to explain profitability in numbers with emotions. prior research by camerer, loewenstein and prelec (2005) distinguish between controlled and automatic processes on human behavior. singer and fehr (2005) note that normal adults can menthalize and empathize as an important feature for self-interested decision to enable people to predict other’s decisions more accurately. mri scanner study showed some parts of brain were active when acivated empathizing pain of others. others’ intensions, beliefs and thoughts are based on emotions and it is important to predict others’ behavior to meet individual goals. the empathic people can predict others’ motives and actions. a finding by powell (1970) states that economic model can predict monkey behavior with belma ozturkkal ph.d p a g e | 22 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu 90% probability. humans tally probabilities, expected gain and cost of work to get reward of simple choice decisions. hence, there are shortcomings of human psychology and behavior. some examples are noted by charness and gneezy (2003) such as some behavioral deficiencies as ambiguity aversion to avoid unclear circumstances, illusion of control arises if involvement is present people’s confidence have in a favorable outcome, myopic loss aversion is loss aversion and tendency to evaluate outcomes frequently and overconfidence increases with task complexity and decreases with uncertainty. another finding on decision-making is by rustichini (2005) that ambiguity premium declines as subjects repeat their choices. people slowly adjust to ambiguity, however they do not adjust to risk. in the study, the interdisciplinary analysis of the investor shareholder relationship and their behavior mechanism under different emotions is demonstrated. my analysis continues with literature review and experimental design and methodology, followed by the results section and concludes. ii. literature review the decision-making process analyzed in depth by the psychologists is more of an interest for the finance field as well, since it is observed that some forms of emotion have effect on outcomes such as profitability and bidding prices. this was the case in real market environment, especially on panic and bubble formation cases such as in the year 2000 and 2008 in the us. easley, david and aldo rustichini (1998) suggest that that the individuals increase the actions where the payoff is high. hofbauer and schlag (2000) reports that the role of imitation in a population is highly important. individuals may have a set of preferences of actions and they update the probabilities according to outcomes and revise systematically even if they are not rational. (a form of rational behaviorism) the systematic procedures work if updating is not biased. a group of studies focuses on the functions of the brain and emotions. some other concentrate on the choices with certain emotions. cassidy (2006) notes that there are multiple systems under the brain and most of the time they compete with each other. he notes that the brain doesn’t like ambigious situations and people who are less fearful make better investors. adler (2004) states that researchers use fmri machines show how it works inside the brain and brain’s insular cortex is associated with negative emotions such as anger and disgust. monkey’s follow highest social ranking troop member similar to humans. engelmann, capra and noussair (2009) observes fmri scans change for participants on a choice and lottery without expert advice, where these brain areas are not active with the condition of expert financial advice. johnson and tversky (1983) found that good mood is associated with optimistic judgments and bad mood with pessimistic judgments and that people are influenced by affect induced and on an experiment who read sad articles on newspaper made pessimistic risk estimates on causes of death compared to people who read happy articles. capra (2004) reports that emotions play a role in determining choice. ther research results show that there is difference between good and bad mood choices. happier subjects are more strategic and more helpful and altruistic. the finding shows that positive affect enhances reasoning and arousal level of good mood people are higher and they are more confident and alert. bad mood people are more trustworthy than good mood people. capra, meer, lanier (2010) investigated the effect of moods on decisions and find that positive mood generates an upward bidding bias. they designed a survey with a quiz and then used mood induction to elicit different state of mood where people recalled a happy or sad event. they found that no major differences observed for negative and neutral a simulation set-up to observe the effects of the emotional factor on capital markets emerging markets journal | p a g e | 23 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu processes, however positive mood affected decision process. the subjects in positive mood over-bid the prices. they report that mood affects selfperceptions and judgment, where positive affect increases efficient reasoning and creativity and negative affect increases self-focus. they prove good mood releases dopamine, however created mood by unexpected occurrence may cause distortions. the finding of the study was that positive mood increases willingness to pay. there is also contradictary evidence that negative mood, sadness may increase willingness to pay. lerner, small and loewenstein (2004) report that anger evokes more optimistic risk estimates and risk-seeking choices and fear does the opposite. they find that negative moods supress value. they use 3 x 2 between subjects design (disgust-trainspotting, sadness-the champ, neutral-national geographic special) wher subjects endowed an object and watched a video clip for mood induction process for 4 minutes and after that they wrote a reponse and on ther second study they had to choose a sell or choice procedure. additionally, they were asked to report their feelings. the finding is that sadness decreased selling prices and increased choice prices, disgust reduced both prices. the research on emotions and financial decision-making process started by lo, repin (2002) where they studied ten professional traders and for the rational decision-making process and find emotional response, skin conductance and cardiovascular variables (heart rate, respiration rate, ..) when price or trend changes. lo, repin and steenbarger (2005) work with 80 day-traders on another study through surveys and find a negative correlation between emotional activity and successful trading. they didn’t find a certain skill set of characteristics which can identify the successful trader. they note that automatic responses such as fear and greed are more powerful than higher-level responses. it is shown that emotional reactions short-circuit complex decision making as well as affective states (sunshine, weather etc.) are related to market activity. witteloostujin and muehlfield (2008) analyze locus of control, maximizing tendency, regret disposition, self-monitoring, sensation seeking, and type a-b behavior. studies linked risk attitude to locus of control. high self-monitors achieve superior trading performance only on male subjects. trading frequency and performance is found to be negatively correlated. they tested six personality traits on 34 students: locus of control, maximizing tendency (maximizing as opposed to satisficing), regret disposition (the extent the individual is sensitive to regret), self-monitoring (observe and control self behavior), sensation seeking (willingness to take risks) and type a-b behavior. people with internal locus of control think they can influence their environment, people with external locus of control think they are passive and events are beyond their control. type a is aggressive and impatient, competitive and hostile. those who have not such behavioral patterns are called type b. they experiment on z-tree with multiple short-lived assets of lottery ticket and cash assset, in a double-auction market for 24 periods. sensation seeking and self-monitoring was positively correlated. gender was negatively correlated with locus of control. women trade less and trading experience reduces trading frequency. there is less frequent trading of people high in regret disposition and low in sensation seeking. type trait lowers trading frequency. selfmonitoring people marginally select themselves to market maker role. type a people showed lower level of arbitraging. loewenstein (1996) find anger may result from perceived insult, shame or embarrasment and is typically unpleasant and increases one’s taste for aggressive actions. they also find uncontrolled anger produces impulsive actions or immobilization. additionally, extreme fear produces panic and immobilization. loewenstein, belma ozturkkal ph.d p a g e | 24 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu weber and welch (2001) analyze anticipatory (immediate-fear, anxiety, etc.) and anticipated (future) reactions. it is shown that people in good mood are reluctant to gamble in order not to lose the good mood. van boven (2005) finds fear of embarrassment is an important determinant of social behavior and people underestimate the effect on their own preferences and decisions. emotional arousal, particularly fear and anxiety narrow attention. he examined illusion of courage and asked 174 undergraduates other people’s interest to dance and perform a mime. some of them were real performers other were hypothetical. they overestimated other people’s willingness. prediction of others are based on one’s own preferences and decisions and underestimation of the power of emotion is a fundamental error in social judgment. people systematically underestimate fear of embarrasment’s impact on other people’s preferences and decisions. anxious people interpret situations threatening. anxiety was positively correlated with risk aversion. raghunathan and pham (1999) found that anxiety increased preference for low risk and low reward options, where induced sadness resulted the opposite. keltner (2000) found that fearful individuals make relatively pessimistic risk assessments and riskaverse choices. iii. experimental design and methodology the study involved 74 student subjects from a major public university in the southern united states. no subject participated in multiple sessions. this study was run in 10 sessions. each session used one of three treatments explained in the appendix and the experiment lasted about 30 minutes including instruction time. each session also paired students together as manager and investor. each manager and each investor were initially given 500 experimental tokens (200 token=$1) and no shares. shares purchased throughout the experiment carried no value at the end of the experiment. the capital market environment is replicated with one asset, where manager declares dividend and investor bids for the asset. the price of the asset is calculated by beckerdegroot marschak method, where the price of the asset is calculated with a random number and compared to the price bid by the investor. the asset is only purchased by the investor, if his price is higher than the random number generated in the auction, otherwise the investor does not purchase any shares and receives no dividends of future periods. the manager and the investor were each compensated according to their final profit at the end of the experiment. shares purchased by the investor in each round continued to earn the applicable dividend of each successive round as decided by the manager. the z-tree program (fischbacher, 2007) was used as the user interface for the computerized experiments. subjects earned anywhere from $2 to $6 each for about 10-15 minutes of participation. sas program was used for econometric analysis and the target was to establish a directional link between emotions and profitability of investors and managers in capital markets than having a model to explain profitability in numbers. smith, van boening and wellford (2000) evidence that experienced investors are less likely to produce bubble formation compared to inexperienced investors and people are adaptive to changes in unchanging environment. hence, investors if unexperienced do not use backward induction and profit maximization methods. there were three treatments with 10 periods each. in treatment “dividend before,” the subject in the role of manager determined and announced the dividend before the investor had the opportunity to buy in each period. in treatment “dividend after,” a simulation set-up to observe the effects of the emotional factor on capital markets emerging markets journal | p a g e | 25 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu the subject in the role of manager determined and announced the dividend after the trade decision was completed by the investor in the period. in treatment “investor control” the investor decided on the dividend before making the trade decision. all other aspects were kept identical across treatments. the subjects are asked to fill the survey in the appendix in order to have information about their emotional status at the time of the experiment and their demographic characteristics. this information then was considered to find possible link with the profitability of the subjects in the experiment set-up. the summarized information of the emotion of the subjects is reported on table 1 and 2. the average age of the subjects is 23.8 ranging between 21 and 41 and 39.7% of the subjects are male. 16.2% of the subjects hold business or economics major or masters degree. the self-reported emotional status is inclined to be observed as “happy” in comparison to other emotions such as “sad”, “worried”, “excited”, “angry”. these emotions are sclaed on a 1-7 and the maximum level 1-2 or 6-7 are considered for the relevant answer. the table 1 reports self-reported emotional state of the subjects. table 2 reports the summarized self-reported characteristics of the subjects in consider themselves as optimistic, emotional, introverted etc. 50% of the subjects consider themselves as optimists on a 1-2 or 6-7 on a 1-7 choice level scale. the method for the analysis is ordinary least square regression where profitability of the subjects a dependent variable is regressed with emotional status and demographic characteristics of the subjects as the independent variables. the regression is first run on the whole sample and then seperately on the group of managers and a group of investors. the regression equation is: total profit = cj + ∑ coefficient ij * mood ij mood i = one mood factor selected from happy, sad, angry, fear, worry, confident, excited, selfcontrol table 2: characteristic information self reported variable optimist 50,5% one happy or sad occurrence in the last two days 53,7% emotional 10,7% introverted 8,9% loses temper easily 12,5% good to deal with uncertainty 44,6% risk-taker 32,1% bought stock before 34,5% table 1: self reported emotional state emotion happy 50,4% sad 7,1% angry 5,4% fearful 3,6% worried 8,9% confident 16,1% excited 16,1% self-controlled 28,6% belma ozturkkal ph.d p a g e | 26 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu iv. results the table 3 summarizes the descriptive statistics of the variables. the regression of gender as independent variable and graduation major are not significant for the sample profitability. the subjects defining themselves as emotional does not have any significant effect on profitability. the subjects who define themselves as risk-taker do not have any significant effect on profitability as well. previous stock purchase history, age are not significantly important on profitability.some of the regressions do not show high significance. this may be the outcome of the study or the sample may not be enough to analyze these variables. it may be interesting to repeat the study with another sample where the results may be investigated on a more diverse group with a larger sample. table 3: descriptive statistics variable n mean std dev minimum maximum age 40 23.7750000 3.3473104 21.0000000 41.0000000 happy 56 0.5000000 0.5045250 0 1.0000000 sad 56 0.0714286 0.2598701 0 1.0000000 angry 56 0.0535714 0.2272078 0 1.0000000 fear 56 0.0357143 0.1872563 0 1.0000000 worry 56 0.0892857 0.2877364 0 1.0000000 condid 56 0.1607143 0.3705910 0 1.0000000 exci 56 0.1607143 0.3705910 0 1.0000000 selfc 56 0.2857143 0.4558423 0 1.0000000 optimist 56 0.5000000 0.5045250 0 1.0000000 happysad 56 0.5357143 0.5032363 0 1.0000000 emo 56 0.1071429 0.3120939 0 1.0000000 intro 56 0.0892857 0.2877364 0 1.0000000 temper 56 0.1250000 0.3337119 0 1.0000000 goodunc 56 0.4464286 0.5016207 0 1.0000000 risk 56 0.3214286 0.4712514 0 1.0000000 totalprofit 68 556.4264706 156.1875371 0 1173.00 a simulation set-up to observe the effects of the emotional factor on capital markets emerging markets journal | p a g e | 27 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu table 4 shows the regression results that a subject’s self-reported happiness has a more significant positive effect on total profit compared to other emotions. furthermore, fear and feeling excited seem to have also a positive effect on the total profit of the subject. as the emotions are not expected to explain the profitability as a whole, the results should be interpreted as satisfactoryu since happiness and profitability have a statistically significan relationship compared to other emotions. the adjusted r2 is 28,4%. i also repeated the study with separate sample sub-groups for the investor and manager roles. the findings show that profitability of investors and managers are dependent on their emotional status. table 5 shows that the investor’s profitability seem to be positively effected by his happiness. the manager’s profitability is reported on table 6, where the happy and fearful managers seem to have statistically significant higher profitability compared to other emotions. the link between profitability and happiness seem to be supported here as well. the results seem to indicate also that the angry managers have lower profitability. the findings support previous findings of capra (2004), where happy mood people act more strategically on a previous study. it can be concluded that the emotion of being happy has a directional effect on the profitability of capital market players, although this cannot be modeled to describe profitability as a whole through the regression estimates. v. conclusion this analysis is to investigate the emotional aspect of the capital market decisions on profitability where shareholder and manager mechanism is replicated on experimental set-up. the investor and manager behavior is analyzed and the profitability of investors and managers seem to be found to be dependent on their emotional status. although there is some research investigating the link of emotions with investor’s willingness to pay, table 5: regression of investor's total profit on emotional state variable parameterstandard error t value p intercept 438,0 53,1 *** 8,3 0,0001 happy 127,2 53,4 ** 2,4 0,0283 sad -13,0 132,5 -0,1 0,9231 angry 35,4 181,2 0,2 0,8473 fear 81,0 132,5 0,6 0,5486 worry -16,5 77,5 -0,2 0,8334 confident 65,9 63,5 1,0 0,3133 excited 108,7 84,4 1,3 0,2141 self-control 40,6 57,7 0,7 0,4908 r-square 33,73% adj. r-square 4,27% f value 1,15 p value 0,3818 observations 27 table 6: regression of manager's total profit on emotional state variable parameterstandard error t value p intercept 489,0 58,3 *** 8,4 0,0001 happy 139,0 60,9 ** 2,3 0,0335 sad 82,0 105,1 0,8 0,447 angry -194,0 105,1 * -1,9 0,0798 fear 397,0 162,4 ** 2,5 0,0239 worry -72,0 85,0 -0,9 0,4067 confident -12,3 69,9 -0,2 0,8621 excited 32,5 57,2 0,6 0,5768 self-control 67,7 49,8 1,4 0,1896 r-square 62,58% adj. r-square 47,62% f value 4,18 p value 0,0045 observations 29 table 4: regression of total profit on emotional state variable parameter standard error t value p intercept 448,5 32,0 *** 14,0 0,0001 happy 145,8 33,5 *** 4,4 0,0001 sad 93,0 67,9 1,4 0,1777 angry -66,5 77,6 -0,9 0,3958 fear 184,8 84,4 ** 2,2 0,0335 worry -30,8 52,9 -0,6 0,5634 confident 44,3 39,5 1,1 0,2679 excited 80,3 43,2 * 1,9 0,0693 self-control 53,3 32,6 1,6 0,1084 r-square 38,90% adj. r-square 28,4 f value 3,7 p value 0,0019 observations 56 belma ozturkkal ph.d p a g e | 28 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu there is no research which can relate emotions to profitability. the interdisciplinary study of the emotions with financial decisions in behavioral finance is an area which is not investigated in depth by the academia. this study is motivated by the urge to establish and prove such a link for the emotions happiness, fearfullness, angriness and excitedness. the results show that there seems to be a statistically significant positive link between a person’s happiness and his profitability in the capital market area. although for the feeling of happiness, we can confirm that the finding is significant, the sample size may not be large enough to prove any further highly statistically significant feelings’ link to profitability. hence, there is some significance of a person’s fear and excitement on profitability again positively. the shortcoming of this study is that the capital market environmant was only replicated with one asset and the future research may establish a more close to real market replication. future research should also consider to have a more detailed analysis with real stock market investors with mood elicitation techniques as this will be the next step to search for a link with major emotions. the findings may help both investors and regulators to establish a more rational investment style for the investors by learning their deficiencies whereby they overcome their disabilities in decision-making process on the road to better governance of the market a simulation set-up to observe the effects of the emotional factor on capital markets emerging markets journal | p a g e | 29 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu vi. references 1. adler, jerry “mind reading-the new science of decision making. it’s not as rational as you think” newsweek, july 2004 2. capra, monica, shireen meer and kelli lanier “the effects of induced mood on bidding in random n-th price auctions” (march 2008) 3. capra, monica “mood-driven behavior in strategic interactions”, american economic review , 94(2), p&p may 2004, 387-372 4. camerer, colin, george loewenstein and drazen prelec “neuroeconomics:how neuroscience can inform economics”, journal of economic literature, vol. xviii (march 2005) pp.9 -64 5. cassidy, john “mind games” the new yorker september 2006 6. charness, gary and uri gneezy “portfolio choiceand risk attitudes:an experiment” (february 2003) jel 7. easley, david and aldo rustichini “choice without beliefs” (1998) 8. engelmann jb, capra cm, noussair c, berns gs, 2009 expert financial advice neurobiologically “offloads” financial decision-making under risk. plos one 4(3): e4957. 9. doi:10.1371/journal.pone.0004957fischbacher, urs “z-tree program”, https://www.uzh.ch/iew/ztree/ssldir/wiki/index.php?n=main.newinversion3, 2007 10. hofbauer, josef and schlag, karl h. “sophisticated imitation in cyclic games” journal of evolutionary economics volume 10, number 5, 523-543, 2000 11. johnson, eric and tversky, amos. “affect, generalization, and the perception of risk.” journal of personality and social psychology, july 1983, 45(1), pp. 20–31 12. lerner, jennifer s., small, deborah a., & loewenstein, george (2004) “heart strings and purse strings: carryover effects of emotions on economic decisions” psychological science, 15(5), 337-341 13. lo, andrew w., dimitry v. repin and brett n. steenbarger “fear and greed in financial markets: a clinical study of day-traders” cognitive neuroscientific foundations of economic behavior, vol. 95 no. 2 (may 2005) 14. lo, andrew w., dimitry v. repin “the psychophysiology of real-time financial risk processing” journal of cognitive neuroscience, vol. 14, no. 3 323-339, (2002) 15. loewenstein, george (1996) “out of control:visceral influences on behavior” organizational behavior and human decision processes, 65, 272-92. https://springerlink3.metapress.com/content/?author=josef+hofbauer https://springerlink3.metapress.com/content/?author=karl+h.+schlag https://springerlink3.metapress.com/content/0936-9937/ https://springerlink3.metapress.com/content/0936-9937/ https://springerlink3.metapress.com/content/0936-9937/10/5/ http://www.andrew.cmu.edu/user/gl20/georgeloewenstein/papers_files/pdf/heartstrings.pdf http://www.andrew.cmu.edu/user/gl20/georgeloewenstein/papers_files/pdf/heartstrings.pdf belma ozturkkal ph.d p a g e | 30 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu 16. loewenstein, george, weber, e., hsee, c. & welch, n. (2001) “risk as feelings” psychological bulletin 127, 267-286. 17. powell, kendall “economy of the mind” plos biology, volume 1 issue 3 18. raghunathan, rajagopal and pham, michel tuan “all negative moods are not equal: motivational influences of anxiety and sadness on decision making,” organizational behavior and human decision processes, 1999, 79 (1), 56–77. 19. rustichini, aldo “emotion and reason in making decisions” science, vol. 310, december 2005 20. singer, tania and fehr, ernst “the neuroeconomics of mind reading and empathy” the american economic review, vol. 95, no. 2, papers and proceedings of the one hundred seventeenth annual meeting of the american economic association, philadelphia, pa, january 7-9, 2005 (may, 2005), pp. 340345 21. shefrin, hersh “beyond greed and fear”, chapter 9, oxford university press, 2002 22. schleifer, “inefficient markets” chapter 1, 23. smith, vernon, mark van boening and charissa p. wellford “dividend timing and behavior in laboratory and asset markets”, economic theory 16, 567-583, (2000) 24. witteloostujin, arjen van and katrin muehlfield “trader personality and trading performance”, 2008 25. van boven, leaf, loewenstein, george, & dunning, david “the illusion of courage in social predictions: underestimating the impact of fear of embarrassment on other people” organizational behavior and human decision processes, volume 96, issue 2, march 2005, pages 130-141 http://www.sciencedirect.com/science/journal/07495978 http://www.sciencedirect.com/science/journal/07495978 http://www.sciencedirect.com/science?_ob=publicationurl&_tockey=%23toc%236978%232005%23999039997%23584962%23fla%23&_cdi=6978&_pubtype=j&view=c&_auth=y&_acct=c000053702&_version=1&_urlversion=0&_userid=10277503&md5=f67d607eeac350e3cb9d5704580a9b87 a simulation set-up to observe the effects of the emotional factor on capital markets emerging markets journal | p a g e | 31 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu vii. appendix treatment # subjects # rounds “dividend before.” dividend announced before trading 24 10 “dividend after.” dividend announced after trading 30 10 “investor control.” dividend decided by the investor 20 10 table vii. experiment design viii. survey please answer these questions. age: gender: major: 1. what do you estimate the level of the dow jones industrial average will be at closing on march 31, 2009? 2. how do you describe your current emotional state? (circle all that apply) a. happy b. sad c. angry d. fearful e. worried f. confident g. excited h. self-controlled 3. how do you rate yourself generally? 1 2 3 4 5 6 7 optimistic neither pessimistic belma ozturkkal ph.d p a g e | 32 | emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.6 | http://emaj.pitt.edu 4. did you have an experience, which made you either very happy or very sad in the last two days? a)yes b)no 4.1 which of the below statements describe you better? on a 1-7 scale, please select the choice, which applies more to you. 5. do you think that you make decisions logically or emotionally? 1 2 3 4 5 6 7 logical stable emotional 6. are you more extraverted (outgoing) or introverted (shy)? 1 2 3 4 5 6 7 extraverted stable introverted 7. are you a person, who loses his/her temper easily? 1 2 3 4 5 6 7 yes neither no 8. do you think that you make good decisions in situations of uncertainty? 1 2 3 4 5 6 7 yes neither no 9. are you generally a risk-taker or risk-avoider? 1 2 3 4 5 6 7 risk-taker neither risk-avoider 10.have you ever bought individual stocks? a)yes b)no emerging markets journal volume 1 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu how to group financial data with maximum homogeneity? mehmet baran marmara university e-mail: mehmet.baran@marmara.edu.tr sıtkı sönmezer – corresponding author beykent university e-mail: sitkisonmezer@beykent.edu.tr abstract grouping may be an obstacle itself or it may have to be improved to extract better information out of a data stream. finding trends and dividing a population into parts may be crucial for analyses. this paper offers a modified version of fisher method that may smoothen the cut point transitions and give out better results. proven methodology is given with a comparison with the original method. the method may be helpful in forming subgroups in financial data, possibly in technical analyses. keywords: grouping, fisher method, trends, cut points this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 3 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.36 | http://emaj.pitt.edu http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://emaj.pitt.edu/ how to group financial data with maximum homogeneity? emerging markets journal | p a g e | 13 volume 3 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.36 | http://emaj.pitt.edu how to group financial data with maximum homogeneity? mehmet baran, sıtkı sönmezer introduction it is often the case, when trying to extract information out of a financial time series data; researchers face the problem of dividing the financial data into homogenous parts. alternatively, when the researchers aim to determine trends within a data set, it may be essential to know how to decompose a sample into subsamples in which homogeneity is maximized. intuition or segmenting the data visually may be used for grouping the data, however; these methods lack the efficiency when compared with the statistical methods that are numerous in the literature. various disciplines have the problem of clustering a set of objects as there are different usages, applications and objective functions, thus, there are many variations of this clustering problem. maharaj and inder (1999) and duncan, gorr and szczypula (2001) have given methods of clustering time series data. therefore, numerous clustering algorithms from different fields of study are present in the literature however; the merits of these algorithms are dubious (gonzales 1985). the method developed in this study is a modification of the method suggested by fisher (1958) that tries to find a methodology for grouping and forming sub-samples. it has to be noted that fisher considered two related, but different problems; first one is introduced as the unrestricted problem and second as the restricted problem. this paper deals with the restricted problem part of the method, which arises in many cases in finance where certain conditions, on the basis of prior information, theory or for convenience, are imposed most of the time and offers a modified version that gives smaller error terms. the first part of the study provides literature survey regarding with the method used in finance related sectors. secondly, fisher method and how it is improved is presented in the second part and the final part is concluded with an example showing the improvement. literature review despite defining homogenous groups are studied vastly by statisticians and hydrologists, in this paper, only the articles that have utilized methods that determine homogeneous grouping with financial data are examined. however, one main method, fisher method, has to be mentioned as it has been used by many studies, including this one. the method introduced by fisher (1958) attempts to minimize the mse, takes the decrease n variance into consideration due to combining which decreases variance and ignores the increase in bias. a review of the algorithm is presented here below. huang and zhang have investigated structural changes in singapore’s private housing market and in particular the impact of government policies on housing price determination by utilizing fisher method to find “1) the specification of the number of changes in the model 2) the detection of the change point, or the boundaries of intervals over which each of the model pieces applies 3) the estimation of the model parameters within each subdomain.” (2012) how to group financial data with maximum homogeneity? emerging markets journal | p a g e | 14 volume 3 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.36 | http://emaj.pitt.edu kumar and patel (2010) have come up with a new method derived from fisher method which is based on the tradeoff between decreased variance and increased bias arising from combining. with this modified version, it is possible to determine when it is beneficial to combine or not. adams and lim also utilized the fisher method in forming sub groups for their data to minimize sum of squared deviations for growth polarity (2011). review of the classical fisher grouping algorithm in order to understand how fisher grouping algorithm works, consider that a time series consisting of n data points x(i), 1<=i<=n, is given. assume that this time series is divided into k contiguous and mutually exclusive segments: [ ] [ ] [ ] [ ] (1) where [ ]denotes all the integers between a and b, inclusive, and if r>s. let the mean for the j th segment [ ]be denoted by : ∑ ( ) (2) note that and . the mean squares (ms) error term for the jth segment, can be computed as: ∑ ( ( ) ) (3) and the ms error for the whole time series, e, is defined as the sum of the ms errors of all segments ∑ (4) after these preliminary definitions, fisher grouping problem can be defined as follows: determine the segment boundaries , , .... , in (1) in such a way that the ms error e defined in eq. (4) is minimized. the how to group financial data with maximum homogeneity? emerging markets journal | p a g e | 15 volume 3 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.36 | http://emaj.pitt.edu set of error minimizing segment boundaries ( )is called the fisher segmentation. fisher segmentation gives the most homogeneous possible division of any given time series into k segments. the segment boundaries represent the transition regions between neighboring segments. it is possible to solve the fisher grouping problem via exhaustive search only for small time series. the number of all possible k-segmentations for a time series of length n is ( ) ( ) (5) which grows exponentially with n. hence, exhaustive search is impractical for large n. fortunately, a dynamic programming approach is provided by fisher. this approach consists of three main steps which is listed herebelow: 1) calculate the error matrix e[i,j] [ ] ∑ ( ) (6) [ ] ∑ ( ( ) [ ]) (7) where m[i,j] denotes the mean of all points within [i+1,j], and e[i,j] denotes the variance of all points in the same interval. 2) compute the vector d[2,r] for all r, r<n as the cost of the optimum two-segment division of the interval [ ] [ ] ( [ ] [ ]) (8) 3) lastly, for m>2, compute [ ] ( [ ] [ ]) (9) how to group financial data with maximum homogeneity? emerging markets journal | p a g e | 16 volume 3 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.36 | http://emaj.pitt.edu note that d[m,r] denotes the optimal ls cost of the division of time series [1,r] into m segments. given the above algorithm, one can compute d[k,n] recursively, which is the quantity we are looking for. at the first step, one must calculate the matrix a[i,j]. then the vectors d[2,2], d[2,3], ...., d[2,n] must be computed. then using these values, one can compute d[3,3], d[3,4], ...., d[3,n] and so on. the algorithm will stop when it reaches d[k,n], which is the desired quantity. all steps of the algorithm has ( ) complexity, and there are k steps. hence, the overall complexity is ( ). problems of fisher grouping in segmenting financial data fisher grouping is perfect for time series where the data remains in near-constant regimes for long durations, and the transitions between these near constant regimes are relatively fast. this is one reason why fisher algorithm found particular favor with hydrologists: most of the lakes and rivers have near-constant depth for long periods of time, with very rapid change of depth during short intervals of time (ie, spring rains) between them. unfortunately, financial data does not fit into this pattern. "trends" in financial data are rarely defined by approximately constant levels. more frequently, trends are defined by approximately constant rates of growth or decay, and changes in the growth rate can be considered as changes in trend. therefore, fisher algorithm in its classical form (ie, equations (1)-(9) given above) is largely unsuitable for discovering trends in financial data, and boundaries between neighboring trends. below, a more developed version of fisher's algorithm will be proposed, in which the deficiencies mentioned will be addressed. fisher's original grouping algorithm is "zero order", as it approximates segments with constants, which are zero order curves. the proposed algorithm, in contrast, will approximate segments with first order curves, i.e. lines, which are ordinary least squares (ols) approximations of the data in the segment. we will call this newly proposed algorithm as the first order fisher grouping algorithm. first order fisher grouping algorithm the main difference between zeroth order and the proposed first order algorithms comes from a modification of eqs. (6)-(7), which calculates the segment error. in fisher's original article, this error is calculated around the segment mean , via eqns. (6)-(7). in contrast, we propose the following equations for segment error calculation: how to group financial data with maximum homogeneity? emerging markets journal | p a g e | 17 volume 3 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.36 | http://emaj.pitt.edu [ ] ∑ ( ) ∑ ∑ ( ) (10) [ ] ∑ ( ∑ ) (11) [ ] [ ] [ ] (12) [ ] ∑ ( ) [ ] ∑ (13) [ ] ∑ ( [ ] [ ] [ ]) (14) note that these are the well-known linear regression equations. after calculating the e[i,j] matrix, the rest of the first order algorithm is exactly the same with the zeroth order algorithm. namely: 1) calculate e[i,j] by using eqs. (10-14) 2) calculate d[2,r] for all 2<r<k by using eq. (8) 3) calculate d[m,r] by using eq. (9) till d[k,n] is found. how to group financial data with maximum homogeneity? emerging markets journal | p a g e | 18 volume 3 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.36 | http://emaj.pitt.edu as will be seen in the next section, even though only the first step of the segmentation algorithm is changed, the resulting segmentations are dramatically different application to financial data in the figures below, the green curve represents the time series for the closing price of fener ti equity for 3000 days, subsampled to 200 data points. blue curves represent the trends discovered by the classic zero-order fisher algorithm. the red curves represent the trends discovered by the first order fisher algorithm, which is proposed in this article. from the upper-left figure to the lower-right figure, progressively more trends are searched in the data. in the upper-left figure, data is divided into two trends. this is increased to seven trends in the lower right figure. it is clear from the figures that the two algorithms give markedly different segmentations on the same data set. as predicted above, classic fisher algorithm is particularly weak when the time series diplay a uniform rate of increase for long periods of time. this is obvious at the lower right figure where data is divided to seven trends. at the range [0, 110] there is clearly two trends in data, and first order algorithm clearly discovers them. zero order algorithm discovers five trends at the same range. this is the best the zeroorder algorithm can do, as it can only approximate uniformly increasing data by staircase-like constant segments. same phenomenon can be seen, in a less extreme form, in all the other plots. how to group financial data with maximum homogeneity? emerging markets journal | p a g e | 19 volume 3 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.36 | http://emaj.pitt.edu conclusion our results show that classic zero order fisher algorithm is not the ultimate solution for partitioning financial data into trends and there is room for improvement. first order fisher algorithm, which is proposed in this article, succeeds in increasing the accuracy of the classical algorithm considerably, while not adding to its computational complexity. it gives practically the same segmentations with the zero order algorithm when the data remains constant over long durations, but gives markedly better segmentations when the data increases at a constant rate. it is possible to extend the first order algorithm to second order to handle quadratic increases, or to impose a continuity condition between neighbouring segments. we plan to extend our research into these directions in forthcoming publications. references duncan, g., gorr, w. l., & szczypula, j., 2001, forecasting analogous time series. in j. s. armstrong (ed.), principles of forecasting: a handbook for researchers and practitioners, 195–213. dordrecht: kluwer. fisher w. d., 1958, on grouping for maximum homogeneity. journal of the american statistical association, 53, 789–798. huang w. & y. zhang, 2012, structural change modeling of singapore private housing price in simultaneous equation model, journal of financial risk management. vol.1, no.2, 7-14 kane j. a.and j. j. lim, 2011, global growth poles in a multipolar world economy kumar m, nitin r. patel, 2010, using clustering to improve sales forecasts in retail merchandising, annals of operations research, february, volume 174, issue 1, 33-46 maharaj, e. a., & inder, b. a.,1999, forecasting time series from clusters ,monash econometrics and business statistics working papers, monash university, department of econometrics and business statistics, 9/99. teofilo f. gonzales, 1985, clustering to minimize the maximum inter-cluster distance, theoretical computer science 38, 293-306 http://link.springer.com/search?facet-author=%22mahesh+kumar%22 http://link.springer.com/search?facet-author=%22nitin+r.+patel%22 http://link.springer.com/journal/10479 http://link.springer.com/journal/10479 http://link.springer.com/journal/10479/174/1/page/1 microsoft word 20-248-1-ce.doc volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.20 | http://emaj.pitt.edu re-thinking entrepreneurship, intrapreneurship, and innovation: a multi-concept perspecti̇ve mehmet çağrı gündoğdu istanbul university | e-mail: cagri.gundogdu@yahoo.com abstract this paper aims to show an understanding of the vague issues on the relations among the concepts of entrepreneurship, intrapreneurship and innovation. some of the greatest intellectual challenges of our time are emerging from the huge study of business management and organization. through these issues; creating and applying smart ideas that form the practice of business and management, namely entrepreneurial activities, have been noticeably stepping forward for more than three decades. an updated entrepreneurial view in business and management is crucial for reaching the aim of innovation; besides, as it’s mentioned above, this perspective deserves to be scrutinized deeply in order to obtain a full understanding of the key concepts of entrepreneurship, intrapreneurship, and innovation also to provide a lean conclusion, which is mainly based on the dual and multi-relations of the related terms. the approach taken in the literature, generally construes entrepreneurship as the main concept regarding entrepreneurial thought; intrapreneurship as its sub-concept; and considers innovation as redundant to include in some of the entrepreneurial definitions; though it’s not totally been ignored. however, the new economical framework has proven that a fresh insight is required from now on, in order to explain how to survive in this rapidly changing environment. from this perspective, the main questions of this paper are: keywords: entrepreneurship, intrapreneurship, innovation, innopreneur, innopreneurship this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.20 | http://emaj.pitt.edu re-thinking entrepreneurship, intrapreneurship, and innovation: a multi-concept perspective emerging markets journal | p a g e | 61 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.20 | http://emaj.pitt.edu re-thinking entrepreneurship, intrapreneurship, and innovation: a multi-concept perspective mehmet çağrı gündoğdu i. introduction   no managerial system or organization can properly be understood unless it is set in its fundamental and conceptual contexts. any explanation and understanding of what an entrepreneurial idea is, and what it has and has not achieved, must recognize this. there is not much doubt about the concepts of entrepreneurship, intrapreneurship and innovation in terms of being mutually inclusive. understanding each of these trending topics of business management and organization study in an integrative view; will certainly make valuable contributions to the existing accumulated knowledge in this discipline and also to the practitioners by highlighting the obscure issues throughout the related subject. acquiring the capability of explaining the core of the abovementioned key concepts; will provide the essentials to the actors of this career, which they will necessarily be using in the field. the emphasis on the collaboration of the academy and the business world in this context, takes place in the hub. stemming from the fact that the traditional definition of entrepreneur and intrapreneur has become insufficient in the new economy; it seems to be obligatory to broaden these concepts. the term new economy, as koçel mentions; implies the qualitative and quantitative changes in the structures and operations of enterprises which are the significant units of the economy, beginning from the mid-80’s [1]. the traditional entrepreneur shall now act as an innovation hunter to proactively be able to set up new smart businesses; ideally from the beginning, till the end of any business life cycle. in addition to this, she/he shall persistently continue in this attitude to jump-start innovation in her/his existing enterprise. in our time; finding the capital and taking the risk self-confidently are essential but not sufficient…as martha beck underlines; “any transition serious enough to alter your definition of self will require not just small adjustments in your way of living and thinking but a full-on metamorphosis [2].” inspirationally, it’s seen to be inadequate to stay as a traditional entrepreneur in order to survive on the change island. considering the incredible progress in information and communication technologies and the new globalized economic framework as a natural outcome; enterprises of our time are like the inhabitants of an island on which everything changes very rapidly. pursuing this metaphorical manner; sustainable competitive advantage is somewhere very deep below the ocean. in order to dig it up; some capabilities, more than entrepreneurship and intrapreneuship can achieve, are required. in this paper, a new concept called innopreneurship is introduced together with its performing actor, innopreneur. in addition to her/his existing characteristics of a traditional entrepreneur, an innopreneur also has the skills of an intrapreneur to successfully widen the business, besides; she/he is able to act as a vanguard in terms of openness to change, orientation to innovation, proactively scanning the environment, dynamic capability of manoeuvring with implications to adaptation, and having the vision of a transformational leader. moreover, prudence is certainly fundamental while conversional activities are being conducted. contemporarily, enterprises are getting smaller. this is the unavoidable result of the new economy in which, customer needs and expectations are complex and shift sharply. small and medium sized enterprises (smes), as mentioned in the global paradox, are the potential stars of this new economic model. the global re-thinking entrepreneurship, intrapreneurship, and innovation: a multi-concept perspective emerging markets journal | p a g e | 62 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.20 | http://emaj.pitt.edu paradox describes smes, as the strengthening small actors of the growing world economy [3]. smes shall take advantage of this new conjuncture stemming from the fact that they create much convenience for the customers by their ability to adapt more quickly to dynamic internal and external environmental changes. because of their nature, they are able to communicate more effectively with customers. thus, they can fulfill customer needs before their larger competitors in the market can. on the other hand; it’s significant for smes to adopt and implement proactive strategies, while being aware of the opportunities and threats inside and outside the market. instead of considering sustainable competitive advantage as a dedicational goal that should be obtained at the end of the day; it’s the innopreneurial mind-set which is primarily more critical and will naturally take us to sustainable competitive advantage in the long-run. the innopreneurial mind-set will be discussed later in the section 2.4 of this paper which is about innopreneuring. now, entrepreneurship in its traditional context will be examined first, and then, intrapreneurship will connectedly be forthcoming. ii. literature  review     education   entrepreneurship the idea of one’s doing her/his own business in simple context, has always been perceived as attractive not only by the academicians but also by the employees working in any job and no matter what level or where they’re working at. more clearly, many people are concerned with either being an entrepreneur or understanding who entrepreneurs are and what they do; in order to witness their charming but challenging world. the term entrepreneur, etymologically originates from the french word entreprendre meaning “to begin something, undertake.” during the mediaeval times, this word was being used to describe an active working person [4]. however, in the economic theory, it was richard cantillon (1759), -an irish economist of french descentfirst, who used the term entrepreneur. according to cantillon, the entrepreneur is a specialist in taking risk [5]. risk-taking is one of the famous attributes of entrepreneurs which is also frequently emphasized in the literature. spiritually, some people are observed to tend to behave extraordinarily. as jobs addresses; “you have to trust in something—your gut, destiny, life, karma, whatever—because believing that the dots will connect down the road will give you the confidence to follow your heart, even when it leads you off the well-known path, and that will make all the difference [6].” taking the risk phenomenon and the spiritual reflections into consideration; it can easily be summed up that entrepreneurship has something to do with inner-journey. another emphasis on entrepreneurship is its presentation as a mind-set. “entrepreneurship is first and foremost a mind-set. to seize an entrepreneurial opportunity, one needs to have a taste for independence and self-realization.” said olli rehn, a member of the european commission [7]. understanding the entrepreneurial mind-set requires a certain threshold of empathy. first of all, entrepreneurship is the story of ambiguity. an anonymous supporting quote is likely to highlight the gist of entrepreneurship. it’s as follows: “anyone, (can be an entrepreneur) who wants to experience the deep, dark canyons of uncertainty and ambiguity; and who wants to walk the breathtaking highlands of success. but i caution, do not plan to walk the latter, until you have experienced the former [8].” in this regard, as schumpeter also points out; entrepreneurs seem to have some heroic vision. schumpeter focused on high-level entrepreneurship, and larger businesses [9]. on the other hand, marshall examined smaller businesses, partially [10]. it was hayek and kirzner, who examined the entrepreneurs as middlemen hoping to profit by buying cheap and selling expensive [11]. this preference of discussing entrepreneurship inside smaller boundaries is closer re-thinking entrepreneurship, intrapreneurship, and innovation: a multi-concept perspective emerging markets journal | p a g e | 63 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.20 | http://emaj.pitt.edu to the intent of this paper which will be clarified in the upcoming sections. stopford and baden-fuller considered entrepreneurs as opportunists even in chaotic situations, and they also approached to entrepreneurship in a metaphorical way. according to them, entrepreneurs are like olympic athletes, long-distance runners, symphony orchestra conductors, and top-gun pilots…these metaphors underline the entrepreneurs’ being ambitious, determined, self-challenging and talent of synchronizing [12]. when it comes to define entrepreneurship; it can easily be discovered that various people have defined entrepreneurship differently. in spite of this fact, the most common classification follows the mainstream of collins and moore; who claimed two types of entrepreneurship, differentiating due to the context of entrepreneurial activities undertaken. these are, firstly, independent entrepreneurship and independent entrepreneurs (similar to entrepreneurship/traditional entrepreneurship and entrepreneurs/traditional entrepreneurs in this paper), implying the process whereby an individual or a group of individuals, acting independently of any association with an existing organization, create a new organization [13]. secondly, corporate entrepreneurship and administrative entrepreneurs (similar to intrapreneurship and intrapreneurs in this paper), implying the process whereby an individual or a group of individuals, in association with an existing organization, create a new organization or instigate renewal or innovation within that organization [14]. a brief definition of an entrepreneur, inspired by kuratko, can be made as the following: an entrepreneur is an undertaker who notices and seizes opportunities; converts those opportunities into commercial ideas; adds value via processes, effort, capital, or capabilities; and confronts the risks of the competitive market to apply those ideas; and what an entrepreneur accomplishes, is therefore called entrepreneurship [15]. now, entrepreneurial activities within an existing organization, namely intrapreneurship will be discussed. intrapreneurship the study of intrapreneurship, implying entrepreneurial activities conducted within existing organizations, has expanded over the last three decades [16]. most research in this field, has focused on the possibility; that managers and individual employees could be inspired to behave entrepreneurially; create innovations, and obtain profit and growth through these innovations [17], [18], [19], [20], [21]. this is about a powerful foresight that managers and their organizations can form an ambience that fosters to create and manage new businesses within existing organizational framework [22], [23], [24]. scholars have shown the tendency to divide entrepreneurship into two sub-titles according to its operating context. on one hand, it’s common to use entrepreneurship or independent entrepreneurship to describe entrepreneurial efforts of individuals operating outside the context of an existing organization. on the other hand, different terms can be seen in the literature implying the entrepreneurial efforts within an existing organization such as corporate entrepreneurship as burgelman and zahra used respectively in their separate studies; corporate venturing which biggadike mentioned ; pinchot’s intrapreneuring ; internal corporate entrepreneurship of jones and butler; schollhammer and vesper’s internal entrepreneurship; guth and ginsberg’s strategic renewal and venturing of hornsby, naffziger, kuratko, and montagno [25], [26], [27], [28], [29], [30], [31], [32]. here, only intrapreneurship is being used for common purpose, referring more likely pinchot’s view of defining intrapreneurs as the “dreamers who do”; those who take hands-on responsibility for creating innovation of any kind within an existing organization [33]. innovation is the next topic to be examined. innovation innovation, has emerged as a headline in the field of business management, recently. kuratko determines the magic words to describe the new re-thinking entrepreneurship, intrapreneurship, and innovation: a multi-concept perspective emerging markets journal | p a g e | 64 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.20 | http://emaj.pitt.edu innovation way of our time: dream, create, explore, invent, pioneer, and imagine [34]. innovation itself is undergoing change [35]. the etymological roots of innovation stretch to the latin word innovare, meaning to do something new [36]. most of the innovation definitions, have focused on similar points with different perspectives. the key common points imply change and renewal for a better situation. the organization for economic cooperation and development (oecd), inside the oslo manual— the source of information regarding international technological developments— defines innovation by linking it to technological change. according to oecd, innovation means “completing products and services by developing them technologically [37]. the european union (eu) has made a broader definition. to eu, innovation introduces the change in workforce talent, working conditions, managerial and organizational jobs. also, it’s about renewal and growth in product and service range [38]. in addition to this, a well-known expression about innovation; characterizes it as the process of converting new ideas into value-creating outputs such as new products, methods or services. by the help of innovation; companies acquire the ability to develop and apply not only new products, processes or designs but also new operation and business models [39]. after having experienced enormous financial crises all over the world in recent years; company survival has emerged as the most crucial issue both for smes and even some of large companies [40]. as mentioned in the introductory part of this paper, smes, as the increasing value of the new economy, are obligatorily undertaken the mission of being innovative. it’s innovative smes which will lead the way to economic recovery. now, the innopreneurial thought will be scrutinized in the light of entrepreneurship, intrapreneurship and innovation. a prototype emerging from the new economy: the innopreneur— beyond the optimum synthesis of entrepreneur, intrapreneur and innovation it has been long, having dispelled the myth that “the entrepreneurs are born, not made.” drucker confirms this opinion regarding entrepreneurial thought: “most of what you hear about entrepreneurship, is all wrong. it’s not magic; it’s not mysterious; and it has nothing to do with genes. it’s a discipline and, like any discipline, it can be learned [41].” likely, innopreneurship, can be learned via education, training programmes, strategy formulation and a well-comprehended strategic management view. undoubtfully, a certain level of enterprising talent is underlying. it’s not a desired outcome to be thought that the traditional entrepreneurs will totally be eliminated because of the new emerging character, innopreneur. but, it’s true for traditional entrepreneurs, who take the risk and invest the capital in a self-confident manner, that they should remedy themselves by making the necessary adjustments; to become an innopreneur. like the organizations being exposed to entropy; traditional entrepreneurs are facing the danger of being pushed to the outside of the system. the concept of entropy implies the tendency which exists in every system; toward the exhaustion of energy, losing the balance, disorder, and finally leading to demise of the system [42]. besides; negative entropy, which is possible in open systems (biological and social systems which interact with the environment), means preventing the negative effects of entropy with the help of knowledge, energy and materials taken from the environment [42]. in biological systems, entropy may cause death; and in social systems like enterprises, it may cause all the operations to stop, ultimately [42]. in order to make it reverse, and maintain sustainable competitive advantage; traditional entrepreneurs should transform themselves into innopreneurs. re-thinking entrepreneurship, intrapreneurship, and innovation: a multi-concept perspective emerging markets journal | p a g e | 65 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.20 | http://emaj.pitt.edu the increasing significance of smes as the main constituents of the new economy, was emphasized in the beginning of this paper. innopreneurs; as the steering leaders of smes in this new economic framework, while protecting the traditional values and traits of entrepreneurs; will have to reach beyond. innopreneurs should constantly enter into positive change and make efforts for innovation. they should continuously update and develop themselves also intra-business, maintaining the aspects of being an intrapreneur. entrepreneurial factors like capital, self-confidence, motivation for the start-up, commitment to business, optimism, managerial skills, leadership characteristics are certainly also valid for innopreneurship. it would be acting unjustly to traditional entrepreneurs by saying that the above-mentioned attributes are unimportant. indeed, entrepreneurship is at the core. it’s a strong pillar of the business and management discipline, on top of which, innopreneurship is builded. innopreneurs can be made. entrepreneurs can learn to become innopreneurs with the help of education and training. an innopreneur has the ability of leading to innovation. so, she/he has the characteristics of an innovative leader in this regard. she/he is also an effective manager to accomplish the business. it’s not an absolute necessity for an innopreneur, to apply hands-on-management in every step of the business. whatever the case is; the innopreneur’s leading role stays constant. it’s noteworthy; that every innopreneur is also an entrepreneur but not every entrepreneur can be classified as an innopreneur. our goal is, achieving the utopia of transforming every entrepreneur into innopreneurs. every innopreneur is an innovation-oriented entrepreneur. every innopreneur, has powerful attempts toward innovative new ventures. not every entrepreneur makes innovation but every innopreneur does. in this sense, the intrapreneur resembles the innopreneur in terms of innovation-orientation. in spite of this, the intrapreneur differs from the innopreneur in performing environment of innovation. the scope of intrapreneurship is constricted to the existing organizational area. on the other hand, the innopreneur, is not subject to such criteria. the innopreneur performs at a new stage, which is called the new economy. the innopreneur, is a prototype, self-developed to meet the needs of the new economy. the innopreneur is the new evolutionary model, the cumulative advanced type that emerged from this environment. in addition, she/he is the leader who forms the suitable environment; in which the intrapreneurs are empowered, and their ideas and attempts to make innovation are strongly encouraged. while serving as a catalyst, the innopreneur may also take active role in these efforts. innopreneurship, for now, is a concept dealing with the ideal rather than what exists. it harmonizes its predecessors entrepreneurship, intrapreneurship and the popular concept of innovation through an integrative perspective and fulfills the unique requirements of the new economy. the innopreneur undertakes to manage, and take the risks of a business model. in our time, an innopreneur is interested in research and development and characterized as an innovation hunter who agressively seeks for opportunities; transforms those opportunities into concrete marketable ideas; creates value-added; makes maximum efforts, assesses and undertakes the relevant risks to apply those ideas; and gathers the crops at harvest time. iii. conclusion   the catastrophic advance in the information and communication technologies in the last few decades and the new globalized world economy as a result, caused the enterprises compulsorily get much closer to the customers, respond more quickly to their needs, and dynamically adapt to internal and external environmental circumstances. in such a new order, smes, have emerged as the significant actors of the economy. they’re the strengthened small actors of re-thinking entrepreneurship, intrapreneurship, and innovation: a multi-concept perspective emerging markets journal | p a g e | 66 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.20 | http://emaj.pitt.edu growing world economy as mentioned in the global paradox. consequently, in this high-competition environment, management of the smes, is appraised as a top-agenda subject. most of the smes are family businesses and the most important handicap of the family businesses is their inadequancy in qualified human resources. despite smes’ turning to be the shining stars of the new economy; they are not likely to succeed in this challenging arena with the available traditional entrepreneurs they have, most of whom are lessqualified family members. the solution they need is probably hidden inside the concept of innopreneurship. they need innopreneurs who show talent in adapting to dynamically changing conditions of the environment; responding to evolutionary expectations of customers even simultaneously, getting an inkling of innovation and marketing it in the first place. moreover, maintaining this position is also crucial for the sake of innopreneurship. sustainable competitive advantage has emerged to be able to be obtained only by this new type of innovation hunters demonstrating powerful innopreneurial attitude. in other words, the enterprises of our time are gradually downsizing. on the opposite, this fact brings the necessity of an increase in the abilities of the enterprising people who will enter into smart businesses, and drag them with intra-organizational activities. in attribution to the global paradox once again; strengthening small actors (smes)’ commanders’ attributes should be updated and converted into that of innopreneurs’. taking the famous saying “either change or die [43]!” into consideration; like the organizations which manage to reverse the danger of entropy to negative entropy; existing traditional entrepreneurs also should turn out as innopreneurs not to face the danger of being isolated outside the system. up to now; capital, risk-taking, and selfconfidence have been the dominant characteristics of a business starter, called an entrepreneur. however, today, these attributes help maintaining an enterprise only for a certain period of time which is not very long. yes, it has been known that owning the ship has never made the owner, the captain. but things have changed; and this mission is attributed to the great innopreneur. as a concluding remark, only owning the ship doesn’t make traditional entrepreneur the captain. the aim of this paper is to point out the obligation of traditional entrepreneurs; to evolve and become the captains, who are capable of floating their ship on the new economical ocean. who knows what the tide could bring for the innopreneurs of the change island [44]? re-thinking entrepreneurship, intrapreneurship, and innovation: a multi-concept perspective emerging markets journal | p a g e | 67 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.20 | http://emaj.pitt.edu iv. references   1. koçel, t., (2007), i̇şletme yöneticiliği, 11.bası, arıkan basım yayın, istanbul. 2. beck, m., (2004), o magazine, growing wings, january. 3. koçel, t., (2007), i̇şletme yöneticiliği, 11.bası, arıkan basım yayın, istanbul. 4. tüsi̇ad, (2002), türkiye’de girişimcilik, i̇stanbul: tüsi̇ad yayını. 5. cantillon, r., (1755), essai sur la nature du commerce en generale (ed.henry higgs, 1931), london: macmillan. 6. jobs, s.p., (2005), american businessman and inventor, stanford commencement speech, usa. 7. lundström, a. and stevenson, l.a., (2010), entrepreneurship policy, theory and practice, springer, usa. 8. timmons j. a., and spinelli s., (2007), new venture creation, seventh edition. new york: mcgrawhill/irwin. 9. schumpeter, j.a., (1934), the theory of economic development (trans. redvers opie), cambridge, ma: harvard university press. 10. marshall, a., (1919), industry and trade, london: macmillan. 11. hayek, friedrich a. von, (1937), economics and knowledge, economica (new ser.). kirzner, israel m., (1973), competition and entrepreneurship, chicago: university of chicago press. 12. stopford, j.m. and baden-fuller, c.w.f., (1994), creating corporate entrepreneurship, strategic management journal, 15(7), 521-536. 13. collins, o. and moore, d.g., (1970), the organization makers, new york appleton. 14. collins, o. and moore, d.g., (1970), the organization makers, new york appleton. 15. kuratko, d.f., (2009), introduction to entrepreneurship, eigth edition, south-western cengage learning, canada. 16. sathe,v., (2003), corporate entrepreneurship: top managers and new business creation, cambridge, uk: cambridge university press. 17. block, z.and macmillan, i.c., (1993), corporate venturing: creating new businesses within the firm, boston, ma: harvard business school press. 18. bowman, c., (1999), “why we need entrepreneurs, not managers?”, general management review, 1(1), 15-23. 19. brazeal, d.v., (1993), “organizing for internally developed corporate ventures”, journal of business venturing, 8(1), 75-90. re-thinking entrepreneurship, intrapreneurship, and innovation: a multi-concept perspective emerging markets journal | p a g e | 68 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.20 | http://emaj.pitt.edu 20. morris, m.h., (1998), entrepreneurial intensity, westport, ct: quorum books. 21. sathe, v., (2003), corporate entrepreneurship: top managers and new business creation, cambridge, uk: cambridge university press. 22. morris, m.h., (1998), entrepreneurial intensity, westport, ct: quorum books. 23. munk, n. (1998), “the new organization man”, fortune, 16 march, 68-72. 24. pinchot, g. iii., (1985), intrapreneuring, harper & row, new york. 25. burgelman, r.a., (1983), corporate entrepreneurship and strategic management insights from a process study management science, 29, 1349-1364. 26. zahra, s.a., (1993), a conceptual model of entrepreneurship as firm behavior, a critique and extension, entrepreneurship theory and practice, 17(4), 5-21. 27. biggadike, r., (1979), the risky business of diversification, harvard business review, 57(3), 103-111. 28. pinchot, g. iii., (1985), intrapreneuring, harper & row, new york. 29. jones, g.r., and butler, j.e., (1992), managing internal corporate intrapreneurship: an agency theory perspective, journal of management, 18, 733-749. 30. schollhammer, h., (1982), internal corporate entepreneurship, in kent, c.a., sexton, d.l., and vesper, k.h.(eds.), encylopedia of entrepreneurship, pp.209-229, englewood cliffs, nj, prentice hall. 31. guth, w.d., and ginsberg, a., (1990), guest editors’ introduction, corporate entrepreneurship, strategic management journal, 11(summer), 5-15. 32. hornsby, j.s., naffziger, d.w., kuratko, d.f., and montagno, r.v., (1993), an integrative model of the corporate entrepreneurship process, entrepreneurship theory and practice, 17(2), 29-37. 33. pinchot, g. iii., (1985), intrapreneuring, harper & row, new york. 34. kuratko, d.f., (2009), introduction to entrepreneurship, eigth edition, south-western cengage learning, canada. 35. nicol, t., (2010), the innovation handbook, how to profit from your ideas, intellectual property, and market knowledge, second edition, kogan page, great britain and the united states 36. clapham, m.m., (2003), “the development of innovative ideas through creativity training”, international handbook on innovation, ed.larisa v. shavinina, london: pergamon. 37. oecd and european commission, (1997), proposed guidelines for collecting and interpreting technological innovation data: the oslo manual, paris: oecd. 38. european commission, (1995), green paper on innovation, com (1995) 688, brussels: european commission. re-thinking entrepreneurship, intrapreneurship, and innovation: a multi-concept perspective emerging markets journal | p a g e | 69 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.20 | http://emaj.pitt.edu 39. webb, r., (2010), the innovation handbook, how to profit from your ideas, intellectual property, and market knowledge, second edition, kogan page, great britain and the united states. 40. webb, r., (2010), the innovation handbook, how to profit from your ideas, intellectual property, and market knowledge, second edition, kogan page, great britain and the united states. 41. drucker, p., (1985), innovations and entrpreneurship. new york harper & row 42. koçel, t., (2007), i̇şletme yöneticiliği, 11.bası, arıkan basım yayın, istanbul. 43. beer, m. and nohria, n., (2000), “cracking the code of change.”, harvard business review, 78(3), pp.133141. 44. hanks, t. as noland, c., (2000), cast away, a drama film directed by zemeckis, r. , and starring hanks, t., twentieth century fox international dreamworks, usa.                                                 emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry lingling wang southern new hampshire university | e-mail: lingling.wang@snhu.edu bo fan southern new hampshire university | e-mail: bo.fan@snhu.edu dr. c. bulent aybar southern new hampshire university | e-mail: c.aybar@snhu.edu dr. aysun ficici southern new hampshire university | e-mail: aficici@msn.com abstract china’s automotive industry has developed dramatically in recent years as more and more major multinational corporations (mncs) in this industry began to invest in china. most of these investments have developed in the form of joint-ventures with chinese state owned enterprises (soes). this paper contributes to the current literature by studying the effect of foreign direct investment (fdi) on the productivity of the automotive industry in china using panel data during the 1999 –2008 period. channels through which fdi may directly and indirectly affect the productivity are investigated using pooled ordinary least squares model (pols) and fixed effects model (fes) to estimate the influence of fdi on productivity in the automotive industry. the results suggest that fdi plays a negative role in this industry and suggests that there is a need for chinese government to modify its policies and practices in order to improve the productivity of such a key industry in the chinese economy. keywords: fdi, automotive industry, productivity spillovers, china, emerging markets new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu | http://emaj.pitt.edu mailto:lingling.wang@snhu.edu mailto:bo.fan@snhu.edu mailto:c.aybar@snhu.edu mailto:aficici@msn.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 69 changing dynamics of foreign direct investment in china’s automotive industry lingling wang bo fan dr. c. bulent aybar dr. aysun ficici i. introduction automobile industry has been the main driver of the intensification of technological changes in the 19 th century (womack, jones, and roos, 1990). more importantly, however, in recent years, automobile industry has been one of the most important heritors of foreign direct investment (fdi), especially in emerging markets. the importance of automotive industry is very well accepted in the field of international business as it contributes to the economic development of any region where it is established. this is mostly due the fact that when established it creates millions of direct and indirect manufacturing employment, and hence generates growth of related upstream and downstream industries. in the united states, for example, the automotive industry and its related industries comprise 10 % of the gdp (maxton and wormald, 2004). in the developing countries, a burgeoning domestic auto industry is a key contributing factor of the industrialization process. this is especially true in the case of china. however, industrial development is not a new phenomenon in china. the chinese auto industry developed rapidly after economic reform and a policy of openness to business were implemented with the open door policy since 1978. lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 70 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu yet, despite the economic reforms and increased openness, a large quantity of automobiles was still imported to satisfy the domestic market demand. in the beginning, fdi entered into china through joint ventures and the first joint venture in china’s automotive industry was established between the shanghai auto factory and the german volkswagen in 1985. since then, several multinational corporations (mncs) have invested in the chinese automotive industry. joint venture operations continued in the 1990s and major automotive industry mncs cooperated with their chinese partners to establish joint-ventures. after china’s admittance into the world trade organization (wto) in december 2001, the domestic auto production increased dramatically. in 2009, china produced more than 13 million vehicles, which was equivalent to 18 % of the total world production, and thus became the largest automotive producer surpassing the us and japan (chang, 2010). according to previous literature, fdi plays an important role in the development of china’s automotive industry. in theory, fdi promotes the host country’s industrial productivity through the following: 1) the development of new products and processes; 2) the demonstration imitation effect; and 3) the linkages effect and the worker training effect (romer, 1990; grossman and helpman, 1991; markusen and venables, 1999). however, previous literature have also suggested that at times the industrial productivity in a host country may not benefit from fdi because of technology diffusion restrictions imposed by mncs, particularly those with affiliations in the host countries that decrease the linkage effects or keep the volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 71 skills and the know-how secret (teece, 1977; das, 1987; caves, 1996). to better understand the contradictory results that previous literature offers and the relationship between fdi and productivity of the chinese automotive industry, empirical analysis is required. hence, the purpose of our empirical investigation is to estimate the effects of fdi on the productivity of the chinese automotive industry during the period of 1999–2008. specifically, we examine the channels through which fdi may affect the productivity of the auto industry and whether the interaction between fdi and human capital can influence the fdi–productivity link. the paper is organized as follows: in section ii, a literature review is presented. in section iii, the model, data and methodology are described. in section iv, the results are discussed and in section v, the conclusion, the limitations of the present research as well as recommendations for further research are presented. ii. ii. literature review according to the surveyed literature of theories on the fdi– productivity links, there are five interrelated modes through which fdi may impact a host country’s productivity directly and indirectly (caves, 1996; markusen and venables, 1999). the direct effect of fdi is defined as the impact on the productivity of firms that results from receiving fdi. the introduction of capital, new products, ideas and practices, new management skills lead to direct transfers of technology. the establishment of r&d centers is also considered a direct effect of fdi. lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 72 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu the indirect effect of fdi, however, is the influence that a mnc’s presence has on the productivity of local firms in the form of spillovers from foreign firms to local ones. in other words, what mncs attempt to keep as proprietary knowledge and technology, will eventually result in indirect transfers of technology (blomström and persson, 1994). for example, backward and forward linkages, training effects, demonstration-imitation effects and competition effects are observed in those spillovers. direct effects of fdi new ideas, products and procedures: here, new technologies can be introduced with the presence of fdi in the form of new ideas, products and procedures. new skills to operate the technologies are introduced and developed by fdi (das, 1987; grossman and helpman, 1991). furthermore, a host country’s stock of ideas can be augmented by those new ideas brought by mncs, thus innovation is stimulated. r&d centers: although most of the r&d centers are located in the mncs’ headquarters to avoid technology diffusion and keep their competitive advantage, mncs are increasing their r&d expenditures overseas and establishing r&d centers in host countries (braconier, ekholm and midelfart-knarvik, 2001;unctad, 2005). the capacity of generating knowledge in the host country is improved by participating in the r&d activities of mncs. indirect effects of fdi backward and forward linkages: a backward linkage is the linkage between mncs and suppliers, while a forward linkage occurs between volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 73 the mncs and their customers and the companies that buy their products (rodriguez-clare, 1996). backward linkages may help local suppliers promote their productivity by providing technical and information assistance (belderbos, capannelli and fukao, 2001; javorcik, 2004). in forward linkages local distributors and downstream firms can benefit from the mnc’s knowledge to access higher-quality and/or lowerpriced products. demonstration-imitation effect: due to technological differences between foreign and local firms, advanced technologies are introduced by foreign companies to the local industry. local companies improve their productivity by watching and imitating the way foreign companies operate. through learning by watching, local firms who are competitors of mncs improve their production processes through the disclosure of foreign advanced technology (blomström, kokko and zejan, 1994). training effect: mncs train their foreign partners, foreign buyers or suppliers, and local companies to maintain their competitiveness. employees who are employed by foreign companies may diffuse knowledge, skills, and management practices learned to local companies through labor turnover or if they run their own businesses (fosfuri and saggi, 2002). competition effect: because of the increased competition in the domestic market with the presence of mncs, local firms are obligated to operate competently to avoid losing their market position (bertschek 1995). generally, this kind of spillover takes place at the intra-industry level. in other lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 74 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu words, companies in the same industry can be affected by competition imposed by mncs with advanced technology. although fdi has the potential to improve productivity in the host country, the benefits are not guaranteed and are not independent of the conditions of each host country. the particular characteristics of the host country will determine the extent of those benefits. specifically, an absorptive capability is required to cope with the new technology (girma, 2003; crespo and fontoura, 2007). sometimes, technologies mncs bring to a host country are inappropriate for local companies and industries. therefore, local companies are not able to improve their market position. in order to benefit from technology transfer, domestic firms and industries need to make certain investments. spillover mainly depends on the absorptive capability of local firms to become equal to the more developed foreign firms (teece, 1977). when the technological gap between mncs and local companies is significant, spillovers may not occur constructively. at times, inward fdi can even worsen the host country’s productivity. the technology transferred from the mncs may have little influence on the host country’s technological development and may even slow down the local productivity by restraining the local entrepreneurship since mncs tend to dominate the local markets. there is also the possibility that the competition effect may have a negative impact on the local economy when local companies are not efficient enough to compete with foreign ones. furthermore, local companies may become even less competitive and are eventually pushed out of business by foreign ones volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 75 (cantwell 1995). likewise, with fdi presence, the local productivity can decrease as the goal of those mncs is to gain local market-share, by attracting demand from local competitors, which eventually decreases the local productivity (aitken and harrison, 1999). in addition, mncs may tend to keep advanced technology and not transfer it to the host country in order to hold their monopoly status in technology (ram and zhang, 2002). finally, foreign companies may draw the best workers from the local labor pool, leaving local companies with workers that are less skilled and less productive. iii. model, data and methodology we employ the widely adopted cobb-douglas production function model to test the relationship and the link between productivity and fdi. since changes in technology add value (romer, 1990; grossman and helpman, 1991; barro and sala-i-martin, 1995) to production, by incorporating technical factors associated with fdi and domestic factors into the original cobbdouglas production function, we incorporate the following form of the equation: y = f(l, k, h, r, f, s, g, e) (1) where: y (productivity) is taken as the current value-added in each subsectors of china's automotive industry. l (input of labor) is measured by the total number of employees in each sub-sector. k (domestic capital stock) is defined by the current value of total domestic capital formation in each subsector. this suggested definition is in line with previous research, which lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 76 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu assumes that fdi leads to increases on the domestic stock of capital and production capacity (according to egger and pfaffermayr, 2001). h (human capital) is measured by the ratio of the number of technical staff to the annual average number of employees in each industry sub-sector. human capital demonstrates the level of skill or education of employees. r (domestic technological efforts) is taken as the ratio of r&d expenditure by the total output in each sub-sector. innovation stands for new ideas, methods and products that are introduced into production process or into the market, representing the technological capability of domestic economy. f (direct effects from fdi) is measured by the current value of fdi stock in each sub-sector. since fdi transfers capital, technology and management skills to their affiliates in host country, the greater value the foreign investment inflows will lead to the higher productivity. s (spillovers of fdi) is proxied by the ratio of output by foreign-invested enterprises in the sub-sectors of china's automotive industry to each sub-sector’s total output. g (absorptive capacity) is measured by the product of each subsector’s human capital and fdi stock (h * f), which shows the ability of domestic firms to catch up with the technical knowledge of foreign firms and complementarities between domestic technological capacity and fdi. e (firm size) is measured by the ratio of the total value of industrial output in each sub-sector to the number of firms in each sub-sector. firm size stands for the economies of scale since it volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 77 is an important factor that affects the productivity in the automotive industry. based on the adopted production function, the following hypotheses are postulated: h1: the number of employees (l) has a positive impact on each subsector’s productivity in china’s automotive industry. h2: value of domestic capital (k) has a positive impact on each subsector’s productivity in china’s automotive industry. h3: the ratio of the number of technical staff to the annual average number of employees (h) has a positive impact on each sub-sector’s productivity in china’s automotive industry. h4: the ratio of r&d expenditure to total output (r) has a positive impact on each sub-sector’s productivity in china’s automotive industry. h5: the value of fdi stock (f) has a positive impact on each subsector’s productivity in china’s automotive industry. h6: the ratio of output by foreign-invested enterprises to total output (s) has a positive impact on each sub-sector’s productivity in china’s automotive industry. h7: the product of human capital and fdi (g) has a positive impact on each sub-sector’s productivity in china’s automotive industry. h8: the ratio of the value of industrial output to the number of firms (e) has a positive impact on each subsector’s productivity in china’s automotive industry. it is expected that all of the individual independent variables has a positive impact on the productivity of the chinese automotive industry. hence, lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 78 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu a panel data set of each sub-sector in the industry is employed to test the model. the time period studied captures the period from 1999 to 2008. all the data were obtained from the chinese automotive industry yearbook 20002009, in which the industry is divided into five sub-sectors: automanufacturing, auto-assembling, motormanufacturing, vehicle-engines, and vehicle-parts. consequently, a logarithmic model is employed to measure the elasticity of the impact of the independent variables on the dependent variable as described by the equation below: ln(yit) = αi+β1ln(lit) + β2ln(kit) + β3ln(hit) + β4ln(rit) + β5 ln(fit) + β6ln(sit) + β7ln(git) + β8ln(eit) + ϵit (2) where i and t denote the subsectors of the industry and time, respectively; α is the intercept and ϵ is the stochastic error term. the coefficients β1, β2, β3, β4, β5, β6, β7 and β8 show the percent change in ln(y) related with percent change in variables l, k, h, r, f, s, g and e respectively. three statistical models are usually applied to estimate panel data sets: a pooled ordinary least squares model (pols), a fixed effects model (fes), and a random effects model (res). the main differences among these models are the assumptions, which are related to the intercepts and the error terms. both the pols model and the fes model are used to estimate equation (2). the res model cannot be used in this research because the number of independent variables is larger than the number of cross-sections. hence, the volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 79 likelihood ratio (lr) test is used to determine which model is better (pols or fes). we favor the fes estimation since the value of lr is significantly different from zero. iv. empirical results the empirical results from the pols and fes model are summarized in the following (in table 1??) table. as the table indicates, the fes model is preferred to the pols model because of its large and significant lr-value. therefore, the discussion is based only on the estimates of the fes model. results of panel data estimations, 1999-2008 are as follows: variable pols fes ln(l) -0.7574(0.2250) 0.0820(0.1976) ln(k) 4.9277(0.2621) *** -0.2162(0.2156) ln(h) -1.1838(1.7500) -2.0470(0.9068)** ln(r) -3.7140(0.1249) *** 0.2683(0.0820)*** ln(f) -1.1926(1.7488) -1.9853(0.8983)** ln(s) -0.3735(0.0681) 0.0226(0.0691) ln(g) 1.1930(1.7580) 2.0187(0.9038)** ln(e) -0.0844(0.0818) 1.1076(0.1201)*** adjusted r-squared 0.9340 0.9813 f-statistic 80.2458 214.9333 sample size (n) 50 50 ln likelihood -8.874 27.2686 notes: (1) standard errors are in parentheses. (2) *** significant at 1%, ** significant at 5%, * significant at 10%. the results from the fes model display that domestic technological efforts ln(r), absorptive capacity ln (g) and firm size ln(e) are positive as expected. ln(r) and ln(e) are statistically significant at a 1 % level and ln(g) is statistically significant at a 5 % level. the coefficient for ln(r) is positive and statistically significant at the 1 % level, indicating that r&d positively affects the productivity in china's automotive industry. the lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 80 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu magnitude of ln(r) may mean that when other variables are kept constant, a 1% increase in r&d increases productivity by 0.268 %. the coefficient for ln (g) is positive and statistically significant at the 5 % level, showing that the absorptive capability positively affects productivity in china's automotive industry and that domestic human capital plays a role in capturing the benefits from fdi. in addition, the magnitude of ln(g) indicates that when other variables are kept constant, a 1% increase in absorptive capability will raise productivity by 2.018744 percent. the magnitude of the coefficient ln (e) indicates that when other variables are kept constant, a 1% increase economy of scale will raise productivity by 1.108 %. the coefficient for ln (e) is positive and statistically significant at the 1 % level, demonstrating that economy of scale positively affects productivity in china's automotive industry. this is an important finding and contribution to the emerging markets literature. on the other hand and surprisingly, foreign direct investment ln (f) and human capital ln (h) are negative and statistically significant. input of labor ln (l) and spillover in fdi ln(s) are positive as expected; however, they are statistically insignificant at different levels. similarly, domestic capital stock ln (k) is negative but statistically insignificant at various levels as well. furthermore, the coefficient for ln (f) is negative and statistically significant at the 5 % level, demonstrating that direct fdi effects negatively affect productivity in china's volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 81 automotive industry. the magnitude of coefficient ln (f) displays that when other variables are kept constant, a 1% increase in the direct fdi effect causes a decrease in productivity by 1.985 %. hence, the result suggests that mncs may not tend to transfer technology to host countries since they prefer to keep their monopoly status in technology (ram and zhang, 2002). this seems be the case in china, since the chinese government only allows fdi in the form of joint-ventures in the automotive industry, thus mncs may be discouraged to transfer their core technological capabilities. the coefficient for ln (h) is negative and statistically significant at the 5 % level, showing that human capital negatively affects productivity in china's automotive industry. the magnitude of ln (h) shows that when other variables are kept constant, 1% increase in human capital will decrease productivity by 2.047 percent. the result reflects the fact that compared to the total number of employees, the number of technically skilled employees is needed more in this industry since imported production lines are highly automated and only trained workers can operate them efficiently. although ln (l), ln (s) and ln (k) are not significant at all levels, the coefficients of ln (l) and ln (s) are as expected indicating that these two factors contribute to productivity. however the coefficient of ln (k) is negative, suggesting that the domestic capital negatively affects productivity in china's automotive industry. this result proposes that there may be capital market imperfection in this industry. this proposition may further be lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 82 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu supported by the status quo that soes have privileges to access capital and may be able to obtain subsidies from the government; thus compared to small and medium size enterprises (smes), they may lack the incentive to use capital efficiently. interestingly, our results contradict the fdi theories that suggest fdi has a positive impact on the host country’s industrial productivity through both direct and indirect effects. this may be related to the competition effect and the unwillingness of core technology transfer. based on the results, we can suggest that the chinese government should not continue to place an ownership limit on fdi in the chinese automotive industry. our results also indicate that the most influential factors to increase the productivity in the automotive industry are the domestic technology effort, the domestic absorptive capability and the economy of scale. hence the results suggest that it crucial for the chinese government to continue to encourage r&d and consolidation to improve productivity level in the industry within the current development period. furthermore, the results suggest that the domestic capital has a negative impact on the productivity in the industry indicating the existence of capital imperfection in the industry and suggesting that the government should treat soes and smes indifferently to improve their comparative advantages in order to compete not only in the domestic market, but also in international markets. v. conclusion this paper focuses on the effects of fdi on the productivity of the volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 83 chinese automotive industry by using a panel data set consisting of five subsectors over a period of ten years from 1999 to 2008. thus, the paper contributes to the empirical evidence concerning the fdi-productivity linkages in the economies of developing countries through a unique approach that emphasizes on a particular sector. in this paper, we model two channels, namely, the direct effects and spillovers through which fdi may affect local industries. we also test how human capital in the host country may behave together with fdi in influencing industrial productivity. the results indicate an important finding and suggest that inward fdi plays a negative role in raising productivity in the automotive industry, which is one of the most crucial key sectors in chinese economy. yet, productivity-augmenting effects from fdi on chinese automotive industry do transpire neither through direct methods nor through spillovers. hence, the results contradict the theory of fdi that mncs play an important role to improve the host country’s economy through introducing and transferring capital, advanced technologies and managerial skills. the results may also denote that governmental policies introduced to attract fdi are not effective enough to promote productivity. consequently, based on the results it is crucial to suggest that it may not sensible for the chinese government to keep imposing ownership limits on the inflow of fdi in the automotive industry as this practice decreases the productivity and does not allow the industry to benefit from direct effects of fdi. it is also recommended that the lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 84 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu chinese government should treat soes and smes equally, stop giving privileges to soes, and encourage them to compete with the rest of the industry by incorporating efficiency and competency. in conclusion, it is important to point out that due to data limitations, the time period studies in this paper is only10 years. if the time span is extended to include the preceding years of 1990s and 1980s, the result would undoubtedly be very different. this is mostly attributable to the fact that the development of the chinese automotive industry could have not been achieved without the participation of mncs, especially in the early stages. finally, although in this study, it is shown that fdi has a negative impact on the productivity of the automotive industry, as a whole, it is likely that some sub-sectors benefit from fdi and others do not. in order to clarify the benefits of fdi, and the ones that benefit from fdi, as well as to further understand the cause and effect relations in china, further study is required. it is, however, certain that the implications of our empirical results are valuable to government decision makers and jointventure managers to promote their productivity and eventually enable them to compete globally. volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 85 references aitken, b. j. & harrison, a. e. (1999). do domestic firms benefit from direct foreign investment? evidence from venezuela, the american economic review, 89, 3, 605-618. barro, r. & sala-i-martin, x. (1995). economic growth, mit press. belderbos, r., capannelli, g. & fukao, k. (2001). belderbos, r., g. capannelli, and k. fukao, backward vertical linkages of foreign manufacturing affiliates: evidence from japanese multinationals, world development 29, 189–208. bertschek, i. (1995). product and process innovation as a response to increasing imports and foreign direct investment, the journal of industrial economics, 43, 4, 341-357. blomström,m., kokko, a.& zejan, m. (1994). host country competition, labor skills, and technology transfer by multinationals, weltwirtschaftliches archiv 130, 521–33. blomstrom, m. & persson, h. (1983). foreign investment and spillover efficiency in an underdeveloped economy: evidence in the mexican manufacturing industry, world development, 11, 6, 493-501. braconier, h., ekholm, k. & midelfartknarvik, k. (2001).in search of fdi-transmitted r&d spillovers:a study based on swedish data, weltwirtschaftliches archiv 137, 644–665. cantwell, j. (1995). the globalisation of technology: what remains of the product cycle model, cambridge journal of economics, 19, 1, 155-174. caves, r. e. (1996). multinational enterprises and economic analysis, 2nd edn, cambridge university press . chang, c. (2010). developmental strategies in a global economy: the unexpected emergency of china’s independent auto industry, 2010 harvard east asia society graduate student conference. crespo, n. & fontoura, m.p. (2007). determinant factors of fdi spillovers: what do we really know, world development 35, 410–425. lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 86 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu das, s. (1987). externalities and technology transfer through multinational corporations: a theoretical analysis, journal of international economics 22, 171–82. fosfuri, a & saggi, k. (2002). foreign direct investment and spillovers throughworkers’ mobility, journal of international economics 53, 205–22. girma, s. (2003). absorptive capacity and productivity spillovers from fdi:a threshold regression analysis, european economy group working paper. grossman, g.& helpman, e. (1991). innovation and growth in the global economy, mit press. markusen, j. & venables, a. (1999). foreign direct investment as a catalyst for industrial development, european economic review, 43, 335–56. maxton, g. & wormald, j. (2004). time for a model change: reengineering the global automotive industry, cambridge univesity press. ram, r. and zhang, k. (2002). foreign direct investment and economic growth: evidence from crosscountry data for the 1990s, economic development and cultural change 51, 205–15. rodriguez-clare,a. (1996). multinationals, linkages, and economic development, american economic review 86, 852–73. romer, p. (1990). endogenous technological change, journal of political economy 98, 71– 102. teece, d. j. (1977). technology transfer by multinational firms: the resource cost of transferring technological know-how, economic journal 8, 242–61. unctad, (2005). world investment report, united nations. womack, j. p., jones, d. t. & roos, d. (1990). the machine that changed the world, new york: free press. volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 87 appendix regression output conduct, interpret and test the regression estimation command: ===================== est(f,b,m=500,c=0.0001) ln(?y) ln(?l) ln(?k) ln(?h) ln(?r) ln(?f) ln(?s) ln(?g) ln(?e) estimation equations: ===================== ln(_automy) = c(9) + c(1)*ln(_automl) + c(2)*ln(_automk) + c(3)*ln(_automh) + c(4)*ln(_automr) + c(5)*ln(_automf) + c(6)*ln(_automs) + c(7)*ln(_automg) + c(8)*ln(_autome) ln(_autoay) = c(10) + c(1)*ln(_autoal) + c(2)*ln(_autoak) + c(3)*ln(_autoah) + c(4)*ln(_autoar) + c(5)*ln(_autoaf) + c(6)*ln(_autoas) + c(7)*ln(_autoag) + c(8)*ln(_autoae) ln(_motormy) = c(11) + c(1)*ln(_motorml) + c(2)*ln(_motormk) + c(3)*ln(_motormh) + c(4)*ln(_motormr) + c(5)*ln(_motormf) + c(6)*ln(_motorms) + c(7)*ln(_motormg) + c(8)*ln(_motorme) dependent variable: ln(?y) method: pooled least squares date: 03/19/11 time: 21:49 sample: 1999 2008 included observations: 10 number of cross-sections used: 5 total panel (balanced) observations: 50 variable coefficient std. error t-statistic prob. ln(?l) 0.081986 0.197583 0.414946 0.6806 ln(?k) -0.216175 0.215563 -1.002841 0.3225 ln(?h) -2.047024 0.906785 -2.257452 0.0300 ln(?r) 0.268329 0.082033 3.270992 0.0023 ln(?f) -1.985265 0.898289 -2.210052 0.0334 ln(?s) 0.022643 0.069100 0.327679 0.7450 ln(?g) 2.018744 0.903825 2.233555 0.0316 ln(?e) 1.107633 0.120074 9.224608 0.0000 fixed effects _autom--c 5.326694 _autoa--c 6.834744 _motorm-c 5.455930 _ve--c 4.534370 _vp--c 8.484960 r-squared 0.985857 mean dependent var 5.424238 adjusted rsquared 0.981271 s.d. dependent var 1.191332 s.e. of regression 0.163040 sum squared resid 0.983541 ln likelihood 27.26855 f-statistic 214.9333 durbinwatson stat 2.168451 prob(f-statistic) 0.000000 lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 88 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu ln(_vey) = c(12) + c(1)*ln(_vel) + c(2)*ln(_vek) + c(3)*ln(_veh) + c(4)*ln(_ver) + c(5)*ln(_vef) + c(6)*ln(_ves) + c(7)*ln(_veg) + c(8)*ln(_vee) ln(_vpy) = c(13) + c(1)*ln(_vpl) + c(2)*ln(_vpk) + c(3)*ln(_vph) + c(4)*ln(_vpr) + c(5)*ln(_vpf) + c(6)*ln(_vps) + c(7)*ln(_vpg) + c(8)*ln(_vpe) substituted coefficients: ===================== ln(_automy) = 5.326693765 + 0.08198634807*ln(_automl) 0.216175275*ln(_automk) 2.047023508*ln(_automh) + 0.268329243*ln(_automr) 1.985264718*ln(_automf) + 0.02264279557*ln(_automs) + 2.018744196*ln(_automg) + 1.107632601*ln(_autome) ln(_autoay) = 6.834743645 + 0.08198634807*ln(_autoal) 0.216175275*ln(_autoak) 2.047023508*ln(_autoah) + 0.268329243*ln(_autoar) 1.985264718*ln(_autoaf) + 0.02264279557*ln(_autoas) + 2.018744196*ln(_autoag) + 1.107632601*ln(_autoae) ln(_motormy) = 5.455930021 + 0.08198634807*ln(_motorml) 0.216175275*ln(_motormk) 2.047023508*ln(_motormh) + 0.268329243*ln(_motormr) 1.985264718*ln(_motormf) + 0.02264279557*ln(_motorms) + 2.018744196*ln(_motormg) + 1.107632601*ln(_motorme) ln(_vey) = 4.534369629 + 0.08198634807*ln(_vel) 0.216175275*ln(_vek) 2.047023508*ln(_veh) + 0.268329243*ln(_ver) 1.985264718*ln(_vef) + 0.02264279557*ln(_ves) + 2.018744196*ln(_veg) + 1.107632601*ln(_vee) ln(_vpy) = 8.484959842 + 0.08198634807*ln(_vpl) 0.216175275*ln(_vpk) 2.047023508*ln(_vph) + 0.268329243*ln(_vpr) 1.985264718*ln(_vpf) + 0.02264279557*ln(_vps) + 2.018744196*ln(_vpg) + 1.107632601*ln(_vpe) = +0.082*ln(lit)-0.2162*ln(kit)2.047*ln(hit)+0.2683*ln(rit)-1.9853*ln(fit)+ 0.0264*ln(sit)+2.0187*ln(git)+ 1.1076*ln (eit) (0.1976) (0.2156) (0.9068) (0.082) (0.8983) (0.0691) (0.9038) (0.1201) t 0.415 -1.0028 -2.2575 3.271 -2.2101 0.3277 2.2336 9.2246 fixed effects _autom--c 5.326694 _autoa--c 6.834744 _motorm--c 5.455930 _ve--c 4.534370 _vp--c 8.484960 n=50 =0.9813 dw=2.1685 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu ensar nişancı, ph.d. p a g e | 89 | emerging markets journal descriptive statistics ?y ?l ?k ?h ?r ?f ?s ?g ?e mean 446.9 340 35.2 4000 1767. 664 0.12 0606 0.01 8306 28.7 6000 0.23 7105 3.03 5949 11.4 4342 sum 2234 6.70 1762 .000 8838 3.20 6.03 0287 0.91 5314 1438 .000 11.8 5526 151. 7974 572. 1709 median 196.2 000 20.6 5000 702.1 000 0.11 1492 0.01 5852 8.20 0000 0.24 8120 0.76 1331 3.64 0682 maxim um 2135. 300 101. 9000 7549. 000 0.47 4970 0.06 8710 167. 8000 0.48 4372 20.3 8165 88.6 7830 minim um 19.80 000 5.00 0000 224.8 000 0.00 8881 0.00 4190 0.10 0000 0.00 3071 0.01 8220 0.39 5206 sum sq. dev. 1497 1427 3975 4.08 1.62 e+08 0.18 1494 0.00 4428 7866 6.42 1.06 1033 925. 2253 1747 3.68 std. dev. 552.7 561 28.4 8346 1819. 152 0.06 0860 0.00 9506 40.0 6791 0.14 7152 4.34 5359 18.8 8401 s skewne ss 1.656 683 0.73 9366 1.371 115 4.24 4056 3.19 5501 1.66 4027 0.04 0006 1.95 2353 2.37 7623 k kurtosi s 4.715 386 2.32 9692 3.891 937 24.9 9973 17.0 6770 5.14 5007 1.67 5742 6.92 1447 8.26 2093 jarquebera 29.00 197 5.49 1579 17.32 369 1158 .409 497. 3856 32.6 6043 3.66 6792 63.8 0100 104. 7958 probabi lity 0.000 001 0.06 4198 0.000 173 0.00 0000 0.00 0000 0.00 0000 0.15 9870 0.00 0000 0.00 0000 observ ations 50 50 50 50 50 50 50 50 50 cross section s 5 5 5 5 5 5 5 5 5 f-testing hypothesis: in the regression output, the probability of f-statistic=0, so we can reject at 1% level. therefore, the overall fit of the equation is statistically significant at 1% level. hypothesis testing 1. test the sign and significance of ln(l) at the 1%, 5% and 10% level. hypothesis: ≤0, >0 the slop coefficient of ln(l) is positive as we expected. the p-value is 0.3403 for one tail, which is insignificant at 1%, 5% and 10% level. therefore, we cannot reject at all levels. 2. test the sign and significance of ln(k) at the 1%, 5% and 10% level. hypothesis: ≤0, >0 the slope coefficient of ln(k) is negative as we unexpected. the p-value is 0.1613 for one tail, which is insignificant at 1%, 5% and 10% level. thus, we cannot reject at all levels. 3. test the sign and significance of ln(h) at the 1%, 5% and 10% level. hypothesis: ≤0, >0 the slope coefficient of ln(h) is negative as we unexpected. the p-value is 0.015 for one tail, which is insignificant at 1% level of confidence, however is significant at 5% and 10% level of lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 90 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu confidence. therefore, we cannot reject at all levels. 4. test the sign and significance of ln(r) at the 1%, 5% and 10% level. hypothesis: ≤0, >0 the slope coefficient of ln(r) is positive as we expected. the p-value is 0.00125 for one tail, which is significant at 1%, 5% and 10% level. as a result, we can reject at all levels. 5. test the sign and significance of ln(f) at the 1%, 5% and 10% level. hypothesis: ≤0, >0 the slope coefficient of ln(f) is negative as we unexpected. the p-value is 0.0167 for one tail, which is insignificant at 1% confident level but 5% and 10% level. therefore, we cannot reject at all levels. 6. test the sign and significance of ln(s) at the 1%, 5% and 10% level. hypothesis: ≤0, >0 the slope coefficient of ln(s) is positive as we expected. the p-value is 0.3725 for one tail, which is insignificant at 1%, 5% and 10% level. as a result, we cannot reject at all levels. 7. test the sign and significance of ln(g) at the 1%, 5% and 10% level. hypothesis: ≤0, >0 the slope coefficient of ln(g) is positive we expected. the pvalue is 0.0158 for one tail, which is insignificant at 1% level but significant at 5% and 10% level. therefore, we cannot reject at 1% level but we can reject at 5% and 10% level. 8. test the sign and significance of ln(e) at the 1%, 5% and 10% level. hypothesis: ≤0, >0 the slope coefficient of ln(e) is positive as we expected. the p-value is 0 for one tail, which is significant at 1%, 5% and 10% level. thus, we can reject at all levels. irrelevant variables and omitted variables testing ln(l) dependent variable: ln(?y) method: pooled least squares date: 03/20/11 time: 00:00 sample: 1999 2008 included observations: 10 number of cross-sections used: 5 total panel (balanced) observations: 50 variable coefficient std. error t-statistic prob. ln(?k) -0.171756 0.185055 0.928135 0.3592 ln(?h) -2.077665 0.893875 2.324336 0.0256 ln(?r) 0.273355 0.080245 3.406479 0.0016 ln(?f) -1.996759 0.888028 2.248531 0.0304 ln(?s) 0.029097 0.066589 0.436968 0.6646 ln(?g) 2.028649 0.893615 2.270161 0.0290 ln(?e) 1.089716 0.110815 9.833683 0.0000 fixed effects _autom--c 5.337568 _autoa--c 6.795396 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 91 _motorm-c 5.406406 _ve--c 4.440478 _vp--c 8.481541 r-squared 0.985792 mean dependent var 5.424238 adjusted rsquared 0.981679 s.d. dependent var 1.191332 s.e. of regression 0.161255 sum squared resid 0.988118 ln likelihood 27.15249 f-statistic 239.6784 durbinwatson stat 2.208052 prob(f-statistic) 0.000000 1. theory: as hypothesis 1 mentioned, this variable is sound theoretically. 2. t-test: the p-value of ln(l) for one tail is 0.3403, which is insignificant at all levels. thus, it should be an irrelevant variable. 3. adjusted r-squared: the increased slightly from 0.9813 to 0.9817. it indicates that ln(l) should not belong to this equation. 4. bias: with ln(l) removed, all coefficients changed slightly. therefore, it should be an irrelevant variable. to sum up, the variable ln(l) should belong to this equation. testing ln(k) dependent variable: ln(?y) method: pooled least squares date: 03/20/11 time: 00:06 sample: 1999 2008 included observations: 10 number of cross-sections used: 5 total panel (balanced) observations: 50 variable coefficient std. error t-statistic prob. ln(?l) -0.016412 0.171511 0.095691 0.9243 ln(?h) -2.141613 0.901934 2.374468 0.0227 ln(?r) 0.275813 0.081699 3.375962 0.0017 ln(?f) -2.031471 0.897173 2.264301 0.0293 ln(?s) 0.049296 0.063789 0.772801 0.4444 ln(?g) 2.055809 0.903137 2.276298 0.0285 ln(?e) 0.999257 0.052339 19.09212 0.0000 fixed effects _autom--c 4.274776 _autoa--c 5.751558 _motorm-c 4.446693 _ve--c 3.567653 _vp--c 7.204965 r-squared 0.985473 mean dependent var 5.424238 adjusted rsquared 0.981268 s.d. dependent var 1.191332 s.e. of regression 0.163053 sum squared resid 1.010274 ln likelihood 26.59810 f-statistic 234.3462 durbinwatson stat 2.222591 prob(f-statistic) 0.000000 1. theory: as hypothesis 2 mentioned, this variable is sound theoretically. 2. t-test: the p-value of ln(k) for one tail is 0.1613, which is significant at 5% and 10% level. thus, it should belong to the equation. 3. adjusted r-squared: the decreased slightly from 0.9813 to 0.9812. it indicates that ln(k) should be a relevant variable. lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 92 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu 4. bias: with ln(k) removed, some coefficients changed significantly. therefore, it should belong to the equation. to sum up, the variable ln(k) should belong to this equation. testing ln(h) dependent variable: ln(?y) method: pooled least squares date: 03/20/11 time: 00:07 sample: 1999 2008 included observations: 10 number of cross-sections used: 5 total panel (balanced) observations: 50 variable coefficient std. error t-statistic prob. ln(?l) 0.118310 0.207269 0.570803 0.5715 ln(?k) -0.266792 0.225653 -1.182314 0.2444 ln(?r) 0.262277 0.086295 3.039304 0.0043 ln(?f) 0.022470 0.132820 0.169173 0.8666 ln(?s) 0.005416 0.072285 0.074930 0.9407 ln(?g) 0.001194 0.141792 0.008418 0.9933 ln(?e) 1.132610 0.125842 9.000260 0.0000 fixed effects _autom-c 5.577782 _autoa--c 7.053500 _motorm-c 5.671369 _ve--c 4.766150 _vp--c 8.775257 r-squared 0.983909 mean dependent var 5.424238 adjusted rsquared 0.979252 s.d. dependent var 1.191332 s.e. of regression 0.171603 sum squared resid 1.119006 ln likelihood 24.04263 f-statistic 211.2395 durbinwatson stat 2.113126 prob(f-statistic) 0.000000 1. theory: as hypothesis 3 mentioned, this variable is sound theoretically. 2. t-test: the p-value of ln(h) for one tail is 0.015, which is significant at 5% level. thus, it should belong to the equation. 3. adjusted r-squared: the decreased slightly from 0.9813 to 0.9792. it indicates that ln(h) should be a relevant variable. 4. bias: with ln(h) removed, most of the coefficients changed significantly. therefore, it should belong to the equation. to sum up, the variable ln(h) should belong to this equation. testing ln(r) dependent variable: ln(?y) method: pooled least squares date: 03/20/11 time: 00:08 sample: 1999 2008 included observations: 10 number of cross-sections used: 5 total panel (balanced) observations: 50 variable coefficient std. error t-statistic prob. ln(?l) 0.177401 0.218942 0.810263 0.4228 ln(?k) -0.280316 0.240510 -1.165505 0.2511 ln(?h) -1.950082 1.015399 -1.920507 0.0623 ln(?f) -1.673329 1.000736 -1.672099 0.1027 ln(?s) 0.138016 0.066573 2.073150 0.0450 ln(?g) 1.694066 1.006501 1.683124 0.1006 ln(?e) 1.176640 0.132435 8.884653 0.0000 fixed effects _autom-c 3.814688 _autoa--c 5.765333 _motorm4.095647 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 93 -c _ve--c 3.213681 _vp--c 7.147873 r-squared 0.981768 mean dependent var 5.424238 adjusted rsquared 0.976490 s.d. dependent var 1.191332 s.e. of regression 0.182667 sum squared resid 1.267954 ln likelihood 20.91854 f-statistic 186.0192 durbinwatson stat 2.080478 prob(f-statistic) 0.000000 1. theory: as hypothesis 4 mentioned, this variable is sound theoretically. 2. t-test: the p-value of ln(r) for one tail is 0.00125, which is significant at 1% level. thus, it should belong to the equation. 3. adjusted r-squared: the decreased slightly from 0.9813 to 0.9765. it indicates that ln(r) should be a relevant variable. 4. bias: with ln(r) removed, some coefficients changed significantly. therefore, it should belong to the equation. to sum up, the variable ln(r) should belong to this equation. testing ln(f) dependent variable: ln(?y) method: pooled least squares date: 03/20/11 time: 00:09 sample: 1999 2008 included observations: 10 number of cross-sections used: 5 total panel (balanced) observations: 50 variable coefficient std. error t-statistic prob. ln(?l) 0.095451 0.207337 0.460368 0.6479 ln(?k) -0.240611 0.226014 1.064585 0.2938 ln(?h) -0.062855 0.133738 0.469985 0.6411 ln(?r) 0.249082 0.085637 2.908584 0.0060 ln(?s) 0.024155 0.072543 0.332982 0.7410 ln(?g) 0.022112 0.027982 0.790205 0.4343 ln(?e) 1.123657 0.125831 8.929871 0.0000 fixed effects _autom--c 5.363287 _autoa--c 6.871578 _motorm--c 5.468140 _ve--c 4.552025 _vp--c 8.549084 r-squared 0.983990 mean dependent var 5.424238 adjusted rsquared 0.979356 s.d. dependent var 1.191332 s.e. of regression 0.171171 sum squared resid 1.113377 ln likelihood 24.16871 f-statistic 212.3250 durbin-watson stat 2.106214 prob(f-statistic) 0.000000 1. theory: as hypothesis 5 mentioned, this variable is sound theoretically. 2. t-test: the p-value of ln(f) for one tail is 0.0167, which is significant at 5% level. thus, it should belong to the equation. 3. adjusted r-squared: the decreased slightly from 0.9813 to 0.9794. it indicates that ln(f) should be a relevant variable. 4. bias: with ln(f) removed, some coefficients changed significantly. lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 94 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu therefore, it should belong to the equation. to sum up, the variable ln(f) should belong to this equation. testing ln(s) dependent variable: ln(?y) method: pooled least squares date: 03/20/11 time: 00:10 sample: 1999 2008 included observations: 10 number of cross-sections used: 5 total panel (balanced) observations: 50 variable coefficient std. error t-statistic prob. ln(?l) 0.096561 0.190237 0.507583 0.6147 ln(?k) -0.243344 0.196629 -1.237580 0.2235 ln(?h) -2.014210 0.890591 -2.261656 0.0295 ln(?r) 0.282050 0.069708 4.046180 0.0002 ln(?f) -1.988180 0.887632 -2.239870 0.0310 ln(?g) 2.025247 0.892932 2.268088 0.0291 ln(?e) 1.115672 0.116151 9.605330 0.0000 fixed effects _autom-c 5.568539 _autoa--c 7.031517 _motorm-c 5.678094 _ve--c 4.760362 _vp--c 8.737241 r-squared 0.985816 mean dependent var 5.424238 adjusted rsquared 0.981711 s.d. dependent var 1.191332 s.e. of regression 0.161114 sum squared resid 0.986395 ln likelihood 27.19611 f-statistic 240.1030 durbinwatson stat 2.178565 prob(f-statistic) 0.000000 1. theory: as hypothesis 6 mentioned, this variable is sound theoretically. 2. t-test: the p-value of ln(s) for one tail is 0.3725, which is significant at 5% and 10% level. thus, it should belong to the equation. 3. adjusted r-squared: the increased slightly from 0.9813 to 0.9817. it indicates that ln(s) should be an irrelevant variable. 4. bias: with ln(s) removed, some of the coefficients changed significantly. therefore, it should belong to the equation. to sum up, the variable ln(s) should belong to this equation. testing ln(g) dependent variable: ln(?y) method: pooled least squares date: 03/20/11 time: 00:10 sample: 1999 2008 included observations: 10 number of cross-sections used: 5 total panel (balanced) observations: 50 variable coefficien t std. error t-statistic prob. ln(?l) 0.093641 0.20762 2 0.45101 8 0.6545 ln(?k) -0.235864 0.22640 5 1.04178 2 0.3041 ln(?h) -0.044293 0.14207 5 0.31176 2 0.7569 ln(?r) 0.248207 0.08570 9 2.89591 5 0.0062 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu changing dynamics of foreign direct investment in china’s automotive industry emerging markets journal | p a g e | 95 ln(?f) 0.020240 0.02784 6 0.72687 8 0.4718 ln(?s) 0.026032 0.07261 9 0.35846 8 0.7220 ln(?e) 1.123061 0.12600 9 8.91251 7 0.0000 fixed effects _autom-c 5.331692 _autoa--c 6.842342 _motorm-c 5.436364 _ve--c 4.522267 _vp--c 8.517270 r-squared 0.983950 mean dependent var 5.42423 8 adjusted rsquared 0.979305 s.d. dependent var 1.19133 2 s.e. of regression 0.171384 sum squared resid 1.11615 3 ln likelihood 24.10645 f-statistic 211.788 3 durbinwatson stat 2.112292 prob(f-statistic) 0.00000 0 1. theory: as hypothesis 7 mentioned, this variable is sound theoretically. 2. t-test: the p-value of ln(g) for one tail is 0.0158, which is significant at 5% level. thus, it should belong to the equation. 3. adjusted r-squared: the decreased slightly from 0.9813 to 0.9793. it indicates that ln(g) should be a relevant variable. 4. bias: with ln(g) removed, some coefficients changed significantly. therefore, it should belong to the equation. to sum up, the variable ln(g) should belong to this equation. testing ln(e) dependent variable: ln(?y) method: pooled least squares date: 03/20/11 time: 00:11 sample: 1999 2008 included observations: 10 number of cross-sections used: 5 total panel (balanced) observations: 50 variable coefficient std. error tstatistic prob. ln(?l) -0.573421 0.330473 1.735151 0.0908 ln(?k) 1.573491 0.168411 9.343153 0.0000 ln(?h) -2.817801 1.618479 1.741018 0.0898 ln(?r) 0.401285 0.144755 2.772167 0.0086 ln(?f) -2.485638 1.607226 1.546539 0.1303 ln(?s) 0.152894 0.121248 1.261006 0.2150 ln(?g) 2.498364 1.617406 1.544673 0.1307 fixed effects _autom--c -2.902205 _autoa--c -2.212636 _motorm--c -2.497163 _ve--c -2.935549 _vp--c -2.378402 r-squared 0.953332 mean dependent var 5.424238 adjusted rsquared 0.939823 s.d. dependent var 1.191332 s.e. of regression 0.292247 sum squared resid 3.245509 ln likelihood -2.578155 f-statistic 70.56896 durbin-watson stat 1.441169 prob(f-statistic) 0.000000 lingling wang, bo fan, dr. c. bulent aybar, dr. aysun ficici p a g e | 96 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.41 | http://emaj.pitt.edu 1. theory: as hypothesis 8 mentioned, this variable is sound theoretically. 2. t-test: the p-value of ln(e) for one tail is 0, which is significant at all levels. thus, it should belong to this equation. 3. adjusted r-squared: the decreased slightly from 0.9813 to 0.9398. it indicates that ln(e) should be relevant variable. 4. bias: with ln(e) removed, all coefficients changed significantly. thus, it should belong to the equation. to sum up, the variable ln(e) should belong to this equation. serial correlation durbin-watson testing the d-value from the regression output is 2.1685, n=50, and k=8. there is potential of serialcorrelation, since the data set contains time-series data. : =0 (no serial correlation), (serial correlation) 1.93 since 4 >dvalue=2.1685 > , the result is inconclusive, we cannot be sure if there exists serial-correlation in the equation at 5% level. thus, general least square model is not required. study on the shock-transmission mechanism of stock price among china, russia and india* study on the shock-transmission mechanism of stock price among china, russia and india dr. menggen chen beijing normal university, institute of national accounts, beijing, china | email: cmg@bnu.edu.cn abstract researchers pay more and more attention on the price comovement-effect among international stock markets. this paper deals with the transmission mechanism of price shocks among three stock markets of china, russia and india, with a sample of weekly returns. the results showed that the price fluctuation of each market has an influence on other markets, although the price behavior is significantly independent. the impact of external price innovations will last 5 or 6 weeks usually and disappear after about 8 weeks. the pattern of transmission-mechanism for the price shocks is very different from each other. besides, a further study revealed that the influence of external shocks on the domestic stock price increased significantly among the three markets after the 2008 international financial crisis. keywords: stock markets; price shock; transmission effect new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.58 | http://emaj.pitt.edu | mailto:cmg@bnu.edu.cn http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.58 | http://emaj.pitt.edu dr. menggen chen emerging markets journal | p a g e |33 study on the shock-transmission mechanism of stock price among china, russia and india dr. menggen chen 1 introduction as three important emerging economies in the world, china, russia and india are geographical proximity and closely interconnected in terms of political, economic, social, cultural, military, scientific and technological spheres. in fact, these countries have a huge impact on global and regional development and stability. in october 2003, a global economic report of the goldman sachs predicted that over the next 50 years the world economy will change dramatically and the six largest economies will be china, us, india, japan, brazil and russia in 20501. at present, china is the world’s second largest economy, the largest exporter and second largest importer and one of the fastest-growing economies. russia, which is vast in territory across the asia and the europe, abounds with minerals and energy resources and now it is the ninth largest economy according to the imf’s latest rankings of the world economy in 2013. india, as one of the fastest-growing economies in the world, is an international powerhouse in software industry and also a major exporter of financial, research and technical services. for a long time, china, russia and india have built up a closely bilateral relationship each other. especially, after the 2008 international financial crisis, the three countries further strengthened the economic and political cooperation under the brics-country mechanism. meanwhile, they are also key countries attracting international investment and hot money in recent twenty years. as we all know, the price comovement-effect 1 goldman sachs, 2003, dreaming with brics: the path to 2050. goldman sachs global economics paper, no. 99, october. among international stock markets has been a focus of researchers’ attention in the finance (berger and pozzi, 2013). along with the increasing growth of the bilateral economic and trading linkage, the financial relationship among china, russia and india is continuously strengthened. this study intends to explore the shock-transmission mechanism of stock price among china, russia and india, which has an obvious practical importance. the remainder of this paper is organized as follows: section 2 is a review of the related theory and literatures, section 3 discusses the methodology, section 4 reports the empirical study and section 5 concludes the paper shortly. 2 theory and literature review generally, the price comovement-effect in stock markets could be thought as a chain reaction, that is, the returns of different markets, different sector-stock portfolios or different stocks in one market exhibit a significant correlation, and form a long-term equilibrium or a synchronous moving trend (chen, 2010). under the background of economic globalization, researchers pay more and more attention on the comovement-effect of stock price across countries or areas. for example, premaratneb and balaa (2004) showed that the comovement-effect among stock markets of america, britain, japan, hong kong and singapore is statistically significant at different levels, and there is a significant transmission phenomenon from the stock markets of small economies to those of america, britain and other major economies. contessi et al. (2004) found that the introduction of the euro and the convergence of european countries’ economic structure made the comovement-effect among european stock markets significantly increased in recent years. berger and pozzi (2013) measured the comovement effect and time-varying integration in financial markets with the unobserved components approach. in literatures, the existing studies on the comovement-effect of securities usually followed three levels: the equalization of asset price, the economic theory for stock price comovement and the transmission volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.58 | http://emaj.pitt.edu study on the shock-transmission mechanism of stock price among china, russia and india emerging markets journal | p a g e |34 mechanism of international stock contagion during the financial crisis (grieb and reyes, 2002). asset price equalization theory explores the market comovement from the perspective of asset pricing, which studies the diversity and convergence of asset price or returns based on the risk of asset and focuses on the degree of price comovement. the study on economic theory for stock price comovement extends the research on the equalization theory of asset price from financial field to much wider fields including trade, investment, securities market characteristics, geographic and cultural perspectives, to explore the intrinsic driving force behind the comovement phenomenon of stock price. the third level deepens this line of studies on time dimension and focuses on the crisis period to explore the special mechanism and characteristics of comovement effect among different markets during the crisis period. there are two representative views to explain the comovement-effect of stock markets: fundamental-based comovement and behavior-induced comovement (qixia yang, 2007; tam and pui, 2012). on the basis of the classic efficient market hypothesis (emh), the fundamental-based comovement view considers that the return comovement of securities is resulted from the fluctuation of fundamental factors, which is also called the economic fundamental hypothesis. as far as stock markets are concerned, the fundamentals are the correlation emerging from cash flow or discount rate (tam and pui, 2012). the correlation of changes in expected cash flow is usually resulted from the following aspects: changes of economic policies or homogeneous impact of important events on expected return or profitability of some securities. the correlation of changes in discount rate usually derives from changes of interest rate or related discounting methods. the theory of fundamental-based comovement has a strong linkage to economic structure, which could explain the comovement phenomenon among the closely related economies and industries, as well as the comovement phenomenon in the same industry sector. for example, bekaert and harvey (1997) and chinn and forbes (2004) found that international trade is an important factor accounting for the linkage among emerging markets. in fact, gerrits and yuce (1999) has pointed out that along with the rapid development of global trade and the increase of regional cooperation among countries, the less barriers to the flows of commodity, service, financial asset and human-resource made the stock price comovement-effect stronger. the behavior-induced comovement is also called a trading-induced comovement coming from the market contagion, which points out that specific behavior of investors will form certain transaction mode, leading to changes of demand on the securities and further resulting in the comovement-effect of return rate in stock markets (berger and pozzi, 2013). for example, connolly and wang（2002）found that investors could extract unobservable global information from the stock returns and then adjust their investment strategies, which finally led to a correlation among the return rates in different stock markets. inconsistent with the fundamental-based comovement theory, zhigao yi and ning mao (2008) argued that the herd behavior is a most typical irrational behavior which constructed a key behavior factor resulting in the price comovement-effect. in the behavior finance, investors are usually classified into two specific kinds: category investors and scope investors. the investment strategies for the two kinds are different, however, both behavior of them maybe lead to the price comovement. the theory of category investment suggests that investors will divide assets into different categories when choosing investment portfolio, since assets always have different characteristics. then they decide how to allocate capital while the price comovement occurs if the investors redistribute their assets among different categories (barberis and shleifer, 2003; berger and pozzi, 2013). the theory of scope investment argues that investors have to choose only a small part of assets to invest due to trading cost, space constrains or absence of information. if the investors try to adjust the direction of investment due to changes of market mood or the degree of risk aversion, the price volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.58 | http://emaj.pitt.edu dr.menggen chen p a g e |35| emerging markets journal comovement effect will be induced (lee, shleifer and thaler, 1991). some studies have investigated the stock price comovement-effect between china and other countries. han fei and xiao hui (2005) found that the correlation between china and us stock markets is weak during 2000-2004. ligao chen et al. (2006) showed that the us stock market is much more independent compared with the japanese and asian emerging stock markets and the japanese stock market is highly correlated with asian emerging markets, while the chinese stock market exhibits strong exogeneity. jian hu and pengbo lv (2008) argued that there is no long-term stable equilibrium between shanghai and hong kong stock markets and failed to find any common factor. however, according to xicun youzuo (2009), there is a unidirectional volatility spillover effect from the chinese stock market to the us stock market, and the us stock market has started to affect the chinese stock market. bing zhang et al. (2010) argued that there is no long-term equilibrium between the chinese and us stock markets and both markets show relative independence, while an increasing spillover effect from the us market to the chinese market is found. specially, xiaoguang li and yangui zhang (2008) revealed that after the us subprime crisis, the comovement effect between the chinese and international key stock markets strengthened gradually, especially the linkage of the chinese stock markets with uk and hong kong are continually increasing. chuilin yi and cuiyu zhang (2010) investigated the relation between the chinese stock market with six main markets of asia, and suggested that the chinese stock market is significantly influenced by other markets before the 2008 financial crisis while the impact of the chinese stock market on other markets becomes stronger after the crisis. recently, oztek and ocal (2012) explored the integration of china stock markets with international stock markets using the approach of smooth transition conditional correlation. generally speaking, the related studies about the price comovement in stock markets usually have two characteristics. the one is that most of the existing literatures focused on the comovement effect between the chinese stock market and the stock markets of developed countries, while they paid less attention on the comovement effect between the chinese stock market and those of other emerging economies. the other is that current studies usually tested whether there is a comovement effect in the stock markets among different countries or regions, while they paid little attention on the transmission mechanism of stock price shock. 3 methodology this study employs the approaches of impulse response function and variance decomposition to investigate the price shock transmission-mechanism among the stock markets of china, russia and india with samples of weekly returns. in a var model, the shock on the ith variable will not only directly affect the ith variable, but also affect other endogenous variables through the dynamic structure of var model. the var(p) can be written as follows: tptpttt yayayay   2211 (1) where ty represents a k-dimension endogenous vector and t is a multivariate sequence of stochastic error with mean-zero and nonsingular-covariance matrix  . the vma(∞) model of ty can be represented as: tt lly  )( 2 210  (2) since var(p) model is invertible, the coefficients of var model could be used to compute the coefficients of vma model. setting )( ,ijqq   , q=1,2,…， then the ith variable in y could be written as follows     k j jtijjtijjtijjtijity 1 3,32,21,1,0 )(  (3) volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.58 | http://emaj.pitt.edu study on the shock-transmission mechanism of stock price among china, russia and india emerging markets journal | p a g e |36 according to equation (3), the impulse response function depicts the impact of a one-off shock to stochastic error on the current and future values of endogenous variables. generally, the response function of iy resulting from the shock to jy can be presented as follows 0, 1, 2, 3,, , , ,ij ij ij ij    using the approach of variance decomposition, changes in endogenous variables could be decomposed to shocks on the components of var system. therefore, the variance decomposition shows the relative importance of stochastic error influencing variables in var and reveals the order of importance of stochastic error affecting variables in var. in equation (3), the items in parentheses are the sum of all impacts of j on iy . the variance of ity is calculated as follows:            k j q jjijqity 1 0 2 , )()var(  (4) the variance of ity could be decomposed to k unrelated effects, an index (called relative variance contribution, rvc) is defined to analyze the contributions of error terms to the variance of ity , which is calculated as follows:                   k j jj s q ijq s q jjijq s ij rvc 1 2) 1 0 , ( 1 0 2) , ( )(   i,j=1,2,…,k (5) following the equation (5), the greater )(srvc ij is, the larger the impact of jth variable on ith variable is; while the smaller )(srvc ij is, the weaker the impact of jth variable on ith variable is. 4 empirical study 4.1 data this paper investigates the transmission effect of stock price shock with a sample of weekly closing price indices ranging from january 1998 to december 2012, including the shanghai composite index of china, the rts index of russia and the sensex30 index of india. the data are collected from bloomberg system and the weekly returns of stock rt are computed as follows: )ln()(ln 1 ttt iir (6) where it denotes the closing stock price index at period t. totally, 746 observations are obtained after eliminating the unmatched trading data. the descriptive statistics of samples are shown in table 1. the mean of weekly return rate of the shanghai composite index is 0.0008 and that of the rts index is 0.0035, while that of the sensex30 index is 0.0019. the skewness coefficients for chinese and russian stock markets are positive, while that for indian stock market is negative. the kurtosis coefficients are all larger than 3 for the three markets. the jareque-bera statistics are relative high and the corresponding p-values are almost 0, which shows that the return series are not subject to normal distribution. moreover, the results of adf test, df-gls test and phillips-perron test all show that the return series are stationary. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.58 | http://emaj.pitt.edu dr.menggen chen p a g e |37| emerging markets journal table 1 a summary statistics of the return series variable sh ru in mean 0.0008 0.0035 0.0019 median 0.0003 0.0072 0.0052 maximum 0.1394 0.4008 0.1317 minimum -0.1489 -0.2976 -0.1738 s.d. 0.0345 0.0641 0.0362 skewness 0.1168 0.2255 -0.4017 kurtosis 4.7521 9.8597 5.0441 jarque-bera 97.1153 1468.9680 149.9412 p-value 0.0000 0.0000 0.0000 observation 746 746 746 note: sh represents the weekly return of shanghai composite index, ru represents the weekly return of rts index and in represents the weekly return of sensex30 index. 4.2 empirical study 4.2.1 basic analysis the correlation analysis showed that the correlation coefficient of sh and ru is 0.0947; the correlation coefficient of sh and in is 0.1488; the correlation coefficient of ru and in is 0.1488. therefore, the sample series of weekly returns exhibits weakly positive correlation during the sample period. granger causality test could check the direction of causality between any two variables and the results could be used to judge the mutual prediction power. the lag length is determined by the akaike information criterion and schwarz information criterion. as shown in table 2, the results suggest that ru does granger cause sh, while there is no statistically causality between sh and in, and there is a bilateral causality between ru and in at 5% level. table 2 results for granger causality tests pairwise granger causality tests sample:1 746; number of lag:12 the null hypothesis h0 direction of causality obs. f-value p-value decision ru doesn’t granger cause sh sh cg ru   .. ru cg sh   .. 734 1.5559 0.0997 *** reject sh doesn’t granger cause ru 1.0071 0.4402 do not reject in doesn’t granger cause sh sh cg in   .. in cg sh   .. 734 1.1702 0.3005 do not reject sh doesn’t granger cause in 0.5295 0.8962 do not reject in doesn’t granger cause ru ru cg in   .. in cg ru   .. 734 1.9725 0.0242 ** reject ru doesn’t granger cause in 1.9451 0.0267 ** reject note: * represents statistical significance at 1% level; ** represents statistical significance at 5% level; *** represents statistical significance at 10% level. 4.2.2 impulse response function analysis according to the impulse response function, when exerted one unit standard deviation shock to a variable in var at period 1, all variables in the var system will respond in subsequent periods. figure 1 reports the accumulated response in the first 12 weeks, and the results have following features: first, the accumulated response of variables in the var system changes obviously in the first 5 weeks, when a variable is exerted one unit standard deviation shock. this time pattern suggests that the accumulated response values usually approximate steady in the 6th or 7th week and almost there is no changes after the 8th week, and the impact of new innovations lasts for about 5 or 6 weeks and it will die out after the 8th week. therefore, the impact of price shock among china, russian and india usually lasts for about 5-6 weeks observing from the reaction time perspective. second, the reaction mode (including direction and magnitude) of sample variables in the var system is obviously different from each other. generally, the accumulated response deriving from the shock of itself is the intensest and the direction is positive; the accumulated response to external markets is much more tepid. besides, the direction and magnitude of reaction for three markets to the price shock are also different significantly. third, the final convergence levels for the response to price shock are obviously different from each other. the accumulated response of shanghai stock market is positive and converges to the level of about 0.0415, 0.0066 and 0.0052, respectively for the price shock coming from china, russia and india. meanwhile, the accumulated response of russian stock market converges to the level of about 0.0055, 0.0710 and -0.0054, respectively for the price shock coming from china, russia and india. besides, the accumulated response of indian stock market converges to the level of around 0.0075 and 0.0354, respectively for the price shock coming from russia and india, while the reaction of indian market converges to the level near 0 for the shock from china. from above, the russian and indian volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.58 | http://emaj.pitt.edu study on the shock-transmission mechanism of stock price among china, russia and india emerging markets journal | p a g e |38 stock markets have an almost similar influence on the shanghai stock market; the impact of the chinese stock market on the russian stock market is significantly different from that of the indian stock market on the russian stock market, along with an opposite response direction; the chinese stock market almost has no impact on the indian stock market, while the russian market has a certain influence on the indian market. finally, the transmission-mechanism of variables in var system is different from each other and is obviously irregular. 1) the shanghai stock market makes a positive response from the 2th to 4th week to a shock from the russian stock market, and a negative response in the 5th week and a positive response in the 6th and 7th week, while the response isn’t significant after the 7th week. the shanghai stock market makes a positive response in the 2th, 3th, 5th, 6th and 7th week to a shock from india except for a negative response in the 4th week. 2) the russia stock market makes a positive response in the 2th, 3th, 5th and 6th week to a shock from the shanghai stock market, and a negative response in the 4th, 7th week while the response decreases rapidly after the 7th week. meanwhile, the russia stock market makes a positive response in the first two weeks to a shock from the indian stock market, and a negative response from the 4th to 7th week and the response almost could be ignored after the 7th week. 3) the indian stock market makes a positive response to a shock from the russian stock market during the 2th to 4th week, and a negative response from the 5th to 6th week, while the response turns to positive and converges rapidly after the 7th week. at the same time, the indian stock market makes a negative response in the 2th, 4th, 7th, 10th week to a shock from the shanghai stock market, and a positive response at the rest periods, while the magnitude of response is relative small at all periods. .00 .01 .02 .03 .04 .05 1 2 3 4 5 6 7 8 9 10 11 12 sh ru in accumulated response of sh to nonfactorized one s.d. innovations -.01 .00 .01 .02 .03 .04 .05 .06 .07 .08 1 2 3 4 5 6 7 8 9 10 11 12 sh ru in accumulated response of ru to nonfactorized one s.d. innovations -.01 .00 .01 .02 .03 .04 1 2 3 4 5 6 7 8 9 10 11 12 sh ru in accumulated response of in to nonfactorized one s.d. innovations figure 1 accumulated impulse response of sample series 4.2.3 variance decomposition analysis the variance decomposition could obtain the relative importance of stochastic error influencing the variables in var system, which supports to assess the importance of different factors in the transmission mechanism of price shocks. table 3 showed the main results of the variance decomposition in the first 12 weeks. first, each variable accounts for the largest share of forecasting error by itself in the var system. according to the requirement of algorithm, the forecasting error all comes from its own innovation of the variable at the first step, that is, each variable itself accounts for all of the volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.58 | http://emaj.pitt.edu dr.menggen chen p a g e |39| emerging markets journal variance at this step. in subsequent periods, the forecasting error will be affected by all variables in the var system. however, the variable itself always accounts for almost more than 97% of the variance. this suggests that there is only a very small mutual influence among the three stock markets and the price fluctuation primarily depends on the domestic factors, which means that the price behavior exhibits significant independence. second, according to table 3, the results of variance decomposition are relatively stable after the 7th or 8th week and usually converge to a certain level. this is very similar to the conclusion obtained from the impulse response analysis. undoubtedly, the impact of new shocks to stock price usually lasts for about 6 weeks and dies out after the 8th week. third, the contribution shares of other variables to the variance of each variable continue to increase during all forecasting periods. however, a change of the shares for non-self variables is so small and keeps relatively stable in all periods. what’s more, the rvc results are not sensitive to the forecasting periods. finally, the rvc values for non-self variables reach peaks in the 12th week. the maximum contribution shares of ru and in in the variance of sh account for 2.0342% and 0.7809% respectively, and the maximum contribution shares of sh and in in the variance of ru account for 0.8608% and 0.7878% respectively. then, the maximum contribution shares of ru and sh in the variance of in account for 1.4603% and 0.1540% respectively. therefore, all three variables in the var system reveal a different transmission mechanism to the price shock exerted by other markets and have a different importance. relatively speaking, the russian stock market has a significant influence on the chinese and indian stock markets, and the influence of the chinese stock market on the russian stock market is stronger than that on the indian stock market. table 3 variance decomposition of sample series variable time standard error（s.e.） sh ru in sh 1 0.0342 100.0000 0.0000 0.0000 2 0.0344 99.2566 0.2365 0.5068 3 0.0346 98.6295 0.6414 0.7291 4 0.0348 97.9082 1.3687 0.7231 5 0.0349 97.6234 1.6096 0.7669 6 0.0349 97.6200 1.6127 0.7672 7 0.0350 97.2279 1.9989 0.7732 8 0.0350 97.2232 2.0033 0.7736 9 0.0350 97.2094 2.0171 0.7735 10 0.0350 97.1892 2.0311 0.7797 11 0.0350 97.1856 2.0337 0.7808 12 0.0350 97.1849 2.0342 0.7809 cholesky ordering: se sh ru in ru 1 0.0342 0.0000 100.0000 0.0000 2 0.0344 0.0018 99.9522 0.0461 3 0.0346 0.4773 99.3570 0.1657 4 0.0348 0.6692 99.0327 0.2981 5 0.0349 0.8163 98.8668 0.3169 6 0.0349 0.8559 98.8267 0.3174 7 0.0350 0.8530 98.3611 0.7859 8 0.0350 0.8534 98.3590 0.7876 9 0.0350 0.8584 98.3540 0.7875 10 0.0350 0.8596 98.3528 0.7877 11 0.0350 0.8607 98.3516 0.7877 12 0.0350 0.8608 98.3514 0.7878 cholesky ordering: se ru in sh in 1 0.0342 0.0000 0.0000 100.0000 2 0.0344 0.0114 0.5976 99.3911 3 0.0346 0.0425 1.1719 98.7856 4 0.0348 0.1041 1.3172 98.5786 5 0.0349 0.1188 1.3377 98.5435 6 0.0349 0.1460 1.3884 98.4657 7 0.0350 0.1525 1.4450 98.4025 8 0.0350 0.1527 1.4516 98.3957 9 0.0350 0.1537 1.4595 98.3868 10 0.0350 0.1540 1.4598 98.3862 11 0.0350 0.1540 1.4599 98.3862 12 0.0350 0.1540 1.4603 98.3857 cholesky ordering: se in ru sh 4.2.4 robustness test the 2008 international financial crisis brought a huge and deep influence on the global financial markets. considering the robustness, this study divided the full sample into two sub-samples by the crisis and analyzed the two periods respectively. the sub-sample 1 (january volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.58 | http://emaj.pitt.edu study on the shock-transmission mechanism of stock price among china, russia and india emerging markets journal | p a g e |40 1998-december 2007) includes 494 observations and sub-sample 2 (january 2008december 2012) includes 252 observations. the results suggested during the period of sub-sample 2, the external price shock has a more obvious impact on the domestic stock price. moreover, the sensitivity and response magnitude increase significantly too. specifically, the main conclusions of the robust test are as follows: first, the correlation among three stock markets increased significantly at the later stage. the correlation coefficients between china and russia, china and india, russia and india are 0.0598, 0.0965 and 0.2439 for the sub-sample 1 respectively, while those are 0.1495, 0.2196 and 0.6150 for the sub-sample 2 respectively. second, the granger causality tests showed that in granger causes ru and there is no any other causality for the sample series at the previous stage. meanwhile, at the second stage, sh does exist the granger causality to ru and in, and a bilateral causality between ru and in is found. third, the results of impulse response analysis are obtained the following findings: 1) for the sub-sample 1, the response of the three markets to new shock usually lasted for about 5 or 6 weeks, followed by a rapid convergence and stable trend. however, for the sub-sample 2, there is no evidence for a convergence and the impact of external stock markets on the domestic market shows a significant instability. this may prove that the 2008 international financial crisis has a huge effect on international financial markets to some extent. 2) for the sub-sample 2, the magnitude of response is much larger than that for the sub-sample 1. 3) the shanghai stock market made a positive response to the price shocks coming from the russian and indian stock markets for both sub-samples. the accumulated effect of the russian stock market to the price shock from china and india began positively, and turn negative gradually before coming to stability for the sub-sample 1. however, for the sub-sample 2, the accumulated response of the russian stock market to the price shock from china is still positive, but that effect of the shock from india is positive at first and then turns negative. finally, the accumulated response of the indian stock market to the shock from china always kept negative for the sub-sample 1 while it kept positive for the sub-sample 2. the accumulated response of the indian market to the price shock from russia kept positive at both stages, while the scale of this effect is much larger at the second stage. forth, the results of variance decomposition for the subsamples are very similar to those of the full sample, that is, the own rvc of each market in variance deposition is the largest, and the share of external markets to the variance reach peaks in the 12th week, too. for the sub-sample 1, the maximum share of ru and in in the variance of sh are 2.3299% and 0.7335% respectively, those of sh and in in the variance of ru are 1.0526% and 1.2389% respectively and those of sh and ru in the variance of in are 0.4846% and 2.6953% respectively. for the sub-sample 2, the maximum shares of ru and in in the variance of sh are 4.7059% and 3.4877% respectively, those of sh and in in the variance of ru are 5.1878% and 3.0448% respectively and those of sh and ru in the variance of in are 1.1675% and 2.8793% respectively. from above, the shares of external markets in the variance of each market at the second stage are much larger than those at the first stage, and the shares of chinese factor in the variance of russian and indian stock returns increased largely at the second stage. this proved that the power of external markets in forecasting the price of domestic stock market rose after the 2008 international financial crisis, especially the influence of chinese stock market on the russian and indian stock markets increased significantly which is the same with the conclusions of guangxiao li and yangui zhang (2008), chuilin yi and cuiyu zhang (2010). 5 conclusion nowadays, financial researchers pay more and more attention to the price comovement-effect among international stock markets. this paper investigated the volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.58 | http://emaj.pitt.edu dr.menggen chen p a g e |41| emerging markets journal shock-transmission mechanism among three emerging stock markets of china, russia and india, with a sample of weekly closing price including shanghai composite index, russia rts index and india sensex30 index ranging from january 1998 to december 2012. the results showed that the price fluctuation has an important influence on external markets, although the price behavior of each market primarily depends on the domestic factors. obviously, the independence of price is significantly stronger than its comovement-effect. usually, the impact of external price innovations will last for about 5 or 6 weeks and then die out after the 8th week in these three markets. the transmission mechanism of price shocks is very different from each other. relatively, the russian stock market has a significant influence on other two stock markets, and the impact of the chinese stock market on the russian stock market is stronger than that on the indian stock market. a further study suggested that the impact of external price shock to the domestic stock price significantly increased after the 2008 international financial crisis, as well as the sensitivity and response amplitude increased too. especially, the price shock from the chinese stock market has shown a fast growing impact on foreign stock markets. acknowledgement this study is supported by project of national social science fund of china (14zda047, 13azd086), program for new century excellent talents in university (nect-11-0029), research project of national statistical science (2012lz042), humanities and social science project of the ministry of education (13yja630005) and the fundamental research funds for the central universities (2012wzd02). references barberis, n., and shleifer, a., 2003, style investing. journal of financial economics, 68, pp.161-199. bekaert, geert, and campbell r. harvey, 1997, foreign speculators and emerging equitymarkets. working paper of william davidson institute at the university of michigan, series 79. berger, tino and pozzi, lorenzo, 2013. measuring time-varying financial market integration: an unobserved components approach. journal of banking & finance, vol.37(2), pp.463-473. bing zhang, zhizhen fan and xindan li, 2010, comovement between china and us’s stock markets. economic research journal, no.11. chen, m.g., 2010, price comovement-effect of chinese securities market. dongbei university of finance and economics press. chinn, m., and forbes, k., 2004, a decomposition of global linkages in financial markets over times. review of economics and statistics, 86(3), pp.705-722. chuilin yi, cuiyu zhang, 2010, before and after the sub-prime crisis an analysis of co-movement for china and asia's major stock markets. industrial economics research, no.2. connolly, robert a., and wang, f. albert, 2002, on stock market return co-movement: macroeconomic news, dispersion of beliefs and contagion. working paper, university of north carolina. contessi, s., de pace p., and francis, j., 2010, the cyclical properties of disaggregated capital flows. federal reserve bank of st. louis working paper, no.2008-041c. fei han and hui xiao, 2005, analysis on the co-movement between chinses stock market and the u.s. stock market. journal of finance, no.11. gerrits, r. j., and yuce, a., 1999, shortand long-term links among european and u.s. stock markets. applied financial economics, 9(1), pp.1-9. grieb, terrance, and reyes, mario g., 2002, the temporal relationship between largeand small-capitalizations stock returns: evidence from the uk. review of financial economics, 11, pp.109-118. jian hu and pengbo lv, 2008, analysis on the reaction between shanghai stock market and hong kong stock market. journal of shanxi finance and economics university, vol. 30. no.12. http://ideas.repec.org/s/eee/jbfina.html http://ideas.repec.org/s/eee/jbfina.html volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.58 | http://emaj.pitt.edu study on the shock-transmission mechanism of stock price among china, russia and india emerging markets journal | p a g e |42 lee, c., shleifer, a., and thaler, r., 1991, investor sentiment and the closed-end fund puzzle. journal of finance, vol.46, pp.75-109. ligao chen, pengfei wu and ning liu, 2006, the empirical study on the degree of international stock market co-movements. the journal of quantitative & technical economics, no. 11. oztek, m. fatih and ocal, nadir, 2012. integration of china stock markets with international stock markets: an application of smooth transition conditional correlation with double transition functions. erc working papers 1209, erc economic research center, middle east technical university, revised dec 2012. premaratneb, g., and balaa, l., 2004, stock market volatility: examining north america, europe and asia. national university of singapore working papers, no.1. qixia yang, 2007, study on comovment between the financial sectors in domestic and hong kong stock market, thesis of master degree of university of international business and economics. tam, pui sun and pui, i tam, 2012. rethinking stock market integration: globalization, valuation and convergence. sfb 649 discussion papers sfb649dp2012-052, sonderforschungsbereich 649, humboldt university, berlin, germany. xiaoguang li, yangui zhang, 2008, the mechanism of the linkage between china’s stock market and international markets. studies of international finance, no.11. xicun youzuo, 2009, study on comovement between chinese stock market and the u.s. stock market. economic review, no.2. zhigao yin and ning mao, 2008, a theoretical review on stock market comovement. economic perspectives, no. 8. http://ideas.repec.org/p/met/wpaper/1209.html http://ideas.repec.org/p/met/wpaper/1209.html http://ideas.repec.org/p/met/wpaper/1209.html http://ideas.repec.org/p/met/wpaper/1209.html http://ideas.repec.org/p/met/wpaper/1209.html http://ideas.repec.org/s/met/wpaper.html http://ideas.repec.org/p/hum/wpaper/sfb649dp2012-052.html http://ideas.repec.org/p/hum/wpaper/sfb649dp2012-052.html http://ideas.repec.org/p/hum/wpaper/sfb649dp2012-052.html http://ideas.repec.org/s/hum/wpaper.html microsoft word 18-263-1-ce.doc volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms aysun ficici southern new hampshire university | e-mail: a.ficici@snhu.edu c. bulent aybar southern new hampshire university abstract this study explores the value implications of good corporate governance for a sample of 54 adr issuing emerging market firms (emfs) from 9 countries primarily located in the regions of asia, eastern europe and latin america and the and employs recently constructed company composite corporate governance metric along with some alternative corporate governance measures associated with the origin of the issuing firm. although the adr literature primarily focuses on the impact of subscription to us disclosure requirements we contend that company and country specific corporate governance standards play a significant role in the risk reduction and ensuing value capture. the fundamental inquiry in this study has the following foci: the primary focus is on the impact of corporate governance structures on firm performance as to whether adherence to standards creates market value for adr issuing emfs. do good corporate governance practices affect the value of emfs? the secondary focus is concerned with whether the impact of corruption level and legal system in a firm’s home country affect the corporate structures of emfs thus affecting the market value of firms. in this study, we utilize tobin’s q as the measure of firm performance/market value. our findings suggest that there is a significant correlation between corporate governance structures of adr issuing emfs and their market values and/or performances. the results also indicate that the level of corruption and legal structures in home countries of emfs strongly impact the corporate governance structures of these firms and sequentially affect their market values. therefore, this research further contributes to the scholarly findings and suppositions that corporate structures of firms do create consequences on firm value. keywords: corporate governance, emerging market, adrs, tobins q, firm value this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 38 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms aysun ficici c. bulent aybar i. introduction   asymmetric information in financial markets is a taxing problem. an impediment to capital allocation is implicit in situations, which a capital user knows far more about his/her prospects and problems than the supplier of the capital. the resolution of information problems requires carefully designed control mechanisms such as appropriate contracts, courts to enforce these contracts, corporate governance rules, and financial intermediaries willing to act as corporate monitors. these mechanisms may either reduce the amount of information needed by the investors and intermediaries or may reduce the cost of collecting it. the acuteness of the information problems in emerging financial markets has been an escalating concern for global investors as the share of emerging market equities and bonds in global portfolio allocations grew substantially over the last decade. there is no sign of reversal in this trend as private capital flows in these countries gain further momentum in light of promising demographics and high growth prospects in emerging markets. the literature on information problems in financial markets suggests that prevalence of information problems create a more conducive environment for the development of debt markets rather than public equity markets. in essence, equity investments are far more information intensive than debt, simply because equity investors own the residual claims on the company. accordingly, they should be fully aware of the range of risks and opportunities facing the firm. this difficult task requires a complex screening assignment which is unlikely to be fulfilled by the average investor. therefore, the access to equity markets require significant support from a range of institutions (eg underwriters, institutional investors and brokers), which should collectively provide objective information about the company prospects. it is no accident that the abundance of financial information and its effective dissemination is an invariable characteristic of developed equity markets where external equity constitutes a significant source of capital for corporations. in the absence of such infrastructure, debt emerges as a practical and viable alternative to equity. indeed debt contracts exist primarily to overcome information problems such as the ones encountered in equity markets. unlike equity, debt creates simple, fixed obligations whose promised cash flows are the same regardless of how well or badly firm performs. the claims are in principle enforceable and almost everywhere debt holders are in a stronger position than holders of public equity to obtain their return in an environment of imperfect information. the extent of informational asymmetry also determines the structure of debt markets. relatively sophisticated debt securities such as bonds, notes and commercial papers are less likely to develop in environments characterized by inadequate informational infrastructure. despite well defined cash flow rights, buyers of debt securities still need to feel that either they are themselves well informed or that some institution such as a rating agency is able to inform them indirectly about the company prospects. banks in contrast generate their own private information and are thus the dominant suppliers of debt finance when public information is inadequate. consequently, banks play a far larger role in corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 39 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu markets where publicly available information is limited. informational asymmetries constitute an impediment in development of financial markets. emerging markets suffer from this consequence. information problems in emerging markets led to development of bank centered financial systems and left corporations with limited choice and variety of financial resources. despite renewed attempts to jumpstart equity market development in emerging markets, relatively slow evolution of the institutional infrastructure limits widespread use of equity markets to finance growth. a natural outcome of this is over reliance on the internal funds and high cost of capital due to limitations of domestic financial markets. because of rampant information problems, and infrastructure issues, equity is still very costly. therefore, a growing number of em companies attempt to overcome the limitations of domestic financial markets by subscribing to more stringent disclosure requirements in more developed financial markets particularly by accessing tools such as american depositary receipts (adrs). adr issuance is considered to be a strong signal to the market that the issuing company is ready for disclosure and compliance. the commitment to increased levels of disclosure is expected to reduce the potential informational asymmetries between the management of the firm and its shareholders or among buyers and sellers of the firm’s shares. the voluntary disclosure reduces the risk borne by the investors and increases liquidity of firm’s stock by attracting larger group investors, who are more confident that the stock transactions occur at fair prices. voluntary disclosure can also lower the cost of information acquisition for analysts and hence increase the supply of information about the company, reinforcing further reductions in informational asymmetry. as a result, em firms committed to disclosure reduce their external cost of capital, and capitalize on the growth prospects in their respective markets. such a move by an em firm theoretically has some value implications. in other words, in general commitment to good corporate governance should create value for the existing shareholders of the firm. the announcement and more importantly verification of such behavior should result in a decline in risk premium and therefore an increase in value. a number of empirical studies verify this expected increase in firm value in the context of event studies by analyzing the returns around the adr listing (miller 1999, forrester and karolyi 2000). the subscription to higher standards of disclosure by issuing adr in the us market is expected to generate the effects discussed above. klapper and love (2002) suggest that foreign firms issuing adrs in the us on average have better operating performance and they attribute this finding to better corporate governance structures emerging as a result compliance to more stringent us disclosure requirements. we argue that a number of factors are expected to actively shape the resultant impact on performance and the value! first, there are different tiers of adr markets with varying levels of disclosure and to best our knowledge there are no studies investigating the value implications for the issuing firms in the post listing period in relation to their commitment to better corporate governance. secondly, the empirical literature analyzing value implications around the adr issues report that risk reduction is more prevalent for developed country firms with poor corporate governance standards. drawing on this literature, we argue that the impact of home country legal and regulatory environment should be considered. finally, the extent of corruption in the home country setting would affect the commitment to better disclosure over the long run. this study focuses on the impact of corporate governance structures on firm corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 40 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu performance as to whether adherence to those standards creates market value and enhances performance for emfs. we also explore whether the impact of corruption level and legal systems in a firm’s home country affect the corporate governance structures of emfs and subsequently affecting the market value and performance. we use a sample of adr issuing emerging market firms, and employ recently constructed company composite corporate governance metric along with some alternative corporate governance measures associated with the origin of the issuing firm. our sample is composed of a cross-section of 54 em firms in various industries from 9 countries (brazil, chile, india, korea, malaysia, peru, philippines, taiwan and thailand) primarily located in asia and latin america. although the adr literature primarily focuses on the impact of subscription to us disclosure requirements, such as increased exposure to the us capital market, and increased liquidity in equity through higher trading volumes, we contend that company and country specific corporate governance standards play a significant role in the risk reduction and ensuing value capture. the study is organized as follows: section two of the paper presents a review of the relevant literature. section three focuses on standard and poor’s (s&p) governance benchmarks. section four discusses the data and methodology. section five presents empirical findings and finally section six concludes the paper with closing remarks. ii. corporate  governance,   performance  and    value   linkage   there is a growing body of literature in finance providing evidence on the linkage between corporate governance practices, corruption, legal infrastructure and firm performance and value. doidge et.al (2001) show that home country characteristics defining governance structures such as inadequate investor rights and protection of minority interests are associated with poor performance and lower value. in a parallel study dowell, hart and yeung (2000) suggest that companies with no or little stringent adaptation to global governance standards have lesser market value. in a study focusing on emerging market firms klapper and love (2002) argue that inefficient corporate governance structures and poor legal infrastructure increase risks associated with emerging market investments. in a single country study, black, jang and kim (2003) examine the effects of corporate governance structures on the market value of korean firms and suggest that corporate governance is a significant dynamic in explaining the market value of korean public companies. similarly, black (2001) finds a robust relationship between the market value and corporate governance of a small sample of russian firms. a related body of research, which mainly includes firms from the united states and western europe focuses on ownership structure and shareholders rights and their impact on the firm value. la porta et.al (1999) and la porta et.al (2000) emphasize the value implications of potential conflicts of interest between the controlling and minority shareholders and insiders and outsiders when there is little or no transparency. when the interests of those who control the firm differ from the interests of those who supply the firm with external finances, the predicament evolves into principal agent problem and the ensuing agency costs have significant negative impact on firm value. particularly interesting implications of the agency costs engendered by lack of transparency are the dividend policy and company’s ability to exploit growth opportunities. the authors demonstrate that firms operating in countries, where minority shareholders are better protected, pay higher dividends. those firms that experience faster growth pay lower dividends than the slower growing firms. this illustrates that when corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 41 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu the shareholders are legally protected they are likely to wait since the investment opportunities are good. conversely, poorly protected shareholders prefer not to wait no matter what the investment conditions are. this imperative leads to massive misallocation of funds, and in turn affects the firm value. such conflicts of interest emanating from lack of transparency and inadequate regulatory safeguards to protect minority shareholders are endemic in emerging markets with non-negligible value implications. other research examines corporate governance and firm value by focusing on the issue of transparency from investors’ perspective. perotti and von thadden (1998) suggest that although corporate transparency has both strategic advantages and disadvantages, in general it has positive value implications since investors are able to receive meaningful information concerning their investments. recent proliferation of literature on economic implications of corruption suggests that private firms are entangled in the process as they take advantage of administrative corruption, involve in public procurement kickbacks and state capture . xun (2002), examines the relationship between corporate governance and corruption. his findings suggest that poor corporate governance standards contribute to the proliferation of corruption by reducing transparency and impair the interests of investors. in countries with poor corporate governance practices, corruption develops into a transparency issue. corruption may falsify the information received by the investors and the insiders may be treated preferentially through asset diversion, transfer prices and theft. consequently, impaired investor trust exacerbated by poor corporate governance standards and corruption raise the cost of capital, negatively affect the operating performance and reduce value. finally, a growing body of literature indicates that variations in home country legal structure and the laws that protect investor across nations have significant impact on corporate governance mechanisms as well as ownership structure, dividend payout, cost of external finance and market valuations ((la porta, lopez-de-silanes, and vishny (1999); klapper and love, (2002)). while in some countries investor protection laws may not be binding since some firms may decline specific provisions, others, such as adr issuing firms may implement additional provisions to improve investor protection rights by increasing disclosure, instituting better functioning boards and impose disciplinary means to ensure the rights of minority shareholders. klapper and love (2002) find that corporate governance structures are positively related to country level measures of investor protection and suggest that it is crucial for firms from countries with weak legal systems to adopt better corporate governance practices. similarly, black (2001) suggests that corporate governance structures of firms in developing countries can have larger effects, since these countries may have weaker rules. iii. data  and  methodology   data our sample includes 54 companies from 9 emerging market countries with adr issues in us. our sample firms originate mostly from asia and latin america. accounting data to measure firm performance was compiled from datastream international. the governance data which includes s&p’s corporate governance index and composite company governance scores (cgs) were obtained from standard and poor’s. cgs is rated from 1 to 10 – 10 being highest adherence to corporate governance standards by firms. corruption scores were obtained form transparency international. the data for legal structures of firms is obtained from the institute of corporate governance at yale university. corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 42 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu methodology a. performance measures: we use several performance proxies based on accounting data. these performance proxies are return on assets (roa) and return on equity (roe). all return indicators are based on the earnings before interest taxes and depreciation (ebitd) due to its neutrality to depreciation methods, leverage and tax treatment. while all three indicators measure management’s operating efficiency, they represent returns on different sources of capital. we also use tobin’s q which is an important and widely accepted measure of corporate performance. tobin’s-q is defined as the ratio of market value of the firm to the replacement cost of its assets. we employed doidge, karolyi and stulz’s (2001) approximation to calculate the q ratio: where ta is the book value of the total assets of the firm, bve is the book value of the firm’s equity and mve is the product of a firm’s share price and the number of outstanding common shares. this indicator is employed to explain a number of diverse corporate phenomena such as cross-sectional differences in investment and diversification decisions, the relationship between managerial equity ownership and firm value. we are particularly interested in using tobin’s-q to gain comparative insights on the effectiveness variant corporate governance practices adopted by emerging market firms on the firm value. b. control variables: we use size and leverage as control variables since their significance is empirically well established in literature addressing performance and value issues. while logarithm of sales and total assets are used as alternate size proxies, debt ratio is used as a measure of leverage. corporate governance measures our main corporate governance measure is standard and poor’s corporate governance scores (cgi). this index offers a detailed measure of a company’s corporate governance standards by reference to global practices. standard & poor’s corporate governance profiles assign scores to companies according to their global practices. the assigned scores range from 1 to 10, and 10 corresponds to best corporate governance practices. s&p total decile scores are employed as the general corporate governance index s&p corporate governance index is composed of three subindices which collectively determine the overall cgi score. these three subcategory indices address various aspects of corporate governance. sub-index-1 focuses on ownership structure and investor relations; sub-index-2 addresses financial transparency and information disclosure; and finally sub-index-3 measures the board, management and governance processes. more specifically, ownership structure and investor relations sub-index is concerned with the role of stakeholders in corporate governance and equitable treatment of shareholders and it includes: (1) fairness to minority shareholders in protecting against fraud, self-dealing or other insider wrongdoing; (2) responsibility of the corporation as a member of society to abide by the laws and act with regard to society’s needs. corporate laws and regulations are also included in this subcategory. financial transparency and information disclosure sub-index focuses on transparency and improved disclosure of accurate and timely information. finally, board and management and processes sub-index is concerned with the rights of the shareholders corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 43 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu and accountability of management through effective oversight based on a balance of power between the board of directors, managers, shareholders and the auditor. legal system proxies in an attempt to explore the linkage between the corporate governance structure of a firm and the legal structure of its home country, we developed a legal system proxy. we loaded 28 variables used by lopez de silanes to describe a country’s legal structure into four principal components, namely legal structure, shareholder protection, efficiency and country risk . corruption index the corporate governance scores of individual countries are obtained from transparency international. the ratings are 10 to 1. the score 1 indicates the highest level of corruption. a. empirical models: we use several alternative specifications to explore the impact of corporate governance, corruption and legal systems on the firm performance and value. our first specification uses tobin’s-q as a value metric. in addition to the corporate governance index (cgi) composite score, we use variables to control for the size and the leverage. tq = �0 + �1 cgi + �2 lev + �3 ln(sales) + � (1) we also check the significance of the cg sub-indices by using the following specification: tq = β0 + β1 sub1 + β2 sub2 + β3 sub3 + β4 (lev )+ β5 ln(sales)+ε (2) pricing inefficiencies and high volatility in emerging markets raise some questions about tobin’s-q as a reliable value metric or performance measure. therefore, we use roa and roe as alternative performance measures. our specifications take the following form: roa = β0 + β1 cgi + β2 lev + β3 ln(sales) + ε (3) roa = β0 + β1 sub1 + β2 sub2 + β3 sub3 + β4 (lev) + β5 ln(sales)+ε (4) roe = β0 + β1 cgi + β2 lev + β3 ln(sales) + ε (5) roe = β0 + β1 sub1 + β2 sub2 + β3 sub3 + β4 (lev) + β5 ln(sales)+ε (6) in order to explore regional and industry patterns we use region and industry dummies. la_dummy = 0 if the firm belongs to an asian country and 1 if it belongs to a latin american country. we classified firms into three types of industries based on their two digit sic codes: i) diversified ii) service industry and iii) hightech industry dummy_si = 1 if industry is service industry0 if the industry is high-tech industry dummy_di = 1 if industry represents diversified 0 if the industry is high – tech industry with the inclusion of regional and industry dummies, we use the following specifications: tq = β0 + β1 cgi + β2 lev + β3 ln(sales) + β4la_dummy+ β3 dummy_si+ β5 dummy_di +ε (7) tq = β0 + β1 sub1 + β2 sub2 + β3 sub3 + β4 (lev )+ β5 ln(sales)+ β6la_dummy+ β7 dummy_si+ β8 dummy_di +ε (8) corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 44 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu roa = β0 + β1 cgi + β2 lev + β3 ln(sales) + β4la_dummy+ β3 dummy_si+ β5 dummy_di +ε (9) roa = β0 + β1 sub1 + β2 sub2 + β3 sub3 + β4 (lev )+ β5 ln(sales)+ β6la_dummy+ β7 dummy_si+ β8 dummy_di +ε (10) we also explored the impact of legal system and the corruption on the firm performance by using the following specification. tq = β0 + β1 lev + β2 ln(sales) + β3 cgi +β4ci + β5 legal structure + β6efficiency + β7 country risk + β8share holders protection (11) roa = β0 + β1 lev + β2 ln(sales) + β3 cgi +β4ci + β5 legal structure + β6efficiency + β7 country risk + β8share holders protection (12) value creation we utilize the ols method to address the research hypotheses: hypothesis 1: corporate governance structure of a emerging market mne affects its market value (mv). hypothesis 2: the level of corruption in a country affects the market value of an emerging market mne. hypothesis 3: legal system/ structure in a country affects the corporate governance structure of an emerging market mne, thereby affecting the market value of the firm.. iv. empirical  findings   data analysis and methodology ols results for tobin’s q and corporate governance, corruption and legal structures: a. in order to find whether corporate governance structure of a firm affects its market value, a linear regression model is chosen: tq = β0 + β1 cgi + ε where tq stands for tobin’s q, which is utilized as a proxy for market value. and cgi stands for corporate governance index. the results as follows: variables � t r2 adj r2 f tobin q vs cgi cgi 3.52e-01 2.53e+00 0.124 0.124 6.378 the f-value is high and the t-statistic is greater than 2. therefore, the above regression demonstrates that as governance score increases, the market value increases by 35.2%. since a high number for cgi ranking indicates good governance, we find that as firms implement strong governance practices, their market values increase. therefore, the results support hypothesis 1. b. it may be possible that the firm’s profitability may affect the market value. therefore, to control for the profitability effect we add the ebit/sales variable into the model. tq = β0 + β1 cgi + β2 ebit/sales+ ε the following table shows the results of the regression: variables � t r2 adj r2 f tobin q vs cgi,ebit/sales cgi 4.54e01 2.83e+00 0.165 0.124 4.043 ebit/sales -0.172 -1.072 the adjusted r-square remains the same indicating that the added variable does not corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 45 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu contribute much in explaining the variation in the data. firm’s profitability (measured by ebit/sales) is negatively correlated with tq. the t-statistic of β1 increases, which strengthens the variable in the model. the above regression displays that as governance score of a firm increases, its market value increases by 45.4%. hence the results from this regression as well support hypothesis 1. c. the size of a firm may also affect the market value. to control for this effect, we add the ln (assets) into the model. we use ln(assets) as a proxy for firm size. tq = β0 + β1 cgi + β2 ebit/sales + β3 ln(assets) + ε variables � t r2 adj r2 af tobin q vs cgi,ebit/sales,ln(assets) cgi 0.536 3.19e+00 0.206 0.147 3.467 ebit/sales 0.218 1.35e+00 ln(assets) 0.217 1.45e+00 the adjusted r-square has increased indicating that the added variable contributes in explaining the variation in the data. size of the firm (measured by ln(assets)) is positively correlated with tq. the above regression shows that as governance score increases, the market value increases by 53.6%; thereby, it supports hypothesis 1. d. ln(sales) could also be a measure of firm’s size. hence we regress with ln(sales) instead of ln(assets). tq = β0 + β1 cgi + β2 ebit/sales + β3 ln(sales) + ε variables � t t r2 a ad jr2 a f tobin q vs cgi,ebit/sales,ln(sales) cgi 0 .466 2 .63e+00 0 .165 0 .103 2 .64 ebit/s ales 0.17 1.04e+00 ln(sa les) 0 .027 1 .62e-01 the adjusted r-square has decreased indicating that the added variable does not contribute in explaining the variation in the data. hence we take ln(assets) as a better proxy for firm size. e. the investor’s confidence of a firm might result in a greater market value. to control for this effect bv/mv is added to the model. tq = β0 + β1 cgi + β2 ebit/sales + β3 ln(sales) + β4 bv/mv + ε variables � t r2 adj r2 f tobin q vs cgi,ebit/sales,ln(assets),mv to bv cgi 3.345e03 3.975 0.525 0.477 10.785 ebit/sales -1.81e02 2.038 ln(assets) 3.323e03 3.000 mv to bv 1.819e02 5.117 from the above regression we observe that the model improves. adjusted r-square has increased. mv/bv explains 1.81% of the variation in the data. corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 46 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu f. next tobin’s q is regressed against the corruption index to find whether corruption affects the market value of a firm. tq = β0 + β1 corruption index + ε the results of the regression are as follows: variables � t r2 adj r2 f tobin q vs corruption index corruption index -0.07 -4.71e+00 0.005 -0.017 0.222 there seems to be a negative relation between corruption and tq, indicating that as corruption scores go up (high corruption), the market value of the firm decreases. the findings state that high corruption level within a country decreases firm value. the results support hypothesis 2. g. to find the relationship between market value (tobin’s q) and the 4 principal components: structure, efficiency, country risk and shareholders protection the following model is utilized: tq = β0 + β1 legal structure + β2 efficiency + β3 country risk + β4 share holders protection + ε judging from the above regression, it can be noted that the type of legal structure explains 94.6% of the variation in the data. (type of legal structure: depending whether the country adheres to swiss law, german law or british law). as the efficiency of the legal structure increases, the market value increases by 2.5%. as country risk increases the market value increases 138% and as shareholders’ protection increases, market value of the firm decreases by 67.6%. the results from this regression support hypothesis 3, illustrating that legal structure in a country, country risk, and shareholder protection do affect firm value. here some effects on market value are negative. h. the effect of the three sub indices used in the computation of corporate governance scores on tobin’s q is obtained from the following regression: tq = β0 + β1 sub1 + β2 sub2 + β3 sub3 + ε variables � t r2 adj r2 f tobin q vs legal structure,effeiciency,country risk,share holders protection legal structure -0.946 -3.48e+00 0.388 0.33 6.656 efficiency 0.025 0.207 country risk 1.38 4.564 share holders protection -0.676 -3.946 corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 47 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu variables � t r2 adj r2 f tobin q vs sub1,sub 2,sub 3 sub1 ownership structure and investor relations 0.875 4.567 0.355 0.309 7.873 sub 2 financial transparency and information disclosure -0.04 -0.234 sub 3 board and management and processes -0.442 -2.049 from the above regression it can be inferred that as ownership structure and investor relations scores increase, market value increases by 87.5%. high financial transparency and information disclosure scores cause a decrease in the market value by 4%. an increase in board and management process scores causes the decrease in the market value by 44.2%. the results support hypothesis 1. however, ownership structure and investor relations have positive effect on firm market value, and sub category 2 financial transparency and information disclosure, and sub category 3 – board and management process have negative effects on firm market value. b. in order to find whether corporate governance structure of a firm across the geographical region affects its market value, the following linear regression model is employed: tq = �0 + �1 cgi + �2 la_dummy + � la_dummy = 0 if the firm is in asia and 1 if in latin america. this model assumes that the rate of change of market value with respect to cgi is a constant across the two countries. the results are the following: variables � t r2 adj r2 f tobin q vs cgi & country dummy const 0.978 298.043 cgi 2.259e-03 2.819 .318 .287 10.242 la_dummy 1.352e-02 3.533 the two equations obtained are as follows: for firms in latin america, tq = 1.978 +2.259e-03 cgi + ε corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 48 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu for firms in asia tq = 0.978 +2.259e-03 cgi + ε the above equations suggest that the mean of the tobin’s q in latin america is higher than those of asia. this could be attributed to investor’s perceptions or any such external variables outside the scope of this research. j. in order to find whether corporate governance structure of a firm across the industry affects its market value, the following linear regression model is chosen: tq = β0 + β1 cgi + β2 dummy_mi + β3 dummy_si + ε the above model assumes that the rate of change of market value with respect to cgi in the two geographical areas is a constant. three types of industries are identified as i) mixed industry ii) service industry and iii) high-tech industry where, dummy_si = 1 if industry is service industry 0 if the industry is high-tech industry dummy_mi = 1 if industry represents mixed industry 0 if the industry is high – tech industry variables � t r2 adj r2 f tobin q vs cgi & industry dummy cgi 8.829e-04 1.023 .372 .328 8.474 dummy_mi 1.376e-02 4.049 dummy_si 5.217e-03 1.809 assuming that the rate of change of market value with respect to cgi in the two geographical areas is a constant, the following three equations can be obtained from the above regression for the three industries: 1. service industry tq = (0.978 + 5.217e-03) + 8.829e-04 cgi + ε = 0.983217 + 8.829e-04 cgi + ε 2. mixed industry tq = (0.978 +1.376e-02) + 8.829e-04 cgi + ε = 0.99176+ 8.829e-04 cgi + ε 3. high – tech industry corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 49 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu tq = (0.978) + 8.829e-04 cgi + ε the results indicate that the mean market value of firms in the mixed industry category is higher than the other two categories as given by the y-intercept. the mean market value of the firms in the service industry is higher that the ones in the high-tech industry. v. conclusion   the results support a positive correlation between tobin’s q (market value of the firm) and total corporate governance scores of emerging market mnes. thereby supporting the hypothesis – corporate governance structures of emerging market mnes affect their firm value and value creation. when there is better corporate governance within the firms, the market value of firms increase. when we consider the sub-indices separately in the regression model, it is inferred that as ownership structure and investor relations’ scores increase, market value of a firm increases as well. however, high financial transparency and information disclosure scores cause a decrease in the firm market value. additionally, an increase in board and management process scores, causes a decrease in the market value of the firm. the results also report that there is a negative relationship between tobin’s q and corruption, indicating that as corruption scores go up (high corruption level within a country), the market value of the firm decreases. the findings state that high corruption level within a given country decreases firm value. the type of legal structure explains 94.6% of the variation in the data. (type of legal structure: depending whether the country adheres to swiss law, german law or british law). as the efficiency of the legal structure increases, the market value increases by 2.5%. as country risk increases the market value increases 138% and as shareholders’ protection increases, market value of the firm decreases by 67.6%. this research further contributes to the studies relating corporate governance and market value, as it confirms a positive relationship between the two variables. the research also includes control variables that were not previously used in other studies. therefore it can be said that it is more robust than the other studies. our findings suggest that it is imperative for firms to enhance their corporate governance standards in order to increase firm value. the findings also suggest that investors need to be extra cautious when investing in firms with less stringent corporate governance mechanisms. future studies in this area can be expanded by incorporating other variables to control for factors outside of the scope of this study. vi. references   1. agrawal, anup. and knoeber, charles r. “firm performance and mechanisms to control agency problems between managers and shareholders”. journal of financial and quantitative analysis, 31(1996). 2. black, jang and kim (2003), “does corporate governance affect firms’ market values?,”social science research network electronic library at: http://papers.ssrn.com/abstract =311275. 3. black, bernard (2001), “the corporate governance behavior and market value of russian firms,” emerging markets review, vol. 2, pp. 89-108. corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 50 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu 4. doidge, c, andrew karolyi, and rene m. stulz (2002), "why are foreign firms listed in the u.s. worth more?," working paper at: http://ssrn.com/abstract = 2853397. 5. dowell, hart and yeung (2000), do corporate global environmental standards create or destroy market value? management science. vol, 46 no. 8 1059-1074. 6. fama, e., l. fisher, m. jensen and r roll. (1969) “the adjustment of stock prices to new information.” international economic review 10: 1-21. 7. gompers, p, joy l.ishii, and andrew metrick (2003), "corporate governance and equity prices", quarterly journal of economics, vol. 118, pp. 107-155. 8. hellman, j., g. jones, and d. kaufmann (2000), “are foreign investors and multinationals engaging in corrupt practices in transition economies?” the world bank/the william davidson institute. 9. hellman, joel and jones, geraint and kauffman, daniel and schankerman, mark a. “measuring governance, corruption, and state capture: how firms and bureaucrats shape the business environment in transition economies”. world bank institute of governance, regulation and finance. 2312. washington d.c. (2000). 10. kaufmann, d., and s.-j. wei (1999), “does ‘grease money’ speed up the wheels of commerce?” the world bank and harvard university. working paper. no. 2254. 11. kaufmann, d., and s.-j. wei (2000), “measuring governance, corruption, and state capture – how firms and bureaucrats shape the business environment in transition economies” the world bank and harvard university. working paper no. 2312. 12. klapper, l. and inessa love (2002), “corporate governance, investor ptotection, and performance in emerging markets”, world bank policy research working paper 2818. 13. laporta, r. f. silanes, and a. shleifer (1999) “corporate ownership around the world,” journal of finance, vol. 54, pp. 471-517. 14. laporta, r. f. silanes, a. shleifer, and r.w. vishny (2000) “agency problems and dividend policies around the world,” journal of finance, vol. 55, pp. 1-33. 15. laporta, rafael and lopez de silanes, florencio and shleifer, andrei and vishny, robert w. (2000). “investor protection and corporate governance”. journal of financial economics. 58, pp. 3-27. 16. maher, m. and t. andersson (2000), convergence and diversity of corporate regimes and capital markets, oxford university press, oxford. 17. modigliani, franco and enrico perotti (2000), “security versus bank finance: the importance of a proper enforcement of legal rules,” international review of finance, vol. 1, pp. 81-96. 18. oecd report (1987 – 1997). 19. oecd, “principles of corporate governance”. organisation for economic cooperation and development. accessed june 2, 2004. http:www.oecd.gov 20. patel, s.a., amra balic, and liliane bwakira (2002), "measuring transparency and disclosure at firm level in emerging markets," emerging markets review, vol.5, pp. 169-191. corporate governance and firm value in emerging markets an empirical analysis of adr issuing emerging market firms emerging markets journal | p a g e | 51 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.18 | http://emaj.pitt.edu 21. transparency international. cpi index. http://www.transparency.org/policy_research/surveys_indices/cpi . 22. stulz, rene m and lang, larry h p. (1994). tobin's q, corporate diversification, journal of political economy. 102:6, pp. 1248-80. 23. woochan, kim and black, bernard, s. and jang, hasung. .(2003) “does corporate governance affect firms’ market values?” social science research network. 24. xun, wu, (2002), "corporate governance and corruption: a cross country analysis," public policy program, national university of singapore. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu a new path for management education in an emerging country ayşe çoban kayacı istanbul medeniyet university, department of management | ayse.coban@medeniyet.edu.tr abstract management education has a long history in turkey, but it still has so many structural problems. both scholars and practitioners complain about the inconsistencies with theoretical and practical sides of university education in the management field. lack of critical thinking and ethical values have become first hand problems of management education both globally and nationally. this study focuses on the evolution of management education and its historical problems in the light of global perspectives. suggestions to solve intrinsic matters in university education for a better human resource quality and business life for turkey have been made. keywords: management education, turkey, critical thinking, curriculum development new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.110 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.110 | http://emaj.pitt.edu a new path for management education in an emerging country page |38| emerging markets journal a new path for management education in an emerging country ayşe çoban kayacı 1. introduction it becomes a necessity that management education needs to be restored for the post-industrial requirements of business environment. an overall assessment of management education in higher education may contribute new paths for the applicants of business life. although, it seems that the winner of the terrain of management education is north american school, there have been local applications and resistances for higher education in management field. the globalization process helped north american style to win this battle. in the post-industrial era, studying business has become so popular for students from different disciplines in most of the countries (bruner and iannarelli, 2011). moreover, the evolution of management education has been discussed for europe and mediterranean europe by most of the academicians in management field since 1960s.1 expanding markets, new business fields, social changes, increased mobilization and e-business activities need more talented and professional labor force. most of the business schools try to educate students according to needs of business environment, but the education style still remains as absolute teaching for the students. traditional classroom teaching has started to be ineffective for inexperienced students to develop organizational understandings (shaw and fisher, 1999). this study will discuss the history of management education in turkey, different applications to restore higher education in different countries and a critical perspective of managerial thought in today’s business life. 2. history of management education in turkey the lack of critical thinking is an obstacle for management education in turkey. ozcan (2012), mentioned this problem by showing the immaturity of critical management studies which has been made so far. to understand the management education and its problems, it is an obligation to assess the history of management education of turkey. the seeds of management education in turkey have started to grow up in 1882 by constituting “higher” school of commerce in istanbul. the education style of this school was affected from french “grandes écoles” because of the cyclical environment of ottoman empire. after the foundation of the republic of turkey, this school has become a faculty of istanbul university and the effect of continental europe had been noticed in the style of education. in the second evolution of management education, the “higher” commerce schools had transformed into academies of economics and commerce and the french school effect left its place to german effect in the management education area. in the third evolution, with the constitution of middle east technical university and robert college, the management education was started to be dominated by the american style. the government’s economic applications and post-war conditions of the world also affected the country’s education system. the new universities had a new position in the education system of country by applying american management education style and teaching the courses in english. moreover, the business environments in the country demand more professional labor force and managers to employ in developing industrial firms (kipping, usdiken, and puig, 2004; sargut, 2009). in accord with these improvements, the education style has evolved to train individuals for managerial positions of the private sector organizations in management field (üsdiken, 2009). it has been accepted by most of the academicians in management field that turkey’s late industrialization and financialization has served the domination of american style in managerial thought and education (kipping, usdiken, and puig, 2004; sargut 2009). actually, the influence of american style in managerial thought and education was perceived in europe as well. however, the european style was seen as more abstract cause of “business economics” and tended to be less disposed to train professional management (kast, 1965). 3. praxis for a new style and critical aspects in the post-industrial era, the economic crisis and financial scandals in business environment have made the managerial thinkers to re-think about the importance of values in management education. the transition of the values and ethics to management students has also been a problem for academicians. a special framework has been mentioned by moosmayer and bode (2010) to support a worldwide comprehension of different cultures and traditions about the effect of academicians on the values. this is to make clear precise hypotheses about academics’ influence on students and business environments and to develop management education (moosmayer and bode, 2010). this framework can contribute a different perspective for turkish academia in management field. in the shadow of market volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.110 | http://emaj.pitt.edu ayşe çoban kayacı emerging markets journal | p a g e |39 oriented view, the business life has sheltered all the risks of corrupt practices and financial scandals in turkey as well. focusing on managerial values and ethics would brighten the students for the practical side of management field and their future work lives. students can achieve to assimilate the importance of values and ethics with the help of independent knowledge. furthermore, it is globally very important to have an mba degree and mba holders have their own “habitus” which is highly oriented with “market capitalism”. there is a risk for mba programs to reinforce unethical values and practices of “habitus”. for instance, the accreditation institutions can be a double edged sword for business schools and mba programs to replace unethical standards and practices or to maintain preconceived values (vaara and faÿ, 2011). the research of o’donovan (2010) in uk has shown that most of the undergraduate students in management field tend to gather absolute and transitional knowledge. the students at the undergraduate level generally want the definite knowledge about the lectures from their teachers or they try to categorize the knowledge in their lectures (o'donovan, 2010). this is an alert for managerial thought, since it ignores to criticize the knowledge of management discipline. the students may have so many problems in their work life when they would try to solve the conflicts with absolute knowledge they got from their undergraduate education. unfortunately, critical thinking and learning is not so common in turkish society. the cultural context and social factors may have an important effect on epistemological beliefs (o'donovan, 2010). because of this effect, the examples or cases in management education classes would not be so applicable for the students. even if the students get the absolute information from their undergraduate classes, they would fall in trouble to connect real life situations. most of the cases and applications in management classes are from american books or articles and most of the times the solutions can’t respond local needs of business life. another study has been offered by rousseau (2007) to assemble the practical and theoretical side of management education. an online access portal that helps the researchers, educators and practitioners to meet and discuss the practical questions, problems and research results is called as the evidence based management collaboration (ebm) (rousseau, 2007). rousseau (2007) thinks that ebm can be a pivot to transfer the abstract knowledge of organization science into the practices of business life. this praxis would be beneficial for turkish management education to constitute a local case database to respond our local problems since the imported cases in management classes try to impose an american managerial thought. the changes in management education would need an institutional policy to sustain the new style of education. however, universities with powerful and professionalized faculty members may resist to develop an institutional policy and follow it (kraatz, ventresca, and deng, 2010). it has become so common to constitute partnerships among business schools. most of the business schools in the world (about 65 %) have developed partnerships with u.s. business schools. according to reports, european business schools have the highest level of this ratio by having one or more partners for each business school from all over the world (bruner and iannarelli, 2011). even though adopting the management education into the local needs of business environment is important, turkish business schools should create new partnerships especially with european business schools to eliminate american style management education and to bring a more critical perspective to the field. there is evidence about the lack of studies for critical management thinking in the management field of turkey. ozcan (2012) has proved that by his study about investigating the proceedings which was presented in national management organization conference since 1993. the results of the study have shown that there have been a high level of studies about bullying and mobbing, gender based power relations, discrimination, sexual harassment, managerialism, etc. which can’t be ignored since the topics are related to critical thinking. however, these topics generally have focused on “behavioral” part of management field. the study shows that turkish management education has grown an adequate critical approach in behavioral field of organizational study and these attempts probably would have reflections in classroom teaching (ozcan, 2012). students should be imposed to criticize about the facts of business life by expanding the topics about power relationships, discrimination, sexual harassment and performance based evolutions in management departments. even though there has been a spreading for cognitive approaches in the latest years, the academicians should focus on the critical aspects of these approaches. besides the need for critical thinking in management studies and education in turkey, management scholars should focus much more on social responsibility issues in organizations. it has been criticized that managers don’t use social sciences for social responsibility in management and they prefer to struggle with age-old problems of costs and employee loyalty by the help of social sciences. at this point, social scientists have been seen as the collaborators of managerial elites to dominate the employees (baritz, 2005). furthermore, management education is seen as so ideological because of its assistance to foster the internal solidarity of management and to support managerial authority over subordinates (anthony, 2005). since the cognitive approaches have imposed the individuals to volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.110 | http://emaj.pitt.edu a new path for management education in an emerging country page |40| emerging markets journal behave in performance focused base, critical understandings can eliminate the pressures for the individuals. in addition to social responsibility issues, sustainability in management education could be significant for both practical and theoretical aspects. sustainability can be achieved by curricular and cocurricular learning as well as effective decision makers in business schools (rusinko, 2010). unfortunately, turkish business schools generally suffer from chopping and changing curriculums according to decision makers’ education profiles rather than the needs of students and business life. however, sustainability has become a popular issue for business firms, which management scholars deal with. there is an urgent need for arranging curriculums for sustainability oriented view in lectures and contribute to it by supporting both students and academic staff practice sustainability activities. likewise, graduating managers of future should have basic skills and knowledge about research and development oriented firms. at this point, it has been highly recommended by scholars to develop curriculums with the help of science courses. science courses are seen as good sources for cultivating critical thinking and inductive reasoning of management students. collaboration with science and art faculties is seen as a must to have rich curriculums in management or business departments and schools (ledley and holt, 2014). in the manner of collaboration with other scientific fields, turkish business schools or management departments still lack a lot. most of the students cannot show success in math lessons and there have been so few examples which have a philosophy of science lecture at undergraduate level. moreover, business schools have shown a great loyalty to the benefits of high status shareholders until this time (emiliani, 2006). this situation is similar in turkey. at this point, emiliani (2006) has suggested that business schools should train their students for considering all stakeholders’ benefits in organizations and a “human-economic” approach should be accepted to designate the principles for distributing the benefits. in turkish management field, the lack of critical management studies has strengthened the domination of supporting top management privileges and a “humaneconomic” approach for management classes is also applicable for a better education style. another advice of emiliani (2006) for improving management education is teaching students to focus on not only the results, but also the processes of activities in every department of organizations. a systematic approach would be beneficiary to fully understand all of the operations and problems in the organizations (emiliani, 2006). system thinking has become popular in management field since 1960s and a holistic view has brought to light so many managerial problems (scott, 2003). however, when it comes to management education, the classroom teaching methods and academic research become distinct. it should become common to consider the topics of organizational field with the relations among other study areas. it is known that organizational field is a transdisciplinary study area, but in classroom teaching it can be hard to understand the relations of topics in one lecture with other lectures of the area. the lecturers of organizational field should build up the bridges between organizational behavior classes and human resources management classes or strategic management classes and organization theory classes. by this way, management students can overcome business problems in their future life. however, business schools and management scholars cannot be adequate for bridging the theoretical and practical sides of the field since they are reluctant to learning. most of the business schools are not reflexive and they don’t adopt the idea of “education for change” rather than “change in education”. in the present view of change idea in business schools, individuals can learn through higher education. on the other hand, in organizational learning literature, change is possible with learning within higher education. most of the business schools in western countries are highly concerned with ranking issues which are short term problems. it is similar for turkish business schools. they are interested to gather the attention of successful students in university entrance exams and make them to choose their institutions among other schools. however, having the students with greatest scores is not sustainable to be a prestigious business school in the long run. some of prestigious business schools in turkey suffer from awkward organization structures and can fail to meet the expectations of successful students. this awkwardness generally results from academicians’ and management’s behavior for not being open to criticism. individual learning cannot be separated from organization learning, especially for education institutions (solitander et al., 2011). in addition to considering all shareholders’ benefits, human resources development topic is important for management education. holden and griggs (2011) have claimed that hrd is usually taught with a managerialist perspective. their study has supported the idea of evaluating the human resources politics more in human resources management classes to prepare the students for real business problems. the condition of having a more critical curriculum has been partially achieved in their business department. also, another claim of them is that, having a critical curriculum can provide advanced critical management thinking in their classes (holden and griggs, 2011). this approach should be considered with the need for critical studies for management in turkey and can be applied to improve human resources management courses. since there has not been enough research outputs about human resources management topics and graduate programs in turkish universities, organizations may abstain from getting support of management scholars. as a result, most of business organizations may prefer global volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.110 | http://emaj.pitt.edu ayşe çoban kayacı emerging markets journal | p a g e |41 research outputs about human resources management problems and still suffer the inconsistency of solutions with turkish cultural context (aycan, 2001). these problems are another indicator for insufficient and reluctant management education as well as organizations in turkish universities. as mentioned before, business schools and scholars should be more open to criticism and not undermine the needs of practical side. academicians may try to collaborate with practitioners when conducting research in human resources management and other fields of management education. another important point for management education is its relation with research field. studies have shown that, a positive correlation can be seen between high quality teaching and high quality research (james, 2011). this point should also be considered for the turkish case. high quality research has generally been made possible by old business schools or private universities. the business schools in anatolian universities still struggle for qualified academic stuff for high quality research and education. a more homogeneous distribution of academic staff has to be accomplished for the future of business education. 4. conclusion most of the examples of this paper have been derived from american or british academic studies. the content of these studies have an aim of improving the management education in business schools. as expected from american style, the advices and applications of education improvement studies are generally firm or stakeholder oriented. on the other hand, studies from british academicians have opened a new direction for management education with a critical and individual oriented perspective. most of the praxis and suggestions in this paper depend on the critical perspective of british or european style in managerial thought. however, developing and changing economic conditions of turkey can’t be isolated from american type managerial thought. because of this situation, management lecturers and academicians have to combine these different styles to consider the beneficiaries of all the stakeholders in organizations. new research areas should be filtered with a critical thought not to exploit lower level employees in business life. a more comprehensive study can be made to understand additional needs of management education in turkey. curriculums of business schools would be key evidences for a future study. references anthony, pd. 2005. "management ideology " in critical management studies: a reader, edited by christopher grey and hugh willmott, 21-28. oxford: oxford university press. aycan, zeynep. 2001. "human resource management in turkey ‐ current issues and future challenges." international journal of manpower 22 (3):252-260. doi: 10.1108/01437720110398347. baritz, loren. 2005. "the servants of power." in critical management studies: a reader, edited by christopher grey and hugh willmott, 29-45. oxford: oxford university press. bruner, robert f., and juliane iannarelli. 2011. "globalization of management education." journal of teaching in international business 22 (4):232-242. doi: 10.1080/08975930.2011.653908. emiliani, ml. 2006. "improving management education." quality assurance in education 14 (4):363-384. holden, rick, and vivienne griggs. 2011. "teaching the politics of hrd: a journey in critical curriculum development." the international journal of management education 9 (2):71-81. doi: 10.3794/ijme.92.307. james, simon. 2011. "does business school research have to be excellent to benefit business school teaching?" the international journal of management education 9 (2):37-47. doi: 10.3794/ijme.92.322. kast, fremont e. 1965. "management education in europe." academy of management journal 8 (2):75-89. kipping, matthias, behlul usdiken, and núria puig. 2004. "imitation, tension, and hybridization: multiple" americanizations" of management education in mediterranean europe." journal of management inquiry 13 (2):98. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.110 | http://emaj.pitt.edu a new path for management education in an emerging country page |42| emerging markets journal kraatz, matthew s, marc j ventresca, and lina deng. 2010. "precarious values and mundane innovations: enrollment management in american liberal arts colleges." academy of management journal 53 (6):1521-1545. ledley, fred d, and stephen s holt. 2014. "learning objectives and content of science curricula for undergraduate management education." journal of management education 38 (1):86-113. moosmayer, dirk c., and matthias bode. 2010. "a conceptual framework for management academics' behavioural intention to influence students' and companies' values." the international journal of management education 9 (1):67-80. doi: 10.3794/ijme.91.259. o'donovan, berry. 2010. "filling a pail or lighting a fire? the intellectual development of managment undergraduates." the international journal of management education 9 (1):1-10. ozcan, kerim. 2012. "from the frankfurt school to business schools: critical management studies in turkey." international journal of organizational analysis 20 (1):107-123. doi: 10.1108/19348831211215696. rousseau, denise m. 2007. "a sticky, leveraging, and scalable strategy for high-quality connections between organizational practice and science." academy of management journal 50 (5):1037-1042. rusinko, cathy a. 2010. "integrating sustainability in management and business education: a matrix approach." academy of management learning & education 9 (3):507-519. sargut, a selami. 2009. "türkiye’de işletme yönetimi eğitiminin kurumsal çerçevesi: çeşitlilikten eşbiçimliliğe." eskişehir osmangazi üniversitesi i̇i̇bf dergisi, nisan 4 (1):51-63. scott, w richard. 2003. "organizations as open systems." in organizations: rational, natural, and open systems. pearson education international. shaw, james b, and cynthia d fisher. 1999. "practical organizational behavior education (probe): modifications and innovations." journal of management education 23 (1):13-30. solitander, nikodemus, martin fougère, andré sobczak, and heidi herlin. 2011. "we are the champions: organizational learning and change for responsible management education." journal of management education:1052562911431554. üsdiken, behlül. 2009. "bir örgütsel alanin yeniden sekillenisi: türkiye'de is hayatina yönelik yüksek ögretimde degisim, 1955-1975." metu studies in development 35:1. vaara, eero, and eric faÿ. 2011. "how can a bourdieusian perspective aid analysis of mba education?" academy of management learning & education 10 (1):27-39. notes the idea is derived from the articles of kipping, üsdiken and puig (2004) and east (1965), finance and law. 367-389. microsoft word 16-114-1-sm.doc volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.09 | http://emaj.pitt.edu , human capital heterogeneity and organzational performance analysis: an empirical study about international hotel chains in turkey murat kasimoglu ali halici canakkale onsekiz mart university | e-mail: mkasimoglu@yahoo.co.uk baskent university ramazan aktaş murat kasimoğlu ahu genis gruber tobb university canakkale onsekiz mart university tobb university abstract today, workforce diversity is not only a legal requirement for organizations, but it is also a must to survive in a highly competitive business environment. the prime motive for this study is to investigate the relationship between workforce diversity and perception of discrimination. the basic hypothesis of the study is that as the workforce diversity increases, the perception of discrimination decreases. in order to test the hypothesis, a survey is carried out international hotel chains in istanbul. there are 19 international hotel chains in turkey. in this study research is designed to understand human capital heterogeneity pattern of international chains of hotel industry and how this contribute organizational culture strategically that help to manage organizational performance much more efficiently with cross sectional data. globalization of markets, changing demographics in the labor market, new business strategies requiring team work and the shift from a manufacturing to a service economy are the prime reasons for human capital heterogeneity (hch). hch improves the organizational capabilities in terms of flexibility, creativity, problem solving and competitive advantage. especially in the service sector, in order to gain competitive advantage, organizations need a diverse workforce for both understanding the diverse needs of customers and answering to these needs in a prompt and proper way. keywords: human capital, organizational performance, hotel chain this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 1 volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.09 | http://emaj.pitt.edu human capital heterogeneity and organzational performance analysis: an empirical study about international hotel chains in turkey murat kasimoglu ali halici ramazan aktaş murat kasimoğlu ahu genis gruber i. introduction   although there are various classifications of discrimination types in the literature, two of the most widely stated ones are disparate treatment and disparate impact. disparate treatment occurs when individuals in similar situations are intentionally treated differently based on such factors as race, religious belief, sex, age, national origin, disability status. disparate impact occurs as a result of employment processes or decisions that result in discrimination, although there is no such discriminatory intention. discriminatory practices towards workforce result basically from prejudice against individuals or certain groups (women, black people, the disabled etc.) there are negative consequences of discriminatory practices for the organizations such as high turnover rates, decreased employee efficiency and motivation, increased absenteeism rates, increased failure rates in selecting the best people for the job, diminished competitive advantage and as a result of these, decreased overall efficiency and effectiveness of the organization. although there are legal regulations concerning workforce discrimination, discriminatory practices continue to exist. on the other hand, changing world of today and globalization result in more organizations valuing workforce diversity. diversity means that organizations are becoming more heterogeneous in terms of sex, race, age, national origin, thought, viewpoint etc. ii. human  capital   heterogeneity   heterogeneity stands for organizational or societal variety in which human beings differ from one another demographically (ferris, buckley & fedor, 2002:122). the variety of workforce concept consists of several dimensions which can be named as gender, race, nationality, religion and disability (byars &rue, 2000:7). heterogeneity in human capital stands for human features that diverge individuals from one another. (mejia, balkin & cardy, 2001:124). the dimensions of variety can be categorized under two frameworks. the primary dimension consists of basic features which every individual has in common and features that can not be changed (reece & brandt, 2003:156); they are born and/or specify the features that start in early socialization process of individuals which have an important impact on life-long period of every individual. the primary dimensions are age, ethical background, gender, physical and mental abilities, race and sexual preferences (loden & rosener, 1991:18-19, reece & brandt, 2003:156). the secondary dimensions consist of features that individuals can change consciously and on purpose, can gain or can quit, such as education level, residential location, marital status, work experience, impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 2 volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu income level, religious beliefs, political beliefs, health habits, communication means (mejia, balkin & cardy, 2001:124, reece & brandt, 2003:156). iii. the  reasons  of   human  capital   heterogeonity   in the new era, globalization and its’ recently formed structural consequences have led human capital heterogeneity (hch) to become an important issue. especially, hch in the organizational systems should be designed in order to support the expansion to different markets, and to establish a synergic organizational culture. there are numberless developments that led “change is good” mentality rather than “change is bad” mentality to take over in organizational change process. these developments can be summarized as; a. change in workforce demographic structure the change in workforce demographic structure has changed the size and the composition of new employees pool (denisi & griffin, 2001:477). b. globalization of market global variety means everything and everyone should be analyzed in concept of resemblance and diversification features (byars ve rue; 2000:8). c. shift from production economics to service economics d. organizational understanding of variety and/or diversification features another important factor for contributing workforce diversification is organizational understanding of workforce quality improvement by employing and promoting the most qualified (denisi &griffin, 2001:477). e. new business strategies that stimulate teamwork necessity organizations should be in the position to overcome the broad set targets and goals in order to be more durable, serve better and be successful. thus, organizations should accomplish strategies that one specific department can not fulfill (cascio, 2003:124). iv. research   methodology   in our era, organizations should speak the cross-cultural language to succeed in the global competitive environment. new diversified communication tools that respond to various demands and needs should be developed and supply of similar product policies should be departed (loden & rosener, 1991:10). one of the basic factors that organizations need to be successful, is to divert workforce and segment customer variety. organizations that differ in terms of culture, language, clothing, customs and traditions that fulfill the necessity of being parallel to customers, respond their needs and requirements in a fast and convenient way. in this study, service sector in which hch term counts most, has been preferred. the conduct of study is planned to be in hotels area because of customer variety it offers and 24/7 service mentality, employment of diversified workforce, possession of various departments. the questionnaire has been developed under this framework and four and five stars hotels in ankara regions that offer high numbers in terms of employees and low turnover rates, have been chosen as sample. 10 hotels out of 40 hotels have been chosen as sample. in the questionnaire, demographical variety measurement data is being asked. dependent on the literature review and primary and/or secondary dimensions, questions of the impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 3 volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu questionnaire are developed. the context contains gender, age, marital status, education level, work period in the job, position in the job, income level, religion, race, ethnical background and the physical or mental abilities. the return rate in 10 hotels is 210 respondents out of 550 employees. v. findings  related  to   human  capital   heterogeneity   two different measurement methods are applied in terms of workforce diversification measurement; heterogeneity index of blau and coefficient of variation. blau gathers parameters in two groups; nominal parameters and graduated parameters. as can be drawn from figure 1, blau states that the first parameter indicates heterogeneity and second parameter indicates inequality (blau, 1977:8-9). nominal parameters are the parameters that sub-group the population. graduated parameters are the parameters that diversify the individuals according to their status ranking (blau, 1977:7). therefore, when measuring demographic diversification, gender, marital status, religion, race, nationality, ethnical background and physical and mental abilities, blau’s heterogeneity index is used (knight, pearce, smith, olian, sims, smith & flood, 1999:452; carpenter, 2002:279; simons, pelled, smith, 1999: 666; carpenter &fredrickson, 2001: 538). coefficient of variation is used in the measurement of other factors. data measured with blau index. measurement using blau index depends on the formula indicated below: (blau, 1977: 9). data measured with coefficient of variation (standard deviation and mean): data gathered from hotels are transferred to spss program and after having run the program, sd and mean values of parameters such as age, education level, position in job, income level parameters are measured together with blau index. vi. human  capital   heterogeneity   measurement   criteria   according to blau’s heterogeneity index, if the whole population is gathered under one group then there is no heterogeneity and the value is equal to zero (0). if all groups are in equal size, heterogeneity approaches to the value one (1) (blau, 1977:9), which means that heterogeneity is at maximum. thus; as human capital heterogeneity approaches to zero, population homogeneity should be pronounced. workforce diversity is at its’ maximum as the population groups show an equal distribution. as to blau index, the maximum heterogeneity level depends on the number of groups the population is distributed. when the index is shown as : ( where “ ” shows the number of individuals in each group and the percentage of population (blau, 1977:78), the maximum diversity level for each parameter can be calculated. in the first half of the study which measures the demographic structural diversity, the parameters such as gender, nationality and physical and mental abilities that are measured with blau index, the population is categorized in two groups and the maximum diversification level is 0,50. parameters such as religion and ethnical background categorize the population into four categories and the maximum diversification level is 0,75. marrital status parameter categorizes the impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 4 volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu population into three groups and the maximum diversification level is 0,667. at this stage of the study, performance index that concerns finance, sales performance and management systems efficiency of companies has been developed. under this framework, performance indexes of each hotel have been developed by using three factors. the overlapping of human capital heterogeneity and organizational performance is provided in figure 1. figure 1: overlapping of human capital heterogeneity and organizational performance of hotels as can be drawn fro figure 1, hch of companies creates a synergic effect and allows the company to show a more dynamic and a more innovative approach. thus, companies should give great attention to plan their human capital stocks and organize them strategically. the companies can maximize their resources in this way and gain competitive advantage. vii. results   the study shows that hotels are neither aware of human capital heterogeneity benefits nor know how to manage the process. they have a broader approach by not employing a diversified workforce in means of nationality diversification. the perception verifies for turkish nationalities as well as foreign nationalities. the different treatment to turkish nationalities is perceived as discrimination by foreign nationalities and also different treatment to foreign nationalities is perceived as discrimination by turkish nationalities. the reason for discrimination perception is cultural differences. in hotels sector, the customer diversification is a fact due to different customer profiles. the increase in hch is a urge to serve cross-cultural customers in better ways as a result of global world economics which lead to foreign subsidiary openings and/or establish strategic alliances. the managers of hotels that serve different nationalities should give importance to this issue and find strategies to avoid such perceptions. in the correlation analysis, by %95 meaning, the relation between education level and income level is measured and the result was 0,887 positive correlated. the income level increases as impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 5 volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu the education level increases and visa versa, the education level increases as the income level increases. as the income level increases individuals have more opportunities for a better education and as the education level increases their approach differs. the variation and diversity in approaches lead individuals to think about various behaviors. the results compared to other studied conducted in the filed, lead to similar results in terms of position in the job, but different in terms of education level. the main result for this difference is the implementation of study conducted in various cultures and in different sectors. when the job advertisements in turkey are analyzed, it reveals the fact that individuals who belong to middle-old aged groups are disadvantaged due to fact that job advertisements require age restrictions, innovative thinking and openness to change criteria. during evaluation of job applications, younger applicants are preferred and education opportunities are provided to younger employees. the result of the study reveals that human capital heterogeneity is low. dependent on high ranking of power distance index of hofstede for turkey and the tendency to avoid conflicts, employers tend not to react against discrimination or accept the inequalities in work environment. as a result of power distance index, employees expect their managers to have an authoritarian management style and be stronger than themselves. workforce diversity, besides its’ positive features, also possesses negative consequences. the most important consequence is conflict in the organizations, and as a result of grouping of similar employees, the division of communication networks and not being able to profit from different approaches in the organization. individuals are complicated systems and each dimension of diversification adds new complicated factor to the system process. many individuals prefer homogeneity to heterogeneity, known to unknown and being with similar individuals to themselves. the reason for such a tendency is that individuals feel more comfortable and conflicts are minimized (loden & rosener, 1991:23). it is natural that human capital heterogeneity level is low when the effect of uncertainty avoidance index, avoidance of conflicts, and friendship relations on turkish culture are analyzed. whereas, the study is conducted in hotels, thus in service sector. in service sector, customer diversity is high and with respect to this fact, the problem diversity which various personalities’ differing needs and requirements result is also high. the problems in service sector, because of existence of human factor, are not always routine. teamwork, different approaches, innovation and quick response to problems are required. this can only be reached through diversified workforce. as a result of low human capital heterogeneity in the study, it is seen that in ankara four and five star hotels still lack such factors, avoid conflicts and are not well informed about conflict resolution techniques. besides, because of homogenous workforce, services provided will also be limited in terms of variety and this will result in limited customer variety. this result will minimize organization’s success and competitive advantage in the globalization process. for future research, the effect of low ranking human capital heterogeneity on process and the most effective management style to overcome the problems occurred due to this low ranking can be analyzed. impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 6 volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.09 | http://emaj.pitt.edu viii. references   1. anthony, william p., k. m. kacmer & p. l. perrewe, 2002 human resource management a strategic approach, south-western / thomson learning, 4th edition, usa. 2. baruch, yehuda, 2003 managing careers theory and practice, prentice hall, england. 3. blackaby, david, l. h. pelled ve k. a. smith, 1999 “making use of difference: diversity, debate, and decision comprehensiveness in top management teams”, academy of management journal, vol. 42, no. 6, 662-673. 4. blau, peter m., 1977 inequality and heterogeneity, collier macmillan, usa. 5. brady, teresa, 1996 “the downside of diversity”, management review. 6. byars, lloyd l. & l. w. rue, 2000, human resource management, mcgraw-hill, 6th edition, usa. 7. carpenter, mason a., 2002 “the implications of strategy and social context for the relationship between top management team heterogeneity and firm performance”, strategic management journal, 23, 275-284. 8. carpenter, mason a. j. w. fredrickson, 2001 “top management teams, global strategic posture, and the moderating role of uncertainty”, academy of management journal, vol. 44, no. 3, 533-545. 9. carrell, michael r., n. f. elbert &r. d. hatfield, 2000 human resource management strategies for managing a diverse and global workforce, the dryden press,6th edition, usa. 10. cascio, wayne f., 2003, managing human resources productivity, quality of work life, profits, mcgraw-hill, 6th edition, usa. 11. çağlar, i̇rfan, 2001, “yönetim-kültür bağlamında türk yönetim modelinin saptanmasına yönelik kavramsal bir çalışma”, g.ü.i̇.i̇.b.f. dergisi, 3, 125-148. 12. denisi, angelo s. & r. w. griffin, 2001 human resource management, houghton mifflin company, usa. 13. ferris, gerald r., m. r. buckley & d. b. fedor, 2002 human resource management perspectives, context, functions and outcomes, prentice hall, 4th edition, usa. 14. hultin, mia, 1998, “gender differences in workplace authority: discrimination and the role of organizational leaders”, acta sociologica, vol.41. 15. kirchmeyer, catherine, 2002 “gender differences in managerial careers: yesterday, today and tomorrow”, journal of business ethics, 37, 5-24. impact of the global crisis on the governance structures of international financial institutions emerging markets journal | p a g e | 7 volume 2 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.9 | http://emaj.pitt.edu 16. knight, don, 1999 “top management team diversity, group process, and strategic consensus”, strategic management journal, 20, 445-465. 17. koçel, tamer, 2003 i̇şletme yöneticiliği, beta basım a.ş., 9. baskı, i̇stanbul. 18. mathis, robert l. ve j.h. jackson, 1994 human resource management, west publishing corporation, 7th edition, usa. 19. mathis, robert l. ve j. h. jackson, 2000 human resource management, south-western, 9th edition, usa. 20. mathis, robert l. & j.h. jackson, 2005 human resource management essential perspectives, thomson south western, 3rd edition, canada. 21. reece, barry l.&r. brandt, 2003 human relations principles and practices, houghton mifflin company, 5th edition, usa. 22. robbins, stephan p., 2003 essentials of organizational behavior, prentice hall, 7th edition, usa. 23. simons, tony, l. h. pelled & k. a. smith, 1999 “making use of difference: diversity, debate, and decision comprehensiveness in top management teams”, academy of management journal, vol. 42, no. 6, 662-673. emerging markets journal a genetic algorithm on inventory routing problem dr. nevin aydın artvin çoruh university | e-mail: nevin.aydin@gmail.com abstract inventory routing problem can be defined as forming the routes to serve to the retailers from the manufacturer, deciding on the quantity of the shipment to the retailers and deciding on the timing of the replenishments. the difference of inventory routing problems from vehicle routing problems is the consideration of the inventory positions of retailers and supplier, and making the decision accordingly. inventory routing problems are complex in nature and they can be solved either theoretically or using a heuristics method. metaheuristics is an emerging class of heuristics that can be applied to combinatorial optimization problems. in this paper, we provide the relationship between vendor-managed inventory and inventory routing problem. the proposed genetic for solving vehicle routing problem is described in detail. keywords: inventory routing problem, genetic algorithm new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.31 | http://emaj.pitt.edu | mailto:nevin.aydin@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.31 | http://emaj.pitt.edu a genetic algorithm on inventory routing problem emerging markets journal | p a g e |59 a genetic algorithm on inventory routing problem dr. nevin aydin i. introduction and motivation recently, inventory routing issues face a great deal of attention, because it is seen as a prosperous function of logistics and inventory management. it can be considered as one of the ties between these two functions of the firm and it offers a wide range of improvement. solution of inventory routing problem is basically used to determine the amount and time of shipments to the buyers and form the routes between them. there are side constraints accompanied with the inventory routing problem. for instance, the capacity of the vehicles and the distribution of demand faced by the buyers should be taken into account. additionally, the maximum load that can be placed on the trucks varies; therefore, the capacity of the trucks may change while leaving from a state and entering into another. this fact should be taken into account while planning the inventory routing problem. our motivation for dealing with that area primarily comes from its importance for vendor managed inventory. if we consider a vendor managed inventory as philosophy, the inventory routing problem is the philosopher itself. inventory routing problem can be considered as a combinatorial optimization problem and the decisions given based on the output of the inventory routing problem will determine the success of the vendor managed inventory which is one of the widely studied topic in supply chain management. on the other hand, inventory routing problem has close ties with vehicle routing problem. vehicle routing problem is an area that the researchers bring in theoretical, heuristics and metaheuristics approaches. ii. related work the inventory routing problem is concerned with the repeated distribution of the single product, from a single facility, to a set of n customers over a given planning horizon. the customers have a consumption rate and the vehicle delivering the products to the customers has a capacity. the objective is to minimize the average distribution costs during the planning period without causing stockouts for any of the customers. however, if the consumption rate is stochastic, then there may be cases that the stockouts may occur. in that case, a term related with the backordering or stockout costs for the product may be added to the objective function. in a similar way, inventory-holding costs may also be added to the objective function. the vehicles are considered to be homogeneous (i.e. all of the vehicles are the same). the customers are supposed to have a depot with a certain capacity for storing the inventory. the vehicles also have a carrying capacity. according to campbell et al. [3], three decisions to be made within the context of inventory routing problem include i) when to serve the customer?, ii) how much to deliver to customer when it is served?, iii) which delivery routes to use? inventory routing problems are different from the traditional vehicle routing problems because it is based on customers’ usage rather than the customers’ orders. inventory routing problems dr. nevin aydın p a g e |60| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.31 | http://emaj.pitt.edu are multi-period while vehicle routing problems are single-period problems. vehicle routing problems occur when customers place orders and the delivery company assigns the orders for the given day to routes for trucks. in vehicle routing problems, the shortage of the inventory is not possible. these two types of problems are np-hard. since the inventory routing problem is a multi-period problem, it is more difficult to find a solution. federgruen and zipkin [6] bring a single day approach into the inventory routing problem. they aim to build a nonlinear integer model and it decomposes into routing problem and inventory problem. golden, assad and dahl [7] develop a heuristic based on a measure of the urgency of each customer. it is defined as the ratio of the tank inventory level to tank size. while selecting the customers to be visited, they take this value into consideration. while forming the routes, they also consider the extra time required to visit that customer. chien, balakrishnan and wong [4] also propose a single day approach, but it does not treat each day as a complete separate entity. instead, their model passes some information from one day to the next and the system simulates a multiple day planning period. dror and ball [5] are considered the first researchers to analyze the long-term performance side of the inventory routing problems. they consider the demand to be stochastic. anilyn and federgruen [1] look at minimizing long run average transportation and inventory costs by determining long term routing patterns for a set of customers with deterministic demand. they used partitioning schemes to decide on the distribution patterns. after the customers are partitioned, customers within a partition are divided into regions to make the demand of each region roughly equal to the truckload. bramel and simchi levi [2] consider the variant of the inventory routing problem in which the customers can hold an unlimited amount of inventory. to obtain a solution, they transform the problem to the capacitated concentrator location problem. in recent years, there are certain attempts to deal with the stochastic version of the problem. iii. genetic algorithm overview genetic algorithms (gas) are stochastic search algorithms that were pioneered by holland in 1970s. a ga utilizes an artificial chromosome that represents a solution to the problem of interest and attempts to successively find a better solution, using the darwinian principle of survival of the fittest genes. this principle specifies that the gene represents possible solutions to the problem and fitness is the objective function value. gas are atypical because many solutions are followed in parallel and then recombined in search of the improved ones. the technique is modeled on evolutionary process found in nature; natural evolution and thermodynamics. the evolutionary function eliminates trial solutions that are relatively ineffective, but a range of selection criteria is possible. the quality of the overall result and the computational effort required to achieve convergence depend critically on the selection criteria used. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.31 | http://emaj.pitt.edu a genetic algorithm on inventory routing problem emerging markets journal | p a g e |61 gas are based on natural selection principles which guide the generation of new chromosomes in living entities via genetic recombination. using a genetic algorithm, the solutions are represented by chromosomes in gas. in biological terminology, chromosomes consist of genes, which may take on some number of values called alleles. chromosomes or genotypes are represented by a finite number of possible values or alleles at each position. they consist of a fixed length string. gas conduct efficient search of a solution space because they use a probability transition guide. a genetic search is conducted on all dimensions by recombining structures and then evaluating them simultaneously. they enable survival-of-the fittest structures to be combined with a structured, yet randomized, information exchange. this combination forms a search algorithm with some creativity of human search. gas use historical information to discover new research points in order to improve performance. to solve the problem, genetic algorithms must have the following five components: 1. a chromosomal representation of solutions to the problem. 2. a method to create an initial population of solutions 3. parameter values used by genetic algorithms (population size, mutation rate, crossover rate, etc.) 4. an evaluation function that operates in the role of the environment, rating solutions with respect to their “fitness” 5. genetic operators that change the composition of children during reproduction. a pseudocode of a genetic algorithm is given below: t=0; initialize p(t); evaluate (p(t); while (termination condition is not satisfied) do begin t=t+1; select p(t) from p(t-1); recombine p(t); evaluate p(t); end; proposed genetic algorithm for vehicle routing problem for vehicle routing problem, a tailored genetic algorithm is constructed. we have to address several problems for developing and implementing this genetic algorithm. one of the most important questions is how to represent a solution as a chromosome. for this purpose, the general chromosome representation of genetic algorithms for dealing with the traveling salesman problem will be followed with a modification. the customers will be assigned numbers from 1 to n, 1 being the first customer and n is being last customer. the sequence of visited customers will be represented by chromosome. at that point, there is a striking difference dr. nevin aydın p a g e |62| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.31 | http://emaj.pitt.edu from the traveling salesman problem representation. for each visited customer, a number will be placed next to customer number indicating the amount of inventory that is being delivered to the customer. whenever, the vehicle returns the warehouse, the symbol w (i.e. warehouse visiting) will be placed in the string. a vehicle returns to the warehouse for refill and then departs for distribution of these items to the customers. this task may be carried out in the same day or the next day. if subsequent visits to the customers are realized in the same day, then there appear more than two w symbols in that given day indicating the multiple visits to the warehouse. since, there are more than one vehicle, the sequences of the customers the vehicle have visited will be merged. for this purpose, the vehicles will also be numbered from 1 to m, where m is the total number of vehicles. an example of the proposed chromosome representation is given below. the string will be translated as follows. there are two vehicles in total. in the first day, the first vehicle departs from the warehouse, visits customers 2, 4, and 3, delivers items 5, 2, and 3 respectively, and then return back to the warehouse. the first vehicle in the second day, visits customers 1, 5, and 6, delivers items 4, 1, and 5 respectively, and then returns to warehouse again. this is a 2-day schedule for vehicle and the similar schedule is carried out for the second vehicle in two days. there are several points to take into consideration. 1) on each trip, the number of the items should not exceed the vehicle capacity and in our example, the vehicle capacity can be 10, 15 but not 8. 2) the time required for the trip is always smaller than the operation period of warehouses. it means that, if the operating hours of warehouses and customers are between 9 am-9 pm, the duration of trip, irrespective of the number and locations of the customers will take at most 12 hours. 3) all the items are homogeneous. the demand of the customers is discrete and expressed as integer values. there is only single warehouse, with stochastic demand pattern for the customers. short-term horizon is considered extending from a couple of weeks to at most 2 weeks, and the unit time is a day. 4) at the beginning of the planning horizon, the depots of all customers are full. the vehicles are all homogeneous, and they have the same carrying capacity. this chromosome representation resembles the representation in traveling salesman problem but there are some extensions. the next phase of constructing the genetic algorithm is initial population generation. to start with the initial population generation, a customer will be selected at random, and the closest customer to that customer is selected. this procedure will be continued till the number of selected customers reaches       tm n * , n being the number of total customers, m is the number of vehicles, and t is the number of days. this operation will be performed for each vehicle each day. if 0** *        tm tm n n , then remaining customers at randomly selected days will be assigned randomly volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.31 | http://emaj.pitt.edu a genetic algorithm on inventory routing problem emerging markets journal | p a g e |63 selected vehicles such that the total number of selected customers is n when it is summed over all vehicles and all days. if there are some customers not selected at all, the same number of customers already selected more than once in the whole population will be removed from the respective chromosome and new customers are placed instead. the reason for this operation is to consider all the customers for the solution process. if some of them are neglected, there is no way to retrieve these customers by our crossover and mutation operators. after selecting the set of customers to be visited for each day by each vehicle, we need to determine the number of items delivered to each customer. in order to address this problem, an urgency measure may be developed which can be expressed as: n n n r c u  , where rn being the number of items at the customer depot n, cn being the expected consumption rate per day for customer n and un being the urgency measure for customer n. in addition to this approach, a different method can be followed. instead of incorporating the expected consumption rate, one can use a simulation to find the day-by-day usage rates of customers. after finding the urgency measure of each customer, these un figures pertaining to specific customers for a given vehicle on a given day are summed up, and an overall u figure is found. to calculate the amount of items delivered to each customer, the following formula will be used: n n n n u u ca d   where ca representing the capacity of the vehicle and dn is the amount to be distributed to customer n. since, all vehicles are assumed to be homogeneous, ca has no index. the calculated amounts are distributed to the customers. if dn is greater than tn-rn, where tn is the capacity of depot of customer n, then it is not possible to make the scheduled replenishment to that customer, in that case make replenishment of tn-rn to customer n. there is no simple formula for determining the population size in genetic algorithms, but a population size of 30 can be considered a reasonable choice. after forming the initial population, we proceed to the next phase, the recombination. the recombination operators in genetic algorithms are mainly crossover and mutation, and we will use these two operators. next step after forming the initial population is determining the fitness value of the chromosomes. the fitness value of the chromosomes is determined by the cost of the tours of the vehicles among customers, the inventory holding costs, and the inventory backorder or shortage costs. since in our application, the demand is considered to be stochastic, and because of the method in which the initial population is generated, the backorders are highly likely, so it must also be incorporated into model. since the objective function is summation of the traveling cost, backorder cost and the inventory holding costs, a mapping that links the objective function to the fitness value of the chromosome should be constructed. it should be adjusted such that the higher the objective function is, the lower the fitness value will be. dr. nevin aydın p a g e |64| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.31 | http://emaj.pitt.edu the crossover operator in genetic algorithms is mainly used to blend the good properties of the parents in the offsprings. for this purpose, some of the selected portions of the parents are selected for crossover, and these are combined to form a new offspring. in order to combine good properties, parents with good fit values should be selected. for this purpose, some mechanisms are devised in which higher probability is given to the fitter chromosomes. after these chromosomes are selected, they are mated with each other to produce offsprings. for our genetic algorithm, we prefer to use two-point crossover. in traditional two-point crossover, the portions of the chromosome that are exchanged have the same length. but, in our case, we choose to make two-point crossover based on portions that have different sizes. the reason for such a modification is that we can change the number of visits a vehicle can make per day by this varying length portion exchange. if an offspring has more than two w symbols on the given day, it means multiple warehouses are visited. an example of crossover in our genetic algorithm may be given as follows: note that under that scheme, if we assume the capacity of the vehicle as 10, for the second offspring for vehicle 1 in day 2, the total capacity of the vehicle is exceeded. in that case, we can devise a rule stating that 2 units of item can be removed from the customer which has the lowest un value. if this is not possible, we can check the next customer having the lowest un value, and so on. as a result of crossover, the total capacity of the depot may be exceeded. in that case, the amount shipped to customer may be reduced by exceeded capacity so that the constraint for customer depot is not violated. it must be noted that in second offspring, the customer 5 is not visited, and in the first offspring the customers 8 and 10 are not visited. however, looking at this infeasibility from the genetic algorithm perspective, it does not pose a big problem because the customers 5 in solution 1, 8 and 10 in solution 2 will suffer from stockouts and backorders and this will definitely be reflected to the fitness function after offsprings are formed, another mechanism which comes to the scene is mutation. some researchers prefer to apply the mutation operator to offsprings only while the others apply it to both offsprings and parents. in this research, we will be applying this operator to offsprings only. for mutation, we exchange the gene locations in the chromosome. two pairs (i.e., the customer visited and the shipped amount to that customer) are selected and exchanged. an example is shown below: volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.31 | http://emaj.pitt.edu a genetic algorithm on inventory routing problem emerging markets journal | p a g e |65 again, here for vehicle 1 in day 2 in mutated offspring, the capacity of the vehicle is exceeded. although the capacity of the vehicle is 10, 11 items are scheduled to be delivered. to overcome this problem, the customer scheduled with lowest un value is selected and one less item is delivered to that customer. another version of the mutation may be only exchanging the number of items delivered to the specific customers. this way, the sequence of the customers remains the same, but only values scheduled to be shipped are exchanged. yet another version may be to keep the amount of items shipped constant, and exchange the order of customers to be visited. regardless of the version selected, we should keep in mind that the capacity constraint of the vehicle and the depot capacity constraint of the visited customer should not be violated. after crossover and mutation are performed, it is time to select the solutions (chromosomes) that will form the next generation. for this purpose, the researchers proposed different methods. some favors the elitist selection which supports the idea of picking up the chromosomes with a highest fitness function. the others have devised some mechanisms for assigning probability of selection to the chromosomes according to the fitness function. for our research, we use the elitist selection, where we select the best chromosomes for the next generation. at that point, the number of crossovers performed in each generation is important. the number of offsprings are always twice of the number of crossovers performed in each generation. so, if we assume the number of chromosomes to be 30, then the total number of parents and offsprings are 30+c, c being the number of crossovers. out of 30+c, 30 chromosomes are selected for the next generation. the best 30 chromosomes in terms of fitness values are identified and placed in the next generation. generally, there is a predefined limit on the number of generations. they can be estimated based on some convergence criteria. if a certain proportion of the population converges to a single solution (i.e. the population is represented by few unique solution), then it can be concluded that it is time to end the genetic algorithm. while running the genetic algorithm, the incumbent solution is generally kept, and it is declared as the best solution at the end of the run. some researchers suggested that there should be multiple runs of the genetic algorithm to find the best solution. in that case, different parameters (i.e. number of generations, crossover rate and mutation rate) are used in genetic algorithm runs; the incumbent solution in each run is kept and these incumbent solutions are compared with each other to find the “incumbent” of the incumbent solutions. iv. conclusions and future work in this paper, we aim to bring a metaheuristic approach the inventory routing problem. tailored genetic algorithm for inventory routing problem is proposed. the mechanisms of genetic algorithm are outlined in this research. dr. nevin aydın p a g e |66| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.31 | http://emaj.pitt.edu one of the future research direction is to determine the fitness function since the fitness function that correctly reflects the value of the solution is vital in genetic algorithms. if you discriminate between the good and relatively worse solutions too much, the problem of the domination of super chromosomes in the population and premature convergence may emerge. to overcome this problem, a good fitness function that combine the inventory holding, backorder and stockout costs as well as the cost of trip should be devised. a pilot study may be conducted to decide on the best sets of parameters. the deviation from the optimal solution can be used as an indicator of the solution quality. to find the deviation from optimum, a mixed integer-programming model can be constructed and solved with some optimization packages such as gams. however, when the number of customers to be visited and the length of planning horizon are increased, the complexity of the problem also increases. for that reason, some lower bound finding mechanisms for the problem may be devised, or the results of previously solved vehicle routing problems may be used for comparison. finding some cyclic properties for inventory routing problem could be another avenue. for this reason, the t (i.e. the duration of the period for which the inventory routing problem is solved) should be selected accordingly. small t may not give the desired solution to our problem. on the other hand, large t values may increase the computation time and deteriorates the solution quality of genetic algorithm. the deterioration in solution quality in case of the increase in the chromosome length is nearly inevitable when the number of generations is remained constant. references anily, s. and federgruen, a. (1990) "one warehouse multiple retailer systems with vehicle routing costs", management science, 36, p.92-114. bramel, j. and simchi-levi, d. (1995) "a location based heuristic for general routing problems", operations research, 43, p.649-660. campbell a., clark l., kleywegt a., and savelsbergh m. “the inventory routing problem”, source: http://www.isye.gatech.edu/faculty/martin_savelsbergh/p ublications/irp.pdf chien, t.w., balakrishnan, a. and wong, r. t. (1989) "an integrated inventory allocation and vehicle routing problem", transportation science, 23, p.67-76. m. dror and m. ball. inventory/routing: reduction from an annual to a short period problem. naval research logistics quarterly, 34(6): 891-905, 1987. a. federgruen and p. zipkin. a combined vehicle routing and inventory allocation problem. operations research, 32(5): 1019-1036, 1984. golden, b. l., assad, a. a. and dahl, r. (1984) "analysis of a large scale vehicle routing problem with an inventory component", large scale systems, 7, p.181190. volatility transmission between dow jones stock index and emerging islamic stock index: case of subprime financial crises amir saadaoui email: am.saadaoui@yahoo.fr younes boujelbene email: younes.boujelbene@yahoo.fr abstract in the course of the recent global crisis, the stock shocks are distributed and transmitted from their homes in the developed stock market to emerging stock markets. by supporting the development of emerging stock markets, this study aims to see the transmission of volatility between the dow jones stock index and the dow jones emerging islamic stock index. in this study we have divided the period into three, periods, before, during and after this crisis to demonstrate the resilience of the islamic market index in response to the global financial crisis. another aim of this study is to provide a new guide line for investors in emerging stock market before making investment decisions. the data are daily, going from 02/01/2005 until 31/12/2012. to measure the transmission we used vicariate bekk-garch and dcc-garch model. the result shows that there is a transmission mainly during the crisis period which means that the crisis affects all the financial assets whether islamic or not. the same result also shows the preference to invest in both islamic and classical stock indexes since they are less risky. keywords: volatility transmission, dj index, islamic dj emerging index, subprime crisis new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.68 | http://emaj.pitt.edu | mailto:am.saadaoui@yahoo.fr mailto:younes.boujelbene@yahoo.fr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.68 | http://emaj.pitt.edu amir saadaoui, younes boujelbene emerging markets journal | p a g e |41 volatility transmission between dow jones stock index and emerging islamic stock index: case of subprime financial crises amir saadaoui younes boujelbene 1. introduction the stock market crash around the world during the subprime crisis period demonstrated the financial contagion of the current global financial crisis. although the subprime crisis first hit real estate markets in the united states, it soon spread all over the world to affect all the emerging markets like indonesia and other asian countries in south – est asia. ahlgren and antell (2009), clearly explained that one of the most important features of globalizations and speedy transmission of information across markets is the extend of the financial crisis from, one market to another even if the fundamental economies are different. therefore, the strong economic ties between emerging and developed markets become the conductor of contagion. indeed, investors need a guide line to effective investment portfolio, a less risky investment that can withstand the market shocks. in this context, yang and qiu (2005), show that the risk is essential in investment from the time when the risk is a factor that shapes the decision of investors to make investments. therefore, the risk of investment can guide the investor in the development of efficient portfolio, especially during the crisis period. due to the rapid development of islamic finance and investment, this paper attempts to study the transmission of volatility in the dow jones index and in emerging islamic index and in emerging countries. similarly, to measure the resistance of islamic market indexes faced in the last financial crisis, we can invest in the islamic index. this study can be used as a guide for new investors in emerging stock markets, since it shows that islamic equity indexes are more favorable to create an effective investment portfolio. the study examines the volatility transmission between the stock index and dow jones emerging islamic country indices hungary, malaysia, mexico, peru, poland and turkey. it also shows the resistance of these indexes when facing the subprime crisis. this document is divided into five sections covering the above discussion; the first section is the introduction of the research that includes the context and objectives of the study. the next section discusses the literature review. the data and methods of observation are discussed in section 3, while the result and the empirical analysis will be described and discussed in section 4. finally, we end up with a conclusion in which the results are discussed. literature review market growth of the islamic capital has drawn the attention of many investors worldwide who that muslims and non-muslims. in discussing the situation of islamic indexes in the financial sphere, charles, steak and pop (2011) found in their study that, during the crisis, islamic indices were by the subprime crisis affected in the same way as conventional indices. indeed, when testing the relationship between these indexes relative to other periods, the authors found that the variance was not the same, where as islamic indexes were slightly higher compared to conventional indices volatility. in the context of risk, al-zoubi and maghyereh (2007) found that islamic indices are less risky than conventional indices, which brings us back to the principle of sharing profits and losses of islamic finance. regarding the correlation between the indices, rizvi and arshad (2012) found a weak correlation of movement between conventional and islamic evidence proving that the islamic index may provide a better alternative to withstand against the crisis. several studies (kumar mukhopadhyay (2002), wong, agarwal and du (2005) showed that there is a correlation between different markets around the world, which clearly explains the transmission of crises from one market to another. they further emphasized that dramatic movements in one equity market volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.68 | http://emaj.pitt.edu volatility transmission between dow jones stock index and emerging islamic stock index: case of subprime financial crises page |42| emerging markets journal can have a powerful impact on different markets. similarly, for islamic indexes, majid, meera and omar (2007), rahman and sidek (2011); siskawati, (2011) found that volatility in all the major global markets is unlikely to affect islamic indices. on the other hand, several other studies showed that there is no empirical co-integration between islamic indices (karim kassim and arip (2010) and yusof and majid (2007)). 2. data and methodology 2.1. data description a part of the empirical study of this research is a multi-step process, where we try to analyze the sequence data from descriptive statistics. the core of our model is to study the transmission of volatility between conventional dow jones and six islamic indices. all these stock market indices used in the empirical study were taken from the dow jones index family. we consider daily data from datastream for the various indices between 3 january 2005 and 31 december, 2012. we have sub-divided this period into three periods, precrisis period (january 3, 2005 to jun 29, 2007) during crisis period (july 03, 2007 to december 31, 2010) and post crisis period (january 02, 2011 to december 31, 2012). these indexes and their respective indices are as follows: the usa standard index, the dow jones index (dji), for hungary, islamic dow jones stock index of hungary (djiih); for malaysia (my), islamic dow jones index of malaysia (djiimy); for turkey (tky), islamic dow jones index of turkey (djiimtr); for mexico (mex), islamic dow jones index of mexico (djiime); for the peru, islamic dow jones index of peru (djiipe); and for poland, islamic dow jones index of poland (djiipo). 2.2. methodology much attention was paid to the way news from one market can affect the volatility process of another market. in this study, we analyze the mean and volatility spillover effects between the dow jones stock conventional index and islamic emerging index using a bivariate framework of the bekk parameterization (engle and kroner, 1995). in this model, the variance-covariance matrix of equations depends on the squares and cross products of innovation εt, derived from the following mean equation: ),0(/, 1 hnur ttttt   (1) where rt is the 2×1 vector of returns at time t for each market. the n ×1 vector of random errors, εt represents the innovation for each market at time t with its corresponding 2× 2 conditional variance-covariance matrix ht the market information available at time t-1 is represented by ωt-1. thus, we investigate the volatility spillover effect using the bekk bivariate garch model. the standard bekk parameterization of the bivariate garch model is written as ht = c’c+ a’ εt-1 ε’t-1 a + b’ht-1b, (2) where ht is a 2× 2 matrix of conditional variancecovariance at time t and c is a 2× 2 lower triangular matrix with three parameters. a is a 2× 2 square matrix of coefficients that measures the extent to which conditional variances are correlated with past squared errors. b is a 2× 2 squared matrix of coefficients that shows the extent to which current levels of conditional variances are related to past conditional variances. thus, we will have: = + + , (3) where h 11,t denotes the variance in dow jones stock index returns, h 12,t the covariance in the dow jones stock index returns and islamic index returns, and h 22,t the variance in islamic index returns. the significance of the diagonal coefficients a 11,t (a22,t ) suggests that the current conditional variance of h 11, t ( h 22, t) is correlated with its own past squared errors, while the significance of the lagged variance b 11,t (b22,t ) indicates that the current conditional variance of h 11, t ( h 22, t) is affected by its own volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.68 | http://emaj.pitt.edu amir saadaoui, younes boujelbene emerging markets journal | p a g e |43 past conditional variance. in addition, the significance of the off-diagonal coefficients a 12,t and b12 indicates the evidence of a volatility spillover effect from the dow jones stock index to the islamic index in the emerging markets, whereas the significance of the off-diagonal coefficients a12 and b12 suggests the evidence of a volatility spillover effect from the dow jones stock index to the islamic index market. the standard bekk model implies that only the magnitude of past return innovations is important in determining current conditional variances and covariances. 3. descriptive statistics the descriptive statistics for the daily returns of dj conventional stock index and 6 dj islamic market index in the table below. in fact, this study explores important information represented by the standard deviations. tables 1. descriptives statistics of dj index and emerging islamic index dji djhi i djm aii djm eii djpe ii djpo ii djti i pre-crisis period (janury 2, 2005 to jun 29, 2007) mea n 0.000 628 0.001 399 0.001 240 0.002 014 0.001 162 0.001 277 0.001 410 std. dev 0.008 243 0.019 787 0.009 906 0.017 132 0.024 634 0.021 064 0.023 855 ske wne ss 0.169 089 0.595 519 0.687 466 0.338 155 0.483 223 1.076 851 2.641 548 kur tosis 5.088 279 11.08 613 10.55 099 12.63 955 21.34 123 18.74 935 36.25 642 jar queber a 93.04 83** * 1388. 969* ** 1224. 794* ** 1941. 491* ** 7013. 750* ** 5253. 649* ** 2357 5.68* ** during the crisis period ( jully 2, 2007 to december 31, 2012) mea n 0.000 285 3.39e -05 0.000 267 0.000 486 0.000 817 9.43e -05 0.000 142 std. dev 0.019 472 0.029 952 0.013 230 0.024 863 0.030 628 0.027 367 0.027 296 ske wne ss 0.285 118 0.413 618 0.498 800 0.422 559 0.434 684 0.074 346 0.077 837 kur tosis 9.042 33 9.206 964 9.440 654 9.170 728 7.721 582 6.145 266 7.789 031 jar queber 1404. 35** * 1494. 909* ** 1619. 444* ** 1478. 949* ** 878.7 484* ** 378.0 021* ** 875.3 138* ** a post-crisis period ( january 2, 2011 to december 31, 2012) mea n 3.67e -05 0.000 209 0.000 353 0.000 379 0.001 892 2.80e -05 0.000 689 std. dev 0.016 200 0.022 770 0.008 893 0.017 060 0.048 412 0.020 383 0.019 392 ske wne ss 0.198 471 0.160 296 0.369 679 0.110 63 16.75 924 0.310 052 0.114 956 kur tosis 4.255 589 4.113 413 4.431 941 4.786 105 348.4 953 5.715 666 4.770 469 jar queber a 37.64 368* ** 29.14 272* ** 56.37 878* ** 70.31 614* ** 2615 647.* ** 168.4 430* ** 69.19 359* ** notes: jarque–bera corresponds to the test statistic for the null hypothesis of normality in the sample returns distribution. *** indicates the rejection of the null hypothesis at the 1% significance level. the descriptive analysis is used to provide a preliminary description of the nature and volatility indices. at the same time, it helps to compare the performance indicators based indices license, allowing observation of how they stand against each other. table 1 is summary of the statistics on index returns of dow jones standard and some emerging islamic indices for the periods of, pre-crisis, during crisis and post-crisis. in the pre-crisis period, the dow jones conventional index has low volatility with a low std. dev (0.008243) unlike other islamic indices that are the most active and profitable with the highest std.dev (0.024634) for peru, showing the highest average daily returns of 0.2014% for mexico. the other two periods show the same information. for the crisis period, the dow jones index standard has low volatility with std.dev (0.019472) and a negative average (-0.000285). it is lower than islamic indexes which are more volatile and have a higher std.dev (0.030628) for peru and the highest (0.000486) average for mexico. for the post-crisis period all the features are more preferable for islamic indexes except for hungary which has a negative average (-0.000209) and malaysia, which has the lowest std.dev (0.008893). volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.68 | http://emaj.pitt.edu volatility transmission between dow jones stock index and emerging islamic stock index: case of subprime financial crises page |44| emerging markets journal however, dj islamic stock index is highly volatile as it has a significantly higher kurtosis value during the three different periods. 4. empirical results in order to examine the volatility transmission between dow jones conventional index and emerging dow jones islamic index, we first estimate the bekk bivariate garch (1,1) models. table 2 reports the results for the averages and variance equations of the garch estimations over the pre-, in, and post-2008 crisis periods. notes: *** indicates the level of signification at 1%, ** at 5% and * at 10%. table 2. volatility transmission between dj standard index and emerging dj islamic index djiih djiim y djii me djiipe djiipo djiitr pre-crisis period α( 1, 2) (0.0352 64889) 0.79641 784 (0.0618 19471) 0.59846 494 (0.0534 650) 0.6912 4535 (0.22750 577) 0.04781 214** (0.3942 16400) 0.02448 985** (0.00534 624) 0.978406 82 α( 2, 1) (0.02323 412) 0.22774 736 (0.0672 77971) 0.48231 962 (0.0150 554) 0.4604 2417 (0.0129 67414) 0.31550 247 (0.06320 102) 0.01241 957** (0.000365 5) 0.977065 91 β( 1, 2) (0.00277 494) 0.96156 896 (0.1331 51840) 0.30465 732 (0.0143 461) 0.7976 9639 (0.0350 92532) 0.64572 714 (0.68569 148) 0.00027 64*** (0.022454 1) 0.748744 21 β( 2, 1) (0.0081 30994) 0.55585 173 (0.21120 443) 0.22327 80 (0.0009 963) 0.9449 4525 (0.00610 822) 0.46677 779 (0.0572 27937) 0.07730 393* (0.006171 3) 0.506439 43 during crisis period α( 1, 2) (0.04988 442) 0.36387 246 (0.5176 28634) 0.00000 01*** (0.128 999) 0.2704 372 (0.2283 3934) 0.05962 444* (0.1324 60833) 0.02311 598** (0.062037 238) 0.564825 78 α( 2, 1) (0.00722 51) 0.58208 603 (0.03239 434) 0.44820 304 (0.0442 158) 0.0407 7348 (0.04522 429) 0.00801 68*** (0.0197 40279) 0.40214 648 (0.023228 805) 0.263948 24 β( 1, 2) (0.0300 1402) 0.15190 820 (0.36347 158) 0.00000 00*** (0.0342 235) 0.6729 2081 (0.10401 151) 0.25167 864 (0.04769 089) 0.02512 441** (0.14636 7107) 0.003556 85*** β( 2, 1) (0.0007 5246) 0.84346 644 (0.1752 09329) 0.00025 99*** (0.012 36787) 0.1453 1417 (0.0135 19372) 0.01446 224** (0.00951 448) 0.27107 089 (0.00115 6709) 0.887954 01 post-crisis period α( 1, 2) (0.06145 403) 0.18260 564 (0.0091 29657) 0.70802 122 (0.0106 837) 0.7980 1413 (0.00025 128) 0.99629 830 (0.00476 613) 0.91265 234 (0.09035 8756) 0.285861 23 α( 2, 1) (0.0663 81837) 0.00019 85*** (0.0579 91610) 0.26759 740 (0.068 74255) 0.0139 3318 (0.0375 05750) 0.28784 447 (0.0465 52194) 0.04338 228** (0.008525 597) 0.816129 94 β( 1, 2) (0.02538 619) 0.08717 407* (0.0043 08421) 0.55116 992 (0.0109 995) 0.3549 2183 (0.0148 64547) 0.42949 865 (0.03013 006) 0.05432 040* (0.01037 6919) 0.698290 98 β( 2, 1) (0.01300 207) 0.00375 48*** (0.04232 759) 0.01470 664** (0.0223 170) 0.0032 59*** (0.00652 635) 0.64311 734 (0.00279 763) 0.68769 427 (0.023163 135) 0.418777 13 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.68 | http://emaj.pitt.edu amir saadaoui, younes boujelbene emerging markets journal | p a g e |45 4.1 volatility spillover between dow jones standard index and emerging dow jones islamic index in order to examine the volatility spillover effect, we employ the garch (1, 1) model based on the bekk approach. as mentioned earlier, the diagonal elements in matrix “a “captures past shock effect, while, the diagonal elements in matrix b measure past volatility effect. from table 2, the diagonal parameters (β11 and β22) in matrix b are statistically significant, indicating the presence of strong garch effects, namely past volatility affects the conditional variance of all indexes. furthermore, the diagonal parameters (a11 and a22) are significant, implying an arch effect in all indexes. the off-diagonal elements (a12 and a21) of matrices a and b capture cross-index effects, such as the shock and volatility spillover effects between the dow jones standard index and emerging islamic dow jones index. to demonstrate the role of the financial crisis of 2007, we classified the data into three periods, pre, in, and post crisis and found the results mentioned above. the estimation results of the bekk-garch model of the pre-crisis period are reported in table 1. we found no evidence of the shock spillover effect between the dow jones standard index and the emerging dow jones islamic indexes because coefficients a12, a21, β12 and β21 are not significant at 1% level. this implies what there are no significant effects on the present volatility between all indexes and that the increase in the standard dow jones index does not change the volatility of the other emerging dow jones islamic indexes. this explains that before the financial crisis of 2007, the islamic financial markets were stable and there was no disruption of islamic indices. to half of 2007, mortgage markets underwent a crisis called "subprime crisis". this crisis became to a financial crisis that affected all the financial markets worldwide. this turbulence has affected the standards and islamic financial markets. the estimation results of the bekkgarch model in-crisis period are reported in table 1. we found the evidence of the shock spillover effect between the dow jones standard index and the emerging dow jones islamic indexes because coefficients a12, a21, β12 and β21 are significant at 1% level. we noticed that the transmission of volatility is not obvious for all indices, since the result demonstrates that there are no significant factors perhaps because of the resistance of islamic indexes to financial crises. we noticed that the crisis has not affected the stability of all islamic indices concerned. indeed, we explained the non significance of most of the coefficients by the resistance of islamic indexes dealing with financial crises. the result shows that the transmission differs from one market to another. we also noticed that the most affected indices are those of asia such as malaysia, which show a significance at 1% level a12 (0.0000001) and β12 (0.0000000). however, the other indices were less affected, mexico a12 (0.2704372) and β12 (0.67292081), hungary a12 (0.36387246) and β12 (0.15190820) and turkey a12 (0.56482578). regarding the crisis period, we can see that most of the markets regained their stability despite the existence of economic problems in some european countries, such as spain and greece, as well as some arab countries, such as libya, syria, tunisia and egypt. this stability index explains well the non significance of the coefficients on the average and variance. there are at least two conclusions drawn from this study. firstly, the results help investors to choose to invest in less risky and more profitable indices. this can certainly makes them have more precise analysis for the types of appropriate investment risk. secondly, the result show that the islamic index screening process is important not only in eliminating the conventional index but also in providing less risky investment, which is in line with the nature of islamic value of small uncertainty. in the rest of our study, we will look at the transmission of volatility between the indices in question by referring to the dcc-garch model of engle and kroner (1995). this can be done by looking at the period during which the indices are more volatile. as a consequence, the investors will have important information in the way that they may have a volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.68 | http://emaj.pitt.edu volatility transmission between dow jones stock index and emerging islamic stock index: case of subprime financial crises page |46| emerging markets journal portfolio of islamic actions, which are found to have a lower risk in many countries. 4.2. dynamic conditional correlation between dow jones index and dow jones islamic index to evaluate the progress of correlations between dow jones standard index and emerging dow jones islamic index over time, figures 1 reports the dynamic conditional correlations between both types of indexes. the links between indexes during the periods of financial stress are clearly accentuated. first, correlations are extremely volatile during the crisis period. for many indexes, this volatility is especially marked during the subprime period crisis of 2007. in all cases, there is a rise in volatility during and following the crisis. second, in most cases, the greatest in the correlations occurred in the 2008 financial crisis. third, for almost all the series, the highest correlations are observed during the crisis, and at the end of the period under study. overall, the subprime crisis or the 2007-2008 financial crises caused significant changes in the coherence between dow jones standard index and emerging dow jones islamic indexes, as well as a higher correlation in volatility. during the periods of stress of dow jones indexes, correlations tend to decline and become negative during the subprime crisis, as it is clarified in the correlation graph. according to the results, two main detections can be heighted: (i) volatility progressed over time, but was quite stable before the 20072008 crisis, and (ii) correlations tend to jump during the crisis, display increased links between dow jones standard index and emerging dow jones islamic indexes. in general, our results show that the subprime crisis played a key role in developing the relationship between conventional and emerging islamic dow jones indexes. indeed, the topmost correlations between both types of indices are usually observed during the financial crisis, representing the phenomenon of stock market financialization. 5. conclusion this paper examines the links between classical dow jones index and the islamic dow jones of six emerging stock markets. we first use the bivariate bekk-garch model of engle and kroner (1995) to demonstrate the correlation between these indices. then, based on the dcc-garch, we graphically show if the correlations between the indexes change over time and depend on the situation or bullishbearish on the stock market. the great discovery can be summarized as follows: in a panel of 6 islamic indexes over the period from january 3, 2005 december 31, 2012, the correlations between the different emerging islamic indexes and dow jones standard index through time, are highly volatile, particularly during the 2007-2008 financial crises. while the stock market collapse has disentangled the links between the two types of indexes on the very short run, the greatest correlations are observed during the financial crisis, showing increased links between standard and islamic dow jones indexes. on the whole, our detections show that the subprime crisis has played a key role, in showing the links between the standard dow jones and the emerging dow jones islamic indexes, and highlighting the financialization of commodity markets. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.68 | http://emaj.pitt.edu amir saadaoui, younes boujelbene emerging markets journal | p a g e |47 references ahlgren, n & antell, j. (2009),”stock market linkages and financial contagion: a cobreaking analysis,” the quarterly review of economics and finance 50 (2010) 157 – 166. al-zoubi and maghyereh (2007), "the relative risk performance of islamic finance: a new guide to less risky investments," international journal of theoretical and applied finance, vol. 10, no. 2, pp. 235-249. charles, amélie, pop, adrian and darné, olivier (2011), is the islamic finance model more resilient than the conventional finance model? evidence from sudden changes in the volatility of dow jones indexes. international conference of the french finance association (affi), may 1113, 2011. available at ssrn:http://ssrn.com/abstract=183675 1. engle, r. and kroner, k.f. (1995). multivariate simultaneous generalized arch. econometric theory, vol.11, n.1, pp.122–150. karim, bakri abdul, noor akilamohdkassim, and mohammad affendy arip (2010)."the subprime crisis and islamic stock markets integration."international journal of islamic and middle eastern finance and management 3(4) 363-371. kumar, k and c mukhopadhyay (2002): “equity market interlinkages: transmission of volatility – a case of us and india”, nse working paper no.16. majid, m. shabri abd., ahamed kameelmeera, and mohdazmi omar (2007). "interdependence of asean-5 stock markets from the us and japan."20th australasian finance & banking conference. rahman, aisyah abdu, and noor zahirahmohd sidek (2011)."spillover effect of us sub prime crisis on asean-5 stock markets."business and social science research conference. dubai, uae: world business institute australia, 334. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.68 | http://emaj.pitt.edu volatility transmission between dow jones stock index and emerging islamic stock index: case of subprime financial crises page |48| emerging markets journal rizvi, s. arshad, s. (2012) “are islamic equity indices a safer haven in times of crisis? an empirical proof via investigation of global indices using multivariate garch dcc.” international islamic capital market conference, indonesia. wong w k, a agarwal and j du (2005): “financial integration for india stock market, a fractional cointegration approach”, national university of singapore working paper no. wp0501. yang, j. and qiu, w. (2005), “a measure of risk and a decision-making model based on expected utility and entropy,” european journal of operational research 164, 792-799. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.68 | http://emaj.pitt.edu amir saadaoui, younes boujelbene emerging markets journal | p a g e |49 fig 1: conditional correlation between dji & djeii examining overreaction in indian stock market for quarterly announcements examining overreaction in indian stock market for quarterly news dr. sitangshu khatua heritage business school, kolkata, india | e-mail: sitangshu_k@yahoo.com dr. hemant kumar pradhan xlri, jamshedpur, india | e-mail: pradhan@xlri.ac.in abstract market overreaction is a very familiar and age-old craze amongst traders. pigou (1929) defined it as a ‘conducting rod along which an error of optimism or pessimism, once generated, propagates itself about the business world.’ the question of whether or not indian stock prices market is overreacted during any stock-specific news is best answered by a comprehensive and concurrent analysis of the various tests and data available while using the event study. this study wants to address the impact of size, volatility and asymmetry in the terms of investors’ overreaction to the firm-specific news not only individually but also jointly. the outcome of this study helps to solve the problem concerning the extent to which quarterly announcements have informational content, and whether the investors are affected by the signals. the present study substantiates the policy recommendation for the market players as well as for the analysts in estimating earning announcement events under different market condition and different market capitalization value of the firm. keywords: overreaction, event study, abnormal return, cumulative abnormal return, market model, quarterly announcements. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu | mailto:sitangshu_k@yahoo.com mailto:pradhan@xlri.ac.in http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu dr.sitangshu khatua, dr. hemant kumar pradhan p a g e |1| emerging markets journal examining overreaction in indian stock market for quarterly news dr. sitangshu khatua dr. hemant kumar pradhan 1 introduction any event in which there is an abnormal stock price movement followed by a correction in the reverse direction can be taken as evidence of overreaction. in a seminal paper de bondt and thaler (1985) first coin a term, called “overreaction” in the stock market and prove that, as is the case with many other human activities, financial markets show an excessive reaction to new information or unexpected events. they conclude that a price reversal (negative returns) may be anticipated by the evidence of extreme preceding positive returns. alternately, an upward overreaction subsequently calls forth a dramatic downward adjustment or correction. the question of whether indian stock prices market is experiencing overreaction is best answered by a comprehensive and concurrent analysis of the various tests and data available while using the event study for any anticipated stock-specific news like quarterly announcements. the present study has found how the investors’ response will vary with market condition or uncertainty of market to firmspecific news and their reaction will change with size of the firm. 2 literature review in their seminal paper, ball and brown (1968) have established that there is some association between information contained in the firm’s accounting income numbers and stock prices. they identify that about 10-15% of the information contained in announced earnings had been predicted by the month of preliminary declaration. there are some studies illustrating more firm-specific factors. grant (1980) finds that the market in which stocks are traded often establish the behavior of securities return during the earning announcements and these behaviors also change due to change in announcement policy (beneish and whaley,1996). lacina et al. (2009) investigate the association between abnormal stock returns around earnings announcement dates and quarterly foreign and domestic sales and earnings data. freeman (1987) has established that the amount of unpredicted news transferred to the market by earnings report is inversely proportional to the market capitalization or the size of the firm. lev and penman (1990) also indicate that larger firms report more earning forecast than smaller firms. previous researchers (lang and lundholm,1993) infer that uncertainty can act as a proxy for information asymmetry. they investigate cross-sectional variation in analysts' published evaluations of firms' disclosure practices and provided evidence that the analysts' ratings are increasing in firm size and in firm performance as measured by earnings and return variables. ratings decrease in the correlation between earnings and returns and these are higher for firms issuing securities in the current or future period. veronesi (1999) has built up his model by introducing the significant impact of current market uncertainty on the extent of investor’s reaction to good or bad firm-specific news. according to this paper, investors rationally predict that their anticipations of cash flows tend to react more quickly to news during high uncertain periods. this higher sensitivity to news tends to increase the volatility of stock price. that is the reason behind the tendency of investors to hedge, because generally they are risk-averse. according to this model, investors discount good news at a higher rate if it is announced during bad times, and investors discount bad news at a much higher rate if it is announced during good times. several studies document that economic and market conditions influenced the investor’s reactions to any identical events (da costa, 1994; boyd et al., 2001). docking and koch (2005) find that dividend change announcements to lower dividends are followed by greater decrease in stock price during uncertain and up market. announcements to increase dividends i.e. good news tends to be considered as better news in a normal or down market with high volatility. whereas in the case of decreasing dividends announcements investors overreact more strongly to bad news in good times. they prescribe an implication by using dynamic rational expectations equilibrium model (veronesi’s model,1999) with behavioral considerations that link the investors’ reactions to market direction and volatility. the study of johnson and stretcher (2009) shows that excess stock return around the stock split announcements vary depending on the level of market volatility. negative news has more impact on the variance of return or volatility than positive news (pradhan and narashimhan, 2002). following section develops hypotheses and methodologies. section 4 illustrates the data sources. section 5 depicts results and section 6 reports additional feature to capture overreaction effect. section 7 concludes. 3 hypothesis in the present study we have tested following hypotheses to capture how overreaction effects differ across stocks, market conditions and the content of news. the reasons behind the differences in overreaction may be driven by variation in size of the firm, volatility of stock return , the content of the news and also the combined impact of the above three variables. the following tests have been done for considering the three effects like size, volatility and news individually and the combinations of any two effects combined to measure market over-reaction. 3.1 size effects large size firms are less vulnerable of marketturmoil because of their volume, turn-over and selfmonitoring capacity. atiase (1985) and freeman (1987) volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu examining overreaction in indian stock market for quarterly news emerging markets journal | p a g e |2 established that the amount of unpredicted news transferred to the market by earnings report is inversely proportional to the market capitalization or the size of the firm. lev and penman (1990) also indicated that larger firms report more earning forecast than smaller firms. the present study also investigates whether there are any significant differences between cumulative abnormal return (car) of the large and small size firms. in order to distinguish between car of small and large size stocks the following regression test has been done: cari = b0 * ss + b1 * ms + b2 * ls the dummy variables are defined in the following manner. the coefficients are indexed as: bi=1 if the event occurs during size quartile i and 0 otherwise; where, ss(small size) = 0 if the event occurs when firm’s market capitalization value is less (bottom 25 percentile) ; ms(medium size) = 1 if the event occurs when firm’s market capitalization value is medium (middle 50 percentile) and ls(large size) = 2 if the event occurs when firm’s market capitalization value is more (top 25 percentile). hypothesis h1: there is significant difference in the mean car’s of small and large size firm (b0 ≠ b2). 3.2 volatility effects market turbulence may instigate overreaction. that is why, dividend change announcements to lower dividends are followed by greater decrease in stock price during uncertain, volatile market (docking and koch, 2005). johnson and stretcher (2009) also establish that excess stock return around the stock split announcements vary depending on the level of market volatility. in order to determine the difference in the car between high and low volatility periods the regression equation is as follows: cari = b0 * lv + b1 * mv + b2 * hv the dummy variables are defined in the similar manner. the coefficients are indexed as: bi=1 if the event occurs during volatility quartile i and 0 otherwise; where, lv(low volatility) = 0 if the event occurs when market is less volatile (bottom 25 percentile); mv(medium volatility) = 1 if the event occurs when market is medium volatile (middle 50 percentile) and hv(high volatility) = 2 if the event occurs when market is more volatile (top 25 percentile). hypothesis h2: there is significant difference in the mean car’s in low volatility and high volatility period (b0 ≠ b2). 3.3 news effects people react more on any negative news rather than any positive news. negative news has more impact on the variance of return or volatility than positive news ( pradhan and narashimhan, 2002). in order to differentiate between car of good news and bad news the following regression equation has been tested: cari = b0 * gn+ b1 * nn + b2 * bn the dummy variables are defined in the similar manner. the coefficients are indexed as: bi=1 if the event occurs during news quartile i and 0 otherwise; where, gn(good news) = 0 if the event occurs when ar is more than positive 2.5% ; nn(no news) = 1 if the event occurs when ar is less than negative 2.5% and bn(bad news) = 1 if the event occurs when ar is in between negative 2.5% to positive 2.5%. hypothesis h3 : there is significant difference in the mean car’s of good news and bad news events (b0 ≠ b2). 3.4 combined effects earlier studies document that above size, volatility and news – all three variables individually influence on the movement of stock price during any news arrival. to extend it further, the present study also tries to investigate the consequences of the all possible combined or cross effects of two variables out of the above three on market overreaction. to test for the possibility that size and volatility do not have independent effects on stock performance, a regression model has been formed using the car as the dependent variable and a set of nine dummy variables representing the cross products of the three volatility dummies and the three size dummies as independent variables. cari = b00*lv_ss + b01*lv_ms + b02*lv_ls + b10*mv_ss + b11*mv_ms + b12*mv_ls + b20*hv_ss + b21*hv_ms + b22*hv_ls where, lv_ss = low volatility*small size. the other dummy variables are defined in a similar manner. the coefficients are indexed as: bij=1 if the event occurs during volatility quartile i and size quartile j, and 0 otherwise; where i=0 (lv), 1 (mv), or 2 (hv) and where j=0 (ss), 1 (ms), or 2 (ls). hypothesis h4: there is significant difference in the mean car’s in low volatility and high volatility period for small size firms ( b00 ≠ b20). hypothesis h5: there is significant difference in the mean car’s in low volatility and high volatility period for large size firms ( b02 ≠ b22). volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu dr.sitangshu khatua, dr. hemant kumar pradhan p a g e |3| emerging markets journal to test for the possibility that other probable pairs like volatility and news and size and news have combined effects on stock performance, following regression model for each is to be tested: cari = b00*lv_gn + b01*lv_nn + b02*lv_bn + b10*mv_gn+ b11*mv_nn + b12*mv_bn + b20*hv_gn + b21*hv_nn+ b22*hv_bn hypothesis h6: there is significant difference in the mean car’s for good news and bad news events in low volatility period ( b00 ≠ b20). hypothesis h7: there is significant difference in the mean car’s for good news and bad news events in high volatility period ( b00 ≠ b20). cari = b00*gn_ss + b01*gn_ms + b02* gn_ls + b10* nn_ss + b11*nn_ms + b12* nn_ls + b20* bn_ss + b21* bn_ms + b22* bn_ls hypothesis h8: there is significant difference in the mean car’s for good news and bad news events for small size firm( b00 ≠ b20). hypothesis h9: there is significant difference in the mean car’s for good news and bad news events for large size firm( b00 ≠ b20). 3.5 methodology under general conditions ordinary least squares (ols) is a consistent estimation procedure for the market model parameters (mackinlay, 1997). for the ith firm in event time, the ols estimators of the market model parameters for an estimation window of observations are: ---------(1) ---------------------------(2) -----(3) ---------------------------(4) ----------------------------(5) t0 + 1 = -111 days and t1 = -11 days, therefore l1 = 100 days. and are the return in event period t for security i and the market m respectively. from the market model, one can measure and analyze the abnormal returns (arit). let arit, t = t1, ……,t2, be the sample of l2 abnormal returns for firm i in the event window. -------------------(6) example of the use of ols parameters can be found in deangelo et al. (1984); mikkelson and partch (1986). to capture overall impact of the event on security price the abnormal return has to be aggregated along two directions – through time for an individual stock and then aggregation, both across securities and time. but, because of overlapping of event windows there are clustering effects. this has been compensated by using portfolio approach (mackinlay, 1997). a testing framework is defined for calculation of abnormal returns. for this, the null hypothesis is defined and the technique of aggregating the individual firm’s abnormal return is determined. say, for testing of an event on several firms, an equally weighted or value weighted portfolio may be constructed. the cumulative abnormal return (car) is defined as the sum of abnormal returns for each day in the event window. ----------------------------(7) after finding out arit for each day in an event, all arits are aggregated and computed car for each event. 4 data the main data in this study consist of daily closing returns of stocks, earning announcement dates, daily closing market returns. 4.1 preliminaries: data source, study period, sample in the present study, quarterly earnings announcement dates for 50 firms listed in nse (national stock exchange) of india for the period of oct’ 2005 to nov’ 2010 has been taken from cmie (centre for monitoring indian economy) prowess database and nse. these announcements correspond to the quarterly earnings for the third quarter of 2005 – 2006 and second quarter of 20102011. this period (2005-2010) has been the most eventful era not only for the indian security market but the global stock market as well. in this period of study, indian market has taken major strides to make an important place for itself in the entire world security market. within this span of five years, market experienced long term effects of after globalization, world recession and its impact and the post-recessional recovery as well. the present study wants to examine the overreaction effect for stock specific anticipated news, for which we have taken quarterly disclosure dates of the firms as event dates. the announcement dates are considered here as the event dates not the grapevine dates or the effective dates of any announcements. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu examining overreaction in indian stock market for quarterly news emerging markets journal | p a g e |4 the five years data for fifty firms provide a total sample of 822 available announcements. for 20 quarters of 50 companies, data for total 1000 quarters is available. but out of these, 822 have been taken. in selection of sample firms the followings are taken into consideration. for this type of event studies, frequently traded stocks should be taken, that is why nse-50 stocks are considered for this study. 50 stocks listed in nse cover more or less all the leading firms across various industries or sectors. financial year 2008-2009 is considered as the base year, keeping in mind the impact of global recession during this time. it means if a firm is enlisted in nse in this particular year, then only it is included in the sample. few stocks are not considered for this study because of non-availability of data for the entire period like the stocks of reliance power, bajaj auto and power grid corporation. to select the stocks one basic rule has been maintained, i.e. out of available 17 quarters, data of 14 quarters (70 percent) should be available properly. to capture the impact of the news independently, if any other major events happened during the defined event window (21 days), those event dates have not been included in the present sample. in this way impact of confounding effects are removed. this filtering process, we believe, ensures the robustness of results even though wide varieties of firms have not been considered. sometimes firms announce financial report for more than one quarter on a single date. such announcements are also not included in this sample. sometimes the firms do not announce report for a particular quarter. for each firm and quarter three types of information are required. they are date of announcement, the actual earnings and the measure of the expected earnings. the market index is considered as s&p cnx nifty (standard and poor’s crisil nse index) or nifty fifty. for both the stocks as well as market index, adjusted daily closing price and returns have been considered. earlier studies start with annual, semi-annual (obaidullah,1990) and monthly returns (fama et al., 1969). gradually there are developments in considering more frequent data. that is why daily closing prices are taken for this study. impact of other stock specific events like announcement of bonus, dividend etc. are already adjusted by taking the adjusted closing price of the stock. the next step is the measure of expected earnings as per normal return model which can be estimated by using market model as discussed earlier. 4.2 windows specifications next stage is to specify the percentage change in the stock return. for this, an event window and an estimation window have to be specified. in this study the observation interval is one day, i.e., daily stock returns will be used. a 21 day event window will be considered comprising of 10 preevent days, the event day and 10 post-event days. according to the earlier research event window should be as less as possible to get good statistical results. for selecting the event window a detailed sensitivity analysis has been done by choosing the event windows from 3 days (-1 to +1) , 7 days (3 to +3 ), 21 days (-10 to +10 days), 31 days (-15 to +15 ) and 41 days (-20 to +20) and patterns are found. out of these, 21 days (-10 to +10) are taken for final sample which gives a better pattern of car plot in the case of good news, bad news and no news (mackinlay,1997). for each announcement 100 trading day period prior to the event window will be used as the estimation window (mackinlay,1997). it is typical for the estimation window and the event window not to overlap to make the procedure robust. ideally for a quarter 100 days plus 21 days comprises 171 trading days which almost covers one quarter. this design provides estimators for the parameters of the normal return model which are not influenced by the returns around the event. including the event window in the estimation of the normal model parameters could lead to the event returns having a large influence on the normal return measure. in this situation both the abnormal returns and the normal return would capture the event impact. this would be problematic because the methodology is built around the assumption that the event impact is captured by the abnormal returns. on occasions, the post event window data is included with the estimation window data to estimate the normal return model. the goal of this approach is to increase the robustness of the normal market return measure to gradual changes in its parameters. 4.3 sample classifications size: in this study size effects are to be examined. nifty junior (100) stocks could be the ideal choice for small firms to study size effects. but preconditions of the event study are that all stocks should be very frequently traded in the market and selected stocks cover all industry verticals existing in the market on an average. that is why, nifty fifty stocks are selected to fulfill these conditions. the variation of daily market cap of nifty fifty stocks during the period of study (2005-10) is huge. if the daily market cap is considered across the study period, the highest stock is about 215 times that of the lowest. thus the size effects can be studied with considerable precision using the nifty-fifty stocks. accordingly ranking has been done on the basis of market capitalization or size of each stock on the event date. top 25 percentile has been considered as large size firm, bottom 25 percentile as small size firm and the middle 50 percentile as medium size firm (lev and penman,1990). volatility: the investors’ forecasts of expected market trend and volatility are a function of current market and uncertainty. for the pre-announcement period (10 days), the mean and standard deviation of daily stock return of each announcement have been calculated and then ranked according to the standard deviation, and partitioned into quartiles. the high-volatility market is then defined as the top quartile, the lowvolatility as the lowest quartile and the volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu dr.sitangshu khatua, dr. hemant kumar pradhan p a g e |5| emerging markets journal medium-volatility market as the middle 50 percentile (docking and koch, 2005). news or asymmetry: if the actual earnings are more than the expected earnings with respect to any announcement, it can be categorized into good, bad or no news or noise. if the actual exceeds expected by 2.5 percent the announcement is designated as good news, and if the actual is 2.5 percent less than the expected the announcement as designated as bad news. those announcements where the actual earnings is in the 5 percent range centered about the expected earnings are designated as no news or noise (mackinlay,1997). it has been seen that there is a total variation between actual and expected daily earnings to the extent of + 5 to -5 percent approximately in the case of all 50 stocks in nse for the current 5 years. out of total 822 quarterly earnings announcements 206 are good news, 206 are bad news and rest 410 are no news or noise. for every categorization, all events have been analyzed separately for good news, bad news and no news. sampling is given in table 1 (prabhala, 1997). table 1: sampling of data news total bad news no news good news volatility low volatile 39 127 39 205 medium volatile 102 204 101 407 high volatile 65 79 66 210 total 206 410 206 822 size small size 45 94 66 205 medium size 111 212 89 412 large size 50 104 51 205 total 206 410 206 822 volatility small size medium size large size low volatile 51 103 51 205 medium volatile 102 204 101 407 high volatile 52 105 53 210 total 205 412 205 822 4.4 event overreactions table 2 : mean and sd of ar and car for “good news”, “bad news” and “no news” (using market model ) news no. of news mean ar sd ar se mean car sd ca r θ1 = mean car/s d car good news 206 3.9727 18447 2.01 8621 1.9680 3609 3.6756 80434 11.4 1671 0.3219 56219 no news 410 -0.139 0.91 9088 0.1512 36947 0.7562 61877 8.72 7675 0.0866 51017 bad news 206 3.5254 36893 1.76 2171 2.0006 20781 3.5076 30849 10.6 2726 0.3300 59625 total 822 0.0427 61557 3.04 9597 0.0140 22037 0.3350 96296 10.2 6368 0.0326 48737 from the above table 2, on the announcement day (day 0) the sample average ar for the “good news” firm using the market model is 3.9% and standard error is 1.9% and the value of θ1 is 0.321 where as for the “no news” firm the corresponding values are -0.139%, 0.919% and -0.086 respectively. this shows that the null hypothesis (the event has no impact) is strongly rejected. the same story repeats for the “bad news” firms also. figure 1: car plot – all “good news”, “no news” and “bad news” for earning announcements from event day 10 to +10. the car plot (figure 1) shows that up to a certain extent the market gradually realizes about the upcoming announcements. that is why the car is gradually shifted up in -10 to -1 day for “good news” and behaves just in opposite manner for bad news over this period. the same trend continues in the post event windows also. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu examining overreaction in indian stock market for quarterly news emerging markets journal | p a g e |6 4.5 summary statistics table 4 provides the summary statistics of preannouncement periods for the sample of 822 quarterly announcements. events are partitioned by market-cap or size, news category and volatility. for size and volatility, the quartiles partitioning scheme to get the proportioning subsample sizes are used. the news more that +2.5 percent are considered as good news, less than -2.5 percent as bad news and in between these two triggering returns as no news. it is obtained that out of selected 822 quarterly announcements 205 are small size, 412 are medium size and rest 205 are large size. similarly, 205 events are considered as low volatile, 407 medium and 210 as high volatility. in a similar vein, both 206 events are considered as good news or bad news events. balance events are termed as no-news. table 3: ar and car values for event days -10 to +10 of “good news” , “no news” and “bad news” volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu dr.sitangshu khatua, dr. hemant kumar pradhan p a g e |7| emerging markets journal table 4: summary statistics for the 822 quarterly announcements table 5: summary statistics for the 822 quarterly announcements (2) note: sample statistics are shown for 822 quarterly announcement events of nse-50 stocks during the period of 2005-2010. abnormal return (ar) is calculated by using daily adjusted closing return of the market model (ols). estimation window is considered as 100 days. cumulative abnormal return (car) is calculated by accumulating ar over the event windows ( -10, 0, + 10 = 21 days). n = sample volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu examining overreaction in indian stock market for quarterly news emerging markets journal | p a g e |8 5. results table 6: results for individual size, volatility and asymmetry or news effect panel a: size (n =822) dependent variable ls ms ss dw stat adj. r2 f-stat prob(f) cari coefficient .3009 -.6747 -1.941** 2.09 .0023 1.6207 .6377 t-stat -.4196 -1.333 -2.01 n 205 412 205 panel b: volatility (n =822) dependant variable hv mv lv dw stat adj. r2 f-stat prob(f) cari coefficient .5817 -.7878 -.3751. 2.09 .0005 1.23 .5910 t-stat .8216 -1.549 -.5235 n 205 407 210 panel c: news (n =822) dependant variable gn nn bn dw stat adj. r2 f-stat prob(f) cari coefficient 3.6755 ** -.7562 -3.8672 ** 2.11 -0608 27.58 ** .0000 t-stat 5.303 -1.539 -5.3608 n 206 410 206 note: cross sectional mean cumulative abnormal returns (cars), using the market model is shown for 822 quarterly announcements over the event window. t-statistics are calculated by standardizing the abnormal returns on each day for each event and then aggregating the standardized abnormal returns over the event period (21 days: -10,0,+10) to find out car. panel a represents the significant difference between large size and small size firms. ls: large size, ms: medium size and ss: small size. panel b represents the significant difference between high volatility and low volatility events. hv: high volatility, mv: medium volatility and lv: low volatility. panel c represents the significant difference between good news and bad news events. gn: good news, nn: no news and bn: bad news. n= sample size.** significant at size. all are statistically significant at 5 percent level. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu dr.sitangshu khatua, dr. hemant kumar pradhan p a g e |9| emerging markets journal the first question is for addressing the size effect. small cap firms, being less observed and more exposed to abnormality, may have a higher chance of reacting to a certain event. whereas the actions of large cap firms are better observed and more anticipated, and thus any event would not be much of a signaling response. being a large firm, they can absorb any shock by themselves, which a small firm cannot. the same thing has been found in the test shown in panel a of table 5. the difference between the two populations has the predicted sign and is marginally statistically significant (p-value of 6.3%). the result indicates that small cap firm has more impact than large cap firms. small cap coefficient also shows statically significant in the case of measuring overreaction. the second question addressed by the study was based on the notion that firms overreaction varies with volatility. based on the data, it was not possible to reject the null hypothesis. there was no statistically-significant difference between high and low volatility. the results are shown in panel b of table 5. the result indicates that comparatively high volatility firms have marginally more impact than low volatility. third question i.e. the asymmetry or the news effect are shown in the panel c of the table 5, which shows more significant difference ( f-stat27.58 and p –value 0%) . it indicates that bad news has much more impact on overreaction than good news, which is more logical and similar to previous literature. overreactions are both statistically significant for good news as well as bad news events. table 7: regression result for volatility and size combined note: the table represents the multiple regression results of the combined effects of volatility and size on overreaction. the model is: cari = b00*lv_ss + b01*lv_ms + b02*lv_ls + b10*mv_ss + b11*mv_ms + b12*mv_ls + b20*hv_ss + b21*hv_ms + b22*hv_ls, where, lv_ss = low volatility*small size. the other dummy variables are defined in a similar manner. n= sample size.** significant at 5% level other regressions results appear in table 6,7 and 8. table 6 represents the multiplication or joint effects of volatility and size. the highest volatility and smallest size dummy shows a marginally significant result (-2.25 at 5% significance level). medium volatility and medium size is also shows statistically significant result. the cross product of volatility and news shown in the table 7 is that the abnormality in return increases with volatility and it further increases for the bad news. hence market reacts more badly on negative news in an uncertain period. high-volatile and bad news dummy is statistically significant (-2.955 at 5% level of significance). all the independent cross dummies of volatility and news are statistically significant except the no-news cases. overall p-value of 0% and f-stat (7.271) also shows that joint effects of volatility and news have statistically significant impact on market overreactions. table 8: regression result for volatility and news combined note: the table represents the multiple regression results of the combined effects of volatility and news on overreaction. the model is: cari = b00*lv_gn + b01*lv_nn + b02*lv_bn + b10*mv_gn+ b11*mv_nn + b12*mv_bn + b20*hv_gn + b21*hv_nn+ b22*hv_bn, where, lv_gn= low volatility*good news. the other dummy variables are defined in a similar manner. n= sample size.** significant at 5% level the cross product of news and size shown in the table 8 is that the abnormality in return is more for bad news as well as good news. hence market reacts more badly on any extreme price changes. cross dummies associated with medium size are shown more statistically significant results than others. all the independent cross dependant variable independent variables n coefficient t-stat cari lv_ss 51 0.4076 0.2315 lv_ms 103 -0.3226 0.3384 lv_ls 51 -0.9698 0.7005 mv_ss 102 0.7253 0.6813 mv_ms 204 -1.7016** 2.3672 mv_ls 101 -0.3725 0.3805 hv_ss 52 -2.2515** 2.2163 hv_ms 105 1.1583 1.082 hv_ls 53 0.8805 0.5424 dw-stat: 2.113 adj. r2: 0.005 f-stat: 0.938 prob(f): 0.483 dependa nt variable independe nt variables n coefficie nt t-stat cari lv_gn 39 3.738** 2.342 lv_nn 127 -0.3787 0.4283 lv_bn 39 -4.4769** 2.8059 mv_gn 101 3.2424** 3.2704 mv_nn 204 -1.432 2.0541 5 mv_bn 102 -3.4883** 3.5358 hv_gn 66 4.3013** 3.5071 hv_nn 79 0.3843 0.3428 hv_bn 65 -2.955** 2.3911 dw-stat: 2.115 adj. r2: 0.0575 f-stat: 7.271* * prob(f): 0.0000 volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu examining overreaction in indian stock market for quarterly news emerging markets journal | p a g e |10 dummies of news and size are statistically significant except the no-news cases. overall p-value of 0% and f-stat (7.416) also shows that joint effects of news and size have statistically significant impact on market overreactions. table 9: regression result for news and size combined note: the table represents the multiple regression results of the combined effects of news and size on overreaction. the model is: cari = b00*gn_ss + b01*gn_ms + b02* gn_ls + b10* nn_ss + b11*nn_ms + b12* nn_ls + b20* bn_ss + b21* bn_ms + b22* bn_ls, where, gn_ss = good news * small size. the other dummy variables are defined in a similar manner. n= sample size.** significant at 5% level robustness considerations in order to check whether the results are stable over time the cars of events have been re-examined for the two approximately equal-size sub periods within the sample period. during the study period, year 2008 is considered as the year of separation to check the effect of pre and post global crisis period. in this way, the sub periods ( from oct’05 to jun’08 and from jul’08 to nov’10) are selected in such a way so that the sample period is almost split in half in chronological order. cars are found statistically significant for the two sample periods. in the first period sample size is 352 and in the later one it is 470 events. overall, the results of the sub period analysis do not display any significant difference with the findings of the total periods. thus it can be concluded that the actual findings seems to be stable over time and do not appear as sampleperiod dependent (spyros,2007). as regression results are stable over time, it can be said that there are not any serious multi-colinearity issues. further, everywhere dw statistics reaches at least a level of 2. hence it can be considered that the regression results are to be robust and any serious level of auto-correlation exists here. levene statistics value of cari is 3.547 for 1% significance level. this also considers one of the good results for showing homogeneity of the sample. 6. intra-industry news diffusion in the case of quarterly releases before any announcements investors can make an idea from news provided by various public channels. one important source is intra-industry firms’ earnings reports (foster,1981; freeman and tse, 1992). givoly and palmon (1982) find that late-announcers have reduced stock-price over-reactions, because investors are already prepared about the earnings from early peer announcements. prior research has documented that earnings announcements provide information not only about the announcing firm but also about other firms in the same industry ( thomas and zhang, 2008; griffin and hirschey, 2011). it can be studied that how stock market overreaction associated with the phenomenon of intra-industry information transfers. how the stock price movements of late announcers in response to earnings reported by early announcers are related to subsequent price responses of late announcers to their own earnings reports. apparently, the stock market overestimates the intra-industry implications of early announcers’ earnings for late announcers’ earnings, and that overestimation is corrected when late announcers disclose their earnings. 6.1 methods the reason behind the overreaction may be due to investors’ incapability to realize entirely the positive correlation in earnings announcement by industry peers (ramnath, 2002). this explanation is consistent with bias caused by investors depending on the representativeness heuristic discussed in behavioral finance ( barberis et al., 1998; chan et al., 2004). stock-price of late announcing firm adjusts through a couple of price changes those are more-or-less positively related. this leads the lateannouncer’s price to overshoot the price which reflects the earning news it ultimately releases. it has been also considered the findings of bernard and thomas (1990) that are based on investors not understanding the extent to which news in earnings this quarter spills over to future quarter earnings. this study is based on earnings information containing of two parts. one component that has spillover effects for upcoming quarters and a second part that does not. intra-industry information transfers from early announcers to late dependant variable independent variables n coefficient t-stat cari gn_ss 66 2.624** 2.1416 gn_ms 89 4.558** 4.3194 gn_ls 51 3.493** 2.5057 nn_ss 94 -0.3760 0.3661 nn_ms 212 -0.8879 -1.298 nn_ls 104 -0.8314 0.8515 bn_ss 45 -2.693** 2.1406 bn_ms 111 -4.4638** 4.7232 bn_ls 50 -3.0162** 2.1419 dw-stat: 2.106 adj. r2: 0.0588 f-stat: 7.416** prob(f): 0.0000 volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu dr.sitangshu khatua, dr. hemant kumar pradhan p a g e |11| emerging markets journal announcers consisting mainly of the second component, which does not have impact for adjacent quarters. it is felt that considerable progress remains to be made along this dimension. hypothesis h10: there is significant relation between stock price movements of late announcers during it’s earning release period with respect to earnings reports by early peer announcers. 6.2 variables during the quarter earning disclosure period, the last announced firm is considered as the late announcing overreacted firm & the others are early announcer peer firms within the same industry. for each late-announcing firm i, we measure two sets of cumulative abnormal returns, one for firm i and one for its peers. each set contains two returns, one in response to that firm’s own earnings announcement and one in response to the other firm’s earnings announcement. all cars are computed as per the market model and the threeday windows cover the (1, 1) period, where day 0 is the earnings announcement date. 1.carit = cumulative abnormal returns for late announcing firm i around its own earnings announcement date t (1,0,+1) 2.responseit = average cumulative abnormal returns of the firm i over a similar three-day window around the announcement of peer firms in the industry that have already announced during their announcement date t (1,0,+1) to ensure that above two periods do not overlap it is required that the peer’s earnings announcement date precede firm i’s earnings announcement date by at least five calendar days or one week. since there is typically more than one peer firm that announces its earnings earlier, the mean of those peers’ announcements is used to measure firm i’s response to industry peers’ earnings announcements. during the announcement period, the maximum time gap between the earliest peer firm’s announcement date and the late announcing firm’s date is one month to remove confounding effect. turning to the second set of returns—for peer firms—we measure similar event returns on the same two dates for those peers that announce earnings before firm i. that is, we calculate the returns over three-day windows for each of these peers at their own earnings announcement dates and at the earnings announcement date for the lateannouncing firm i. 3.prcarit = the averages of cars across all eligible peers during their own announcement date 4.prresponseit = early peers’ response to the earnings announcement for firm i i.e. average cars of peer firms during the firm i’s announcement date to illustrate how we measure all the four variables consider the following example (see figure below). assume that an industry has four firms ( w, x, y, z and i) that announce their last quarter earnings on may 27, april 15, 18, 24, and 27, respectively. firm i’s early-announcing peers include firms x and y but not firm z and w. some additional variables we consider for control purposes are as follows: 1.peern = the number of early peers that announce earnings at least five days prior to firm i’s announcement date. 2.lagtime = the average time lag between the announcement dates for early peer firms and the announcement date for firm i. 3.cart–1= firm i ’s three-day earnings announcement cumulative abnormal returns around the earnings announcement date in previous quarter (t–1) 4.cart–4= firm i ’s three-day earnings announcement cumulative abnormal returns around the earnings announcement date during the same quarter in the previous fiscal year (t–4) 5.sizei = market cap of firm i around its own earning announcement date 6.return6m = firm i’s last 6 months returns 1 week prior to the announcement date 6.3 results table 9 provides descriptive statistics for the variables of interest. as shown in panel a, the mean earnings announcement return carit is close to zero, in contrast to a positive mean return documented in the literature (ball and kothari,1991). the average responseit of 0.503% reported in panel a suggests that early announcers tend to have higher announcement returns than late announcers (givoly and palmon ,1982). table 9, panel b provides pearson and spearman correlations among the different variables. there can be six possible correlations among carit, responseit, prcarit and prresponseit covering the announcement returns and responses to peers’ announcements. out of which, the correlation between carit and responseit is negative only. this conveys that the stock price of a late announcer firm over-reacts to the news transferred from the earnings disclosure by the early peers. but it is afterward corrected during the announcement of the late announcer firm’s own earnings. the positive correlations between carit and prresponseit , and prcar it and response it signifies intra-industry information transfers. the positive correlation between carit and prcarit is also consistent with the lead-lag effect from large to small firms in earlier literature (hou, 2007), as early announcers tend to be larger firms. interestingly, responseit, and prcarit are volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu examining overreaction in indian stock market for quarterly news emerging markets journal | p a g e |12 positively correlated with each other, but carit is positively related with the earlier and negatively with the later. this evidence documents consistent news dissemination from announcement of the peer-group. the positive correlation between cart–1 and return6m with carit and cart–1 and return6m with responseit respectively confirms the presence of momentum or ownfirm under-reaction also. table 10 indicates substantial proof of price reversal. responseit increases from -4.98 % in d1 to 8.39% in d2 whereas carit depicts a steady decrease from 0.81% in d1 to −0.32% in d10. a hedge portfolio (d1–d10) with a long position in d1 stocks and a short position in d10 stocks yields a three-day market excess return of 1.13%, with a tstatistic of 9.36. table 11 documents the regression results of carit, and responseit in the presence of control variables like prcarit, prresponseit, cart–1, cart–4 ,size, return6m, lagtime and peern . as various combination of control variables are introduced in the model i to v, the values of coefficient on responseit and corresponding tstatistics are not very much different. overall, opposite relation between carit and responseit appears uniformly under different background. the analysis reported in model vi is designed to investigate whether the degree of overreaction differs across observations depending on the consistency between the news revealed by the early announcer and the implications of that news for the late announcer. a dummy variable, d, is used here. it is set to one when responseit and prcarit are of the same sign and zero otherwise. it confers that the positive news reported by the early announcer signifies positive news for the late announcer also and vice versa. the table 11 also provides a negative and significant coefficient on d*response. it evidences more overreaction to information transfers when there is more information transfer. carit = cumulative abnormal returns for late announcing firm i around its own earnings announcement date t (1,0,+1) responseit = average cumulative abnormal returns of the firm i over a similar three-day window around the announcement of peer firms in the industry that have already announced during their announcement date t (1,0,+1) prcarit = the averages of cars across all eligible peers during their own announcement date prresponseit = early peers’ response to the earnings announcement for firm i i.e average cars of peer firms during the firm i’s announcement date peern = the number of early peers that announce earnings at least five days prior to firm i’s announcement date. lagtime = the average time lag between the announcement dates for early peer firms and the announcement date for firm i. cart–1= firm i ’s three-day earnings announcement cumulative abnormal returns around the earnings announcement date in previous quarter (t–1) cart–4= firm i ’s three-day earnings announcement cumulative abnormal returns around the earnings announcement date during the same quarter in the previous fiscal year (t–4) sizei = market cap of firm i around its own earning announcement date return6m = firm i’s last 6 months returns 1 week prior to the announcement date volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu dr.sitangshu khatua, dr. hemant kumar pradhan p a g e |13| emerging markets journal table 10. descriptive statistics panel a: descriptive statistics variable n mean sd se max min carit 1956 0.021% 9.98% 0.004 43.45% -35.56% responseit 1897 0.503% 4.01% 0.1254 25.41% -29.45% prcarit 1956 0.075% 5.89% 0.0127 33.78% -21.59% prresponseit 1897 0.038% 3.23% 0.0117 27.53% -19.78% cart–1 1863 0.058% 8.89% 0.0065 40.01% -34.56% cart–4 1759 0.051% 7.76% 0.0065 41.35% -30.09% sizei 1956 40,350 63,756 0.6329 3,65,331 561 return6m 1956 0.043 0.891% 0.0483 9.675% -0.078% peern 1956 5.67 11.31 0.5013 11 1 lagtime 1956 12.42 8.67 1.4325 39 5 (continued) table 11. descriptive statistics (2) note: pearson correlations are shown above the diagonal and spearman correlations are shown below the diagonal. the sample includes bse-100 stocks during the period of oct’05 to nov’10 ( 22 quarters) with non-missing quarterly announcements returns from firm i and its early peers. there are 1956 firmannouncements with available data. all variables are statistically significant at 5% level of significance except peern and lagtime. variables are as follows: panel b: correlation matrix variable cari t respon seit prc arit prresp onseit cart–1 cart –4 sizei return 6m carit 1 -0.057 0.023 0.121 0.037 0.029 0.005 0.017 response it 0.051 1 0.125 0.006 0.023 0.008 -0.003 0.111 prcarit 0.019 0.157 1 0.017 0.003 0.003 0.007 0.025 prrespo nseit 0.189 0.007 0.015 1 -0.009 0.007 0.004 0.009 cart–1 0.035 0.021 0.002 -0.008 1 0.006 0.003 0.212 cart–4 0.023 0.009 0.003 0.007 0.006 1 0.003 0.006 sizei 0.007 -0.004 0.008 0.003 0.004 0.002 1 -0.018 return6m 0.019 0.101 0.027 0.008 0.196 0.005 -0.019 1 volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu examining overreaction in indian stock market for quarterly news emerging markets journal | p a g e |14 table 12. deciles based ranking on firm i’s over reaction (car) to early peers’ earnings announcements (response) respo nse (%) car (%) prrespo nse (%) prcar (%) d1 (low) -4.98 0.81 -0.03 -0.09 d2 -3.34 0.67 -0.01 -0.01 d3 -2.98 0.78 0.04 0.03 d4 -1.92 0.34 0.07 0.13 d5 -0.67 0.22 0.02 0.54 d6 0.156 0.19 0.06 0.68 d7 1.89 0.07 0.09 0.89 d8 3.98 -0.12 0.08 0.97 d9 6.67 -0.29 0.03 1.01 d10 (high) 8.39 -0.32 -0.02 1.37 d1 d10 -13.37 1.13 -0.01 -1.46 (t-stat) (37.67) (9.36) (0.876) (-15.34) note: carit = cumulative abnormal returns for late announcing firm i around its own earnings announcement date t (-1,0,+1) ; responseit = average cumulative abnormal returns of the firm i over a similar three-day window around the announcement of peer firms in the industry that have already announced during their announcement date t (-1,0,+1) ; prcarit = the averages of cars across all eligible peers during their own announcement date; prresponseit = early peers’ response to the earnings announcement for firm i i.e average cars of peer firms during the firm i’s announcement date. firms are first sorted into 10 deciles for each quarter based on responseit, then mean values for firms in each deciles are calculated and finally maximum one across 22 quarters ( oct’05 – nov’10) is taken for each decile. there are 1956 firm-announcements with available data for 100 firms. all variables are statistically significant at 5% level of significance except carit . portfolios with fewer than 5 stocks are eliminated. table 13. regression results of car on response & other control variable model i model ii model iii model iv model v model vi# intercept 0.00 (0.98) 0.00 (0.44) 0.00 (0.87) 0.00 (0.32) 0.00 (0.29) 0.00 (0.23) respon se -0.098** (-15.34) 0.035** (-10.23) 0.079** (-11.89) 0.121** (-12.64) 0.234** (-13.39) 0.1345* * (-15.67) d -0.00 (-0.976) d*resp onse 0.039** (-2.56) prresp onse 0.078 (1.21) 0.045 (0.786) 0.0236* * (3.31) 0.076** (3.45) prcar 0.032** (4.67) 0.054** (3.29) 0.039** (3.71) art–1 0.047*8 (9.98) 0.087** (12.32) 0.092** (12.98) art–4 -0.008 (-0.987) -0.007* (-2.32) 0.003 (0.987) size 0.01 (0.26) 0.006 (0.975) 0.009 (1.023) return6m 0.009* (2.78) 0.002 (1.023) 0.003 (1.08) lagtim e 0.00 (0.987) peern 0.007 (0.765) adj r2 0.004 0.015 0.012 0.009 0.013 0.012 note: this table reports the mean coefficient estimates across regressions of arit on response and other variables as defined earlier. there are 1956 firmannouncements with available data for 100 firms. **: variables are statistically significant at 5% level of significance. t-statistics are given within parentheses. see table 5.12 for detailed definitions. # d = dummy variable for consistency of information transfer news. d is a dummy variable set equal to 1 if resp *erlypraret > 0, and 0 otherwise; i.e., d = 1 if the early announcer’s news and the late announcer’s response are consistent. 7. concluding remarks in this study, the market over reaction has been investigated during the quarterly earnings announcements. while excess stock returns around this event have already been evidenced for a couple of years, the present study also finds out that these excess stock returns change depending on the level of market volatility. it has also been evidenced that positive cars around the event are caused by periods of high volatility and are more significant for small firms. these events are also tested across the extent of volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu dr.sitangshu khatua, dr. hemant kumar pradhan p a g e |15| emerging markets journal information content of that news. that is why, events are categorized as good news, bad news and no news depending on the extent of variation from actual and expected return. the present study finds that market overreacts more on any bad news than in any good news. it proves the information asymmetry. the outcome of this study may help to evaluate the extent of informational content of quarterly announcements, and whether the investors are affected by the various signals. it may so happen that market-players act differently to earning announcements during different market volatility conditions of various firms of various sizes in different firm-specific newsgood, bad or no news. it may also explain the nature of reaction for the case of small vs. large firms in the most advantageous manner. the present study also substantiates the policy recommendation for the market players as well as for the analysts in estimating quarterly announcement events under different market condition and different market capitalization value of the firm. the event study mechanism is only applied on mostly traded stocks in stock market and listed firms. that is why, nse 50 stocks are chosen for experiment. but generally they are all large or medium size firms. actual small size firms in the samples are not taken into consideration because of the above mentioned reason. this is the major limitation of the study. overlapping of event windows or confounding effects are eliminated to some extent by using adjusted daily closing price and market model. adjustment for other major stock-specific events like split, dividend and bonus etc. are already taken care of in adjusted closing price of the stock. when market model is used for estimated return, impact of any event related to the market is also eliminated. but still further scope of research is there to explore more on how to evaluate the impact of an event during a period after eliminating the effects of any other events either in the firm or in the national and international market. specially, in this era of globalized open economy there is need of evolving a sophisticated statistical tool for measuring the impact of specified news at a given time by eliminating effects of other news during that particular time. this study can be further explored after making portfolio of various instead of individual stock. in indian stock market presence of noninstitutional investors is more likely to cause noise in pricing mechanism, which may result in higher frequency of stock price correction. there are further scopes to study the impact of the noises. earlier research has acknowledged that quarterly reports endow with news not only about the announcing firm but also about peer-group firms in the same industry. the evidence of intra-industry information transfers has reported which is associated with stock market return anomaly. it is observed that the stock price movements of late announcers with respect to earnings reported by early announcers are negatively related to succeeding price reactions of late announcers to their own quarterly results. in fact the stock market overestimates the impact of intraindustry impact of early announcers’ earnings for late announcers’ earnings, and that overestimation is corrected when late announcers report their own earnings. the outcome of this study gives an indication to the analyst, broker, investor, trader, speculator about the future actions. if a stock held for long experiences large positive return, holding of such should reduced by shorting the stock or buying put option and vice versa. finding of this study encompasses strong implications for investor analysts, mutual fund managers as well as small investors who are continually engaged in designing a trading strategy. as mentioned in the introduction of this study, this research was initiated to contribute to the existing literature on overreaction and event study, to offer insights to the traders and institutional investors and to provide macro level inputs to the policy makers. within the limitation, it is expected that the target has been achieved to a reasonable extent. however, that there are other explanations also and encourage future research to construct over and above what has been build up in the present study. references atiase, r. k., 1985. pre-disclosure information, firm capitalization, and security price behavior around earnings announcement. journal of accounting research. 23, 21-36. ball, r., brown, p., 1968. an empirical evolution of accounting income numbers. journal of accounting research. 6(2), 159-178. ball, r., kothari, s.p., 1991. security returns around earnings announcements. the accounting review. 66(4), 718-738. barberis, n., shleifer, a., vishny, r.w., 1998. a model of investor sentiment. journal of financial economics. 49, 307-343. beneish, m. d., whaley, r. e., 1996. an anatomy of the "s&p game":the effects of changing the rules. the journal of finance. 51(5), 1909-1930. bernard, v.l., thomas, j.k., 1990. evidence that stock markets do not fully reflect the implications of current earnings for future earnings. journal of accounting economics.13, 305-340. boyd, j. h., hu, j., jagannathan,r., 2001. the stock market’s reaction to unemployment news: why bad news is usually good for stocks? working paper, university of minnesota, minneapolis. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.57 | http://emaj.pitt.edu examining overreaction in indian stock market for quarterly news emerging markets journal | p a g e |16 chan, w. s., frankel, r., kothari, s.p., 2004. testing behavioral finance theories using trends and consistency in financial performance. journal of accounting and economics. 38, 3-50. da costa, n. jr.,1994. overreaction in the brazilian stock market. journal of banking and finance.19, 633–642. deangelo, h., deangelo, l., rice, e., 1984. going private: minority freeze out and stock holders wealth. journal of law and economics. 27(2), 367-401. de bondt, w., thaler, r., 1985. does the stock market overact? journal of finance. 40, 793-808. docking, d.s., koch, p. d., 2005. sensitivity of investor reaction to market direction and volatility: dividend change announcement. the journal of financial research, 28(1), 21-40. fama, e., fisher, l., jensen, m. c., roll, r., 1969. the adjustment of stock prices to new information. international economic review.10(1), 1-21. foster, g., 1981. intra-industry information transfers associated with earnings releases. journal of accounting and economics. 3, 201-232. freeman, r., 1987. the association between accounting earnings and security returns for large and small firms. journal of accounting and economics. 9, 195-222. freeman, r., tse, s., 1992. an earnings prediction approach to examining intercompany information transfers. journal of accounting and economics. 15, 509-523. grant, e. b., 1980. market implications of differential amounts of interim information. journal of accounting research.19, 255-268. givoly,d., palmon,d., 1982. timeliness of annual earnings announcements: some empirical evidence. accounting review. 57, 486-508. griffin, j., hirschey, n., kelly, p., 2011. how important is the financial media in global markets? the review of financial studies. 24(12), 3941-3992. hou, k., 2007. industry information diffusion and the lead-lag effect in stock returns. review of financial studies.1113–1138. johnson , s., stretcher, r., 2009. news and noise: do investors react to stock split announcements differently during periods of high and low market volatility? springer economic finance. 35, 71-78. lacina, m.j., barry r. marks, b.r., shin, h., 2009. the information content of quarterly foreign earnings of u.s. multinational companies under sfas no. 131. journal of international accounting research. 8(2) , 23–44. lang, m., lundholm, r., 1993. cross-sectional determinants of analyst ratings of corporate disclosures. journal of accounting research. 31, 246271. lev, b., penman, s., 1990. voluntary forecast disclosure, nondisclosure, and stock prices. joumal of accounting research. 28, 49-76. mackinlay, c., 1997. event studies in economics and finance. journal of economic lecture, 35,13-39. mikkelson, w. h., partch, m., 1986. valuation effect of security offerings and the issuance process. journal of financial economics.15, 31-60. obaidullah, m., 1990. stock price adjustment to half yearly earnings announcements: a test of market efficiency. chartered accountant. 38, 922-924. pigou, a.c., 1929. industrial fluctuations, second ed. mcmillan publishers, london. prabhala, n. r., 1997. conditional methods in event studies and equilibrium justification for standard event study procedures. the review of financial studies. 10(1), 1-38. pradhan, h.k., narasimhan, l.s., 2002. stock price behavior in india since liberalization. asia-pacific development journal. 9(2), 83-106. ramnath, s., 2002. investor and analyst reactions to earning announcements of related firms: an empirical analysis. journal of accounting research. 40,1351-1376. thomas, j., zhang, f., 2008. overreaction to intraindustry information transfers? journal of accounting research. 46(4), 909-940. veronesi, p., 1999. stock market overreaction to bad news in good times: a rational expectations equilibrium model. review of financial studies.12, 975–1007. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu entrepreneurial university perspective: tracking labor force capacity to support industrialization processes in the emerging markets, evidence from kazakhstan data dilara orynbassarova independent researcher, kazakhstan | dilara.orynbassarova@nu.edu.kz abstract industrialization is considered as main engine of growth in economic development of the most emerging markets. this is especially true for central asian transitional countries as kazakhstan, which obtained independence from the soviet union in 1991. for enhancing country’s competitiveness potential, kazakhstan national program for 2010-2014 aimed to accelerate industrial-innovative development of the country. while many papers published about the importance of industrialization activities in kazakhstan, few have focused on examining the current capacity of labor market to meet the industry demand. main aim of this paper was to investigate if current manpower is adequate to maintain the planned rate of growth in the country. higher level of economic production led to higher demand of engineering labor force. high demand with low frequency supply created an imbalance in the labor market that resulted what we see as shortage of technically skilled labor. low frequency of supply is influenced by such factors as high engineers’ outflow rate, low students’ enrolment and graduation rates, and lack of practical skills of the graduates hired. keywords: kazakhstan, emerging markets, industrialization, labor market new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.111 | http://emaj.pitt.edu | mailto:dilara.orynbassarova@nu.edu.kz http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.111 | http://emaj.pitt.edu dilara orynbassarova emerging markets journal | p a g e |5 entrepreneurial university perspective: tracking labor force capacity to support industrialization processes in the emerging markets, evidence from kazakhstan data dilara orynbassarova 1. introduction industrialization is a period of the economic change that transforms society from the agricultural to industrial one (sullivan and sheffrin, 2003). the emerging markets are usually considered to be in a transitional phase that undergoes a rapid industrialization process and an economic growth (emfunds, 2014). this is especially true for countries in an economic transition as kazakhstan. kazakhstan has become known to leading world economies as an emerging market having high potential for growth (epmg, 2014). this country in transition has a number of advantages compared to the other emerging economies being resource-rich and having third-largest oil reserves of any country in the world (tatibekov, adams, prochaska, 2004). kazakhstan was ranked the 50th place among 144 with an average score of 4.4 out of 7.0 in global competitiveness report (gcr) of the world economic forum 2013-2014 (palata, 2014). in order to increase further economy’s competitiveness, one of the main aims of kazakhstan national program for 2010-2014 included acceleration of country’s industrial-innovative development (zhunussova, 2014). literature analysis reveals that, industrialization of the manufacturing processes is often considered as the potential source of new employment in the emerging markets (skeath, 1993, squicciarini, voigtländer, 2014). little has been published about assessing the labor market capacity to support industrialization process in kazakhstan. main aim of this study was to examine the current labor force dynamics to meet industrialization demand in kazakhstan, the labor supply side and factors influencing it. section 2 reviews theories drawing close correlation between the industrialization and the higher demand for technically skilled manpower; section 3 analyzes how industrial expansion in the country led to higher engineers demand and discusses low frequency supply factors. section 4 concludes. 2. theoretical background an emerging market economy describes “a nation's economy that is progressing toward becoming more advanced, usually by means of rapid growth and industrialization” (ia dictionary, 2001). literature review draws close correlation between the industrialization, economic growth, and the higher demand for skilled manpower. industrialization triggers economic growth and keeps the labour productivity to be higher in an industrial sector resulting in higher income compared to agricultural one (bineswaree, et al, 2013). the productivity growth rate in the manufacturing sector depends on the positive growth of output. theoretical model developed by skeath (1993) defines industrialization as a dominant firm's expansion into production of an increasing number of goods, where firms' profit maximizing behavior leads to expansion by creating greater employment opportunities in the manufacturing sector. same per kasanda (2005), employment opportunity in the manufacturing sector rises as an expansion occurs. squicciarini and voigtländer (2014) argue that, human capital is one of the strongest predictors of the economic development. thus economic development triggers the expansion of production, which in turn increases the scope for skill and learning. the economic theorist w.w. rostow claimed that, the manufacturing industries in traditional society had a tendency to grow but had always been limited by an inadequate scientific and technical knowledge resulted in low labor productivity (kasanda, 2005). a considerable amount of an ambiguity about the labor dynamics exists within the industrialization process in kazakhstan today. critical review of local sources indicates absence of accurate statistics on an adequacy of manpower capacity to maintain the planned rate of growth. the purpose of next section is to examine the labor dynamics in frame of industrialization process in kazakhstan by finding out a) if the industrial expansion in country has led to the higher labor demand, and if the required technically skilled labor is sufficiently supplied. in order to indentify supply side frequency, the following factors were determined as important for observation: a) the pattern of enrollment rates by students to engineering specialty, b) the graduation rate of engineering specialists in post-secondary programs, c) the quality of graduate technical students entering the job market and d) the technical specialists enrolment stimulation by the universities and compensation rates by the employers. 3. discussion and implications higher level of economic production and the demand for the engineers competitive labor market theory assumes that, the firm's demand for labor is a derived demand which is http://www.investinganswers.com/financial-dictionary/economics/economy-1517 volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.111 | http://emaj.pitt.edu entrepreneurial university perspective: tracking labor force capacity to support industrialization processes in the emerging markets, evidence from kazakhstan data page |6| emerging markets journal derived from the demand for the firm's output (squicciarini and voigtländer, 2014). as part of the industrialization process, 177.8 billion usd were invested to kazakhstan in 2005-2013, and 96.6 billion of them over the past 4 years (2010-2014) were invested during the implementation of the national program (westfal, 2014). the production output of the manufacturing industry has grown by 43% in 2014 compared to 2012 (state program of industrial innovative development for 2015-2019, 2014). figure 1 below indicates real sector of the economy, the positive growing trend of the industry, and the highest values of production in 2011. one can observe growth in an industrial production during the whole period of 20002011, including the crisis in 2009 when kazakhstan experienced decline in the mining and quarrying industry. fig 1. dynamics of industrial production and industrial sectors for 2000-2011. source: statistical agency of rk the review in the previous section indicated close correlation between the industrial expansion and the higher demand for the skilled labor. in an increasingly international world in which rapidly changing technologies are radically transforming work styles, the technically trained workforce is of critical importance (white, 1984). the engineering manpower is the backbone of any manufacturing enterprise as the quality and timing of production directly depends on the availability of these skilled professionals (antonova, 2010). national classification of occupations contains more than 160 items belonging to the engineering profession (kazakhstan zarplat database, 2015). the adequacy of this workforce is essential in assuring that competitive position of the economy is maintained. according to the case study conducted by “el kanaty” country’s public fund in 2014, the current labor market is experiencing a sharp deficit of the technically skilled manpower. the study involved 2000 corporate executives, recruiters and entrepreneurs from all 16 regions of kazakhstan (capital, 2014). according to kazakhstan employers, engineers (13.8%) were the most demanded specialties in the market in 2014, followed by the doctors (12.8%), teachers (10.1%), it specialists (7.4%), construction (6.4%) and marketing specialists (6.2%) (capital, 2014). the basic cause for increased demand for engineers is clear: the demand for engineers fluctuates with rather high frequency, responding to economic conditions that seem to grow rapidly in the country. at same time, another aspect important to note is the mining industry’s ¼ of workforce in 2013, which was represented by employees aged 50 years and older close to retirement in few years (prime minister web source, 2014). thus analysis indicates that, on the demand side, the labor market conditions are driven by the industrial expansion and the replacement requirements. higher level of economic production led to higher demand of engineers labor force. the purpose of next subsection is to assess if engineering manpower is adequately supplied to meet the industry demand. low frequency of supply according to the data on employment distribution by sectors, the total number of the employed in the industry sector represented the lowest amount (19.5%) of total employed population in the country in a period of 2008-2012 (with main portion of the employed lying in the services and trade (54.9%), agriculture and forestry (25,6%) (kozhakhmetova, 2013). low employment distribution of technically skilled labor in country’s labor market is also accompanied by high outflow rate of the engineers to foreign countries. according to the official data, following number of specialists left the country in a period of 2009-2010: technical 9428, economic – 4772, pedagogical – 3923, architecture and construction 1 891, medical – 1854, law 1319; agriculture -1035; other fields – 8866 (atabayev, 2012). table 1 below indicates an alarming trend for kazakhstan’s labor market, where availability of engineers and scientists has decreased almost twofold during the period of 2009 -2012. table 1: kazakhstan's position on the factor of "innovation” evaluating criteria 2009-2010 (among 133 countries) position 2010-2011 (among 139 countries) position 2011-2012 (among 142 countries) position by availability of scientists and engineers 74 91 106 source: tattieva and birukov (2013) low number of graduates graduating technical universities kazakhstan educational system does not function adequately to produce the supply of engineers to meet the industry demand. the logic is that, there is an insufficient number of university graduates to satisfy the volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.111 | http://emaj.pitt.edu dilara orynbassarova emerging markets journal | p a g e |7 demand side and the employer’s requirement. the graduation rate of technically skilled specialist is low. for example, 196.7 thousand bachelor graduates entered the labor market in 2009, however the significant proportion (33%) of the total number of these specialists were majoring in social sciences and business, teaching profession (21.4%), technical sciences and technology (16.5%) and human sciences specialty (13.4%) (sarybassova, 2009). logically, the university graduation rate is a dependable variable to the university enrolment rate. it was also worth studying the data on students’ enrolment rates to technical specializations. low enrolment rate to technical specializations the analysis done by ministry of education in 2014 in frame of strategic plan for 2014-2018, revealed the highest level of enrollment (41%) in business and law programs, and the lowest at the scientific and technical professions 24% (moe, 2014). for comparison, analysis of data for previous years indicates that, as a result of examination testing conducted in 1999 and 2000, international law, psychology, finance and foreign languages were named as the most prestigious professions among school graduates. competition for the university grant ranged from 10 to 21 people per place for these specialties (ryzhikova, 2004). low enrolment rate for technical specializations exist despite the fact that, technical profession is well supported by the government scholarship. table 2 (sorted from largest to smallest number by the author) clearly indicates that, the highest portions (37.4 %) of grants from the national budget for 2014 2015 academic year were allocated to technical professions. the disproportion in training leads to a mismatch of supply and demand in the labor market. table 2: state educational order for training specialists with higher education in educational institutions, national budget, 2014-2015 academic year source: ministry of education, resolution 2014, № 258 low training quality of hired graduates tusupbekov and alimbai (2013) argue that, current bachelors in terms of specific technical training cannot compete with internationally outsourced engineers. out of 131 universities functioning in the country, 71 are engaged in preparing the technical specialists. according to the employers, 50% of graduates after being hired are usually sent to professional on job re-trainings (kuldeyev, 2014). according to study conducted by ryzhikova in 2003, the majority of employer respondents (60.3%) believe that the level of education of graduates in power engineering specialization is lower than that of previous years. kuldeyev (2014) highlighted the following major weaknesses of higher educational system: a) weak material-technical base, the use of an outmoded equipment and machinery during the training courses and b) lack or absence of any practical experience provided by the universities to graduates. to successfully complete international industrial projects, currently government is outsourcing the international engineers. for example, the government has transferred the supervision function over the quality of road construction services to foreign engineers since 2012. the construction of roads in the country since that time is carried out within the basic principles of the international federation of engineering consultants specialization quantity of grants engineering and technology 12,600 education 5,364 health and social security (medicine) 4,000 training of students of preparatory departments of universities 2,530 agricultural sciences 2,020 natural sciences 1,470 services 950 social sciences and business 844 humanitarian sciences 790 universities of arts 770 veterinary science 650 training of nazarbayev university students 545 art 255 training of students from the republic of turkey, other turkic republics in the international kazakh-turkish university named after ha yasavi 200 training of foreign nationals under international agreements 178 law 140 training of students in the kazakhstan branch of the moscow state lomonosov university 125 military and security 60 training of citizens of afghanistan 54 reserve 50 training of students in branch "voskhod" of moscow aviation institute 45 training of citizens of mongolia 25 total 33,665 volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.111 | http://emaj.pitt.edu entrepreneurial university perspective: tracking labor force capacity to support industrialization processes in the emerging markets, evidence from kazakhstan data page |8| emerging markets journal (fidic) (kursiv, 2013). local talent finds it difficult in getting employed in the international projects due to lack of practical knowledge aligned with the international standards (nassimulin, 2014). to note, technical workers’ compensation rate is high in kazakhstan. in economic theory, in a competitive labor market, the wage is determined by the supply of and the demand for workers. a decrease of supply raises the wage, and increases demand. a rise in the worker’s productivity, or in the demand for the worker’s product, increases the wage and the number of workers employed (britannica encyclopedia, 2014). according to statistical agency, the technically skilled labor entered the top 20 highest paid professions list in kazakhstan in 2012. kursiv research data quoted the engineers’ average monthly earning as 619500 kzt (3357usd eqv) in 2013 (zakon data system, 2015). for comparison, same year highest monthly nominal wage of agricultural worker was 86000 kzt (500usd) and the lowest monthly nominal wage of office cleaners was 17000 -23000 kzt (125usd) (agency of statistics, 2012). to sum, data analysis indicates that engineers’ labor supply system is reacting with delay to the growth in the economy. current weak supply of technically skilled labor does not meet the needs of the innovative and technology-based economy, which is characterized by low enrollment rates by students to engineering specialty, low graduation rate of engineering specialists in postsecondary programs and low quality of graduate technical students entering the job market. 4. conclusion this paper analyzed and tracked the labor dynamics in frame of industrialization process in kazakhstan. the industrial expansion in country has led to the higher labor demand. the basic cause for an imbalanced labor dynamic is clear: the demand for engineers fluctuates with higher frequency, responding to growing economic conditions, while the supply side fluctuates with low frequency characterized by low university enrolment and graduation rates and an outflow of local engineers to foreign countries. observed high compensation rates by employers and committed financial support of students by government in form of university grants should positively change the enrolment and consequently the graduation rates of higher technical universities in the near future. the food for thought is that, the competitive positioning and economic sustainability is significantly influenced by the ability of the government and businesses to access talent, as and when it is needed (canadian county of simcoe project, 2011). the insufficiency of skilled labor force tends to decrease businesses and governmental programs’ outputs and performance (bineswaree, 2013). thereof, better synchronized planning of the higher education policy interventions should be considered in current reforms to enhance sufficient supply of the qualified technical manpower. references agency statistics of kazakhstan, 2012, “v kazahstane nominalnaya zarabotnaya plata injenerov vtroe bolshe, chem u agronomov” viewed 13 january, 2015 http://mojazarplata.kz/main/kz-news/vkazahstane-nominalqnaja-zarabotnajaplata-inzhenerov-vtroe-bolqshe-chemu-agronomov agency of statistics of rk, 2011. sourced from national analytic center of rk, “analiticheskaya zapiska”, viewed 12 january, 2015 http://www.nac.gov.kz/news/analytics/ analytical-note.php antonova, a., 2010, “kakie spetsialnosti polzuiutsiya osnovnym sprosom sredi rabotodatelei iz ukazannih otraslei?” viewed 14 january, 2015 http://www.karierist.kz/journal/all/40/3 10 atabayev, d., 2012. prodolzhaetsya utechka mozgov iz kazahstana. available from http://rus.azattyq.org/content/migration -shots-nurymbetovstatistican/24584251.html belyanin, 2014. central asia business journal. vol. 6, no., p40. book review, “globalizing central asia – geopolitics and challenges of economic development” by marlene laurelle and sebastien peyrouse. bineswaree, a., (2013), “the role of industrialization in economic development: theory and evidence africa section”. united nations conference on trade and development unctad, viewed 08 january, 2015, <vi.unctad.org/.../the%20role%20of% 20industri> volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.111 | http://emaj.pitt.edu dilara orynbassarova emerging markets journal | p a g e |9 britannica encyclopedia, 2014. “concept of wage theory”, viewed 12 january, 2015 http://www.britannica.com/ebchecked/ topic/633878/wage-theory capital online datasystem, 2014, “deficit injenerov i vrachei – plody nepravilnogo planirovaniya” viewed 14 january, 2015 <http://kapital.kz/details/32980/deficitinzhenerov-i-vrachej-plodynepravilnogo-planirovaniya.html> dossayev, e., 2014, “labor market and macroeconomic environment move kazakhstan up in wef global competitiveness report”, viewed 12 january, 2015, <http://www.primeminister.kz/news/sh ow/21/lidirujuschie-pozitsiikazahstana-v-rejtinge-vefobespechivajut-rynok-truda-imakroekonomicheskaja-sreda-mnerk/10-09-2014?lang=en> emfunds, 2014, “what are emerging markets?” viewed 14 january, 2015 <https://www.emfunds.us.assetmanage ment.hsbc.com/investing-in-emergingmarkets/content/what-are-em.fs> epmg – energy project management group, 2014, viewed 14 january, 2015 http://www.epmg.kz/en/pec/process.ht ml investing answers online dictionary, (2001), “emerging market economy”, viewed 10 january, 2015, http://www.investinganswers.com/fina ncial-dictionary/worldmarkets/emerging-market-economy1518 kasanda p., (2005), “rostow’s modernization theory of development” viewed 10 january, 2015, <http://www.academia.edu/3596310/r ostows_theory_of_modernization_deve lopment> kozahkhmetova, a.,2013, material from republican science conference, “analiz sostoianiya zaniatosti i bezrabotitsy v kazahstane”, ch 1, p2:329:331. kuldeyev, e, “vstrecha rukovodstva universiteta s predstaviteyiami natsionalnoi palaty predprinimatelei respubliki kazahstan” viewed 14 january, 2015 http://www.kazntu.kz/ru/node/9642 kursiv newspaper, may, 2013, “stroit dorogi budut inostrannyie injeneri” viewed 12 january, 2015 <http://www.kursiv.kz/news/details/obs hestvo/stroit-dorogi-v-kazahstanebudut-inostrannye-inzhenery/> ministry of education of rk, 2014. state educational order for training specialists with higher education in educational institutions financed from the national budget, in the 2014 2015 academic year. available from www.edu.gov.kz/sites/default/files/gos zakaz_russ.doc nassimulin b., 2014. “zachem kazahstanskoi neftiyanke mestnyi injenery” viewed 13 january, 2015 http://forbes.kz/blogs/blogsid_72661 palata, 2014. “kazakhstan maintains its position in the index of global competitiveness”. viewed 10 january, 2015, <http://www.palata.kz/en/news/9938> primeminister official websource, 2014, “labor market in kazakhstan through prism of industrialization and social employment” viewed 12 january, 2015 <http://www.primeminister.kz/news/sh ow/26/rynok-truda-v-kazahstanecherez-prizmu-industrializatsii-isotsialnoj-zanjatosti-/04-092014?lang=en resolution of the government of the republic of kazakhstan dated march 26, 2014 №258. strategic plan for 2014-2018. available from http://www.nomad.su/?a=3201404160030 rostow w., 1960. the stages of economic growth: a non-communist manifesto. cambridge university press, 1960. http://www.primeminister.kz/news/show/21/lidirujuschie-pozitsii-kazahstana-v-rejtinge-vef-obespechivajut-rynok-truda-i-makroekonomicheskaja-sreda-mne-rk/10-09-2014?lang=en http://www.primeminister.kz/news/show/21/lidirujuschie-pozitsii-kazahstana-v-rejtinge-vef-obespechivajut-rynok-truda-i-makroekonomicheskaja-sreda-mne-rk/10-09-2014?lang=en http://www.primeminister.kz/news/show/21/lidirujuschie-pozitsii-kazahstana-v-rejtinge-vef-obespechivajut-rynok-truda-i-makroekonomicheskaja-sreda-mne-rk/10-09-2014?lang=en http://www.primeminister.kz/news/show/21/lidirujuschie-pozitsii-kazahstana-v-rejtinge-vef-obespechivajut-rynok-truda-i-makroekonomicheskaja-sreda-mne-rk/10-09-2014?lang=en http://www.primeminister.kz/news/show/21/lidirujuschie-pozitsii-kazahstana-v-rejtinge-vef-obespechivajut-rynok-truda-i-makroekonomicheskaja-sreda-mne-rk/10-09-2014?lang=en http://www.primeminister.kz/news/show/21/lidirujuschie-pozitsii-kazahstana-v-rejtinge-vef-obespechivajut-rynok-truda-i-makroekonomicheskaja-sreda-mne-rk/10-09-2014?lang=en http://www.palata.kz/en/news/9938 volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.111 | http://emaj.pitt.edu entrepreneurial university perspective: tracking labor force capacity to support industrialization processes in the emerging markets, evidence from kazakhstan data page |10| emerging markets journal ryzhikova t., 2004. podgotovka kadrov dlya energetiki: mnenie potrebitelei. research group of central asian project http://www.cap.online.kz/sociology_4. htm sarybassova a., 2009. kazakhstanksi vipusknik 2009:horoshii specialist bez raboty ne osranetsia. available from http://www.uchi.kz/rabota/kazakhstans kii-vypusknik-2009-khoroshiispetsialist-bez-raboty-ne-ostanetsya satubaldina a., and kuzmina, 2014. nazarbayev sums up first five years of kazakhstan's industrialization program. five years of state-run program of accelerated industrial-innovative development available from http://en.tengrinews.kz/politics_sub/na zarbayev-sums-up-first-five-years-ofkazakhstans-258111/ shamgunova g., 2012, “osnovnyie problemy na rynke truda kazahstana” viewed 14 january, 2015 http://www.economy.kz/files/vse%20st ati/1%20osnov.pdf skeath s., (1993), “industrialization and labor demand” eastern economic journal, vol. 19, no. 2, pp. 209, viewed 10 january, 2015, <http://www.jstor.org/stable/40325492 > squicciarini m., voigtländer, n., ( 2014), “human capital and industrialization: evidence from the age of enlightenment”, viewed 10 january, 2015, www.anderson.ucla.edu/.../encyclopedi e_latest state program for accelerated industrialinnovative development of kazakhstan for 2010 2014 years, astana, 2010, approved by the decree of the president of the republic of kazakhstan dated march 19, 2010 № 958. available from http://strategy2050.kz/ru/page/gosprog 3/ state program of industrial innovative development for 2015-2019 years. available from www.strategy2050.kz. sullivan a. and sheffrin s., (2003). economics: principles in action. upper saddle river, new jersey 07458: pearson prentice hall. p. 472. available from https://www.worldcat.org/title/economi cs-principles-in-action/oclc/50237774 tatibekov, b., adams, j., prochaska, n., (2004), “characteristics of the labor market and human resources management in the republic of kazakhstan, journal american society for competitiveness 12: 1, viewed 10 january, 2015, <http://www.freepatentsonline.com/arti cle/advances-in-competitivenessresearch/129459326.html> tattieva, m., and birukov, b., 2013. “tekushie sostianie i razvitia statistiki nauki i innovatsiy v resbublike kazahstan”, economica i sotsium, №3(8) 2013, viewed 12 january, 2015 www.iupr.ru tusupbekov, m., alimbai, z., 2013, open letter to government of kazakhstan “vernut is zabveniya russkuiu sistemu podgotovki injenerov”, innovation and technology, viewed 14 january, 2015 <http://www.contur.kz/node/2169> westfal, v., 2014, “deficit injenerov meshaet industrialnomu razvitiiu, a ved vasha molodezh sposobna nauchitsia vsemu, chtoby uspeshno sodeistvovat rostu economiki”, viewed 13 january, 2015 <http://www.inform.kz/rus/article/2628 199> http://www.contur.kz/node/2169 volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.111 | http://emaj.pitt.edu dilara orynbassarova emerging markets journal | p a g e |11 white r., 1984. labor market conditions for engineers. is there a shortage? us national research council office of scientific and engineering personnel. proceedings of symposium. national academy press, washington d.c. http://www.nap.edu/catalog/19343/labo r-market-conditions-for-engineers-isthere-a-shortage-proceedings zakon datasystem 2015, “top-20 samyh vysokooplachivaemyh professi v kazahstane”, viewed 13 january, 2015 http://www.zakon.kz/4655761-top-20samykh-vysokooplachivaemykh.html zakon datasystem, 2015, “injenery i v budushem budut vostrebovany v kazakhstane” viewed 12 january, 2015<http://www.zakon.kz/4511811inzhenery-i-v-budushhem-budut.html> zarplat online database, 2015. “zarplata injenera v kazahstane, viewed 12 january, 2015 http://kz.zarplat.info/nnica zhunussova, j., 2014, “industrializatsia kazahstana: problem i perspektivy” viewed 12 january, 2015 volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu determinants of debt-equity choice – evidence from poland bogna kaźmierska-jóźwiak university of lodz, poland | bognakaj@gmail.com jakub marszałek university of lodz, poland | jakmarszalek@gmail.com paweł sekuła university of lodz, poland | pasek@uni.lodz.pl abstract the question of debt-equity choice has so far been widely discussed in literature. the aim of the paper is to analyse the determinants of capital structure of polish enterprises. we analysed factors that may impact the indebtedness. this analysis fills in the gap in worldwide studies with the case of a country representing the group of emerging markets. the paper examines capital structure determinants of non-financial companies listed on the warsaw stock exchange. we used five independent variables compatible with the up-to-date achievements in the field. the results indicate that there is an evidence of a significant negative relationship among the size of a company, its growth rate, profitability, tangibility and the level of total debt. the study shows positive relationship between growth prospects of the company and the debt level. the results of the study indicate that the pecking order theory better explains the changes in indebtedness of analysed companies than other capital structure theories. obtained results are mostly consistent with earlier studies conducted in the poland and with studies in western economies. keywords: capital structure, trade-off theory, pecking order theory, poland, emerging market new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.76 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.76 | http://emaj.pitt.edu bogna kaźmierska-jóźwiak, jakub marszałek, paweł sekuła emerging markets journal | p a g e |1 determinants of debt-equity choice – evidence from poland bogna kaźmierska-jóźwiak jakub marszałek paweł sekuła 1. introduction capital structure of an enterprise and its impact upon the functioning of a business and its value was, is and will remain the subject of numerous studies and analyses. two the most important capital structure theories, which explain the behaviour of entrepreneurs when it comes to the choice of the source of funding are the trade-off theory based on the accomplishments of f. modigliani and m. miller (1958) and the pecking order theory developed by s.c. myers (1984) and s.c. myers and n.s. majluf (1984). according to the trade-off theory, optimal capital structure is the outcome of compromise between benefits and costs of debt. under the trade-off theory, optimal capital structure level is identified by the debt to equity ratio, for which risk accompanying the debt is compensated with tax benefits connected with debt servicing. nevertheless, s. myers (1984) concludes that we still do not know how enterprises shape their capital structure. in his considerations he makes references to the theory of dividend policy and limited knowledge on optimal solutions for paying out dividends. he analyses the results of studies conducted and published by g. donaldson (1961) discussing modes of financing in large us enterprises, which demonstrated that they prefer internal sources of funding. results obtained by g. donaldson had been ignored for a rather long time as no explanations could be found for such a behaviour. g. donaldson himself decided that managers included in the study were not guided by the wish to maximise shareholder value. finally, s.c. myers and n.s. majluf (1984) presented theoretical justification for the above results based on the signalling properties of specific capital and by that they formulated the assumptions of the pecking order of theory. in accordance with the assumptions of the pecking order theory, capital structure of an enterprise is determined by the preference of internal over external sources of funding. when internal sources are insufficient, debt is preferred over equity, meaning credit or the issuing of bonds comes first and only when these possibilities have been exhausted, new stock is issued. high profits encourage managers to accumulate financial surpluses rather than to increase debt, even though the latter would bring tax benefits (under the trade-off theory). trade-off theory may be explained from the perspective of information asymmetry and transaction costs. managers have better access to information than external investors. s.c. meyers (1984) claims that information asymmetry and transaction costs exceed forces, which identify optimal financial leverage in the trade-off model. to minimise financial costs, enterprises prefer to start financing investment projects with internal resources. only if additional financing is necessary, they use external capital, starting from secure debt. thus, contrary to the trade-off theory, the pecking order theory does not foresee any long-term coefficient for capital structure. there is no optimal structure of capital as there are two types of equity: retained profit (preferred by the pecking order theory) and capital acquired from issuing new shares (avoided under the pecking order theory). the choice between equity and debt financing has been widely discussed in literature. studies were mainly oriented at the verification of the compatibility of the above mentioned theories with economic practice. the paper forms a part of this group of studies. its main goal is to analyse the determinants of the capital structure of polish enterprises. we analysed factors that may impact debt. the analysis complements worldwide research with the specificity of a country representing emerging markets, with well developed banking sector, potential source of debt, and capital market meeting the needs of equity funding. this paper is organized as follows: section 2 provides a literature review, section 3 refers to empirical research on capital structure in poland, section 4 presents data description, research methodology and hypotheses, results and the analysis are provided in section 5, summary is presented in section 6. 2. literature review research studies on the structure of capital test many dependant variables as proposed by, inter alia: bradley et.al. (1984), haris and raviv (1991), rajan and zingales (1995), bevan and danbolt (2002), who observed that the capital structure of an enterprise is mostly influenced by the size, profitability, tangibility, growth rate, and growth prospectus. size of the company many authors indicate that the main determinant of the capital structure of an enterprise is its size. however, results of studies on the impact of the size of an enterprise upon the structure of its capital are rather ambiguous. in accordance with the trade-off theory, there is positive relationship between the size of a company and the leverage, which is due to the fact that large companies are more diversified and less threatened with the risk of bankruptcy. the pecking order theory shows volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.76 | http://emaj.pitt.edu determinants of debt-equity choice – evidence from poland page |2| emerging markets journal negative relationship between the size of a firm and its financial leverage. kester (1986) draws attention to the problem of information asymmetry between the board and capital market, smaller in large companies and by that making them more capable of issuing equity. studies by rajan and zingales (1995) indicate that the debt of british firms is positively correlated with their size. positive correlation between the size of an enterprise and debt was also confirmed by bevan and danbolt (2002), who, however, observed that the relationship is very specific and depends on the nature (type) of debt. results obtained by barclay and smith (1996), demirguc-kunt and maksimovic (1999) confirm that debt maturity is positively correlated with company size. no evidence for the impact of the size of a company was detected by remmers et.al. (1974). while kester (1986) suggests a statistically non-significant negative relationship between debt and company size. natural logarithm of total assets will be the indicator for firm size in this study. thus, based on the firm size and according to the pecking order theory, we formulate the first hypothesis: h1: it is hypothesized that the level of leverage is negatively related to company size. profitability under the pecking order theory of myers and majluf (1984), company’s management prefers internal sources of funding over external ones and they usually use retained profits followed by debt and at the very end they decide to issue new equity. myers suggests the behaviour may be caused by the cost of issuing new equity. when analysing such costs, myers and majluf highlight the issue of information asymmetry and transaction costs. according to the theory, there is negative relationship between profitability and debt. enterprises with higher profitability generate higher cash flows and, as a result, enough net profit to be used as internal source of financing. thus, enterprises may strive to reduce debt. taking account of the tax shield effect, enterprises may prefer debt over equity. that, in turn, would suggest negative relationship between company profitability and its debt. negative relationship between debt and profitability in us and japanese enterprises was confirmed by the studies of kester (1986). titman and wessels (1988) also confirm the above relationship for us companies. rajan and zingales (1995) conducted a study among companies from g-7 countries. wald (1999) analysed enterprises from developed countries, booth et.al. (2001) focused on enterprises from developing countries, while huang and song (2006) conducted an analysis of chinese enterprises. all of them confirmed negative relationship between the profitability and debt. the return on assets (roa) ratio will be the indicator of profitability. thus, based on the firm profitability, we formulate the following hypothesis: h2: there is a negative relationship between the level of debt and the level of profitability. tangibility the asymmetric information theories of capital structure suggest there is a conflict of interest between lenders and shareholders (jensen and meckling, 1976). debt providers are exposed to default risk, hence they expect some guarantee for the debt. they usually require the debt to be secured by fixed assets. thus, the tangibility may become the main determinant of debt in enterprises (scott, 1977; williamson, 1988; harris and raviv, 1990). the relationship where enterprises with higher share of fixed assets in total assets use more debt as the source of financing was confirmed in the studies of breadley et.al. (1984), titman and wessels (1988), and rajan and zingales (1995). this positive relationship is based on the assumptions of the agency theory. in this study, the fixed assets over total assets ratio will be the proxy for asset tangibility. we expect that debt level is positively related to tangibility; therefore we formulate the following hypothesis: h3: there is a positive relationship between leverage and tangibility. growth myers and majluf (1984) analyzed a firm with assets in place and a growth opportunity requiring additional financing. in this analysis the main assumption concerns prefect financial markets, except that investors do not have information about true value of existing assets and opportunities. therefore, investors cannot precisely value the securities needed to finance the new investment. trade-off theory suggests that the costs of financial distress (the costs that arise, when a company cannot meet its financial obligations) is the key factor of leverage. myers (1977) argues that this cost is higher for companies whose value is primarily affected by intangible investment opportunities or growth options. therefore, lenders may be unwilling to finance firms of this type, so they will be less leveraged than mature companies whose value reflects cash flows from tangible assets in place. in accordance with the above, titman and wessels (1988), chung (1993), and rajan and zingales (1995) confirm negative relationship between growth opportunities and total debt. kester (1986) cannot find any confirmation for expected negative correlation between growth opportunities and debt. studies of bevan and danbolt (2002) indicate there is negative correlation between growth opportunities and total debt. with regard to growth, two indicators are used in this research. the percentage change of total assets will be used as the indicator of growth rate growth in total assets can be viewed as growth in tangibility. growth prospects will be measured by the ratio ((total assets – volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.76 | http://emaj.pitt.edu bogna kaźmierska-jóźwiak, jakub marszałek, paweł sekuła emerging markets journal | p a g e |3 net book value + market value) / total assets). growth prospects inform about investors’ expectations when it comes to future growth of the company; relatively high ratio may suggest investors anticipate dynamic growth of a company in the future hence their inclination to high market evaluation compared to the book value of assets. based on the growth rate we can formulate the next hypothesis: h5: relationship between debt level and growth rate is negative. based on the growth opportunities we formulate the fourth hypothesis: h4: relationship between debt level and growth opportunities is negative. 3. capital structure research in poland studies on the structure of capital have been conducted in poland since the 1990s. they were conducted, inter alia, by j. gajdka (2002), who analysed two groups of companies; the first one included 48 companies (except for the financial sector) listed at the warsaw stock exchange from 1995 until 1997, the second one included 106 companies, which in any year within the adopted period were listed at the warsaw stock exchange. gajdka’s results demonstrate that profitability relatively well explains changes in the structure of capital. studies also show a reverse relationship between operating profit to sales ratio and the variable, which describes increase in debt, which is in line with the assumptions of the pecking order theory for the sources of financing and would allow concluding that analysed companies preferred internal sources of financing. studies of w. frąckowiak, s. gryglewicz, p. stobiecki, m. stradomski, and a. szyszka (2005) concerning non-financial listed companies (1992-2002) compared to selected european countries (united kingdom, germany, and france; 19882002) indicate that enterprise growth perspectives negatively impact debt maturity structure. besides, in all countries it was observed that the share of tangibility and fixed assets are relevant for long-term debt and total debts. the authors conclude that enterprises adjust maturity deadlines of debt to the age structure of assets. studies confirm negative impact of the size of an enterprise on the share of fixed assets and the relationship between liquidity and the share of long-term capital; higher liability is connected with higher share of long-term capital. k. mazur (2007) researched a group of 238 companies listed in the warsaw stock exchange over the period 2000-2004. results indicate that enterprises with higher profitability and liquidity prefer internal sources of financing. the relevance of the impact of assets structure and the size of a company upon capital structure was also confirmed. k. mazur concludes that the pecking order theory seems to better predict the relevance and direction of impact of analysed factors upon changes in capital structure. e. chojnacka (2011) studied companies listed at the warsaw stock exchange in the period 2002-2008. the author claims that the pecking order theory somehow explains changes observed in debt in groups of analysed companies [chojnacka, 2011: 212]. results show that the main explanatory variable of the change in debt is the shortage of internal sources of funding, however, the intensity of its impact is lower than suggested by the theory. 4. data and methodology the analysis focused on the group of 111 companies listed at the warsaw stock exchange. these were nonfinancial companies listed throughout the entire analysed period, i.e., in the years 2002-2012. research sample consisted of 1211 observations. companies represented a variety of sectors. in accordance with the methodology adopted by the warsaw stock exchange, 17 companies represented construction, 12 metal industry and 9 electro engineering, it, wholesale trade, 8 companies were categorised as representing textile and food processing industries, 7 developers, 4 companies from media, construction materials and wood processing, respectively, 3 companies from retail, telecommunication, and automotive industry, 2 from energy sector and plastics plus single representatives of hotels, raw material and fuel industries; 4 companies were identified as other sectors. the size of companies measured with market capitalisation also varied. however, at this point we should stress the specificity of the polish market, much smaller than developed capital markets, which resulted in rather limited share of high market value companies in the sample. considering market evaluation as at the end of december 2012 and the then usd/pln exchange rate, it was found out that 25 companies were of market value below usd 10 million, 36 companies were worth more than usd 10 million but less than usd 50 million, 14 companies were worth more than usd 50 million but less than usd 100 million, 26 companies were worth between usd 100 million and usd 500 million, and 10 the largest companies were worth more than usd 500 million. data used to analyse the determinants of capital structure in researched companies were taken from the emis database. financial data were taken from annual consolidated financial statements. where no statements were available, we used the statements of individual companies. data on stock prices come from the warsaw stock exchange quote service. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.76 | http://emaj.pitt.edu determinants of debt-equity choice – evidence from poland page |4| emerging markets journal the data were cross-sectional and time related but also panel and balanced. in such cases, relationships between variables can be studied using the ordinary least squares (ols). we need to bear in mind, however, that no individual effect may appear. this is why we conducted three stages of research procedure. first, using the breusch-pagan test we checked whether it is justified to introduce individual effects. when no grounds were found for rejecting the zero hypothesis, we assumed that a given panel model can be estimated using ordinary least squares (ols). where the test produced high values (lm multiplier), we rejected the zero hypothesis in favour of an alternative one and introduced individual effects. in the next stage we performed hausman test to choose between fixed effects and random effects. high value of h coefficient of the hausman test suggested the model with fixed effect, low value was indicative of random effect. in the last stage we estimated variables using a selected model: one way fixed model or one way random model. the test was to analyse determinants of capital structure. hence in the model we used the td/ta – total debt to total assets ratio as a response (dependent) variable. in the test we used five independent variables consistent with the so far achievements in this area presented in part 2.  firm size natural logarithm of total assets ln(ta)  profitability – return on assets ratio (roa), which measures the efficiency of companies and the use of their assets  assets tangibility – fixed assets divided by total assets (fa/ta), the coefficient analyses the structure of assets, which may determine decisions on how to finance the assets. with regard to growth, there are two variables:  growth opportunities – (growth rate) change of total assets – increase in total assets treated as the measure of company’s growth rate  gp – ((total assets – net book value + market capitalisation) / total assets); growth prospects inform about investors expectations with respect to the future growth of a company; relatively high ratio may mean that investors anticipate future dynamic growth of a company, hence the tendency to high market valuation compared to book value of assets. considering earlier studies, we used the following panel regression model to analyse determinants of capital structure: all dependent variables are represented by selected parameters of i-companies in t-time units (years), and is the total random error. 5. results and analysis basic statistics for analysed parameters are presented in table 1. tested variables seem relatively little diversified. average values do not diverge significantly from the median. the least diversification was observed for tangibility (fa/ta) and firm size (ln(ta)). the biggest differences were found in parameters describing growth (gr and gp). thus we obtained an interesting group of similar enterprises, which pursue similar asset management policy but have significantly different growth prospects differently perceived by investors. table 1. descriptive statistics variables mean median standard deviation td/ta 0,5284 0,4706 0,5272 ln(ta) 12,2651 12,2502 1,8488 roa 0,0124 0,0341 0,1688 fa/ta 0,4847 0,4866 0,2006 gr 0,2428 0,0369 1,4218 gp 1,5095 1,0853 2,4816 number of observations 1221 source: own studies. descriptive statistics/variables are linked with specific relationships presented in table 2. first of all, we can observe reverse relationship of variables connected with growth prospects with firm size and asset tangibility. the relationship seems rather obvious. large enterprises have limited growth opportunities, in particular in real terms and investors do realise it. however, the relationship is so weak that the above conclusions do not authorise to make any further generalisations. the strongest relationship was observed for the couple ln(ta) and fa/ta. it also seems obvious. enterprises pursuing a specific asset management policy maintain their structure. table 2. correlation matrix of independent variables variables ln(ta) roa fa/ta gr gp ln(ta) 1,0000 roa 0,1892 1,0000 fa/ta 0,2879 -0,0222 1,0000 gr -0,0023 0,1322 -0,0509 1,0000 gp -0,1944 0,0382 -0,0858 0,0474 1,0000 source: own studies. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.76 | http://emaj.pitt.edu bogna kaźmierska-jóźwiak, jakub marszałek, paweł sekuła emerging markets journal | p a g e |5 low correlation of independent variables presented in table 2 justifies further analysis of debt determinants. we started with identification which variables, and how, impact the relationship between total debt and total assets (td/ta) in non-financial enterprises. for the model analysing the impact of determinants on total debt in companies, breusch-pagan and hausman tests provided arguments for applying fixed effects model. breuschpagan test showed the value of 337.29 (probability 0.0000) and hausman test 33.26 (probability 0.0000). estimated independent variables for (td/ta) variable are given in table 1. all of analysed variables exerted statistically significant influence on the dependent variable ln (ta) (negative influence for p < 0,01), roa (negative influence for p < 0,05), fa/ta (negative influence for p < 0,01), gr (negative influence for p < 0,01), and gp (positive influence for p < 0,01). adjustment degree of the model measured with adjusted r-square was 31.05%. table 3. analysis of impact of selected determinants upon (td/ta) variables coefficient stand. error tstudent p value const 1,28086 0,19005 6,7394 <0,00001*** ln(ta) -0,04998 0,01589 -3,1457 0,00170*** roa -0,20308 0,08631 -2,3530 0,01880** fa/ta -0,37884 0,11213 -3,3787 0,00075*** gr -0,03483 0,00948 -3,6745 0,00025*** gp 0,03656 0,00597 6,1251 <0,00001*** r-square = 0,37551 adjusted r-square = 0,31051 f test = (115,1105) = 5,77765 (p < 0,00001) significant variable at * p < 0,10, ** p < 0,05, *** p < 0,01 source: own studies. all of the five studied variables were statistically significant. by analysing estimates obtained from the panel model, we can conclude that all analysed variables, with the exception of roa, were statistically significant for p lower than 1 percent. the results indicate that there is an evidence of a significant negative relationship between the size of a company and the level of total debt. this supports hypothesis h1 and is consistent with the pecking order theory of capital structure. the impact of ln(ta) was negative, which could be indicative of larger companies being characterised with lower debt as, in accordance with the pecking order theory, they prefer internal over external sources of financing. as expected, there is evidence of a significant negative relationship between the level of debt and profitability. this supports hypothesis h2 and is consistent with the findings of titman and wessels (1988), rajan and zingales (1995), booth et al. (2001), huang and song (2006). the above relationship means that companies representing higher profitability carry lower debt, which is consistent with the assumptions of the pecking order theory, because they use their own financial surpluses to avoid incurring debt. the results indicate that there is an evidence of a significant negative relationship between growth rate and the level of total debt. this supports hypothesis h4 and is consistent with what titman and wessels (1988), rajan and zingales (1995) concluded. results of the study suggest negative relationship between tangibility and debt level, meaning hypothesis h3 was not confirmed. neither was h5 hypothesis since the study confirmed positive relationship between growth prospects and debt level. the above results mean that companies with lower growth dynamics measured with the rate of increase in assets are characterised with higher share of debt financing. that would mean companies unable to work out adequate capital are trying to acquire it by incurring debt. negative impact of (fa/ta) upon response variable should be interpreted as a lower propensity to incur debt observed in companies with higher share of fixed assets. we may thus conclude that, managers in companies want to finance as much fixed assets as possible with secure equity with unspecified maturity date. gp variable in the model positively impacts (td/ta) meaning the companies well evaluated by investors with relatively high market valuations have higher share of debt in assets financing. it suggests that positive perception of companies by investors facilitates the acquisition of external financing. summing up the results we need to stress, however, that the ability of the model to explain the dependent variable (td/ta) was rather limited and adjusted r-squared was 0.31. results of the study demonstrate that the pecking order theory better explains changes in the level of debt in analysed companies. they are also consistent with earlier studies conducted in poland and in western countries (titman and wessels, 1988; rajan and zingales, 1995). different results were obtained for two variables: tangibility and growth opportunities. we must remember, however, that all variables significantly impact the level of debt of an enterprise. 6. conclusions and discussion studies devoted to the propensity of polish companies listed at the warsaw stock exchange to incur debt do not allow confirming all proposed hypotheses. first of all, attention is drawn to reversed relationship between debt and firm size. obtained results confirm the findings of the pecking order theory. that would mean there is information asymmetry between the management and investors. however, considering the conditions of the polish financial market we may note that it is its very volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.76 | http://emaj.pitt.edu determinants of debt-equity choice – evidence from poland page |6| emerging markets journal nature that may determine financing policy of enterprises. debt is supplied mainly by the banking sector, which limits possibilities of any alternative financing. a growing enterprise may face increasing problems with incurring debt. we analysed listed companies, which had an obvious alternative to issue equity. decreasing share of debt in larger operators may reflect their specific unwillingness to take financial risk and the shifting it over to the shareholders. such policy has got its pros and cons. decreasing leverage indicates underused economic potential of a business. this is an example of a conservative financing strategy: safe, free of substantial risk of bankruptcy but restricting profitability. it is also confirmed by other results of studies. negative relationship between the level of debt and profitability provides further evidence. it may mean insufficient profitability resulting from equity financing. investment projects are too conservative. that is why companies cannot use their development opportunities to the fullest potential. aversion to debt observed among larger enterprises may also result from their limited possibilities to use the tax shield. under such circumstances, having higher profitability may be little beneficial from economic point of view as the company will pay too much of its surplus in taxes. obtained results may as well be indicative of ineffective use of the debt in an enterprise. on the other extreme to debt and profitability there are more indebted companies, which perform worse than those which apply a more conservative financing strategy. well functioning enterprises, which use debt in their strategy should achieve better net results because of the tax shield. hence, if an increase in assets (debt) is not accompanied by higher increase in profit, debt financing does not pay off. if we add on the risk of loosing liquidity, debt financing may be given up. enterprises included in the study seem to experience such a relationship and they prefer safer equity financing. we should remember, however, that when we compare the profitability of less and more indebted companies in nominal terms, the first group performs better. companies of a similar size and achieving similar gross profit have different net profitability. in order to have a similar net profitability, indebted companies would have to have higher gross profitability. that may provide another explanation for the relationship between roa and total debt. the tangibility hypothesis was not confirmed either. increased debt is not accompanied by the increase in fixed assets value. it means, the enterprises covered by the analysis do not use fixed assets to secure their debt. apparently, however, this relationship results first and foremost from the reversed relationship between firm size and its debt. similar observation was made for growth rate of an enterprise and debt. that means enterprise growth, including fixed assets, is not accompanied by increased debt. it does not prejudge, however, changes in fixed assets value. observed relationship corresponds with the rest, which suggests conservative financing strategy. negative relationship between tangibility and debt means fixed assets are mostly financed with equity. this may also be interpreted two ways. on the one hand, it is a positive characteristic since it enables the increasing of the leverage in the future and using fixed assets as collateral. on the other hand, it may result from low productivity of fixed assets making them unacceptable as collateral. references barclay, m. j. and smith, c. w. (1996). on financial architecture: leverage, maturity and priority, journal of applied corporate finance, 8 (4), 4-17. bevan, a.a., danbolt j. (2002). capital structure and its determinants in the united kingdom: a decompositional analysis, applied financial economics, 12 (3), 159-170. bradley, m., jarrell, g. & kim, e. h. (1984). on the existence of an optimal capital structure: theory and evidence, journal of finance, 39, 857-78. booth, l., aivazian, v., demirguc-kunt, a., maksimovic, v. (2001). capital structures in developing countries, journal of finance, 56, 87-130. chojnacka, e. (2011). struktura kapitału spółek akcyjnych w polsce, cedewu, warszawa. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.76 | http://emaj.pitt.edu bogna kaźmierska-jóźwiak, jakub marszałek, paweł sekuła emerging markets journal | p a g e |7 chung, k.h. (1993). assets characteristics and corporate debt policy: an empirical investigation, journal of business finance and accounting, 20(1), 83-98. demirgüç-kunt, a., maksimovic, v. (1999). institutions, financial markets and firm debt maturity, journal of financial economics, 54, 295-336. donaldson, g. (1961). corporate debt capacity, boston, division of research, harvard graduate school of business and administration. frąckowiak, w., gryglewicz, s, stobiecki, p., stradomski, m., szyszka, a. (2005). determinants of corporate long-term capital policy. poland vs. france, germany, and great britain: comparative approach and panel analysis, 32nd annual meeting of european finance association, moskwa / rochester: social science research network. retrieved march 1, 2015, from http://www.ewydawnictwo.eu/document/document preview/125. gajdka, j. (2002). teorie struktury kapitału ich aplikacja w warunkach polskich, wydawnictwo uł, łódź. harris, m., raviv, a. (1990). capital structure and the informational role of debt, journal of finance, 45 (2), 321-349. harris, m., raviv, a. (1991). the theory of capital structure, journal of finance, 46 (1), 297-355. huang, s.gh., song f.m. (2006). the determinants of capital structure: evidence from china. china economic review, 17, pp. 14-35. retrieved february 10, 2015, from http://dx.doi.org/10.1016/j.chieco.2005 .02.007. jensen m., meckling w. (1976). theory of the firm: managerial behavior, agency costs and ownership structure, journal of financial economics, 3 (4), 305-360. kester, c.w. (1986). capital and ownership structure: a comparison of united states and japanese manufacturing corporations, financial management, 15, 5-16. mazur, k. (2007). the determinants of capital structure choice: evidence from polish companies, international atlantic society, 495-514. modigliani, f., miller, m. (1958). the cost of capital, corporation finance and the theory of investment, american economic review, 48, 261-297. http://www.e-wydawnictwo.eu/document/documentpreview/125 http://www.e-wydawnictwo.eu/document/documentpreview/125 http://www.e-wydawnictwo.eu/document/documentpreview/125 volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.76 | http://emaj.pitt.edu determinants of debt-equity choice – evidence from poland page |8| emerging markets journal myers, s.c. (1977). determinants of corporate borrowing, journal of financial economics, 5, 147-175. myers, s.c. (1984). the capital structure puzzle, journal of finance, 39, 575592. myers, s.c., majluf, n.s. (1984). corporate financing and investment decisions when firms have information that investors do not have, journal of financial economics, 13 (2), 187-221. rajan r.g., zingales l. (1995). what do we know about capital structure? some evidence from international data, the journal of finance, 50 (5), 1421-1460. titman, s., wessels, r. (1988). the determinants of capital structure choice, the journal of finance, 43 (1), 1-19. remmers, l., stonehill, a., wright, r. and beekhuisen, t. (1974). industry and size as debt ratio determinants in manufacturing internationally, financial management, (summer), 2432. scott, j. h. (1977). bankruptcy, secured debt, and optimal capital structure, journal of finance, 32 (1), 1-20. wald, j.k. (1999). how firm characteristics affect capital structure: an international comparison, journal of financial research, 22(2), 161-187. williamson, o. (1988). corporate finance and corporate governance, journal of finance, 43(3), 567-591. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu target costing using fuzzy logic tunay aslan istanbul aydın university | tunay_aslan@hotmail.com gökhan baral sakarya university | baral@sakarya.edu.tr cüneyt mucedidi independent researcher | cuneytmucedidi@gmail.com abstract every business has to earn a profit in order to survive in a competitive environment and it has to plan the profitability it has targeted. achieving the profitability that the business aimed is only possible by targeting its costs. it is only possible for businesses to achieve profitability that is targeted under uncertain conditions through the use of fuzzy logic method by approximately estimating the target costs. therefore, the business will predict its target costs with the fuzzy logic method and reach the profitability that was aimed. keywords: accounting, target costing, fuzzy logic, profitability new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.123 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.123 | http://emaj.pitt.edu target costing using fuzzy logic page |41| emerging markets journal target costing using fuzzy logic tunay aslan gökhan baral cüneyt mucedidi 1introduction since today’s world includes various uncertainties, both individuals and businesses need to make decisions under conditions of uncertainty. it is only possible for businesses to survive under the increasing and almost deadly competitive environment by taking correct and reliable decisions. markets in today’s world have many uncertainties and therefore, businesses have to pass decisions under these uncertain conditions (baral, 2016). businesses have to make consistent calculations and need logical decisions. if there are historical data from decision-makers and businesses believe these data will not change, then, it is possible for them to pass objective and almost realistic decisions. however, without historical data from the decisionmakers or if the businesses do not believe in the reliability of these historical data, then experts have to pass subjective decisions based on their personal judgments and intuitions. while it is not claimed that these approaches will reveal certain information, it may have an almost-realistic outcome. it is only possible for businesses to succeed in a competitive environment and achieve the profitability they have targeted under a successful cost control if the prices in the market are deemed as fixed. while businesses do not have the power alone to change the price in the market yet, they need target costs to achieve the profitability they aim (kızıl and kızıl, 2007). every business has to earn a profit in order to survive in a competitive environment and it has to plan the profitability it has targeted. achieving the profitability that the business aimed is only possible by targeting its costs. it is only possible for businesses to achieve profitability that is targeted under uncertain conditions through the use of fuzzy logic method by approximately estimating the target costs. therefore, the business will predict its target costs with the fuzzy logic method and reach the profitability that was aimed. this study consists of four sections and presents the theoretical structure of fuzzy logic in the second section, the target costing in the third and the model for using target costing with fuzzy logic has been developed in the fourth part. the results section lists the findings. 2fuzzy logic artificial intelligence has been defined as the science of smart machines and creating smart computer programs by mccarthy for the first time in the history of the world. it is possible to come across different definitions on artificial intelligence in the literature. according to hopgood, artificial intelligence is “the science of imitating cognitive capabilities of humans” (hopgood, 2003). another definition says artificial intelligence is the computer use area created by operational mechanisms to perform works that people carry out by using their intelligence (partridge, 1998). it is possible to unite these definitions under four main titles (russell and norvig, 1995):  thinking humanly  acting humanly  rational thinking  rational acting there are many other branches under artificial intelligence in the literature. these in general are: fuzzy logic, artificial neural networks, expert systems, machine intelligence, genetic algorithms, genetic programming, pattern recognition, speaking recognition, speaking synthesis, and learning by multiple-examples (birgili et al, 2013). as a sub-branch of artificial intelligence, fuzzy logic is a strong problem solving method for most of audit and information processes. it takes into consideration fuzzy information in situations that are not certain and includes uncertainties, and enables getting accurate results simply (zadeh: 1865). fuzzy logic is scientific expression of the existence of various degrees of grey developed by zadeh against the black and white duality of aristo. definitions in fuzzy logic enable the use of uncertain assertions. in other words, aristo’s classical set theory is a structure in mathematics that is defined by very strict rules. this structure consists of sets and elements that are either included or not in a set. such certainty creates differentiation between elements and membership of an element to the set is assessed as either by a yes or no and is certain. this goes for all deterministic and probabilistic situations. membership of classical sets is a dual function; in other words, receives the value of either a 0 or a 1. verbally, this means that all colors are either black or white. a color has to be included in one or the other set. however, this changes in fuzzy sets. membership characteristic is not a dual function and does not only receive the value of a 0 or a 1. belonging to a set is volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.123 | http://emaj.pitt.edu tunay aslan, gökhan baral, cüneyt mucedidi emerging markets journal | p a g e |42 shown with a membership function and can take all values between 0 and 1. verbally, colors will become distant to dual; they will not just be black and white but may take all tones of gray in between (feng et al. 2010). this change arises due to uncertainties in natural languages and life not having a precision (ross, 2009). fuzzy inference systems (fis) are mainly used for transforming inputs to outputs. first, the numeric inputs are fuzzed, on other words are separated into classical sets. depending on their values, rules are affected in rules database and rules that are suitable for the inputs are operated. a total area is created for each input with the rules operated according to mamdani style. these areas form the areas of fuzzy output, which is the provision of the input areas that are fuzzed. fuzzy outputs are turned into numeric values through inference algorithms and form the results of the output system. the same operation is performed for all inputs. in order to create properly working fis, first all inputs and outputs need to be fuzzed. an example of fuzzy logic inference system is presented in the figure below (rebizant and feser, 2001): figure 1. general fuzzy inference system for a mamdani-style fuzzy logic inference system, inputs are defined in fuzzy sets. the structures of these sets, which also introduce membership functions, vary. the widely used fuzzy methods are triangle, trapezoid, gauss and general bell membership functions. it is important to determine the most suitable membership functions depending on the distribution of the data or the model. as an example; for linear models, triangle or trapezoid is used. for non-linear models, gaussian or gbell is used (lorestani et al. 2006). 3target costing globalization and technological developments shorten life of products of businesses and the desires and requirements of customers constantly change. with these developments, classical cost methods don’t meet the requirements of businesses. in other words, modern costing methods are needed. modern cost methods provide a competitive advantage to businesses in the market by offering effective cost information. success and existence of businesses in the market require modern cost methods and the reliable cost information is crucial for determining the costs of products. while there are many modern cost methods due to globalization and technological developments, we will only focus on the target costing method in order to support implementation (pazarçeviren and celayir, 2013). the target costing method was used for the first time in 1965 by toyota and its application area has been extended since then. the japanese toyota factory created this cost method to establish a relationship between its products and costs and to develop a strategy accordingly. target costing method aims to use as a cost management system especially in markets where prices are deemed as data, in order to reach the aimed profit through controlling costs. through this cost method, employees of the business will control the costs in order to reach the aimed profit (gagne et al., 1995). there are different definitions of target costing in the literature. according to tani, target costing “defends planning of costs at the design stage of products and aims to reach a strategic profit through the targeted cost” (tani, 1995). another definition says target costing involves the reviewing of all ideas suggested for lowering costs at planning, research and development stages of a new product and lowering all costs through the life cycle of a product without sacrificing from quality and customer’s requirements. this cost management is a technique that lowers costs of businesses before any activities, in other words, without starting production (kaya, 2010). the purposes of target costing method differ from business to business. the main goals of target costing method can be summarized as follows:  ensuring integration of the whole business to the market  realizing the quality level required for the market  introducing new products at the right time to the market  meeting customer requirements by discovering qualities of the product the target costing method is a technique based mainly on two factors. these are sales prices and targeted profitability. businesses can only reach their targeted profitability by accepting price as an input through the target costing method. this is a method in which the business deducts its targeted profitability from the sales price of a product. unlike the traditional cost approach, in the target costing method, cost is not a function of additional costs, but a function of the sales price and the aimed profit (pazarçeviren and celayir, 2013). in other words, target cost can be be shown mathematically as follows: volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.123 | http://emaj.pitt.edu target costing using fuzzy logic page |43| emerging markets journal target cost = sales price target profit therefore, when calculating the target costs, it is necessary to determine the target sales price and profit margin required for the market share. the target sales price is the sale price determined according to the value the manufacturers place on the product. when determining the target sales price, the prices of rival products and the solvency of the consumers are considered. the target profit margin is the profit margin determined according to the long-term profit planning of the business. the difference between the sales price and the profit margin gives the target cost (aksoylu and dursun, 2011). the figure below explains the target costing process. accordingly, the target costing starts from the product design stage and continue through all the activities taking place within the whole life cycle of the product and its success is only possible with wide participation. all departments and suppliers in the business should serve this purpose. figure 2. target costing process target costing is based on six basic principles (gopalakrishnan et al., 2007; swenson et al., 2006). these can be summarized as follows: price-based costing: the targeted cost is derived by subtracting the target profit from the competitive market price of the business. target cost: sales pricetarget profit customer focus: while the target costing process aims at achieving the desired profit, it needs to take into consideration customer requirements and should not compromise quality while lowering costs to the aimed level. valuing design activity: target costing is run for the design of products and processes. business should spend more time on the design process in order to avoid expensive and time-consuming changes that may be required in the future. comprehensive participation: target costing method consists of processes such as design and production engineering, production, marketing, purchasing, cost accounting and auxiliary services and the success depends on coordination between departments. life cycle approach: the main goal of this method is to reduce the cost of the product from both the point of view of customers and the life cycle. in the life cycle approach, the costs cover all costs arising from the design phase to the sales phase. implementation of the value chain: this means that all groups related to the business are involved in the target costing process. 4fuzzy target costing the implementation part of the study will include modeling by using fuzzy logic and target costing method. the target costing of the laboratory department of a health institution that has commenced its activities in 20xx in order to reach its targeted profitability rates will be carried out by matlab package program, included in the fuzzy logic method. the approximate loss and profit of the business will be calculated through this method and the target cost will also be determined. 4.1 laboratory department memberships our entry-level memberships in the laboratory department are determined as fixed cost (fc), variable cost (vc) and sales revenue (sr) and our output variable is defined as profit. table 1: laboratory department memberships input variables range linguistic variables parameters sales revenue -sr 050.167.00 0 tl low 0-20.000.000 moderate 5.000.00045.000.000 high 30.000.00050.167.000 variable cost vc 030.469.10 5 tl low 0-11.000.000 moderate 4.000.00027.000.000 high 19.000.00030.469.105 fixed cost (fc) 02.800.420 tl low 0-1.100.000 moderate 400.000 2.500.000 high 1.700.0002.8000.420 output variables range lingui̇sti̇c vari̇ables parameters volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.123 | http://emaj.pitt.edu tunay aslan, gökhan baral, cüneyt mucedidi emerging markets journal | p a g e |44 profit 016.897.47 5 tl low 0-7.000.000 moderate 1.900.00015.000.000 high 11.000.00016.897.475 the linguistic variables and the range of these variables are determined as input and output variables required for the profitability analysis of the laboratory department are shown in the table below by forming a triangle membership function. figure 3. variable cost membership range the rectangle membership function showing the variables of variable cost membership is shown above. if the variable cost is approximately below 4,000,000 tl, it belongs to the lower set with full membership degree. if the variable cost is below 27,000,000 tl, again with full membership degree, it belongs to the high set. figure 4. fixed cost membership range angle membership has been used for the fixed cost linguistic variable and the change ranges are shown and the membership values are also indicated in the above figure. figure 5. sales income membership range sales income triangle membership function ranges are depicted above. linguistic variables and range parameters are created by benefiting from the experiences of expert managers. figure 6. profit membership ranges the membership function and change ranges used for profit output variable are indicated above. 4.2 fuzzy rules in the fuzzy logic system, relationship between input and output are established based on rules. this rule base is created by if-then-else structures. as fuzzy operators “and, or not” processors are used. a total of 27 rules are given to classify the costs of the laboratory department below. rules are created with the support of experts. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.123 | http://emaj.pitt.edu target costing using fuzzy logic page |45| emerging markets journal 4.3 resolution of fuzziness inferences are created from the fuzzy information obtained from fuzzy system and the rulebase. the midpoint of maximums has been selected as a clarification method for determining the profitability results. thus, the output variable (profit) is shown below and the results acquired when compared to the actual profit of the business reveal that they are close to the real situation. figure 7. resolution of fuzziness – output variable (profit) 5results fuzzy logic is an expert system that does not include certainty. it can decide or guess using verbal expressions and numerical data together under uncertain situations. numerical data and verbal (linguistic) expressions coexist in decision making or predictive analysis. thus, difficult and complicated situations can be resolved with the help of computers. businesses have to make consistent calculations and need logical decisions. if there are historical data from decisionmakers and businesses believe these data will not change, then, it is possible for them to pass objective and almost realistic decisions. however, without historical data from the decision-makers or if the businesses do not believe in the reliability of these historical data, then experts have to pass subjective decisions based on their personal judgments and intuitions. while it is not claimed that these approaches will reveal certain information, it may have an almost-realistic outcome. it is only possible for businesses to succeed in a competitive environment and achieve the profitability they have targeted under a successful cost control if the prices in the market are deemed as fixed. every business has to earn profits in order to survive in a competitive environment and it has to plan the profitability it has targeted. achieving target profitability is only possible by targeting the costs without sacrificing quality. it is only possible for businesses to achieve profitability that is targeted under uncertain conditions through the use of fuzzy logic method by approximately estimating the target costs. therefore, the business will predict its target costs with the fuzzy logic method and reach the profitability that was aimed. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.123 | http://emaj.pitt.edu tunay aslan, gökhan baral, cüneyt mucedidi emerging markets journal | p a g e |46 the implementation model consists of 3 inputs (fixed cost, variable cost, sales revenue) and 1 output (profit). in the model, mamdami fuzzy inference has been used and as a clarification method, the midpoint of maximums has been utilized as it gives more realistic results. the resulting actual value of 15,947,000 tl with fuzzy logic was close to the actual value (16,897,475) with an acceptable error rate of 5%. by using fuzzy logic method, businesses can predict and make decisions in uncertain situations. this study shows the success of fuzzy logic method in estimation. for further studies and future research, a similar research can be carried out by using artificial neural networks to determine which method is more successful in estimation. references aksoylu,s,.and dursun,y,. (2011), pazarda rekabetçi üstünlük aracı olarak hedef maliyetleme, sosyal bilimler dergisi sayı:11,358-370, p.362. ansari, shadid, bell, janice, swenson. dan (2006), a template for implementing target costing, cost management, cilt. 20, sayı. 5, pp. 20-27. baral,g,.(2016). cost-value-profit analysis and target costing with fuzzy logic theory, mediterranean journal of social sciences, v:7(2), pp.21-29. birgili.,e.,sekmen.,f.,esen.,s.,(2013). bulanık mantık yaklaşımı ile finansal yöntem uygulamaları: bir literatür taraması, uluslararası yönetim ve i̇şletme dergisi, 9. pp.121-136. feng, f., li, c., davvaz, b., and ali, m. i. (2010). soft sets combined with fuzzy sets and rough sets: a tentative approach. soft computing, 14(9), pp. 899-911. gagne,m,., discenza,r,.(1995),journal of business and industrial marketing,vol:10,pp 16-22. gopalakrishnan, mohan, samuels janet, swenson dan (2007), target costing at a consumer products company, strategic finance, sayı. aralık, pp. 37-41. hopgood, a. a. (2003). artificial intelligence: hype or reality? computer, 36(5), pp.24-28. kaya,g,.(2010),hedef maliyetleme,fırat üniversitesi sosyal bilimler dergisi, 20(1), pp.313-332. kızıl, ahmet, kızıl, cevdet (2007), accounting: financial, cost, managerial, bahar yayınevi (bahar publishing), p.238. lorestani, a. n., omid, m., bagheri-shooraki, s., borghei, a. m., and tabatabaeefar, a. (2006). design and evaluation of a fuzzy logic based decision support system for grading of golden delicious apples. int j agric biol, 8(4), pp. 440-444. partridge, d. (1998). artificial intelligence in software engineering. john wiley & sons, inc. pazarçeviren,s,.celayir,d,.(2013), european scientific journal ,v:4, pp 1-21. rebizant, w., and feser, k. (2001). fuzzy logic application to out-of-step protection of generators. in power engineering society summer meeting, 2001 v. 2, pp. 927-932. ross, t. j. (2009). fuzzy logic with engineering applications. john wiley & sons. russell, s., norvig, p. (1995). a modern approach. artificial intelligence. prentice-hall, egnlewood cliffs. takeyuki,tani,.(1995), interactive control in target cost management accounting research,volume:6, pp.399-414. zadeh, l. a. (1965). fuzzy sets, information control, 1( 8), pp.338-353. independent reading and research volume 3 no 3 (2014) | issn 2158-8708 (online) | doi | http://emaj.pitt.edu the effect of organizational support, transformational leadership, personnel empowerment, work engagement, performance and demographical variables on the factors of psychological capital dr. didem rodoplu şahin kocaeli university | e-mail: didem.rodoplu@kocaeli.edu.tr duygu çubuk beykent university | e-mail: duygucubuk@gmail.com tuna uslu gedik university | e-mail: tuna.uslu@gedik.edu.tr this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. abstract the relation with the work and the role of managers and organizational factors are effective on psychological capital and individual performance of employees. this article investigates the impact of the work engagement, performanmce, empowerment, organizational support and transformational leadership on psychological capital using survey data. keywords: organizational support, transformational, leadership, empowerment, job attraction, psychological capital, individual performance new articles in this journal are licensed under a creative commons attribution 3.0 united states license. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu | mailto:didem.rodoplu@kocaeli.edu.tr mailto:duygucubuk@gmail.com mailto:tuna.uslu@gedik.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n, duygu çubuk, tuna uslu p a g e |1| emerging markets journal the effect of organizational support, transformational leadership, personnel empowerment, work engagement, performance and demographical variables on the factors of psychological capital dr. didem rodoplu şahin duygu çubuk tuna uslu i. introduction many factors such as organizational climate, management style, leadership structure, job characteristics, task-employee adaptation, strengthening and authorization level depending on the characteristics of the employees becomes effective on their psychology. it is also a fact that the structure and the management style in the institutions are effective on the employees’ commitment to work and satisfaction levels. a rigid and an authoritarian government, while may cause pressure on the employees and the subordinates’ optimism, hopes, expectations and beliefs, a flexible and participatory approach would create more opportunities for them to be attracted and devoted to their job, expose their own potentials, and improve their psychological states. since the organizations will organize events and activities for their own purposes, employees need to manage and direct their behaviors towards this goal. management is defined as the behavior, which allows you to act together while motivating, of an individual who directs the collective activities towards accomplishment of the shared objectives with a non-coercive influence (rowden, 1999: 30). as a result of non-coercive and constructive approach, employees may get attached to their jobs and therefore, their psychological states might very well improve. an individual joins an organization along with his/her own needs and goals and makes a mutual psychological deal with the organization regarding achieving those personal goals and satisfying his/her needs. the capacity of the organization and the management to meet these needs improves job satisfaction and increases employees’ attachment to the organization. blau's social exchange theory is important in terms of illustrating the emergence of complex social structures from the simplest personal interactions. someone who provides service to others leaves them under a debt of gratitude. the other party must response in return in order to get rid of this feeling of obligation.. thus an interaction in which the actors reward each other arises between them. (blau, 1964: 91) if both of the parties are satisfied with the services provided this exhange continues. a similar interaction occurs between the organizations and the employees. an employee put hard labor into his work using his/her skills, knowledge and experience and in return, expects income, position and reward from the management. the employee him/herself is positioned in a psychological situation with certain expectations, and evaluates and develops his/her circumstances and capital based on what he/she received in return of his/her services. the study of our theorerical infrastructure is based on the social identity and social exchange theories. an individual, according to the social identity theory, in accordance with the data received from the members of the group that he/she belongs to makes a self-assessment and as a result demonstrates certain attitudes and behaviors. social exchange theory specifies that the cost-benefit analyses and alternatives of all human relationships are based on comparisons. an individual, in the environment that he/she is in relationship with, continues the interaction as long as the perceived benefit outweighs the cost of the relationship, and the theory says that if the attributed cost outweighs the benefits, this interaction will no longer continue. employees develop an attitude and a psychological state that is in line with the data received from the organization and group that they are in. at the same time, they show more physical, emotional and cognitive association with their work, and establish a positive development both mentally and psychologically as long as they are supported, strengthened and benefited, and because they are benefited, this interaction and commitment gets stronger although this has a cost associated with it in terms of the employees, thei performances, individual efforts and durability increases. supervisors that are part of the management, by playing a bridge role between the institution and the employees, will play an effective role in new employees' adaption to the organization, keeping them, letting them indulge themselves in work and employees being attached to volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu the effect of organizational support, transformational leadership, personnel empowerment, work engagement, performance and demographical variables on the factors of psychological capital emerging markets journal | p a g e |2 the organization. because, the supervisor's transformational leadership style is in an intermediary position in employees' adaption to the organization and finding the organization and the organization climate attractive. an employee who is placed in a suitable job, given authority and responsibilities, and also supported by his/her supervisor, should be expected to continuously improve his/her performance and be committed to his work. now, let's take a closer look at the "transformational leadership", "that's being empowered" and "organizational support" concepts that shape the work environment. ii. conceptual framework 2.1. organizational support the changing ways of doing business and organizational development process, within the last 20 years, has been moving towards managing the intangible abstract assests more than physical resources, and must focus on managing the processes instead of concrete outputs. while the standardation process that started with the reconstruction and quality assurance systems has been silhouetteing for the ogranizations, in the following years, approaches such as transformation engineering, organization learning have been moving towards differentiation and creating competition advantage. (figure 1) during this transformation process, organizations learn just like the living entities, change and chart out their own course. from this perspective, organizations have been transforming into organisms that the human abilities are attributed to. they are born, they learn, develop, however if unable to ensure their continuity, they die as all the people do. with the total quality movement in the institutions and the start of the organizational structuring as a single body, this made it necessary for the employees to take part in this process both mentally, physically and psychologically. the organizations, being more than organisms that possess a certain structure, are now abstract fields that continuously change and transform with their employees and structures. these abstract fields, beyond the economical and physical resources, host social and psychological interactions. figure 1: organizational development process (luthans,1995) as a result of this approach, organizations have turned to the psychological areas of the employees and engaged in efforts to restructure these areasdespite these approaches at first came out as the elimination of negative behaviors, with time, it has been understood that developing positive behaviors would provide more value both to the organizations and the employees. hence, organizations aim to strengthen their employees with a positive approach by infusing them with concepts such as autonomy, creativity, and flexibility and supporting them. approaches such as learning organizations, the total quality management, excellence and empowerment increase the importance of employees of the organization. the fact that the employees can share their thoughts and receive support related or not related to work will be reflected on the employee performance. on the other hand, not taking employees' recommendations and complaints would cause them to feel unwanted, and lack of psychological meaning resulting from the work interaction. (çakır, 2001: 154). organizational support refers to the organization taking employee happiness into account and targeting a hike in happiness. (eisenberger et al, 1986: 501). a supportive organization establishes a link with its employees (malatesta ve tetrick, 1996) and increasing organizational support brings out effective work behaviors. (eisenberger et al, 1997). perceived organizational support allows the employees of the organization to feel safe, and lean their backs against the institution. overtime, employees develop beliefs regarding whether the organization support them or not (eisenberger et al, 1990). thus, the positive organizational support and work-related interventions may volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n, duygu çubuk, tuna uslu p a g e |3| emerging markets journal have a positive impact on performance increase. (cameron, 2003, cameron et al, 2004). 2.2. that’s being empowered the charasteristics of a job consist of skill variety, task, integrity, autonomy, feedback and importance of the task (sims et al, 1976). skill variety is a measure of how much the work entails different skills, abilities and activities. the integrity of the task means that a job is completed by the same employee from the beginning until the completion. autonomy is the degree of freedom and independence that is provided to the person in the planning and performing process of the job. feedback is how clear and straightforward the information is given to the person regarding his/her individual success. whereas the importance of the task is how important the job is on people's lives. possessing these job characteristics requires being empowered. the concept of employee empowerment is defined as providing an environment for the employees where they can take on responsibilities for their actions, employees being given autonomy and decision making authority, and the awareness of the responsibilities of handling the decision outcomes. thomas ve velthouse (1990) has defined empowering as an individual’s, who is described four subdimensions, motivation to work without external influence and reflecting the employee’s orientation to his/her own work. according to this definition, empowering is an internal and a motivating structure that is composed of four subdimensions which are employee’s competence, possession of autonomy, level of understanding, and his/her impact on the job. also, spreitzer (1995) mentions that empowering reflects employee’s move towards his job role actively (spreitzer, 1995: 1443). the significance of the job is that it contains the correspondence between the person’s beliefs, values, behaviors and the demands of his/her job (spreitzer, 1995: 1443). the concept of employee competency shows the person’s confidence in his own capacity and the required skill in order to fulfill the processes and the activities (spreitzer, 1995: 1443). when the employees are sure that they can use the skills they have and reflect them to their work, they feel competent. in this psychological condition, employee's effort and dedication to work increases, so that he/she has an opportunity for self-development. the ones who feel selfsufficient in the face of failure regarding being able to handle problems base this on lack of effort, whereas the ones who do not feel self-sufficient base this on lack of skill (bolat, 2003). giving the employees a good training program and more opportunities and effective job-employee matching contributes to the development of their skills (siegall and gardner, 2000). initially, the pairing of job-employee the right way is more meaningful than any other relationship, because it will not be possible to develop an employee who does not fit in with his job. the autonomy aspect of empowerment means that perceiving having autonomous rights in regulating activities using employee’s experience (deci, connell and ryan, 1989: 580). employee’s influence on his/her job is the level of being able to influence all the operational, administrative, and strategic outcomes (spreitzer, 1995: 1443–1444). sigler and pearson (2000) in their study determined that the organizational climate that empowers its employees has a significant effect on their commitment to the organization and performance. they demonstrated that employees who perceive that they are empowered compared to the ones who think they are less empowered have a higher level of performance and that there is a positive correlation between performance and employee perceived empowerment (sigler and pearson, 2000). to change the negative attitudes of employees, empowering, transformational leadership and demonstrating a positive attitude towards them have been quite effective (avey et al, 2008). thus, it could be assumed that the individuals will change their attitudes and increase their commitment to their jobs wholeheartedly. 2.3. management styles and transformational leadership in lewin, lippit and white’s study in 1939 on management, ever since they divided management into democratic, authoritarian and irrelevant (laissez-faire) as management styles, this division has been used in many studies (khan, 1999: 574). in recent years, transactional, transformational and authentic leader styles have been being examined and compared in scientific studies. in participatory, democratic and transformational management styles, the employees are able to have control and authority over their work, informed of situations that could hinder their work, and encouraged to bring their own ideas to the table, use their competencies, and develop new alternative methods. management’s participatory and transformational approach can help employees solve problems by producing creative and alternative approaches. in determining objectives, plans and policies, division of labor, and developing procedures, leadership approach that is in line with the thoughts and ideas formed with the help of the subordinates is important in a democratic approach. democratic managers distribute authority instead of volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu the effect of organizational support, transformational leadership, personnel empowerment, work engagement, performance and demographical variables on the factors of psychological capital emerging markets journal | p a g e |4 centralizing it. since the decisions are made based on participation, they are not one-sided as in authoritarian managers; democratic managers consult in the participators and the followers. managers and the group act as a social unit. employees are informed of situations that concern them, and encouraged to express their ideas and recommendations (newstorm and davis, 1993: 227). despite the loss of time that may result from the process of decision-making, making healthier decisions with the participation from both democratic management and the members of the group in the decision making process, the employees whose opinions are valued being satisfied by their jobs, thus, a more effective and efficient working group of employees are provided. while the firm leaders develop objective systematic solutions in resolving conflicts, transformational leaders strive to develop and expand the area of freedom, movement and self-sacrifice (bass and steidlmeier, 1999). thus, they support the employees in being empowered and developing feeling of commitment. bass and avolio (1993) have defined the elements that form the transformational leadership as intellectual stimulation, idealized influence, inspirtational motivation, and individualized consideration. transformational leaders cause increases in feeling of confidence and differentiation of their followers, teams and organization. by the way of caring, they allow the subordinates to show courage of being able to cope with obstacles, commit to their jobs internally, and show themselves beyond only protecting their existence. instead of demanding subordinates that depend on them, they increase the psychological capital and the human capital inside the organization by creating innovative employees that contribute to the organization by thinking critically, risk-taking, independent but committed to his job and objectives along with the organization’s mission, vision and strategy. they warn the followers in a scientific way by trying to respond to the needs and expectations of employees and allowing them to reveal their strengths (bass, 1990:20). tranformational leadership approach notices the subordinates’ trends, needs, and desires by the way of personalized attention and uses these to motivate their followers. outside the conventional managerial duties, a transformational leader gathers the subscales of transformational leadership such as intellectual stimulation, idealized influence, inspirtational motivation, and individualized consideration (karip, 1998: 446). as a prerequisite, they take on a key role in ensuring trust, being fair and maintainin this trust. essentially, they establish relationships and create such an empowered work environment, so that this opens the lines of communication. they create autonomy as well as being supporting, tests applications that would allow knowledge development and integrity, provide continuous improvement, manage limited resources, and establish a balance between competing employees while distributing these resources (rnao, 2006). transformational leader by actively interacting with his/her followers in a positive and optimistic way, does channeling in order to bring out the existing energy in the employees that are in line with the institutional objectives (krishnan, 2001:127). this type of leader is an individual who improves their followers’ self-respect, needs, beliefs and values, thus, improves the performance of the organization (luthans, 1995). their function is provide support to the employees in producing alternatives and scenerios regarding the ways of doing work and mobilizing them with the participation awareness (grupta et al, 2004) managers being participatory will increase the organizational communication, provide the employees who work within the organization the opportunity to reveal themselves, thus increase their self-competencies. the characteristics of a transformational leader are specified as creating spreading vision, mental stimulation and creativity, having a charismatic influence, effective communication, high motivation ability, being representative of change, having a good sense of humor, emotional strength, showing courage and risk-taking, lifelong learning, empowerment (authorization), a flexible management approach, reliability, having self-confidence, valueing team work (eraslan, 2003: 108). transformational leaders by clearly expressing the roles and the tasks they expect from their subordinates, strive to direct them towards a vision. therefore, by focusing on the skills and abilities of their subordinates, they try to improve their self-confidence, thus attain performance above expectations. employees, who work towards this purpose, aim to improve their followers’ performance along with optimisim, morale, hope and motivation level by primarily increasing interest in their field of specialization and their own job. however, if a transformational leader’s charismatic effect is used to reach the personal interests that are intellectual stimulation and inspirational motivation, actions such as behavioral restructuring autonomy might be replaced with a certain ideology (carey, 1992). 2.4. work engagement kahn (1990, 694) defines work engagement as employees expressing themselves physically, cognitively and volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n, duygu çubuk, tuna uslu p a g e |5| emerging markets journal emotionally in terms of getting carried away in their work and performance roles in literature, the concept of engagement, on one hand appears as the exact opposite of the sense of burnout (maslach and leiter, 1997), and on the other hand, it has been specified that the work engagement is not actually on the opposite of the concept sense of burnout, it is the level of commitment and the relationship the employees establish with their work despite the existence of a negative relationship between them beyond the engagement being pathological (schaufeli, salanova, gonzalez-roma and bakker, 2002). schäufele and colleagues have defined work engagement as a case of permanent, positive emotional motivation and characterized it with mobilizing with work, dedicate self to work and feeling work inside emotions. employees who mobilize with work have been observed that they resist against all the difficulties, have the energy and flexibility and are willing to put effort into their work. devoting self to work has been defined as involving himself in work, being proud because of that, and being inspired. the feeling of feeling job inside and getting carried away have been specified as the not realizing how the time passes, and not being able to leave work. there is a positive correlation between work engagement and the individuals being active and having a changing nature (langelaan et al, 2006). there is a positive relationship between work engagement and age albeit weak (schaufeli, salanova ve bakker, 2006). in literature, job charateristics and the empowerment appear precursors of the work engagement variable (saks, 2006). in recent years, there has been studies being conducted on relationships between work engagement and various variables and as a result, it has been demonstrated that various environmental factors had a positive impact on employees being commited to work, and this brought out many positive outcomes in terms of both the employees and the institutions. being empowered, perceived organizational support and procedural justice variables, on the other hand, the results of job satisfaction, organizational commitment , organizational citizenship behavior, and distancing self from the intention to quit the job have been determined as the precursors of the work and organizational engagement. in this regard, it is being considered that different resources will have a positive impact on employees engaging in work, as a result, the employee turnover will decrease and the flexibility of the employees regarding work will increase. additionally, amongst the environmental factors, autonomy has the strongest impact on work engagement, and the supervisor support affects the employees’ intention to leave work adversely and increases the feeling of well-being associated with work (honey, 2008). transformational leadership that provides all of those, we think that will also assist the employees to engage in work and assume that the individuals who engage in work will be in better psychological states. 2.5. psychological capital for the purpose of gaining back the mission of helping people realize their capabilities, strengths and potentials to the science of psychology, in the late 90s, the positive psychology approach that arose as a result of seligman, president of the apa at the time, and his collegues’ work found an echo in the field of organizational behavior. thus, studies in the field of positive psychology have made luthans and friends who were working in the organizational behavior and organizational psychology fields think how this positive perspective would be applied to the organizations. luthans, with a positive approach at the micro level, pointed out that in order to improve employee performance in the organizations, the strengths and psychological capacities could be improved, not stabilized. thus, positive psychology brought along an approach called the “positive organizational behavior” that aims to improve employee performance at work by focusing on the strengths of the employees rather than uncovering their weaknesses, and measuring, developing and managing psychological elements beyond these strengths. positive organizational behavior concept has been brought about to internally improve employees by focusing on the positive strengths rather than changing the negative behaviors externally (instead of correcting the weakness) of the employees in the organizations. optimism, hope, selfefficacy, emotional intelligence, and subjective well being are defined as positive organizational behaviors ( page and donohue , unpublished ). in order to define positive organizational behavior, psychological capital concept developed as a result of studies conducted by luthans et al. at the gallup leadership institute, is composed of subscales such as self-efficacy, hope, optimisim, and fortitude/resiliency. it was suggested that the psychological capital can be status-oriented, measurable, improved, and identify its effect on performance (luthans et al, 2006a). alkılabileceğine the bottom of the hard work is developed in individuals with psychological capital increases confidence, felt optimistic about the challenging situations can be overcome, changed the course of events is shown patience and a better hope for the intended conclusions may be volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu the effect of organizational support, transformational leadership, personnel empowerment, work engagement, performance and demographical variables on the factors of psychological capital emerging markets journal | p a g e |6 reached when faced with failure, go back and rerefocus on the motivation of the target can be achieved. when the psychological capital is developed, the confidence in individuals to handle difficult situations increases, feeling optimistic about challenging situations can be overcome, if shown patience, the hopes of changing the course of events arriving at new outcomes increase, and when faced with failure, going back to the beginning and motivating self to refocus on the objectives can all be provided. these sub-elements of psychological capital synergistically support each other and when one is strengthened, the following one is too strengthened (page ve donohue, 2004). in trainings on this issue, improvement of subjective elements such as the competency, hope, optimism, and resilience are aimed (luthans et al, 2006a). in the experimental studies regarding the measurability of the psychological capital, luthans et al, have demonstrated significant differences after comparing post-training to pretrainin outcomes. (youssef ve luthans, 2007) in their research studies, the 24-item psychological capital questionnaire (pcq) developed by luthans et al, has been applied and after that training on increasing psychological capital was provided to one of the groups. afterwards, psychological capital questionnaire (pcq) was again handed out and responded to. while there were no changes observed in the control group, the experimental group demonstrated a significant increase in the scores as a result of the score they received from the questionnaire (luthans ve diğerleri, 2006a). in terms of assessing one’s own performance, it has been expressed in various research studies that the psychological capital has a significant and increasing effect (luthans ve diğerleri, 2007a, 2007b; avey, published). the psychological capital, in the performance evaluations done by the managers, has been seen to be effective (luthans et al., 2005, 2007a, published; avey, published). additionally, being autonomous regarding business, cognitive abilities, and skills related to his/her job have been shown to be effective on the employee’s job width and improve job performance (morgeson et al, 2005). 2.5.1. situational optimisim the optimistic dimension of the psychological capital has ben defined as having positive thoughts and beliefs that positive results could be obtained with individual efforts (ross, 2006). it is defined as the referring to the internal, permanent and generalized reasons when explaining the positive events that the individuals have experienced, and external, temporary, and situation-specific reasons when explaining the negative events. therefore, individuals who are optimistic possess optimistic points of view for the future. for example, optimistic employees who receive a positive feedback and appreciation, they base this on being ethical and believe that they will be successful in all the other tasks not only on this task by working hard and generalizing this reason. pessimistic people, contrary to the optimists, regard the positive events they experience as external, temporary and situation-specific, and negative events as internal, permanent, and generalized (luthans ve diğerleri, 2007; seligman, 1998). optimistic individuals may not be realistic in the questioning and determining stages of events and behaviors. for example, when they fail in a job that they usually perform successfully, they may fall into the trap of not being able to learn their lessons, see their mistakes when they don’t look for the reasons for failure in themselves. similarly, optimistic people who believe that they will be successful by working hard will be able to try to create too much control over their lives and destinies. this situation may lead to unwanted negative consequences for some people physically, psychologically and emotionally. for optimists to stay away from this trap and unwanted results is based on their realistic assessments of events and behaviors. being able to make a realistic assessment of the situation allows the employees to identify the real reasons for success and failure, more accurate use of capabilities and the resources, and identification of more realistic and achievable objectives (luthans et al, 2007). 2.5.2. situational hope the factor under the hope heading suggests that there could be different ways to achieve a goal and the tendency to seek those ways, and reconsider options to achieve success if necessary (ross, 2006). this is defined as the positive motivational state dependent on the success of planning alternative ways to attain the objective with the goal-oriented energy that the individual possesses (snyder, 2000:8-9). individuals with high levels of hope, while having the essential motivation and the desire to achieve the objectives, may predict the obstacles they may encounter and identify alternative routes that will take them to the purpose proactively. methods towards providing a participatory work volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n, duygu çubuk, tuna uslu p a g e |7| emerging markets journal environment such as accurate decision making from the lower division to the upper division in businesses and establishing communication, empowerment and increasing authority; allow employees to be freer, stronger, and making authoritative decisions, thus identify alternative ways to achieve goals and be motivated. working in a participatory environment, requires a cognitive process, analysis and indepth thinking to make things that are seemingly impossible possible. in recent research studies, the effects of hope on performance, job satisfaction and organizational commitment are examined. according to the studies in which the job satisfaction levels are examined, there has been a positive and significant relationship between employees being hopeful and their job satisfaction levels (adams et al , 2003). 2.5.3. self-sufficiency related to role the sense of self-efficacy targets being able to demonstrate the required effort to overcome challenging tasks and the level of self-confidence to overcome any difficulty or obstacle that the person may face ( ross , 2006). selfsufficiency, in order for an individual under certain conditions to successfully perform a specific task which requires the mobilization of motivation, cognitive resources and behavior style, is the self-confidence that person feels about him/herself (stajkovic and luthans, 1998a).in short, luthans (2007) has used the concept “self-confidence” instead of the “self-sufficiency” concept that is defined as the conviction that an individual achieve a behavior which would lead him to certain outcomes. an individual to gain selfsufficiency in a specific task or an area is dependent upon his attempt to successfully complete that task, learning from the experiences of others, being encouraged by others and receiving positive feedback. moreover, for example, in a complex task, employees may achieve self-sufficiency by dividing the tasks into smaller parts and at first trying to achieve goals in smaller pieces, and with time, by connecting those pieces together to make it a whole again. furthermore, with several applications such as scenario analyses and applications, doing exemplary case studies, managers to appreciate the workers, providing possibilities for child care, and exercise facilities on site, employee assistance program, to provide a more favorable physical and psychological work environment are all identified as the methods that will help the development of self sufficiency. meta -analytic results, there is a high degree of significant relationship between self sufficiency and work-related performance ( stajkovic and luthans , 1998b ) . 2.5.4. fortitude fortitude is the motivation to be able to continue to take the right path in the face of failure, and be strong against all the setbacks and problems (ross, 2006). it is defined as the ability for the individuals to fine-tune themselves in uncertain, difficult situations, and thanks to being able to produce rapid solutions, they recover quickly, and even have the chance to display much better performance than ever before. employees with high fortitude will not have any difficulties adapting to the new work environment that is competitive, changing, and uncertain. people develop their social, cognitive, and psychological assets through skills, values and beliefs. thus, they may gain control of their exposure to risk. therefore, hope, self-sufficiency and optimisim which are components of positive psychological capital except for the flexibility that people have, could be included as one of the assests that allows the development fortitude (luthans et al, 2007c). fortitude concept has been associated with performance outcomes (luthans et al, 2005). iii. research methods 3.1. theoretical framework employees' psychological capital levels and perceived positive work attitudes about themselves are discussed as the dependent variable in this study. organizational support, transformational leadership approach and that’s being empowered which are independent variables of the study and if we consider the employees engagement in work as being the intermediary variable which we think will affect the dependent variables. due to the positive relationship between the perceived performance and subscales of the psychological capital, we expect that there will an interaction between those two variables, and we also expect that the intermediary variable, work engagement, will affect the interaction as well. figure 2: schematic model of the hypothetical relationships and research between variables. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu the effect of organizational support, transformational leadership, personnel empowerment, work engagement, performance and demographical variables on the factors of psychological capital emerging markets journal | p a g e |8 3.2. research hypotheses h1: there is a strong direct positive relationship between the psychological capital’s subscales (situational optimism, situational hope, role-oriented self-efficacy and fortitude variables) h2: demographic characteristics, organizational support, transformational leadership, that's empowerment, performance variables and work engagement are effective on the subscales of the psychological capital. h3: there is a positive correlation between the subscales of the psychological capital and organizational support, transformational leadership, that's empowerment, work engagement, performance, h4: transformational leadership has a positive effect on the organizational support. h5: demographic characteristics, organizational support, transformational leadership, that's empowerment, work engagement and performance variable have an effect on the psychological capital. iv. methods 4.1. subjects the questionnaires used in this research study were prepared to be filled out on the internet, and the subjectswere sent out a link of this website through the e-mail. 356 responses were received as a result of collecting data phase of the study. the mean age for the sample was determined to be 34,5 (standard deviation 10,1) in which the sample ranged from 19 to 70 years of age, the average working years 12,84 (standard deviation; 10,4) and the average years they have been working in the same institution 6,69 (standard deviation; 7,55) the demographic characteristics of the participating subjects are illustrated below: table 1: demographic charateristics of the subjects n=356 females males age until 29 88 49 30–39 63 59 40–49 24 41 50 and over 4 28 total 179 177 marital status single 105 54 married 61 115 divorced/widowed 13 8 total 179 177 education level primary/secondary 0 3 high school 8 19 university 116 115 master’s/doctorate 55 40 total 179 177 sector public 71 63 private 108 114 total 179 177 administrator executive 57 93 non-executive 121 84 total 178 177 4.2. measurement tools as a means of data collection, questionnaires were used for the purpose of determining the leadership and empowerment structure of the institutions where the employees work, and to establish the relationships between, work engagement, psychological capital situations, performance perceptions of these variables. inside this form, in order to determine the demographic characteristics of respondents questions such as age, gender, educational level, marital status , income level , etc. were prepared. thus the questionnaire is composed of seven sections: transformational leadership, organizational support, that’s being empowered, work engagement, psychological capital, perceived individual performance, and demographic characteristics. in the first chapter under the title demographic characteristics, 4 open-ended and 7 elective and a total of 11 questions were asked. in each of the tests that constitute the following sections, the subjects were asked to mark the frequency of occurrence that is represented by the expressions. subjects gave their answers on the spaced scales that extend from "never" to "always" with six options transformational leadership scale: to determine the style of the manager, the first 24 questions from the multifactor leadership questionnaire (mlq) developed by the bass and avolio (1995) were used. this part of the scale measures the transformational leadership style, idealized influence, inspirational motivation, intellectual stimulation and individualized expression subscales in 4-dimensions that are composed of 6 expressions each. in i̇şcan’s (2006) study, cronbach’s alpha reliability coefficient of transformational leadership emerged as .89 organizational support: perceived organizational support is measured with sak’s (2006) questions that consist of 8 expressions. 3 more questions on whether the organization meets the employee needs or not were added to these questions that resulted in 11 total questions. that’s being empowered: in order to determine the that's being empowered state, in terms of the significance of the task, a scale has been created by bringing 15 questions volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n, duygu çubuk, tuna uslu p a g e |9| emerging markets journal together with questions coming from the spreitzer's (1995) empowering scale, sim et al's (1976) skill variety, beyerlein's (1993) one expression, and hacman and oldham's (1980) 2 expressions. work engagement scale work engagement variable will be measured by the questions in the "work experience list" in the shäufele 9, salanova and bakker's (2006) utrecht engagement scale (uwes-9) which is comprised of 9 expressions perceived performance test: 5 questions that is used to measure the individual job performance consist of 1 question added to the 4 expressions that sigler and pearson (2000) took from kirkman and rosen (1999) psikolojik sermaye ölçeği: in our research, in order to determine the questions of the psychological capital variable and subscales, a 50-item scale was developed by the researcher by bringing together snyder et al's (1996) situational hope, scheier and carver's (1985) situational optimisim, block and kremen's (1996) and wagnild and young's (1993) resilience, parker's (1998) role-oriented self-efficacy inventories. expressions in each test were examined by a group of 5 officials and expressions difficult to understand have been simplified and each of the said 6 tests were formed created with a spaced scale. the subjects evaluated each test expression by selecting one of the 6 answers that extend from "never" to "always". 4.3. application questionnaires prepared in printed forms to be used in the study were transferred in to the computer environment and and an interface was created to be published. the questionnaire as whole was checked again on the internet, and the link of the website have been reported to the people through e-mail. 4.4. statistical analysis method for the purpose of testing the subscales and the validity of the variables (that's being empowered, transformational leadership, organizational support, work engagement, the perception of psychological capital and individual performance), spss 13 program has been utilized, each scale are passed through factor analysis separately and their reliability was tested with cronbach alpha values.  factor analysis: in order to identify the subscales of the scales prepared separately that belongs to each variable in the study, the collected data that belong to the each scale set passed through the factor analysis. principle components factor was used as the factor analysis and rotated using the varimax technique  the internal consistency analysis: the only predetermined factor or in determining the reliability of the subscales, cronbach's alpha coefficients  multiple regression: multiple regression have been used in order to determine the factors affecting the dependent variable. after determining the subscales of the variables, initially, the relationships between the subscales of the psychological capital were determined using the pearson analysis. these subscales by being passed through the regression analysis one bye one, independent variables have been identified that affect these scales. all the available data by being passed through the hierarchical regression analysis, variables and scales that create the main effect on the dependent variable. subsequently, multiple regression has been used to investigate the effects of independent and intermediary variables on the dependent variable. v. findings 5.1. factor analyses organizational support: the negatively worded questions’ scores have been reversed from the 15 questions from the organizational support questionnaire and all the questions were passed through the factor analysis. scales’ kaiser-meyer-olkin value 0,952, the p-value of less than one thousandth, and the explanatory factor have been determined to be %59.754. table 2 shows the factor and reliability analysis results. organizational support questionnaire of 15 questions, and all questions negatively worded factor analysis of those scores were reversed. kaiser-meyerolkin value of the scale was 0.952, and the p-value of less than one thousandth of 59,754 % identified as explanatory factors table 2: organizational support, factor and internal consistency results organizational support explanatory factor (%) item weight cr. alpha (%) explanatory factor 59,754 95,0 my organization ignores meeting my expectations (-) ,817 when my organization has the opportunity, uses and abuses me (-) ,803 my organization ignores my complaints. (-) ,801 my organization gives importance to my job satisfaction. ,793 my organization considers my goals and values ,788 my organization really cares about my happiness ,770 ignores me even when i do my best. (-) ,746 my organization neglects to appreciate my extra efforts (-) ,725 my organization provides my opportunities now than when i first started ,733 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu the effect of organizational support, transformational leadership, personnel empowerment, work engagement, performance and demographical variables on the factors of psychological capital emerging markets journal | p a g e |10 my organization pays very little attention to me (-) ,722 i get help from my organization when needed. ,720 my organization cares about my opinions. ,710 my organization offers opportunities i never expect ,655 my organization is forgiving if my mistake is excusable ,617 my organization would hire lower-waged employee in my place. (-) ,582 transformational leadership level: while the transformational leadership expressions composed of 24 questions are gathered in 4 scales, as a result of our analyses, with the removal of 7 questions as they didn’t meet the factor and internal consistencies remained 17 expressions gathered under 2 scales. kaiser-meyerolkin value of 0.966 , p-value of less than one per thousand were determined, respectively. factor and reliability analysis results shown in table 3 table 3: transformational leadership factors and internal consistency results empowerment at work: in the state of being empowered at work questionnaire, the scores of the negatively worded questions have been reversed and all the questions were passed through the factor analysis, in factor analysis these questions were grouped under 4 scales. 3 questions from the factor analysis and 2 questions from the internal consistency tests were removed from the scale as they increased the cronbach alpha value. in the very last factor analysis, of 10 expressions group under 4 scales kaiser-meyer-olkin value 0.885, p-value of less than one thousandth, and the total variation of these 4 scales was determined to be 80,729 %. factor and reliability analysis results shown in table 4. table 4: empowerment at work factors and internal consistency results tranformational leadership scales explanatory scale (%) item weight cr. alpha (%) factor 1: attention towards individual 43,265 97,5 my manager helps us improve my strengths ,924 my manager does his/her best to help us ,913 my manager provides guidance on career development. ,905 my manager does not avoid self-sacrifices to support us ,902 my manager directs us to improve ourselves. ,885 you’d be proud to work with my manager. ,883 my manager takes care of all of his/her subordinates one on one. ,881 my manager is aware of our individual needs. ,873 my manager approaches us in a friendly manner and cares about ouremotions. ,825 factor 2: intellectual stimulation 35,125 96,4 my manager encourages us to be optimistic about future ,896 my manager considers the moral and ethical consequences of the decisions made ,879 total explanatory value 78,390 kaiser-meyerolkin value: ,966 bartlett significance value: ,000 7078,009 empowerement at work scales explanatory scale (%) item weight cr. alph a (%) factor 1: job control 26,271 86,3 i can make decisions on how to run the business. ,761 i have the freedom to do my job any way i like. ,748 my job is under my full command from the beginning to the end. ,715 factor 2: job characteristics 20,174 81,4 i know exactly what to expect from my job ,703 i have the opportunity to know how well i do my job. ,676 job has open, planned and logical goals and objecives ,622 factor 3: job competency 17,523 82,7 i have the required knowledge and skill regarding my job. ,706 i have the required talent and capacity to do my job ,706 factor 4: influence on the job 16,762 81,5 i have the influence and control over the department i work in. ,689 my influence and effect over work in my department is very high. ,689 total explanatory value 80,729 kaiser-meyerolkin value: ,885 bartlett significance value: ,000 approximate chi-square value:: 2109,701 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n, duygu çubuk, tuna uslu p a g e |11| emerging markets journal work engagement level: as a result of work engagement questionnaire being subjected to the factor analysis, those 9 expressions were grouped under 2 factors. in its original state, seen under the other scale “i feel happy when i work hard” came out under the first scale in the reliability test. it has been removed from the first factor, because it was placed under the other scale and to raise the internal consistency levels by 10%. in the most recent factor analysis 8 expressions grouped under 2 scales kaiser-meyer olkin value 8 0.883 , p-value of less than one thousandth, and the total variance of the 2 scales were determined to be 77,579 % . factor and reliability analysis results shown in table 5. table 5: work engagement factors and internal consistency results work engagement scales explanato ry scale (%) item weigh t cr. alpha (%) factor 1: excitement 51,980 92,6 i feel full of energy when i work. ,789 i feel strong when i am at work. ,837 i am very enthusiastic regarding my work ,867 my job insires me. ,801 when i wake up in the morning, i go to work happy. ,753 i am proud of the work i do. ,692 factor 2: getting carried away 25,599 83,1 i get carried away. ,715 i lose myself in my work. ,715 total explanatory percentage 77,579 kaiser-meyerolkin value: ,883 bartlett signifi cance value: ,000 approximate chi-square value: 2130,931 perceived individual performance level: performance related expressions grouped under a single factor , "i complete my tasks on time" expression decreases internal consistency by about 20% and were removed as we thought that it was different from the other expressions. the remaining 4 questions have a kaiser-meyerolkin value of 4 0.828, p-value of less than one per thousand , and explanatory were determined to be 73,877 % , respectively. factor and reliability analysis results are shown in table 6. table 6: performance factor and internal consistency results perceived individual performance explanatory factor (%) item weight cr. alph a (%) explanatory factor 73,877 88,2 i am sure i more than meet the standards with the quality services i offer ,759 i reach my goals more compared to my collegues. ,747 my performance level is higher compared to my collegues. ,736 when a problem arises, i find solutions as quickly as possible. ,733 kaisermeyer-olkin value: ,828 bartlett signifi cance value: ,000 approximate chi-square value:: 717,900 psychological capital level: as a result of factor analysis towards determining the scales of the psychological capital, by eliminating 50 expressions, the remaining 21 expressions that have been passed through the factor and internal consistency tests approximately 30 times were grouped under 5 scales. in the most recent factor analysis kaiser-meyerolkin value of 0.916, p-value of less than one thousandth, and the total variation of these 5 scales was determined to be 59.763%. the remaining expressions and the factor and reliability analysis results shown in table 7 table 7: psychological capital factors and internal consistency results psychological capital scales explanat ory scale (%) item weight cr. alph a (%) factor 1: self-sufficiency 17,419 85,8 i trust my contribution regarding my organization’s strategy in discussions ,759 i am sure of myself when i offer ways to improve my departments work ,714 in my area of work, i believe that i can assist with setting objectives. ,686 i trust myself in designing new ways related to my field of work ,630 i can reach my personal goals and outcomes. ,582 factor 2: situationoriented hope 12,632 80,7 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu the effect of organizational support, transformational leadership, personnel empowerment, work engagement, performance and demographical variables on the factors of psychological capital emerging markets journal | p a g e |12 i can find many ways to overcome a challenge. ,628 i trust myself when analyzing a long term problem to solve ,627 to reach my present ways, i can think of many ways. ,612 i always look on the bright side when it comes to work. ,565 i am optimistic about what’s going to happen to me in the future will about my work ,549 factor 3: fortitude 10,761 73,2 i can overcome and manage unwanted situations right away ,588 i can handle stressful situation without getting anxious ,536 even when left alone, i continue to fight for things i believe in. ,529 when i can’t get out of a certain situation, i step back, and re-assess the situation ,462 factor 4: optimisim towards generilization 10,155 62,9 i am generally optimisitic about my future. ,520 it’s easy for me to unwind and relax ,399 generally, i feel that the possibility of good things happening to me than bad things is higher. ,398 factor 5: conditional optimisim* * for the total facto, the scores for all the expressions in this scale have been reversed 8,796 60,9 in case of a setback, compensating the situation and going on becomes an issue ,446 i rarely think good things might happen to me. ,406 if something can go wrong, it goes wrong. ,366 it’s hard for the things to go my way. ,350 total explanatory percentage 59,763 kaiser-meyerolkin value: ,916 bartlett signifi cance value: ,000 approximate chi-square value: 2887,577 5.2. correlation and regression analysis after the factor and reliability analyses, the relationships of scales between themselves that form the psychological capital have been examined in the “correlation matrix”. as it could be seen in the matrix in table 8, there is a significant positive relationship (p<0.01) between scales. table 8: correlation table between the psychological capital factors amongst the subscales of the psychological capital variable seen in table 8, a positive correlation high but not exceeding .70 was found, and our first hypothesis has been supported. the multiple regression results that belong to the variables that is effective on these subscales are illustrated in table 9, table 10, table 11, table 12 and table 13. table 9: multiple regression results on self-efficacy dependent variable: self-sufficiency (**) 0.01 significance level, (*) 0.05 significance level age and sex from demographic variables have been seen to be effective on self-sufficiency, age has a negative effect on self-sufficiency. the higher the subjects’ ages are, the lower the self-sufficiency is. as long as they are excited about being committed to work, are effective and capable in variables selfsufficiency hope fortit ude general optimis im conditional optimisim selfsufficiency (.858) process hope ,693(**) (.807) fortitude ,636(**) ,560(* *) (.732) general optimisim ,464(**) ,502(* *) ,386(* *) (.629) conditiona l optimisim ,393(**) ,433(* *) ,385(* *) ,471(**) (.609) average 4,6305 4,6163 4,500 7 4,0687 4,0290 standard deviation ,80267 ,74110 ,7064 8 ,88137 ,72004 (**) 0.01 significance level, cronbach alpha values are in paranthesis volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n, duygu çubuk, tuna uslu p a g e |13| emerging markets journal their work, think that their performance is higher than that of their collegues, their self-sufficiencies will go up (table 9). table 10: multiple regression results on process-oriented hope dependent variable: process-oriented hope (**) 0.01 significance level, (*) 0.05 significance level only sex from demographic variables has been seen to be effective on process-oriented hope. the male subjects have given more hopeful answers to our inventory. as long as they are supported by their organization, are excited about being committed to work, think that their performance is higher than that of their collegues, their hopes will go up (table 10). table 11: multiple regression results on fortitude dependent variable: fortitude (**) 0.01 significance level, (*) 0.05 significance level only sex from demographic variables has been seen to be effective on fortitude. the male subjects have specified that they were more resilient in their responses. as long as they are excited about being committed to work, are effective and capable in their work, and think that their performance is higher than that of their collegues; their fortitude will go up (table 11). table 12: multiple regression results on general optimisim dependent variable: optimisim (**) 0.01 significance level, (*) 0.05 significance level being a manager, working in private sector, and spending very low from demographic variables have been seen to have a negative effect on general optimisim. on the other hand, as long as they are supported by their organizations and are excited about being committed to work, they generally tend to be more optimistic (table 12). table 13: multiple regression results on conditional optimisim dependent variable: conditional optimisim (**) 0.01 significance level, (*) 0.05 significance level only having no business partnership and having a business from demographic variables has been seen to have a positive effect on conditional optimisim. as long as they are supported by their organization, have control over their job are excited about being committed to work, think that their performance is higher than that of their collegues, they may think that they are more agile, however so long as the work they do is more clear, the participators become more pessimistic when they face with a difficult situation that concern themselves (table 13). including psychological capital composed of self-sufficiency, hope, fortitude, conditional and generalized optimisim, all of the scales’ model r2 adjust ed r2 f independent variables beta t 2 ,476 ,454 21,95 7(**) being a male ,099 2,340(*) organization al support ,175 3,106(**) job excitement (engagement ) ,276 4,552(**) individual performance ,237 3,980(**) m o d el r2 adjust ed r2 f independent variables beta t 4 ,378 ,329 7,76 3(**) being a manager -,117 1,982 (*) very low spending -,116 -2,247 (*) private sector -,147 -2,744 (**) organizationa l support ,269 3,029 (**) job excitement (engagement) ,255 3,198 (**) volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu the effect of organizational support, transformational leadership, personnel empowerment, work engagement, performance and demographical variables on the factors of psychological capital emerging markets journal | p a g e |14 cronbach alpha reliability values, averages, standard deviations, and relationship between the variables have all been illustrated in table 14. our third hypothesis has been supported. because the organizational support and transformational leadership subscales between the correlation coefficient is higher than 0.70, a multicollinearity relationship between these variables was found. table 14: correlation table between the subscales of the scales (**) 0.01 significance level, (*) 0.05 significance level cronbach alpha values in paranthesis due to correlation being higher than 0.70 between the subscales of transformational leadership and organizational support that constitute our dependent variables, the effects of leader’s attention to the individuals and the intellectual stimulation on the perceived organizational support have been examined with multiple regressions. asgari et al. (2008) have found that the transformational leadership through leader-member (lmx) interactions is effective on the perceived organizational support,. our regression results in table 15 support the effects of transformational leadership on the perceived organizational support. so long as the managers' individual attention to the employees and intellectual stimiluations increase, the perceived organizaional support also increases. (table 15), our 4th hypothesis has been supported. table 15: multiple regression results on perceived organizational support dependent variable: perceived organizational support (**) 0.01 significance level, (*) 0.05 significance level since it is very effective on the variables, the subscales of the transformational leadership have not not been added to the regression analyses in which the organizational support's contribution on the dependent variables is examined.. the hierarchical regression results of the variables that describe psychological capital are illustrated in table 16. our 5th hypothesis has been partially supported. table 16: multiple regression results on psychological capital m o d el r2 adjus ted r2 f independe nt variables beta t 7 ,668 ,635 19,997(**) (fixed) ,881 3,134 (**) sex (male) ,105 2,526 (*) position of manager -,098 -2,189 (*) job competen cy (empower ment) ,164 2,891 (**) job efficieny (empower ment) ,095 1,738 (**) organizati onal support ,270 3,892 (**) job excitement (engage ment) ,274 4,460 (**) performan ce ,337 6,217 (**) dependent variable: psychological capital (**) 0.01 significance level, (*) 0.05 significance level vi. results and discussion in this study, only the effects of the transformational leadership on the employees' psychological capitals and performances have not been identified. however, in terms of employees, the individual attention and intellectual stimulation from the leader primarily increases the perceived organizational support. organizational support and work-related resources have been identified as being precursors in terms of both psychological capital and performance. so long as the organizational support increases, employees' psychological capitals improve and on the other hand, performance perceptions decrease. in other words, employees who feel that they are being supported by their organization; they have a tendency to report lower performance than that of their collegues. this situation can be evaluated as the reduction of cost perception in the social exchange theory with regards to the employees and employees increasing their interactions and psychological benefits by the way of work commitment work engagement variable is an effective variable on the psychological capital and performance, the volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n, duygu çubuk, tuna uslu p a g e |15| emerging markets journal contribution of employees feeling that having control over their work and being excited about their jobs to the psychological capital and the contribution of employees thinking that their jobs are clear to the individual performance acts as mediators. the demographic factors such as sex and managerial positions on the psychological capital have been observed to be effective. male managers perceive the support of their organizations as higher. the ones' who are males and are in managerial positons, self-efficacy, hope, fortitude and general optimisim scales' averages have been a lot higher than that of other subjects.. however, in terms of management criteria, these organizational behavior variables compared to other factors constitute less importance. despite lutfans et al's work towards increasing the positive behaviors of managers, not having much differences between the managers and the employees in terms of psychological capital when compared with the other variables, it makes us think that these studies need to target all the employees, not only the managers. it can be seen that the case of psychological capital and its subscales to distinguish the managers and the employees does not come in the first place, however subscales associated with the empowerment compared to the employees from the standpoint of the managers has been seen to receive higher values. managers perceive the individual performance levels and organizational support directed towards them higher. these findings, within the social identity theroy framework as a result of the interactions of the managers, could be evaluated as developing attitudes and behaviors such as evaluating their positions, undulging in work, getting excited about their jobs, demostrating higher performance than others. since the transformational leader approach has come out as a precursor of organizational support, whether or not the manager approaches are effective an how effective on the psychological capital have not been determined. in future studies, the contribution of supervisor support on the psychological capital and individual performance, as a result of interaction with other variables could be examined. references adams, v.h., snyder, c.r., rand, k.l., king, e.a., sigmon, d.r. ve pulvers, k.m. (2003). “hope in the workplace, handbook of workplace spirituality and organizational performance”, ed. r.a. giacolone ve c. jurkiewicz, sharpe, newyork, 367-377. asgari, a., silong, a. d., ahmad a. ve samah b. a. (2008) “the relationship between transformational leadership behaviors, organizational justice, leadermember exchange, perceived organizational support, trust in management and organizational citizenship behaviors”, european journal of scientific research, vol.23 no.2, ss.227-242 avey, j. b., hughes, l. w., norman, s. m. ve luthans, k. (2008) “using positivity, transformational leadership and empowerment to combat employee negativity”, leadership and organization development journal, vol.29, no.1-2, ss. 110–126. avey, j. b. (yayında) “the relationship between psychological capital and creative, supervisor rated and 360 degree performance; a multi-study analysis”, shortly under review at human resource development quarterly. avey, j. b., wernsing, t. s. ve luthans, f. (yayında). “can positive employees help positive organizational change? impact of psychological capital and emotions on relevant attitudes and behaviors”, journal of applied behavioral science bal, esra atilla (2008) “self-efficacy, contextual factors and well-being: the impact of work engagement”, (yayımlanmamış doktora tezi), marmara üniversitesi sosyal bilimler enstitüsü, i̇stanbul. bass, b.m. (1990), “from transactional to transformational leadership: learning to share the vision”, organizational dynamics, 18, 20. bass, b.m. ve avolio, b.j. (1993). transformational leadership: a response to critiques. new york, ny: free press. bass, b.m. ve avolio, b.j. (1995). the multifactor leadership questionnaire. palo alto, ca: mind garden. bass, b.m. ve p. steidlmeier (1999), “ethics, character, and authentic transformational leadership behavior , leadership quarterly, 10, 181–217. beyerlein, m., beyerlein, s.t. ve richardson, s. (1993) survey of technical professionals in teams: summary report, june 1993. denton: university of north texas, center for the study of work teams blau, p. (1964). exchange and power in social life, new york: wiley. block, j. ve kremen, a. m. (1996). “iq and ego-resiliency: conceptual and empirical connections and separateness”, journal of personality and social psychology, 70, ss. 349–61. bolat, t.(2003). personeli güçlendirme: davranışsal ve bilişsel boyutta incelenmesi ve benzer yönetim kavramları ile karşılaştırılması”, atatürk üniversitesi i̇.i̇.b.f dergisi, cilt 17, sayı 3–4, 199-219. cameron, kim s. (2003) “organizational virtuousness and performance.” in kim s. cameron, jane e. dutton, and robert e. quinn (eds.) positive organizational scholarship: foundations of a new discipline (ss. 4865) san francisco: berrett-koehler. cameron, kim s., david bright, ve arran caza (2004) “exploring the relationships between organizational virtuousness and performance.”american behavioral scientist, 47: 766-790. carey, m. r. (1992) “transformational leadership and the fundamental option for self-transcendence”, leadership quarterly, 3, ss. 217–236 volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu the effect of organizational support, transformational leadership, personnel empowerment, work engagement, performance and demographical variables on the factors of psychological capital emerging markets journal | p a g e |16 çakır, özlem. (2001). “i̇şe bağlılık olgusu ve etkileyen faktörler”, ankara: seçkin yayınevi. deci, e.l., connell, j.p., ryan, r. m. (1989), “selfdetermination in a work organization”, journal of applied psychology, s.74. s.580-590. eisenberger, r., huntington, r., hutchinson, s. ve d. sowa (1986), “perceived organizational support”, journal of applied psychology, 7:500-507. eisenberger, r., fasolo, p. ve v. davis-lamastro (1990), “perceived organizational support and employee diligence, commitment and innovation”, journal of applied psychology, 75:51-59. eisenberger, r., cummings, j., armeli, s. ve p. lynch (1997), “perceived organizational support, discretionary treatment and innovation”, journal of applied psychology, 82:812-820. eraslan, levent. (2003) “i̇lkögretim okulu müdürlerinin dönüsümcü liderlik özellikleri”, yayınlanmamış yüksek lisans tezi, kırıkkale üniversitesi sosyal bilimler enstitüsü, kırıkkale grupta, vipin, mcmilan, ian c., surıe, gita (2004), “enterpreneurial leadership:developing and measuring a cross-cultural consruct”, journal of business venturing, 19. hackman, j.r. ve oldham, g.r. (1980). “work redesign”, reading, ma: addison-wesley. i̇şcan, ömer faruk (2006), “transforming/interacting leadership perception ve organizational identification i̇lişkisinde bireysel farklılıkların rolü”, akdeniz üniversitesi i̇.i̇.b.f. dergisi (11) 2006, 160177 judge, t.a., thoresen, c.j., bono, j.e. ve patton, g.k. (2001). “the job satisfaction-job performance relationship: a qualitative and quantitave review”, psychological bulletin, 127 (3), 376-407. kahn, w. a. (1990). “psychological conditions of personal engagement and disengagement at work”, academy of management journal, 33 (4), 692-724. karip, emin (1998) “dönüşümcü liderlik”, eğitim yönetimi, yıl:4, sayı:16, ankara: pegem yayıncılık khan, umar a., (1999) “type of administrator differencies in work satisfaction of secondary school administrator”, education, volume 113, no: 4, s. 574-578. kirkman, b.l. ve rosen, b. (1999). “beyond selfmanagement: antecedents and consequences of team empowerment”, academy of management journal, vol:42, no:l, ss. 58–74. krishnan, r. v. (2001). “value systems of transformational leaders”, leadership and organizational development journal, 22, 3,126-131. langelaan, s., bakker, a.b., van doormen, l.j.p. ve schaufeli, w.b. (2006). “burnout and work engagement: do individual differences make a difference?”, personality and individual differences, 43, 521-532. luthans, f. (1995) organizational behavior, 7th ed. new york: mcgraw hill. luthans, f. ve youssef, c. m. (2004). human, social and now positive psychological capital management: investing in people for competitive advantage, organizational dynamics, 33 (2), 143-160. luthans, f., avolio, b., walumbwa, f., ve li, w. (2005). “the psychological capital of chinese workers: exploring the relationship with performance”, management and organization review, 1, 247-269. luthans, f., james b. avey, bruce j. avolio, steven m. norman ve gwendolyn m. combs (2006a), “psychological capital development: toward a microintervention”, journal of organizational behaviour, j. organiz. behav. 27, 387–393 luthans, f., zhu, w. ve avolio, b.j. (2006b). “the impact of efficacy on work attitudes across cultures”, journal of world business, 41, 121-132. luthans, f., avolio, b., avey, j. b. ve norman, s. m. (2007a). “psychological capital: measurement and relationship with performance and job satisfaction”, personnel psychology, 60, 541-572. luthans, f., norman, s.m., avolio, b.j. ve avey, j.b. (2007b). “the mediating role of psychological capital in the supportive organizational climate employee performance relationship”, journal of organizational behavior luthans, f., youssef, c.m. ve avolio, b.j. (2007c), “psychological capital: developing the human competitive edge”, new york: oxford university press luthans, f., avey, j. b. ve avolio, b. j., peterson, s. (yayında) “the development and performance impact of positive psychological capacities: a microintervention study”, journal of applied psychology luthans, f. (2007) “psychological capital: investing and developing thai human resources”, graduate school bangkok university. malesta, r.m. ve l. e. tetrick (1996), “understanding the dynamics of organizational and supervisory commmitment”, society for industrial and organizational society annual meeting, san diego. maslach, c. & leiter, m. p. (1997). “the truth about burnout: how organizations cause personal stress and what to do about it”, san francisco: jossey-bass. volume 3 no 3 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.49 | http://emaj.pitt.edu dr. didem rodoplu şahi̇n, duygu çubuk, tuna uslu p a g e |17| emerging markets journal morgeson, f. p., delaney-klinger, k. a. ve hemingway, m. a. (2005). “the importance of job autonomy, cognitive ability, and job-related skill for predicting role breadth and job performance”, journal of applied psychology, 90, 399–406. newstorm, john w. ve keith, davis (1993). “organizational behavior”, mcgraw-hill inc. new york. ostroff, c. (1992). the relationship between satisfaction, attitudes and performance: an organizational level analysis, journal of applied psychology, 77 (6), 963974. page, liam f., ross donohue (2004), “positive psychological capital: a preliminary exploration of the construct”, 51/04, monash university working papers, <http://www.buseco.monash.edu.au/mgt/research/wor king-papers/workingpapers04pdf.html> parker, s. (1998). “enhancing role-breadth self efficacy: the roles of job enrichment and other organizational interventions”, journal of applied psychology, 83, 835–852 quinn, b. (2005). “enhancing academy library performance through positive psychology”, journal of library administration, 42 (1), 79-101. rnao (2006). “healthy work environment best practice guidelines: developing and sustaining nursing leadership”. rnao ross, j. a. (2006) “making every leadership moment matter”, harvard management update, sept. vol.11, no.9, s. 1 -3. rowden, robert w. (1999). “the relationship between charismatic leadership behaviors and organizational commitment”, the leadership & organization development journal, volume:21, no: 1, s. 30-35. saks, alan (2006). “antecedents and consequences of employee engagement”, journal of managerial psychology, vol. 21 no. 7, 600-619 schaufeli, w., salanova, m., gonzales-roma , v., ve bakker, a. b. (2002). “the measurement of engagement and burnout: a two sample confirmatory factor analytic approach”, journal of happiness studies, 3, ss. 71– 92. schaufeli, w., salanova, m. ve bakker, a. b. (2006). “the measurement of work engagement with a short questionnaire: a cross-national study”, journal of educational and psychological measurement, 3, ss. 71–92. scheier, m. f. ve carver, c. s. (1985.) “optimism, coping, and health: assessment and implications of generalized outcome expectancies”, health psychology, 4, ss. 219–47. seligman, m.e. (1998) “learned optimism: how to change your mind and your life”, newyork: pocket books. siegall, m., gardner, s.(2000). “contextual factors of psychological empowerment”, personel review, cilt 29, sayı 6, s. 703–722. sigler, t.h., pearson, c. m. (2000). “creating an empowering culture: examining the relationship between organizational culture and perceptions of empowerment”, journal of quality management, vol.5, ss.27–52. sims, h.p., szilagyi, a.d. ve keller, r.t. (1976). “the measurement of job characteristics”, academy of management journal, 19, 195–212. snyder, c. r., sympson, s. c., ybasco, f. c., borders, t. f., babyak, m. a. ve higgins, r. l. (1996). “development and validation of the state hope scale”, journal of personality and social psychology, 70, ss. 321–35. spreitzer, g.m. (1995). “psychological empowerment in the workplace: dimensions, measurement, and validation”, academy of management journal, vol:38, no:5, ss. 1442–1465. stajkovic, a. d. ve luthans, f. (1998a). “social cognitive theory and self-efficacy: going beyond traditional motivational and behavioral approaches”, organizational dynamics, 26, 62-74. stajkovic, a. d. ve luthans, f. (1998b). “self-efficacy and work-related task performance: a meta-analysis”, psychological bulletin, 124, ss. 240-261. thomas k.w., velthouse b.a.(1990). “cognitive elements of empowerment: an interpretive model of intrinsic task motivation”, academy of management review, cilt 15, sayı 4, s. 666–681. wagnild, g. m. ve young, h. m. (1993). “development and psychometric evaluation of the resilience scale”, journal of nursing measurement, 1, 165–178. youssef, c. m., & luthans, f. (2007). “positive organizational behavior in the workplace: the impact of hope, optimism, and resilience”, journal of management, 33(5), 774-800. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu a comparison of the financial characteristics of nafta and latin american manufacturing firms gulser meric professor of finance, rohrer college of business, rowan university glassboro, new jersey 08028 | meric@rowan.edu cengiz haksever professor of decision sciences, college of business administration, rider university lawrenceville, new jersey 08648 | haksever@rider.edu j. drew procaccino associate professor of information systems, college of business administration rider university, lawrenceville, new jersey 08648 | procaccinod@rider.edu ilhan meric professor of finance, college of business administration, rider university lawrenceville, new jersey 08648 | meric@rider.edu abstract comparing the financial characteristics of firms in different countries and different regions has been a popular research topic in finance. however, nafta and latin american manufacturing firms have never been compared. in this paper, we undertake such a study with the manova (multivariate analysis of variance) method with data drawn from the research insight/global vintage database in october 2015. our findings indicate that nafta manufacturing firms have less liquidity risk, but more financial risk, compared with latin american manufacturing firms. nafta manufacturing firms have significantly higher returns on equity due to achieving higher returns on assets and using more financial leverage. latin american manufacturing firms have more efficient inventory management. however, nafta manufacturing firms have more efficient accounts receivable management and total assets management. keywords: financial ratios, nafta manufacturing firms, latin american manufacturing firms, manova (multivariate analysis of variance) new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.102 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.102 | http://emaj.pitt.edu a comparison of the financial characteristics of nafta and latin american manufacturing firms page |22| emerging markets journal a comparison of the financial characteristics of nafta and latin american manufacturing firms gulser meric cengiz haksever j. drew procaccino ilhan meric 1. introduction comparing the financial characteristics of different groups of firms has long been a popular methodology in finance. altman (1968), beaver (1968), deakin (1972), moyer (1977), edmister (1972), and dambolena and khoury (1980) predict bankruptcy by comparing the financial characteristics of bankrupt and non-bankrupt firms. stevens (1973), belkaoui (1978), rege (1984), and meric at al. (1991) identify the financial characteristics of firms that have been corporate takeover targets by comparing them with firms that have not been corporate takeover targets. hutchinson at al. (1988) and meric and meric (1992) identify the financial characteristics of firms which achieve stock market quotation by comparing them with firms that do not have stock market quotation. meric at al. (2000) compare the financial characteristics of japanese kieretsu-affiliated and independent firms to identify the financial characteristics of kieretsu-affiliated firms. a number of studies compare the financial characteristics of firms in different countries. kester (1986) and wald (1999) compare the capital and ownership structures of firms in different countries and they find significant differences. meric and meric (1989 and 1994) compare the financial characteristics of u.s. and japanese manufacturing firms and they find significant differences. in this study, we compare the financial characteristics of nafta and latin american manufacturing firms. 2. nafta and latin american economies in this section, we present an overview of the economies of the three nafta member countries and seven latin america countries included in this study through various economic indicators. table 1 includes population (based on 2015 estimates), population growth rate (based on 2015 estimates), labor force (based on 2014 estimates), and labor force as a percentage of population. we have also included a corresponding world rank for each of these indicators. population the u.s. had the largest population among the nafta countries at 321.4m (fourth largest in the world) and canada had the lowest at 35.1m (35th largest). among the latin american countries, brazil had the highest population at 204.3m (sixth largest in the world) and costa rica had the smallest at 4.8m (124th largest). population growth rate mexico had the highest population growth rate among the nafta countries at 1.2% (102nd highest in the world) and canada was the lowest at 0.8% (146th highest). among the latin american countries, venezuela had the highest at 1.4% (85th highest in the world), while brazil had the lowest at 0.8% (142nd highest). table 1: population, growth rate and labor force by country countr y populati on 1 [in millions] (world rank) populati on 2 growth rate (world rank) labor force 3 [in million s] (world rank) labor force as percenta ge of populati on n a f t a canada 35.1 (39) 0.8% (146) 19.2 (32) 54.7% mexico 121.7 (12) 1.2% (102) 52.9 (13) 43.5% united state s 321.4 (4) 0.8% (141) 156.0 (4) 48.5% l a ti n a m e ri c a argenti na 43.4 (33) 0.9% (124) 17.3 (36) 39.9% brazil 204.3 (6) 0.8% (142) 110.9 (6) 54.3% chile 17.5 (64) 0.8% (137) 8.5 (58) 48.6% columb ia 46.7 (30) 1.0% (115) 23.7 (28) 50.6% costa rica 4.8 (124) 1.2% (97) 2.3 (119) 46.9% peru 30.4 (44) 1.0% (120) 16.6 (38) 54.4% venezu ela 29.3 (45) 1.4% (85) 14.3 (40) 49.0% resources: 1 https://www.cia.gov/library/publications/resources/theworld-factbook/rankorder/2119rank.html 2 https://www.cia.gov/library/publications/resources/theworld-factbook/rankorder/2002rank.html 3 https://www.cia.gov/library/publications/resources/theworld-factbook/rankorder/2095rank.html labor force the u.s. had the largest labor force among the nafta countries at 156.0m (fourth largest in the world) and canada had the lowest at 19.2m (32nd largest). among the latin american countries, brazil had the highest labor force at 110.9m (sixth highest in the world) and costa rica had the smallest at 2.3m (119th highest). volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.102 | http://emaj.pitt.edu gulser meric, cengiz haksever, j. drew procaccino, ilhan meric emerging markets journal | p a g e |23 table 2 includes total gross domestic product (gdp) (2014 estimates, valued at prevailing u.s. purchase prices), annual gdp real growth rate (2014 estimates, adjusted for inflation), and annual gdp per capita (2014 estimates, valued at prevailing u.s. purchase prices). we have also included a corresponding world rank for each of these indicators. table 2: gdp total, growth rate and per capita by country country gdp total 1 [in billions us$] (world rank) annual gdp real growth rate 2 (world rank) annual gdp per capita 3 [in us$] (world rank) n a f t a canada 1,579.0 (16) +2.3% 137 44,500 (29) mexico 2,143.0 (12) +2.4% 134 17,900 (92) united states 17,460.0 (3) +2.4% 131 54,800 (19) l a ti n a m e ri c a argentina 927.4 (26) -1.7% 211 22,100 (78) brazil 3,073.0 (8) +0.3% 198 15,200 (101) chile 410.3 (44) +2.0% 151 23,200 (76) columbia 642.7 (32) +5.0% 54 13,500 (111) costa rica 71.2 (93) +3.6% 83 14,900 (104) peru 376.7 (48) +3.6% 80 12,000 (119) venezuela 545.7 (35) -3.0% 213 17,900 (88) resources: 1 https://www.cia.gov/library/publications/resources/theworld-factbook/rankorder/2001rank.html 2 https://www.cia.gov/library/publications/resources/theworld-factbook/rankorder/2003rank.html 3 https://www.cia.gov/library/publications/resources/theworld-factbook/rankorder/2004rank.html total gross domestic product the u.s. had the highest total gross domestic product among the nafta countries at $17,460.0b (third highest in the world) and canada had the lowest at $1,579.0b (??). among the latin american countries, brazil had the highest gdp at $3,073.0b (eighth in the world) and costa rica had the smallest at $71.2b (93rd highest). gdp growth rate all three nafta countries were relatively close in annual gdp real growth rate at approximately +2.4%. they were also relatively close in world rank (ranging between 131st and 137th highest). among the latin american countries, columbia had the highest gdp growth rate at 5.0% (54th highest in the world) and venezuela had the lowest at -3.0% (213th highest). gdp per capita the u.s. had the highest annual gdp per capita among the nafta countries at $54,800 (19th highest in the world) and mexico had the lowest at $17,900 (92nd highest). among the latin american countries, chile had the highest gdp per capita at $23,200 (76th highest in the world) and peru had the smallest at $12,000 (119th highest). table 3 includes total exports (2014 estimates, in u.s. dollars using the free on board basis and calculated on an exchange rate basis), major export partners (as a percentage of country’s total exports), total imports (2014 estimates, in u.s. dollars using the cost, insurance, and freight basis or free on board basis), and major export partners (as a percentage of country’s total exports). we have also included a corresponding world rank for each of these indicators. total exports the u.s. had the highest total exports among the nafta countries at $1,610.0b (third highest in the world) and mexico had the lowest at $406.4b (15th highest). among the latin american countries, brazil had the highest total exports at $242.7b (24th highest in the world) and costa rica had the smallest at $11.8b (91st highest). major export partners the vast majority of exports from both canada and mexico went to the u.s. (76.8% and 80.3%, respectively). the largest percentage of u.s. exports went to canada (19.3%) and mexico (14.8%). the highest percentage of exports from argentina went to brazil (20.3%). similarly, brazil exported the most to china (18.0%), chile to china (24.6%), columbia to the u.s. (26.4), costa rica to the u.s. (47.4%), peru to china (18.3%), and venezuela to the u.s. (28.8%). total imports the u.s. had the highest total imports among the nafta countries at $2,334.0b (highest in the world) and mexico had the lowest at $407.1b (14th highest). among the latin american countries, brazil had the highest total exports at $241.9b (23rd highest in the world) and costa rica had the smallest at $17.9b (80th highest). volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.102 | http://emaj.pitt.edu a comparison of the financial characteristics of nafta and latin american manufacturing firms page |24| emerging markets journal table 3: 2014 exports and imports by country coun try exports imports tot al 1 [in billi ons us$ ] (wo rld ran k) major expor t partne rs 3 % of to tal tot al 2 [in billi ons us$ ] (wo rld ran k) major import partners 3 % of to tal n a f t a cana da 465. 1 (13) u.s. china u.k. 76. 8 3.7 2.9 482. 1 (12) u.s. china mexico 54.3 11.5 5.6 mexi co 406. 4 (15) u.s. canad a china 80. 3 2.7 1.5 407. 1 (14) u.s. china japan 4 9 . 0 1 6 . 6 4 . 4 unite d sta tes 1,61 0.0 (3) canad a mexic o china 19. 3 14. 8 7.6 2,33 4.0 (1) china cana da mexi co 19.9 14.8 12.5 l a ti n a m e ri c a argen tin a 76.5 (49) brazil china u.s. 20. 3 6.5 5.9 65.9 (46) brazil china u.s. 21.8 16.4 13.5 brazil 242. 7 (24) china u.s. argent ina 18. 0 12. 1 6.3 241. 9 (23) china u.s. arge ntina 16.3 15.4 6.2 chile 77.0 (48) china u.s. japan 24. 6 12. 2 10. 0 70.7 (43) china u.s. brazi l 20.9 19.8 7.8 colu mb ia 55.0 (57) u.s. china panam a 26. 4 10. 5 6.6 56.8 (51) u.s. china mexi co 28.5 18.4 8.2 costa ric a 11.8 (91) u.s. china mexic o 47. 4 7.5 6.8 17.9 (80) u.s. china mala ysia 28.6 12.6 10.2 peru 36.4 (63) china u.s. switze rland 18. 3 16. 2 6.9 40.3 (61) china u.s. brazi l 21.2 20.9 4.7 vene zue la 83.2 (46) u.s. china brazil 28. 8 14. 6 12. 0 50.3 (55) u.s. india china 42.9 18.7 16.1 resources: 1 https://www.cia.gov/library/publications/resources/theworld-factbook/rankorder/2078rank.html 2 https://www.cia.gov/library/publications/resources/theworld-factbook/rankorder/2087rank.html 3 http://comtrade.un.org/data major import partners the largest proportion of imports to both canada and mexico came from the u.s. (54.3% and 49.0%, respectively). the largest percentage of imports to the u.s. came from china (19.9%). the highest percentage of imports to argentina came from brazil (21.8%). similarly, brazil imported the most from china (16.3%), chile from china (20.9%), columbia from the u.s. (28.5), costa rica from the u.s. (28.6%), peru from china (21.2%), and venezuela from the u.s. (42.9%). figure 1 displays a comparison of 2014 imports and exports among the included countries. figure 1. imports vs. exports balance of trade the balance of trade for each of the nafta countries was negative, ranging from -724.0b for the u.s. to -0.7b for mexico. among the latin american countries, venezuela had the highest balance of trade at +$32.9b and costa rica had the lowest at -$6.2b. table 4 presents a listing of all included countries ranked by decreasing 2014 balance of trade in billions of u.s. dollars. table 4: 2014 balance of trades by decreasing amount country balance [in billions us$] venezuela 32.9 argentina 10.6 chile 6.3 brazil 0.8 mexico -0.7 columbia -1.8 peru -3.8 costa rica -6.2 canada -17.0 united states -724.0 1.610,0 465,1 11,8 36,4 55,0 406,4 242,7 77,0 76,5 83,2 -2.334,0 -482,1 -17,9 -40,3 -56,8 -407,1 -241,9 -70,7 -65,9 -50,3 united states costa rica columbia brazil argentina imports vs. exports (in billions of $ u.s.) imports exports volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.102 | http://emaj.pitt.edu gulser meric, cengiz haksever, j. drew procaccino, ilhan meric emerging markets journal | p a g e |25 figures 2 and 3 depict the three largest export partners (outflowing arrows) of each nafta and latin american country, respectively, based on percent of the exporting country’s total exports. circles are in proportion to total of each country’s total exports (shown below country name). figure 2. largest export partners for nafta countries figure 3. largest export partners for latin american countries figures 4 and 5 depict the three largest import partners (inflowing arrows) of each nafta and latin american country, respectively, based on percent of the importing country’s total imports. circles are in proportion to total of each country’s total imports (shown below country name). 3. methodology and data multiple discriminant analysis mda (see, e.g., altman, 1968; stevens, 1973; belkaoui, 1978) and multivariate analysis of variance manova (see, e.g., hutchinson et al., 1988; meric et al., 1991) are the two multivariate techniques most commonly used in previous studies to compare the financial characteristics of different groups of firms. in this study, we use the manova technique to compare the financial characteristics of nafta and latin american manufacturing firms. detailed information about the manova technique can be found in marascuilo and levin (1983) and johnson and wichern (2007). financial ratios are generally used in empirical studies to compare the financial characteristics of different groups of firms. the financial ratio data used in this study were obtained from the ‘research insight/global vintage’ database in october 2015. manufacturing industries with sic codes between 20003999 are included in the study. our research sample consists of 885 nafta and 849 latin american manufacturing firms. we use the financial ratios presented in table 5 as measures of firm financial characteristics in the comparisons. figure 4. largest import partners for nafta countries figure 5. largest import partners for latin american countries volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.102 | http://emaj.pitt.edu a comparison of the financial characteristics of nafta and latin american manufacturing firms page |26| emerging markets journal table 5: financial ratios used in the study as measures of firm financial characteristics financial ratio financial ratio definition liquidity current ratio current assets / current liabilities quick (acid-test) ratio (current assets inventories) / current liabilities asset management average collection period sales / (accounts receivable / 365) inventory turnover sales / inventories fixed assets turnover sales / net fixed assets total assets turnover sales / total assets financial leverage equity ratio common equity / total liabilities profitability net profit margin net income / sales return on assets net income / total assets return on equity net income / common equity growth sales growth rate average for the last three years total assets growth rate average for the last three years 4. manova method multivariate analysis of variance (manova) is the extension of univariate techniques for discovering differences between group means. when two groups are involved, a t test can be used; when three or more groups are involved anova (analysis of variance) can be used for the purpose. the terms “univariate” and “multivariate” refer to the number of dependent variables tested. the null hypothesis tested in the t test and anova is the equality of means of a single dependent variable across groups. in other words, anova tests if the differences among the group means of a single dependent variable are statistically significant, or likely to have happened by chance. in manova, the null hypothesis tested is the equality of vectors of means of multiple dependent variables across groups. in other words, manova tests if the differences among the group means of a combination of dependent variables are significant, or likely to have occurred by chance. (hair et al., 1998, mertler and vannatta. 2002) a manova can also be considered as a way to test the hypothesis that one or more independent variables have an effect on two or more dependent variables. consequently, a manova has all the properties of an anova, extended to multiple dependent variables. in addition to the similarities between anova and manova, the latter is statistically identical to discriminant function analysis. while manova emphasizes the mean differences and the statistical significance of differences among groups, discriminant function analysis focuses on prediction of group membership and the dimensions on which groups differ. (tabachnick and fidell, 2001) although separate univariate anova or t tests can be used to accomplish what manova does, this can lead to greatly inflated overall type i error rate. another problem with separate univariate analysis is that distributions of dependent variables might overlap such that a mean difference may not be found with anova. however, when several dependent variables are considered in combination with each other, the groups may differ substantially and could result in a statistically significant difference among groups. (mertler and vannatta. 2002) also, individual tests end up using less than the total information available about the dependent variables; this is because individual tests ignore the correlations among them. in case the dependent variables are correlated, manova may detect combined differences not discovered in univariate tests. consequently, manova will be more powerful than the separate univariate tests. (hair et al. 1998) just like any other statistical method, manova has some limitations. the first of these is the attribution of causality to the relationship between independent and dependent variables; the statistical test does not confirm causality. care must be exercised in choosing independent variables and their levels, and ideally dependent variables must be uncorrelated with each other. in addition to these theoretical issues, practical issues concerning the statistical procedures must be considered. one of these is related to sample size; it is necessary to have more cases than dependent variables in every cell. if a cell has more dependent variables than cases, the assumption of homogeneity becomes untestable. also, the power of the test is reduced if the number of dependent variables is more than the cases due to the reduced degrees of freedom for error. (tabachnick and fidell, 2001) a serious limitation of manova, as well as anova, is the sensitivity to outliers. an outlier can produce either a type i or type ii error, without providing any clues as to which one has occurred. (tabachnick and fidell, 2001) manova assumes linear relationship between each pair of dependent variables, as well as all pairs of covariates and all dependent variable covariate pairs in each cell. deviations from this assumption reduce the power of the statistical tests, because “(1) the linear combinations of dependent variables do not maximize the separation of groups for the independent variables, and (2) covariates do not maximize adjustment for error.” (for further discussion of limitations of manova see tabachnick and fidell, 2001, and hair et al. 1998. also, see hair et al. 1998. for a detailed procedure of application of manova) volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.102 | http://emaj.pitt.edu gulser meric, cengiz haksever, j. drew procaccino, ilhan meric emerging markets journal | p a g e |27 5. empirical findings our manova test results are presented in table 6. the multivariate f value test statistic (38.1) in the table indicates that the overall financial characteristics of nafta and latin american manufacturing firms are significantly different at the 1percent level. table 6: manova statistics financial ratios means and standard deviations† nafta latin america univariate statistics f-value pvalue liquidity ratios current ratio quick (acidtest) ratio 2.90 (1.81) 1.86 (1.52) 2.68 (2.99) 1.97 (2.64) 3.46* 1.17 0.06 0.28 asset management ratios average collection period inventory turnover fixed assets turnover total assets turnover 53.55 (23.63) 5.57 (4.32) 6.94 (5.36) 1.04 (0.51) 97.01 (81.18) 8.07 (14.5) 7.57 (18.43) 0.86 (0.53) 33.07*** 24.05*** 0.93 4.99*** 0.00 0.00 0.33 0.00 financial leverage equity ratio 1.77 (1.94) 2.4 (3.66) 20.01*** 0.00 profitability ratios net profit margin return on assets return on equity 5.17% (9.28%) 4.63% (7.37%) 10.69% (18.35%) 4.96% (20.58%) 3.88% (9.21%) 7.52% (20.98%) 0.08 3.54* 11.23*** 0.78 0.06 0.00 growth sales growth rate total 5.36% (12.32%) 7.39% (13.1%) 7.67% (22.12%) 11.56% (17.85%) 7.34*** 30.82*** 0.01 0.00 assets growth rate multivariate statistics: 38.1*** 0.00 the multivariate analysis of variance (manova) technique is used to compare the financial ratios of nafta and latin american manufacturing firms. this table presents the mean ratios of nafta and latin american manufacturing firms, the standard deviations of the ratios, and the univariate and multivariate test statistics. † the figures in parentheses are the standard deviations. ***, **, * indicate that the difference is significant at the 1-percent, 5-percent, and 10-percent levels, respectively. liquidity the univariate f value statistic (3.46) in table 6 indicates that the mean current ratio of nafta manufacturing firms is significantly higher than the mean current ratio of latin american manufacturing firms (2.9 vs. 2.68, respectively) at the 10-percent level. however, the mean quick (acid-test) ratios of nafta and latin american manufacturing firms (1.86 vs. 1.97, respectively) are not significantly different. this result implies that nafta firms have a higher inventory level that makes the mean current ratio of nafta manufacturing firms to be significantly higher than that for latin american manufacturing firms (i.e., the higher liquidity level of nafta manufacturing firms, as measured by the current ratio, is mainly due to nafta manufacturing firms carrying higher inventory levels compared with latin american manufacturing firms). asset management the univariate f value statistic (33.07) in table 6 indicates that the average collection period is significantly shorter in nafta manufacturing firms (53.55 days) than in latin american manufacturing firms (97.01 days) at the 1-percent level (i.e., nafta manufacturing firms are significantly more efficient in managing and collecting their accounts receivable compared with latin american manufacturing firms). the univariate f value statistic (24.05) indicates that inventory turnover is significantly higher in latin american manufacturing firms (8.07) than in nafta manufacturing firms (5.57) at the 1-percent level. this indicates that latin american manufacturing firms are more efficient in managing their inventories compared with nafta manufacturing firms. as we concluded when comparing the current and quick (acidtest) ratios above, this result also implies that nafta manufacturing firms tend to carry significantly higher levels of inventories compared to latin american manufacturing firms. the fixed assets turnover ratios of nafta and latin american manufacturing firms are not significantly volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.102 | http://emaj.pitt.edu a comparison of the financial characteristics of nafta and latin american manufacturing firms page |28| emerging markets journal different. however, the univariate f value statistic (4.99) indicates that the mean total assets turnover ratio of nafta manufacturing firms is significantly higher compared with the mean total assets turnover ratio of latin american manufacturing firms (1.04 vs. 0.86, respectively) at the 1-percent level. this implies a more efficient total assets management in nafta manufacturing firms than in latin american manufacturing firms. nafta manufacturing firms are able to generate a larger amount of sales per dollar invested in total assets compared with latin american manufacturing firms. financial leverage the univariate f value statistic (20.01) in table 6 indicates that the equity ratio (common equity/total liabilities) is significantly higher in latin american manufacturing firms (2.4) than in nafta manufacturing firms (1.77) at the 1-percent level (i.e., latin american manufacturing firms use more equity financing and less debt financing compared with nafta manufacturing firms). this implies that latin american manufacturing firms less financial risk compared with nafta manufacturing firms. profitability net profit margin is not significantly different in nafta and latin american manufacturing firms. this implies no significant difference in product pricing and manufacturing costs of nafta and latin american manufacturing firms. however, the univariate f value statistic (3.54) in table 6 indicates that the mean return on assets is significantly higher in nafta manufacturing firms than in latin american manufacturing firms (4.63% vs. 3.88%, respectively) at the 10-percent level. according to well-known dupont system, this is mainly due to nafta firms being able to achieve a higher total assets turnover compared with latin american manufacturing firms. the univariate f value statistic (11.23) indicates that the mean return on equity is significantly higher in nafta manufacturing firms than in latin american manufacturing firms (10.69% vs. 7.52%, respectively) at the 1-percent level. according to wellknown extended dupont system, this result is due to nafta manufacturing firms having a higher total assets turnover and their using more financial leverage compared with latin american manufacturing firms. growth the univariate f value statistic (7.34) in table 6 indicates that the mean annual sales growth rate is significantly higher in latin american manufacturing firms than in nafta manufacturing firms (7.67% vs. 5.36%, respectively) at the 1-percent level. the second univariate f value statistic (30.82) under growth indicates that the mean annual assets growth rate is also significantly higher in latin american manufacturing firms than in nafta manufacturing firms (11.56% vs. 7.39%, respectively) at the 1-percent level. a comparison of the f value statistics reveals that, the difference between the assets growth rates is more significant than the difference between the sales growth rates. 6. summary and conclusions comparing the financial characteristics of firms in different countries and regions has been a popular research topic in finance. mda (multiple discriminant analysis) and manova (multivariate analysis of variance) are the two popular statistical techniques used in comparisons. in this paper, we compare the financial characteristics of nafta and latin american manufacturing firms with the manova technique. such a comparison has not been made in previous literature. we use eleven financial ratios in the comparisons as measures of liquidity, asset management, indebtedness, profitability, and growth characteristics of the firms. the data of the study were obtained from the ‘research insight/global vintage’ database in october 2015. our research sample includes 885 nafta and 849 latin american manufacturing firms with sic codes between 2000-3999. our multivariate test statistics indicate that the overall financial characteristics of nafta and latin american manufacturing firms are significantly different. we find that nafta manufacturing firms are more profitable but they have greater financial risk compared with latin american manufacturing firms. nafta manufacturing firms use more financial leverage to boast their earnings on equity. latin american manufacturing firms have more efficient inventory management. however, nafta manufacturing firms have more efficient accounts receivable management and total assets management. nafta manufacturing firms are able to earn significantly higher returns on their total assets investments mainly due to their achieving significantly higher total assets turnover rates. nafta manufacturing firms have more liquidity (i.e., nafta firms are better able to meet their maturing obligations) and they achieve significantly higher sales and total assets growth rates compared with latin american manufacturing firms references altman, e. i. 1968. financial ratios, discriminant analysis, and the prediction of corporate bankruptcy. journal of finance, 23 (4): 589-609. beaver, w. h. 1968. alternative financial ratios as predictors of failure. accounting review, 43 (1): 113-122. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.102 | http://emaj.pitt.edu gulser meric, cengiz haksever, j. drew procaccino, ilhan meric emerging markets journal | p a g e |29 belkaoui, a. 1978. financial ratios as predictors of canadian takeovers. journal of business finance and accounting, 5 (1): 93-108. dambolena, i. g., and s. j. khoury. 1980. ratio stability and corporate failure. journal of finance, 35 (4): 1017-1026. deakin, e. b. 1972. a discriminant analysis of predictors of business failure. journal of accounting research, 10 (1): 167-179. edmister, r. o. 1972. an empirical test of financial ratio analysis for small business failure prediction. journal of financial and quantitative analysis, 7 (2): 1477-1493. hair, j. f., jr., r. e. anderson, r. l. tatham, and w. c. black. 1998. multivariate data analysis, 5th ed. upper saddle river, nj: prentice hall. hutchinson, p., i. meric, and g. meric. 1988. the financial characteristics of small firms which achieve quotation on the uk unlisted securities market. journal of business finance and accounting, 15 (1): 9-19. johnson, r. d., and d. w. wichern. 2007. applied multivariate statistical analysis, 6th ed. englewood cliffs, nj: prentice hall. kester, w. c. 1986. capital and ownership structure: a comparison of united states and japanese manufacturing firms. financial management, 15 (1): 5-16. marascuilo, l. a., and j. r. levin. 1983. multivariate statistics in the social sciences. monterey, california: brooks/cole publishing company. meric, g., l. kyj, c. welch, and i. meric. 2000. a comparison of the financial characteristics of japanese kieretsuaffiliated and independent firms. multinational business review, 8 (2): 26-30. meric, g., s. s. leveen, and i. meric. 1991. the financial characteristics of commercial banks involved in interstate acquisitions. financial review, 26 (1): 75-90. meric, g., and i. meric. 1992. a comparison of the financial characteristics of listed and unlisted companies. midwestern journal of business and economics, 7 (1): 19-31. meric, i., and g. meric. 1989. a comparison of the financial characteristics of u.s. and japanese manufacturing firms. financial management fm letters -, 18 (4): 9-10. meric, i., and g. meric. 1994. a comparison of the financial characteristics of united states and japanese manufacturing firms. global finance journal, 5 (1): 205-218. mertler, c. a., and r. a. vannatta. 2002. advanced and multivariate statistical methods, 2nd ed. los angeles, ca: pyrczak publishing. moyer, r. c. 1977. forecasting financial failure: a re-examination. financial management, 6 (1): 11-17. rege, u. p. 1984. accounting ratios to locate take-over targets. journal of business finance and accounting, 11 (3): 301311. stevens, d. l. 1973. financial characteristics of merged firms: a multivariate analysis. journal of financial and quantitative analysis, 8 (2): 149-158. tabachnick, b. g., and l. s. fidell. 2001. using multivariate statistics, 4th ed. needham heights, ma: allyn and bacon. wald, j. k. 1999. how firm characteristics affect capital structure: an international comparison. journal of financial research, 22 (2): 161-187. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu improved customer churn and retention decision management using operations research approach sulaimon olanrewaju adebiyi department of business administration, fountain university pmb 4491. osogbo, osun state. nigeria | lanre18april@gmail.com emmanuel olateju oyatoye department of business administration, university of lagos akoka, lagos. nigeria | eoyatoye@unilag.edu.ng bilqis bolanle amole business administration unit, distance learning institute, university of lagos p. o. box 56, akoka, university of lagos. nigeria | bamole@unilag.edu.ng abstract the relevance of operations research cannot be overemphasized, as it provides the best possible results in any given circumstance, through analysis of operations and the use of scientific method. thus, this paper explores the combination of two operations research models (analytic hierarchy process and markov chain) for solving subscribers’ churn and retention problem peculiar to most service firms. a conceptual model for unraveling the problem customer churn and retention decision management was proposed and tested with data on third level analysis of ahp for determining appropriate strategies for customer churn and retention in the nigeria telecommunication industries. a survey was conducted with 408 subscribers; the sample for the study was selected through multi-stage sampling. two analytical tools were proposed for the analysis of data. these include: expert choice/excel solver (using microsoft excel) and windows based quantitative system for business (winqsb). this paper plays important role in understanding various strategies for effective churn and retention management and the ranking of churn and retention drivers in order of importance to stakeholders` decisionmaking. the study provided a framework for understanding the application of ahp and markov chain for modeling, analysing and proffering solution to problem of churn and retention. the study recommends organizational strategies (corporate, business and functional) that reverse the churn alternatives with high priority and equally strengthen service delivery on high priority retention alternatives in order to ensure firms sustainable competitive advantage. keywords: ahp, markov chain, customer churn, retention, decisions and strategies. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.101 | http://emaj.pitt.edu | mailto:lanre18april@gmail.com mailto:eoyatoye@unilag.edu.ng http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.101 | http://emaj.pitt.edu improved customer churn and retention decision management using operations research approach page |12| emerging markets journal improved customer churn and retention decision management using operations research approach sulaimon olanrewaju adebiyi emmanuel olateju oyatoye bilqis bolanle amole 1. introduction in the submission of some marketing studies (coussement, benoit & van den poel, 2010; ngai, xiu, & chau, 2009; coussement & van den poel., 2008; berson, simith & thearling, 2000), the average churn rate for mobile operators is approximately 2% per month, which means a loss of 25% of its customer base within a year. for a customer, cancellation costs are relatively small, given the fierce competition in the market, which consists of providing similar services (in terms of price and quality) and offering discounts on handsets and various other accessories. nowadays, price is no longer a differentiator, since many telecom providers tend to equal each other’s prices. the main differentiator has become the additional services. therefore, for most of the mobile phone companies, the biggest challenge is, at the moment, switching from reactive to proactive retention; in other words, retaining customers before they take the decision to end their contract and identifying those customers with a high churn risk (slavescu, 2011). in order to maintain market share and profitability, telecom industries have used various approaches or management/marketing strategies to retain customers and prevent serious churn problems. presently, most of the strategies are based on data warehousing maintaining and managing historical and very detailed data obtained from many computing and point-of contact devices, as well as data mining techniques that enrich and transform data into meaningful information for business decisionmakers. in this spirit, a common churn management process involves constructing a churn prediction model using past churn data, and determining key variables, which influence churn. the churn model is then used to identify and classify a list of customers with potentially high risk of churn (potential churners) from existing customer data and to perform the appropriate retention activities (ngai, xiu & chau., 2009; coussement & van den poel., 2008; chu, tsai & ho., 2007; au, chen & yao., 2003; berson et al., 2000). the efficiency of a company’s combined crm and churn management strategy is measured in terms of effectively decreasing of the churn rate (or increase of the retention rate), and not only by whether it can locate a list of potential churners. in the light of this, this study focuses on building operations research models in order to identify customers with a high churn risk. it deploys data from the customers themselves (demand side), rather than database (supplier point of view) which may not reflect reality on the responsiveness of the subscribers to retention strategies of the telecom industry. this study employed the use of questionnaires and interviews to get information from subscribers`/customers` who are directly involved in the activities in the industry and therefore can provide information on what motivates their decision to churn or not to churn. such direct information from the customers on what they desire helped to predict customer that may churn. it will also help the firms to meet the desires of profitable customers in order to retain them (retention) for the survival of the telecommunication firm. the combination of two operations research models (analytic hierarchy process and markov chain) to the analysis of customers churn and retention decision is important in view of the some shortfalls, which is identified on table 2.1. however, decision trees and neural networks are the staples of advanced knowledge discovery workbenches (ibm corporation, 2010). still, some techniques, such as neural networks, can be applied to the churn problem, that are able to uncover complex patterns as regards the types of customers and their rank, based on a score, or the possibility of churning. but, as powerful as the technique is, neural networks are difficult to interpret and do not readily give up the process by which a customer has been scored. this means that, since it does not relate with customers directly in gathering the data or getting information on the motivation for churn or retention, it will not be appropriate for better understanding of why customers churn or stay (remain) with a particular network provider, which is the thrust of this study. the reason(s) are not only customers’ specific at times, but also geographical, economic, social-cultural, situational and other factors bond. decision trees, on the other hand, build very open and interpretable models that show the analyst the patterns discovered but fail to capture data from customers directly on reasons for churning or retaining network sim. it is evident from table 2.1 and the discussion that follows that this study is unique, because it proposes a combination of ahp and markov chain not only to predict customers churn and retention in nigeria mobile telecommunication industry, but also to unravel the motivation for churn or retain the sim of particular network provider. this will inform good policy and strategic decisions appropriate for stakeholders in the nigeria telecommunication industry. this will in the end engender sustainable growth of the industry, through the satisfaction of customers/subscribers demands, their profitability, as well as survival. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.101 | http://emaj.pitt.edu sulaimon olanrewaju adebiyi, emmanuel olateju oyatoye, bilqis bolanle amole emerging markets journal | p a g e |13 1. literature review 1.1. social exchange theory social exchange theory is based on the premise that human behaviour or social interaction is an exchange of activity, tangible and intangible, particularly of rewards and costs (homans, 1961). it treats the exchange of benefits, notably giving others something more valuable to them than is costly to the giver, and vice versa, as the underlying basis of human behaviour (homans, 1961) and therefore, a phenomenon which permeating all social life (coleman, 1990). not only is the market permeated by exchange, but also by the non-economic realm--the social relations situated between extremes of intimacy, self-interest or cost-benefit calculation and disinterested, as well as expressive behaviour (blau, 1964). social exchange is composed of actions of purposive actors that presuppose constellations of interests and resources. the complex of interdependent exchange processes constitutes the market functioning within a definite social and institutional structure, though; admittedly, the latter has not been systematically examined within rational choice theory. since these processes are assumed to be governed by reciprocal relations—viz. since exchange is defined as social interaction characterized by reciprocal stimuli—they would not continue in the long-run if reciprocity were violated. the concept of exchange ratio or balance-imbalance, leading to the concepts of power, dependence, and cohesion, is implied in the attribute of reciprocal reinforcements (emerson, 1969). as a consequence, exchange theory examines the processes which establishes and sustains reciprocity in social relations, or the mutual gratifications between individuals. the basic assumption of exchange theory is that individuals establish and continue social relations on the grounds that their expectations of such relations will be mutually advantageous. the initial impetus for social interaction is provided by the exchange of benefits, intrinsic and extrinsic, independently of normative obligations (blau, 1994). thus, the relationship between mobile telecommunication service providers or her agents and subscribers should be based on social exchange under ideal situation, where both parties aim at mutual advantages, but where one party gains and the other losses, this theory will be violated. creation of customers’ satisfaction has been judged as the only economic and social justification of business existence (drucker, 1973). therefore, telecommunication firms cannot exist profitably/survive without profitable customers that are satisfied with their relationship with organization. thus, in order to satisfy customers, social exchange theory must hold. 1.2. empirical studies on ahp, markov chain, customer churn and retention customer churning has been reported to result in the loss of businesses. this has perhaps accounted for why churn prediction has received much attention in the literature of marketing and management over the past years. in addition, it shows that a small change in the retention rate can result in significant impact on businesses (van den poel & larivie`re, 2004; larivie`re & van den poel, 2005). building an effective customer churn prediction model with the use of various techniques has become an issue of focus for business and academics in recent years. in order to understand how different studies have conceived their churn prediction models, this study reviews some previous studies as shown in table 2.1. table 2.1: list of related literature about customer churn author(s) data set method(s) wei & chiu, (2002) taiwan wireless telecommunications company classification (decision tree) chiang, wang, lee, & lin, (2003) network banking association rules kim & yoon, (2004) five mobile carriers in korea logistic regression van den poel & larivie‘re, (2004) european financial services company hazard model survival analysis buckinx & van den poel, 2005) retailing dataset neural networks, logistic regression burez & van den poel, (2007) pay-tv company logistic regression and markov chains random forests hung, yen & wang, (2006) wireless telecom company classification (decision tree, neural network) clustering (kmeans) coussement & van den poel, (2008) subscriber database support vector machines random forests logistic regression tsai & chen (2010). telecommunication neural networks, decisions trees, association rule apriori coussement, benoit & van den poel (2010) newspaper neural networks, decisions trees, logistics regression sharma & panigrahi (2011) cellular network services neural network based approach adebiyi, oyatoye & kuye, (2015). gsm subscribers primary data; through questionnaire fgd and interview analytic hierarchy process (ahp) adebiyi, oyatoye & amole, (2015) gsm subscribers primary data; through questionnaire, fgd and interview analytic hierarchy process (ahp) oyatoye , adebiyi & amole, (2015) gsm subscribers primary data; through questionnaire markov chain analysis adebiyi, oyatoye & mojekwu, (2015). gsm subscribers primary data; through questionnaire markov chain analysis sources: adapted from sharma and panigrahi (2011); and rodpysh, (2013). other scholar such as kolajo and adeyemo (2012) worked on data mining technique for predicting volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.101 | http://emaj.pitt.edu improved customer churn and retention decision management using operations research approach page |14| emerging markets journal customers` churn behaviour in the telecommunications industry. to achieve this, they employed both descriptive model and predictive data and extracted information on the call behaviour of subscribers in order to recognize those with high probability of churn in the future. then, the simple k-means and expected maximisation (em) clustering algorithms were used for the clustering stage, while decision stump, m5p and reptree decision tree algorithms were applied to the classification stage. in these, the best algorithms in both the clustering and classification stages were used for the prediction process where customers that were likely to churn were identified. the study concludes that the inability to distinguish the churner from non-churner has been the problem of telecommunications service provider. it also avers that, there are two alternatives; either to send incentives to all customers (both churners and nonchurners), which will be tantamount to a waste of money or to focus on acquisition programme (that is, acquisition of new customers) which is costlier than retention effort. since both alternatives have negative implication on the finance of the company, distinguishing churner from non-churner is the best approach. moreover, the ability of the telecom service to distinguish between churner and non-churner is the central idea and the achievement of this study. apart from the fact that most of the study employed the use of data mining which does not take into consideration the subscribers in answering questions on issues relating to his/her satisfaction in the modeling of churn and nonchurner, any study on customer churn that fails to seek the response of the subscribers/customers of the telecommunication firms may not actually capture the essence/reasons/motives of customer movement which may be far from those induced from the data mining process. 1.3. conceptual framework building long or short-term relationships with customers is always difficult if their needs and expectations are not understood and well met. thus, it is a fundamental precept of modern customer management that companies should understand customers, then acquire and deploy resources to ensure their satisfaction and retention. drucker (1973) observed that the sole purpose of every business is to “create customer”, not lose them to other competitors. thus, profitable customers are the essence of any business. customers have expectations of many attributes, for instance in telecommunication industry. such service attributes include quality of calls, coverage, sms, internet, bonus, tariff, customer complaint management and product quality, which were examined using conjoint analysis (oyatoye, adebiyi and amole, 2013). further, these service attributes are not likely to be of equal importance to customers` churn and retention decision. it is important to meet customer expectations on attributes that are important, if the company wants to remain in business since customers are the essence and the core the business of network providers. this study proposed a combined application of two operations research models (ahp and markov chain) to determine, assess, and prioritise the various service attributes as well as predict the customers churn and retention in the nigeria telecommunication industry. the drivers of customer churn and retention were taken from both literature and preliminary interviews granted by the users/subscribers of mobile networks in nigeria. these were presented for the respondents to make a pairwise comparison regarding the extent to which each of the driver in comparison to its pairs could motivate subscribers on churning or retention decisions. the evaluation process was able to assess if the actual service of the particular driver or attribute meets the expectation of the customer, which was used to determine customer satisfaction or dissatisfaction as the case may be. the implication of the decision taken by majority of the subscribers subsequently determines what happens to service provider/ network operators. churn decisions will bring about less revenue, less profit and referral or bad mouth, which is the cheapest advertisement for the company with negative implication. it is the cheapest, because the companies do not pay for it, yet it affects their image and reputation and ultimately reduces its market share in the long run. on the other hand, if majority of the subscribers retain the network, it will increase revenue, and profit, reduce cost of undirected market activities, increase the market share and leads to greater referral with positive implication on the firm. a consequence of this is that subscribers who retain a network will encourage others to be on the same platform without been paid directly by the telecommunication operator to do so. from the above illustration, all the complex interaction that exists in the decision of subscribers whether to switch from their current service provider by comparing the expected future benefit against the other factors or drivers ultimately determines the industry`s performance. thus, figure 2.1 shows the pictorial representation of the conceptual framework. from the foregoing reviews, empirical and theoretical framework, it has been revealed that, volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.101 | http://emaj.pitt.edu sulaimon olanrewaju adebiyi, emmanuel olateju oyatoye, bilqis bolanle amole emerging markets journal | p a g e |15 customer churn and retention are rational decisions taken by subscribers/customers based on comparative/pairwise analysis of the mobile network attributes. this relates to the decision to be taken, the situation, and circumstances which surround the decision made or what may be called decision making environment. therefore, application of operations research methodologies of ahp and markov chain process will assist stakeholders to make better decisions that will enhance growth and development of the service industry that experiences churn and retention problem. 2. research methods this study aims to examine the improved customer churn and retention decision management using operations research approach. to this end, a survey was conducted with 408 subscribers who are within the campuses of six different higher institutions of learning in lagos state, nigeria as at the time of collecting the data. lagos was chosen, because it is the economic nerve center of nigeria (commercial capital), with the highest number of gsm subscribers (adeleke and aminu, 2012), making the largest contribution to overall economy. a decision was made to conduct a survey within campuses of tertiary institutions in order to meet large number of customers (respondents) of the four major gsm companies in the selected area which includes; mtn, airtel, glo, and etisalat, who are literate and can fill the questionnaire. these operators account for over 85 percent of mobile subscriptions in the country (pyramid research, 2010). the sample for the study was selected through multi-stage sampling. two analytical tools were proposed for the analysis of data. these include: expert choice/excel solver (using microsoft excel) and windows based quantitative system for business (winqsb). excel solver was used in structuring a decision into smaller parts, proceeding from the goal to objectives and from sub-objectives to the alternative courses of action. decision-makers, then, make simple pairwise comparison judgments throughout the hierarchy to arrive at overall priorities for the alternatives. the decision problem in the study involves customer churn and drivers, factors which influence subscribers’ retention and the motivation for churn and retention in the nigeria telecommunication industry. the ahp helps people to cope with the intuitive, rational and irrational, and with risk and uncertainties in complex settings. it was used to predict likely outcomes (subscriber that are likely to churn or retain), and exercise control over changes in the decision-making system, and do cost/benefit comparisons of customer acquisition and retention. excel solver is intuitive, structured in a userfriendly mode in order to be valuable for conceptual and analytical thinkers, novices, and category experts. because the criteria are presented in a hierarchical structure, decision makers are able to specify to their level of expertise, and apply judgments, significant achievements that can help them to achieve their goals. at the end of the process, decision makers are fully cognizant of how and why decision are made, so as to achieve results which are meaningful, easy to communicate, and actionable. yilmaz (2009) concluded that, the main strength of the ahp is that, it is both methodologically sound and user-friendly. its ease of use is due to a unique combination of design characteristics. the ahp frames a decision as a hierarchy, an organisational framework many people are already familiar with and easy to explain to those who are not. all inputs consist of comparisons between just two decision elements at a time; pairwise comparisons such as these are generally considered one of the best ways to elicit judgments from people (reynolds & jolly, 1980). the output is easy to understand because it is based on simple scales derived from the pairwise comparisons. finally, there is an inbuilt measure of consistency of the judgments being made which both checks the reliability of the analysis and reduces the chance of making a procedural mistake. moreover, windows based quantitative system for business (winqsb) has 19 application modules and the user who is familiar with these models will be able to go directly to the application module and will find the use of the software self-explanatory. first order markov chain can be employed to analyze the primary data collected from the field survey (see adebiyi , oyatoye & mojekwu, 2015) who worked on the mobile phone subscribers’ preference for staying with or churning a network provider in nigeria. the mobile network providers share data, which are are static, though they may indicate a changing picture over a time period and the exact nature of changes is known. there is a general model which assumes only one-stage dependency of the events, with each event depending on that immediately preceding it, but independent of the other prior events. in other words, subscriber choices made during the period determines the probability of choices in the forth-coming period. the events are the network services provided and the possible outcomes are the four network providers. the outcomes x1, x2, . . ., xn, are called states and the number(s) pij are called the transitional probabilities. markov chain describes a system whose state changes over time. for example, as a system, mobile phone subscribers switch their preferences among the network operators over time. the changes are not completely predictable. it is not possible to predict accurately which network operator a particular subscriber will switch to in the next period, but rather are governed by certain probability distributions. these probability distributions incorporate a simple sort of dependence structure, where the conditional distribution of future states of the system, given some information about past states, depends only on the most recent piece of information (the decision to churn or retain a network depends on recent experience of the services received). that is, significant in predicting the future of the system is its present state, and not the path by which the system got to its present state. markov chains illustrate many of the important ideas of stochastic processes in an elementary setting. this classical subject is still very much alive, with important developments in both theory and applications coming at an accelerated pace in recent decades. thus, there is need for its application in modeling and predicting subscribers` churn and retention in the growing nigeria telecommunication industry. furthermore, it should be noted that the application of ahp to survey research in this study is to assist in overcoming the deficiency of traditional questionnaire volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.101 | http://emaj.pitt.edu improved customer churn and retention decision management using operations research approach page |16| emerging markets journal methods. the procedure of the ahp results is not only the identification of the most important alternative, but also the preference, weight, and priority of all alternatives for each respondent. therefore, applying ahp to survey questionnaire, elicits respondents/subscribers` opinion more precisely than that of traditional methods. this is another positive side of operations research as ahp also helps to prioritize the churn and retention drivers/factors, using a content analysis of literature and opinions of expert (customers) whose encounter the services on a daily basis. this is based on the idea that judging the relative importance of churn and retention drivers (comparing pairs of them in a hierarchical structure) is more reliable than judging their absolute importance (like in other questionnaire methods of judging items by items). the ahp procedure involves pairwise comparisons among n elements in each level lead to an approximation of each aij = wi/wj which is the ratio of the weight of element i to element j. the estimated weight vector w is found by solving the following eigenvector problem: aw = λmaxw, where the matrix a consists of aij ’s, and λmax is the principal eigenvalue of a. if there is no inconsistency between a pair of elements, then aij is equal to 1/ aij for any i and j. the result is that λmax = n and we have, aw = nw, where n is the number of elements in each row. written out more completely, this matrix equation takes the form: figure 1. matrix table to calculate the w vector (also called the eigenvector), each column of a is first normalized and then averaged over its rows. this vector is used to find the relative importance of each element. observe that since small changes in aij imply a small change in λmax, the deviation of the latter from n (the number of elements in a row) is a measure of consistency. the consistency ratio (cr) is given by (λmax-1)/(n-1), which is the variance of the error incurred in estimating the matrix a. if the inconsistency becomes more than 10%, the problems and judgments must be reinvestigated and revised (saaty, 1980). among the several advantages of ahp, we can list capability of seeking consistency in judgments, being user friendly and so on. furthermore, it affords users opportunity to structure complex problems in the form of a hierarchy or a set of integrated levels. ahp can also be combined with well-known operations research techniques to handle more difficult problems. one of the main advantages of this method is the relative ease with which it handles multiple criteria (dura’n & aguilo, 2008). in addition, ahp can handle both qualitative and quantitative data effectively. 4. results and discussion 4.1. determining appropriate retention strategies for mobile service providers in the nigerian mobile telecommunication industry the success or failure that an individual organization experiences, depends, to a large extent, on the ability of making acceptable decisions on time (sharma, 2009). thus, to arrive at such a decision, a decision maker (network provider) needs to enumerate feasible and viable courses of action (alternatives or strategies), the projection of consequences associated with each course of action and measure of effectiveness (an objective) to identify the best course of action. network operators need to retain customers and not lose them to competitor, since studies have shown that the acquisition of new customers generally comes at higher costs than keeping the existing customer base satisfied (reinartz & kumar, 2003). thus the knowledge of total weight (which are product of criteria vector priority and alternative vector priority), will be appropriate in formulating appropriate retention strategies for growth and survival in the industry. 4.1.1. computation of total weight/ global priority of each alternative for churn decision after the weight of elements at all level is computed, the weight of the whole level is then calculated. from the hierarchical structure of the ahp and its characteristics, it is clearly observed that each level in the hierarchy is independent of one another which implies that the probability multiplicative law holds. hence, pr(alternative\corresponding decision criterion) where, decision criteria and decision alternatives are independent event to one another. owing to independent relationship that exists between criteria and alternatives in ahp, the above formula holds and the total weight is presented in table 4.1. table 4. 1: customers` churn alternatives and total weight alternatives total weight frequently receiving irrelevant text 0.1087 frequently receiving irrelevant calls 0.0251 short change on service charge 0.0851 charged for services not used by operator 0.0718 easiness to port with mnp framework 0.0606 competition brought by mnp implementation 0.0367 competitors’ frequent promos 0.0491 bonuses on calls/sms/ data plan by competitors 0.0518 volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.101 | http://emaj.pitt.edu sulaimon olanrewaju adebiyi, emmanuel olateju oyatoye, bilqis bolanle amole emerging markets journal | p a g e |17 dubious promo of present operator 0.0387 difficulties in making calls / sending sms same network 0.1330 difficulties in making calls/sending sms to another network 0.0469 insufficient data with low cost 0.0505 sufficient data with high cost 0.1376 service agent non-willing to resolve customer challenges 0.0523 service agent non-response to customer complaint 0.0283 service agent being elusive 0.0210 figure 4.1. horizontal bar chart of the total weight of customers` churn alternatives the bar chart in figure 4.1 shows the total weight of customer churn. what motivates a customer to churn most is a network provider with high cost of data/internet plan. even when such plan has sufficient data for the use of customer per period, with priority value (pr = 0.1376), high cost data plan allows customers to turn to competitors. for service provider to minimize churn rate, especially for people in academic environment, there must be a sufficient data at reasonable competitive cost. another factor that customer considered to churn from a network is difficulties in making calls or sending messages to same network. it can frustrate customers who have sufficient telecom credit and send a message either by voice or text and they are told by the network provider that their message is unable to deliver due to insufficient telecom credit. next on the alternatives that customer considered in their churn decision is frequently receiving unsolicited irrelevant text messages from service providers. sometimes, this may even be unbearable if customer does not have any benefit from them. in the same vein, service providers can notify customers of new service attributes which may be irrelevant to the immediate telecommunication needs of subscribers. as such, service provider should identify the communication need of different groups of subscribers in order to meet them. other alternatives that equally drives customer churn are short-change on service charge with priority 0.0851 and this is followed by charging customer for service not used. network operator should realize that, customers are rational human beings who consider value for money and are transitive in their comparison of what they get and what they give. therefore, service providers should ensure fair and just billing system in order to minimize customer churn. other factors which influence churn decision are easiness to port with mnp framework (pr = 0.060), service agent non-willing to resolve customer challenges (pr = 0.0523) and bonuses on calls/sms/ data plan by competitors. again as rational human being, when competitors provide similar services and give bonuses on the basic needs of effective telecommunication, which is intended to stimulate sales, customer loyalty to the present network will switch to where he/she can get more benefits. the total weight continues until the least priority of service agent being elusive with pr = 0.0210. the sum of the probabilities of the total weight equals one, thereby satisfying the law of probability. 4.1.2. computation of total weight of each alternative for retention decision after the weight of elements at all level is computed, the weight of the whole level is then calculated. from the hierarchical structure of the ahp and its characteristics, it is clearly observed that each level in the hierarchy are independent of one another, which implies that the probability multiplicative law holds. thus, where, decision criteria and decision alternatives are independent events to one another. owing to independent relationship that exists between criteria and alternatives in ahp, the above formula holds and total weight for retention alternative is computed and presented in table 4.2. table 4. 2: customer retention alternatives and total weight alternatives total weight call clarity 0.1919 sufficient data with low cost 0.1496 cheapness of calls 0.1270 prompt response by customer agent 0.0821 widely spread mobile number 0.0777 frequent free internet data 0.0666 prompt delivery of complete message 0.0663 long in use number 0.0659 no calls drops 0.0343 cheapness of data plan 0.0341 cheapness of text message 0.0267 inefficient affordable data plan 0.0220 late delivery compete message 0.0194 late response but effective 0.0184 frequency free calls services 0.0131 frequency short message services 0.0131 prompt delivery of incomplete message 0.0125 volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.101 | http://emaj.pitt.edu improved customer churn and retention decision management using operations research approach page |18| emerging markets journal figure 4.2. horizontal bar chart for total weight of customers` retention alternatives from the total weight bar chart of all the retention alternatives (figure 4.2), respondents preferred call clarity most with probability value of pr = 0.1919, out of the seventeen alternatives crucial to determining customer retention of network. it is followed by sufficient data with low cost (pr = 0.1496), with cheap calls (pr = 0.1270) in the third position of alternative that drive subscribers to retaining a network provider. other alternatives and their respective probability of preference are: prompt response by customer agent in fourth position with pr =0.0821, widely spread mobile number (pr = 0.0777), prompt delivery of complete message with pr = 0.0663 closely and long in use number pr = 0.0659. the order continues until the least factor which drives customer`s retention, which is prompt delivery of incomplete message (pr = 0.0125). this means that the practice by which network provider delivers sms incomplete is the least that will make customers to be loyal. the sum of the probabilities of the total weight equals to one, thereby satisfying the law of probability. table 4.2 presents all the retention alternatives and total weight while figure 4.2 shows the bar chart presentation. overall, the appropriate retention strategies for mobile service providers in the industry through ahp analysis are organizational strategies (corporate, business and functional) that reverse the churn alternatives with high priority and equally strengthen service delivery on high priority retention alternatives as shown in figure 4.1 and 4.2 2.1. the use of markov chain analysis markov chain describes a system whose state changes over time. for example, as a system, mobile phone subscribers switch their preferences among the network operators over time. the changes are not completely predictable. it is not possible to predict accurately which network operator a particular subscriber will switch to in the next period, but rather are governed by certain probability distributions. these probability distributions incorporate a simple sort of dependence structure, where the conditional distribution of future states of the system, given some information about past states, depends only on the most recent piece of information (the decision to churn or retain a network depends on recent experience of the services received). that is, significant in predicting the future of the system is its present state, and not the path by which the system got to its present state. markov chains illustrate many of the important ideas of stochastic processes in an elementary setting. this classical subject is still very much alive, with important developments in both theory and applications coming at an accelerated pace in recent decades. thus, there is need for its application in modeling and predicting subscribers` churn and retention in the growing nigeria telecommunication industry. markov chain analysis operates under restrictive assumptions such as independence and stationarity. it is scientifically compact and easy to execute with empirical data such as survey of respondents/subscribers’ that are currently using the services of network providers (see adebiyi, oyatoye & mojekwu, 2015; oyatoye, adebiyi & amole, 2015). in addition, the customer churn/retention transition probability results can serve as an indicator of the direction and magnitude of customer churn and retention process in the nigerian telecommunication industry. markov model has several advantages. firstly, it is relatively easy to derive from succession data. secondly, the markov model does not need deep insight into the system of dynamic change. it however, can assist in specifying areas where such insight would be important and therefore act as both a stimulant and guide for further research. thirdly, the basic transition matrix summarizes the fundamental parameter of vibrant change in a way that is accomplished by very few other kinds of models. lastly, the computational requirements of markov models are self-effacing, and can easily be met by small computers package (mubea, ngigi & mundia. 2010). 3. conclusion and implication for policy the application of ahp to survey research in this study is to assist in overcoming the deficiency of traditional questionnaire methods. the procedure of the ahp results is not only the identification of the most important alternative, but also the preference, weight and priority of all alternatives for the subscribers. therefore, applying ahp to survey questionnaire, elicits respondents/subscribers` opinion more precisely than that of traditional methods. this is another positive side of operations research as ahp also helps to prioritize the churn and retention drivers/factors (see, adebiyi, oyatoye & kuye, 2015; adebiyi, oyatoye & amole, 2015), using a content analysis of literature, focus group discussion (fgd) and opinions of expert (customers) whose encounter the services on a daily basis. this was based on the idea that judging the relative importance of churn and retention drivers (comparing pairs of them in a hierarchical structure) is more reliable than judging their absolute importance (like in other questionnaire methods of judging items by items). the study provided a framework for understanding the application of ahp and markov chain for modeling, analysing and proffering solution to problem of churn and retention. thus, managers can establish performance ranking for any service firm/industry through the combined operations research models as well as identifying the service attributes that most require improvement for sustainable development of the industry. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.101 | http://emaj.pitt.edu sulaimon olanrewaju adebiyi, emmanuel olateju oyatoye, bilqis bolanle amole emerging markets journal | p a g e |19 recommendations for future research future research could replicate this study in other service industries and different countries since this study is based on data from telecommunication industry. there is need for other study to combine the two operations models in modeling, analysing and proffering solution to problem of churn and retention in the same and other business environment. this is imperative in order to offer adequate generalization to the application of operations research models to customer churn and retention problem. future research also should test this conceptual framework in order to contribute to new theory, whereby it can be referred by academics and practitioners. references adebiyi s. o., oyatoye, e. o & kuye, o. l (2015). an analytic hierarchy process analysis: application to subscriber retention decisions in the nigerian mobile telecommunications industry, international journal of management and economics, 48, 63 – 83. adebiyi s. o., oyatoye e. o & mojekwu, j. n. (2015). predicting customer churn and retention rates in nigeria's mobile telecommunication industry using markov chain modeling, acta universities sapientia economics and business, 3,74 80. adebiyi s. o., oyatoye e. o & amole, b. b. (2015). determinants of customers` churn decision in the nigeria telecommunication industry: an analytic hierarchy process approach, international journal of economic behaviour, 5, 81-104. adeleke, a & aminu s. a, (2012). the determinants of customer loyalty in nigeria’s gsm market, international journal of business and social science, 3(14), 209-222. adeleke, a & aminu s. a, (2012). the determinants of customer loyalty in nigeria’s gsm market, international journal of business and social science, 3(14), 209-222. au, w., chan, c. c. & yao, x. (2003). a novel evolutionary data mining algorithm with applications to churn prediction. ieee transactions on evolutionary computation, 7(6), 532 545. berson, a., simith s, & thearling, k., (2000). building data mining applications for crm, new york: mcgraw-hill. blau, p. (1994). structural contexts of opportunities. chicago: university of chicago press. blau, p. (1964). exchange and power in social life. new york: john wiley & sons. burez, j., & van den poel, d. (2007). crm at a pay-tv company: using analytical models to reduce customer attrition by targeted marketing for subscription services. expert systems with applications, 32(2), 277 – 288. buckinx, w., & van den poel, d. (2005). customer base analysis: partial defection of behaviourally loyal clients in a non-contractual fmcg retail setting. european journal of operational research, 164(1), 252– 268. chiang, d. a., wang, y. f., lee, s. l., & lin, c. j. (2003). goal-oriented sequential pattern for network banking churn analysis. expert systems with applications, 25, 293 – 302. chu, b. h, tsai, m. s, & ho, c. s., (2007). toward a hybrid data mining model for customer retention, knowledge based system, 20,703-718. coleman, j. s. (1990). foundations of social theory. cambridge, mass, harvard university press. coussement, k., & van den poel, d. (2008). churn prediction in subscription services: an application of support vector machines while comparing two parameter selection techniques. expert systems with applications, 34, 313– 327. coussement, k., benoit, d. f & van den poel, d (2010). improved marketing decision making in a customer churn prediction context using generalized additive models, expert systems with applications, 37, 2132 – 2143. dura’n, o., & aguilo, j. (2008). computeraided machine-tool selection based on a fuzzy-ahp approach. expert systems with applications, 34, 1787–1794. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.101 | http://emaj.pitt.edu improved customer churn and retention decision management using operations research approach page |20| emerging markets journal drucker, p. f. (1973). management: tasks, responsibilities, practices. ny: harper & row. emerson, r. (1962). power-dependence relations. american sociological review 27, 31-41. homans, g. (1961). social behaviour. new york, harcourt, brace & world. hung, s. y., yen, d. c., & wang, h. y. (2006). applying data mining to telecomm churn management. expert systems with applications, 31(3), 515 – 524. ibm corporation, (2010). working with telecommunications, minimizing churn in the telecommunications industry, united states of america. kim, h. s., & yoon, c. h. (2004). determinants of subscriber churn and customer loyalty in the korean mobile telephony market. telecommunications policy, 28, 751 – 765. kolajo, t & a. b. adeyemo (2012). data mining technique for predicting telecommunications industry customer churn using both descriptive and predictive algorithms. computing information systems & development informatics journal. 3(2). 27-34. larivie`re, b, & van den poel, d. (2005). predicting customer retention and profitability by using random forests and regression forests techniques. expert system application, 29(2), 472 484. mubea, k. w, ngigi, t. g & mundia, c. n. (2010). assessing application of markov chain analysis in predicting land cover change: a case study of nakuru municipality, jomo kenyatta university of agriculture and technology (jagst), 12(2), 126-144. ngai, e. w. t, xiu, l, & chau, d. c. k., (2009). application of data mining techniques in customer relationship management: a literature review and classification. expert system application, 36, 2592-2602. oyatoye e. o., adebiyi s. o and amole, b. b. (2015). modeling switching behaviour of nigeria global system for mobile communication multiple sims subscribers` using markov chain analysis, the indiana university press (iup) journal of operations management, 14(1), 7 31. oyatoye e.o, adebiyi s.o & amole, b. b. (2013). an empirical study on consumers’ preference for mobile telecommunication attributes in nigeria, british journal of economics, management & trade, 3(4), 419 428. pyramid research (2010). the impact of mobile services in nigeria: how mobile technologies are transforming economic and social activities; abuja, nigeria. reinartz, w.j. kumar, v. (2003). the impact of customer relationship characteristics on profitable lifetime duration, journal of marketing, 67(1), 77 99. reynolds, t. & jolly, j. (1980). measuring personal values: an evaluation of alternative methods. journal marketing science, 17, 531–536. rodpysh, k. v. (2013). applying data mining to customer churn analysis: a case study on the insurance industry of iran, open journal of artificial intelligence, 1(1), 8-12. saaty, t. l. (1980). the analytic hierarchy process, mcgrawhill, new york. sharma. a & panigrahi, p. k. (2011). a neural network based approach for predicting customer churn in cellular network services, international journal of computer applications, 27(11), 56-89. sharma j. k. (2009). operations research; theory and applications, third edition, indian macmillan ltd. slăvescu e o, (2011). the implementation of uplift modeling to telecommunications marketing campaigns. the case of the romanian mobile telecommunications market. proceedings of the 7th international conference management of technological changes, alexandroupolis, greece, 2011. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.101 | http://emaj.pitt.edu sulaimon olanrewaju adebiyi, emmanuel olateju oyatoye, bilqis bolanle amole emerging markets journal | p a g e |21 tsai, c. f. & chen, m. y. (2010). variable selection by association rules for customer churn prediction of multimedia on demand, expert systems with applications, 37, 2006 – 2015. van den poel, d. & lariviere, b. (2004). customer attrition analysis for financial services using proportional hazard models. european journal of operational research, 157, 196 217. wei, c. p., & chiu, i. t. (2002). turning telecommunications call details to churn prediction: a data mining approach. expert systems with applications, 23, 103 – 112. yilmaz, h. (2009). “optimization of the product design through quality function deployment (qfd) and analytical hierarchy process (ahp): a case study in a ceramic washbasin”, thesis submitted to the graduate school of engineering and sciences of izmir institute of technology in partial fulfillment of the requirements for the degree of master of science. emerging markets journal corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach dr. wided khiari universitaire de jendouba (jendouba university) | e-mail: khiariwided@yahoo.fr abstract this study aims to establish a typology of tunisian listed firms according to their corporate governance characteristics and disclosure quality. the paper uses disclosed scores to examine corporate governance practices of tunisian listed firms. a content analysis of 46 tunisian listed firms from 2001 to 2010 has been carried out and a disclosure index developed to determine the level of disclosure of the companies. the disclosure quality is appreciated through the quantity and also through the nature (type) of information disclosed. applying the decision tree method, the obtained tree diagrams provide ways to know the characteristics of a particular firm regardless of its level of disclosure. obtained results show that the characteristics of corporate governance to achieve good quality of disclosure are not unique for all firms. these structures are not necessarily all of the recommendations of best practices, but converge towards the best combination. indeed, in practice, there are companies which have a good quality of disclosure but are not well governed. however, we hope that by improving their governance system their level of disclosure may be better. these findings show, in a general way, a convergence towards the standards of corporate governance with a few exceptions related to the specificity of tunisian listed firms and show the need for the adoption of a code for each context. these findings shed the light on corporate governance features that enhance incentives for good disclosure. it allows identifying, for each firm and in any date, corporate governance determinants of disclosure quality. more specifially, and all being equal,obtained tree makes a rule of decision for the company to know the level of disclosure based on certain characteristics of the governance strategy adopted by the latter. keywords: corporate governance, disclosure, decision tree new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu | http://emaj.pitt.edu mailto:khiariwided@yahoo.fr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://emaj.pitt.edu/ dr. wided khiari p a g e | 46| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach dr. wided khiari 1.introduction the financial scandals have drawn the attention of regulators and policymakers, especially in the developing markets (s&p, 2008; mulili and wong, 2011; feleaga, n. and al., 2011; shanikat and abbadi, 2011 and erkens and hung, 2012). disclosure and transparency are considered as an important component and one of the main indicators of an effective corporate governance structure. indeed, according to mangena & tauringana (2007) the issue of corporate governance was long ignored in developing countries. also, many studies tried to examine the effect of one or several corporate governance mechanisms on disclosure quality (ho and wong, 2001; chau and gray, 2002; bushee and noe, 2001; chen and jaggi’s, 2000 and wong, 2001). this paper aims to contribute to the literature on corporate governance by providing taxonomy of tunisian listed firms according to corporate governance characteristics and disclosure quality using a new approach based on the decision tree method. in other words, we try to explain differences in disclosure quality of tunisian listed firms using various attributes of corporate governance. the disclosure quality is appreciated through the quantity and also through the nature (type) of information disclosed. corporate governance attributes used in this study consists of ownership structure, board of directors and audit committees. indeed, it is to show that the quality of disclosure is related to a corporate governance structure specific to each type of firm. to do this, we will start by constructing an index of disclosure, for each category of information disclosed, which translated for each company, the scope of the quality of disclosure from a target company that discloses all information. in other words, we will explain the results based on the importance of the information disclosed on the market. indeed, financial, forecasting or nonfinancial information certainly has a larger value for investors than a general or relating to executive information. thus, we will consolidate the information disclosed in two types: important information (combining financial, forecasting and non financial information), which can reflect the health and the situation of the company in question and information of average importance (it means general or relating to the management and shareholders information). in other words, we interpret the scope of the quality of disclosure for a company based on the degree of importance of the information disclosed. specifically, we will identify characteristics of governance to improve the quality of disclosure for each type of information, but we will concentrate volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach emerging markets journal | p a g e | 47 mainly on the information of high importance. thus, we try to verify the existence of a convergence between the recommendations on corporate governance and the quality of disclosure. so, following this logic, a company that has a good system of governance, and which adopts recommendations for governance has to disclose financial, forecast and non financial information (i.e. of high importance). then, we use a decision tree model to analyze the profile of groups of companies in terms of corporate governance. in other words, we will try to build a decision tree to understand the characteristics of a particular firm regardless of its level of disclosure. more specifically, and all being equal, we will try to establish a decision rule, which allows to any firm to know its level of disclosure using corporate governance strategy adopted by the latter. the reminder of this paper is organized as follows. the second section presents the information disclosure in the tunisian context. section three provides a description of the sample, variables measurement and empirical model and results. section four presents results. the last section is reserved to the conclusion. 2.information disclosure in the tunisian context transparency and disclosure have gained increased importance by many researchers, which attribute the problem to great weakness in corporate governance and this was considered a contributing factor to broader systematic problems in emerging markets (standard & poor’s, 2008). previous research has been made mainly in the usa where investors are relatively highly protected. tunisian context is worth to study because it presents much specificity. the aim of this paper is to identify the correspondence between the quality of disclosure and characteristics of corporate governance of tunisian listed firms, in order to establish taxonomy of tunisian listed firms according to their disclosure quality level and corporate governance features. in the tunisian context several laws define and regulate the mandatory information, in order to provide to all investors transparency and an equal level of information. these regulations are listed in several legal sources which are: the companies accounting system; the commercial companies’ code; act no. 1994 117 of november 14th, 1994; order of chartered accountants of tunis; law n ° 2005-96 of october 18th, 2005. the accounting system :the accounting system defined the set of principles and rules used to the establishment and presentation of the accounting documents. it aims to reduce the uncertainty of its users as well regarding the knowledge of the past than predicting the future. according to the accounting act, each company must prepare and submit financial statements no later than three months following the closing date of the fiscal year. the financial statements are formed by a whole structure whose elements (balance, the result state, the state of dr. wided khiari p a g e | 48| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu cash flows and the notes to the financial statements) are inter-related. the commercial companies’ code: it includes a set of laws and obligations, to comply with financial information. indeed, according to article 128 of the code of commercial companies (ccc), the annual ordinary general assembly must be held within three months from the closing of exercise and twenty days at least before the general assembly which is the approval management accounts. in addition, under article 201 of the ccc board of directors must establish, at the close of each fiscal year, under his responsibility the financial statements of the company in accordance with the accounting system of the companies act. act no. 1994 117 of november 14th, 1994 relating to the reorganization of the financial market, it presents in the title i the different procedures for information and publications required by the regulations in force in the tunisian stock market. indeed, according to this law, each undertaking using public savings has to put at the disposal of the board of the financial market (bfm) and the stock exchange securities of tunis (sest) a number of documents no later than 4 business days after the holding of the general meeting. in addition, it must publish a prospectus for the information of the public and its conditions of preparations. moreover, companies admitted to the side of the stock exchange are required to provide to the bfm and the sest an interim states established under the responsibility of the board of directors no later than one month after the end of each semester ran from the exercise. the order of accounting experts in tunisia sets the statements as being "accounting documents established, in principle, each year and usually are the subject of communication to three parts (shareholders, bankers and tax administrators). law no 2005-96 of october 18th, 2005 on strengthening the security of financial relations includes provisions for strengthening the transparency of financial transactions, in compliance with the rules of financial disclosure for all forms of companies and given their size, their commitments and their activities. the distinction between the obligations borne by corporations for securing the information they disclose is no longer, now linked to the public call for savings only. this fundamental change is based essentially on the principle that financial transparency is a vital condition in transactions and an overarching principle between the company and its environment with all its components including shareholders, lenders, clients, suppliers and the listeners. 3.materials and methods the main goal of our approach was to provide taxonomy of tunisian listed firms basing on the relation between corporate governance features and disclosure quality . 3.1.sample selection data were collected on companies listed on the tunisian stock exchange, using content analysis; the sample consisted of 46 tunisian listed firms from 2001 to 2010. volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach emerging markets journal | p a g e | 49 3.2.measurement of corporate governance variables corporate governance is approached by a set of variables related to the ownership structure, board of directors and audit committees. the table 1 below summarizes definition and measurement of the different variables of corporate governance used in this study: table i – definitions and measurements of corporate governance variables owner ship structure fam family ownership : percentage of ownership held by family con cp ownership conce ntration : percentage of ownership held by majority shareholders (more than 5%) eta pr state ownership: percentage of ownership held by the state inst pr institutional ownership : percentage of ownership held by institutional adm pr directors ownership : percentage of ownership held by directors pm dg manageial ownership : percentage of ownership held by managers audit commit ee ca dt existence of an audit committee : a binary variable equal to 1 if the there is an audit committee and 0 if not big4 a binary variable equal to 1 if the audit committee is a big4 one and 0 if not 3.3.disclosure index construction the study uses 42 attributes or items in all to measure extent of disclosure in tunisia. this attributes have been compiled by botosan (1997).and used by many previous studies on disclosure. using an objective methodology, annual reports are analyzed for common disclosure items grouped into five sub-categories (s-c): variables variables definitions and measurements board of directors tailco the board size: number of directors in the board admext the percentage of outsiders in the board: number of outsiders/ total number of directors in the board dual duality:a binary variable equal to 1 if the manager is member in the board and 0 if not. mandad director mandatory: number of years as a member of the board of directors mandma manager mandatory: number of years as a member of the board of directors. ropdg ceo turnover a binary variable equal to 1 if the manager is was replaced and 0 if not. dr. wided khiari p a g e | 50| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu s-c1 general information on the company; s-c 2 information on the direction and shareholders; s-c 3 non financial information; s-c 4 forecasting information; s-c 5 financial information. the table 2 gives an example of items relative to the first sub-category, items relative to the general information on the company: table ii – example of items relative to the sub-category 1 of the evaluation grid i items s-c (1) : gen eral informat ion on the company s it u at io n e vo lu ti on c om m en ts g ra p hi cs i item1 historic and presentati on of the company (legal form, capital, creation date, organizat ion chart,…) i i item2 presentati on of the company objective s item3 presentati on of the general strategy of the company no item4 presentati on of the economic environm ent of the company sector and its impact item5 actions taken by the company to achieve its objective s no item6 descripti on of the main features associate d with the company market no volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach emerging markets journal | p a g e | 51 item7 data on company info. sys. no no criteria (situation, graphics, comments and variation), the use of non linear principle components analysis (nlpca) is an important step, which allows to identify, for each item, a combination of factors built on the basis of correlations between the different criteria of each item. situation : that is to say, presenting basic information without any details (amount, values). comments : presentation of information, explanation and analysis by management. graphics : in cases where the item would be presented as a histogram or other graph. evolution : presentation of the evolution of the item on a period > or = 3 years. for each sub-category and for each company, a disclosure score is developed from a binary evaluation of the number of items present in their annual reports: if a company discloses a particular attribute, a score of 1 is awarded and if not a score of 0 is awarded. a similar approach has been adopted by previous studies on disclosure and corporate governance such as pateonel and al., (2002) and tsamenyi and al. (2007). the second step consists on locating the position of each company relative to a target one (a company which is considered as a reference).thus, we proceed by insertion of an additional observation: a fictitious company (for reference) that discloses all information and which will be used as a reference for the companies of the sample. indeed, as shown in table 2, each item is evaluated according to four the application of the nlpca to the different items of each sub-category allows identifying, for each company (the companies of the sample and the reference company) its co-ordinates from the different axes identified for each item as below:                                 k 2 k 1 2 2 2 1 1 2 1 1 i x x . .. . . . x x x x f                                 k 2 k 1 2 2 2 1 1 2 1 1 r y y . .. . . . y y y y f where; k is the number of items of the evaluation grid fi represents coordinates of the company i on different axes, i = 1,..., 46; dr. wided khiari p a g e | 52| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu fr represents coordinates of the reference company on the various axes. k 1x and k 2x represent coordinates of each firm relating to the item k, k = 1,…..,42; k 1y et k 2y represent coordinates of the reference company relating to the item k. the table 3 below presents results of the nlpca applied to the first three items of the first sub-category: table iii – results of the nlpca applied to the first sub category i items s-c (1) : general information on the company axes x 1 x 2 i item1 historic and presentation of the company (situation) 0 .641 historic and presentation of the company (evolution) 0 .776 historic and presentation of the company (comments) 0 .449 historic and presentation of the company (graphic) 0 .658 proper values 1 .864 1 .106 % of the variances explained by the factor 4 6.597 2 7.644 total variance 74.242 i item2 presentation of the company objectives (situation) 0 .774 presentation of the company objectives (evolution) 0 .673 presentation of the company objectives (comments) 0 .769 presentation of the company objectives (graphic) 0 .699 proper values 1 .692 1 .338 % of variances explained by the factor 4 2.294 3 3.459 total variance 75.753 i item3 presentation of the general strategy of the company (situation) 0 .924 presentation of the general strategy of the company (evolution) 0 .992 presentation of the general strategy of the company (comments) 0 .918 proper values 1 .713 0 .997 % of variances explained by the factor 5 7.087 3 3.221 total variance 90.308 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach emerging markets journal | p a g e | 53 the next step consists on computing a disclosure index for each sub-category of the grid. so, for each sub-category, the extent of the disclosure of the firm i is measured by the euclidean, distance which is the root of the sum of the squares of the differences of the coordinates of the firm in question and the firm of reference. indeed, the objective here is to describe the proximities between the sample companies and the reference company, which discloses all information and which is considered as a referential for disclosure: more the distance that separates the company i of the company of reference is high and more the company is qualified as a company which has a bad policy of disclosure policy. the formula for calculating these distances is then as follows: 2/17 1 2 22 2 11 ])()([),(tan    k kkkk ri xyxyffcejdis where j is the number of distance calculated; j = 1, 2,...5 this work has allowed to calculate, for each company, five distances or indexes measuring the extent of the disclosure quality:  an index that reflects the quality of disclosure on general information noted index1;  an index that reflects the quality of disclosure information about direction and shareholders noted index2;  an index that reflects the quality of disclosure about non financial information noted index3;  an index that reflects the quality of disclosure about forecast information noted index4;  an index which reflects the quality of disclosure about financial information noted index5; results of indexes computation are given by the table 4 below: table iv distribution of disclosure indexes index 1 index 2 index 3 index 4 index 5 minimum 3.35 3.9 5.7 5.68 3.07 maximum 4.43 4.71 6.6 3.67 4.28 mean 4.07 4.21 6.28 3.20 3.81 standard deviation 0.23 0.21 0.19 0.26 0.28 4. results and discussion in this part, we’ll try to establish connections between scores of information disclosure and governance characteristics of tunisian listed firms. in other words, the object is to divide firms of the sample into subgroups according to values of the variables of governance which, at each stage, discriminates the best variable to model, dr. wided khiari p a g e | 54| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu i.e. the quality of disclosure. to do this, we will use a decision tree model to analyze the profile of groups of companies in terms of corporate governance characteristics, allowing to improve the disclosure quality. in this step, for each type of information disclosed, we started by dividing the companies of the sample based on the distribution of scores of disclosure obtained. this operation conduct to three classes reflecting the extent of the disclosure quality (good, average, bad). the class characterized by a high quality of disclosure is composed by companies with the lowest scores (i.e. less than 33rd percentile). the class characterized by a an average quality of disclosure is composed by firms with scores between the 33rd percentile and the 66th percentile. class characterized by poor quality of disclosure is composed by companies with the highest scores (i.e. higher than 66th percentile). the classification of firms following scores of information disclosure led therefore to a structure formed of three classes for all types of disclosed information except for non-financial information. for this type of information we have considered two classes: the class composed by firms with scores lower than the median is considered as the class of good disclosure quality. however, the class of the firms with scores higher than the median is considered as the class of poor disclosure quality (see figure 1) figure i. distribution of the firms of the sample according to the disclosure scores the next step consists to build a decision tree for each type of information disclosed to identify the characteristics of corporate governance leading to the good quality of disclosure. having constructed the decision trees, we will extract, from each tree, the leaves with the highest percentage of observations with the quality of disclosure as shown in figures 2, 3, 4, 5 and 6. then, for every sheet we will determine its corporate governance characteristics. 4.1.decision trees: disclosure quality explained by corporate governance features volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach emerging markets journal | p a g e | 55 the decisions trees obtained show that the sector variable is the best independent variable of the quality of disclosure for all types of disclosed information: figure iii – decision tree : information on the direction and shareholders for the companies of the financial sector, the variable that allows better discrimination for the general information and on management and shareholders is the existence or not of an audit committee in the companies (see figures 2 and 3). figure ii – decision tree: general information on the company dr. wided khiari p a g e | 56| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu if companies have an audit committee, the ownership concentration is the following independent variable. where this percentage is low, the model includes a different additional independent variable for each type of information: the percentage held by families for information on management and shareholders and the percentage held by administrators for the general information. however, if this percentage is high, the duality is the discrimination variable for the quality of disclosure of information on the direction. however, for firms belonging to the non-financial sector, independent variables are completely different. for general information, the best variable is the percentage held by institutional. for companies where the presence of institutional is not significant, the variable that provides the best discrimination is the size of the board of directors. similarly, if the size is not important, the percentage held by families remains the best following independent variable. for information relative to the board of directors, the best variable is the state ownership. if this part is high, the family ownership is the following independent variable, followed by the existence of a big 4 audit committee in the firm. for companies of the financial sector, the concentration of ownership is the independent variable which allows better discrimination on financial and non-financial information (see figures 4 and 6) figure iv – decision tree: non financial information volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach emerging markets journal | p a g e | 57 figure vi – decision tree: financial information where this percentage is high, another independent variable will be included: the institutional property. finally, if the latter is low, the following variable is the property of administrators. however, for the nonfinancial sector companies, the variables of discrimination are totally different. indeed, for the non-financial information, the most important variable is the percentage of outside directors in the board of directors, followed by the share held by the families. for financial information, the best independent variables are the percentage held by families and the concentration of ownership. if the latter is high, the model includes an additional variable which is the size of the council. where the size is small, the following variable is the use of one of the large audit firms. the last type is the forecast information. corporate governance variables that explain the good quality of disclosure of such information are totally different (see figure 5). figure v – decision tree: forecasting information dr. wided khiari p a g e | 58| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu indeed, for companies of the financial sector, the best variable which allows better discrimination is the percentage of outsiders in the board of directors followed by the size of the board of directors. however, for companies belonging to the nonfinancial sector, the best independent variable is the size of the board followed by concentration of ownership. if the latter is high, the managerial ownership is the following variable; otherwise it is the percentage of outsiders in the board of directors. finally, if the managerial ownership is low the pattern includes another variable that is the percentage of outside directors in the council. 4.2.taxonomy of tunisian listed firms as shown above structures provided by the decision trees provide ways to build groups to identify optimal combinations of characteristics of corporate governance to achieve good quality of disclosure. indeed, the use of this method is justified by the fact that firms differ, and each company has its specificities. thus, we cannot talk about an optimal corporate governance structure for all firms and even for those belonging to the same activity sector. in what follows, we will try to make sense of the different results depending on the type of information disclosed. indeed, we were able to get 23 groups where the contribution of corporate governance characteristics in the improvement of the quality of disclosure differs. distribution and combinations of the corporate governance characteristics of each group are given by the table 5. table v taxonomy of tunisian listed firms according to the corporate governance features and disclosure quality nature of the information disclosed groups corporate governance features s-c 1 – good disclosure quality of general information on the company group 1 financial sector, no audit committee, low ownership concentration. group 2 financial sector, existence of an audit committee, high ownership concentration group 3 financial sector, existence of an audit committee, low ownership concentration, low directors ownership. group 4 non financial sector, low institutional ownership, big size of board of directors group 5 non financial sector, low institutional ownership, small size of board of directors, average family property volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach emerging markets journal | p a g e | 59 group 6 non financial sector, high institutional property. s-c 2 – good disclosure quality of information on the direction and shareholders group 1 financial sector, no audit committee, audit committee belong to a big4 group 2 financial sector, existence of an audit committee, low ownership concentration, high family property. group 3 financial sector, existence of an audit committee, high ownership concentration, duality. group 4 non financial sector, high state property, high family property, high institutional property, audit committee is not a big4 group 5 non financial sector, high state property, low family property. s-c 3 – good disclosure quality of non financial group1 financial sector, low ownership concentration. information group 2 financial sector, high concentration, low institutional property, low property of directors. group 3 financial sector, high concentration, high institutional property group 4 non financial sector, low percentage of outsiders in the board, high family property, group 5 non financial sector, an average percentage of outsiders in the board, low family property s-c 4 – good disclosure quality of forecasting information group 1 financial sector, high percentage of outsiders in the board, small size of the board. group 2 non financial sector, big size of the board, high concentration, low managerial property, low dr. wided khiari p a g e | 60| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu percentage of outsiders in the board. group 3 non financial sector, big size of the board, high ownership concentration, high managerial property. group 4 non financial sector, big size of the board, low ownership concentration, low percentage of outsiders in the board. s-c 5 – good disclosure quality of financial information group 1 financial sector, low concentration group 2 non financial sector, low family property, high concentration, small size of the board, audit committee is a big4. group 3 non financial sector, low family property, high concentration. s c 1 general information. groups 1, 2 and 3 include companies of the financial sector. g1 is the group with a low ownership concentration but with no audit committee. this result is explained by the fact that in firms with dispersed ownership interest conflicts are more important than in firms with concentrated ownership. in addition, these companies have no way of internal control, to reduce these conflicts and to ensure that their interests are optimized, some shareholders require leaders to disclose more information. therefore, the disclosure of information is likely to be more intensive in this type of firms. indeed, disclosure can go up to present the information of medium importance to investors. g2 and g3 are characterized by the existence of an audit committee but different levels of concentration. for the group 3 with a low concentration of ownership, to the share held by administrators has not to be important. in fact, where the ownership is concentrated, the quality of disclosure is more complicated. conflicts of interest are no longer between managers and shareholders but between the majority shareholders and minority shareholders (ho and wong, 2001). in such situations, leaders are encouraged to behave against the interests of the minority in retaining information on the firm. similarly, archambault and archambault (2003) have advanced that investors are regarded as the main beneficiaries of the strategy of information disclosure. however, investors who hold a high percentage of the shares that constitute the capital of the company have the advantage of information directly from the company. therefore the need for disclosure may decrease, where the existence of a committee at the breast of this type of firms remains necessary to resolve such problems. the characteristics of group 2 show that in companies with a strong concentration of ownership, an audit committee allows to achieve a good quality of information disclosure. however, since major carriers get the volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach emerging markets journal | p a g e | 61 information directly from the company, the type of information disclosed is not of considerable importance. group 3 is distinguished from other groups by an additional characteristic which is a small proportion owned by administrators. in fact, due to the concentration of property conflicts can be resolved by the existence of an audit committee, but if administrators property is high, the latter being closest to the company, can reduce the information disclosed to investors, so for this group administrators ownership is low. groups 4, 5 and 6 is composed by firms belonging to the non-financial sector. g6 is characterized by a high institutional property. this result can be explained by the fact that the institutional have become key players in governance structures, they may therefore compel the leaders to perform frequent disclosures. (elgazzar, 1998 and bushe and noah, 2001). also, institutional investors are considered as the most demanding of a regular and timely published financial information. however, where this share is low (g4 and g5), other characteristics of governance are involved. g4 is characterized by a large size of the board of directors. this is explained by the fact that the presence of administrators in the council is likely to control the actions of the leaders in the institutional property is low, and encourage him to disclose more. in fact, some authors assume that the size is small increase more chances of manipulation on the part of the leaders, however a large council may have more expertise and managerial opportunism. however, a council of small size can be effective in cases where a part of the property of the company is owned by families. these are generally reluctant in their communication of information and consider the company as a family business, where outsiders have no right to access to information. in this case, over the board of directors is of reduced size more effective will be the control of managerial expediency and thus companies will be more encouraged to announce more information (chen and jaggi, 2000 and mak and li, 2001) (see figure 7) figure vii – firms taxonomy according to governance and good disclosure quality of general information on the company s c 2 information on the direction and shareholders. groups 1, 2 and 3 includes financial firms. g1 is the group composed by firms that does not have internal audit committee, and so to limit the opportunistic behavior of their managers, companies in this group tend to have a big 4 external audit dr. wided khiari p a g e | 62| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu committee. they are more likely to encourage leaders to disclose as much information to protect their reputation. g2 and g3 are characterized by the existence of an audit committee. however, g2 has a low concentration and incorporates another governance characteristic that is a significant presence of families. such situation is characterized by a significant presence of families led to a reluctance to disclose information outsiders. thus, the existence of a committee within the company and a low concentration of ownership may be a good way of reducing information asymmetry between insiders and outsiders, especially because the information disclosed has not a considerable importance for investors. g3 is characterized by a high concentration of ownership and combine the functions of management and control. because the information is not of high importance in a situation where both roles of ceo and chairman of directors board may harm the independence of the board and increase conflicts of agency within the business and therefore the quality of the information disclosed is no longer credible (gul and leung, 2004) and where the high concentration of ownership is likely to create conflicts between majority and minority shareholders, the existence of an audit committee can be a good incentive to disclose information about the management and shareholders. groups 4 and 5 include nonfinancial companies. g4 is characterized by a high family ownership which is likely to limit the information disclosed. however, this problem is solved by the intervention of the state and institutional who hold a significant part of the property and the use of large firms audit. in addition, companies that form the group 5 have a small family-owned and high state-owned, which is already justified by previous studies (see figure8) figure viii – firms taxonomy according to governance and good disclosure quality of information on the direction and shareholders s c 3-non financial information. firms of groups 1, 2 and 3 belong to the financial sector. g1 has a single characteristic of governance which is likely to improve the quality of disclosure of non-financial information: a low concentration of ownership, which is justified by the literature. the two groups 2 and 3 are characterized by a a high concentration of ownership. problems of interest between majority and minority shareholders related to this concentration are accompanied in group 3 with a strong institutional presence volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach emerging markets journal | p a g e | 63 which is likely to enhance the disclosure of non-financial information. group 4 differs from group 3 by a low institutional and administrators. in groups 4 and 5 we find are the nonfinancial firms. the attributes of these two groups are similar, but the level of family ownership and the number of outside directors in the board are different. group 4 is characterized by a low number of outside directors, but a high family ownership, while group 5 is composed of firms whose board is formed by a percentage of external medium and low family ownership (see figure 9). s c 4 forecasting information. group 1 is formed by companies in the financial sector. characteristics of corporate governance tend to improve the quality of disclosure looking for this type of business are related only to the composition of the board of administration. in fact, this group is characterized by a small board dominated by outside. this result was suggested by jensen (1993), who stated that a board filled effectively its supervisory board is composed mainly by small external directors. according to the agency theory in the presence of external counseling helps reduce agency problems, and subsequently, the information asymmetries due to their independence and objectivity. figure ix – firms taxonomy according to governance and good disclosure quality of non financial information groups 2 and 3 have the same attributes for membership industry, board size and the degree of concentration of ownership. in fact, they are formed by the non-financial sector businesses with highly concentrated ownership and whose board of directors is composed of a large number of administrators. however, they differ in the percentage held by the manager. g3 is the group with high managerial ownership. this result can be explained by the fact that managerial ownership reduces agency problems and managerial opportunism arising from the separation of ownership and control. therefore, owner-managers will no longer retain dr. wided khiari p a g e | 64| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu information and can improve the quality of disclosure. g2 is characterized by a low percentage of outside directors. this deficiency is corrected by a low managerial ownership. according to gelb (2000) companies whose leaders hold a small proportion of capital better meet the informational needs of investors and those whose participation is important. in fact, when leaders do have a small percentage of equity, the increase in value due to good communication is the risk of loss of human capital tied to their employment and various benefits attached thereto. the group is composed of four companies belonging to the nonfinancial sector, with a large board formed by a small number of outside directors. however, this group is characterized by a low concentration of ownership that is likely to improve the quality of disclosure (see figure 10). figure x – firms taxonomy according to governance and good disclosure quality of the forecasting information s c 5 financial information. group 1 consists of firms in the financial sector with a low concentration of ownership. this group has the same characteristics as the first group of companies with a good quality of disclosure of non-financial information. this result is partly explained in the literature that firms with a low concentration tend to have a more extensive disclosure. on the other hand, it shows that firms in the financial sector with a low concentration tend to insist on disclosure of non-financial and financial. groups 2 and 3 is that nonfinancial firms characterized by low family ownership and a high concentration of ownership. however, they are distinguished by the size of the board. for companies where the board has a reduced size, the use of a large audit firms is an important feature in improving the quality of disclosure of financial nature (see figure 11). figure xi – firms taxonomy according to governance and good disclosure quality of the financial information volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach emerging markets journal | p a g e | 65 5.conclusion this study aims to use correspondence between corporate governance characteristics and disclosure quality in order to establish taxonomy of tunisian listed firms using a new approach based on the decision tree method, and to show that good quality of disclosure is related to a governance structure specific to each firm. to do this, we started by constructing an index allowing to assess the extent of the quality of disclosure in annual reports for tunisian listed firms. indeed, the disclosure quality is appreciated through the quantity and also through the nature (type) of information disclosed. this idea is explained by the fact that an overall score of disclosure may not reflect the actual strategy of disclosure of the company in question. a firm may have a good score of disclosure but the disclosed information is not important for investors. this work has enabled us to calculate, for each company, five indexes measuring the extent of the quality of disclosure by type of information disclosed in the next step, we tried to relate scores of information disclosure to corporate governance characteristics of tunisian listed firms. tree diagrams obtained provide the means to know the characteristics of a particular firm regardless of its level of disclosure. they enable to identify corporate governance factors of its quality of disclosure for any types of information for each company, and in any date. more specifically and everything being equal, this tree makes a decision rule that allows the company to know its level of disclosure based on certain characteristics of the strategy of governance adopted by the latter. add that we were able to identify several groups reflecting a difference in the structures of governance but whose objective is the same: improving the disclosure quality. these results show that the characteristics of corporate governance to achieve the high quality of disclosure are not unique for all businesses. indeed, although there are governance standards that should be adopted by firms, they may not be respected all at once. in other words, a company can, for example, have a large board of directors (which is not recommended by most of the codes of best practices), but can have a good quality of disclosure. this shows the complementarities of governance characteristics: governance is a brand, a set of practices that it is impossible to ungroup them. therefore, it is more interested to treat these mechanisms together and to identify for each firm a corporate governance target structure, related to a good quality of disclosure. these structures are not necessarily all good practice recommendations, but converge towards the best combination. indeed, in practice, there are companies that have a good quality of disclosure but that are not well-governed. however, we can estimate that by improving their system of governance their level of disclosure may be best. dr. wided khiari p a g e | 66| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu these results show, in a general way, a convergence towards the standards of corporate governance with a few exceptions that are not such as to call in question the corporate governance best practices, but to show the specificity of tunisian listed firms and show the need for the adoption of a code for each context. volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu corporate governance and disclosure quality: taxonomy of tunisian listed firms using the decision tree method based approach emerging markets journal | p a g e | 67 references archambault, j.j. & archambault, m.e. (2003), “a multinational test of determinants of corporate disclosure”, the international journal of accounting, vol. 38 n. 2, pp 173-194. bushee, b., & noe, c.( 2000), “corporate disclosure practices, institutional investors, and stock return volatility”, journal of accounting research, vol. 38, pp 171-202. chau, g.k. & gray, s.j. (2002), “ownership structure and corporate voluntary disclosure in hong kong and singapore”, the international journal of accounting, vol. 37, pp 247 – 265. chen, c.j.p. and jaggi, b. (2000), “association between independent non executive directors ,family control and financial disclosure in hong kong”, journal of accounting and public policy, vol. 19, pp 285-310. el-gazzar, s.m. (1998), “predisclosure information and institutional ownership: a crosssectional examination of market revaluations during earnings announcement periods”, the accounting review, vol. 73 n. 1, pp 119–129. erkens, d.h. and al. (2012), “corporate governance in the recent financial crisis: evidence from financial institutions worldwide”, journal of corporate finance, vol. 18, pp 389-411. feleaga, n. and al. (2011), “corporate governance in emerging economies: the case of romania”, theoretical and applied economics, vol. 8 n. 9, pp 5-16. gelb, d.s. (2000), “managerial ownership and accounting disclosure: an empirical study”, review of quantitative finance and accounting, vol. 15 n. 2, pp 169-185. gul, f.a. & leung, s. (2004), “board leadership, outside directors’ expertise and voluntary corporate disclosures”, journal of accounting and public policy, vol. 23, pp 351 – 379. ho, s.s.m. & wong, k.s.(2001), “a study of the relationship between corporate governance structures and the extent of voluntary disclosure”, journal of international accounting, auditing and taxation, vol. 10, pp.139-156. jensen, m.c. (1993), “the modern industrial revolution, exit and the failure of internal control systems”, journal of finance, vol. 48, pp 831– 880. mak, y.t. & li, y. (2001), “determinants of corporate ownership and board structure: evidence from singapore”, journal of corporate finance, vol. 7 n. 3, pp 235-256. dr. wided khiari p a g e | 68| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.33 | http://emaj.pitt.edu mangena, m., & tauringana, v. (2007), “disclosure, corporate governance and foreign share ownership on the zimbabwe stock exchange”, journal of international financial management and accounting, vol. 18 n. 2, pp 53-85. mulili, b. m. &wong, p. (2011), “corporate governance practices in developing countries: the case for kenya”, international journal of business administration, vol. 2 n. 1, pp 14-27. shanikat, m. & abbadi, s.s. (2011), “assessment of corporate governance in jordan: an empirical study”, australasian accounting business and finance journal, vol. 5 n. 3, pp 93-106. standard & poor’s (2008), “criteria: gamma scores”, available at http://www.standardandpoors.com/home /en/us tsamenyi, t., enninful-adu, e. & onumah, j. (2007), “disclosure and corporate governance in developing countries: evidence from ghana”, managerial auditing journal, vol. 22 n. 3, pp 319-334. emerging markets journal the new intellectual capital of turkey : muslim intellectuals dr. ensar nişancı beykent university | e-mail: ensarnisanci@beykent.edu.tr abstract a new genre of intellectuals has newly arisen in turkey. they are coming from islamic backgrounds. they are different from both modernizing elites of state and traditional ulema of islam. the most distinctive feature of them is that they are self-confident towards western philosophy and intellectuals, while being pudent towards people. in this article both defining features of new islamic intellectuals by comparision and contrast to state intellectuals and ulema. keywords: intellectual capital, new turkey, muslim intellectual, vernacularization of modernity new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.44 | http://emaj.pitt.edu mailto:ensarnisanci@beykent.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ the new intellectual capital of turkey: muslim intellectuals emerging markets journal | p a g e |127 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.44 | http://emaj.pitt.edu the new intellectual capital of turkey: muslim intellectuals dr. ensar nişancı i. introduction in the post 1980 era in all spheres of life turkey has undergone so big changes and transformations that some intellectuals used the phrases like “silent revolution”(yavuz, 2003:1-8), “emergence of a new turkey” (yavuz, 2007: 1-20) to signify particular consequences of that conjuncture. of course not all decades are to witness to the same, unilinear and homogenous processes with respect to dynamics informing new turkey. first decade is of particular importance with respect to the creation of new economic opportunity spaces by then economic restructuring programs for the emergence of a new businessmen group mostly organized under the umbrella of müsi̇ad. müsi̇ad, as a newly emerging and competent agent in export oriented economy of motherland party –then governing partyhas become a major challenging force against the priviledged business man club of tusi̇ad. the second decade has been a witness to many setbacks for the newly arising classes and the capital caused by the old governing elites mostly positioned in military and judiciary higher ranks of bureaucracy. the tensions between old and the new dynamics and classes of turkey caused some setbacks, backpedaling, political crises so much so that culminating to a covert military coup d’etat in 1997 on 28 february. the next decade however it is tension ridden is witness to revolutionary changes not just in economic sphere but in political, social arenas as well. just like new business classes emerged in previous decades new genre of political and intellectual personas started to take the scene in turkey. new capitalist group has pulled attention of academic studies but the islamic intellectuals are not yet taken the necessary attention. whereas they are utmost importance in the formation of intellectual capital behind justice and development party (jdp). in this article i will write about the rise of a new class of muslim intellectuals in turkey in the past two decades. in order to better describe the characteristics of this new group of muslim intellectuals and their difference from the previous generations of muslim and islamic intellectuals and from the secular and nonislamic intellectuals in turkey, i will try to answer the questions of “who are the new muslim intellectuals?”, “what are their certain characteristics?”, “what makes the new muslim intellectuals different from dr. ensar nişancı p a g e | 128| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.44 | http://emaj.pitt.edu previous muslim intellectuals including the ulema and other leading non-islamic intellectuals in turkey?” “how do they affect islamic discourse?” and “what is their influence in turkish society?” there is an emerging generation of muslim intellectuals in turkey. i think that studying this generation of intellectuals will not only be helpful for understanding the transformation of islamic identity and discourse in contemporary turkey but also will be instrumental for the understanding of the dynamics of turkish society at large. ii. state intellectuals: before starting to talk about the new generation muslim intellectuals, i think that it is important to go back to the early years of turkish republic and briefly look at the general characteristics of the intellectuals. the founding fathers of the turkish republic were thinking that the reason why ottoman empire declined and why the turkish society could not keep up with the developmental achievements of the west were because of the tradition and religion. for example, for mustafa kemal “the teacher of the newly established nation,” “it was the religion which blocked the innate development potential of the turks.” similarly, the founding fathers of the republic had the idea that cutting all the ties from the past and from the religion will solve the problems and help develop the turkish nation. in order to overcome these obstacles they instrumentalized secularism, positivism and nationalism, three major concepts of western model of modernism. therefore, the main objective of the new republic was to modernize through westernization. in order to achieve this goal, the founding fathers primarily including mustafa kemal wanted to build a new society and a nation state which will be the guardian of these modern values. in this regard, the state implemented radical reforms in order to reshape all segments of the society according to western modern values and principles. for example, the state abolished the caliphate, religious schools and sufi lodges. in addition, the state replaced the old ottoman alphabet with the new latin alphabet. i think that with these reforms the state and its founding fathers wanted to create a tabula rasa so that they can manipulate the minds and the lives of the citizens and thereby create a modern nation state (nişancı, 2001). therefore, the state supported and educated new elites who embraced the the new intellectual capital of turkey: muslim intellectuals emerging markets journal | p a g e |129 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.44 | http://emaj.pitt.edu ideals of the secularist and modernist kemalist state, after the establishment of secularist turkish republic in 1923. these state elites were the agents of the state ideology of a top-down transformation and reformation approach (i̇nsel: 1997: 21). therefore, these elites had a jacobin mentality. they were outside and above the society as they were supporting an idea “for people and against people” by presenting themselves as the emancipators of the people and the nation. they were different from the society with their way of life including their dressing styles. in this regard, their main goal was to marginalize the religion and the tradition and to exalt the secularist modern identity and way of life without criticizing the west. in order words, they were criticizing the tradition but praising the west. i think that they were looking at the society from an orientalist perspective. i also think that it would be appropriate to call these intellectuals as native orientalists. moreover, they were not producing the knowledge for themselves but for a project which made these elites a higher status group in society. that is why; most of these elites were part of the state bureaucracy working as teachers and professors. i think that the early intellectuals of the turkish republic were more of “organic intellectuals” in gramscian terms. because, they did not question and criticize the modernity. they just accepted and welcomed the modernization ideals of the new republic and worked as the social engineers of the modernization project of the kemalist state. the dominance of the regime’s intellectuals were paramount until the end of one party rule in 1950. their influence diminishingly continued until the 1980’s, which represented declining power of nation states and the rise of neo-liberal policies. iii. first generation muslim intellectuals (ulema): while the early republic was pushing for its reforms with the help of its intellectuals, there were also resisting and challenging groups including major islamic movement leaders and religious scholars such as mehmed zahid kodku, said nursi, suleyman hilmi tunahan and elmalili hamdi yazir. most of these religious intellectuals were defending the religion against materialist philosophy and secularist ideology. these intellectuals were also affected by revivalist thinkers such as cemalleddin afgani and muhammad abduh. that is also why the first generation islamic intellectuals represented dr. ensar nişancı p a g e | 130| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.44 | http://emaj.pitt.edu a revivalist movement. these intellectuals supported the ideas that islam as a religion and as a way of life was not against science and development. they rather argued that the ills of society can be cured if the individuals and the institutions are lived and functioned according to the principles of “true islam.” since islam was under the attack of modernist and positivist ideologies, some of these early intellectuals had an apologetic approach in defending the religion. while the modernist state intellectuals were supported by the republic, religious scholars and intellectuals were persecuted. for example, iskilipli akif was tried in exceptionally authorized “istiklal mahkemesi courts” and executed in 1926 since he rejected wearing the hat. said nursi was persecuted many times, jailed and exiled in different parts of the country. these early religious intellectuals were well accepted by the masses. for example, said nursi according to one of the court reports had over five hundred thousand followers in 1947. in addition, these older generation religious intellectuals primarily including mehmed zahit kodku, suleyman hilmi tunahan and said nursi have been very influential in shaping the later generation muslims’ religious and political discourses. all nur movements are fallowing said nursi’s, iskenderpasa community is following mehmed zahid kotku’s, and sulaymanci communities are following the teachings of suleyman hilmi tunahan. iv. second generation muslims (islamist intellectuals): after the first generation of islamic scholars who were educated in ottoman educational institutions, a new group of muslim intellectuals who were educated in the republic’s secularist educational system began to emerge after the 1970’s. these intellectuals including ali bulac, rasim ozden oren, ismet ozel, alparslan acikgenc and nazif gurdogan became more visible after 1980’s. these intellectuals mainly appealed to the university students. unlike the first generation islamic intellectuals, these second generation islamic intellectuals did not frequently refer to quran and hadith. rather, they used a modern rhetoric and spoke about meta-narratives. one of their major aim was to prove that the sources of the problems in the muslim world in general and in turkey in particular was colonialization of muslim muslims’ life and minds by the western ideas and values. therefore, they argued that cutting all the the new intellectual capital of turkey: muslim intellectuals emerging markets journal | p a g e |131 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.44 | http://emaj.pitt.edu ties from the western influence will solve the problems. for example, ali bulac a leading second generation islamic intellectual, argued in his first book “modern concepts and orders” he published in 1987, that the concepts used by the secular groups in turkey were profane which were coming from a foreign culture and civilization. therefore, the solution, for him, was to cleanse the minds of muslims polluted by the western ideas. these second generation elites were supporting both the islamization of politics as well as the islamization of the knowledge. in short, i argue that the second generation islamic intellectuals were reimagining islam in the opposite mirror of the west. therefore, i think that they looked at islam as more of a political ideology rather as a source of ontological and moral teachings. v. new generation of (post islamist) muslim intellectuals: the second generation islamist intellectuals and their anti-western discourses remained influential until the post-modern coup d’état in 1997 which facilitated the rise of a post-islamist movement. after the coup d’état, the military, the secular bureaucracy including the judiciary and the secularist media formed an alliance to expel and eliminate the muslims from the public spaces especially from universities. for example, more than 40 academicians were laid off at dumlupinar university because they were practicing muslims and because they had connections with religious communities. in addition many quran schools and religious non-profit organizations were banned during this time. 1997 or february 28 th coup d’état represented a decisive process in determining the mindset of the new muslim intellectuals. since they have seen aggressive forms of state control and authority, they realized how state authority and unbalanced political power could turn into oppression and how uncontrolled power could lead to coercion. that is why they started supporting the idea of democratization of the political authority alongside the rule of law and to a certain extent they gave up the idea of controlling the political authority. under this pressure, muslim intellectuals started to change their discourse from islamist rhetoric to a human rights and democracy oriented discourse. these new generation intellectuals do not write and speak about religious issues. unlike the second generation islamist intellectuals, these new muslim intellectuals also do not glorify islamic past unlike previous islamists like necip dr. ensar nişancı p a g e | 132| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.44 | http://emaj.pitt.edu fazil and sezai karakoc. that is why i don’t call the third generation as islamic intellectuals. i think that defining these intellectuals as post-islamist intellectuals would describe them better. yasin aktay, ahmet yildiz, mucahit bilici, nihal bengisu karaca, ahmet t. kuru, abdulhamit bilici, fikri akyuz, ekrem dumanli, hilal kaplan, bulent kenes, yalcin akdogan, mustafa sentop, and ishak torun can be named among these new generation muslim intellectuals. these intellectuals are mostly coming from middle and lower middle class family backgrounds. they are welleducated and some of them are columnists, academicians and consultants. they are characterized in general by critical tendency towards all kinds of status quo. as william cittick noted, the new generation muslim intellectuals were strongly influenced by their professions. that is why they became more individualist. they did not also ask the question of what quran is asking me to do. rather they asked the question of what i can find from the quran. they did not talk about the obligations and duties of muslims and themselves but talked about democratic rights and individual freedoms. these new intellectuals also form alliances with other liberalist intellectuals both inside and outside the country. i think that the abant platform is a good example of such alliances. gazeteciler ve yazarlar vakfi “journalists and writers foundation” started to organizes meetings in abant turkey starting from 1998 one year after the 28 february coup d’état to discuss issues related to human rights and democracy. although the organizers of the platform are affiliated with muslim communities, the participants of the platform are also coming from other opinion groups of the turkish society primarily including the liberals. moreover, some of these intellectuals such as yildiray ogur and bekir berat ozipek are collaborating with the “genc siviller” “the young civilians” a popular antiauthoritarian pro-democracy group which has been organizing demonstrations against elitism and military intervention in politics after 2000’s. unlike the second generation islamic intellectuals these new intellectuals are not using a discourse against postcolonialism and western ideals with essentialist approaches. in addition, the new generation intellectuals are not challengers of modernism as noted by ihsan dagi. in this regard, most of these the new intellectual capital of turkey: muslim intellectuals emerging markets journal | p a g e |133 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.44 | http://emaj.pitt.edu muslim intellectuals are supporting turkey’s bid for eu membership unlike the second generation islamic intellectuals. they are also supporting more inclusive policies, democratization of political processes and liberalization of the market economy. after the establishment of the turkish republic, the old ulema were accepted by society but not by the state. the intellectuals of the republic were well accepted by the state and its secular institutions but not much by the society at large. the new muslim intellectuals seem to be in between. at the beginning, they were not accepted by the state and they were trying to carve a space for themselves. similarly, they were not well accepted by the religious communities at the beginning either because they were criticizing both the state authority and the authority of the religious communities. when they started speaking against the oppression of the state and the secularist establishment, they began to be embraced by the religious communities. unlike the second generation islamic intellectuals, the new generation of muslim intellectuals looked at europe as an ally in order to force the turkish state for human rights reforms. the second generation of islamic intellectuals would say that women should cover themselves and wear headscarf since it is mentioned in quran. however, the new generation referred to the human rights to justify why women should wear the hidjab. for example, they said that the women have the right to choose whether she is going to wear hidjab or not and that the state should respect those rights. unlike the former religious elite or the ulema, they were educated in secular institutions and had a more secular discourse. however, they were not well accepted by the state ideology because the secular discourse used by these elites was supporting ideas against the statuesque. the state elite on the other hand were both educated in secular institutions and supported by the state ideology because they lend their support to the state’s secularist and modernist ideology. the second generation intellectuals were largely influenced by post-colonial intellectuals in the muslim world such as ali-sheriati, sayyid qutb and sayyed abul ala mawdudi. the first and second generation muslims thought that emancipation would be realized by going towards the religion. the state elite were thinking that emancipation would come with going away from religion. the third generation muslims supported the idea that emancipation would come through dr. ensar nişancı p a g e | 134| emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.44 | http://emaj.pitt.edu democratization, freedom and liberalization. as agents, new intellectuals do not support the idea of islamization of society. rather, they support democratization of public space and the expansion of human rights. they are more interested in the salvation of self from all forms of oppression and they are not much interested in establishing moral codes for the society. that is was we can say that the new intellectuals were affected pretty much from liberalism. the new muslim intellectuals are both professionals and intellectuals. their professional sides are more visible than their ideological side. that is also why we can conclude that the new muslim intellectuals represent an internal secularization of religion and vernacularization of modernity. vi. conclusion i argue that islamic political identity is a dynamic and the transformation in this identity does not only reflect the transformation of the islamic and muslim identity but also indicates the major transformation in turkish politics. they are an outcome of transformation of a post-islamist paradigm. this transformation also contributed significantly to the democratization process of turkey. their transformation in their identity also transformed islamic discourse and gave rise to a post-islamist paradigm. the new intellectual capital of turkey: muslim intellectuals emerging markets journal | p a g e |135 volume 3 no 2 (2013) | issn 2158-8708 (online) | 10.5195/emaj.2013.44 | http://emaj.pitt.edu bibliography bulaç ali, 1997, çağdaş kavramlar ve düzenler/modern concepts and orders, i̇z yayıncılık, istanbul nişancı ensar, (2001), geleneksel patrimonyalizden modern neo patrimonyalizme: bir modernleşme denemesi, haliç üniversitesi yayınları, i̇stanbul. yavuz hakan m. (2003), islamic political identity in turkey, oxford university press, new york. yavuz hakan m, 2006 “introduction: the role of new bourgeoisie in the transformation of turkish i̇slamic movement” in the emergence of a new turkey, ed. by hakan yavuz ,utah university press . microsoft word 27-270-1-sm.doc volume 1 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu entry modes of european firms in vietnam daniel simonet american university of sharjah e-mail: dsimonet@aus.edu abstract purpose: the purpose of the paper is to explore the entry modes of eu firms setting up operations in vietnam. design/methodology/approach: we use a case study approach on haymarket, cadbury, creative education, fairchild, aventis and artemisinin and farming international using interviews from managerial professionals in vietnam. findings: despite the fact that vietnam has been opening up for more than 20 years, licensing is the preferred entry mode because of the risks involved in venturing with local firms; that preference signals a low level commitment and a high perception of risk and state interference. in line with vietnam transition to state rather than private market capitalism, a foreign company opting for a joint-venture will do so with a state-owned rather than privately-owned company. the choice of a subsidiary can be explained by the lack of trust in partners and institutions, not by improvement in the socio-political environment. limitations: in determining the entry mode strategy, the paper focuses on the uppsala school’s “psychic distance” (e.g. cultural distance, lack of trust) rather than on firm-specific advantages (rugman, 1980; 2006). key-words: international entry mode; emerging markets; subsidiary; joint-venture; india; vietnam this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu entry modes of europen firms in vietnam emerging markets journal | p a g e | 10 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu entry modes of europen firms in vietnam daniel simonet i. foreign  firms  and  the   preference  for  private   partners  in  newly-­‐emerging   emerging  markets   reducing dependency remains a priority for foreign firms entering a newly-emerging, often adversarial market. that dependency ranges from access to markets, control over distribution channels, acquisition of business licenses, human capital, and government connections, the latter playing a prominent role in emerging markets. government role can be positive, as documented in russia where local governments use reforms to attract investments (meyer and pind, 1999), in china with the creation of special economic zones, and in india where states use tax incentives to attract foreign investment (oman, 2000). it can also be restrictive: the government may impose a mandatory partnership with a local firm (e.g. malaysia, indonesia), or the purchase of locallymade components. thus, firm operating within restrictive state-controlled environment will attempt to diminish government interference, thus might opt for a private rather than public partnership when possible. this is likely to be the preferred option if they have little experience managing government relations or, if they target a private rather than public market. besides, dealing with private actors usually involves a variety of participants with different levels of power which the foreign firm can played against one another to extract better contracting terms: in the vietnamese industrial equipment industry for instance, exclusive distribution agreements are limited to a period of 2 to 3 years (tuang and stringer, 2008), which enables foreign suppliers to shift to an alternative distributor should the need arise. the number of stakeholder is also a factor. contrary to democracies, where dealing with the public sector involves many stakeholders (e.g. interest groups, political parties, the mass media, citizen and consumer association), doing business in government-restricted markets involves fewer, often government-controlled, stakeholders. these can be more powerful, and thus put the foreign firm in a more dependent position. to eliminate that dependence, a foreign entrant may prefer a private rather than public partner. accountability and transparency are two other factors that make partnership with a private firm a more attractive option: while in free market and democratic countries, dealing with public organizations means a public display of accountability and frequent changes in officials; in contrast, the public service is less open to outside pressure and removal of ineffective public servants. by partnering with a private rather than a public company, a foreign firm can reduce those risks drastically (dye, 2010). sound management of financial reserves is another reason to prefer a partner from the private sector. while public actors (e.g. elected officials) spend someone else’s money, private individuals and business owners usually spend their own money, and will be more conscious when making investment decisions. thus, partnership with private firms shall limit the risk of resource squandering, as accountability is greater with private business owners. other factors such as monopoly (statutory or de facto), tendencies to over-spend and overregulate, failures in core roles (e.g. infrastructure), the pursuit of self-interest amongst both politicians and civil servants which leads to resource misallocation, decisions based on political rather than public benefits, all of which being more prevalent in adversarial rather than mature markets, would in principle deter investors from partnering with public firms, thus makes partnership with a private firm a preferred option (clemons et al., 2009; post et al., 2002). reputation is a factor in emerging government-controlled economies. fearing a boycott at home, foreign investors are wary of being associated with countries that are at odds with the international community, as this would affect their reputation at home. that happened to the french oil firm total in burma. that risk has become greater because information circulates more rapidly. media pressure and reiterated calls for boycott by not-forprofit organizations can harm the reputation of a firm in its domestic market for actions conducted entry modes of europen firms in vietnam emerging markets journal | p a g e | 11 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu overseas. in contrast, supporting a private business is less likely to generate a similar backlash. another factor concerned planning horizon. public budgets must be planned well in advance of the spending year. private sector budgets are short-term, more flexible and can be adjusted: they can be remade just about any time management decides. that flexibility is another reason to prefer a private rather than public partnership. p1 firms entering a newly-emerging government-controlled market will prefer a partnership with a private rather than public organization however, a partnership with a government-linked company remains relevant in some occasions e.g. when the foreign firm target public buyers; when the private sector is still in infancy; or when the foreign entrant is public (i.e. a preference may be given to a partner with a similar culture) ii. time-­‐horizon  and  the   preference  for  high-­‐equity   entry  modes   there is another factor to consider: time horizon. in developing countries, there has been a shift in development strategies recommended by international money lenders (e.g. adb) with a preference for long term projects and nation building. in these countries, capacity building has become the new mantra. aid has shifted from economic infrastructure and services to increased emphasis on basic social services and public management capabilities (world bank, oecd). dominica and rwanda exemplify the features of old and new style aid. dominica, still receives about 80% of aid in form of economic infrastructure projects, such as roads, water supply, or irrigation. the aid programs of rwanda have changed dramatically, with education, health and other social programs taking the lion’s share (world bank, oecd). in other countries, debt relief has become a major part of aid, relieving financial pressures of past, poorly-conceived or managed development programs. for foreign firms, as the time horizon of public development projects increases (which is also an indication of international lenders’ commitment), risk intensity is not inherently less, but rather spreads over a longer period, thereby signaling that a short term loss could be offset on the long run. a foreign investor is more likely to adopt a high equity entry mode if it feels that the project duration is enough to recoup its investment, or if the benefits of the entry mode will fully materialize within a timeframe backed by an international institution. hence, the longer the time horizon and project life cycle, the greater the commitment in the form of a more structured entry mode e.g. subsidiary. as international community support, investment visibility grow, and the host country gains socio-political stability (urata and al, 2006), the perception of risk diminishes, and foreign firms are more inclined to increase their commitment in the form of a wholly-owned subsidiary e.g. foreign subsidiaries in china can be found in areas that offer the best long term prospects, as in the pearl river delta where major japanese firms have established subsidiaries to serve the guangdong i, guangxi, fujian and hainan provinces. p2 as the socio-political environment stabilizes, foreign firms will prefer a wholly-owned subsidiary over a low-equity entry mode (e.g. alliance, joint venture, partnership) p3 as the time horizon of foreign investment expands, foreign firms prefer a whollyowned subsidiary over a low-equity entry mode (e.g. alliance, joint venture, partnership) however, the time-horizon approach with its emphasis on long term projects underestimates rapid country changes: the middle east, turkey and north africa region have emerged as promising off shore destinations because of their large, welleducated population and proximity to europe in the late 2000s (at kearney). in particular, cairo i in 2008, the guangdong province alone contributed to almost 12 percent of china’s national gdp, the largest of all provinces and municipalities, and to nearly 30 % of china’s total exports entry modes of europen firms in vietnam emerging markets journal | p a g e | 12 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu (egypt) in north africa has undertaken major infrastructure projects and administrative reforms to minimize risks to foreign investors. rankings have changed in recent years: dubai debt problem prompted foreign firms to consider alternative business hubs (e.g. qatar, bahrain) in the middle east region, but these eventually stayed in dubai as it provided political stability in the context of the arab spring. in southeast asia, thailand is no longer perceived as a safe investment destination due to its recent political turmoil and rioting. foreign firms’ expectations and criteria to select a destination also vary over time. years ago, the importance of host economy size and wealth, and more recently mnc agglomeration were major criteria when selecting a host country. cheaper but skilled labor pools and tax incentives were also taken into consideration. but these criteria did not reflect certain risks (e.g. personal safety). south africa, nigeria, pakistan, kenya and jamaica later proved unreliable, and criteria for selecting a country were amended. current rankings of safest and riskiest places are now based on a wider range of factors which includes high terrorist or rebel threats, uncontrolled environmental pollution, corruption and organized crime, currency instability, geopolitical conditions cultural dissimilarities and unsecured communication networks: while india continues to be the most favored back-office of the world (brown and wilson 2009), it holds a precarious ranking in certain areas: unlike china, india’s democratic society, and strong secondary stakeholders (e.g. free press and an active civil society which include ngos, labor unions and politicians) will not hesitate to challenge foreign companies in courts, in the media, or via on site demonstration, especially when it involves land acquisition or other aspects of their livelihood (vachani, 2008); wal-mart had to delay its entry in the indian market because activists were concerned that the firm will hurt the livelihood of small traders. in addition, there are sectorspecific and country-specific criteria e.g. in the off shoring industry, similar time zone and language skills are critical factors due to the necessity to communicate with clients based in the west (e.g. british operators with indian and philippine callcenters; french operators with tunisian and moroccan call-centers). while the severity and complexity of country vulnerabilities has skyrocketed, firms often consider a too narrow set of criteria (e.g. typically country risk, competitiveness, costs) when selecting a foreign market. iii. investment  delays  and   the  preference  for  wholly-­‐ owned  subsidiaries.   entry barriers can be a deterrent to jointventures: partners and service providers, particularly in the financial services, insurance and telecom sectors often demand hefty upfront payments. to this, add another constraint: time. finding a suitable partner is difficult and timeconsuming in newly-emerging markets: after announcing its intention to enter the indian market in 2002, starbucks signed an agreement with tata in 2004 to source premium coffee beans. however, in 2009, the company was still looking for a partner (it was rumored to be in talks with jubilant group, the indian franchisee for domino’s pizzaii), and its entry in the indian coffee market was delayed again. there are also countryrather than companyspecific causes of delays such as a lack of confidence, uncertainty regarding economic performance and growth, as evidenced in malaysia (duasa, 2007) or in the pharmaceutical industry of vietnam: while as many as 266 foreign businesses had registered to operate in vietnam in 2005iii, only 42% of combined investment capital of us$ 240 million had been disbursed, and authorities had licensed just 35 foreign-invested projectsiv. for foreign firms, waiting is no longer an option: while years ago, adverse market conditions would prompt a foreign entrant to delay market entry, this is not possible because globalization makes the world faster: in a fast-paced environment, firms will be pressed to accelerate rather than delay their entry plan, even under adverse market conditions. to ii http://us.asiancorrespondent.com/indianomics/starbucks-inindia-%e2%80%93-right-time-or-about-time iii source : ministry of health ivvneconomy. foreign pharmaceutical companies show interest in vietnam. 26/09/2005.source: vietnam agency. entry modes of europen firms in vietnam emerging markets journal | p a g e | 13 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu control local operations and avoid delays caused by ineffective partners, and to eliminate the risk associated with a joint-venture, and increase speed of entry, foreign firms will opt for an acquisition or the creation of a fully-owned subsidiary. p4: investment delay leads foreign investors to prefer a wholly-owned subsidiary over a joint venture in a newly-emerging market iv. effectiveness,   opportunism  and  the   preference  for  subsidiaries   according to the uppsala model (johanson and weidersheim-paul, 1975), a high level of cultural distance between the country of origin and the target country is a deterrent to entry modes that involve high levels of ownership and control (hill, hwang and kim, 1990). cultural distance makes capabilities transfers more difficult: managers are reluctant to deepen involvement in markets they know little about, restrain their commitment (e.g. financial stake) when differences in values and beliefs between their home country and the host country are large, thus will prefer a joint-venture over a subsidiary in less culturally familiar environments (erramilli and rao, 1993; gatignon and anderson, 1988). there is an incremental expansion strategy encompassed in this school of thought: it implies a form of low commitment during initial entry (e.g. a licensing agreements has traditionally been a way to test a new market while keeping sunk costs lowv), especially in market with greater “psychic distance” (e.g. differences in language education, business practices, culture and industrial development), and a greater commitment (e.g. subsidiary), as familiarity with the market develops (sim, rajendram pandian, 2007). while other scholars (jung, 2004; tatoglu, et al., 2003) too argue that “firms are more likely to v as withdrawal is a possible occurrence in transition economies with changing regulatory frameworks have difficulties in managing foreign operations alone”, hymer (1960) and shenkar (2001) assert that full ownership and the resulting total control allow managers to conduct business in their own way, which is thought to be more effective and straightforward than relying on local agents whose behavior is little known or cannot be predicted. performance drivers such as local responsiveness or information flow are less effective in adversarial environment (oliver, 1991): a local partner may be passive/dormant, act as a buffer between the foreign firm and the target market, thereby distorting critical information; maintain a hidden agenda (e.g. acquisition of foreign know-how before setting up a competing business), has harmful motives (e.g. a licensee may not develop the product of the licensor because of the nih syndrome), or may acquire a license to prevent a foreign competitor from introducing a competing product (i.e. market preemption strategy), thus gain time to develop its own line of products (simonet, 2002). dues to these shortcomings, alliances were often ineffective: joint-ventures and other temporary transitional organizational form (porter, 1990; williamson, 1991) were either terminated or suffered from changes in the ownership structure (yan & zeng, 1999) due to opportunism (parkhe, 1993), and the unequal pace of learning (larsson, bengtsson, henriksson, & sparks, 1998) with most exits by international joint ventures consisting in a sale to one of the partner firms or ‘‘internalization’’ (hennart et al., 1998). when newly-emerging markets open up to foreign investors, early entrants face a lack of potential partners, either because of the local firm’s inexperience, or because of different strategic priorities at the country-level: for example, in contrast to other east asian countries (e.g. korea) that focus on competitive advantage in light industries (lee, 2005), vietnam has focused on its competitive advantages in agricultural (e.g. rice and coffee) and aquatic products, which create a dearth of potential partners in the industry and in the service sector. though suitable partners may also be lacking because of potentially opportunistic behaviors, opportunism can be reduced in different ways e.g. repeated transactions with a small set of contractors; economies of scale and scope in transacting (e.g. a high volume of exchange between transactors); extensive inter-firm information sharing (e.g. to reduce information entry modes of europen firms in vietnam emerging markets journal | p a g e | 14 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu asymmetry); the use of non-contractual, selfenforcing safeguards (i.e., goodwill) which are effective for an indefinite time horizon (as opposed to contracts which are effective for a finite time horizon); key personal contacts with critical social capital and other factors (e.g. partner’s customer orientation) (truang and stringer, 2008); and investments in co-specialized assets (e.g. a free trade zone with the local partner providing manpower, assets and land). however, these mechanisms are difficult to find in unchartered markets e.g. transactions may be irregular due to economic and political disruption; newlyestablished privately-owned firms neither have a reputation of being trustworthy, nor a history of partnering (nguyen, 2005) ; non-contractual safeguards are weaker in adversarial environments: the local partner may not have specialized assets to share (e.g. if the foreign firm is looking for nonspecific assets e.g. low-cost labor). besides sharing specific assets is only a short-term temporary fix: it would still require a contract regarding availability and lease of equipment, which will generate transaction costs. faced with a possible hostage-like situation (when sunk costs are high) or a lack of alternatives (e.g. when there are no substitute partners), foreign firms will opt for internalization (i.e. a subsidiary). p5: in adversarial markets, effectiveness (i.e. ability to achieve a desired goal) and opportunistic partners leads foreign investors to prefer a subsidiary over a partnership contracts often serve an implicit function, acting as 'self-enforcing' agreements, and are often viewed as symbol of 'trust' (telser, 1980; sako, 1991), or goodwill (bradach and eccles, 1989; sako, 1991). trust can be defined as being “the firm’s belief that another company will perform actions that will result in positive outcomes for the firm, as well as not take unexpected actions that would result in negative outcomes for the firm” (anderson and narus, 1990, p.45 in tuang and stringer, 2008). trust is an essential element in reducing relationship and transaction costs (dyer and chu, 2003), particularly in emerging markets marked by weak safeguards and governance structures. when countries compete for foreign investment, the one with the lowest costs in relationship building will be selected coase (1937) and williamson (1975). should these costs increase further, internalization (e.g. an acquisition, a startup, a subsidiary) will be preferred over a local partnership. trust and other factors (i.e. reputation) are effective safeguards when doing business. private firms must devote time to develop new relationships and trust with partners (nguyen tv et al, 2005). however, building trust is more difficult when significant income disparities exists (wilkinson, pickett, 2009), in countries at odds with the international community, or in transitional economies (nguyen et al, 2005): in vietnam, property rights are not well defined and private sector legitimacy is weak; market institutions and infrastructure are largely underdeveloped. a compounding factor, foreign governments might attempt to build legitimacy by blaming foreign governments for their own inadequacies, thereby generating more distrust between local and foreign organization. often, the level of trust depends on perceived fairness within the transaction. a lack of perceived fairness will result in higher transaction costs right from the start i.e. the response to injustice is “neglect” or a deterioration of conditions which lead to greater opportunistic behaviors (husted, folger, 2004). fairness or the lack of it leads to higher transaction costs, thus make it more difficult for mnc to achieve their objective when expanding overseas. in line with the transaction costs theory that suggests that firms minimize their costs as they grow, a subsidiary would eliminate monitoring costs in transaction whenever neglect is possible. when trust is lacking and when the transaction suffers from perceived unfairness, highequity modes should be preferred over low-equity entry modes. this also justifies takeovers: converting a joint venture into a wholly-owned subsidiary is more likely when there is a need to prevent neglect, for instance when conflict arises (steensma et al, 2007). conversely, a greater level of trust and goodwill will prompt foreign firm to opt for a subsidiary: in the 1990s, a rapid familiarity with the emerging markets of eastern and central europe (estrin et al., 1997; meyer, 1998) coupled with the european economic community’s willingness to integrate these countries in the eec to build political stability and peace following the collapse entry modes of europen firms in vietnam emerging markets journal | p a g e | 15 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu of the soviet union justified the preference for high-equity entry modes. in line with the uppsala model, foreigners increase their commitment (e.g. subsidiary) in markets with limited “psychic distance”, rising familiarity and trust (sim, j. rajendram pandian, 2007): p6. a wholly-owned subsidiary will be preferred in two opposite situations: either when the target market is unfamiliar and trust lacking, or when the target market is familiar and trust abundant. v. company  size  and   experience     bargaining power affects firms differently, and depends on both company size and experience. bargaining power exists between mncs that have a preference for high-control entry modes, especially if the project is long-term; the government of the hosting country, which hopes to create jobs and earn tax; and the local firms that need foreign support to expand. foreign firms have bargaining power because the newly-emerging markets of vietnam, cambodia and laos vie with each other for foreign investments: “despite being neighbors with close fraternal ties, no indochina country ranks amongst the largest investors in another country of the sub-(indochina) region,… three countries are competing with each other to attract fdi inflows” (freeman, 2002b). cambodia offers some unique advantages: “foreign investors are allowed to own a company outright, without a local partner. there are no restrictions on funds transfers, no exchange controls and cambodia is one of the few least-developed countries to have joined the world trade organizationvi”. regarding size, chen and chen (1998) assert that large firms are better able to establish a position in primitive vi interview of bretton g. sciaroni. sciaroni & associates. phonm penh. in cambodia is hard sell for investment companies. june 29, 2010 by simon marks. the new york times and non-institutionalized networks: “…members of the community often consist of multinational enterprises that individually generate global annual revenues that far exceed the annual gdp of some host countries, and have the trans-continental balance sheets to match…” (freeman, 2002b). in a survey of tenant firms of a vietnamese industrial park, the smaller companies view government regulations as the major constraint they encountered (in contrast, the larger companies cited competition for overseas competitors) (yeoh et al, 2004). parent firm size, possession of some knowledge-based and firm-specific strategic assets also prompt a firm to opt for entry modes with a higher degree of control (tan et al., 2001): the larger the firm, the higher the propensity to adopt a high equity mode that allows full control (leung et al., 2003). for cultural differences and host country conditions reduce foreign firms’ ability to extract valuable location-specific resources (birkinshaw and hood’s 1998), the foreign entrant’ experience is a factor in absorbing knowledge from its overseas acquisitions: a more experienced entrant will find it easier to manage cultural differences, or is more able to make a correct evaluation of a potential acquisition (i.e. cherry-picking). thus, experienced rather than inexperienced foreign firms are more likely to opt for a wholly-owned subsidiary.     p7: a large and experienced entrant will prefer a wholly-owned subsidiary (i.e. internalization) over a low-equity entry mode when entering an newly-emerging market   however, this relationship does not appear uniform in asia. in south-asia in particular, large and experienced firms do not systematically opt for acquisitions: while starbucks is a large and experienced entrant (years ago, it was a successful first entrant in the japanese and chinese markets), there is no indication of its intention to open a subsidiary in india. as for gap, while its stores in other more mature retail markets such as canada, france, ireland, japan, uk, and us (and puerto rico) are company-owned, stores outside of these countries are owned and operated by franchisees. other large single-brand firm with significant international experience such as apparel retailers (e.g. diesel, tommy hilfiger, esprit, louis vuitton, fcuk, lee cooper, escada, guess, dunhill, and mango), mass-retailers (e.g. marks & spencer, entry modes of europen firms in vietnam emerging markets journal | p a g e | 16 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu debenhams, next) and fast-food company (e.g. pizza hut) also entered the indian market though the franchise routevii. in contrast to india, will the large and experienced entrants of our case group adopt a wholly-owned subsidiary (i.e. internalization) when entering vietnam? vi. asset  specificity  and   capability  matching   while cultural distance is a factor in choosing an entry mode, asset specificity is critical: according to coase (1937) and williamson (1975), if asset specificity and risk intensity are high, and transactions frequent, the firm will prefer internalization, and high-equity entry modes such as wholly-owned subsidiaries will prevail. asset specificity in emerging economies has often been analyzed in terms of risks e.g. a local partner may copy an innovation or product (i.e. a tangible specific asset), dilute a brand (i.e. an intangible specific asset), or deteriorate the quality of a product. however, asset specificity should be viewed in terms of capacity matching: to make the partnership worthwhile, the local firm must have the capacity to absorb the capabilities of its foreign partner. in a newly-emerging market with greater psychic distance, the more specific the asset, the more difficult the absorption: a local firm in laos, vietnam or cambodia may not have the technological know-how to maximum the use of the product of its foreign parent company, or the marketing skills needed to promote a foreign brand adequately. imitation is less likely to occur when a foreign firm is unable to comprehend the value of an innovation it gets hold of, or unable to turn it to its advantage: simple imitation ignores what made the original great, as exemplified in the cargo-cult metaphorviii . capacity matching is a more critical vii www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf viii during world war ii, islands in the pacific are were key locations for the belligerent and received large quantities of air-dropped supplies (e.g. food, weapons, medicine) destined to both japanese and us troops. some of these supplies were shared with the indigenous people who lived on the factor than cultural distance when choosing a subsidiary. p8 capacity matching concerns rather than cultural distance will prompt a foreign firm to opt for a high equity entry mode in a newlyemerging market foreign firms often source for cheaper resources, moving their business to locations that are the most affordable: in response to increasing costs in the most advanced asian countries (e.g. singapore, taiwan, malaysia), mncs have shifted their operations to china. still, the rapid increase in wages has eroded china’s attractiveness as a lowwage investment base and enticed chinese firms to relocate labor-intensive manufacturing (e.g. clothing and footwear) lo lower wage neighboring countries. chinese investors are already the largest investors in the cambodian garment industry (athukorala, 2008). japanese firms have started shifting factories from china to vietnam in response to strikes for higher wagesix. the degree of asset specificity foreign firm seek overseas will determine the entry mode in a host country: investors looking for non-specific resources (i.e. readily available and easily reproducible such as low-labor cost) will opt for a low-equity entry mode because it makes divestiture easier: they will then be more able to move their assets to a new location, if it offers lower labor costs. a low equity entry mode will be preferred when (i) asset specificity is islands. when the war ended, they imitated what they saw , building large-scale replica of air-strips, bamboo control towers and straw planes, which was not good enough to bring the supplies back. they did not understand the underlying logic of the air-drop. ix according to the japanese external trade agency, japanese direct investment in vietnam that stood at 140 million dollars in 2009 have reached 1.1 billion over the first 5 months of 2010. entry modes of europen firms in vietnam emerging markets journal | p a g e | 17 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu low (e.g. unskilled labor is widely available); (ii) there is a high need for re-deployability (e.g. should labor costs increase further). in contrast, investors in search of specific assets (i.e. rarer, more expensive, or demanding a higher mobilization of resources) will either set up a subsidiary, or acquire a firm in the host country. as a result, we expect to observe more low-equity entry modes when foreign firms look for assets that serve primary business needs (e.g. low labor costs), and more high-equity entry modes when foreign firms look for assets that serve more strategic or specific business needs.     p9: foreign entrants in search of nonspecific assets will have a preference for a lowequity entry mode while foreign entrants in search of specific assets will opt for a high equity entry mode vii. agglomeration  effect   when deciding upon entering a foreign market (hymer, 1960; caves, 1996), firms take into consideration the experience of other firms in their immediate business environment (abrahamson and rosenkopf, 1993). the agglomeration effect of foreign investment illustrate the need to build active local networks, which in turn will attract new network partners, either local or foreign (krugman, 1991) (audretsch and feldman, 1994; harrison, 1994) with dis locating primarily in the vicinity of firms in the same industry, or from the same country of origin, as evidenced in china (chen and kwan, 2000). foreign companies set up operations in geographic areas that benefited from earlier investments from similar developed countries, which leads to the formation of industry clusters. though the core cities of hanoi, ho chi minh city and hai phong accounted for only 13% of the population in 1989, they captured about 70% of joint-venture investments in all sectors, and their neighboring province only 20% (nguyen and meyer, 1999). ho chi minh, which has accommodated foreign companies early on during the doi moi period, continues to be a magnet for foreign investors. foreign investment are principally directed to areas that offer not the cheapest but the most literate and highly qualified labor forces (nguyen and meyer, 1999). in contrast to other emerging markets where foreign companies primarily invest in wealthier areas because of improved market prospects, foreign investors in vietnam look primarily for provinces with higher quality manpower (i.e., higher level of literacy), even if those provinces are economically poorer (nguyen and meyer, 1999). as long as the population flow from the poor rural areas to the main cities remains constant, there is little need to relocate activities to the low labor-cost periphery. overall, more educated workers and managers, easier access to information and market opportunities attract firms to the metropolitan areas (tran thi bich, 2008). this legitimizes the building of industrial parks near the main cities (e.g. the vietnam-singapore industrial park which has 124 tenants, 80 of which are in operations) (yeoh et al, 2004). to this add other parks, either vietnamese, such as the viet huong industrial park, song than 1 and 2; japanese (thang long 2 run by sumitomo) or korean or taiwanese. early movers have a strong incentive to help latecomers settle in these clusters because it increases their business network (e.g. in the form of business association) and enhances their bargaining power e.g. everyone want a stronger chamber of commerce to represent their interest and create a stronger resource pooling and exchange (wassermanan, 1994) (tsai and ghoshal, 1998). capitalizing on the experience of early entrants, late entrants also face less uncertainty when making an entry decision. governments, including foreign and state-owned firms of the host country will also assist foreign investors in building local linkages in an effort to promote foreign investment (yeoh et al, 2004). while these local linkages (e.g. to local private firms and communities) would traditionally consist in joint-ventures to acquire information (inkpen and beamish, 1997), a manager in a foreign market will be less willing to opt for a joint venture if it finds equally reliable ways to gather information i.e. via networks made possible by a greater internet access in the developing world; informal contacts with business and trade associations, companies from similar geographic origins; and knowledge transfers from expat returnees or locally-hired expats. these networks have grown significantly in recent years, and benefits late rather than early entrants. p10 an early rather than late entrant will prefer a low-equity entry mode (e.g. jv, licensing) when entering a newly-emerging market entry modes of europen firms in vietnam emerging markets journal | p a g e | 18 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu viii. discussion   after 14 years of socialist experimentation, vietnam entered a new era with the doi moi. the country drafted its first banking reform and “was feted in paris and washington for his derring-do” (beech, 2009). while vietnam had all the characteristics of an adversarial market an environment typically characterized by regulatory ambiguity, structural uncertainty and a weak legal system (meyer, 1998; peng, 2000), government regulations, institutional and historic ties, helped reduce adversity (padmanabhan and cho, 1996) and created a more stable and liberal environment. to this, add a more mature market the dynamic of which is better understood and easier-to-obtain business licenses. the creation of foreigninvestment zones signaled a warming up of relationships, and a return to economic and diplomatic normalcy e.g. “the formation of the tan thuan export processing zone in 1989 was predicated on vietnam quitting cambodia, since a withdrawal was a precondition for normalizing economic relations with vietnam” (beech, 2009). unlike other transitional economy (e.g. russia), vietnam has chosen a gradual path of “system improving” rather than a “shock therapy” for its transition to a market-based economy (sachs and woo, 1994): “mass privatization of state-owned enterprises does not seem to be necessary to create markets in vietnam” (lee and al, 2005). looking at joint-venture formation, about 98 percent of jointventures have been made with state-owned enterprises (soes) (le dang, 2002). several factors made soes attractive partners: transportation infrastructure serves state-owned firms efficiently (joint-ventures locate primarily in regions with many state-owned firms e.g. ho-chiminh) (meyer and nguyen, 2005), making them attractive partners, and though one could have expected foreign firms to avoid areas with stateowned firms or national incumbents for fear of reprisals, foreign investors are willing to engage the latter as they provide access to government institutions (meyer and nguyen, 2005). for some (nguyen tv et al, 2005), foreign investor can benefit from the state owned enterprises’ preferential treatment (e.g. the government provides soes with subsidized bank loans). foreign firms can also obtain financing from international financial institutions, as exemplified by dutch lady, now known as friesland campina vietnam ltd who partly financed its jvs with loans from the finance arm of the world bank i.e. international financial company (ifc). ventures with local soes shall help circumvent domestic private sector’s weaknesses and vietnam’s poor regulatory framework e.g. “the transition from a centrally planned economy to a socialist-oriented market economy implies two kinds of challenges: first, totally new fields, never covered, have to be regulated; and second, the subjects and institutions that have to cope with this work have developed in a different context and have no experience with aspects of a market economy” (van arkadie and mallon, 2003) (leproux, brooks, 2004). to this, adds the discrimination against the private sector in terms of imports, technology and training (thi bich tran et al, 2007), access to land and capital (i.e. contribution of property rights as equity in jointventures with foreign investors is conceded to soes but not to domestic private enterprises) and “equitization”x (i.e. most strategic enterprises have remained under government control) (leproux, brooks, 2004). these constraints have affected small and medium vietnamese enterprises. instead of growing organically, these expand by adding new contractors to their existing network (nguyen et al, 2005). politics is a factor (masina, 2002). the emergence of a capitalist private sector may be perceived as a challenge to the state’s authority and as a factor of political destabilization (leproux, brooks, 2004). this is not a single authoritative view. others have argued that preservation of the state-run economy was to provide a safety net and give the private sector enough time to grow (lee, 2000). besides, partnering with state-owned companies is the not the panacea e.g. many are inefficient and had to be bailed out with government money or via bank loans (van arkadie and mallon, 2003). that preference for soes contradicts our first proposition (p1 firms entering a newlyemerging market will prefer a partnership with a private rather than public organization). an overwhelming majority of local partners of mnes are public sector firms. vietnamese authorities still x in vietnam, the privatization of state owned companies is called "equitization". entry modes of europen firms in vietnam emerging markets journal | p a g e | 19 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu discriminate against local, private firms which make soes more attractive for partnering. however, not all emerging markets in indochina have given unfair advantages to the public sector: in contrast to vietnam, laos has aligned its fdi inflow with its privatization program; some of its ‘flagship’ stateowned enterprises (e.g. the country’s telecommunications company, the beer lao brewery) were partially sold to foreign investors (freeman, 2002b). in our cases, foreign firms relied on opposite entry modes, with a preference for either a high-equity entry mode such as wholly-owned subsidiary, or a simple licensing agreement. haymarket media, one of the largest uk publishers in the uk, has launched its journals into vietnam via a licensing system. in line with its transnational strategy, the parent company provides generic content (i.e. one that remains similar across its overseas editions) to its affiliated partners. the latter only adds local content. haymarket media intended strategy was twofold. firstly, capitalizing on a 5 year old relationship, it intended to add new magazines to its partner’s portfolio. secondly, it looked for additional distributors to expand its readership. however, the company has an explicit ‘licensing and syndication’ strategy for its international magazines and content (over 40 editions of haymarket’s magazines published in asia and a growing portfolio of online versions in asia for a long timexi) which are managed from its hong kong offices. there has never been any strategy to set up wofs in asia. licensing is more appropriate than a subsidiary because asset specificity is low. the most specific asset (i.e. the journal content) already exists and is owned by the foreign firm. rather than creating new specific (i.e. localized) asset (i.e. content), the firm make existing asset ‘sweat’ i.e. generate more cash by selling the same content to new overseas markets. these xi in china, simplified chinese; hong kong, traditional chinese; india – gujarati; indonesia – bahasa indonesian; japan – japanese; korea, south – korean; malaysia – english; philippines – english; singapore – english; taiwan – traditional chinese; thailand – thai; vietnam – vietnamese. licenses are not strategic, but confined to one stage of the value chain (i.e. marketing and sales). the only intangible specific asset consists of connections with publishers and advertisers. the same can be observed in the yachting industry (e.g. fairchild’ licensing agreement aimed at obtaining an access to potential yacht buyers and politicians to build marinas in touristy areas) and in education with creative education: foreign entrants rely on low-equity entry modes when looking for assets with low specificity (e.g. buildings or classrooms). though these firms were first entrantsxii, they did opt for a low-equity entry mode, which supports our proposition (p10 an early rather than late entrant will prefer a low-equity entry mode when entering a newly-emerging market). the same applied to cadbury. though an early entrant in the emerging vietnamese confectionary sector, it shunned the creation of a joint-venture, preferring a simple distribution agreement. only when foreign firms seek more specific assets, do they look for a more complex form of cooperation (e.g. a joint-venture, a whollyowned subsidiary), which support our earlier proposition (p9: “foreign entrants in search of nonspecific assets will prefer a low-equity entry mode while foreign entrants in search of specific assets will opt for a high equity entry mode”). for instance, sanofi created the sanofi-pharma vietnam joint venture in 1992 with usine 23, one of the major national pharmaceutical companies. aventis pharma international established the roussel vietnam joint venture in 1993 as a 40/60 jointventure with sapharco. both were looking for specific resources (e.g. medicinal plants to be used in r&d), which justified a higher equity stake. xii in particular, fairchild was a first entrant in the nascent yachting market: unlike taiwan, vietnam has no yachting industry and lacks basic infrastructure (e.g. marinas, engineers, skippers, after-sales maintenance). entry modes of europen firms in vietnam emerging markets journal | p a g e | 20 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu ix. cultural  differences,   opportunism  and  subsidiary   creation   in vietnam, joint-ventures proved disappointing. in the earlier year of the doi moi period, foreign investors sought partnership with local vietnamese firms, and joint ventures were to overcome inefficient bureaucracy, acquire market and business information (griffith, zeybek, and o'brien 2001) (erramilli and rao, 1993), and lower foreign entrant’ sunk costs (root, 1987). however, joint-ventures lacked flexibility and many ended up in disputes because the minority partner could and did exercise significant power on his foreign partner e.g. sapharco purchased the stake held by french partner to turn roussel vietnam into a 100% locally-owned company in 2002. to this, add the meddling of ministries and provincial authorities if the local partner is a state-owned enterprise, and the fear that a partner may eventually become a competitor. a compounding factor were differences in law: ownership status will determine which law to apply because different laws regulate the private and state sectors (cie, 1998), (nguyen tv et al, 2005) e.g. in a survey of tenant firms of a vietnamese industrial park, the smaller ventures cited government interference as the major constraint they encountered (in contrast the larger wholly-owned companies cited competition for overseas competitors) (yeoh et al, 2004). in such a high-risk environment, firms are less likely to cooperate (carlier and tran, 2005). as thi et al (2008) observed, while 30 percent of firms in the 1996 sample relied on a network of subcontractors, that percentage decreased to 18 percent in 2001. this supports proposition 6 (e.g. a subsidiary will be preferred when the target market is unfamiliar and trust lacking). conversely, when trust abounds, contracts are not a priority. because of the trust it had in its partners, creative education thought that contract would be of limited value in the vietnamese context, thus it neither created a subsidiary, not opted for a joint-venture. when trust exists, contracts are believed to be superfluous. being patient and blending into the local culture is critical to success. the risk however is to try too hard to play with the local rules; that is to leave one’s own comfort zone, “change the way one would normally operate, and eventually do business in a way that would be considered irrational at home” (creative education). in retrospect, inefficient partners and cultural misunderstanding in vietnam suggest that foreign firms would be better off by choosing a wholly-owned subsidiary, as these have lower failure rates. from 1988 till november 1997, the failure rate of investment projects in all sectors was 16% in vietnam (694 investment projects were dissolved out of 4,514 projects)xiii. the failure rate of joint ventures is thought to be at least twice as much (thu, 1998). the number of equity-based relationships (e.g., joint ventures) and other business relations between foreign investors and private sector companies has been fairly disappointing (freeman, 2002a): 60% of the registered fdi was not used in 2006xiv. the slow fdi implementation has been attributed to factors such as inadequate infrastructure, management problems and a shortage of adequately trained human resourcexv. with feedback and experience from previous entrants, late entrants prefer subsidiaries over joint-ventures and other lowequity entry modes. the former represents a higher fraction of foreign investment in vietnam, with 61% of licensed projects compared to 34.3% of licensed projects for joint ventures (le dang, 2002). the same can be observed in china. joint-ventures are no longer the preferred entry mode. in 2004, wholly-owned subsidiaries accounted for 65% of entry modes in 2004 (24 % for the period 19791996) compared to 30 % for equity joint venture (61 % for the period 1979-1996), and 5 % for cooperative venture (15 % for the period 19791996). this supports proposition 10 (p10 early entrants will opt for a low-equity entry mode while late entrant will opt for a high-equity entry mode when entering a newly-emerging market), but contradicts proposition p2 (as the socio-political xiii e.g. there has been a high number of high-profile withdrawal cases such as chrysler’s abandonment of a car plant, or the withdrawal of total from a refinery project xiv http://www.economywatch.com/foreign-directinvestment/countries/vietnam.html xv http://www.economywatch.com/foreign-directinvestment/countries/vietnam.html entry modes of europen firms in vietnam emerging markets journal | p a g e | 21 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu environment stabilizes, foreign firms prefer subsidiaries over joint ventures). the preference for subsidiaries can be explained by the lack of trust in partners and institutions, not by improvement in the socio-political environment. in the education venture for instance, even if there was a genuine commitment (the local partner made significant investments e.g. in the form of a new building, by providing an operating license while the foreign partner provided hanoi-based foreign staff, curriculum, teacher training, recruitment and management services and proprietary knowledge e.g. course syllabus), the local firm omitted significant financial information in its dealings with the british education provider. major cultural differences also emerged during the negotiations process: under the belief that personal relationships were more important, that a contract has little legal value (though their symbolic value cannot be dismissed), the british education provider engaged in lengthy negotiations before withdrawing from the venture after months of negotiation. a subsidiary would have eliminated those risks, as exemplified by the many other education service providers that have since set up wofss in vietnam. for instance, british international school caters to expatriates’ children and local children from wealthy families. ila vietnam is a 100% foreign-owned education and training company that provides english language programmes. to this add university pathway programmes, corporate training and teacher training. rmit international university has remained the only foreign university to operate soloxvi. only when investment are stake are large, do foreign firm seek a partner: wholly-owned foreign enterprises accounted for 32.8% of fdi value in 2002, and joint-ventures for 53% of fdi value. foreign firm would go alone, if it were not for the size of the investment. besides, the reason for opting for a subsidiary might also not fall under the uppsala school’s of “psychic distance” (e.g. lack of trust in partners and institutions, opportunistic behaviors, and cultural differences, etc): large number of mnes set up 100% wholly xvi it has a student body of approximately 5,000 owned foreign subsidiary (wofs) from scratch e.g. nestle (food), prudential (life insurance and financial services), etc. (just to name a few european companies as this paper focuses on european companies) because they possess strong firm-specific-advantages (capital, brand, marketing, management, international experience in new venture start up, and ability to hire good experienced local personnel, etc.) that no local firm can match, which supports p8 (capacity matching concerns rather than cultural distance will prompt a foreign firm to opt for a high equity entry mode in a newly-emerging market). x. the  time  horizon  issue   in contrast to proposition 3 “as the time horizon of foreign investment expands, foreign firms prefer a wholly-owned subsidiary over a lowequity entry mode (e.g. alliance, joint venture, partnership)”, a long-term view does not prompt foreign investors to opt for a subsidiary. in our cases, no firm opted for a subsidiary because of investment delay, and many maintained they strategy of licensing because of the lack of efficient patent protection in vietnam: though licensing out is a low-risk/return alternative that provides little control, it enables the licensing firm to make a rapid entry and obtain some, but not all return on investment when facing potential future copycats (rajshekhar and wright, 2003). in contrast to earlier research studies (davidson, 1980; agarwal and ramaswami, 1992) that states that newly-emerging markets are more likely to attract experienced rather than inexperienced firms, and that firms with international experience have a preference for high equity entry modes (e.g. wholly-owned entry modes), firms in our group cases did not opt for a subsidiary in vietnam: in 2006, cadbury schweppes signed a distribution agreement with vietnam's leading food maker kinh do, one of the largest confectionary companies in vietnam, giving it access to its distribution network. despite a longterm business strategy, a double-digit market growth in vietnam and a strong international experience, cadbury commitment did not extend as far as far as opening a subsidiary from scratch. only in more mature but still emerging market was an entry modes of europen firms in vietnam emerging markets journal | p a g e | 22 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu acquisition a better option for the british company. in brazil, cadbury acquired adams, a giant confection company with distribution channel and a decent share of the market. perhaps, this was the only option at the time. in 2006, when it entered into the distribution agreement with kinh do, the parent firm itself was confronted with a take-over bid from kraft food, which left the company with few resources, and opening a subsidiary in vietnam was not an option at this time. it is the more inexperienced and smaller entrants (e.g. foreign entrepreneurs) who opted for a wholly-owned subsidiary in vietnam, as exemplified by the privately-owned firm artemisinin and farming international (afi) in the anti-malarial industry. this is in line with concurrent observations in the cambodian and laotian hospitality sector (hipsher 2008), and earlier observations in honduras (befus, 1988): foreign entrepreneurs often launch their own small firm in a foreign country (“foreign-born firm”). as hipsher (2008) notes, the lack of government regulations, the lower sunk costs, the less intense competition and the informal nature of the economy encourage entrepreneurs to start a subsidiary from scratch. traditional barriers to entrepreneurship in mature markets (e.g. access to capital, business experience, and competition on market) are not as high in less developed foreign markets. most often, subsidiary creation is based on personal factors: a short term exposure to the country (as an expat working in the country or during travel / leisure time), an entrepreneurial mindset, the “need to do something” in an environment that provide little employment opportunities and where self-employment is seen as a poverty-reduction strategy. however, full ownership could not prevent opportunism. afi had to relocate its activities (e.g. farming, postharvesting, and extraction) from the red river basin of northern vietnam to northern thailand due to difficulties in controlling costs. compounding factors were ineffective middle-men, unsecured transaction prices, problems in accessing land and obtaining local funding of working capital. thus, neither proposition 7 (a large and experienced entrant will prefer a wholly-owned subsidiary (i.e. internalization) over a low-equity entry mode when entering a newly-emerging market), nor proposition 5 (“in adversarial markets, effectiveness i.e. ability to achieve a desired goal and a higher opportunism risk leads foreign investors to prefer a subsidiary over a jointventure”) are supported. country rather than international experience is a factor when switching to a highequity entry mode. converting a joint venture into a wholly-owned subsidiary is more straightforward for country-experienced firms: aventis and sanofisynthelabo set up two joint-ventures aventis vietnam, formerly known as vinaspecia, and sanofi-pharma vietnam in 1992. as sanofi’s market experience grew, the firm raised its initial 50% stake in the company to 70% in june 1995. as for aventis, it ended its joint-venture with its vietnamese partner i.e. sapharco to set up a wholly foreign-owned company in vietnam in 2002. acquisition of local knowledge was a factor in increasing the drug firm financial stake (puck et al., 2006). as for aventis, the conversion to a subsidiary will put an end to the discrepancy in resources brought by partners, which supports proposition 8 “capacity matching concerns rather than cultural distance will prompt a foreign firm to opt for a high equity entry mode in a newlyemerging market”. it also appears than when transactions imply highly specific assets, as in the pharmaceutical industry, firms will opt for highcontrol modes (e.g. subsidiaries) regardless of environmental uncertainty. in 2000, on 24 foreign projects invested in the vietnamese pharmaceutical industry, there were 15 enterprises with 100% foreign investment capital and 8 joint ventures only (invest consult group, 2002). wholly owned subsidiary have become more prevalent because of the potential of the vietnamese market due to its sheer size (87 million people), central location (vietnam is increasingly used a base for exporting drug product to neighboring countries of laos and cambodia) (simonet, 2008) and rapid growth (health expenditure has been growing at more than 10% annually and the drug market at 4.5% per annum) (wpm outlook, 2005). that is in line with earlier work: makino and neupert (2000) found that strong market growth prompts managers to prefer wholly owned subsidiaries over joint ventures. conclusion: we note the high number of simple agreements (e.g. licensing) in our cases. after more than 20 years of economic and diplomatic opening, one would have expected that trust would flourish, and that foreign entrants would display a greater level of commitment and a entry modes of europen firms in vietnam emerging markets journal | p a g e | 23 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu preference for high equity entry modes. however, in a country that is gradually liberalizing but is still heavily government regulated, one that is growing fast but is as yet a developing country with uncertainty about the economic conditions, licensing agreements still prevail, even among large and experienced firms: joint venture had outcomes below expectations, and subsidiary creation is no guarantee for success. the preference for low equity entry mode (e.g. licensing) signals foreign firms’ reluctance to commit to the vietnamese market, despite its potential (in terms of customer base, growth rate). in vietnam, the life cycle of the uppsala model has a longer life span than anticipated, with foreign firms’ exploratory phase lasting more than 20 years. in contrast to european firms that have entered eastern european markets with full-fledged subsidiaries, managers go through extensive testing in vietnam, relying on lowcommitment entry modes to gain a foothold in the market, even after its 20-years transition to capitalism, perhaps because of the nature of vietnamese capitalism: it is a state rather than private capitalism. it remains to be seen whether the preference for entry modes with low-sunk costs will constitute a hurdle in the development of the vietnamese economy, or if it will protect it from foreign competitors until a strong domestic private sector emerges. entry modes of europen firms in vietnam emerging markets journal | p a g e | 24 volume 1 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.15 | http://emaj.pitt.edu xi. references   1. anderson, j.c. and narus, j. (1990), “a model of distributor firm and manufacturer firm working partnership”, journal of marketing, vol. 54, pp. 42-58. 2. audretsch, d.b. and feldman, m.p. (1994), external economies and spatial clustering, in p. krugman and a. venables (ed.), the location of economic activity: new theories and evidence, centre for economic policy research: london. 3. abrahamson, e. and rosenkopf, l. (1993) institutional and competitive bandwagons, 4. a miner, a.s. and haunschild, p.r. (1995) population level learning, research in organizational behavior vol. 17, pp. 115–166. academy of management review vol. 18, pp. 487–517. 5. agarwal, s. and ramaswami, s.n. (1992), “choice of foreign market entry”, journal of international business studies, vol. 23(1), pp. 1–27. 6. chandra, a.p. (2008). “trends and patterns of foreign direct investments in asia: an interpretative survey”. in the future of economic integration in asia in economics 2007 proceedings of the , thammasat university and japan bank for international cooperation, 2008. 7. at kearney global service locations index 2007 8. beech hannah. about turn. time. vol 173, n 26/27, 2009. 9. befus, d.r., mescon, t.s., debbie, l. and vozikis, g.s. (1988), “international investment of expatriate entrepreneurs: the case of honduras”, journal of small business management, vol. 26 no. 3, pp. 407. 10. birkinshaw, j. and hood, n. (1998), multinational subsidiary evolution: capability and charter change in foreign-owned subsidiary companies, academy of management review, vol 23 no.4, pp. 773–795. 11. bradach, j. l. and r. eccles (1989). markets versus hierarchies: from ideal types to plural forms, annual review of sociology, vol. 15, pp. 97-118. 12. brown and wilson (2009). black book of outsourcing, year-of-outsourcing-dangerously. 13. carlier, a. and tran, s. (2005). promoting business to business commercial contracts in vietnam, world bank policy note, hanoi. 14. caves (1996). multinational enterprises and economic analysis, 2nd ed., cambridge university press, new york, ny. 15. chen, h. and chen, t.-j. (1998), “network linkages and location choice in foreign direct investment”, journal of international business studies vol. 29 no.3, pp. 445–468. 16. chen, l.k. and kwan, y.k. (2000) “what are the determinants of the location of foreign direct investment? the chinese experience”, journal of international economics, vol. 51, no. 2, pp.379– 400. entry modes of europen firms in vietnam emerging markets journal | p a g e | 25 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu 17. cie, (1998). “enterprise reform project”, in canberra and sydney (ed.), center for international economics. 18. clemons r. s. and mcbeth m. k. (2009), public policy praxis: a case approach for understanding policy and analysis, 2nd edition, coase, r.h. (ed.) (1937), the nature of the firm, economica n.s, vol. 4, pp. 386–405, in stigler, g.j and boulding, k.e. (eds.), price theory, irwin, homewood , pp.386–405. 19. davidson, w.h. (1980) “the location of foreign direct investment activity: country characteristics and experience effects”, journal of international business studies, vol. 11 no.2, pp. 9–22. 20. duasa j. (2007). “foreign direct investment and growth: does stability matter?” journal of economic cooperation among islamic countries, vol. 28 no.2, pp. 83-98. 21. dye t. (2010), “understanding public policy. international edition 13th edition” 22. dyer j.h. and chu w. (2003). “the role of trustworthiness in reducing transaction costs and improving performance: empirical evidence from the united states, japan, and korea”. organization science, vol. 14, no. 1, pp. 57-68. 23. erramilli, m.k. and rao, c.p. (1993) “service firm’s international entry-mode choice: a modified transaction-cost analysis approach”, journal of global marketing, vol. 57, pp.19–38. 24. saul e., hughes k. & todd s. (1997). foreign direct investment in central and eastern europe, cassel, london. 25. freeman, n.j. (2002a). foreign direct investment in vietnam: an overview’, dfip workshop on globalisation and poverty in vietnam, hanoi. 26. freeman, n.j. (2002b). foreign direct investment in cambodia, laos and vietnam: a regional overview. conference on foreign direct investment: opportunities and challenges for cambodia, laos and vietnam, hanoi. 27. gatignon, h. and anderson, e. (1988). “the multinational corporation’s degree of control over foreign subsidiaries: an empirical test of a transaction cost explanation”, journal of law, economics and organization, vol. 4 no. 2, pp.305–336. 28. griffith, d. a., zeybek, a.y., and o'brien, m. (2001). "knowledge transfer as a means for relationship development: a kazakhstan-foreign international joint venture illustration", journal of international marketing, vol. 9 no.2, pp. 1-18. 29. harrison, b. (1994), lean and mean: the changing landscape of power in the age of flexibility, basic books, new york, ny. 30. hennart, j. f.,kim, d. j. and zeng, m. (1998). the impact of joint venture status on the longevity of japanese stakes in u.s. manufacturing affiliates, organization science volume 9 no. 3, pp. 382-395. 31. hill, c.w.l., hwang, p. and kim, w.c. (1990). “an eclectic theory of the choice of international entry mode”, strategic management journal, vol. 11, pp.117–128. entry modes of europen firms in vietnam emerging markets journal | p a g e | 26 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu 32. hipsher s. (2008). “born foreign firms in cambodia exploration of mode of entry decisions of firms originating from the greater mekong sub-region”, international journal of emerging markets, vol. 3 no. 1, pp. 104-115 33. hymer, s. (1960) the international operations of national firms: a study of direct investment, phd thesis, mit press, cambridge. 34. husted, bw and folger, d. (2004). fairness and transaction costs: the contribution of organizational justice theory to an integrative model of economic organization, organization science, vol. 15 no. 6, pp. 719-729. 35. inkpen, a.c. and beamish, p.w. (1997). knowledge, bargaining power and the instability of joint ventures, academy of management review, vol. 22 no. 1, pp.177–202. 36. invest consult group (2002) report on vietnam basic chemical and pharmaceutical market, may. 37. johanson, j. and weidersheim-paul, f. (1975), “the internationalization of the firm: four swedish cases”, journal of management studies, vol. 12 no. 3, pp. 305-22. 38. jung, j. (2004). “acquisitions or joint ventures: foreign market entry strategy of us advertising agencies”, the journal of media economics, vol. 17, no. 1, pp.35–50. 39. krugman, p. (1991). geography and trade, mit press, cambridge, ma. 40. larsson, r., bengtsson, l., henriksson, k. & sparks, j. (1998). “the interorganizational learning dilemma: collective knowledge development in strategic alliances”, organization science, vol. 9 no.3, pp. 285–305. 41. le dang, d. (2002) foreign direct investment in vietnam: results, achievements, challenges and prospects, international monetary fund, conference on foreign direct investment, hanoi. 42. leproux v and brooks d.h. (2004). “viet nam: foreign direct investment and postcrisis regional integration”, working paper no. 56, september. 43. leung, s., and j. riedel, (2001). “the role of the state in vietnam’s economic transition”, working paper, technical report economics of development, apseg, australian national university. 44. lee k. (2005). "late marketization vs. late industrialization: convergence or divergence in east asia",asia-pacific journal of economic literature, vol. 19 no. 1, pp. 42-59. 45. leung, m.k., rigby, d. and young, t. (2003). entry of foreign banks in the people’s republic of china: a survival analysis, applied economics, vol. 35, pp.21–31. 46. makino, s. and neupert, k.e. (2000). “national culture, transaction cost, and the choice between joint venture and wholly owned subsidiary”, journal of international business studies, vol. 31, pp.705– 713. 47. masina, p. (2002). rethinking development in east asia, curzon press, nordic institute of asian studies. surrey. 48. meyer, k.e. (1998). direct investment in economies in transition, elgar, aldershot. entry modes of europen firms in vietnam emerging markets journal | p a g e | 27 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu 49. meyer ke and pind c. (1999). the slow growth of foreign direct investment in the soviet successor states, economics of transition, vol. 7 no.1, pp.135-50. 50. nguyen, h.v. and meyer, k.e. (2005). “foreign investment strategies and sub-national institutions in emerging markets: evidence from vietnam”, journal of management studies, vol. 42, no. 1, pp.63–95. 51. nguyen, v.t., weinstein, m. & meyer a.d. (2005). “development of trust: a study of inter-firm relationships in vietnam”, asian pacific journal of management, vol. 22no. 3, pp.211-235. 52. oliver, c. (1991). strategic responses to institutional processes, academy of management review, vol. 16, pp. 145–179. 53. oman c. (2000). policy competition for foreign direct investment: a study of competition among governments attracting fdi, oecd, paris. 54. padmanabhan, p. and cho, r.k. (1996). ownership strategy for a foreign affiliate: an empirical investigation of japanese firms, management international review, vol. 36 no. 1, pp.45–65. 55. pandian, s.j.r. (2007), “an exploratory study of internationalization strategies of malaysian and taiwanese firms”, international journal of emerging markets, vol. 2 no. 3, pp. 252-273. 56. parkhe, a. (1993). “strategic alliance structuring: a game theoretic and transaction cost examination of interfirm cooperation”, academy of management journal, vol. 36 no.4, pp. 794–829. 57. peng, m.w. (2000). business strategies in transition economies, sage: thousand oaks, ca. 58. porter, m. (1990). the competitive advantage of nations. new york: free press 59. post, james e.; lawrence, anne t.; weber, james. business and society: corporate strategy, public policy, ethics, 10th edition boston, mcgraw-hill/irwin. 60. puck, j.f., holtbrügge, d. and mohr, a.t. (2006). “beyond entry mode choice: explaining the conversion of joint ventures into wholly-owned subsidiaries in the prc”, in aib southeast asia regional conference 2006 proceedings of the conference in bangkok, thailand 7–9 december. 61. rajshekhar, j. and wright, r. (2003) “an international market entry model for pharmaceutical companies: a conceptual framework for strategic decisions”, international journal of medical marketing, vol. 3, no. 4, pp.274–286. 62. jonathan, r.(2005). living with transition in laos: market integration in southeast asia. routledge, abington. 63. root, f.r. (1987). entry strategies for international markets, lexington books, lexington, ma. 64. rugman am, 1980. "internalization as a general theory of foreign direct investment: a re-appraisal of the literature," review of world economics (weltwirtschaftliches archiv), springer, vol. 116(2), pages 365-379, june. 65. rugman am & sukpanich n, 2006. "firm-specific advantages intra-regional sales and performance of multinational enterprises," working papers 2006-19, indiana university, kelley school of business, department of business economics and public policy. entry modes of europen firms in vietnam emerging markets journal | p a g e | 28 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu 66. sachs j, woo wt, fischer s and hughes g. (1994). structural factors in the economic reforms of china, eastern europe, and the former soviet union economic policy, vol. 9 no. 18, pp. 101-145 67. steensma k, jeffrey q. barden j, dhanara c, lyles m and tihany l. (2007). “the evolution and internalization of international joint ventures in a transitioning economy”, journal of international business studies, pp. 1–17. 68. sako, m. (1991). the role of "trust" in japanese buyer-supplier relationships, ricerche economiche, vol. 45 no.2-3, pp. 449-474. 69. shaver, m. and flyer, f. (2000). “agglomeration economies, firm heterogeneity and foreign direct investment in the united states”, strategic management journal, vol. 21, pp. 1175-1193. 70. shenkar, o. (2001). “cultural distance revisited: towards a more rigorous conceptualization and measurement of cultural differences”, journal of international business studies, vol. 32, pp.519–535. 71. simonet d. (2008). “the vietnamese pharmaceutical market: a comparison of foreign entry strategies”, international journal of business and emerging markets, vol. 1 no. 1, pp. 61. 72. simonet d. (2002). “licensing agreements in the pharmaceutical industry”, english version published in international journal of medical marketing. vol. 2 no.4, pp. 329-341. 73. smith, d.a. (1996). third world cities in global perspective: the political economy of uneven urbanization, westview, boulder, co. 74. tatoglu, e., glaister, k.w. and erdal, f. (2003). determinants of foreign ownership in turkish manufacturing, eastern europe economics, vol. 41 no. 2, pp.5–41. 75. telser, l. g. (1980). “a theory of self-enforcing agreements”, journal of business, vol. 53 no.1, pp. 27-44. 76. tan, b., erramilli, k. and liang, t.w. (2001). the influence of dissemination risks, strategic control and global management skills on firms’ modal decision in host countries, international business review, vol. 10, pp.323–340. 77. tran thi bich, grafton r. and kompas, t. (2008).”firm efficiency in a transitional economy: evidence from vietnam”, asian economic journal, vol. 1 no. 22, pp. 47-66. 78. tuang a and stringer c. trust and commitment in vietnam: the industrial distributor’s perspective. international journal of emerging markets. vol. 3 no. 4, 2008. pp. 390-406. 79. thu, t. (1998). new wave to improve investment climate, saigon times, pp.22–25. 80. thu, t. (1998). new wave to improve investment climate, saigon times, pp.22–25. 81. tsai, w. and ghoshal, s. (1998). “social capital and value creation: the role of intra-firm networks”, academy of management journal, vol. 41 no.4, pp. 464–476. 82. urata s, chia siow, y. and fukunari, k. (2006). “multinationals and economic growth in east asia foreign direct investment, corporate strategies and national economic development. routledge international business in asia routledge, uk. entry modes of europen firms in vietnam emerging markets journal | p a g e | 29 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.27 | http://emaj.pitt.edu 83. vachani s. india: opportunities and challenges for multinational enterprises” international journal of business and emerging markets, vol. 1,no. 1, pp. 42-59. 84. van arkadie, b., and mallon r. (2003). vietnam: a transition tiger? australian national university press, canberra. 85. wasserman, s. and faust, k. (1994). social network analysis: methods and applications, cambridge university press: cambridge. 86. williamson, o. (1975) markets and hierarchies: analysis and antitrust implications, 87. the free press, new york. 88. williamson, o. (1991). comparative economic organization: the analysis of discrete structural alternatives. administrative science quarterly, vol. 36 no.2, pp. 269–296. 89. wilkinson rg and pickett ke. (2009). the spirit level: why more equal societies almost always do better. penguin, london. 90. outlook wpm. (2005). world pharmaceutical markets, vietnam. 91. yan, a., & zeng, m. (1999). “international joint venture instability: a critique of previous research, a reconceptualization, and directions for future research”, journal of international business studies, vol. 30 no.2, pp. 397–415. 1. yeoh c, wong d and wong sy (2005). "a note on singapore's pursuit of location advantages in indonesia and vietnam", asia-pacific journal of economics and business, vol.5, 8, 1, pp. 4459. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu erratum correction to: orynbassarova, dilara “entrepreneurial university perspective: tracking labor force capacity to support industrialization processes in the emerging markets, evidence from kazakhstan data” emering markets journal 6 (2): 5-11. 10.5195/emaj.2016.111 cevdet kızıl istanbul medeniyet university cevdet.kizil@medeniyet.edu.tr http://dx.doi.org/10.5195/emaj.2016.111 abstract author’s affiliation was indicated as “independent researcher, kazakhstan” when the article was initially submitted. however, author asked for his affiliation to be changed as “nazarbayev university, graduate school of education, astana, kazakhstan” after publication. the original article can be found via the doi http://dx.doi.org/10.5195/emaj.2016.111 new articles in this journal are licensed under a creative commons attribution 3.0 united states license. erratum cover page: author’s affiliation of “independent researcher, kazakhstan” was changed to “nazarbayev university, graduate school of education, astana, kazakhstan” full text original article http://dx.doi.org/10.5195/emaj.2016.111 this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.132 | http://emaj.pitt.edu | mailto:cevdet.kizil@medeniyet.edu.tr http://dx.doi.org/10.5195/emaj.2016.111 http://dx.doi.org/10.5195/emaj.2016.111 http://dx.doi.org/10.5195/emaj.2016.111 http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu usage of social media in city marketing: a research on 30 metropolitan municipalities in turkey niyazi gümüş kastamonu university, faculty of economics and administrative sciences business department | ngumus@kastamonu.edu.tr abstract rapid changes in information and communication technologies cause serious developments in marketing field similar to every sector. in parallel with these developments, the social media channels which appear as web 2.0 applications have a number of advantages in comparison with traditional media channels. social media gained a place in marketing activities because of its advantages. social media is added on instruments in line with these developments that countries benefit in marketing activities for attracting more tourists, investment and becoming prominent against the other cities. cities intensively benefit from social media because of social media’s properties like reaching the large masses, low marketing cost, interaction, receiving feedbacks rapidly, etc. within this context, the purpose of this research is to determine the use statuses of social media by metropolitan municipalities as part of city marketing. in accordance with this purpose, official social media accounts of 30 metropolitan municipalities are investigated between the dates of 01/09/2016 and 30/09/2016, then their shares in social media channels are investigated in the context of city marketing. it is observed that two metropolitan municipalities do not have official facebook accounts, four metropolitan municipalities do not have an official twitter account as well. again, it is found that 19 metropolitan municipalities do not have an official instagram account and 17 metropolitan municipalities do not have official youtube account. in consequence, it is observed that, our metropolitan municipalities do not benefit from social media effectively for city marketing activities. keywords: city marketing, social media, metropolitan municipalities new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.114 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.114 | http://emaj.pitt.edu usage of social media in city marketing: a research on 30 metropolitan municipalities in turkey page |30| emerging markets journal usage of social media in city marketing: a research on 30 metropolitan municipalities in turkey* niyazi gümüş 1. introduction social media has directly or indirectly affected many fields since its emergence. social media channels having billions of users today have added a new meaning to the concept of communication. today, the brands, companies, public enterprises, celebrities, nongovernmental organizations as well as the individuals are taking part on social media. one of the fields that social media directly affects and contributes is certainly city marketing activities. by the social media, tens of cities had the opportunity of announcing their historical, cultural and touristic characteristics to a wide audience. the cities, in the name of their public enterprises and touristic locations, have reached to hundreds of thousands of followers through the accounts opened on social media channels. they had the opportunity of directly or indirectly communicating their touristic values to millions of people through their followers and their sharings. moreover, the visuals prepared by the specialists in the field are also reaching to hundreds of thousands of people through these social media channels. when the intense competition among the cities is considered, this opportunity provided by social media is extremely important. within the scope of this study that is realized in order to learn the social media usage statuses of 30 metropolitan municipalities in turkey in the city marketing activities, findings relevant to presence of metropolitan municipalities in social media accounts, their follower numbers and number of their sharings regarding publicity have been revealed. 2. city marketing the strong competition that emerges in all the fields today has also covered the cities, and it has obliged them to perform marketing operations in order to attract more tourists and investors against other cities. in this * this study was presented at the 1st international congress of management economy and policy, 26-27 november 2016. direction, the marketing activities have started to be realized mostly by the local managers, companies and inhabitants of the city who are the main actors of city marketing. within this scope, city marketing is being defined as efforts for showing others why these actors love this city (kavaratzis and ashworth, 2007). in another definition, it is being defined as the efforts for increasing the economic and social functions and thus the attractiveness of the city in the direction of the demands of the target audience (carrasquillo, 2011). city marketing, which is being considered as a long-termed process, is being defined as efforts to meet the requirements of the visitors, investors and inhabitants of the city. within this scope, it is being suggested to carry out marketing activities on issues such as entertainment, recreation, security, employment, settlement facilities, trade, transportation, education, city order, infrastructure etc. (goowaerts et al., 2014). other reasons directing the cities to city marketing activities due to the competition arising among the cities are being listed as follows (altunbas, 2007):  attracting the tourists and visitors  attracting business from other cities  carrying out and improving the current business  growing small business and opening new ones  increasing export and investments  increasing the population and enabling distribution within when the above articles are examined, it is being observed that the cities involve in marketing activities for economic and social reasons. in the process of city marketing, the requirements of arranging the infrastructure and social view of the city, determining common objectives, forming the development agenda and action plans that will pave the way for common vision, revealing the current potential of the city, increasing sharing and communication, forming the common city vision and values, enabling the decisions to be made jointly along with extensive reconciliation by integrating the views shouldn‘t be forgotten in order to attain the above purposes. in the general sense, turkish cities have historical, cultural and touristic values which are valuable than the other. but by versatile marketing efforts, it shouldn’t be forgotten that millions of tourists may be attracted even for a few number of touristic products. the element required to be performed at this point is the initiation of marketing activities by the local managers of the city along with the stakeholders through modern marketing tools and approaches. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.114 | http://emaj.pitt.edu niyazi gümüş emerging markets journal | p a g e |31 3. social media social media is known as the common name of hundreds of channels such as facebook, twitter, instagram, youtube etc. which had emerged as web 2.0 applications. social media, with its user numbers, is standing as a channel in which all parts either seeking profit or not as brands and companies being in the first place take place and are required to take place. in the evaluations performed regarding social media, it is being expressed as technology based applications allowing the users to generate information and to share such information (kaplan and haenlein, 2010). in another study, when the social media is used by public institutions, it is being assessed as an innovative platform allowing the institutions to interact with citizens and other institutions (criado et al., 2013). it is easily specified that the social media, which had emerged along with the improvements arising in communication technologies in the recent ten years, is shaping and transforming the marketing activities (gulbahar and yıldırım, 2015). if we consider the user numbers of social media channels that come to the forefront in the general sense, it is being observed that facebook has 1.650 million and twitter has 500 million users by september 2016 (www.socialbakers.com, 2016). and if we consider the social media figures in turkey, about 46 millions of turkish population – which had exceeded 79 millions by january 2016are active internet users. also, the total number of social media users in turkey is estimated as about 42 millions (wearesocial, 2016). social media is intensely being used in tourism sector and thus in city marketing activities as in each field. social media platforms such as facebook, instagram, twitter, blogs, forums and media sharing sites are providing facilities for both the stakeholders of tourism and the city managers on issues such as improving the images of touristic locations, making the past or future tourism plans and establishing direct communication with the touristic locations. the main reason of this is the continuous use of social media by the people before planning their travels, in the process of travel and by the end of their travel at the point of sharing their experiences regarding their travel. for this reason, social media tools are being considered as effective means in the publicity of touristic locations (ketter, 2016). 4. usage of social media in city marketing along with city marketing or marketing of locations, frequent magazines, newspapers and city presentation videos are also used. but these unidirectional means of communication were over costly and remained very limited in getting feedback from the target audience and in interacting with the target audience along with increasing popularity of the cities (zhou and wang, 2014). but by virtue of social media, interaction in between the city and the target audience, receipt of instant feedback, sharing opinions mutually and sharing visual and written items regarding the city have become possible. social media is now very effective on city marketing, especially as destination of tourism. social media is providing a suitable platform for improving and sharing the experiences of the ones visiting the city. the integrated use of other social media channels relevant to tourism by the local managers will definitely increase the effect of activities (zhou and wang, 2014). through the social media, the city administrations are able to initiate discussions with different target audiences and are able to obtain the opinions of target audience rapidly (howard, 2012). this condition will provide significant advantages to managers compared to the traditional media tools. social media, besides being a platform providing followers the opportunity of communicating with each other, also provides the followers the chance of directly reaching the opinions and suggestions of public institutions which have a page (mossberger, 2013). because, it is known that personal experiences and interactions are affecting the perception of the individuals regarding the city (sevin, 2014). by the social media, the opinions of ones which had previously visited the relevant cities and the suggestions of the public institutions relevant to the touristic product are directly learned. social media is used in planning travels and in searching travel information, and briefly as a field of tourism (xiang and gretzel, 2010; jacobsen and munar, 2012). moreover, it will be possible to reach to a wider audience through sharing of texts and visuals -relevant to events that will be organized in the cityby the municipalities, and thus the attention of hundreds of thousands of people will be drawn (calisir, 2015). for this reason, the use of social media in city marketing activities is standing inevitably. for instance, by the claim that the şirince village of izmir will not be affected from doomsday in 2012, it had become the most known village of the world (bozkurt, 2013). this condition shows the power of social media. in a research performed on social media accounts of 31 cities in the world, it had been found out that twitter, youtube and facebook are the most used social media channels by the city municipalities (mainka et al., 2014). in a research regarding the social media implementations of metropolitan municipalities, it had been determined that only 9 out of 16 metropolitan municipalities operating in turkey are using social media in corporate sense. in the same study, it had been determined that the metropolitan municipalities are mainly tweeting regarding the issues of transportation, service, infrastructure, events and social municipalism, and that very few municipalities are using social media for publicity of cities (tarhan, 2012). being a recognized or known city means becoming more valuable and preferable in the eyes of ones living in volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.114 | http://emaj.pitt.edu usage of social media in city marketing: a research on 30 metropolitan municipalities in turkey page |32| emerging markets journal that city and sightseeing the city (iri and et al., 2011). today, everyone will accept that the most suitable means both affordability and reachability in increasing the recognition of the cities and in making it reach to large masses in social media. for this reason, the local managers not using this channel in the process of city marketing or being unable to use this channel sufficiently will not be accepted. the following strategies are generally recommended to municipalities which want to use social media in city marketing activities;  designing the social media strategy in the direction of the purposes of city marketing,  designing the social media strategies as integrated with the traditional media tools,  continuously updating the page,  in the contents, giving weight to visual and audial elements prepared by professionals,  focusing on viral contents,  managing the social media account by someone having good command of the information relevant to the city. 5. method within the scope of this study that is performed in order to learn the use of social media in city marketing, 30 metropolitan municipalities in turkey had been selected as institutions which take or required to take active duty in the process of publicity and marketing of the cities. within this scope, the contents shared by 30 metropolitan municipalities in between 01-30.09.2016 on their official social media accounts had been examined. within the scope of the research, first it had been entered in the official web sites of the municipalities and then it had been accessed to their social media accounts. facebook, twitter, instagram and youtube had been selected as social media channels. among the contents shared by the municipalities, the contents relevant to natural, touristic, cultural and historical etc. elements of the city and the contents of artistic, cultural and sportive events realized in the city have been assessed as content within the scope of publicity, and the numbers of these contents have been considered. content analysis method has been applied in the research. 6. findings in this section, the account statuses of metropolitan municipalities on social media channels such as facebook, twitter, instagram and youtube, their follower numbers on these channels, and their total sharings and sharings for publicity on these channels in between 01-30.09.2016 are being examined.1 table 1: social media account information statuses of metropolitan municipalities resource: table composed by author (01/10/2016) in table 1, the social media account information statuses of metropolitan municipalities are available. when the table is examined, it is observed that two metropolitan municipalities (trabzon and van) don’t have official facebook accounts, and that four metropolitan municipalities don’t have official twitter accounts. it is understood that the mayors of some of the metropolitan municipalities -which don’t have twitter accountsare performing sharing on their twitter accounts. it is also observed that nineteen metropolitan municipalities don’t have official instagram accounts, and that seventeen metropolitan municipalities don’t have official youtube accounts. when the memberships of social media channels -reaching to millions both across the world and across our countryare considered, the non-presence of metropolitan municipalities operating in turkey cannot be thought. 1international criminal tribunal for the former yugoslavia or icty, is a body of the united nations established to prosecute serious crimes committed during the wars in the former yugoslavia, and to try their perpetrators. the tribunal is an ad hoc court which is located in the hague, netherlands. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.114 | http://emaj.pitt.edu niyazi gümüş emerging markets journal | p a g e |33 table 2: social media account information of metropolitan municipalities resource: table composed by author (10/10/2016) * belongs to mayors of metropolitan municipalities. in table 2, the populations of metropolitan municipalities as per address based population registration system for the year 2015 and their social media account information are available. when the table is examined, istanbul is ranking the first by 14.657.434 individuals in terms of population. also in terms of facebook followers, diyarbakir is ranking the first with 136.379 followers. ankara has 284.343 followers on twitter. and in terms of instagram followers, izmir is ranking the first with 49.7 thousand followers. finally, gaziantep has 920 youtube subscribers. when the figures are considered, it is observed that the numbers of followers and subscribers are as few as not be compared with the populations of especially the largest three cities. it is being thought that these figures will increase through the provision by the metropolitan municipalities of information that will facilitate the daily activities of citizens as daily routine issues being in the first place over social channels of information. table 3: facebook sharings of metropolitan municipalities resource: table composed by author (01/10/2016) it contains data between 01-30.09.2016. in table 3, there are facebook sharing of metropolitan municipalities in between 01-30.09.2016. when the table is examined, it is being observed that three metropolitan municipalities which share content the most on facebook are manisa with 378 contents, mersin with 246 contents and antalya with 188 contents. moreover, three metropolitan municipalities sharing content the most are antalya with 121 contents, manisa with 86 contents and istanbul with 67 contents. when the publicity focused contents shared on facebook by metropolitan municipalities are considered, it had been determined that they are visuals of activities for increasing the life quality of inhabitants of the city. these are relevant to social and cultural events performed in the city and the natural, historical and touristic elements of the city. today, facebook has the most followers among social media networks. in this direction and in the context of city marketing, turkish metropolitan municipalities should increase their number of followers through publicity focused sharings and should enable their followers to share such contents on their pages. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.114 | http://emaj.pitt.edu usage of social media in city marketing: a research on 30 metropolitan municipalities in turkey page |34| emerging markets journal table 4: twitter sharings of metropolitan municipalities it contains data between 01-30.09.2016. in table 4, there are the twitter sharings of metropolitan municipalities in between 01-30.09.2016 given as total and publicity focused. when the table is examined, the metropolitan municipalities sharing content the most within the specified period had been sanlıurfa with 474 contents, manisa with 383 contents and istanbul with 374 contents. when the publicity focused twitter sharings of metropolitan municipalities are considered, antalya has 233 contents, istanbul has 160 contents and sanlıurfa has 116 contents. when the contents shared by metropolitan municipalities on twitter are considered, it is observed that mostly the contents on facebook are shared. it is required for the metropolitan municipalities to be present also on twitter to feed their followers with visuals and texts. table 5: instagram sharings of metropolitan municipalities resource: table composed by author (01/10/2016) it contains data between 01-30.09.2016 in table 5, there is instagram sharing of metropolitan municipalities between 01-30.09.2016. as it will be observed from the table, only 10 of the metropolitan municipalities have instagram accounts. this social network, where the followers mainly share visual contents, is being encountered as a channel on which the visuals and publicity videos relevant to the city are required to be shared greatly. when the table is examined, it is observed that ankara and adana are the metropolitan municipalities sharing content the most. also, in terms of sharing publicity focused contents, again these two metropolitan municipalities are coming to the forefront. but when the contents shared are examined, it is observed that they are mostly focused on celebrations, meetings and openings. instagram is a social network that, the metropolitan municipalities should definitely use with its user numbers reaching to millions in turkey. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.114 | http://emaj.pitt.edu niyazi gümüş emerging markets journal | p a g e |35 table 6: youtube sharings of metropolitan municipalities resource: table composed by author (01/10/2016) it contains data between 01-30.09.2016. finally, in table 6, the youtube sharing figures of metropolitan municipalities in between 01-30.09.2016 are available. when the table is examined, it is observed that only 13 metropolitan municipalities have youtube accounts. it is thought that other municipalities which don’t consider to be present in this social channel –that has millions of users in the worldwill not be able to have reasonable grounds. when the table is examined, it is observed that the metropolitan municipality which had shared the most videos in between the specified dates is adana with 32 videos, and it is being followed by kahramanmaraş with 11 videos. also when the publicity focused video sharings are considered, adana is ranking first. adana metropolitan municipality’s videos for introducing the city such as festivals etc. are coming to the forefront. 7. conclusion social media has extremely significant pluses when compared to traditional communication means with its advantages such as being able to reach to large masses, interacting with the target audience, getting fast feedback, cost etc. in this sense, the local administrations such as municipalities and governorates should involve in their city marketing activities. the following results and recommendations have been revealed within the scope of this study that is realized in order to determine how the 30 metropolitan municipalities use social media by sharing publicity focused contents within the scope of city marketing activities;  in the examination performed within the scope of the research, with 136.379 followers, diyarbakir metropolitan municipality is ranking the first among 30 metropolitan municipalities in respect of facebook followers. also, ankara metropolitan municipality is ranking the first with 284.343 individuals in respect of number of twitter followers. and in terms of instagram followers, izmir metropolitan municipality is ranking the first with 49.7 thousand followers. finally, gaziantep metropolitan municipality has 920 youtube subscribers. when the figures are considered, it is observed that the numbers of followers and subscribers are as few as not to be compared with the populations of especially the largest three cities.  it is being observed that the three metropolitan municipalities which share content the most on facebook are manisa with 378 contents, mersin with 246 contents and antalya with 188 contents. moreover, in the ranking of three metropolitan municipalities sharing publicity focused content the most, it is observed that they are antalya with 121 contents, manisa with 86 contents and istanbul with 67 content.  when the twitter sharings of 30 metropolitan municipalities are considered, the metropolitan municipalities sharing content the most within the research period had been sanliurfa with 474 contents, manisa with 383 contents and istanbul with 374 contents. when the publicity focused twitter sharings are considered, antalya has 233 contents, istanbul has 160 contents and sanliurfa has 116 contents.  also in the instagram sharings of metropolitan municipalities, it is being observed that ankara and adana metropolitan municipalities are sharing the most content. plus, in sharing of publicity focused contents, again these two metropolitan municipalities are coming to the forefront.  then by the help of research, it is observed that only 13 metropolitan municipalities have youtube accounts, and the metropolitan municipality sharing the most video is adana with 32 videos. that is followed by kahramanmaraş with 11 videos. when the publicity focused video sharings are considered, adana is ranking the first.  for the municipalities to effectively benefit from social media in city marketing, it is required for the accounts to be managed by professional employees directly affiliated to the administration of the city and for them to respond the questions and critics as soon as possible. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.114 | http://emaj.pitt.edu usage of social media in city marketing: a research on 30 metropolitan municipalities in turkey page |36| emerging markets journal  when the sharings of metropolitan municipalities on social media channels are examined, it had been revealed that the contents are relevant to meetings, openings, visits, celebrations and etc. the metropolitan municipalities to perform sharings also on other subjects besides these contents will contribute to the increase of number of followers.  for the municipalities to effectively use social media in the context of city marketing, they are required to frequently share the historical, touristic, cultural values of the city with visual contents. again, all kinds of social, artistic, cultural and sportive events to be realized in the city are required to be shared with the followers with visual and viral contents. consequently, it is affecting the behaviors of users of social media –that increases its number of users each dayboth at the point of goods and services and at the point of touristic products. thus, it has become easier for the local administrations to communicate their touristic, historical and cultural values through official accounts to attract the attention of masses. it is not possible to explain and understand the attitudes of local administrations which stay away from these social media channels which have millions of followers and uses, and which don’t effectively use these channels despite willing to attract more tourists and investors to their cities. references altunbaş, h. (2007) pazarlama i̇letişimi ve şehir pazarlaması “şehirlerin markalaşması”. selçuk i̇letişim, 4, 4, 2007. bozkurt, h.h. (2013) halkla i̇lişkiler uygulamacıları i̇çin edirne i̇li tanıtım materyallari. sosyal ve beşeri bilimler dergisi cilt 5, no 2, 2013 issn: 13098012 (online). criado, j. ignacio, sandoval-almazan, rodrigo. gil-garcia, j. ramon (2013) government innovation through social media. government infotmatin quarterly 30 (2013) 319-326. çalışır, g. (2015) halkla i̇lişkiler uygulaması olarak belediyelerde sosyal ağların kullanımı. çağdaş yerel yönetimler, cilt 24 sayı 4 ekim 2015, s.59-93. goovaerts, p. biesbroecka, h. van, t, van t. (2014) measuring the effect and efficiency of city marketing procedia economics and finance 12 ( 2014 ) 191 – 198. gulbahar, o. m. and yıldırım, f. (2015) marketing efforts related to social media channels and mobile application usage in tourism: case study in istanbul. procedia social and behavioral sciences 195 ( 2015 ) 453 – 462. jacobsen, j. steen k. and munar, a. m. (2012) tourist information search and destination choice in a digital age. tourism management perspectives 1 (2012) 39–47 howard, anne e (2012)connectıng wıth communıtıes, how local government is using social media to engage with citizens.http://www.governanceinstitut e.edu.au/magma/media/upload/ckeditor /files/1353548699_conconnect_com munities_anzsigacelg_august_2012.pdf (18.07.2016). i̇nal m. e. i̇ri r., h. türkmen h. (2011). şehir pazarlamasında bilinirliğin önemi: niğde yöresinin bilinirliğinin ölçülmesine yönelik bir araştırma. niğde üniversitesi i̇i̇bf dergisi, 2011, cilt: 4, sayı: 1, s. 81-96 kaplan, a. m. and haenlein, m. (2010). "users of the world, unite! the challenges and opportunities of social media", business horizons, 59—68. kavaratzis m. and ashworth g.j. (2007) partners in coffeeshops, canals and commerce: marketing the city of amsterdam. cities, vol. 24, no. 1, p. 16–25, 2007. _ 2006 elsevier ltd. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.114 | http://emaj.pitt.edu niyazi gümüş emerging markets journal | p a g e |37 ketter, e. (2016) destination image restoration on facebook: the case study of nepal's gurkha earthquake. journal of hospitality and tourism management 28 (2016) 66-72. mainka a. h. s., stock w., peters g. i. (2014) government and social media: a case study of 31 informational world cities. 2014 47th hawaii international conference on system science. https://www.phil-fak.uniduesseldorf.de/fileadmin/redaktion/ins titute/informationswissenschaft/heck/m ainka_ua_hicss_2014_publikation_0 1.pdf (25.08.2016). mossberger, k. wu, y, crawford, j. (2013) connecting citizens and local governments? social media and interactivity in major u.s. cities. government information quarterly 30 (2013) 351–358. sevin h. e. (2014) understanding cities through city brands: city branding as a social and semantic network. cities 38 (2014) 47–56. socialbakers (2016) free social media statistics directory https://www.socialbakers.com/statistics /google-plus/profiles/turkey/ (09.09.2016). tarhan, a. (2012) büyükşehir belediyelerinin sosyal medya uygulamalarına halkla i̇lişkiler modellerinden bakmak. i̇letişim kuram ve araştırma dergisi sayı 35 /güz 2012 wearesocial (2016) digital in 2016. http://wearesocial.com/uk/specialreports/digital-in-2016 (06.09.2016).žiković, s. 2006. implications of measuring var using historical simulation; an example of zagreb stock exchange index – crobex in j. roufagalas (ed.), resource allocation and institutions: explorations in economics, finance and law. 367-389. xiang. z, and gretzel, u. (2010) role of social media in online travel information search. tourism management 31 (2010) 179–188. zhou, l, and wang, t. (2014) social media: a new vehicle for city marketing in china. cities 37 (2014) 27–32 https://www.phil-fak.uni-duesseldorf.de/fileadmin/redaktion/institute/informationswissenschaft/heck/mainka_ua_hicss_2014_publikation_01.pdf https://www.phil-fak.uni-duesseldorf.de/fileadmin/redaktion/institute/informationswissenschaft/heck/mainka_ua_hicss_2014_publikation_01.pdf https://www.phil-fak.uni-duesseldorf.de/fileadmin/redaktion/institute/informationswissenschaft/heck/mainka_ua_hicss_2014_publikation_01.pdf https://www.phil-fak.uni-duesseldorf.de/fileadmin/redaktion/institute/informationswissenschaft/heck/mainka_ua_hicss_2014_publikation_01.pdf https://www.phil-fak.uni-duesseldorf.de/fileadmin/redaktion/institute/informationswissenschaft/heck/mainka_ua_hicss_2014_publikation_01.pdf emerging markets journal volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu global cri̇si̇s and its effects in the developed and emergent countri̇es “the bottom of the pyrami̇d” as an innovati̇on resource irma shyle universiteti politeknik i tiranes | e-mail: irmitash@yahoo.com abstract the economists forecast that in the next 5 years the average annual growth of the global economy will be smaller than the average rate in the past 15 years. this reinforce more than ever the problem of the restricted resources management and discovery of the best possible ways to improve and increase the population welfare. it is raised the question: to serve 5 milliard people in the world (with less than 2$ per day) is: moral responsability? high level of intelect? business opportunity? is it the time for companies to enter in the bottom of the pyramid markets? is it the bottom of the pyramid the source of the innovation? why are these markets attractive? keywords: average annual growth, global economy, resources management, markets this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu mailto:irmitash@yahoo http://creativecommons.org/licenses/by-nc-nd/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://emaj.pitt.edu/ global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 48 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource irma shyle i. introduction maybe it was not believed that the entire world would have been fallen in a crisis situation after the big depression. because of the global crisis, it is obviously seen a decline in the market volume but an increase in its value, for the only fact of the extremely growth of the prices. for many countries in the world, import and export were declined, and foreign direct investments were also declined in the emergent countries. there are also social effects of the gloabl crisis in all countries. albania, as part of the world felt the effects of the crisis, beginning from the decrease of the incoming flow of the emigrants money, who are now unemployed, till to exports decrease pace. it is important to be mentioned that albania is an emergent country and its main activities are: agriculture, tourism, construction and emigrants remittance. the world experience has shown that heavy industries and those of automibiles are more vulnerable from the crisis, so albania is less sensitive in this case. in albania, one in two persons is poor and one in 20 persons is extremely poor. some years ago, companies will be directed to the consumers category with average and high income, eleminating and even ignoring low income category (less than 2$/day). this market segmentation with income less than 2$/day represent the so-called the bottom of the pyramid. this segment is considered as unsuitable and non-profitable market. today if population is segmented by income, it will be clear that 2/3 of them, which is the great part of the market, has less than 2$ per day. the world crisis deepen more the gap between the rich and the poor people. for a market segment to be effective, it must be considerable. the bottom of the pyramid market size is significative. it is important to be informed in details about this segment specifications, the ability to enter in the market, the neccessary capacity and disponibility to enter to this market. ii. global crisis effects the world economy is mired in the worst financial crisis since the great depression. what first appeared as a sub-prime mortgage crack in the united states housing market during the summer of 2007 began widening during 2008 into deeper fissures across the global financial landscape and ended with the collapse of major banking institutions, precipitous falls on stock markets across the world and a credit freeze. these financial shockwaves have now triggered a full-fledged economic crisis, with most advanced countries already in recession and the outlook for emerging and other developing economies deteriorating rapidly, including those with a recent history of strong economic performance. the crisis has already had a severe impact on global commodity markets with far-reaching implications for the prospects of the developing world at large. commodity prices have been highly volatile during 2008. most prices surged in the first half of 2008, continuing a trend that had begun in 2003. trends in world market prices reversed sharply from mid-2008, however. oil prices have plummeted by more than 60 per cent from their peak levels of july to november. the prices of other commodities, including basic grains, also declined significantly. in the outlook, most of these prices are expected to even out further along with the moderation in global demand. global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 49 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu growth of world trade decelerated to 4.3 per cent in early 2008, down from 6.4 per cent in 2007, owing mainly to a decline in imports by the united states. united states imports, which account for about 15 per cent of the world total, have registered a decline in every quarter since the fourth quarter of 2007 and dropped as steeply as 7 per cent in the second quarter of 2008. growth in the volume of world trade had dropped to about 3 per cent by september 2008, to about one third of the rate of growth a year earlier. in the outlook, global trade is expected to weaken further in 2009. owing to their limited exposure to the mortgage market derivatives that brought down major banks in the united states and europe, financial systems in most developing countries initially seemed shielded from any direct impact from the international financial crisis. growing risks have emerged through other channels, however, as investors have started to pull back resources from emerging market economies and other developing countries as part of the deleveraging process of financial institutions in the developed countries. unlike in recent years when the spread varied significantly across regions and countries to indicate investor discrimination among countryspecific risks, the latest surge has been uniform, suggesting that contagion and aversion to investing in emerging markets has taken hold among investors. spreads are expected to remain high in 2009, as the strains in global credit markets linger and also as capital flows to emerging market economies are projected to drop further. our society is facing a financial crisis, an economic crisis, and as recent research is increasingly showing, a humanitarian crisis. recession has hit the entire world. wherever we go everybody is talking about it and each and every trade is affected by it. the declining quality of work opportunities, barriers to employment, exploitation and the failure of income support programs to protect families from debilitating poverty impact everyone. while the country’s increasing rates of incarceration impact communities of color disproportionately, our willingness to punish formerly imprisoned people indefinitely affects all of our lives negatively, as we make it impossible for them to contribute to our common wellbeing. the marginalization of poor immigrants of color helps to pull down labor standards for everyone, making work increasingly precarious for all workers. in the larger economic picture, the creation of populations who are unemployed and underemployed at far higher rates than the societal norm, and who remain locked out of stable employment, contributes to the country’s overall levels of inequality. high levels of inequality are predictive of the overall lack of a robust national economy. removing barriers to equal employment for whole populations of people is one very obvious way to begin dismantling inequality in employment and help rebuild the national economy. in this recession, poverty could grow massively. as the economic crisis continues, deep recession could push 25% of middle-class families into more serious financial distress. the danger is higher for families of color, with 33% of blacks and 41% of latinos at risk of falling out of the middle class and into poverty (j. huezo et al. 2009) according to the bureau of labor statistics, eight of the 10 occupations projected to generate the most jobs by 2016 are low-wage jobs in the service sector (a. bernhardt and c. owens, 2009). these are precarious jobs that will make more and more workers extremely vulnerable to even small economic fluctuations. while developed countries are experiencing some of the sharpest economic contractions, households in developing countries are much more vulnerable, and likely to experience acute negative consequences, both in the shortand long-term. (justin yifu lin, 2009) declining growth rates combined with high levels of initial poverty leave many households in developing countries highly exposed to the crisis. global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 50 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu vulnerability is heightened if, at the same time, governments are constrained in cushioning the impacts due to limited institutional capacity and fiscal resources. when the financial crisis first broke, it was thought that developing countries in general would not be affected because their financial sector was not fully integrated in the global financial system. but now as the crisis has entered the second stage and problems in the real sector have emerged, it has become clear that developing countries will also be seriously affected by the downturn. between 2002 and 2007, these countries grew rapidly because of global trade expansion and the large inflows of private capital, including foreign direct investment (fdi), the increase in remittances and the surge in commodity prices. in fact, in 2007, private capital flows to the developing countries amounted to $1.2 trillion, a six-fold increase compared to the beginning of the decade, thanks in part to the rise in fdi which responded to the higher export earnings of the resource-rich developing countries. these higher earnings, in turn, were made possible by higher world commodity prices. also, workers’ remittances expanded three times to $328 billion over the same period. now, with the crisis taking its toll, it is estimated that total fdi and private capital flows will decline from $1.2 trillion in 2007 to $363 billion this year. as a result of declining exports and reduced capital inflows, the developing countries may encounter a financing gap of between $352 billion to $635 billion. moreover, remittances are likely to fall by 7.3 percent in 2009 to the level of $305 billion. the gdp growth rate in developing countries in 2009 is forecast to drop to 1.2 percent, a sharp decline from 8.1 percent of growth rate in 2007 and 5.9 percent growth rate in 2008. this decline alone will cause more than 30 million workers to lose their jobs according to the united nations international labour organization, and of course, poverty will rise. in fact, if we don’t do anything, this may just be the start of the worst scenario. new estimates for 2009 suggest that lower economic growth rates would trap 53 million more people in poverty, those living on less than $1.25 a day than was expected prior to the crisis. if the $2a-day poverty line is used, 65 million will stay trapped. if the recession protracts, more and more people will fail to get out of poverty. as robert zoellick, world bank group president, has said, “the global economic crisis threatens to become a human crisis in many developing countries unless they can take targeted measures to protect vulnerable people in their communities.” critical to protecting households in countries exposed to the crisis will be the ability of governments to cope with the fallout of the downturn: to finance programs that create jobs, ensure the delivery of core services and infrastructure, and provide safety nets. yet, only one-third of the exposed countries have the fiscal capacity (i.e., ability to expand fiscal deficits) to render significant countercyclical spending. in countries with limited fiscal capacity it is imperative that assistance be provided via grants and concessional financing wherever possible. moreover, one-third of the countries with a reasonable amount of fiscal capacity are aid dependent, and will also require external support to finance increased spending. the crisis effects in south-eastern europe all economies in south-eastern europe continued to grow at relatively robust rates in the order of 5 per cent or higher in 2008, with the exception of croatia which had 3.8 per cent. growth in 2008 continued to be largely driven by domestic demand, underpinned by rising real wages, strong fdi inflows and domestic credit expansion. however, in the course of the year, and with the escalation of the global financial crisis, global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 51 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu these growth factors started to lose steam and will weaken further in 2009. hence, a further moderation in the pace of growth to about 4.5 per cent for the region as a whole is expected in the baseline scenario for 2009, down from 5.2 per cent in 2008. inflation accelerated in south-eastern europe in the first half of 2008, driven by surging world food and energy prices, strong domestic demand and rising real wages. the acceleration was quite pronounced in bosnia and herzegovina, croatia, serbia and the former yugoslav republic of macedonia. however, during the second half of the year, inflationary pressures weakened as world commodity prices started to fall from their highs and domestic inflationary pressures subsided. given the overall domestic and global macroeconomic prospects, this trend is likely to gain further ground in 2009. employment conditions improved in all south-eastern european economies along with the continued dynamic economic performance in much of 2008. nonetheless, unemployment rates remain very high (about 16 per cent on average); only croatia has a single-digit rate of unemployment. nevertheless, positive labor market developments are expected to continue in 2009 as a result of new investments in production capacity and the implementation of infrastructure projects. in croatia, though, the rate of unemployment may increase in response to weaker performance of the tourism industry. the general government budgets in most south-eastern european economies have become more balanced and were fortified by higher tax revenue following strong economic growth in recent years. there was some fiscal loosening in a number of countries in 2008, in part because of their electoral cycle. fiscal deficits are expected to widen as a result of the economic slowdown and anticipated expected fiscal responses in 2009, but larger deficits do not pose an immediate threat to macroeconomic stability. in contrast, there was a notable tightening of monetary policy in 2008, partly in response to rising inflationary pressures. central banks increased their policy rates in albania, serbia (in stages) and the former yugoslav republic of macedonia, while mandatory reserve requirements were increased in bosnia and herzegovina and croatia. the domestic monetary tightening was coupled with deteriorating conditions of access to international financial markets. the rising cost of credit is likely to further dampen economic activity in the region. against the backdrop of strong domestic demand and weakening import demand in the important european markets, imports by southeastern european economies generally outpaced their exports in 2008. as a result, both trade and current-account deficits continued to widen in all countries and, in a number of cases, have reached alarming proportions. financing these deficits up until the 2008 crisis did not pose a problem, but financing conditions have been changing for the worse, forcing a downward adjustment in domestic demand. the restraining effect of unfavorable financing conditions is likely to increase further in 2009 and the deficits may decline somewhat in the short run. iii. the poor as victims or as resilient and important consumers? coming on the heels of the food and energy security crises, the global financial crisis will most likely substantially set back progress towards poverty reduction and the millennium development goals. the tightening of access to credit and weaker growth will cut into public revenues and limit the ability of developing country governments to make the necessary investments to meet education, health and other human development goals. global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 52 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu unless adequate social safety nets are in place, the poor will no doubt be hit the hardest. an estimated 125 million people in developing countries were already driven into extreme poverty because of the surge in global food prices since 2006. in the global economy, lasting competitive value is no longer assured by natural resources, human talent, or even core competencies. in these areas, the world is indeed flat. sustaining innovative solutions and beating the competition is about tapping software and digital applications to wire customer knowledge into the core systems of the firm and measure customer behavior through smart analytics. and this can be done at lower costs and in faster time frames than many understand. the rise of global supply chains in asia, eastern europe and the west are highly competitive, fearless, and bubbling with new approaches driven by the young and ambitious upstarts of the next business generation. coming to terms with the implications of this transformation is both urgent and inevitable for the survival of businesses (c.k prahalad and m.s krishnan, 2008). ceos, senior executives, and managers of every level face an imperative to understand that to form strategy and execute it they must renew their knowledge of business processes, information technology, and data analysis. to win in the competitive landscape defined by creating one consumer experience at a time, decision makers must develop a “whole new mind” for understanding their global supply, logistics and communications networks. the focus of young people and young professionals on sites such as my space, youtube, and facebook suggest that a whole generation of consumers are growing up expecting to be treated as unique individuals, and will have the skills and the propensity to engage in a market place defined by customer co-creation. value for them is not about traditional ideas of quality. that is a given. they want to be involved in shaping their own experiences. similarly, the imperatives of access to talent, speed, and cost will drive most firms towards this new global resourcing. by forging the ‘always on’ network, firms can engage customers and employees emotionally and intellectually in the mission of the firm, minute by minute, day by day. as prahalad writes: “from cement to jet engines, from children’s toys to delivery of parcels to your home or office by ups, all industries are going through this transformation. this transformation is not a choice.” (c.k. prahalad, 2008) while there is a strong demand among the urban poor for better services and quality goods, as well as a demonstrated ability to pay for those services and goods, the failure of the private sector to provide adequate services and goods is in fact a contributor to poverty. because of the deliberate exclusion of the urban poor from mainstream urban market systems, they live in very high cost economies. for instance, slum dwellers without access to municipal water pay 4 to 100 times as much as their middle and upper class counterparts. they also pay 30% to 50% more for food items that are sold in small unit packages. the availability, accessibility and affordability of private sector goods and services are bound to change the situation of the urban poor and in turn address some of the challenges facing urban centers today. by expanding the global market system to include the urban poor would provide new markets for the private sector and at the same time create opportunities for poor communities. for example, the wireless telecommunication industry in africa and asia has been able to create a sustainable win-win situation for the private sector and the urban poor. mobile communication allows an incredible whole range of new ways to conduct business for the small slumbased entrepreneurs. this industry has created systems and channels that have increased availability of affordable mobile phone service for the poor without creating cost structures that global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 53 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu translate to higher prices for the poor. instead it has opened and created new business possibilities for the poor through access to technology, which a few years back was considered the prerogative of the middle and upper class (auclair c, 2008). iv. bottom of the pyramid in 1932, the phrase “bottom of the pyramid” was used by former united states president franklin d. roosevelt in a radio address to his country that was in the midst of the great depression. he said, “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power (plans) that put their faith once more in the forgotten man at the bottom of the economic pyramid”. it is almost an ominous coincidence that 80 years hence, we are also in the midst, although hopefully at the tail end, of a global crisis. it is apparent that president roosevelt’s statement is as relevant for us today, as it was then. indeed, it is in adequately and appropriately serving and strengthening the sectors that we will be able to build a solid base for economic growth and development. “if we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and kreative entrepreneurs and valueconscious consumers, a whole new world of opportunity will open up” . (c.k. prahalad, 2008) popularized by c.k. prahalad, the bottom of the pyramid concept which contends that poor people should be seen as potentially profitable customers rather than mere charity cases has caught on fast in the past few years. while some organizations have taken notice and reaped benefits, the bottom of the pyramid has been largely ignored by most. multinationals and even local companies are yet to be convinced there is a large enough profitable market. for long time the mnc have the idea that the poor cannot be the segment who they can be focus. the reasons are given to the table (c. k. prahalad and stuart hart, 2002). assumption implication the poor are not our target customers; they cannot afford our products or services. our cost structure is a given; with our cost structure, we cannot serve the bop market. the poor do not have use for products sold in developed countries we are committed to a form over functionality. the poor might need sanitation, but can’t afford detergents in formats we offer. therefore, there is no market in the bop. only developed countries appreciate and pay for technological innovations. the bop does not need advanced technology solutions; they will not pay for them. therefore, the bop cannot be a source of innovations the bop market is not critical for long-term growth and vitality of mncs bop markets are at best an attractive distraction. intellectual excitement is in developed markets; it is very hard to recruit managers for bop markets we cannot assign our best people to work on market development in bop markets 1. the dominant logic of mncs as it relates to bop global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 54 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu the numbers are clearly against the views of such companies. more than half the world’s population lives on less than us$ 2 a day. there is striking disparity between the rich and the poor with over 76.6% of the private consumptions made by 2 richest deciles of the world’s population. the distribution of wealth and the capacity to generate incomes in the world can be captured in the form of an economic pyramid. at the top of the pyramid are the wealthy, with numerous opportunities for generating high levels of income. more than 4 billion people live at the bop on less than $2 per day. for more than 50 years, the world bank, donor nations, various aid agencies, national governments, and, lately, civil society organizations have all fought the good fight, but have not eradicated poverty. while various quarters shudder at the thought of the three crises mentioned there also laid limitless opportunities for enterprises, governments and entrepreneurs. the financial crisis maybe associated with closures and companies going bankrupt, but it must be kept in mind that some of the best known companies have thrived while some were born during such times. companies should be tough in anticipation of tough times. they should seize the downturn opportunities gear-up for the upturn. the bop three pillar principles posses the following questions to the private sector: • are the goods and services in the market available to the poor? • how accessible and at the disposal of the poor are these goods and services? • can the poor afford what is being proposed to them by the markets? if managers do not recognize this trend and get organized to compete in this new environment, they are likely to be left behind. businesses will need to ceaselessly improve flexibility and efficiency and transparency in all it and customerfacing processes. ultimately, the race for the future will be won by those who deliver a unique customer experience at the lowest cost. the crisis saw failure and closures of thousands of businesses worldwide, record unemployment, declines in consumer wealth estimated in the trillions of u.s. dollars, substantial financial commitments incurred by governments, and most notably significant decline in economic activity around the globe. now many economists, political leaders, bankers and other market commentators are jubilantly declaring the worst is over and everything is ok again. these same analysts who were oblivious to the looming financial debacle are ignoring evidence which corroborate that this marks only the beginning of larger impending global crisis. beyond the global recession, the world also needs to brace for more crises in the coming years. mti consulting’ ceo hilmy cader states “we are not out of the woods yet-the worst is yet to come! we still need to deal with the impact and aftershocks of the financial meltdown and the long term changes it has brought about. also the world, particularly the emerging and developing nations should be on guard to face a greater impacting eco credit crisis and bottom of the pyramid crisis” (hilmy cader, 2009). economies and enterprises should also be cautious of long term changes and implications that maybe brought about by the crisis. consumer’s tendency to save and avoid large debt will become more popular leading to long term drop in consumption. government spending will also reduce in the long term which coupled with reduced private consumption will slow down investment. as we recover from the global financial crisis we are faced with the greater imminent dangerthe eco credit crisis. the world’s fast global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 55 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu growing population is using up resources at an unprecedented level, significant part of which is not being renewed and is causing irreparable damage to the environment. if we continue to live on the earth ecological credit, by 2030 we need the equivalent of 2 planet resources to keep up our lifestyle. hilmy cader stated “it must be kept in mind that unlike the economic recession, governments cannot bailout enterprises from the emerging credit crisis.” with the world’s population expected to shoot to 9 billion by 2040, it is now up to governments and enterprises around the world to take responsibility-what is being done is certainly not enough (james leape, 2009)! one of the real threats to sustainable urbanization is urban poverty. it establishes a sophisticated and intricate system that results in a vicious cycle of poverty where conventional market economics condemns millions to poverty, while awarding a few with prosperity. the world bank affirms that over 3 billion people live on less than $2.50 a day, and with the recent global crisis, this number is bound to grow unprecedentedly. twelve principles of innovation for bop markets ( c.k prahalad, 2005). 1. focus on price performance of products and services. serving bop markets is not just about lower prices. it is about creating a new price– performance envelope. quantum jumps in price performance are required to cater to bop markets 2. innovation requires hybrid solutions. bop consumer problems cannot be solved with old technologies. most scalable, price-performanceenhancing solutions need advanced and emerging technologies that are creatively blended with the existing and rapidly evolving infrastructures. 3. as bop markets are large, solutions that are developed must be scalable and transportable across countries, cultures, and languages. how does one take a solution from the southern part of india to the northern part? from brazil to india or china? solutions must be designed for ease of adaptation in similar bop markets. this is a key consideration for gaining scale. 4. the developed markets are accustomed to resource wastage. for example, if the bop consumers started using as much packaging per capita as the typical american or japanese consumer, the world could not sustain that level of resource use. all innovations must focus on conserving resources: eliminate, reduce, and recycle. reducing resource intensity must be a critical principle in produkt development, be it for detergents or ice cream. 5. product development must start from a deep understanding of functionality, not just form. marginal changes to products developed for rich customers in the united states, europe, or japan will not do. the infrastructure bop consumers have to live and work in demands a rethinking of the functionality anew. washing clothes in an outdoor moving stream is different from washing clothes in the controlled conditions of a washing machine that adjusts itself to the level of dirt and for batches of colored and white clothes. 6. process innovations are just as critical in bop markets as produkt innovations. in developed markets, the logistics system for accessing potential consumers, selling to them, and servicing products is well-developed. a reliable infrastructure exists and only minor changes might have to be made for specific products. in bop markets, the presence of a logistics infrastructure cannot be assumed. often, innovation must focus on building a logistics infrastructure, including manufacturing that is global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 56 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu sensitive to the prevailing conditions. accessing potential consumers and educating them can also be a daunting task to the uninitiated. 7. deskilling work is critical. most bop markets are poor in skills. the design of products and services must take into account the skill levels, poor infrastructure, and difficulty of access for service in remote areas. 8. education of customers on product usage is key. innovations in educating a semiliterate group on the use of new products can pose interesting challenges. further, most of the bop also live in “media dark” zones, meaning they do not have access to radio or tv. in the absence of traditional approaches to education—tradicional advertising— new and creative approaches, such as video mounted on trucks and traveling low-cost theatrical productions whose job it is to demonstrate product usage in villages, must be developed. 9. products must work in hostile environments. it is not just noise, dust, unsanitary conditions, and abuse that products must endure. products must also be developed to accommodate the low quality of the infrastructure, such as electricity (e.g., wide fluctuations in voltage, blackouts, and brownouts) and water (e.g., particulate, bacterial, and viral pollution). 10. research on interfaces is critical given the nature of the consumer population. the heterogeneity of the consumer base in terms of language, culture, skill level, and prior familiarity with the function or feature is a challenge to the innovation team. 11. innovations must reach the consumer. both the highly dispersed rural market and a highly dense urban market at the bop represent an opportunity to innovate in methods of distribution. designing methods for accessing the poor at low cost is critical. 12. paradoxically, the feature and function evolution in bop markets can be very rapid. product developers must focus on the broad architecture of the system—the platform—so that new features can be easily incorporated. bop markets allow (and force) us to challenge existing paradigms. for example, challenging the gridbased supply of electricity as the only available source for providing good-quality, inexpensive energy is possible and necessary in the isolated, poor bop markets. despite the idea of serving the poor profitably being with us for over a decade, little has been done to demonstrate the true calling of the private sector, as the entity of risk takers who utilize existing market opportunities to create wealth. while the skepticism of many in the private sector is based is real, the reality of the bop latent potential is real too. by dedicating more investments into research and development, forming alliances and partnerships with bop entrepreneurs the road to unleashing the full potential of the bop market will be realized in our live time. the private sector is bound to benefit from serving and working with the bop populace. the synergy created in the process is what will translate into a research ground where innovations and ideas will be developed tested and implemented before being moved up to other markets and segments of the urban society. the bottom-up approach to the creation and development of solutions to the urban challenge will place the private sector on a track of sustainability and offer real benefits to the wider global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 57 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu society. the challenges that rapid urbanization present us with makes it imperative that we create working models and framework that will enable the private sector to tap into the reservoir of the whole society, including the bop to come up with economic solutions to the economic problems that threaten the very fabric of urban living today. v. conclusions and recommendations in the world we live today, businesses and top executives must understand what differentiates their companies from others and must understand the needs of the consumers in their markets. if these two ingredients are understood, a business can develop a strategic plan to create a market niche and develop their customer base to be successful. development of this information along with the development of the internal business processes can lead to some form of a competitive advantage in the market. the businesses and their representatives are directly responsible for the patterns of purchases (in the long run) of each of their customers. how they (the customers) will react within certain situations is largely due to the education and supplying the customer with enough data and tools to proficiently inform them of what is to be completed and within what context and timeframe. understanding the customer and their reactions to the environment will prolong the life of the relationship between businesses and their customers. our society is facing a financial crisis, an economic crisis, and as recent research is increasingly showing, a humanitarian crisis. recession has hit the entire world. wherever we go everybody is talking about it and each and every trade is affected by it. if the recession protracts, more and more people will fail to get out of poverty. the bottom of the pyramid approaches offers the private sector an opportunity to lead the way towards urban economic and social transformation in the 21stcentury. what is fundamentally required is the elicitation of the adventurous spirit of the sector to push the frontiers of market economics to new heights. the risk-taking attitude of the entrepreneurs of the industrials revolution who opened the wells of wealth to humanity through inventions and innovations needs to be relived in our times. getting the right combination of scale, technology, price, sustainability, and usability requires that managers start with a “zero-based” view of innovations for the bop markets. managers need a new philosophy of innovation and product and service delivery for the bop markets. the 12 principles that constitute the minimum set of a philosophy of innovation are critical to understand and apply. needless to say, they challenge the existing assumptions about product and market development. by forcing managers in large enterprises to rethink and re-examine their assumptions about form and functionality, about channels and distribution costs, bop markets can serve as catalysts for new bursts of creativity. the biggest advantage is often in challenging the capital intensity and the managerial cost structures that have been assumed in mncs. innovation in bop markets can reverse the flow of concepts, ideas, and methods. therefore, for an mnc that aims to stay ahead of the curve, experimenting in bop markets is increasingly critical. it is no longer an option. global crisis and its effects in the developed and emergent countries “the bottom of the pyramid” as an innovation resource emerging markets journal | p a g e | 58 volume 1 (2011) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.12 | http://emaj.pitt.edu vi. references 1. bernhardt and c. owens, 2009. “rebuilding a good jobs economy,” the nation, 30 march 2009 edition 2. auclair c. 2008. how can the bottom of the pyramid approach work for the slums? the habitat debate, 14, 3. bender, paul s. 1976 "design and operation of customer service systems", american management association, new york. 4. steven m. bragg, 2006 "outsourcing: a guide to: selecting the correct business unit, negotiating the contract, maintaining control of the process ", john wiley & sons, inc., new jersey 5. c. k. prahalad and stuart hart 2002, ‘the fortune at the bottom of the pyramid , strategy + business’, 26, 6. c.k prahalad, 2004. ‘the fortune at the bottom of the pyramid”, wharton school publishing, 7. c.k prahalad and m.s krishnan, 2008. “the new age of innovation”, mcgrawhill, london 8. foxall, gordon 1991. "consumer psychology in behavioural perspective", journal of economic psychologie , 12, 544-547 9. j. huezo et al., 2009). “the state of the dream 2009: the silent depression,” united for a fair economy, 10. prlog press release 2009, after the global financial crisis... expect more, http://prlog.org/10373858 11. applied research center 2009, race and recession, , http://arc.org/downloads/2009_race_recession 12. un-habitat 2007. business for sustainable urbanization, challenges and opportunities, 13. world bank 2009, weathering the global economic crisis: lessons for emerging markets, http://worldbank.org/dec/weathering-the-global-economic-crisis 14. united nations 2009, world economic situation and prospects 2009, http://www.un.org/esa/policy/wess/wesp 15. united for a fair economy 2009, state of the dream 2009: the silent depression, www.faireconomy.org/dream. using genetic algorithm for winter maintenance operations: multi depot kchinese postman problem dr. i̇brahim zeki akyurt istanbul university, istanbul, turkey | e-mail: zekiakyurt@gmail.com dr. timur keskintürk istanbul university, istanbul, turkey | e-mail: tkturk2010@gmail.com dr. çağatay kalkancı istanbul metropolitan municipality, istanbul, turkey | e-mail: cagatayk@mail.com abstract this study deals with the winter maintenance operations in istanbul, turkey. the assignment and routing of winter service vehicles are discussed. the starting points of the study are the high cost of winter maintenance activities, decreased budget, high numbers of vehicles and routes to service. in this respect, the problem was modeled as multi depot k-chinese postman problem, a type of arc routing problem. this mathematical model was solved by genetic algorithm. for comparison, the current solution, clarke and wright algorithm and sweep algorithm were used. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.69 | http://emaj.pitt.edu | mailto:zekiakyurt@gmail.com mailto:cagatayk@mail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.69 | http://emaj.pitt.edu using genetic algorithm for winter maintenance operations: multi depot k-chinese postman problem page |50| emerging markets journal using genetic algorithm for winter maintenance operations: multi depot k chinese postman problem dr. i̇brahim zeki akyurt dr. timur keskintürk dr. çağatay kalkancı 1. introduction winter conditions are among the factors influencing our daily life directly. snow and ice experienced in winter months diminish friction co-efficiency on roads and affect traffic flow, and generate an unsafe environment for land and air traffic and cause unfavorable social and economic effects. ice and snow have rather big influences on roads. errors made in road maintenance in winter months lead to frequent closing of roads and therefore lead to economic losses (sherif and hassan, 2004). another effect caused by ice and snow is the increased accident risk (norrman, eriksson and lindqvist, 2000; eriksson and norrman, 2001). antiicing is the application of solid, liquid or pre-heated chemicals to the ground prior to the snow falling. anti-icing is the most frequently preferred method for snow removal (ahmetzade, yılmaz, and yılmaz, 2007; allison and bernard, 2004; kuloğlu and kök, 2005). in general terms, turkey, which is located in a subtropical zone in the mediterranean macroclimatic region, is under the influence of different types of air masses. in the winter time, turkey stays under the influence of the polar based frontal system and in the summer time it is under the influence of the tropical-based frontal system, and it receives plenty of rain in spring (march and april) and fall (october to january) which coincides in the progress and regression periods of the said air masses. precipitation in this period in general is in the form of rain in the seafronts and sections close to the seafronts, and they are in the form of sleet or snow in the inner region of the high sections. moreover, during these periods, snow falling on the high sections of the eastern black sea and the eastern anatolian region are affected, and it is observed that it paralyzes the life on occasion. furthermore, both structures of precipitation occurring in these periods and their formation in unexpected times other than the seasonal normal, lead to high disaster rates (sever, 2008). istanbul is the most crowded city in this country with a similar climate and has the most prevalent industrial organizations and businesses. in this sense, it is an industrial, commercial, cultural, and educational center. when it is considered that 12 million people travel every day for various reasons in istanbul, it is clear that life, gets to nearly a stop because of adverse weather conditions which can also lead to important losses to the economy of the country. we don’t have exact figures for the economic loss amounts caused by adverse weather conditions in istanbul, nevertheless, if the research conducted by the ito (istanbul chamber of industry) is considered, the effect on the economy caused by the snow storm experienced in january 2004 was at least 1 trillion tl. despite the significance of snow clearing, sanding and salt spreading, the number of studies conducted on this matter is rather low. even in countries where these problems are shown among the important problems and despite the immense spending done, these problems are not studied extensively. in 1971 marks and stricker focused on vehicles providing public service and opened the snow clearing collection problems to discussion. liebling (1973), handled snowplow routing by a two-stage procedure which is raw and good planning. cook and alprin (1976) attempted to solve the routing problem due to capacity limitations of salt spreading vehicles in an urban field. the main purpose was to minimize the time required for the salt spread to a certain road section. tucker and clohan (1980), generated a general computer model for urban srp simulation. it was targeted that characteristics of snow clearing vehicles and snow storm were simulated by a series of parameters, and a routing was determined for effective snow plowing. lemieux and campagna (1984), discussed processing in single tank, single vehicle srps. haslam and wright (1991) suggested a multipurpose algorithm method for snow clearing processing problem in the rural environment. the problem was defined to include minimum cost of the snowplow vehicles and to cover the total distance. campbell and langvein (1995), suggested a snow clearing problem as a multi sourced problem in a two-phase algorithm way. golbaharan (2001), studied a multi-depot snow clearing processing problem by time windows; and in the model, the route for each snow vehicle starts and ends at the same depot. this problem was formulated to include a limited series and solved by a column generation algorithm. perrier, langevin, and amaya (2008), have suggested a formulation and two-step solution based on mathematical volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.69 | http://emaj.pitt.edu dr. i̇brahim zeki akyurt, dr. timur keskintürk, dr. çağatay kalkancı emerging markets journal | p a g e |51 optimization techniques for directing snow maintenance vehicles in urban areas. fu, trudel, and kim (2009) have developed real-time optimization model for evaluating alternative resources for winter roads and maintenance processes. in the study of dali (2009), a sequential constructive algorithm way was suggested for determining the routes of snow vehicles in a multi-depot network. grupta et al. (2010) have conducted a shift planning project study for optimal work force for clearing snow and ice in minnesota. in this study, assigning of snow maintenance vehicles which take part in winter maintenance work in istanbul and the scheduling of these vehicles were discussed. such a model is included as multi-depot k-chinese postman problem among arc routing problems (arp). in this respect, a mathematical model of multi-depot k-chinese postman problem (k-cpp) will be focused, which is specific to the situation and is the subject of the next section. in the third section, the genetic algorithm will be shown for the solution of the generated mathematic model. genetic algorithm phases, specific to the model, will be discussed. in the fourth section, data on the model regarding winter maintenance activities in istanbul province will be shown. the fifth section encompasses the previous three sections. istanbul province winter maintenance activities were modeled as multi-depot k-chinese postman problem and solved by genetic algorithm and two other algorithm methods. the current solution and solving methods were compared in terms of cost. 2. problem formulation the problem discussed in the study was a multidepot k-chinese postman problem, which is a type of arc routing problem. arc routing problems plan to generate the shortest route with the lowest cost enabling to reach different points and return to the start point again (gupta and krishnamurti, 2003). the chinese postman problem, defined by mei-kokwan in 1962 attempts to determine the most effective route for a postman to distribute the mail received from the post office and to return to the post office with the shortest walking distance during mail distribution. the chinese postman problem is based on starting from a certain start point and to generate the shortest route with the condition that each point on the route is stopped at once at least one time (ahuja, magnatni, &orlin, 1993). in addition to handling arcs instead of nodes, chinese postman problem is different from traveling salesman problem since it includes euler tour as a basis. if in the chinese postman problem a euler tour is not achieved, it is necessary that it should go by the arcs more than once for tour completion. in a postman problem, if an euler tour is present, the number of arrivals to a point must equal to the number of departures from that point. in case the postman cannot repeat an arc corresponding to a point, this point should be seen to have a double degree or the number of arcs arriving to this point should be seen as double. the purpose of the chinese postman problems is to minimize the total cost of passing at least once from all arcs by allowing passage from an arc more than one time. the linear programming model of chinese postman problems is as follows: 𝑚𝑖𝑛 ∑ ∑ 𝑐𝑖𝑗𝑥𝑖𝑗 𝑛 𝑗=1 𝑛 𝑖=1 (1) ∑ 𝑥𝑖𝑗 𝑛 𝑗=1 − ∑ 𝑥𝑗𝑖 𝑛 𝑗=1 = 0 ∀ 𝑖 ∈ 𝑉 (2) 𝑥𝑖𝑗 + 𝑥𝑗𝑖 ≥ 1 ∀ (𝑖, 𝑗) ∈ 𝐴 (3) 𝑥𝑖𝑗 ≥ 0 and integer ∀ 𝑖, 𝑗 ∈ 𝑉 (4) equation 1 is a fitness function and minimizes the number of visited arcs. the constraint for the entry numbers and exit numbers of each arc is included in equation 2. there must be at least one visit for each arc (equation 3) and all variables must be positive integer numbers. when the chinese postman problem is attempted to be solved by more than one postman or vehicle, the problem k is called the chinese postman problem (k-cpp). the k number of vehicles with a c capacity leave from the depot and visit all arcs with a positive demand and carry out the tours so that the vehicle capacity will not be exceeded. the objective is to make tours with minimum cost, in other words with minimum total distance. in the graph, g = (v, e); v represents the point group and e represents the arc group. 0 is the depot. the number of vehicles can be determined beforehand or it can be variable as well. each arc (𝑖, 𝑗) has a cost (𝑐𝑖𝑗) and demand(𝑑𝑖𝑗). each arc in the problem can be visited as many times as desired. 𝑚𝑖𝑛 ∑ ∑ 𝑐𝑖𝑗𝑥𝑘 𝑖𝑗𝑖,𝑗∈𝑉𝑘∈𝐾 (5) ∑ 𝑥𝑘 𝑖𝑗𝑘∈𝐾,𝑗∈𝑉 − ∑ 𝑥𝑘 𝑗𝑖𝑘∈𝐾,𝑗∈𝑉 = 0 (6) ∑ 𝑥𝑘 𝑖𝑗 ≥ 1𝑘∈𝐾 ∀ 𝑖 ∈ 𝑉 ∖ {0}, ∀ 𝑗 ∈ 𝑉 ∖ {0} (7) ∑ 𝑥𝑘 0𝑗 = 𝐾,𝑗∈𝑉 (8) volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.69 | http://emaj.pitt.edu using genetic algorithm for winter maintenance operations: multi depot k-chinese postman problem page |52| emerging markets journal ∑ 𝑥𝑘 𝑖0 = 𝐾,𝑖∈𝑉 (9) ∑ ∑ 𝑥𝑘 𝑖𝑗 ≤ |𝑆𝑘| − 2𝑗∈𝑆𝑘𝑖∈𝑆𝑘 ∀ 𝑆𝑘 ⊂ 𝑉, 𝑆𝑘 ≠ ø, (10) 𝑥𝑘 𝑖𝑗 ∈ {0,1} ∀ (𝑖, 𝑗) ∈ 𝐴, ∀ 𝑘 ∈ 𝐾. equation 7 expresses constraint of passing from each arc at least once. equation 8 and 9 indicate the requirement that all vehicles start the tour from a depot and end up at the same depot. the 10th constraint shows that the route of each vehicle should not have an empty group as well as equal 2 less than the element number of the s group (visited nodes), which is a sub group of v. secondly, it contains departures from a depot and returns to the same depot. the application problem is modeled as a multi depot k-chinese postman problem which is a type of chinese postman problem developed with multi depots and multi vehicles. the mathematical model of our problem can be explained this way. we have used the first group then the route process for the genetic algorithm and other heuristics. accordingly, relevant routes are assigned to the current depots. studies in the literature use different techniques to perform this. in our study, each route is assigned to the closest depot. when this process is performed, routes where each depot is going to provide a service are determined and the problem is turned into a k-cpp for each depot. k-cpp formulation (equation 5 – equation 10) is used for each depot in our application problem by using the same formulation, and optimization of the total of solutions of these sub problems is the objective. different techniques are used in the studies in the literature for achieving this. as 𝑉𝑔 = {1, … . , 𝑛} n number of depots, 𝑇𝑖, k-cpp objective function belonging to depot 𝑖, the objective function in our problem can be expressed as follows. 𝑚𝑖𝑛 ∑ 𝑇𝑖,𝑖∈𝑉𝑔 multi depot k–cpp (11) the distance of 𝑐𝑖𝑗 in k-cpp formulation is different for different i and j groups. as g = (vg u va, a) being a graph, vg = {1,…….,n} expresses n number of depots, va = {n+1,……,n + s}, s number of arcs, for each j, if j ∈ vg , in other words, if it is returned from an i arc to a j depot, 𝑐𝑖𝑗 =𝑑𝑖𝑗 . 𝑑𝑖𝑗 is the distance of the road between i and j points. if j ∈ va; 𝑐𝑖𝑗 =𝑑𝑖𝑗 + 𝑐𝑖. here 𝑐𝑗 is the total tour distance calculated according to the number of tours that a vehicle has to take in j arc. 3. genetic algorithm model for snow maintenance problem genetic algorithm, population based metaheuristic algorithm, which gives good results for similar problems is used to solve our problem. genetic algorithms, started by michigan university faculty member j. holland during 1960s, are developed for solving some nature problems which are difficult to be solved or impossible to be solved by deterministic methods (mitchell, 1995). genetic algorithm, instead of generating a single solution for problems, generates a solution group made of different solutions. thus, many points are evaluated in the search space at the same time and as a result of this, possibility to reach an optimal or near optimal solution increases. solutions in the solution group are independent from each other completely. each one of them is a vector on multidimensional space (tuong–quan and et al., 2009). in our model, the population can be considered as a set of books that every book is a chromosome that represents one solution. every page of book represent a depot and every row including the route of a specific vehicle (figure 1). in our problem, the chromosome structure given in figure 1 was used. since istanbul is situated on two different continents, a chromosome group, made of as many pages as the number of depots for european and anatolian (asia). figure 1: population representation of multi depot arp and cpp problems in ga. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.69 | http://emaj.pitt.edu dr. i̇brahim zeki akyurt, dr. timur keskintürk, dr. çağatay kalkancı emerging markets journal | p a g e |53 a separate matlab .*m file was used for the estimation of relevance values. the total distance calculated with adding up the distance from depot to the arc, the distance at salting operations on the arcs and return distance to the depot. moreover, for respect to distance constraint, a penalty function is added and it is enabled that solutions remain in the feasible solution area. roulette wheel selection method was used for selecting operator. the method was created in a separate matlab file and selection process of the population sent to this file in iteration. chromosomes belonging to the better fitness value were multiplied, and chromosomes having the worse fitness value were removed from the population. a different method was developed for crossover operator. firstly, two chromosomes are chosen randomly. secondly, again choosing the depot randomly that the same depot of two chromosomes exchange. thus, there was no reason for coming up with unfeasible solutions and preparing of required control mechanisms (figure 2). figure 2: crossover operator developed for cpp in ga. generally, crossover operator is used according to certain crossover rate. candidate chromosomes are produced according to this and compared with parent chromosomes so better chromosomes are left in the generation. this crossover process can be done in many different ways, and in our study it is done without using the crossover rate. accordingly, as much as the population size, a new individual is created by randomly selected parent chromosomes and their fitness values are calculated. individuals as many as the size of the population, which has higher fitness among the parent chromosomes and the entirety of the new individual chromosomes, are sent to the next operator as the individuals of the new generation. another ga, mutation, operator used to avoid local optimums. different processes are developed specific to the problem for mutation. these are divided into two groups. first: a change made in one of the tours belonging to the same depot in a chromosome; the second one is changes made among different routes in the same depot. two different local search procedures within two groups were applied according to the mutation possibility. one of these is random exchange and the other is insertion mutation. in the random exchange mutation, values of the genes in two positions that are selected randomly are changed reciprocally (figure 3). figure 3: mutation operators used in ga for cpp: the same route. when they are visited in the same tour, the positions of the two routes visited in the relevant route are changed reciprocally. in insertion mutation, on the other hand, the value of a gene in a position that is selected randomly, is added to an interval in another position that is selected again randomly. when they are visited in the same route, visiting order of a course in a route is changed. same mutation operators are also applied between different routes (figure 4). when the mutation possibility is provided, one of these four different operators is applied with equal chances. figure 4: mutation operators used in ga for cpp: between different routes. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.69 | http://emaj.pitt.edu using genetic algorithm for winter maintenance operations: multi depot k-chinese postman problem page |54| emerging markets journal 4. istanbul example for snow maintenance in our study, salting operation in winter maintenance activities in istanbul was discussed. the problem was limited with primary routes. for istanbul, which is divided into two main regions as european and asian, two sub problems were created in our model. there are 3 depots and 28 primary routes in the european side, and there are 4 depots and 20 primary routes in the anatolian side. coordinate data of these depots are shown in table 1. indication of the depots of the anatolian side on a map is given in figure 5. table 1: coordinates of the depots european side asian side depot x y depot x y edirnekapı 41.0865 45.45696 k.bakkalköy 42.5268 45.38550 maslak 41.8372 45.53625 kartal 43.1289 45.31139 tüyap 38.4003 45.45409 hekimbaşı 42.4925 45.47295 ömerli 44.4440 45.49329 figure 5: anatolian side depots’ locations. other data about the problem are starting and ending point coordinates of the routes, vehicle capacities, distance constraints and current solution information. primarily, distance information is determined according to the real road distances. the geography information system and arc gis program were used. with the condition that the anatolian and european sides are handled separately, the distance matrices generated in a two groups. there are two different kind of matrices that the first one is distances between primary routs and the second one is distances between depots and primary routes. depending on the number of depots and routes for the european side, a distance matrix of a dimension of 28 to 28 and 3 to 28 routes were established. these matrices for the anatolian side were determined as 20 to 20 and 4 to 20. an example of matrix can be seen in table 2. table 2 : example of distances matrix (european side: depots – routes starting point) (km). …… x11 x12 x13 …… edirnekapı … 11,1 19,1 19,5 … maslak … 23,6 31,6 32 … tüyap … 15,6 7,5 15,7 … there are different types of salting vehicles, and their speed capacities are close to one another. according to this, vehicles are homogenous and their salt capacities are 7.500 kilograms. the vehicles spread until salt runs out. when salt is finished or when there is no more salt needed vehicles go to the depot. there are some assumptions for the problem;  the vehicles are homogenous; in other words their salt capacities are the same.  the vehicles tour around in the same route(s) until the salt runs out, and return to the depot.  since the vehicle running out of salt during salting will be returning to the depot after completing their routes, the estimated tour number (total salt amount of vehicle(s)/salt need in a route for one tour) is rounded up.  the vehicles return to the depot they leave from.  fuel capacities of the vehicles are enough to complete their tours and for returning to their depots. 5. application as a solution method of the model, genetic algorithm was selected. for comparison with classical algorithm, clarke and wright saving algorithm, and sweep algorithms were used. these algorithms have used for vehicle routing problems in literature. algorithms were modified specifically to our problem. all codes, including genetic algorithm, were written by matlab r 2009a program. the parameters used in the application of genetic algorithm to our problem are number of iterations, population size, and mutation probability. as a result of the tests, it showed that genetic algorithm found the best solution between 200 and 500. however by considering this characteristics of the algorithm, which does not guarantee the optimum and making a progress jump in advance iterations, the iteration number was determined to be 1000. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.69 | http://emaj.pitt.edu dr. i̇brahim zeki akyurt, dr. timur keskintürk, dr. çağatay kalkancı emerging markets journal | p a g e |55 population size in literature is between 20 and 100 in general. in our study, it was considered that a population size of 30 would be sufficient as a result of the performed tests. although increasing this size would enable the finding of the best value, in an early iterations; it could increase the algorithm completion time due to the operations. a series of studies was performed for mutation possibility and different values were tested. these values are in turn 1%, 3% and 5%. it was observed that 5% found faster and good results. for assigning routes to depots, a method used frequently in literature, assigning of all routes to the closest depot technique was used. in the initial population, except for one chromosome, a method for assigning to all routes a single vehicle was used. current solution of the set up for one chromosome was assigned as the initial solution. clarke and wright savings method was developed by clarke and wright in 1964. it was started by estimating cost saving of each customer dual and continued by adding a customer between the two customers. this method was used in the study for comparison purpose. the saving method has been continuing to be developed up until today (laporte, 1992) in many researches like the researches of gaskell (1967) and yellow (1970). the sweep method was suggested by gillet and miller in 1974 for the solution of small and large arp problems (laporte, 1992; düzakın and demircioğlu, 2009). in the sweep algorithm, the nodes for distribution are shown on a polar coordinate system, and the depot is positioned as the center of the polar coordinate system (nureahyo et al., 2002). developed genetic algorithm matlab codes were run in a computer with pentium dual core processor, 4 gb memory and 120 gb hard disk characteristics. the results are shown in table 3 and table 4. table 3 : comparison of the solutions. table 4 : comparison of solution (%). when the results are examined, it is observed that genetic algorithm generates better results than the current solution and other classical algorithms. both the european and anatolian and in total, objective function values, were better for genetic algorithm. the result found for the european side was 3.4% better than the current solution; 3.12% better for the anatolian side; and in total 3.28% better than the current solution. the sweep algorithm was less unsatisfactory, it can be stated that it was not successful. although clarke and wright saving algorithm, on the other hand, could make a progress worth of mentioning, it was again insufficient in the anatolian side and in total. sum of ga improvements was determined to be 3.28%. its equivalent is 231,5 km. it was observed that annual intervention number was 15 in the meetings held with the institution. as a result of the progress made according to this, total annual distance improvement is: 15 x 231,5 = 3.472,5 km. distributions of ga solutions for the european and the asian sides are shown as box graphics in figure 6. in the graphs, distribution of the results around the median is given as boxes, and max and min values estimated by medians are shown by the low and upper limits. according to this, it can be stated that ga results are very close to one another, and it can be said that the deviation in the european side and the extreme values in the asian side are within acceptable limits. confidence interval with 99% possibility is estimated to be 3.991,14 and 3.993,07 for the european side, and it is estimated to be 2.823,18 and 2.824,31 for the asian side. figure 6: box graphics of ga solutions of the problem. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.69 | http://emaj.pitt.edu using genetic algorithm for winter maintenance operations: multi depot k-chinese postman problem page |56| emerging markets journal when it is viewed in terms of cost evaluation; main cost items of the vehicles working in winter maintenance are;  fuel used by the vehicles  depreciation value of the vehicles  annual maintenance value of the vehicles  values paid to the drivers of the vehicles and assistants  general expenditures. the vehicles working in winter maintenance work run 1.200 kilometers. as a fuel value, 3.0 lt/km consumption was considered, and fuel value was accepted to be 4 tl/lt. depreciation value was accepted to be 100.000 tl, maintenance value 25.000 tl, driver value 3.900 tl, and general expenditure was accepted to be 10.000 tl. by dividing these numbers to the annually run 1.200 kilometers, expenditure for each 1 kilometer is found.  fuel expense: 12 tl/km (3,00 lt * 4 tl)  depreciation: 83,30 tl/km ( 100.000 tl / 1.200 km)  maintenance amount: 20,83 tl/km (25.000 tl / 1.200 km)  driver amount: 26 tl/km (2*4*3.900 tl / 1.200 km)  general expenditure: 8.33 tl/km (10.000 tl / 1.200 km)  total: 150,46 tl/km as a result of the conducted study, it was found that a total of 150,46 tl spending is made for 1 kilometer. when it is multiplied by 3.472,5 kilometers, which is found as improvement, this amount comes to 522.472 tl, and this equals to the number 12.000.000 tl annually, in other words, this equals to approximately 4,35% of spending made for winter works. conclusion in this study, routing of the vehicles for primary routes in istanbul province winter maintenance works was examined. the problem was modeled as the arc routing problem, which is a type of vehicle routing problems. in terms of constraints and objective function, it was set up as chinese postman problem, which is one of arc routing problems. the problem was divided into two sub problems as europe and asia, and it was solved as multi depot for each continent. the current solution was compared with the genetic algorithm, clarke and wright saving algorithm and sweep algorithm. when the results were examined, it was observed that the best value for both continents and total was obtained by the genetic algorithm, and for each intervention, the improvement was 231,5 kilometers, and 3,28%. since 15 interventions were faced annually, the equivalent of this progress annually was determined to be 3472,5 km. the benefits of such a progress per intervention and annually are not limited with a progress made per kilometer; but also it has direct and indirect benefits as well such as decreasing traffic load, reducing work force hours, time of intervention and decreasing environmental pollution. the study, handled in the winter maintenance content, can be extended to road construction and maintenance, traffic service and safety, garbage collection and similar areas, and improvement can be spread to primarily the traffic problem in istanbul, which has been growing for years. since the study has provided favorable results in istanbul in general, it can be applied to other regions. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.69 | http://emaj.pitt.edu dr. i̇brahim zeki akyurt, dr. timur keskintürk, dr. çağatay kalkancı emerging markets journal | p a g e |57 references ahmetzade, p., yılmaz, m. ve yılmaz, m. (2007). kar ve buz ile mücadele etmek amacıyla geliştirilen daha etkili ve ekonomik yeni yöntemler. 7. ulaştırma kongresi bildiri kitabı, ss. 186–195, i̇stanbul: eylül, 2007 ahuja, k. r., magnatni, t. l. ve orlin, j. b. (1993). network flows: theory, algorithms and applications, prentice hall, new jersey. allison e. k. and bernard n. s. (2004), effects of highway deicing chemicals on shallow unconsolidated aquifers in ohio—final report, scientific investigations report 2004–5150, p. 199. campbell, j. f. and langevin, a. (1995). operations management for urban snow removal and disposal. transportation research– a, 29 (5): 359–370. cook, t. m. and alprin, b. s. (1976). a snow and ice removal in an urban environment. management science, 23: 227–234. dali, z. (2009). optimization of vehicle routing for plowing and snow disposal. y. wang, p. yi, s. an, h. wang (editors). proceedings of the 9th international conference of chinese transportation professionals. icctp 2009: critical issues in transportation system planning, development, and management, harbin, china, ss. 2738– 2744. eriksson, m. and norrman, j. (2001). analysis of station locations in a road weather information system. meteorological applications, 8: 437–448. fu, l., trudel, m. and kim, v. (2009). optimization winter road maintenance operations under real time information. european journal of operational research, 196: 332¬341. golbaharan, n. (2001). an application of optimization to the snow removal problem – a column generation approach. ph. d. thesis, linköping university, linköping, sweden. gupta, d., tokar–erdemir, e., kuchera, d., mannava, a. k. ve xiong, w. (2010). optimal workforce planning and shift scheduling for snow and ice removal. technical report, industrial and systems engineering program, department of mechanical engineering, university of minnesota. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.69 | http://emaj.pitt.edu using genetic algorithm for winter maintenance operations: multi depot k-chinese postman problem page |58| emerging markets journal haslam, e. and wright, j. r. (1991). application of routing technologies to rural snow and ice control. transportation research record, 1304: 202–211. kuloğlu n. and kök b. v. (2005). karayollarında kar ve buz mücadelesinde kullanılan tuzun beton asfalt kaplamaya etkisi. fırat üniversitesi fen ve mühendislik bilimleri dergisi, 17 (1): 87–96. lemieux, p. f. and campagna, l. (1984). the snow plowing problem solved by a graph theory algorithm. civil engineering systems, 1: 337–341. liebling, t. m. (1973). routing problems for street cleaning and snow removal. i̇çinde, deininger, r. (editör), models for environmental pollution control, ss. 363–374. marks, h. d. and strieker, r. (1971). routing for public service vehicles. asce journal of the urban planning and development division, 97: 165–178. mitchell, m. (1995). genetic algorithms: an overview. complexity, 1 (1): 31–39. norrman, j., eriksson, m. and lindqvist, s. (2000). relationships between road slipperiness, traffic accident risk and winter road maintenance activity. climate research, 15: 185–193. perrier, n., langevin, a. and amaya, c. a. (2008). vehicle routing for urban snow plow operations. transportation science, 42: 44–56 sever, r. (2008). aşırı kar yağışlarının afete dönüşmesini engellemek için alınması gereken bazı önlemler. 5. dünya su forumu bölgesel hazırlık süreci: dsi̇ yurtiçi bölgesel su toplantıları. kar hidrolojisi konferansı bildiri kitabı, ss. 173–183. sherif, a. and hassan, y. (2004). modelling pavement temperature for winter maintenance operations. canadian journal of civil engineering, 31: 369378. tucker, w. b. and clohan, g. m. (1979). computer simulation of urban snow removal. transportation research board, special research report number 185, ss. 293–302. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.69 | http://emaj.pitt.edu dr. i̇brahim zeki akyurt, dr. timur keskintürk, dr. çağatay kalkancı emerging markets journal | p a g e |59 tuong–quan v., hyoung–seok, k., hyo, s. c., doan, n. d. and byung–ryong, l. (2009). a study on optimization of fish robot maximum velocity using the combination of genetic – hill climbing algorithm. iccas–sice, ss. 2280– 2285. the participation banking as a distinctive method and the its growing in the turkish finance marketperiod: 2007-2013 ferhat sayım yalova university, economics and administrative sciences faculty, yalovaturkey | email: f_sayim@hotmail.com abstract financial systems and companies has become the most important reason in the weakness of world economic system. the formation and development process of the financial structure also constitutes the infrastructure of the world economic system. the path of the financial system and development has led to discuss with the financial crisis in 2008-2011. one of the argument topic in order to reduce problems caused by the conventional banking system is alternative financing systems. in turkey, the corporations based on profit share system which are named participation based banking attention, if the alternative banking systems are considered. these banks which settle on different principles in the risk distribution of the portfolio acquired are analyzed more nowadays. participation based banks are placed in almost every regulation related to banking terms and get their legal infrastructure more stable in the banking legislation of turkey. this study is a 2007-2013 part of research series. we try to find out the place and the importance of participation based banking with the various sub-headings especially in turkey. we examine the comparative review 2007-2013 data of participation banks which total assets, equity net profit, collected turkish currency and foreign currency funds and bank loan funds, figures for the four participation banks in turkey. we are comparing the total figures with deposit banks for the same period. one of our primary aim in this essay, to study in the framework of the alternatives of the financial companies and options. these options could be stated as a vibrant and viable well established choice as a non-western modeldifferent from the classical western interest based leading banking system in the globe. moreover, that participation banking systems’ grow and increase with its resourceful bulk of transactions and shares within the financial market. in addition, we intended to delineate the basic functioning structures, rules, norms, principles, procedures, operations of that alternate banking system in the financial market. keywords: bank, finance market, finance sector, participation bank, islamic bank, interest free banking, alternative banking system new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu | mailto:f_sayim@hotmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |93 the participation banking as a distinctive method and the its growing in the turkish finance marketperiod: 20072013 ferhat sayim introduction the set of governing principles for interest free banking in turkey is dated as the end of the year 1983. with the decree dated 16.12.1983 and numbered 83/7506, the foundation of private finance institutions is laid. in turkish their former name private finance institutions, or with the new name, participation banks haven’t authorized or empowered to collect deposits but receive fund through special current accounts or profit and loss participation accounts, and utilize fund through methods such as production financially assist, community of profit and loss, financial leasing, buying and selling documents against payment. even if these institutions are have been permitted in turkey since 1984, they have been limited in terms of both quantity and scale (central bank of republic of turkey, 2005). participation banks are banks operating in financial sector, supporting real economy and offering banking service. participation banks gather funds from saving owners, use them in industrial and trade sectors according to the interest free financing ethics and shares the profit or loss with saving owners. the word “participation” in their name expresses that this type of banking is based on the opinion of participation to profit and loss (the participation banks association of turkey-faq, 2010). participation banks provide as a means of transformation of saving to capital. proportional to their advantage of working with a greater number of branches, they also give standard banking services such as investment consulting, safe deposit box, money transfer service, giving check book, mediating cash proceeds etc (battal, 2007, p. 57). at present, diversity of such services given by participation banks is equal or similar to the standards of other banks. currently, in this article, we are going to elaborate as the unit of analysis, the participation banks, new financial instruments. in the middle of the first quarter of 21th century, there has been occurred a new world financial crises. in fact, those crises mainly influenced the capitals of the financial centre in the west. for those countries which heavily affected by this economic crises, forced them look for new financial instruments and systems. for that reason, it leaded to the quest for other models, opportunities or proposals. the fiscal and financial-economic crises, especially in the european union member states, it may be due to of the rigidity of maastricht euro criteria, is deepening and deteriorates further. so we think that it proves the need for penetrating new sort of financial innovations, techniques and tools. it is also our modest propositions that might be recorded some theoretical and practical contributions, revisions and amendments to overcome these current troublesome critical financial problematic. one of our main aim in this paper, to study in the framework of the alternatives of the financial institutions and other options. these options could be asserted as a vibrant and practicable well established choice as a nonwestern modeldifferent from the classical western interest based dominant banking system in the world. moreover, that participation banking systems’ growth, progression and increase with its resourceful bulk of dealings and shares within the financial market. in addition, we intended to delineate the basic functioning structures, rules, norms, principles, procedures, operations of the alternate banking system in the financial market. after that, we have applied as a descriptive, explanatory, discursive and comparative analytic methodology to expound the matter in factor. having provided literature reviews then we have concentrated on turkey as a model state in that banking system practice; at which, what kind of instruments and tools used by referring basic indicators, data and information related to the development, flourish and share of that sector within the sum of banking and financial system in turkey. furthermore, that participation banking system positions has been researched in the country. thus, it has been explicated more concerns on how it can be investigated by mentioning its credits, deposits, financing formulation systems and commitments with the banks, customers and investors of the alternate banking system in the country’s financial order. at last, we have attempted to make clear and summarize the concepts, definitions, expositions, demonstrations, rules, assets, liabilities, equities etc.. by giving special cultural internalizations about the organizational and operational activities of the participation banks both similarities and differences, too; so as to draw the attentions of the new researchers and studies in that situation. i.participation banking in the literature banking methods of this system generally called “islamic banking” in the international literature. these banking operations are methods such as various kinds of project partnership and others based on prohibition of interest (moles & tery, 1999, p. 304). as islamic banking is part of the banking system of a country, its performance may affect the soundness and stability of the banking system (mariani; 2008, p.4). islamic banks in general referred to volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu the participation banking as a different banking method and the developing of it’s in the turkish finance market-turkish participation banking for 2007-2013 page |94| emerging markets journal the three types of. (1) development banks, (2) islamic banks in special purpose, (3) islamic commercial banks. participation banks may categorized in islamic commercial banks groups (canbaş & doğukanlı, 2007, p. 237). moreover, for conventional banks with islamicbanking windows, the performance of these windows has certain influence on the performance of conventional banks (mariani; 2008, p.4). islamic bank works as a trading concern and financial intermediary to perform interest-free activities purely according to principles of sharia’h. it is a welfare organization that promotes business and trade activities by pooling the financial resources for the sake of profit and loss for mutual benefit (ahmad, humayoun, & hassan, 2010, p. 8). participation or islamic banks are not institutions peculiar to turkey. all around the world, especially in muslim countries, there are many financial bodies operating according to a similar system. even if the system consisting of such kind of institutions operating on the basis of enterprise of profit and loss is known as “interest free banking” or “islamic banking” in the world, it is taken first as “special finance house”, and then as “participation banking” in the turkish set of laws. the first modern experiment with islamic banking can be traced to the establishment of the mit ghamr savings bank in egypt in 1963. during the past four decades, however, islamic banking has grown rapidly in terms of size and the number of players. islamic banking is currently practiced in more than 50 countries worldwide. in iran, pakistan, and sudan, only islamic banking is allowed. in other countries, such as bangladesh, egypt, indonesia, jordan and malaysia, islamic banking co-exists with conventional banking. islamic banking, moreover, is not limited to islamic countries (chong & liu, 2009, s. 125-126). there is no standard way of grouping islamic financial institutions, but in terms of services rendered, today islamic financial institutions can be divided into the following broad categories:( (al-baraka; 2015) 1islamic banks. 2islamic windows. 3islamic finance/investment banks. 4islamic mortgage companies. 5takaful companies. 6mudarabah companies. 7islamic investment funds but, when we look at the books of financial institutions generally we can’t see these institutions among the financial institutions (rose & marquis, 2009). (burton, nasiba, & brown, 2009) (mishkin & eakins, 2009) on the other hand islamic banks ability to withstand the global downturn has fuelled an expansion of islamic finance around the world. islamic banks have learned that customer loyalty and brand loyalty must be earned (omar & ali, 2010, p. 25). therefore, the determination of the relative performance between islamic banks, and between islamic and conventional banks will assist policy makers in devising a strategy to improve the performance of a banking system in a country and help managers in the conventional banks that choose to have islamic banking windows besides conventional banking to improve bank performance.(mariani; 2008, p.4) the islamic banking and finance systems in west will continue to grow in areas like sukuk, takaful, hedging funds, mutual funds, equity & asset management, corporate finance, wealth and asset management. these high street banks are far more accessible and popular, and all offer similar services. the main reason for the struggle is that, the islamic bank is introducing an entirely new banking model into a country that has been built around an existing banking system that has been around for a long time (malik & malik, 2011, p. 184). the existence of differences in the operation of islamic banking between countries is partly attributed to differences in the approach of regulating islamic banks and differences in the interpretation of the shariah related to financial transactions by different schools of islamic jurisprudence. (mariani; 2008, p.4) both mobilisation and investment of funds should be conducted in accordance with the principles of islamic shari'a".(al-baraka; 2015)  prohibition of interest or usury  ethical standards  moral and social values  liability and business risk http://www.albaraka.com/default.asp?action=article&id=46#1 http://www.albaraka.com/default.asp?action=article&id=46#2 http://www.albaraka.com/default.asp?action=article&id=46#3 http://www.albaraka.com/default.asp?action=article&id=46#4 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |95 table-1: comparison between riba (interest) and profit riba(interest) profit 1.when money is “charged”, its imposed positive and definite result is riba 1. when money is used in productive activity (e.g., in trading), its uncertain result is profit. 2. by definition, riba is the premium paid by borrower to the lender along with principal amount as the condition for the loan 2.by definition, profit is the difference between the revenue from production and the cost of production. 3. riba is prefixed, and hence there is no uncertainty on the part of either the givers or the takers of loan 3. even if a sharing ratio is agreed in advance, profit is still uncertain, as its amount is not known until the activity is completed. 4. riba cannot be negative, it can at best be very low or zero 4. profit can be positive, zero or even negative 5. from islamic shariah point of view, it is haram(prohibited) 5. from the islamic shariah point of view, it is halal(allowed) source: jammeh.b.e.; 2010, 15 participation banks founded in turkey the set of governing principles for interest free banking in turkey is dated as the end of the year 1983. with the decree dated 16.12.1983 and numbered 83/7506, the foundation of private finance institutions is laid. private finance institutions adopted by turkish society in short time showed a rapid improvement in terms of collected funds, volume of work and project capacities. these finance institutions in turkey are: albaraka türk special finance institution inc.: the first finance institution of interest free banking in turkey, albaraka türk participation bank, finished its foundation in 1984, and began its operations as of the beginning of 1985. its name is still albaraka türk participation bank. (albaraka türk–about us, 2010) kuveyt türk evkaf finance institution inc.: kuveyt türk, founded in 1989 at the status of special finance institution, changed its name in may 2006 as kuveyt türk participation bank inc (the history of kuveyt türk, 2010). anadolu finance institution inc.: it began its operations in 1991 in ankara. it is founded with domestic capital. faisal finance institution inc.: founded in 1985. in 2001, faisal finance institution inc. it has been taken over by ülker group, its trade name was changed to family finance institution inc. in 2005, anadolu finance institution inc. and family finance institution inc. merged under the name of türkiye finance participation bank inc. i̇hlas finance institution inc: founded in 1995. as a result of the 2001 economic crisis, it went on bankrupt and its official authorization has been cancelled. that bank still has been in liquidation, since 2001. we should underline the fact that the bankruptcy of this finance bank negatively influenced the other participation banks, too. asya finance institution inc: founded in 1996. after the act no. 5411 came into effect, its name has been changed to bank asya participation bank. after the banking act no. 5411 accepted on october 19, 2005 and published in the official journal on november 1, 2005, the name “private finance institutions” has been changed to “participation banks”. and the name “private finance institutions association” has been changed to “participation banks association of turkey” which has also created their own insurance funds so as to prevent their depositors’ loss; because of any of its member’s probability of bankruptcy at which they could compensate similar to other banks. this insurance include some limits like deposit banks insurance. participation banks operating today among the institutions mentioned above are albaraka türk participation bank inc., kuveyt türk participation bank inc., asya participation bank inc. and türkiye finans participation bank inc. ii.methods of fund collection these organizations gather funds in the type of sharing accounts or current accounts to operate separately within each maturity group (parasız, 2009, p. 251).main matter of liability side in the balance sheet of all firms consist of equity capital and loan capital. equities are funds given by partners as capital or profit which is not distributed etc. these express resources belonging to the capital owners. however the share of equity item within the total capital is not so high in finance institutions and especially in banks in comparison to other businesses. it can be read as follows: an important part of resources of banks consist of loan capital. because of the banking system is based on this. bank or participation bank transforms funds collected from real or legal entities to loan. and the collected funds are naturally loan capital. therefore, the growth of a bank depends on that it collects funds as much as possible in order to be able to give loan as much as possible. in deposit banks, fund collection is mostly realized through promise of interest. however participation banks cannot promise any future interest which would mean a predefined return. the sources of funds for the banks are deposits, capital and equity. deposits can be divided into transaction deposits or investment deposits which are respectively equivalent to current and fixed deposit accounts in conventional banking. in the former, banks act as the safe-keeper which promises the nominal value of the transaction deposits but does not guarantee returns on this liability and is known as wadiah. in the latter, depositors are not guaranteed nominal value nor paid with a fixed return. instead, depositors are considered as shareholders, hence share profits or losses from the investment account with the bank. in addition, the volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu the participation banking as a different banking method and the developing of it’s in the turkish finance market-turkish participation banking for 2007-2013 page |96| emerging markets journal proportion of the profits or the loss to be distributed is predetermined and agreed by both parties. (mariani; 2008, p.4) chart 1application of funds (islamic) source: (aminuddin, i.2010) participation banks collect funds mainly through three ways below. in addition to them, there are also investment accounts based on gold or precious metals. current account or al-wadiah account islamic banks receive deposits in their al-wadiah account. this account is similar to the demand deposit account of interest-based banks. conventional interest-based banks do not pay interest on this type of deposit account. in addition, depositors may withdraw all or a part of the funds deposited in this account without restriction. the term alwadiah means deposit of money allowing somebody to claim the funds in the account. the bank as trustee preserves and safe keeps the funds deposited. thus, depositors feel safe keeping their money with the bank because the bank provides assurance of returning their money on demand. when an individual opens an alwadiah account, he agrees to allow the bank to lend these funds to entrepreneurs seeking financing for their products or activities. in addition, the depositor understands that the bank may earn a profit from its lending activity. however, any losses incurred from this investment activity are totally borne by the bank. the depositor is not liable for any losses incurred from this lending activity. (islamibank, 2015) these accounts are similar to checking accounts in interest banks. account holders open current account to be free of trouble to protect their money against theft, loss etc., and have opportunity to keep their money in a safe place. they also use services provided by their bank such as use of commercial check book, money transfer, collection of check and bills. with the help of these accounts, services are provided such as payment and so on, parallel to needs of commercial and daily life. therefore, these accounts which are mostly dynamic are not proper to bring return and to promise interest. however banks can use these capitals as equity capital after determining average amounts held in these accounts and keeping the needed reserves. participation accounts or saving account or general mudaraba account: interest-based banks receive deposits from clients in return for being paid a fixed interest rate. these deposits are considered to be a loan from the depositors and, thus banks must pay a predetermined rate of interest based upon the daily average balance. so, under the interest-based banking system, the relationship between the bank and its depositors is essentially that of a debtor and creditor. in the case of checking deposits, depositors are provided with a check book. in most cases, a depositor may withdraw all or part of the funds on deposit at any time. in some instances, depending on the type of account, notice may need to be provided to the bank for a withdrawal of money exceeding a specified amount. the mudaraba account of islamic banks is different from the checking account of an interestbased bank. mudaraba is a form of business contract where one party supplies money and the other manages the business by investing labor and time. profits generated from the venture are shared by both in a proportion agreed upon at the time of contract. however, in this arrangement, the financier is solely responsible for any loss that may be incurred. the financier of the business is known as sahib al mal, rabbul mal or owner of the capital and the manager of the business is called mudarib or entrepreneur. (islamibank, 2015) participation accounts are funds of interest free banks which belong to physical or legal entities, money in which is deposited as turkish lira or foreign currency against contract of profit/loss participation account, and which result in profit/loss participation. interest free banks pay amount of balance equivalent to unit account value to the account holder according to the state of profit/loss. payees of interest free banks have no right to demand anything from funds accumulated in these funds (akın, 1986, pp. 288-299). returns remaining back from the funds deposited by participation account holders are distributed to account holders after deduction of losses stemming from returns obtained from funds utilized in pools constituted after certain criteria are handled such as their fixed terms and deposit date. when these returns are distributed, certain shares of these returns are hold by participation banks as management share. special fund pools or investment account or special mudaraba account: when an islamic bank receives a mudaraba deposit for investment in some specific business, sector, or project, the deposit is called a "special mudaraba deposit". in this case, an islamic bank, while receiving deposits, comes to an agreement with the depositors that the money to be https://plus.google.com/100211611322222933243 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |97 received will be invested in some specific business such as the fertilizer or salt business; or in some specific sector like the industrial sector, textile sector, export-import sector; or in some specific investment sector of the bank such as real estate, shipping or a special project. profits earned from these types of specific projects are distributed between the bank and the special mudaraba depositors based a previously agreed to percentage. as before, in the event of a loss, the depositors share the loss in an amount proportional to their deposits in the account (islamibank, 2015). in turkey participation banks, according to the 60th article 7th paragraph of the banking act, can create special fund account pools for 3 or more months by collecting funds in private accounts in order to be utilized for financing planned projects or other investments, without the necessity of adhering time or types determined by the central bank of the republic of turkey. participation accounts belonging to funds collected in this manner are operated in different accounts independent from other accounts and with different time. no transfer is allowed from the collected funds to other period groups. the related authority or institution has to be informed in 15 days after opening or closing dates, regarding special fund pools. at the end of the period of funding, special fund pools get closed**. table-2: islamic banking accounts at a retail level account type purpose of deposit use of funds current account safety and trust qard al-hassan saving account readily available, small investment return finance small or medium size investments investment account large investment return or partial (up to total) loss finance large-scale or long term investment source:jammeh.b.e.; 2010, 19 iii. fund utilization methods this sector is a service sector. with its operations, it is a sector aiming to utilize fund surplus – collected from entities which have no opportunity or ability to use funds in their hands – for paving the way for operations based on commercial activities, and to take a share from the added value created. therefore funds collected in order to create added value have to be used for production of goods and service. otherwise, it is clear that money etc. held in lockboxes would not increase where they stay, and not create added value. the most important difference of participation banks is that they prohibit for themselves **published in official journal no. 26333. banking regulation and supervision agency (brsa) / bankacılık düzenleme ve denetleme kurumu (bddk), article 7, 2006 definite methods of fund utilization and certain sectors used by other banks when utilizing collected funds. fund utilization methods based on commerce. the main fund utilization methods of participation banks can be listed under two titles: the first of them is fund utilization methods based on commerce. also deposit banks can use these types of financing. however there are some points in certain procedures such as handover of money which participation banks pay more attention. the important points here are that it has to be an operation necessarily based on trade of goods or service, and that payment to be made has to be delivered to the firm which sells the goods. private funding support participation bank pays the price of goods or services – bought by real entities directly from sellers for personal needs such as vehicle and apartment – in the name of the customer to the seller, with the condition of not to be used in funding of commercial activities, and in return the buyer is charged with a debt (the participation banks association of turkey, 2008). maybe this method called as bai-muajjal. it means credit sale of goods by the bank to the customer. such contracts provide for a margin of profit or mark-up to the bank as mutually agreed upon by the buyer (client) and the seller (bank). goods are kept at the disposal of the customer/buyer and the sale price can be paid either in lump sum or in instalments. it can also be used for both internal and external trade operations. like murabaha, baimuajjal is also a short-term commercial investment and therefore, the concept of discounting technique is not really applicable here (islamibank limited, 2015). financial rent lease is defined as “an agreement in which one party gains a long-term rental agreement, and the other party receives a form of secured long-term debt” (www.investopedia.com). the lessee gains a long-term contract for the use of an asset, and the lessor is assured of regular payments for a specified number of years. under the conventional leasing system, the lessee pays the specified rentals and a fixed interest rate over specified period of time for the use of specific assets. the conventional bank takes the risk of interest rate changes (addave,2012, p.26). in the operation which is called “leasing” today, the person who wants to buy a good demands that this good is bought by the participation bank and rent to this person after the agreement between this person and the participation bank. however it is decided the customer of the participation bank will be the owner of that good after a certain period of rent and of paying rents. in this way, the good with financial renting is used by the customer demanding financial renting, and is owned by the bank. at the end of rent period, the ownership is handed over. as investment banks, also participation banks can realize financial renting operations without founding a separate company. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu the participation banking as a different banking method and the developing of it’s in the turkish finance market-turkish participation banking for 2007-2013 page |98| emerging markets journal murabaha: (instalment sale) murabaha is another participating form used by the islamic bank. in a murabaha contract, the seller informs the buyer the cost of the goods, services or producing a specified product.parties negotiate a mark-up or profit margin and total cost is usually paid in installment. the murabaha is usually short-term contract. this mode of participation enables the islamic bank to enter the trading cycle as a buyer of goods, raw materials and equipment or any assets. for example with murabaha contract, a client requests the bank to buy a certain asset at a specific price, and promises to buy it from the bank at agreed higher price at a set of time(addave,2012, p.25). murabaha used in banking is sale of goods with an order of sale in which payment is made some time after delivery of the goods transacted. a customer and a bank sign a pre-contract which proposes that the customer buys a good from the bank. after the contract, upon the customer’s written demand, the bank buys the mentioned good in cash from the seller, and sells it to its customer in accordance with the conditions agreed upon before (akın, 1986, p. 159). so, participation bank mediates trade, buys the good from the seller in cash, and sells to its customer for the account. fund utilization through profit and loss partnership method mudaraba: (venture capital) mudaraba is a other method of fund utilization used by interest free banks very commonly. one party gives its labor, know-how and experience (entrepreneur), and the other party gives capital (interest free bank). in this method, real and legal entities present their applicable projects to the bank. the manager accepted and funded by the bank is called “mudarib”, and the person or institution funding or supporting the project is called “rabbul-mal”. after signing a contract with the mudarib, rabbul-mal (interest free bank) has to keep ready the amount of capital mentioned in the contract, in accordance with mudarib’s demand. other than conditions mentioned in the contract, bank has no authority to interfere in transactions realized by the project owner. however in case of emergence of danger of loss because of unplanned and irregular work, the bank can make some initiatives in order to prevent loss. normally, it can control accounts every time, and demand all formal and informal bookings. profit obtained at the end of mudaraba operation is shared among rabbul-mal guaranteeing funding and mudarib using fund according to the proportion determined before. in case of any loss, this loss is met by rabbul-mal (küçükkocaoğlu, 2010, p. 8). an islamic bank for example lends money to a client to finance a factory. in return the bank receives pre-specified percentage of the factory’s net profit every year. this share of the profits obtained from the entrepreneur provides for repayment of the principal and profit to pass to the depositors by the bank. however, there is some confusion about the issue. those literatures that i have obtained mostly agreed that the capital provider bears the entire capital losses; however, according to aramco world magazine (may-june 1987), profits and losses are to be shared by the bank and the entrepreneur. this aramco writing is a minor issue because all these other academic literatures are in consensus about the issue and they agreed that the provider of capital has to bear any financial losses(addave,2012, p.24). under this islamic mode of financing, the bank provides all of the capital for the project while the mudarib(client) only puts contributes his efforts and skills. under this arrangement, the bank and the client share profits in a predetermined ratio, but any loss is solely the responsibility of the bank unless the loss has been caused by the negligence or willful act of the client. the discounting techniques are applicable to mudaraba in the same manner as that of musharaka(islamibank limited, 2015). muşareke: (joint capital partnership or capital invesment) in the musharaka participation, the bank is not the only who provides the funds but at least one or more partners contribute to the joint capital of investment. for example the bank enters into a partnership with a client and both contribute the equity capital. both the bank and the client invest in varying proportion and they both have the rights to participate in the management of the project or the enterprise. from the perspective of corporate governance, the bank has the rights to exercise its voting rights and both the bank and partner also have their representatives in the board of directors. this kind of mode is different from the conventional banks’ participation as it is based on profit/loss sharing arrangement. in this mode of participation, the bank and partner share the profit or losses according to their equity shareholdings(addave,2012, p.22). selem sale: (current sale of future delivery goods or future markets and sales) “selem sale” means buying a good on account with another good bought or sold in cash. the bank buys a good by paying its price in cash which is going to be delivered to the bank in a future date agreed upon in the contract between the bank and the seller. a different style of selem sale, as in funding purchase of building, machinery and equipment, can be used also in purchase of consumer durables in case of that conditions are proper in terms of economy. in other words, this finance technique can be used in order to fund industry, trade and agriculture (akın, 1986, p. 163). volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |99 according to another definition bai-salam means forward purchase of the potential product. under this arrangement, the bank enters into a contract to purchase a certain quantity of the product or commodity that is to be delivered to the bank at a future date. however, the payment for the aforesaid goods is made in advance. the price of the goods must be reasonable and the bank is free to sell the goods in the open market to earn a good profit (islamibank limited, 2015). according to another definition, selem is the sale activity which is made with money in cash and goods on account. in selem, type, quality, amount, price, delivery place and date of the product have to be determined in the contract. with the help of selem, goods which will be produced in a future date are sold, and the needed money is obtained. on the other hand, customer buys a good which it will need in a future date. so, both parties meet their needs without using interest (yılmaz, 2010, p. 14). for example, a farmer which needs money is supported by the bank in terms of capital, and the bank sells the yield in the market. documents against payment shortly, it means that a participation bank buys goods abroad in the name of its customer who gave him order, and sells them to its customer. this type of fund use operation method is used for funding of foreign buy and sell. according to the agreement signed between participation bank and the party using fund, the participation banks buy documents touching payment in cash, and sells to one using fund on account with a higher price. this type of finance technique is mainly based on the method of murabaha (forward sale) (akın, 1986, p. 290). however, methods and documents used in foreign trade gain importance at that point. documents are used in foreign trade especially in operations of documented credit. they are documents which assure importer’s custom clearance of goods sent by exporter. therefore, these documents which make possible that goods entering in customs in the country of exporter are delivered by customs authorities are undertake the ownership of goods as documents with status of valuable papers. iv. personnel and branch structure of participation banks growth of branch numbers the number of deposit banks founded in turkey is 32 in the end of 2013. their 3 of them are based on public capital, 11 of them are based on domestic private capital, and 17 of them are based on foreign private capital, 1 of them belongs to sidf. additionally, there are 13 development and investment banks founded in turkey. if we take also 4 participation banks into consideration, it is seen that the number of banks in turkey reaches to 49. the branches number of deposit banks was 7.570 in 2007, and reached to 10.981 with an increase of 45% as of the end of 2013. the number of branches of participation banks was 422 in 2007, and reached to 966 with an increase of 129% as of the end of 2013. currently 32 private deposit banks have 343 branches on an average, each of 4 participation banks has 242 branches on an average in the end of 2013. however in terms of the increase rate of branches from 2007 to 2013, it is seen that participation banks reached almost three times bigger increase rate of branch numbers than deposit banks. the table below shows the position of participation banks within themselves. table-3/a: growth of branch numbers, 2007 -2013 end of year albaraka türk bank asya kuveyt türk türki̇ye fi̇nans total sum average 20072013 117 189 162 189 657 2013 167 281 268 250 966 2012 137 250 221 220 828 2011 123 200 180 182 685 2010 109 175 141 182 607 2009 101 158 121 180 560 2008 100 143 113 174 530 2007 80 118 87 137 422 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu the participation banking as a different banking method and the developing of it’s in the turkish finance market-turkish participation banking for 2007-2013 page |100| emerging markets journal table-3/b: increase rate from previous year at branch numbers, 2007-2013 end of year albarak a türk ban k asya kuvey t türk türki̇y e fi̇nans increase rate from prev.yea r total sum averag e 20072013 15% 18% 19% 11% 16% 2013 22% 12% 21% 14% 17% 2012 11% 25% 23% 21% 21% 2011 13% 14% 28% 0% 13% 2010 8% 11% 17% 1% 8% 2009 1% 10% 7% 3% 6% 2008 25% 21% 30% 27% 26% 2007 27% 30% 10% 12% 19% source: composed from data provided by (bat: the bank association of turkey, 2011) (bat, the bank association of turkey, 2012-13) (pbat, the participation banks association of turkey, 2012-13). growth of personnel number as of the end of 2013, totally, 214.177 employees are employed in the banking sector in turkey. personnel number of deposit banks was 153.212 in 2007, and reached to 192.219 with an increase of 25 % as of the end of 2013. the number of personnel of participation banks was 9.215 in 2007, and reached to 16.712 with an increase of 81% as of the end of 2013. looking at the growth rates of the number of their personnel from 2007 to 2013, it is seen that the growth rate of personnel of participation banks is almost 3,2 times more than deposit banks table-4/a: employment in the banking sector, 20072013 2007 2008 2009 2010 2011 2012 2013 participatio n banks 9.21 5 11.0 32 11.8 02 12.70 3 13.85 7 15.3 56 16.7 12 deposit banks 153. 212 166. 325 167. 063 173.1 33 176.5 76 181. 197 192. 219 >public banks 41.0 56 43.3 33 44.8 56 47.23 5 50.23 9 51.5 87 54.4 66 >private banks 75.1 24 82.1 58 82.2 70 83.63 3 89.04 7 90.6 12 93.3 65 >fund banks 325 267 261 252 243 226 229 >foreign banks 36.7 07 40.5 67 39.6 76 42.01 3 37.04 7 38.7 72 44.1 59 developmen t and investment banks 5.32 2 5.27 3 5.33 9 5.370 4.842 4.90 1 5.24 6 total 172. 391 182. 630 184. 204 191.2 06 195.2 75 201. 454 214. 177 source: composed from data provided by (bat, the bank association of turkey, 2011) (bat, the bank association of turkey, 2012-13) (pbat: the participation banks association of turkey, 2012-13). as of the end of 2013, the average personnel number for branch in participation banks is as follows: table-4/b: the average personnel number for branch in participation and deposit banks, 2007-2013 bank total personnel no./branch no. average pers.n. for branch 2011 average personnel no. for branch 2012 average personnel no. for branch 2013 albaraka türk 2013(3.057/167) 21,1 20,1 18,3 bank asya 2013(5.074/281) 22,7 20,3 18,1 kuveyt türk 2013(4.642/268) 18,5 17,8 17,3 türkiye finans 2013(3.990/250) 18,6 16,3 16,0 total sum 2013(16.763/966) 20,2 18,5 17,4 deposit banks 2013(192.219/10.981) 18,0 17,8 17,5 actually, bank asya participation bank has the biggest personnel number and it has biggest average personnel number with albaraka. in deposit banks, average personnel number reached by dividing the total personnel number to the branch number is 18 in the end of 2011. the same average is 20,2 in participation banks. this means that participation banks employ 12 % more employees for branch than deposit banks for 2011. but both of them is equal almost in the end of 2013. the average personal decreased in the end 2012 and 2013 for participation banks. rapidly increase in the brunch number seems the cause of the decrease for average brunch personnel number. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |101 table5/a: growth of personnel number (participation banks), 2007-2013 end of year albarak a türk ban k asy a kuvey t türk türki̇y e fi̇nans tota l sum averag e 20072013 2.258 4.309 3.035 3.359 12.960 2013 3.057 5.074 4.642 3.990 16.763 2012 2.758 5.064 3.939 3.595 15.356 2011 2.601 4.548 3.326 3.382 13.857 2010 2.175 4.266 2.850 3.403 12.694 2009 1.935 4.074 2.447 3.346 11.802 2008 1.796 3.806 2.245 3.185 11.032 2007 1.481 3.329 1.794 2.611 9.215 source: composed from data provided by (bat: the bank association of turkey, 2011) (bat: the bank association of turkey, 2012-13) (pbat: the participation banks association of turkey, 2012-13). table-5/b: increase rate from previous year at personnel number (participation banks), 2007-2013 end of year albarak a türk ban k asy a kuvey t türk türki̇y e fi̇nans increase rate from prev.ye ar total sum average200 7-2013 15% 12% 19% 9% 13% 2013 11% 0% 18% 11% 9% 2012 6% 11% 18% 6% 11% 2011 20% 7% 17% -1% 9% 2010 12% 5% 16% 2% 8% 2009 8% 7% 9% 5% 7% 2008 21% 14% 25% 22% 20% 2007 28% 40% 29% 19% 30% v. evaluation of sectoral quantitative data turkish currency funds in the table, participation banks showed a quite better performance as of the end of 2013 compared to 2007 in funds of turkish currency. as of the end of 2013, deposits of turkish currency reached to approximately 37 billion turkish lira after an increase of 366 %. among participation banks, bank asya has the biggest fund of turkish currency. but highest average grown rate owner is kuveyt turk. the second high performance belongs to the albaraka türk. table-6/a: collected turkish currency funds in participation banks, 2007-2013 (1000tl) end of year albara ka türk bank asya kuve yt türk türki̇ ye fi̇nans total sum avera ge 20072013 4.148.378 6.765.57 7 4.606.55 4 5.646.76 9 21.167.2 77 2013 7.518.851 10.496.2 22 9.327.03 2 9.641.97 8 36.984.0 83 2012 5.535.572 9.241.39 1 6.768.53 0 7.444.77 2 28.990.2 65 2011 4.797.751 7.813.46 3 5.215.35 7 6.233.35 4 24.059.9 25 2010 4.358.934 7.662.28 8 4.496.12 6 5.712.66 2 22.230.0 10 2009 3.290.809 5.979.82 5 2.987.41 5 4.660.03 5 16.918.0 84 2008 2.029.617 3.603.48 7 2.111.41 4 3.300.25 2 11.044.7 70 2007 1.507.109 2.562.36 3 1.340.00 3 2.534.33 0 7.943.80 5 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu the participation banking as a different banking method and the developing of it’s in the turkish finance market-turkish participation banking for 2007-2013 page |102| emerging markets journal table-6/b: increase rate from previous year at collected turkish currency funds in participation banks, 2007-2013 (1000tl) end of year albarak a türk ban k asy a kuvey t türk türki̇y e fi̇nans increase rate from prev.ye ar total sum averag e 20072013 36% 32% 40% 28% 33% 2013 36% 14% 38% 30% 28% 2012 15% 18% 30% 19% 20% 2011 10% 2% 16% 9% 8% 2010 32% 28% 51% 23% 31% 2009 62% 66% 41% 41% 53% 2008 35% 41% 58% 30% 39% 2007 60% 56% 48% 44% 51% source: composed from data provided by (bat, the bank association of turkey, 2011) (bat, the bank association of turkey, 2012-13) (pbat, the participation banks association of turkey, 2012-13). foreign currency funds, 2007-2013 table7/a: foreign currency funds, 2007-2013 (1.000tl) end of year albara ka türk bank asya kuvey t türk türki̇ ye fi̇nans total sum avera ge 20072013 2.869.541 4.305.0 22 3.885.08 6 3.066.41 1 14.126.0 60 2013 5.007.361 8.015.3 41 7.703.67 0 5.499.74 0 26.226.1 12 2012 3.689.446 6.500.4 67 5.986.51 3 3.984.76 4 20.161.1 90 2011 3.246.996 4.583.5 80 4.702.97 0 3.275.81 1 15.809.3 57 2010 2.522.656 3.504.2 94 2.885.34 7 2.685.23 4 11.597.5 31 2009 2.173.836 3.156.7 53 2.370.84 2 2.222.45 5 9.923.88 6 2008 1.955.493 2.239.3 34 1.957.95 8 2.012.29 6 8.165.08 1 2007 1.490.999 2.135.3 87 1.588.30 5 1.784.57 5 6.999.26 6 table-7/b: increase rate from previous year at foreign currency funds, 2007-2013 (1.000tl) end of year albarak a türk ban k asy a kuvey t türk türki̇y e fi̇nans increase rate from prev.ye ar total sum averag e 20072013 23% 27% 28% 18% 24% 2013 36% 23% 29% 38% 30% 2012 14% 42% 27% 22% 28% 2011 29% 31% 63% 22% 36% 2010 16% 11% 22% 21% 17% 2009 11% 41% 21% 10% 22% 2008 31% 5% 23% 13% 17% 2007 23% 37% 9% 2% 17% source: composed from data provided by (bat: the bank association of turkey, 2011) (bat: the bank association of turkey, 2012-13) (pbat: the participation banks association of turkey, 2012-13). the case in foreign currency funds is some different. among participation banks, bank asya has the biggest fund and türkiye finans has the highest increase of performance of foreign currency in 2013. kuveyt türk has the highest average growing rate in the foreign funds. the second participant bank is kuveyt türk in the total foreign funds. as of the end of 2013, foreign currency deposits of participation banks reached to approximately 26 billion turkish liras after an increase of 275 % compared to the end of 2007. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |103 total funds collected, 2007-2013 bank asya is the leading participation bank with an amount of 18.5 billion turkish lira; in terms of total funds collected as the end of 2013. kuveyt türk, türkiye finans and albaraka türk follow bank asya respectively. as of the end of 2013, total funds collected by participation banks reached to approximately 63 billion turkish lira, after an increase of 323% compared to the end of 2007. figures of participation banks and deposit banks are shown below which facilitates to make a relative analysis between them. table-8/a: total funds collected, 2007-2013 (1000tl) end of year albarak a türk bank asya kuvey t türk türki̇y e fi̇nans total sum averag e 20072013 7.017.919 11.070.59 9 8.491.640 8.713.180 35.293.33 8 2013 12.526.212 18.511.56 3 17.030.70 2 15.141.71 8 63.210.19 5 2012 9.225.018 15.741.85 8 12.755.04 3 11.429.53 6 49.151.45 5 2011 8.044.747 12.397.04 3 9.918.327 9.509.165 39.869.28 2 2010 6.881.590 11.166.58 2 7.381.473 8.397.896 33.827.54 1 2009 5.464.645 9.136.578 5.358.257 6.882.490 26.841.97 0 2008 3.985.110 5.842.821 4.069.372 5.312.548 19.209.85 1 2007 2.998.108 4.697.750 2.928.308 4.318.905 14.943.07 1 table-8/b: increase rate from previous year at total funds collected, 2007-2013 (1000tl) end of year albarak a türk ban k asy a kuvey t türk türki̇y e fi̇nans increase rate from prev.ye ar total sum average 2007-2013 29% 29% 33% 23% 28% 2013 36% 18% 34% 32% 29% 2012 15% 27% 29% 20% 23% 2011 17% 11% 34% 13% 18% 2010 26% 22% 38% 22% 26% 2009 37% 56% 32% 30% 40% 2008 33% 24% 39% 23% 29% 2007 39% 47% 24% 23% 33% source: composed from data provided by (bat: the bank association of turkey, 2011) (bat: the bank association of turkey, 2012-13) (pbat: the participation banks association of turkey, 2012-13). among participation banks, albaraka has the highest increase rate for total funds in 2013, but kuveyt türk has the highest increase rate in 2012,2011 and 2010. the second bank is kuveyt türk in the same 2013. kuveyt türk also has the highest average growing rate in the foreign funds. table-9: fund distribution of participation and deposit banks, 2007-2013 (million tl) 200 7 200 8 200 9 201 0 201 1 201 2 2013 20072013 inc. rate deposit banks 356. 984 453. 485 507. 258 614. 681 656. 276 770. 016 943.3 13 164% participation banks 14.9 43 19.2 10 26.8 42 33.8 28 39.8 69 49.1 51 63.21 0 323% deposit+ participation b. 371. 927 472. 695 534. 100 648. 509 696. 145 757. 230 1.006 .523 171% source: composed from data provided by (bat: the bank association of turkey, 2011) (bat: the bank association of turkey, 2012-13) (pbat: the participation banks association of turkey, 2012-13). table-10: total deposits in deposit banks, 2007-2013 (million tl) year 2007 2008 2009 2010 2011 2012 2013 1.000.000 tl 356.9 84 453.4 85 507.2 58 614.6 81 656.2 76 770.0 16 943.3 13 inc. rate 27 12 21 7 8 23 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu the participation banking as a different banking method and the developing of it’s in the turkish finance market-turkish participation banking for 2007-2013 page |104| emerging markets journal when figures are compared as of the end of 2007 and 2013, it is seen that participation banks have two times bigger percentage of increase than deposit banks on the percentage basis in terms of rate of increase. participation banks taken into account, total fund + deposit in turkey reaches 1.007 billion tl as of the end of 2013. funds utilized, 2007-2013 table-11/a: funds utilized-participation banks and deposit banks in turkey 2007-2013 (1000tl) 2007 2013 inc.rate deposit banks total loans 262.572 939.772 258% participation banks total loans 14.072 62.029 341% source: composed from data provided by (bat: the bank association of turkey, 2014) (http://ebulten.bddk.org.tr/abmvc/#) increase rate of loan-fund utilization from the end of 2007 to the end of 2013 of participation banks higher than deposit bank’s rate. they are 341% and 258% in that order. bank asya is the leading participation bank with an amount of 20,6 billion turkish lira; in terms of funds utilized as the end of 2013. türkiye finans, kuveyt türk and albaraka türk follow bank asya respectively. it is seen that kuveyt türk and bank asya have the highest average increase rate for last seven years. table-11/b: funds utilized by participation banks 2007-2013 (1000tl) end of year albarak a türk bank asya kuvey t türk türki̇y e fi̇nans total sum averag e 20072013 6.557.097 11.405.94 8 8.298.940 9.532.569 35.794.55 5 2013 12.033.661 20.614.10 5 16.595.84 5 18.172.35 9 67.415.97 0 2012 9.075.183 16.085.16 8 11.848.41 9 12.971.05 8 49.979.82 8 2011 7.273.906 13.141.38 0 10.360.91 7 10.327.23 2 41.103.43 5 2010 6.269.485 10.916.73 2 6.984.989 7.913.437 32.084.64 3 2009 4.675.617 8.221.427 4.904.932 7.109.233 24.911.20 9 2008 3.716.977 6.253.160 4.237.341 5.526.380 19.733.85 8 2007 2.854.852 4.609.665 3.160.138 4.708.285 15.332.94 0 table-11/c: increase rate from previous year at funds utilized by participation banks 2007-2013 end of year albaraka türk bank asya kuveyt türk türki̇ye fi̇nans increase rate from prev.year total sum average 20072013 28% 35% 36% 29% 31% 2013 33% 28% 40% 40% 35% 2012 16% 48% 28% 26% 22% 2011 16% 20% 48% 31% 28% 2010 34% 33% 42% 11% 29% 2009 26% 31% 16% 29% 26% 2008 30% 36% 34% 17% 29% 2007 44% 51% 47% 49% 46% source: composed from data provided by (bat: the bank association of turkey, 2011) (bat: the bank association of turkey, 2012-2013) (pbat: the participation banks association of turkey, 2012-2013). growth of net profit table-12/a:growth of net profit, 2007-2013 (1000tl) end of year albaraka türk bank asya kuveyt türk türki̇ye fi̇nans total sum average 20072013 150.763 230.885 172.933 218.419 772.999 2013 241.409 180.604 300.343 329.277 1.051.633 2012 191.835 190.392 250.156 283.573 915.956 2011 160.870 216.090 195.042 231.587 803.589 2010 134.379 259.962 159.648 205.529 759.518 2009 105.626 301.281 127.133 171.388 705.428 2008 136.242 246.529 104.086 160.633 647.490 2007 84.979 221.337 74.123 146.943 527.382 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |105 table-12/b: increase rate from previous year at net profit, 2007-2013 (1000tl) end of year albaraka türk bank asya kuveyt türk türki̇ye fi̇nans increase rate from prev.year total sum average 20072013 22% 5% 38% 13% 16% 2013 26% -5% 20% 16% 15% 2012 19% -12% 28% 22% 14% 2011 20% -17% 22% 13% 6% 2010 27% -14% 26% 20% 8% 2009 -22% 22% 22% 7% 9% 2008 60% 11% 40% 9% 23% 2007 22% 51% 105% 5% 35% source: composed from data provided by (bat: the bank association of turkey, 2011) (bat: the bank association of turkey, 2012-14) (pbat: the participation banks association of turkey, 2012-14). looking at deposit banks for the 2007-2013 period, their profit increased by %67 from 2007 to 2013, and reached to 22,5 billion tl in 2013. increase rate of participant banks total net profit is %99 from the end of 2007 to the end of 2013. the rate of participation bank’s is 1,5 times higher than deposit banks. in terms of average profit per bank, deposit banks have too high figures compared to participation banks naturally. however it is also obvious that average scales, branch numbers and history of deposit banks are above participation banks. türkiye finans has the biggest share in total profitability of total participating banks at the end of 2013. kuveyt türk, al baraka and bank asya follow it respectively. furthermore, kuveyt türk has the highest average net profit increase rate among the others. kuveyt türk has more stable rates at the last seven years. table-13: net profit/loss of deposit banks for the year, 2007-2013(1.000.000) year 2007 2008 2009 2010 2011 2012 2013 total 13.468 11.852 18.490 20.518 19.849 21.539 22.473 inc.rate -12 56 11 -3 9 9 source: composed from data provided by (bat: the bank association of turkey, 2011-2014) (bat: the bank association of turkey, 2012) (pbat: the participation banks association of turkey, 2012-2014). growth of asset (equity capital) looking at the table regarding the equity capital growth, it is seen that participation banks increased their equity in 2013 274% according to the 2007. looking at deposit banks for the 2007-2013 period, their equity capital increased by 157 % from 2007 to 2013. table-14/a: growth of equity capital, 2007-2013 (1000tl) end of year albarak a türk bank asya kuvey t türk türki̇y e fi̇nans total sum averag e 20072013 922.148 1.843.53 6 1.223.189 1.492.863 5.481.73 6 2013 1.497.268 2.510.94 6 2.302.049 2.522.381 8.832.64 4 2012 1.218.333 2.349.27 3 1.684.037 2.125.162 7.376.80 5 2011 1.004.251 2.137.42 6 1.437.978 1.613.659 6.193.31 4 2010 852.635 1.941.66 7 1.256.685 1.406.096 5.457.08 3 2009 710.666 1.707.89 4 807.312 1.193.692 4.419.56 4 2008 638.102 1.403.69 2 685.679 1.001.456 3.728.92 9 2007 533.780 853.856 388.583 587.592 2.363.81 1 table-14/b: increase rate from previous year at equity capital, 2007-2013 (1.000tl) end of year albaraka türk bank asya kuveyt türk türki̇ye fi̇nans increase rate from prev.year total sum average 20072013 33% 23% 39% 30% 29% 2013 23% 7% 37% 19% 20% 2012 21% 10% 17% 32% 19% 2011 18% 10% 14% 15% 13% 2010 20% 14% 56% 18% 23% volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu the participation banking as a different banking method and the developing of it’s in the turkish finance market-turkish participation banking for 2007-2013 page |106| emerging markets journal 2009 11% 22% 18% 19% 19% 2008 20% 64% 76% 70% 58% 2007 117% 35% 55% 35% 52% source: composed from data provided by (bat: the bank association of turkey, 2011) (bat: the bank association of turkey, 2012-14) (pbat: the participation banks association of turkey, 2012-14). türkiye finans has the biggest share in total equity capital of total participating banks at the end of 2013, although, bank asya has the biggest share in total equity for six years before 2013. bank asya, kuveyt türk and al baraka follow it respectively for 2013. furthermore, kuveyt türk has the highest average equity capital increase rate among the others. kuveyt türk has biggest equity growing rate at the last seven years. table-15:equity growth of deposit banks,20072013(1.000.000 tl) year 2007 2008 2009 2010 2011 2012 2013 total 64.53 3 72.06 1 93.83 3 114.97 9 123.00 7 157.55 3 165.95 4 inc.rat e 12 30 23 7 28 5 source: composed from data provided by (bat: the bank association of turkey, 2011) (bat: the bank association of turkey, 2012-2014) (pbat: the participation banks association of turkey, 2012-2014) (bat: the bank association of turkey, 2013) growth of total assets table-16/a: growth of total assets in participation banks, 20072013 (1000tl) end of year albarak a türk bank asya kuveyt türk türki̇y e fi̇nans total sum average 20072013 9.043.635 15.265.08 9 12.281.37 7 12.626.262 49.216.36 3 2013 17.216.553 27.784.94 7 25.893.54 2 25.126.629 96.021.67 1 2012 12.327.654 21.390.02 4 18.910.51 3 17.616.504 70.244.69 5 2011 10.460.885 17.190.09 9 14.897.59 2 13.528.353 56.076.92 9 2010 8.406.301 14.513.41 9 9.727.117 10.691.860 43.338.69 7 2009 6.414.914 11.608.95 5 6.904.526 8.699.643 33.628.03 8 2008 4.789.108 8.108.129 5.768.034 7.104.156 25.769.42 7 2007 3.690.029 6.260.048 3.868.318 5.616.687 19.435.08 2 table-16/b: increase rate from previous year at total assets in participation banks,2007-13(1000tl) end of year albaraka türk bank asya kuveyt türk türki̇ye fi̇nans increase rate from prev.year total sum average 20072013 29% 31% 37% 30% 32% 2013 40% 30% 37% 43% 37% 2012 18% 24% 27% 30% 25% 2011 3% 18% 53% 27% 29% 2010 31% 25% 41% 23% 29% 2009 34% 43% 20% 22% 30% 2008 30% 30% 49% 26% 33% 2007 48% 50% 32% 36% 42% source: composed from data provided by (bat: the bank association of turkey, 2011-2014) (bat: the bank association of turkey, 2012-2014) (pbat: the participation banks association of turkey, 2012). when we look at the table of growth of assets, it is seen that participation banks provide in the 2007-2013 period according to deposit banks. participation banks increased their total assets 394% owing to deposit banks increased their total assets 189%. bank asya has the biggest asset among participation banks, which is followed by kuveyt türk at the end of 2013. similarly in this case, kuveyt türk has the highest average increase rate for 2007-2013 period. bank asya, türkiye finans and al baraka follow it respectively volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |107 table-17: growth of total assets in deposit banks, 20072013 year 2007 2008 2009 2010 2011 2012 2013 total 542.2 93 682.9 37 771.5 12 930.9 47 1.119.9 11 1.245.4 16 1.565.2 58 inc.ra te 26 13 21 20 11 26 source: composed from data provided by (bat, the bank association of turkey, 2011-2014) (bat, the bank association of turkey, 2012-2014) (pbat, the participation banks association of turkey, 2012-2014). table-18: the shares of participation banks within the sector (1.00 0.000 ) deposit banks dev. and inv. banks participation banks year secto r total assets ratio in the sector total assets ratio in the sector total assets ratio in the sector 2013 1.731 .392 1.565. 258 90,40% 70.11 2 4,05% 96.02 2 5,55% 2012 1.368 .387 1.245. 416 91,01% 52.72 6 3,85% 70.24 5 5,13% 2011 1.217 .695 1.119. 911 92,00% 41.63 6 3,40% 56.14 8 4,60% 2010 1.006 .667 932.3 71 92,60% 30.95 8 3,10% 43.33 9 4,30% 2009 834.0 14 773.3 57 92,70% 27.02 9 3,20% 33.62 8 4,00% 2008 732.5 36 683.8 23 93,40% 22.94 3 3,10% 25.77 0 3,50% 2007 581.6 06 543.2 72 93,40% 18.88 8 3,20% 19.44 5 3,30% source: composed from data provided by (bat, the bank association of turkey, 2011-2014) (bat, the bank association of turkey, 2012-14) (pbat, the participation banks association of turkey, 2012-14). chart-2:share of participation banks in the sector the table clearly shows that the participation banks have increased the theirs shares in the sector. while the share of participation banks is %3,3 in 2007, the share reaches to %5,6 in the end of 2013. the increasing rate of sector share is %68 as a number. vi. conclusions the old name “special finance houses” the new name “participation banks” are companies collecting funds similar to deposit through private current accounts and accounts giving right to profit/loss participation, and utilizing funds through methods such as production support, leasing, document against payment, partnership of profit and loss,. in turkey, the foundation of these companies has been permitted since 1984. their number which has increased to 6 decreased to 4 finally similar to the consolidation of deposit banks. however growth of volume and branch number in the finance sector particularly in the last years is also extremely valid for these companies. their share is relatively small today in total sector but it grows in a steady way with their higher development rate than other banks. in 2001, participation banks had total asset amount of 2,4 billion tl which meant a share of 1,08 % in the total assets of the sector. these amounts and shares were 7,3 billion tl and 2,33 % in 2004, 13.730 billion tl and 2,75 % in 2006, 25.769 billion tl and % 3,50 in 2008, and 96.022 billion tl and 5,6 % as of the end of 2013.  these companies which are subject to most limitations of general arrangements and loan limitations in the banking act no. 5411 differ from deposit banks at most in terms of that they don’t undertake the risk of interest. because these kinds of banks don’t undertake the risk of interest which is one of the greatest risks which have to be managed in banking sector, we can talk about an assetliability balance which is less sensitive to financial 0,00% 2,00% 4,00% 6,00% share in the sector share in the sector volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu the participation banking as a different banking method and the developing of it’s in the turkish finance market-turkish participation banking for 2007-2013 page |108| emerging markets journal crisis. however not to undertake the risk of interest, in these kinds of banks, differently from deposit banks, eliminates the opportunity to obtain sudden and high institutional profit based on interest rate difference.  while 32 private deposit banks have 343 branches on an average, each of 4 participation banks has 242 branches on an average in the end of 2013. however in terms of the increase rate of branches from 2007 to 2013, it is seen that participation banks reached approximately three times bigger raise rate of branch numbers than deposit banks.  increase rate of loan-fund use operation from the end of 2007 to the end of 2013 of participation banks higher than deposit bank’s rate. they are 341% and 258 % in that order.  total net profits increasing rate of participant is %99 from the end of 2007 to the end of 2013 and reached to 1,05 billion tl in 2013. looking at deposit banks for the 2007-2013 period, their profit increased by %67 from 2007 to 2013, and reached to 22,5 billion tl in 2013. the rate of participation bank’s is a little higher than deposit bank’s. in terms of average profit per bank, deposit banks have too high figures compared to participation banks naturally. however it is also clear that average branch numbers, scales and history of deposit banks are above participation banks  it is seen that participation banks greater than before their equity in 2013 274% according to the 2007. looking at deposit banks for the 2007-2013 period, their equity capital increased by 157 % from 2007 to 2013. the differences between them are significant.  thus those given results also all support our thesis in this paper.  meanwhile, the participation banks also have some problems for instance they have needed such as the interbank system which provides urgent proper credits for the depository banks in the short run. whereas, this situation negatively hinders the participation banks performance. because they are sharing nearly all of their funds for the creditors or investors who uses them for leasing, sales, trade, production, , export and imports which composed the real sector in the economy.  for that reason it is very important interest for the participation banks forming the similar interbank organization which would increases their customers and operational transactions, too. for instance, the establishment of guaranty insurance system among the participation banks optimistically influenced their growth in the market.  nevertheless, the depository banks they are the corporations so their rulers and executive bodies are responsible fully form their operations and in any case, the state quarantined their possible bankruptcy situations, but in the participation banking systems there was no such kind of full responsibility or insurance system in their financial credit operations because of joint losses or gains. in both theory and practice there is a legal gap that is why it leaded to some corruptions and abuses, the participation banks and companies in turkey and european countries, too. this problem has been partially solved for turkey. those banks and companies forced to adopt the status and the legal structural establishment of banks and companies. some of them applied to be part of the capital stock exchange market. that is why they could be checked and controlled by the state audit system.  this study examines the case of each participation bank among each other for 2007-2013. the tables and figures show the each participation bank ordering at 9 different criteria. in conclusion, bank asya is the leader among the four banks in the seven criteria; türkiye finans is the leader in two criteria (net profit and total assets).  this study examines the more important thing for these banks. the average increasing rate for last seven years has been calculated in this study. this figures show that kuveyt türk participation bank has the highest average in the all of criteria.  this study shows that the participation banks have increased the theirs shares in the sector also. while the share of participation banks is %3,3 in 2007, the share reaches to %5,6 in the end of 2013. the increasing rate of sector share is %68 as a number. references addave,s. (2012), “what are the impacts of the global financial crisis on islamic banking system and how islamic bank spared from the crisis?”, http://epub.lib.aalto.fi/en/ethesis/pdf/12 737/hse_ethesis_12737.pdf ahmad, a., humayoun, a. a., & hassan, u. u. (2010). an analysis of functions performed by islamic bank: a case of pakistan. european journal of social sciences , 17 (1), 7-12. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |109 akın, c. (1986). faizsiz bankacılık ve kalkınma. i̇stanbul: kayıhan yayınları. albaraka türk – about us. (2010). retrieved 12 23, 2010, from albaraka türk: http://www.albaraka.com.tr/bizi_taniyi n/detay.aspx?sectionid=avw7ccoue lqlqzfwvbqmfq%3d%3d&contenti d=sjpzafdvjzk8baqmqwszqq%3d %3d al-baraka banking group(2015); “principles of islamic banking” http://www.albaraka.com/default.asp?a ction=article&id=46 al-baraka banking group(2015); “about islamic banking” http://www.albaraka.com/default.asp?a ction=article&id=28 aminuddin, i.(2010), “application of funds”, http://www.islamicbankingway.com/20 10/11/22-application-of-funds.html bat, the bank association of turkey. (2008). bankalarımız 2007. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2009). bankalarımız 2008. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2010). bankalarımız 2009. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2011). bankalarımız 2010. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2012). bankalarımız 2011. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2013). bankalarımız 2012. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2014). bankalarımız 2013. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2014). 2013 4.quarter information. i̇stanbul: türkiye bnk. birl. battal, a. (2007). bankacılık kanunu şerhi (2 ed.). ankara: seçkin yayıncılık. bilgin tevfik(2011), the head of the brsa, conferences on the union of participation banks, i̇stanbul, 18.05.2011. burton, m., nasiba, r., & brown, b. (2009). an introduction to financial markets volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu the participation banking as a different banking method and the developing of it’s in the turkish finance market-turkish participation banking for 2007-2013 page |110| emerging markets journal and institutions (second ed.). usa: m.e.sharpe. canbaş, s., & doğukanlı, h. (2007). finansal pazarlar-finansal kurumlar ve sermaye pazarı analizleri (4 ed.). adana, turkey: karahan kitabevi. central bank of republic of turkey, c. b. (2005). türkiye cumhuriyet merkez bankası, “finansal i̇stikrar raporu 2005”, ankara; http://www.tcmb.gov.tr/yeni/evds/yayi n/finist/bolumii.pdf, 28.06.2010. retrieved 6 28, 2010, from central bank of republic of turkey: http://www.tcmb.gov.tr/yeni/evds/yayi n/finist/bolumii.pdf chong, b. s., & liu, m. h. (2009). islamic banking: interest-free or interest-based? pacific-basin finance journal , 17, 125–144. jammeh.b.e.; (2010), “ prospects and challenges of islamic banking and finance in united states”, htw university paper, berlin-germany küçükkocaoğlu, g. (2010, 6 28). i̇slami bankalar ve i̇slami finans kurumları. retrieved from http://www.baskent.edu.tr/~gurayk/finp azcuma17.doc islamibank limited, (2015), “operational techniques of islamic bank”, http://www.islamibankbd.com/abtibbl /cis_operational_techniques_of_islamic _bank.php majid,m.a.(2008), “islamic and conventional bank performance: a review of literature”, working paper in islamic economics and finance no. 0819; universiti kebangsaan malaysia, https://www.academia.edu/4410417/isl amic_and_conventional_bank_perfor mance_a_review_of_literature malik, a., & malik, m. s. (2011). an analysis of islamic banking and finance in west from lagging to leading. asian social science , 7 (1), 179-186. mishkin, f. s., & eakins, s. g. (2009). financial markets and institutions (sixth ed.). boston: pearson prentice hall. moles, p., & tery, n. (1999). the handbook of international financial terms. united kingdom: oxford university press. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.73 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |111 omar, m. w., & ali, m. n. (2010). brand loyalty and relationship marketing in islamic banking system. canadian social science , 6 (1), 25-32. parasız, i̇. (2009). para banka ve finansal piyasalar (9 ed.). bursa: ezgi kitabevi. pbat, the participation banks association of turkey. (2010). türkiye katılım bankaları birliği. retrieved 06 28, 2010, from statistics: http://www.tkbb.org.tr/index.php?optio n=com_content&task=blogsection&id= 30&itemid=382 rose, p. s., & marquis, m. h. (2009). money and capital markets (tenth ed.). singapore: mc graw hill. saunders, a., & cornett, m. m. (2004). financial markets and institutions (fourth ed.). sigapore: mc graw hill. sayım, f. & alakel, m. (2011). the participation banking and its comparison with deposit banking in the turkish finance market, scientific journal european integration studies, kaunas university of technology institute of europe, no:5, 152-164 (*this study contains only 2007-2009 year in the sector.) sayım,f.(2013). some information about participation banks, www.akademikfinans.com the history of kuveyt türk. (2010). retrieved 12 22, 2010, from kuveyt türk participation bank: http://www.kuveytturk.com.tr/tr/hakki mizda_tarihce.aspx the participation banks association of turkey, t. (2008). türk finans sisteminde katılım bankaları. türkiye katılım bankaları birliği. the participation banks association of turkey-faq. (2010, 12 28). retrieved 2010, from the participation banks association of turkey: http://www.tkbb.org.tr/index.php?optio n=com_content&task=blogcategory&id =46&itemid=83 yılmaz, o. n. (2010). faizsiz bankacılık i̇lkeleri ve katılım bankacılığı. antalya, turkey: türkiye katılım bankaları birliği. emerging markets journal hershey’s entry to the australian market with a new brand: an accounting and marketing perspective dr. cevdet kızıl yalova university | e-mail: cevdetkizil@yahoo.com valorie eddy southern new hampshire university | e-mail: valorie.eddy@gmail.com laura clary verizon wireless | e-mail: laura.clary@gmail.com katrina crowell strategic media inc. | e-mail: katrina.crowell@gmail.com abstract this paper discusses the entry of hershey’s chocolates company to the australian market with a new brand. for this purpose, background information and key performance indicators about the firm are presented. also target customers and market summary, market demographics and target customer profile of the firm are mentioned in the context of situational analysis. then, hershey’s entry to the australian market with a new product is proposed by providing and commenting on swot analysis, competition environment, accounting-finance indicators, marketing strategy and marketing mix (4p) factors. thus, a deeper focus on the organization is realized and shared. as a result, firm’s entry to the australian market is discussed with a new product by suggesting recent and altered target customer base, customer profile, marketing strategy and marketing mix. our study evaluates the potential disadvantages and advantages in detail and argues that there is a need for hershey’s to enter the australian market with a new product. in general, this article discusses and defends the entry of hershey’s to australian market with a new product by logical reasoning and draws a strategic roadmad to reach this goal. keywords: accounting, finance, marketing, marketing strategy, marketing mix new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu | http://emaj.pitt.edu mailto:cevdetkizil@yahoo.com mailto:valorie.eddy@gmail.com mailto:laura.clary@gmail.com mailto:katrina.crowell@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://emaj.pitt.edu/ volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 97 hershey’s entry to the australian market with a new brand: an accounting and marketing perspective dr. cevdet kızıl valorie eddy laura clary katrina crowell i. introduction the hershey company is known as the largest chocolate producer in north america. hershey’s headquarters is located in pennsylvania. the firm was established by milton s. hershey in 1894. the organization currently sells different products in ninety countries worldwide. the plants of hershey currently take place on in stuarts draft, virginia; lancaster, pennsylvania; hazleton, pennsylvania; memphis, tennessee; robinson, illinois and guadalajara, mexico (google finance, 2012). hershey’s has fame as being one of the oldest chocolate companies in the united states. milton hershey has established other firms in addition to hershey’s, which can be listed as hershey trust company, hershey entertainment and resorts company, hershey park, hershey bears, hersheypark stadium and giant center (orion international, 2012). the firm currently has the capacity to produce eighty million candies per day. however, hershey’s cannot be categorized as a simple chocolate manufacturing firm, since they also give a high importance to consumer relations. as an example, herhsey’s chocolate world located in pennsylvania can be visited by its consumers and the public via a tour ride (hershey community achieves, 2011). hershey’s also attracts attention with its acquisitions in the industry. mauna loa macadamia nut corporation was acquired from the shansby group in 2004. likewise, scharffen berger boutique chocolate maker was acquired in 2005 and josephy schmidt confections was acquired the same year. in 2006, hershey’s acquired dagoba organic chocolate, and brookside foods ltd. was acquired in 2011 (business wire, 2011). the structure of hershey’s distribution system helps to deliver all products across the united states. three largescaled distribution centers with modern technology and eye-catching labor management system prove the commitment of hershey’s to innovation. research and development is also a core element for corporation (georgia tech supply chain and logistics institute, 2012). recognized brands of hershey’s include hershey’s kisses, hershey’s bliss, reese’s, kit kat, twizzlers, almond joy and ice breakers (hershey’s, 2012). the mentioned brands are quite popular among hershey’s consumers and in markets the company operates. additionally, corporate social responsibility (csr) is a priority for hershey’s. the hershey industrial school was established in 1909 to provide education for orphan boys with limited opportunities. presently, the hershey industrial school still operates with the name of milton hershey school. the mentioned institution is a strong proof of organization’s devotion to corporate social responsibility (hershey’s, 2012). finally, hersey’s takes advantage of the social media to build a communication bridge with its consumers all over the globe. firm encourages the customers to find and follow them on facebook. similarly, hershey’s is also active on twitter (hershey’s, 2012). the organization emphasizes and invests in its key brands, extends the product line, enters new markets, meets the important changes in consumer lifestyles and operates as a low-cost producer as part of its strategy (taylor, 1997). kızıl, eddy, clary, crowell p a g e | 98 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu table 1. key performance indicators for hershey’s as of december 31, 2012 resource: hershey’s (2012), “corporate social responsibility progress report 2012”, official website of hershey’s, http://www.thehersheycompany.com/assets/pd fs/hersheycompany/scorecard2012.pdf (retrieved on may 6, 2013). table 2. key performance indicators for hershey’s as of december 31, 2011 resource: hershey’s (2011), “corporate social responsibility progress report 2011”, official website of hershey’s, http://www.thehersheycompany.com/assets/pdf s/hersheycompany/hershey2011csrreport.pd f (retrieved on august 18, 2012). ii. literature review the timing of entering a new market is very critical in a dynamic and competitive environment. firms should balance and evaluate the risk of premature entry against the missed opportunity of late entry (lilien and yoon, 1990). in today’s business world, innovation and technology create new markets for products as well as services. previous research indicates that volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 99 experience of companies in former markets increases the probability of these firms to enter new markets (king and tucci, 2002) and organizations’ growth is possible by new product introductions (nerkar and roberts, 2004). generally, entering new markets is a necessity for firms rather than being a choice in order to sustain competitiveness (belu and caragin, 2008). however, the decision to enter a new market should be taken very carefully step by step. first of all, information should be gathered about the new market, then this information should be analyzed and finally required action plans must be determined for success (tookey, 1975). several modes of international market entry exist. one of them is entering the new market with strategic alliances, which enables the companies to access assets not available in the market, access to technology and markets, get introduced to new products and form synergies with partner organizations (bradley, 2002). another mode to enter a new market is joint ventures (kogut and singh, 1988). definitely, owning subsidiaries is also a method for exploring new markets. but, literature shows that international companies do not prefer to have hundred percent owned subsidiaries in high risk companies (gatignon and anderson, 1988). then, acquisitions are observed as a technique to enter new markets (cho and radmanabhan, 1995). besides, licensing and franchising are recognized ways for satisfying the needs of new customers (belu and caragin, 2008). strategic alliances in addition to mentioned modes improve the rate of new product development (deeds and hill, 1996). emerging markets do attract serious attention because of their higher growth rates. still, entering emerging markets make it a necessity to understand local markets, gathering local knowledge, analyzing competitors and determining input costs (kpmg, 2012). if analyzed well, emerging markets possess great opportunities for firms to introduce new products and brands. the reason is that, grants and tax incentives awarded in emerging economies provide eye-catching advantages in terms of funds and costs (ibm, 2006). additionally, entering emerging markets earlier than competitors present significant benefits such as reputation, economic advantages, attaining critical sales volumes, dominating distribution and communication channels, building favorable government relations, realizing marketing productivity and utilizing marketing resources (arnold and quelch, 1998). plus, firms entering emerging markets before competitors do also take advantage from temporary monopolies (robinson and min, 2002). literature supports this and shows that pioneers outperform later entrants in average (lambkin, 1988). previous research shows that, several factors do higher the success rate of introducing and marketing new products. one of these factors is the speed and flexibility of competitors. besides, former studies show that having a long-run view of product development, owning a stable project vision and following the whole product development process also increase the success rate of new product introductions (lynn, abel, valentine, wright, 1999). likewise, cycle time reduction and time to market influence the success rate of new product presentation according to the literature. moreover, the need for product superiority, strong market orientation, solid upfront homework, early and sharp product definition, cross-functional team approach, focus and project prioritization, execution quality and a systematic new product process are effective for victorious new product introduction (cooper, 1994). research and development (r&d) departments also play a critical role for the introduction of new products (barczak, 2003). on the other hand, previous studies show that approximately fifty percent of new product introductions every year do fail despite the advantages of increased sales, profitability and competitive strength if the new product becomes successful. thus, introducing new products is like a double edged sword for firms. risky and expensive innovations as well as potential competitive advantages are evaluated together in detail (sivadas and dwyer, 2000). another reason why specific new product introductions fail is that, according to previous research, most leaders are not pioneers (tellis and golder, 1996). also, former research kızıl, eddy, clary, crowell p a g e | 100 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu reveals that, firms with lower technological capabilities are less successful about new product introductions (link, 1987). finally, poor product performance, weak marketing, poor pricing and less access to distribution channels are listed as causes of new product failures (karakaya and kobu, 1994). iii. situation analysis the company originated with candymanufacturer milton hershey’s decision in 1894 to produce sweet chocolate as a coating for his caramels. located in lancaster, pennsylvania, the new enterprise was named the hershey chocolate company. in 1900, the company began producing milk chocolate in bars, wafers and other shapes. with mass production, hershey was able to lower the per-unit cost and make milk chocolate, once a luxury item for the wealthy, affordable to all. one early advertising slogan described this new product as “a palatable confection and a most nourishing food.” (rapitis, 2007). the immediate success of hershey’s low-cost, high-quality milk chocolate soon caused the company’s owner to consider increasing his production facilities. he decided to build a new chocolate factory amid the gently rolling farmland of south-central pennsylvania in derry township, where he had been born. close to the ports of new york and philadelphia that supplied the imported sugar and cocoa beans needed, surrounded by dairy farms that provided the milk required, and with a local labor supply of honest, hardworking people, the location was perfect. by the summer of 1905, the new factory was turning out delicious milk chocolate (hershey trust, 2010). the following decades would see the company renamed hershey foods corporation in 1968 expanding its confectionery product lines, acquiring related companies and even diversifying into other food products. among the many acquisitions were san giorgio macaroni and delmonico foods (1966); manufacturing and marketing rights to english candy company rowntree mackintosh’s products (1970); y&s candies, makers of twizzlers licorice (1977); dietrich corp.’s confectionery operations (1986); peter paul/cadbury’s u.s. confectionery operations (1988); and ronzoni foods (1990) (chocolate center, 2012). today, the hershey company is the leading north american manufacturer of chocolate and non-chocolate confectionery and grocery products. as the new millennium begins, the hershey company continues to introduce new products frequently and take advantage of growth opportunities through acquisitions. hershey’s products are known and enjoyed the world over. in fact, the company exports to over 90 countries. the firm approximately has 13,800 employees and its net sales are over $4 billion. the hershey company remains committed to the vision and values of the man who started it all so many years ago. (hershey’s, 2012). the website of company states their mission statement as follows: “at the hershey company, we make the chocolate brands that people love. hershey’s mission statement, bringing sweet moments of hershey happiness to the world every day, summarizes our company, our people, our past and our future. our history of producing the world’s best treats goes back more than 100 years. we take great pride in our brands and in the fun and enjoyment our products add to the lives of our consumers” (hershey’s, 2012). ii. a) target customers and market summary hershey’s focuses on both children and the adult market. the previous years of hershey’s only focused on children, which was a small and specific segment. the children’s market was also very profitable. however, the firm decided to also concentrate on the adult market for further growth and profit. this helped the organization to come up with new products and gain an advantage against strong rivals such as mars. hershey’s also gained market share with this strategy, since adults volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 101 consume 55% of all candies sold and are very influential all children’s consumption (hub pages, 2012). in the context of adult market, hershey’s also targets the mothers. the research shows that mothers play a critical role in creating royal customers and decisions in the house. definitely, hershey’s also presents products for the health conscious consumers today (kay, 2011). actually, the target market of hershey’s is broad, even including athletes, sports people and elders (penn state university, 2010). hershey’s is a firm which implements marketing segmentation. in this regard, the firm divided its total consumer base into specific segments. based on our research, the firm has six consumers segments which are loyal indulgers, engaged and exploring munchers, practical value seekers, confection loving moderators, controllers and detached occasionalist (jamielonie, 2012). figure 1. candy consumption by children market and adult market resource: figure composed by authors australia is the 6th largest nation, after russia, canada, china, brazil, and the usa. it is sometimes referred to as an island, as it is surrounded by the ocean. the population of australia is 23 million, with nearly 80% of its residents living on the coastline. australia also has a large population of urban dwellers, with many citizens choosing to live in the country's urban centers. the currency used in australia is the australian dollar and the per capita gdp is $50,747. the economy is generally quite stable (australian government department of foreign affairs and trade, 2012). australian government is a constitutional monarchy, with queen elizabeth of the uk, being the head of state, who appoints the governor general of the country. the selection of the governor is heavily influenced by the advice of several elected australian officials. from there, citizens elect other government officials. the major political groups are the australian labor party and the coalition. the government in australia is based on democracy based principles such as tolerance of religion, speech, and association. the majority language is english (many other foreign languages are also spoken) and the religion most commonly practiced is christianity. australian english is often called "strine" which is believed to be a mixture of cockney english and irish, derived from early prisoner immigrants (moore, 2008). australia is comprised of six states and two territories. the states include canberra (which is the national capital), new south wales (where the major city sydney is located), victoria (where 2nd largest city melbourne is located), queensland, south australia, tasmania, and western australia (australian government department of immigration and citizenship, 2012). australian culture is made up of many backgrounds. aboriginal and torres strait island people have inhabited australia for thousands of years, and they remain there today. many other cultures immigrated to australia around 200 years ago. like the usa, there are several different languages, religions, and overall cultures represented in australia (lo bianco, 1987). the aboriginal people are believed to have migrated to australia during the ice age. their culture is heavily based on spiritualism, with a lot of weight given to the belief of dreamtime. this is a belief that ancestors help guide and connect the past, present, and future. aboriginal culture plays a large part in the overall culture of australia (dudgeon, wright, paradies, garvey and walker, 2009). kızıl, eddy, clary, crowell p a g e | 102 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu in 1770, britain claimed australia as their own and began shipping convicted criminals there, basically creating a prison society. prisoners were shipped to australia from england until the late 1800's. this convict based background also plays a role in australian culture today, with the tendency of aussies to root for the underdogs in life, and the idea of the "hero" fighting for the innocent. a lot of these themes can be seen in popular australian literature, movies, songs, and folklore (dunn and mccreadie, 2012). non-prisoners also located to australia during this time, although life was very tough living among england's criminal cast offs. the aboriginal people had an even more difficult time adjusting to the new, very rough inhabitants of their land. many of them perished from newly introduced disease. in the 1800's, immigrants to australia (including newly freed convicts) began to work the land, and really settle down there (ballyn, 2011). more foreign citizens flocked to australia in the 1800s in hopes of finding gold. with a growing population, australia finally became its own nation in 1901. australia struggled terribly in the first world war, with a huge portion of men dying in combat or coming home wounded. they experienced a similar roaring 1920's era as the usa, as a way to cope with all of the sadness coming out of the war. also like the united states, australia suffered an economic depression starting in the late 20's. in wwii, australia was able to contribute significantly to overall victories, which resulted in a surge of national pride (johnston, 2007). after the war, many people began to immigrate to australia again. particularly, the mentioned individuals were from european counties and the middle east. there was plenty of work for everyone, especially in the manufacturing sector. the rate of home ownership skyrocketed to 70 percent by the 1960's. like the usa, there were many social changes in the 60's in australia one of the most meaningful being laws made on behalf of the aboriginal people. in the 1970's australia continued to move forward as a society, making changes such as removing college/university fees, removing the white australia party in favor of embracing multiculturalism, making no-fault divorce available, introducing free universal health care, and taking strides to ensure equal pay for women (australian government department of immigration and citizenship, 2012). the 80's saw a lot of economic reform, with deregulation of the banking system. also the 1990's through the early 2000's saw further change, including taxation and industrial relations systems (martin, 2012). the current majority party is the labor party (elected in 2007) and their platform is further development of industrial relations, developing climate change policies, and health and education related changes (australian labor, 2012). australia is a very dry continent that receives little rain throughout the year. the weather is generally mild, and their seasons are opposite of seasons in the usa. specifically, december to february is summer; march to may is fall; june to august is winter; and september to november is spring. australia has vibrant plant life, with rainforests and tall trees the eucalyptus tree is one of the most famous. australia is home to gorgeous mountains, such as the blue mountains and world renowned coral reefs like the great barrier reef (australia.com, 2012). currently, australia is also known as a wealthy country with high income per capita and low poverty. australian stock exchange is the 9th largest in world. economic growth rate of the country is 3,6% for the last fifteen years (world bank, 2011). unemployment rate is currently 5,1% in australia. the country has rich natural resources and imports a serious amount of agricultural products. privatization is also one of the most common practices in australia, especially in the telecommunications sector (the economist, 2007). ii. b) market demographics and target customer profile hershey’s has a large customer segment, which is offered a wide range of products. main customers of hershey can be listed as wholesale distributors, chain grocery stores, mass volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 103 merchandisers, chain drugstores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires, department stores and natural food stores. also, food brokers do sell hershey’s products to the resale outlets. household consumers do also take an important place in hershey’s customer base (matienzo, 2008). household consumers are comprised of women interested in fashion and candies, cosmopolitans, luxury generation, kids, teens, young adults, local and regional customers. calorie conscious and diabetics are also hershey’s consumers (pittsburgh post gazette, 2003). the company’s clients belong to different income levels, geographies and ethnic backgrounds. through the years, hershey’s realized that it is possible to serve diverse markets simultaneously. increasing their presence in various markets and attributing to all ages, genders and income levels helped the firm to increase its competitiveness against rivals. research shows that, the young generation of today (teenagers and young adolescents) has more money to spend than previous generations in this range (michman and mazze, 1998). our research also shows that, 25-29 age group comprised most of the australian population in 2010. this was followed by the 20-24 age range. 15-19 age group also stood for a great majority of australian population. in other words, the presence of 20-24 and 15-19 age categories in australia can never be underestimated. our study also reveals that, male and female populations in the country were very close to each other at the end of 2010. also, australians did reside in capital cities more than remainder of the country. another eyecatching finding gathered by our study was that, elder population had a low percentage in australia. for example, 85+, 80-84 and 75-79, 70-74 and even 65-69 age groups did represent lower rates in the country (australian bureau of statistics, 2010). the 2001 census determined 2.6 million people aged 15-24 years in australia (excluding overseas visitors). this equated to 14% of the total population, a similar proportion to five years ago and slightly lower than the 16% observed in 1991. compared with 1991, the number of people aged 15-19 years had climbed by 1%, while the number aged 20-24 years had lowered by 7%. these differences are mostly a reflection of fertility patterns in the 1970s and 1980s (australian bureau of statistics, 2004). in 2001, there were more males than females in the youth australian population, with 103.6 young males for every 100 young females. the greater number of males to females in the children and youth population is not a pattern that is reflected in the population as a whole, since greater life expectancy for females compared with males results in relatively more females in the older ages. the sex ratio for the total population was 97.5 males per 100 females (australian bureau of statistics, 2004). figure 2. profile of australia’s population(‘000) – june 2010 resource: australian bureau of statistics (2010). “population by age and sex, regions of australia, 2010.” retrieved from http://www.abs.gov.au/ausstats/abs@.nsf/products/ 3235.0~2010~main+features~ main+features?opendocument#paralink10 kızıl, eddy, clary, crowell p a g e | 104 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu figure 3. profile of australia’s population (%) – june 2010 resource: australian bureau of statistics (2010). “population by age and sex, regions of australia, 2010.” retrieved from http://www.abs.gov.au/ausstats/abs@.nsf/products/ 3235.0~2010~main+features ~main+features?opendocument#paralink10 figure 4. profile of australia’s population – 2001 resource: australian bureau of statistics (2004), “2059.0 census of population and housing: australia's youth, 2001”, australian bureau of statistics website, http://www.abs.gov.au/ausstats/abs@.nsf/0/ab3f34 0b33c8abc4ca256e97007a7857?opendocument (retrieved on july 26, 2012). figure 5. profile of australia’s population – 1991 resource: australian bureau of statistics (2004), “2059.0 census of population and housing: australia's youth, 2001”, australian bureau of statistics website, http://www.abs.gov.au/ausstats/abs@.nsf/0/ab3f34 0b33c8abc4ca256e97007a7857?opendocument (retrieved on july 26, 2012). while the northern territory and australian capital territory had the lowest shares of the youth population, they had the greatest proportions of people aged 15-24 years in their total population (16% and 15% respectively). new south wales, south australia and tasmania had the lowest proportions each with 13% (australian bureau of statistics, 2004). aussie teens enjoy a lifestyle that is similar to their american and british counterparts. australian children attend school for 13 years in traditional western style public and private schools with the exception of those living in the “outback” that get their schooling through distance education (hansen, n.d.). australian youth enjoy an active lifestyle with an emphasis on sports such as cricket, netball, volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 105 and football. they also spend a lot of their leisure time enjoying the beach. like teenagers around the globe, aussie youth enjoys spending time on the internet on various social networks, such as facebook (oracle think quest, 2012). iv. hershey’s entry to the australian market with a new brand this part of the research provides a more focused analysis of hershey’s entry to the australian market with a new brand. thus, comprehensive swot analysis of firm with the new product introduction is presented. also competition environment, accounting-finance indicators, marketing strategy and marketing mix factors are evaluated and discussed considering the case of introducing a new product/brand to the australian market. iii. a) swot analysis strengths hershey’s is a product known worldwide, through the use of sourcing and manufacturing in various countries. although hershey’s does not sell in every country, the brand hershey’s is still known through reputation. moreover, the firm has a strong human capital with capable managers and high number of employees (jain, 2009). hershey’s wrappers are eye-catching and the taste of their products is a significant factor increasing the sales. currently, the company has a wide product spectrum and they operate in different countries. furthermore, hershey’s production capacity is high and they generally have positive consumer relations. an additional strength is the acquisitions strategy of hershey’s, which helps the corporation to grow. besides, the organization has a strong distribution system and a modern labor management system. they are recognized as a low cost producer and the research and development (r&d) department of hershey’s attracts attention. finally, hershey’s makes corporate social responsibility (csr) a priority and they do use the social media actively (wikiswot, 2012). weaknesses first of all, health trends are lowering the candy sale, which is a weakness of hershey’s and the candy & chocolate industry as a whole. also, there is price inflation for hershey’s products and the products of other firms operating in the sector. then, hershey is not a known brand through experience within australia. the target market is likely to have not tasted hershey chocolate before. moreover, consumer tastes differentiate in the world. plus, the market already has chocolate bars such as tim tam, violet crumble and milky bar. moreover, research shows that entering a new market generally possesses some difficulties for multinational firms. in other words, entering a new market with no brand name value outs hershey at a disadvantage in the pre-established market (wu, 2008). transportation and storage costs is another weakness of hershey’s, since chocolate and candies are not durable goods. they must be kept and stored under ideal temperatures. also, an aging product life cycle exists for the chocolate/candy industry. additionally, hershey’s has a centralized management structure and most of the sales of firm are generated from united states. moreover, hershey’s has high level of borrowing. finally, they experience specific difficulties in the decision making process and company control during expansion (nasdaq, 2012). opportunities having a sourcing and manufacturing global presence creates an opportunity for hershey to expand globally to sell hershey products in other countries. hershey has very little manufacturing and sourcing locations, with uninhabited markets, kızıl, eddy, clary, crowell p a g e | 106 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey has the opportunity to expand into other countries with sourcing and manufacturing which can increase hershey’s brand name as it can create more jobs and opportunities for the various countries/communities (gehlhar, 2003). hershey’s can also build global partnerships in international markets. the firm can satisfy the emerging demands and tastes of consumes by inventing new products. furthermore, hershey’s has a relatively lower price compared to other healthy foods. the company can take advantage of this opportunity, considering the quality of its products. then, spending capacity of the new young generation of today (teenagers and young adolescents) is higher than all previous generations in this range. hershey’s can also invest in low fat and healthier products parallel to consumer demands. besides, the tastes of customers are changing and that is a good opportunity to serve them with new products. finally, hershey’s can benefit from joint ventures with other sectors such as the coffee industry to increase its global expansion (ryan, 2012). threats competition is a huge threat to hershey entering australia because hershey is a new company entering the australian market. companies such as tim tam are established within the market and very popular. health concerns are the biggest threat to hershey. quality standards are different in each country, and ingredients used in the products can have adverse effects on the consumers. for example, a coco bean that is used in hershey chocolate in the u.s. may cause health problems in australia. not only can importing foreign materials be harmful to the consumers buying the product(s), but also the environment and other inhabitants in the area. the high quality cocoa is also increasing the price of hershey’s products, which is a threat for the firm (jb foods limited, 2012). moreover, the company lowers the weight of some products while keeping the prices stable, which attracts criticism from particular consumers. besides, wholesale prices are climbing and the cost of manufacturing is increasing. both of these factors are threats for the firm. plus, a stable increase is observed for the labor wages, which increases the costs as a whole. unfortunately, agricultural areas are decreasing as a result of building and factory constructions. that is a threat for the production of raw materials used in hershey’s products. likewise, natural disasters do hurt the growth of chocolate ingredients. from an accounting-financial perspective, the fluctuations in exchange rates are a threat for organization affecting the value of its receivables and liabilities. finally, governmental policies and regulations as well as fda requirements are analyzed in the context of threats for hershey’s (mermelstein, 2012). table 3. swot analysis strengths  brand name strength  well known firm  previous global sourcing countries  previous global manufacturing countries  human capital  eye-catching wrappers  delicious taste increasing sales  product spectrum  presence in several countries  production capacity  positive consumer relations  acquisitions strategy  strong distribution system  modern labor management system weaknesses  health trends lowering candy sales  price inflation  risk of introducing additional products with new names  consumer taste differences in the world  different brand candy bars with chocolate  difficulties experienced in entering a new market  transportation and storage costs  aging product life-cycle  centralized management structure volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 107  low cost producer  research and development (r&d) department  corporate social responsibility (csr) initiatives  active usage of social media  most of the sales (90%) are generated from united states  high level of borrowing  difficulties in decision making process  problems in company control opportunities  global expansion to sell in other countries  manufacturing in other countries  global partners  inventing new products  relatively lower price compared to other healthy foods  spending capacity of the new young generation  investment for low fat and more healthy products  changing tastes  joint ventures threats  competition  health concerns  high quality cocoa increases prices  lowered product weight  climbing wholesale prices  increasing cost of manufacturing  stable increase in labor wages  decrease in agricultural areas  natural disasters hurting the growth of chocolate ingredients  fluctuations in exchange rates  governmental policies and regulations  fda requirements resource: wikiswot (2012). “hershey’s swot analysis”. http://www.wikiswot.com/ swot/4/hershey_s.html iii. b) competition environment cadbury’s brief history and presence in the australian market after cadbury in england merged with j.s. fry in 1919, the new company sought to expand internationally and decided to build a factory in australia. australia had developed into an important market since making cadbury’s first overseas order in 1881. in 1922, cadbury and fry, joined by pascall, created a new australian company named cadbury-fry and pascall. the company chose a factory site in claremont, in tasmania, whose location was ideal because of its close proximity to the city of hobart, good source of inexpensive hydro-electricity and plentiful supply of high-quality fresh milk. the claremont factory was modeled on bournville, with its own village and sporting facilities. in 1967, cadbury acquired macrobertson chocolates, a well-respected confectionery manufacturer founded in 1880. the move gave cadbury another major manufacturing base on the australian mainland at ringwood in melbourne, victoria. it also added a range of unique confectionery brands, including cherry ripe and freddo frog, which were household names. in 1969, cadbury merged with schweppes australia, creating the now familiar cadbury schweppes identity. cadbury expanded again in the 1980s after it acquired the red tulip confectionery company and broadened its range of fine products to include a vast array of easter confectionery, as well as after dinner mints. on 27 february 2009, the confectionery and beverages businesses of cadbury schweppes pty ltd in australia were formally separated and the beverages business began operating as schweppes australia pty ltd. in april 2009, schweppes australia was acquired by asahi breweries. on 1 april 2009, cadbury in australia changed its name from cadbury schweppes pty ltd to cadbury pty ltd and cadbury in new zealand also changed its name from cadbury confectionery kızıl, eddy, clary, crowell p a g e | 108 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu ltd to cadbury ltd. this marks a new era for cadbury and enables a more invigorated and singular focus for cadbury in australia. cadbury became part of the kraft foods family on 2 february 2010. nestle’s brief history and presence in the australian market henri nestlé gave his name to what is now the world’s largest food and beverage business, with over 280,000 employees, 456 factories in 84 countries and sales of more than $110 billion in 2008. in its region, nestlé products have been available since the 1880s and by 1906 australia had become nestlé’s second largest export market. in 1867, at a time of high infant mortality, henri nestlé developed a milk-based food for babies unable to feed from their mothers. within five years, nestlé milk was being sold around the world as a food for babies, old people and the infirm. rapid development followed and nestlé soon diversified into other areas with the introduction of a condensed milk product, followed by a move into the growing chocolate industry. although henri bowed out of the company in 1875, the name was retained and in 1905 it merged with the anglo-swiss condensed milk company to form a dynamic new venture known simply as nestlé. it has since then continued to develop through product innovation and acquisitions. by 1906, australia had become the second largest export market for nestlé and was served by a network of sales agents. as it showed such tremendous potential, in 1908 the company set up a business in australia. over the years, a nationwide sales and distribution network was established. the invention of milo in 1934 stands out as a great australian achievement the product of australian ingenuity and distinctive nestlé technology. nowadays, the brand is sold in 30 countries with worldwide sales of more than $550 million. in 1999, nestlé australia's head office became headquarters for the oceania region, which includes nestlé operations in australia, new zealand and the pacific islands. the firm has been in new zealand since 1885. today, two manufacturing plants operate in new zealand together with regional sales offices and a number of distribution centers. and since 1989, the company has operated in the pacific islands. today, nestlé employees throughout the oceania region are just as committed to providing good food for good living continuing the tradition that henri nestlé began more than 130 years ago. iii. c) accounting-finance indicators table 4. hershey’s balance sheet 2010-2012 period ending dec 30, 2012 dec 30, 2011 dec 30, 2010 assets current assets cash and cash equivalents 728,272 693,686 884,642 short term investments net receivables 583,607 536,360 445,821 inventory 633,262 648,953 533,622 other current assets 168,344 167,559 141,132 total current assets 2,113,485 2,046,558 2,005,217 long term investments property plant and equipment 1,674,071 1,559,717 1,437,702 goodwill 588,003 516,745 524,134 volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 109 intangible assets 214,713 111,913 123,080 accumulated amortization other assets 152,119 138,722 161,212 deferred long term asset charges 12,448 33,439 21,387 total assets 4,754,839 4,407,094 4,272,732 liabilities current liabilities accounts payable 1,095,212 1,034,102 1,013,365 short/current long term debt 3 75,898 139,673 285,480 other current liabilities total current liabilities 1,471,110 1,173,775 1,298,845 longterm debt 1,530,967 1,748,500 1,541,825 other liabilities 668,732 603,876 494,461 deferred long term liability charges 35,657 minority int. 11,624 23,626 35,285 negative goodwill total liabilities 3,718,090 3,549,777 3,370,416 stockholders' equity misc stocks options warrants redeemable preferred stock preferred stock common stock 359,901 359,901 359,901 retained earnings 5,027,617 4,707,892 4,374,718 treasury stock (4,558,668) (4,258,962) (4,052,101) capital surplus 592,975 490,817 434,865 other stockholder equity (385,076) (442,331) (215,067) total stockholder equity 1,036,749 857,317 902,316 net tangible assets 234,033 228,659 255,102 resource: yahoo! finance. (may, 2013). “the hershey company – balance sheet.” retrieved from http://finance.yahoo.com/q/bs?s=hsy+balance+sh eet&annual the balance sheet of hershey’s between 2010-2012 shows that, the firm’s cash and cash equivalents are instable. this cannot be commented positively. also, the firm’s net receivables are increasing. although this signals that hershey’s is making sales, the company is having trouble collecting its receivables. that factor kızıl, eddy, clary, crowell p a g e | 110 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu cannot be commented positively as well. thus, hershey’s entering the australian market with a new brand can benefit the firm for mentioned accounting-finance indicators. inventories are not stable, making an analysis impossible. other current assets are going up, meaning that the firm is increasing liquidity in terms of this account. hershey’s long term debt is fluctuating. in addition, other liabilities have increased through 2010-2012. this draws a negative scenario for the firm, since the company has to pay more interest related to mentioned liabilities. again, firm’s entry to the australian market with a new brand can help at this point. retained earnings of hershey’s through 2010-2012 have climbed. this means that, the firm is increasing its earnings. but they are kept inside the company with a rising trend every year. there is a capital surplus in hershey’s through 2010-2012. finally, total stockholder equity and net tangible assets of the organization have an up and down graph for the recent three years. table 5. hershey’s balance sheet 2009-2011 resource: yahoo! finance. (august, 2012). “the hershey company – balance sheet.” retrieved from http://finance.yahoo.com/q/bs?s=hsy+balance+sh eet&annual the balance sheet of hershey’s show that, cash and cash equivalents of the firm is unsteady. the organization’s cash and cash equivalents are even lower at the end of 2011 compared to the end of 2010, which must be commented as negative. also, the net receivables of hershey’s increased in 2011. in fact, it is the highest of three years with 536,360. that is a critical problem for corporation, since that means hershey’s is experiencing problems in collecting its receivables. naturally, that hurts the liquidity and lowers cash and cash equivalents of the firm. also, total current assets of hershey’s are increasing, but there is only a slight peak in 2011. that is questionable and may lead to disadvantages in the coming years. then, the organization’s volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 111 inventory levels and property, plant and equipment sums are increasing. however, these do not reflect to gross profit and net income, as we can see on the income statement of hershey’s (table 4). in this situation, the increasing inventories are disadvantageous for the company, since storage costs get higher. besides, this means that investments in the property, plant and equipments do not convert to gross profit and net income. on the other hand, accounts payable of hershey’s are going up, which is risk. again, the long-term debts are increasing. fortunately, the firm has a positive trend for short/current long term debt. total current liabilities also decreased in 2011, but it is unstable. the present situation on the balance sheet of hershey’s reflects that, company prefers long term instead of borrowing for the short-term. that is a sensible strategy considering the liquidity problem of hershey’s and since it provides more time for organization to pay the debts. however, the corporation makes higher interest payments as a result of long-term debts. next, hershey’s other liabilities increased in 2011 and it is the highest of most recent three years. total liabilities are also going up, which draws a negative portrait about the firm. finally, total stockholder equity and net tangible assets are going down for hershey’s. evaluating the balance sheet as a whole, it is clear that the firm is not making great progress in the recent years. thus, they should take the initiative and make new investments as well as entering new markets. this strengthens our argument, which offers that hershey’s should start operating in the australian market for increasing income and profitability. table 6. hershey’s income statement 2010-2012 period ending dec30, 2012 dec30, 2011 dec30, 2010 total revenue 6,644,252 6,080,788 5,671,009 cost of revenue 3,784,370 3,548,896 3,255,801 gross profit 2,859,882 2,531,892 2,415,208 operating expenses research development selling general and administrative 1,703,796 1,477,750 1,426,477 non recurring 44,938 (886) 83,433 others total operating expenses operating income or loss 1,111,148 1,055,028 905,298 income from continuing operations total other income/expenses net earnings before interest and taxes 1,111,148 1,055,028 905,298 interest expense 95,569 92,183 96,434 income before tax 1,015,579 962,845 808,864 incometax expense 354,648 333,883 299,065 minority interest net income from continuing ops 660,931 628,962 509,799 kızıl, eddy, clary, crowell p a g e | 112 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu non-recurring events discontinued operations extraordinary items effect of accounting changes other items net income 660,931 628,962 509,799 preferred stock and other adjustments net income applicable to common shares 660,931 628,962 509,799 resource: yahoo! finance. (may, 2013). “the hershey company – income statement.” retrieved from http://finance.yahoo.com/q/is?s=hsy analyzing the income statement of hershey’s for 2010-2012 shows that, the firm is increasing its revenues with a stable trend. this is a positive accounting-finance indicator for company. parallel to the mentioned situation, the firm’s cost of revenues is also going up. additionally, hershey’s gross profit has a climbing trend for the recent three years, again a desired condition. the organization’s selling, general and administrative expenses have also climbed for 2010-2012. considering the steady increasing total revenues and gross profits, that is a natural accounting/finance outcome. still, hershey’s can attempt and seek actions to lower its selling, general and administrative expenses. hershey’s operating income is on the rise for 2010-2012 period, which is a positive accounting-finance indicator. similarly, firm’s earnings before interest and taxes are also going up, good news for hershey’s. the organization’s interest expense is unsteady, making it not possible to reach a clear conclusion. income tax expenses of hershey’s are climbing. besides, net income from continuing operations is increasing, a good accounting-finance indicator for firm. finally, growing net income and net income applicable to common share numbers should be commented as desired figures for hershey’s. table 7. hershey’s income statement (october 1, 2011 – june 30, 2012) resource: yahoo! finance. (august, 2012). “the hershey company – income statement.” retrieved from http://finance.yahoo.com/q/is?s=hsy hershey’s income statement reveals that, total revenue of the firm is unsteady, since it decreased in second period, increased in third period and again decreased in fourth period. volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 113 however, the decreased sum of 1,414,444 for the four quarter (june 30, 2012) raises concerns. the firm’s gross profit follows the same pattern and it is again not steady. the lower gross profit on june 30, 2012 possesses risk for hershey’s. the company seems to be successful in decreasing selling, general and administrative costs. but that is not enough to have a positive effect in gross profit as a whole. operating income of hershey’s is again not steady. worse than that, we can observe the lowest operating income of four periods for hershey’s with 222,271. earnings before interest and taxes are similar with volatility, but a negative sum for the last period. interest expense is also higher for the june 30, 2012 period. additionally, income before tax is the lowest in fourth period with 197,927, which is alarming for hershey’s. their income tax expense is minimum on the last term (june 30, 2012), but that is alone not sufficient considering all indicators together. organization’s net income from continuing operations is also not promising, since the lowest sum of 135,685 is observed on the last period of june 30, 2012. finally, hershey’s net income is a subject for instability. besides the mentioned fluctuation, it is also bad that the firm had the lowest net income on the most recent period with 135,685. overall, the income statement of hershey’s also causes red lights and raises question marks, just like the balance sheet of organization. it is a must for hershey’s to take some steps for sustainable growth and competitiveness. thus, entering the australian market bears an important opportunity for organization to maintain profitability and generate cash flow. iii. d) marketing strategy factor target market segment geographical segmentation based on our research, the new product to hershey’s should introduce the entire australian marketplace. the chocolate covered snack should be available throughout the entire country therefore making geographic segmentation within the country unnecessary. the brand must ultimately aim towards both business and consumer markets. both of these markets should be segmented based on demographic, psychographic and behavioristic characteristics. australia is a country where there is a large amount of chocolate consumption. as seen from figure 4 below, in the year 2007 australians consumed approximately 5.64 kilograms of chocolate per person (broek, 2009). kızıl, eddy, clary, crowell p a g e | 114 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu figure 6. chocolate consumption by country – 2007 resource: broek, w. (2009). “how much chocolate do we eat?”. retrieved from http://www.shockmd.com/2009/12/07/how-muchchocolate-do-we-eat/ target market segment demographic segmentation as discussed previously, individuals ages 15-19 and 20-24 account for approximately 14% of the australian population while individuals ages 25-64 make up 51.8% of the population (going rank, n.d.). while all different age groups consume decent amounts of chocolate and sugar in australia, data prove that this consumption has substantially increased in children and adolescents but increased normally for adults (emery, 2008). table 5 below shows the mentioned data: table 8. sugar consumption behaviors in australian adults & adolescents resource: emery, m. (2008). “summary of trends in obesity-related behaviours in nsw and australia.” retrieved from http://www.cavemanpower.com/blog/summary-oftrends-in-obesity-related-behaviours-in-nsw-andaustralia/ australia is a country that has a high level of chocolate consumption. data shows that children and adolescents have a higher level of sugar consumption than that of adults, which is steadily increasing. given these facts alone, it will be most effective for the new hershey’s product to target australian adolescents, male and female, ages 15-24. also, research reveals that the young population (adolescents and teenagers) is increasing in australia, while the older population is decreasing (australian bureau of statistics, 2010). besides, the product life cycles are aging for hershey’s (world watch institute, 2012), thus inventions and coming up with new products are musts. the young population (adolescents and teenagers) aged 15-24 is a very accessible and suitable segment for innovation and change. because, they are more open to changes and new tastes. thus, targeting the australian young volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 115 generation is also logical and sensible from this perspective. the emerging taste demands of young generation will be well satisfied by the new hershey’s product. target market segment business market segmentation in the context of target market segment, hershey’s should also work with distributors and retail stores to sell the new product to consumers. the business demographic new product needs to work with are businesses that cater to the young adult/teenage market and businesses that cater to families to reach key consumers. a key supermarket for the new product should be woolworths, which is a major grocery chain in australia, with over 3,000 stores throughout the country (findouter, n.d.). another key supermarket chain for the product recommended by our research is the large supermarket chain coles, which has over 740 store fronts in australia. the youth oriented retail chain jay jays, which has 212 stores in australia also presents a good opportunity to get the new product in front of key target consumers (findouter, n.d.). another strong retail opportunity is the candy store, which is a popular candy store located in the blue mountain area of australia (candy store, 2011). finally, our research shows that one other important retail location for the new product is the candy room, which is a trendy candy store that focuses on selling unique domestic and imported candy in a unique, fun atmosphere (the candy room, 2012). at last, a key online retailer for the new product should be noted as simply australian, which is a distributor of aussie candies (simply australian, 2012). according to our research, the new hershey’s product as chocolate covered honeycomb biscuit should have two layers of actual honeycomb biscuit, as opposed to the single layer of small pieces of honeycomb that can be found in tim tam crush. the chocolate that is used to make these chocolate covered honeycomb biscuits should also be of the finest quality. couverture chocolate must be used in the product. this type of chocolate is made with more cocoa butter than any other type of chocolate, therefore giving it a creamier taste and making it of higher quality in the eyes of the chocolate lover (thenibble.com, n.d.). positioning statement we argue with our research that, the new hershey’s product should be promoted as a delicious and quick snack on the go. the mentioned positioning is required, considering that the product targets and most appeals to 15-24 age group. also, the new hershey’s product should be promoted as a healthy snack. consumers of today are very concerned about the nutrition, ingredients and fat levels of products. thus, hershey’s must emphasize that the new product is at the same time good for health. finally, the firm must promote the new product as an energizing snack. this positioning of the product is logical to make the new hershey’s product more attractive for teenagers and young adolescents. according to our research, this is an effective strategy to enable a positive and successful entry to the new australian market. brand/brand logo we propose with our research that hershey’s can enter the australian market with honey-ace! brand name. ace means “excellent” and “very good” in australia (urban dictionary, 2012). additionally, ace is a short, simple and memorable word. these factors are advantageous to make honey-ace! attractive and eye-catching in the eye of australian teenagers and young adolescents. concerning the brand logo, we claim that is should be simple and it must symbolize the product in a glance. in other words, it is a must for a brand logo to have link back to a firm’s operating sector. also, a logo should reflect the identity and image of the organization. furthermore, the logo must be unique and it must build a bridge with the kızıl, eddy, clary, crowell p a g e | 116 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu basic nature of organization. definitely, firm logos should also be appealing to the target customers. related to the mentioned point, the logo should also work for the international market (logo design guru, 2012). finally, the brand logo must reflect the high quality and service provided by organization. moreover, a business logo is critical to build a first impression. effective logos sell the company well (evans, 2012). thus, the brand logo has a great meaning in terms of public relations and marketing. iii. e) marketing mix factor (4p) product the new hershey’s product should target australian adolescents and young adults, both male and female from the ages of 15-24. according to our research, the product should essentially be a chocolate covered honey comb biscuit. since australians love sweet biscuits and crackers as well as the flavor combination of honey and chocolate, this product should encompass various flavors that the typical aussie loves making for a one of a kind product to sell in the australian marketplace. also, our research shows that the biscuits (new product) should be large enough for individuals to share with each other. this feature is essential to make the product socially desirable in the eyes of children and teens, having it viewed as a snack to share with friends. there are various biscuits, crackers and chocolate products that are currently available in the australian marketplace. one of them is “tim tam biscuits”. these biscuits are covered in chocolate and have a chocolate cream filling and are quite popular among australians (aussie products.com, n.d.). there are various flavors available, one of which is called “tim tam crush.” this product is considered as an ultimate competitor of choco-ace! chocolate honeycomb biscuits, the new product proposed by our research. tim tam crush features the honeycomb flavor but has received many product complaints, because it is filled with mostly chocolate-mousse and extremely little honeycomb biscuit (chocablog, 2009). this is where hershey’s new product can be considered different and ultimately better in the eye of consumers. chocolate covered honeycomb biscuit of hershey’s (new product) should have two layers of actual honeycomb biscuit, as opposed to the single layer of small pieces of honeycomb that can be found in tim tam crush. the chocolate that is used to make these chocolate covered honeycomb biscuits should also be of the finest quality. couverture chocolate should be used in all honey-ace! products. this type of chocolate is made with more cocoa butter than any other type of chocolate, therefore giving it a creamier taste and making it of higher quality in the eyes of the chocolate lover (thenibble.com, n.d.). additionally, the new hershey’s product should focus on promoting a healthy lifestyle for consumers. the mentioned characteristic of product is critical to gain health conscious loyal customers. moreover, the new hershey’s product promoting a healthy lifestyle is useful to strengthen the image of firm in public. finally, the packaging needs to be appealing and eye catching to the consumer. the packaging should emphasize the social aspect of sharing new product with friends. there should be 3-4 biscuits in each package, each wrapped separately but connected to form a single package. also, there should be perforations where one can rip the individually wrapped biscuits off and share with a friend. price since the new hershey’s product is making its debut in the australian marketplace for the first time, a penetration pricing strategy should be utilized. offering the candy at a price lower than similar products of the competition gives volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 117 consumers an incentive and encourages them to purchase the new product. this does not lead to profitability of the brand. but once the new product establishes market share and an australian consumer base, the prices should be re-evaluated and a higher level of price should be set for sustainability. the penetration strategy with lower prices compared to competitors leads customers to consider that they are getting premium chocolate at a very reasonable price. finally, research also shows that, penetration pricing strategy is commonly used in the saturated sectors, such as the chocolate/candy industry (david, 2011). promotion (communication) as previously noted, the new hershey’s product should target audience which is comprised of young australians, aged 15-24, who make up around 14% of the population and are almost equally male and female. australian young adults are an active group that enjoys being outdoors, yet also appreciates the internet (hansen, n.d.).considering that the young aussies are target demographic for new hershey’s brand, it makes the most sense for the promotional mix to be comprised of the web, outdoor signage, and public relations events. the web campaign should include an interactive website and a strong social media campaign including facebook, twitter, instagram, youtube, tumblr, and pinterest. to reinforce the idea that hershey’s new product is the snack for active, cool people, the website and social media presences should include many pictures of attractive young people in interesting places with their honey ace! consumers should be encouraged to share their pictures and stories about the brand, as well. because young australians are so active, outdoor signage at football games, cricket matches and surfing competitions are great ways to reach the target consumers of new hershey’s product. public relations events such as a sponsored netball league or surfing competition by the new product also help reaching this active audience with the message that honey-ace! is the snack for them. then, special occasions such as the valentine’s day, mother’s day, birthdays and wedding ceremonies should be evaluated as important parts of the new hershey’s product’s promotional strategy. hershey’s should run unique advertisements and commercials to create brand awareness for mentioned events. also, different packaging and wrapping should be provided to consumers on the valentine’s day, mother’s day, birthdays and wedding ceremonies. table 9. overview of promotion strategy resource: figure composed by authors finally, as indicated on the table above, hershey’s should use four different mediums for the new product in the context of promotion strategy. the mentioned mediums are traditional media, outdoor advertising, mail and other mediums. hershey’s should blend the four separate mediums for experiencing the most positive effect. first of all, commercials should run on television. the new product of hershey’s should utilize a strong television campaign placing commercials during high rated programming viewed by teenagers and young adolescents between the ages of 15-24. in addition, the firm should take advantage of radio commercials. also, with the current rise of the internet and social medium utilized traditional media outdoor advertising mail other mediums channels used television radio internet magazines newspaper billboards/signage buses and subways mall advertising (kiosks) direct mailers coupons flyers distribution at public events and conferences stands at sporting events and concerts in-store samples kızıl, eddy, clary, crowell p a g e | 118 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu media, the new hershey’s product should also build facebook and twitter accounts and have a fun website that teenagers and young adolescent can go to print off coupons, play games and win free products. the company should also utilize print advertising in teenager and young adolescent magazines. these print ads should contain coupons for discounts on the product, which ultimately drive consumers for purchase. the advertisements of brand should also take place on national and local australian newspapers. hershey’s new product introduced to the australian market should also be advertised on billboards and signage concerning outdoor advertising. colorful and attractive advertisements should be placed on buses and subways in over populated cities. mall advertisements such as kiosks are also important to promote the new product. in this regard, new and popular malls should be selected, which are popular among teenagers and young adolescents. finally, direct mailers, coupons and flyers should be used for the promotion of new product. coupons for discounts and in-pack coupons should be utilized by hershey’s for this purpose. distribution at popular public events and highly recognized, prestigious conferences also benefit hershey’s to promote the new product. then, the company should have stands at sports events and concerts which have a high attention from teenagers and young adolescents. it is argued and defended by our research that, sports events and concerts are sensible platforms for hershey’s new product to increase brand awareness. at last, in-store samples should be provided to customers. that helps potential consumers to taste hershey’s new product and have a better idea about the quality of product. iv. d) place (channel) hershey’s should take advantage of wholesalers and business to business dealings to distribute the new product. the mentioned system brings several benefits to organization and it is suitable for distributing to different geographical markets. additionally, supermarkets are determined by our research to sell and distribute the new hershey’s product. then, the vending machines should be used, since they are popular among teenagers and young adolescents. besides, parallel to our research, retail stores and convenience stores are other ideal arenas for the distribution of new hershey’s product. definitely, hershey’s can also utilize gas stations for introducing the new product to australia since many enjoy a practical, on the go and convenient snack while travelling. finally, hershey’s official website should promote the new hershey’s product. in addition, the new brand should have a unique website of its own, which appeals to teenagers and young adolescents. the mentioned website must be functional, colorful and easy to navigate. consumers can share their interesting and different experiences concerning the new hershey’s product. furthermore, hershey’s should create an online community loving the new product by coming up with an interactive website. at last, online markets and shopping websites should be arranged to include the new product on their web pages, since hershey’s rivals implement the mentioned promotion strategy in australia. v. conclusion the research shows that, hershey’s entering the australian market with a new brand name has some potential threats but at the same time specific opportunities. when the disadvantages and advantages of entering the australian market with the new product are evaluated simultaneously, the benefits outweigh the dangers. thus, this study argues that there is a significant need for hershey’s company to enter the australian market with new product. in regards to potential threats and disadvantages to enter australian market with a volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 119 new product, most importantly hershey’s is not a recognized brand through experience within australia. also, consumer tastes vary in the world. plus, the market is already dominated by well known global firms such as cadbury’s and nestlé in addition to chocolate bars such as tim tam, violet crumble and milky bar. moreover, research points out that entering a new market generally reflects some difficulties for multinational firms. in other words, entering a new market with no brand name initially puts hershey at a disadvantage in the pre-established market. additionally, hershey’s centralized management structure, generation of most of the sales from united states and high level of borrowing are other potential dangers that can affect hershey’s success in the australian market. moreover, the firm experiences difficulties in the decision making process and company control during expansion, and that can also negatively influence the success of introducing a new product in australia. furthermore, different quality standards in australia and ingredients to be used in the new product should be analyzed carefully before entering the australian market. otherwise, already implemented laws and regulations, as well as governmental policies can harm hershey’s when introducing the new product. manufacturing, direct materials, direct labor and operating costs can also threaten hershey’s if not analyzed in deeply. from the accounting-finance viewpoint, the fluctuations in exchange rates are also a threat for organization affecting the value of its receivables and liabilities. concerning the potential opportunities and advantages to enter australian market with a new product, first of all hershey’s has a worldwide fame, through the use of sourcing and manufacturing in several countries. hershey’s also has a positive reputation and their strong human capital cannot be underestimated. plus, hershey’s production capacity is high, their distribution system is strong and the labor management system is modern in addition to low cost manufacturing capabilities and eye-catching r&d initiatives. thus, hershey’s has the capacity to enter australian market with a new brand. the company has the chance to take advantage of economies of scale with this strategic move. also, analyzing the hershey’s recent balance sheet as a whole, shows that the firm is not making great progress in the last years. so, taking the initiative, making new investments and entering the australian market with a new product are good opportunities for hershey’s. the mentioned action has a high potential to increase hershey’s income and profitability. similarly, the income statement of hershey’s is also alarming and raises question marks, such as the balance sheet of organization. so, entering the australian market bears a significant opportunity for company in terms of profitability, generating cash flows, sustainable growth and competitiveness. in conclusion, our research argues that hershey’s should introduce the new product to whole australian marketplace. there is no need for geographic segmentation within the country. the brand should also target both business and consumer markets. the mentioned markets should be segmented based on demographic, psychographic and behavioristic characteristics. also, since australia is a country that has a high level of chocolate consumption and children as well as adolescents have a higher level of sugar consumption than that of adults, the new hershey’s product should target australian adolescents, male and female, ages 15-24. according to our research, the young population is going up in australia, while the older population is going down. also, product life cycles of hershey’s are aging. so, inventions and coming up with new products are required actions for hershey’s. the young population aged 15-24 is a very accessible and suitable group for innovation and change. all these mentioned factors strengthen our argument that, the new hershey’s product is an effective tool to satisfy the emerging taste demands of australia’s young generation. kızıl, eddy, clary, crowell p a g e | 120 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu finally, according to our research, hershey’s should use distributors and retail stores to sell the new product to consumers. the business demographic at that point should be the young adult/teenage market and businesses that cater to families to reach key consumers. also, based on our research, the new hershey’s product should be promoted as a healthy food, since today’s consumers are highly knowledgeable and interested in the nutrition, ingredients and fat levels of products. moreover, we defend with our research that hershey’s can enter the australian market with honey-ace! brand name, because ace means “excellent” and “very good” in australia. plus, the word ace is a short, simple and memorable word, another factor supporting our argument. our research also states that, the logo of new brand should be simple and it must symbolize the product in a glance. the packaging of new brand should attract attention of consumers and emphasize the social aspect of sharing new product with friends. then, the new hershey’s product should be presented to the market with penetration pricing strategy. however, our research shows that, after the new product gains market share and sufficient australian consumer base, the prices should be reevaluated and a higher level of price should be determined. besides, promotional mix should include the web, outdoor signage, and public relations events. likewise, traditional media, outdoor advertising, mail and other mediums should be used in terms of promoting the new product according to our research. consequently, hershey’s should benefit from wholesalers, business to business dealings, supermarkets, vending machines, retail stores, gas stations, its official website, new product’s unique website, online communities, online markets and shopping websites to further market the new product with success. volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 121 references arnold, d. j. and quelch, j. a. (1998), “new strategies in emerging markets”, mit sloan management review. aussie products. (n.d.) “tim tam biscuits”. retrieved from http://www.aussieproducts.com/timtam.asp australia.com (2012.). “famous australians tourism australia. information about australian holidays and travel tourism australia”. retrieved from http://www.australia.com/about/culturehistory/famous-australians.aspx australia.com (2012.). “weather in australia tourism australia. information about australian holidays and travel tourism australia”. retrieved from http://www.australia.com/about/keyfacts/weather.aspx australian bureau of statistics (2004). “2059.0 census of population and housing: australia's youth, 2001”. retrieved from http://www.abs.gov.au/ausstats/abs@.nsf/0/ab3f34 0b33c8abc4ca256e97007a7857? opendocument australian bureau of statistics (2010). “population by age and sex, regions of australia, 2010.” retrieved from http://www.abs.gov.au/ausstats/abs@.nsf/products/ 3235.0~2010~main+features~ main+features?opendocument#paralink10 australian government department of foreign affairs and trade (2012). “australia in brief”. retrieved from http://www.dfat.gov.au/aib/competitive_economy.h tml australian government department of immigration and citizenship (2012). retrieved from http://www.immi.gov.au/media/publications/multic ultural/issues97/macpape3.htm australian government department of immigration and citizenship (2012). “why is australia great?”. retrieved from http://www.immi.gov.au/living-in-australia/chooseaustralia/about-australia/why-is-au-great/ australian labor (2012). “kevin rudd”. retrieved from http://www.alp.org.au/federalgovernment/labor-people/kevin-rudd ballyn, sue (2011). “the british invasion of australia, convicts: exile and discolation”. retrieved from http://www.ub.edu/dpfilsa/2ballyn.pdf barczak, g. (2003). “new product strategy, structure, process, and performance in the telecommunications industry”, the journal of product innovation management, vol. 13, issue: 3, p. 224-234. belu, m. and caragin, a. r. (2008), “strategies of entering new markets”, the romanian economic journal, year: xi, no:27, p.83. bradley, f. (2002), “international marketing strategy”, prentice hall kızıl, eddy, clary, crowell p a g e | 122 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu broek, w. (2009). “how much chocolate do we eat?”. retrieved from http://www.shockmd.com/2009/12/07/how-muchchocolate-do-we-eat/ business wire (2011). “hershey reaches an agreement to acquire brookside foods ltd.”. http://www.businesswire.com/news/home/2011120 8006310/en/hershey-reaches-agreement-acquirebrookside-foods-ltd cadbury . (2012). “the story of cadbury” . retrieved from http://www.cadbury.com.au/about-cadbury/thestory-of-cadbury.asx. candy store (2011). “welcome to "the candy store" located in leura within the blue mountains. australia”. retrieved from http://www.candystore.com.au/. cho k. r., radmanabhan r. (1995). “acquisition versus new venture: the choice of foreign establishment mode by japanese firms”, journal of international management l (3), pp. 255285. chocablog. (september, 2009). “arnott’s honeycomb tim tam crush”. retrieved from http://www.chocablog.com/reviews/arnottshoneycomb-tim-tam-crush/ chocolate center (2012). “the hershey company”. retrieved from http://www.thechocolatecenter.com/hershey.html cooper, r. g. (1994). ”new products: the factors that drive success”, international marketing review, vol. 11 issue: 1, p.60-76. david, f. (2011). “strategic management concepts and cases”. prentice hall. new jersey, usa. p. 141. deeds, d. l. and hill, c. w. (1996), “strategic alliances and the rate of new product development: an empirical study of entrepreneurial biotechnology firms, journal of business venturing, volume 11, issue 1, january 1996, p. 41–55. dudgeon, p. wright, m., paradies, y., garvey, d. and iain w. (2009). “the social, cultural and historical context of aboriginal and torres strait islander australians”. retrieved from http://aboriginal.childhealthresearch.org.au/media/5 4859/part_1_chapter3.pdf dunn, c. and mccreadie, m. (2012). “australia’s first fleet”. retrieved from http://www.australianhistoryresearch.info/the-firstfleet/ emery, m. (2008). “summary of trends in obesity-related behaviours in nsw and australia.” retrieved from http://www.cavemanpower.com/blog/summary-oftrends-in-obesity-related-behaviours-in-nsw-andaustralia/ evans, j. e. (2012). “company logos: a must have for a good pr”, ezine articles. retrieved from http://ezinearticles.com/?companylogos:-a-must-have-for-a-goodpr&id=6965303. findouter (n.d.). “retail chains in australia”. findouter website. retrieved from http://www.findouter.com/oceania/australia/shopp ing/retail-chains http://www.sciencedirect.com/science/journal/08839026/11/1 volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 123 gatignon h, anderson e. (1988), “the multinational corporation's degree of control over foreign subsidiaries: an empirical test of a transaction cost explanation”, journal of law, economics and organization 4, p. 304-336. gehlhar, m. (2003). “regional concentration in the global food economy”, paper presented at the first biennial conference of the food system research group, june 27, 2003 madison, wisconsin, p. 19. georgia tech supply chain and logistics institute (2012). “hershey foods”. retrieved from http://www.scl.gatech.edu/professional-education/ going rank. (n.d.). “australia.” retrieved from http://www.goingrank.com.au/population.html google finance (2012). “the hershey company”. retrieved from http://www.google.com/finance?client=ob&q=nys e:hsy# hansen, l. (n.d.). “life as a teen in australia”. retrieved from http://rcg.org/youth/articles/0502-a.html hersey community achieves (2011). “chronology”. retrieved from http://www.hersheyarchives.org/resources/searchres ults.aspx?type=search&text=hershey%27s+choc olate+world (retrieved on august 18, 2012). hershey trust (2010). “over 100 years of strength, heritage and stability”. retrieved from http://www.hersheytrust.com/ hershey’s (2011). “corporate social responsibility progress report 2012”. retrieved from http://www.thehersheycompany.com/assets/pdfs/he rsheycompany/hershey2011csrreport.pdf hershey’s (2012). “hershey’s history”. retrieved from http://www.thehersheycompany.com/abouthershey/our-story/hersheys-history.aspx hershey’s (2012). “products”. retrieved from http://www.hersheys.com/pure-products.aspx hershey’s (2012). “pure hershey’s. pure happiness”. retrieved from http://www.hersheys.com/ hershey’s (2012). “the hershey company – global marketing principles”. retrieved from http://www.thehersheycompany.com/assets/pdfs/he rsheycompany/global_marketing6-09.pdf hershey’s (2012). “the legacy”. retrieved from http://www.hersheys.com/ourstory.aspx#/the-legacy hub pages (2012). “target marketing strategy examined: an analysis of hershey and mars (the kings of candy)”. retrieved from http://meangreen.hubpages.com/hub/marketingstrategy-examined-an-analysis-of-hersh ibm (2006), “the perfect product launch: innovation drives growth in the consumer products industry”, retrieved from http://www935.ibm.com/services/us/gbs/bus/pdf/ibv-perfectproduct-ge510-6281-00.pdf jain, a. (2009). “case analysis of hershey’s food corporation”, fostiima business school case analysis, p. 11. jamielonie (2012). “the hershey company”. retrieved from http://www.jamielonie.com/jamielonie.com/portfoli o_files/hershey_research_report.pdf kızıl, eddy, clary, crowell p a g e | 124 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu jb foods limited (2012). “final prospectus”,jb foods limited website. retrieved from http://www.jbcocoa.com/upload/5894007451jb%2 0foods%20limited_final%20prospectus_13july20 12.pdf johnston, m. (2007). “the australian army in world war ii”. osprey publishing, p 1-64. karakaya, f. and kobu, b. (1994). “new product development process: an investigation of success and failure in high-technology and nonhigh-technology firms”, journal of business venturing, vol. 9, issue: 1, p. 49-66. kay, k. (2011). “segmenting and target markets”. retrieved from http://lipstickaffair.blogspot.com/2011/11/chapter8-segmenting-and-target-markets.html king, a. and tucci, c. (2002), “incumbent entry into new market niches: the role of experience and managerial choice in the creation of dynamic capabilities”, management science journal, vol. 48, p. 171-186. kogut, b. and singh, h. (1988). “the effect of national culture on the choice of entry mode”, journal of international business studies (jibs), vol. 19, no: 3, p. 411-432. kpmg (2012). “considerations and trends about new market entry”, retrieved from http://www.kpmg.com/uk/en/industry/internationa lmarkets/internationalstrategy/documents/considerations-and-trends.pdf lambkin, m. (1988), order of entry and performance in new markets”, strategic management journal, vol. 9, issue: 51, p. 127-140. lilien, g. l. and yoon, e (1990). “the timing of competitive market entry: an exploratory study of new industrial products”, management science journal, no: 36, p. 568-585. link, p. l. (1987).”keys to new product success and failure”, journal of industrial marketing management, vol. 16, issue: 2, p. 109118. lo bianco, j. (1987). “national policy on languages”. australian government publishing servicing, canberra, p. 6. logo design guru (2012). “attorney and legal logos salient features of attorney and legal logo design”. logo design guru website. retrieved from http://www.logodesignguru.com/a/attorney_and_l egal_logos.asp lynn, g. s., abel, k. d., valentine, w. s., wright, r. c. (1999), “key factors in increasing speed to market and improving new product success rates”, industrial marketing management, vol. 28, issue: 4, p. 319-326. martin, h.s. (2012). “australia’s economic prosperity can be sustained with focus and reform”. brisbane economic series, issue iv, p. 6. matienzo, j. (2008). “the hershey company – introducing the world of chocolate”. retrieved from http://www.scribd.com/doc/38616935/thehershey-company mermelstein, n. (2012). “food safety and quality”, food technology, p. 66. volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu hershey’s entry to the australian market with a new brand: an accounting and marketing perspective emerging markets journal | p a g e | 125 michman, r. and mazze, e. (1998). “the food industry wars – marketing triumphs and blunders’. quorum books, united states of america, p. 209. moore, b. (2008). “speaking our language: the story of australian english”. oxford university press, united kingdom, p. xviii. nasdaq (2012). “hsy guru stock analysis”, nasdaq website, http://www.nasdaq.com/symbol/hsy/guru-analysis/ (august 15, 2012). nerkar, a. and roberts, p. w. (2004), “technological and product-market experience and the success of new product introductions in the pharmaceutical industry”, strategic management journal, vol. 25, issue: 8-9, p. 779-799. nestlé australia (2012). “our history, nestle story, about-us” retrieved from http://www.nestle.com.au/about-us/nestlestory/our-history. oracle think quest (2012), “a kid’s life in australia”, oracle think quest, http://library.thinkquest.org/cr0212302/australia.ht ml (august 15, 2012). orion international (2012). “the hershey company”. retrieved from http://www.orioninternational.com/pub/files/2012/7 /k5g7ypbl58g83erxhersheyscandidatesmartpack .pdf penn state university (2010). “hershey’s kisses brand”. retrieved from http://www.personal.psu.edu/ art5115/blogs/alydiathomas/hersheys%20product .pptx pittsburgh post gazette (2003). “hershey: so long, sugar…”. retrieved from http://www.postgazette.com/stories/business/news/hershey-so-longsugar-517949/?print=1 rapitis, g. (2007). “the lighter side of dark chocolate – take it to heart”. author house publishing, united states of america, p. 2. robinson, w. t. and min, s. (2002). “is the first to market the first to fail? empirical evidence for industrial goods businesses”, journal of marketing research, vol. 39, no: 1, p. 120-128. ryan, j. (2012). “hershey’s chocolate spread”. central penn business journal website, http://www.centralpennbusiness.com/article/201207 05/frontpage/120709916/hershey's-chocolatespread simply australian. (2012). “australian foods”. simply australian website. retrieved from http://www.simplyoz.com/products/australian_food s/sweets__lollies__chocolate?gclid=cjjuviau_lec fyfo4aodbqoaea sivadas, e. and dwyer, f. r. (2000). “an examination of organizational factors influencing new product success in internal and alliancebased processes”, journal of marketing, vol. 64, no: 1, p. 31-49. taylor, d. (1997). “global cases in logistics and supply chain management”. thompson learning press, united kingdom, p. 341. tellis, g. j. and golder, p. n. (1996). “first to market, first to fail? real causes of enduring market leadership”, mit sloan management review, vol. 37, no: 2, p. 65-75. http://www.nestle.com.au/about-us/nestle-story/our-history http://www.nestle.com.au/about-us/nestle-story/our-history kızıl, eddy, clary, crowell p a g e | 126 | emerging markets journal volume 3 no 2 (2013) | issn 2158-8708 (online) | doi 10.5195/emaj.2013.43 | http://emaj.pitt.edu the candy room (2012). “about us”. the candy room website. retrieved from http://thecandyroom.com.au/about_us_2.html. the economist (2007). “the australian economy”. retrieved from http://www.economist.com/node/8931798?story_id =8931798 the nibble (2012). “understanding couverture chocolate”, official website of the nibble. retrieved from http://www.thenibble.com/reviews/main/chocolate/ couverture-chocolate.asp tookey, d. a. (1975), “export marketing decision”, harmondsworth, penguin. urban dictionary (2012). “dictionary”. retrieved from http://www.urbandictionary.com/define.php?term= ace wikiswot (2012). “hershey’s swot analysis”.http://www.wikiswot.com/swot/4/hers hey_s.html world bank (2011). “gdp growth (annual %)”. retrieved from http://data.worldbank.org/indicator/ ny.gdp.mktp.kd.zg world watch institute (2012). “life-cycle studies: candy bars”. retrieved from http://www.worldwatch.org/node/5691 wu, j. (2008). “an analysis of business challenges faced by foreign multinationals operating the chinese market”, international journal of business and management, vol. 3, no: 2, p. 169. yahoo! finance. (august, 2012). “the hershey company – balance sheet.” retrieved from http://finance.yahoo.com/q/bs?s=hsy+balance+sh eet&annual yahoo! finance. (august, 2012). “the hershey company – income statement.” retrieved from http://finance.yahoo.com/q/is?s=hsy volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu erratum correction to: adebiyi, sulaimon olanrewaju, oyatoye, emmanuel olateju, amole, bilqis bolanle “improved customer churn and retention decision management using operations research approach” emering markets journal 6 (2): 12-21. 10.5195/emaj.2016.101 cevdet kızıl istanbul medeniyet university cevdet.kizil@medeniyet.edu.tr http://dx.doi.org/10.5195/emaj.2016.101 abstract university affiliations for first author (adebiyi, sulaimon olanrewaju) and third author (amole, bilqis bolanle) were changed. the numbering for literature review section was changed from 1 to 2. accordingly, numbering of all future (next) sections was adjusted. corrections to figures and tables were made. table 2.1 is now numbered 1, figure 2.1 is numbered figure 1, figure 1 is numbered figure 2, table 4.1 is numbered table 2, figure 4.1 is numbered figure 3, table 4.2 is numbered table 3 and figure 4.2 is numbered figure 4. a duplicated reference to adeleke, a and aminu s.a. (2012) on page 19 was removed. the original article can be found via the doi http://dx.doi.org/10.5195/emaj.2016.101 new articles in this journal are licensed under a creative commons attribution 3.0 united states license. erratum cover page: first author’s (adebiyi, sulaimon olanrewaju) affiliation of “department of business affiliation, fountain university” and the related address of “pmb 4491. osogbo, osun state. nigeria” was changed to “department of business administration, university of lagos” and “akoka, lagos. nigeria” as address. cover page: third author’s (amole, bilqis bolanle) affiliation of “business administration unit, distance learning institute, university of lagos” and the related address of “p. o. box 56, akoka, university of lagos. nigeria” was changed to “accounting and business administration department, distance learning institute, university of lagos” and “akoka, lagos. nigeria” as address. page 13: number of literature review was changed from 1 to 2 and all future (next) sections were adjusted. page 13: table 2 is now numbered table 1. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.131 | http://emaj.pitt.edu | mailto:cevdet.kizil@medeniyet.edu.tr http://dx.doi.org/10.5195/emaj.2016.101 http://dx.doi.org/10.5195/emaj.2016.101 http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.131 | http://emaj.pitt.edu page 14: figure 2.1 is now numbered figure 1. page 16: figure 1 is now numbered figure 2. page 16: table 4.1 is now numbered table 2. page 17: figure 4.1 is numbered figure 3. page 17: table 4.2 is now numbered table 3. page 18: figure 4.2 is now numbered figure 4. page 19: the duplicated reference of “adeleke, a & aminu s. a, (2012). the determinants of customer loyalty in nigeria’s gsm market, international journal of business and social science, 3(14), 209-222” was removed. full text original article http://dx.doi.org/10.5195/emaj.2016.101 this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. http://dx.doi.org/10.5195/emaj.2016.101 http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu the impact of organizational learning capability on product innovation performance: evidence from the turkish manufacturing sector özlem yaşar uğurlu gaziantep university | e-mail: yasar@gantep.edu.tr mustafa kurt yalova university | e-mail: mkurt@yalova.edu.tr abstract this study aims to examine the effect of organizational learning capability on product innovation performance in the manufacturing sector using empirical data. a survey was conducted with 120 firms that were on the list of top 1000 firms of turkey and registered with the istanbul chamber of industry, to examine the relationship between the dimensions of organizational learning capability and the dimensions of product innovation performance. the findings of the study indicate a positive relationship between organizational learning capability and product innovation performance. keywords: organizational learning, organizational learning capability, innovation, product innovation performance, turkish manufacturing firms new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu | mailto:mkurt@yalova.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu the impact of organizational learning capability on product innovation performance: evidence from the turkish manufacturing sector page |70| emerging markets journal the impact of organizational learning capability on product innovation performance: evidence from the turkish manufacturing sector özlem yaşar uğurlu mustafa kurt 1. introduction recent studies argue that organizational learning is a must for businesses (garcia-morales et al. 2007) and that it represents a modern approach to management that could solve many problems which businesses encounter (aydemir, 2000, santos-vijande and alvarez-gonzalez, 2007). organizational learning capability, a closely related concept, has not received the same level of attention given to organizational learning. in the literature on management, organizational learning capability is defined as an organizational capability that makes effective organizational learning possible by managing the process of organizational learning (gomez et al., 2005). innovation is another concept that has received a lot of attention in recent years. many studies describe innovation as a critical factor for organizational survival in the contemporary world. studies on innovation usually employ a comprehensive definition that includes innovation in processes, services, structure, and management (hult et al., 2004). product innovation is another type of innovation that allows a more precise measurement. there are many studies establishing the strong positive relationship between innovation and organizational learning (hurley and hult, 1998; damanpour, 1991; goes and park, 1997), but the number of studies examining the relationship between innovation and organizational learning capability is very limited (alegra and chiva, 2008). focusing on organizational learning capability rather than on organizational learning would contribute to the literature by helping fill this important gap. in addition, most of the existing studies were conducted in anglo-saxon countries, with a dearth of studies on developing economies. within this framework, the present study aims to examine the relationship between organizational learning capability and product innovation performance of manufacturing firms in turkey, and identify the dimensions of organizational learning capability that affect product innovation performance. 2. literature review 2.1. organizational learning capability organizational learning and organizational learning capability are treated separately in the relevant literature, with the former being defined as an effort to develop methods for the generation and practical management of organizational knowledge (calantone et al., 2002). according to another definition, provided by argyris, organizational learning takes place when members of an organization identify and correct mistakes in the prevailing behavioral theory of the organization and respond to changes in the internal and external environment, and the new knowledge is recorded in the organizational memory (sinkula et al., 1997). organizational learning capability, on the other hand, consists of the features that shape the process of organizational learning. organizational learning volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu özlem yaşar uğurlu, mustafa kurt emerging markets journal | p a g e |71 capability refers to the ability of an organization to engage in management activities in line with structures and procedures that support and facilitate learning (goh, 2003). according to another definition, organizational learning capability refers to patterns of action that allow an organization to process knowledge and experience, generate new knowledge on the basis of existing knowledge and experience, and store knowledge for later use when the need arises (garbi, 1998; ussahawanichakit, 2008). hsu and fang (2008) define organizational learning capability as the ability to adopt and transfer new knowledge, and to use this knowledge in the process of product development for competitive advantage and higher production speeds. in yet another attempt, pınar and arıkan (2015) define organizational learning capability as the ability of an organization to develop new knowledge and approaches that could potentially affect the existing mode of operation of the organization. finally, march (1991) examines organizational learning capability from two different perspectives: exploitation and exploration. the first approach, exploitation, views organizational learning as the accumulation of knowledge and experience. in this approach, the main organizational capabilities are failure detection and correction (argyris and schön, 1996) and memory and organizational routines (walsh and ungson, 1991; nonaka and takeuchi, 1995; prahalad and hamel, 1994; prieto and revilla, 2006). the second approach, exploration, emphasizes the exploratory nature of organizational learning capability. in this approach, organizational learning is seen as the driving force behind change, flexibility, and innovation (prieto and revilla, 2006). according to this approach, the main organizational capabilities are scanning, problem solving (simon, 2000), variety of ideas (van de ven and polley, 1992), and organizational renewal (senge, 2007; barr et al., 1992). the first organizational learning capability is the ability of an organization to detect failures and correct them for future action plans. the absence of this capability results in repeated failure and faulty learning (fiol and lyles, 1985; garbi, 1998). garvin argues that organizations need to conduct systematic reviews their successes and failures to be able to learn (lynn et al., 2000). operation and implementation routines are related to organizational routines such as rules, policies, and standard operating procedures concerning knowledge, communication, and coordination systems. organizational routines (regular and predictable behaviors implicit in processes and product and service standards) are important avenues for learning to take place (spicer and smith, 2006). for organizational learning to take place, there must be proper mechanisms in place to transfer the acquired knowledge from the individual employee to the team, and from the team to the larger organization (jerez et al. 2008). in addition, operation and implementation routines serve as knowledge stores developed by organizations to respond to structural or frequent problems (garbi, 1998; weick, 1991). they show that the organization has the ability to store, transfer, and remember past experiences, in other words, organizational memory (huber, 1991; walsh and ungson, 1991). organizational learning is closely related to past experiences stored in the memory. these records and experiences greatly facilitate employees’ access to knowledge (lynn et al., 2000). volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu the impact of organizational learning capability on product innovation performance: evidence from the turkish manufacturing sector page |72| emerging markets journal problem solving is another organizational learning capability. in addition to rules and procedures to deal with frequently repeated structural problems, organizations must have problem solving skills to overcome new problems for which no previous action plan exists (garbi, 1998). the problem solving capability of an organization is also a reflection of its ability to generate new knowledge (cohen and levinthal, 1990). problem solving skills allow organizations to interpret new knowledge, and question and re-define existing knowledge (singh, 2006). scanning refers to the ability of an organization to collect information on its external environment and identify threats and opportunities (daft and weick, 1984). scanning capability is necessary for the generation of new and appropriate knowledge. environmental scanning involves conducting research on customers, competitors, suppliers, and technological trends and regulatory changes affecting the sector. this knowledge is usually acquired through informal means such as individual contacts and social networks, not through formal channels (hambrick, 1982). this is done to ensure that the efforts of employees are based on valid knowledge of the internal and external environment of the organization (singh, 2006). this dimension refers to the ability of an organization to create many new ideas and approach issues from different perspectives. this ability distributes new solutions, new perspectives, and new knowledge throughout the organization (singh, 2006). it is related to the structural characteristics of the organization (garbi, 1998), and involves searching for new solutions to problems using novel methods and procedures (alegre and chiva, 2008). continuous renewal, the last item on the list of organizational learning capabilities, refers to the ability of an organization to continuously search for new ways of overcoming obstacles to organizational change and new methods of doing business more effectively (mcgill and slocum, 199; senge, 2007). this capability is implicit in huber’s (1991) definition of organizational learning as a change in the organization’s field of potential behaviors, and argyris’ definition of organizational learning as removing obstacles to organizational change. this dimension of organizational learning capability has been studied in the context of elements that facilitate organizational change, such as flexibility, inclusiveness, creativity, and teamwork (koffman and senge, 1993; mcgill and slocum, 1993; senge, 2007). 2.2. innovation and product innovation innovation, the focus of much recent topic in the literature, has been defined in different ways. according to garcia and calantone (2002), innovation refers to change that result in commercial benefit and that is based on new ideas or implementation of existing knowledge in novel ways. atik (2005) defines innovation as “the process of transforming an idea into a marketable product or service, or into a new or improved method of manufacturing or distribution”. the u.s. national science foundation defines innovation as the transformation of knowledge into products, processes, systems, or services (atik, 2005). according to another definition provided by amabile et al. (1996), innovation is the successful implementation of creative ideas in an volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu özlem yaşar uğurlu, mustafa kurt emerging markets journal | p a g e |73 organization. thompson defines innovation as the production, adoption, and implementation of new ideas, processes, products, and services (yeung et al., 2007; oskarsson, 2003). finally, schumpeter defines innovation as the use of inventions to create new commercial products or services. according to schumpeter, innovation is a driving force behind the creation of demand for goods and services (kirchhoff, 1994). in addition to the definitions of the concept of innovation, there are also a number of classifications in the literature. the two most commonly used classifications are based on the degree (radical or gradual) and focus (product or process) of innovation (güleş and bülbül, 2004). atik (2005) classifies innovation into three types: product innovation, process innovation, and organizational innovations. in another classification, özen and bingöl (2007) offer a fourfold typology: product innovation, process innovation, marketing innovation, and organizational innovation. hult et al. (2004) argue that a new service or product, a new manufacturing process, a new structure or administrative system can all be described as innovation. durna (2002), on the other hand, classifies innovation into categories of product and process innovation, radical and incremental innovation, and business innovation. apart from these definitions and classifications regarding innovation in general, product innovation is defined in the literature as a change in the products manufactured or services offered by a firm. batmaz and özcan (2008) define product innovation as the transformation of an idea into a marketable, new/improved product, method, or service at the end of the production process. according to another definition, product innovation refers to a new product/service or an improvement that increases the life cycle or competitiveness of an existing product or service; it means the launch of a new product or service or major improvements in the functional or user features of existing goods and services (durna, 2002; özen and bingöl, 2007). there are two types of product innovation: new products and improved products. a new product is a product that significantly differs from previous ones with its technological features. the novelty of the new product may be the result of new knowledge, a novel combination of existing technologies, or a radical new technology. an improved product, on the other hand, is the result of an improvement in the performance of an existing product (batmaz and özcan, 2008). product innovation performance, one of the focuses of the present study, is a multi-dimensional concept. researchers use different performance assessment criteria depending on the focus of their studies. for example, hsu and fang (2008) examined product development performance in terms of market performance, financial performance, customer performance, and product performance. according to freeman, product innovation is a process that includes technical design, research and development, production, and administrative and commercial activities for the marketing of a new or improved product (alegre and chiva, 2006). the present study measures product innovation performance in two dimensions: innovation efficacy and innovation efficiency. both dimensions are widely discussed in the literature on innovation. innovation efficacy measures the market performance of an innovation, using indicators such as product range, market share, and expansion to new markets, and captures the level of success of an innovation. innovation volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu the impact of organizational learning capability on product innovation performance: evidence from the turkish manufacturing sector page |74| emerging markets journal efficiency, on the other hand, measures the amount of effort spent for an innovation project to succeed (alegre and chiva, 2008). this study measures innovation performance using a metric that combines both aspects. 3. the relationship between organizational learning capability and product innovation performance as mentioned above, organizational learning capability involves the generation and use of new knowledge that improves organizational performance. learning is key for speed and flexibility in the process of product development, and systematic learning on the basis of past experiences is critical in the first stages of product development process (nederhof et al., 2002). an organization that is capable of generating new knowledge and integrating it with existing knowledge using different methods is expected to perform well in terms of product innovation and manufacturing process. in addition, the process of developing new products requires continuous organizational renewal (calantone et al., 2002). in this context, learning capability is seen as a key factor for an organization to innovate (jerez, 2005; alegre and chiva, 2008; sinkula et al. 1997; calantone et al. 2002). a learning-focused company would have the knowledge and skills to understand and meet customer needs, to better analyze rivals’ strengths and weaknesses, and to be more effective in drawing lessons from failures and successes. such companies would also be more effective in making innovation compared to their competitors, and make more innovations (garciamorales et al. 2007). there are other studies in the literature examining the relationship between organizational learning capability and product innovation performance. lynn et al. (1999), for example, found that higher levels of organizational learning were associated with higher levels of success in product development. in other words, an increase in organizational learning capability is accompanied by a parallel increase in innovation capability (hsu and fang, 2008; ussahawanitchakit, 2008; akgün et al. 2007; phromket and ussahawanicthakit, 2009). innovation is a process of individual and collective learning that facilitates finding new methods to solve problems, and is associated with learning capability, which makes it possible for an organization to generate, transfer and make use of new knowledge (alegre and chiva, 2008; sinkula et al. 1997; calantone et al. 2002). therefore, we hypothesize the following: hypothesis 1: dimensions of organizational learning capability have a positive effect on product innovation efficiency (effort spent on successful innovation). hypothesis 2: dimensions of organizational learning capability have a positive effect on product innovation efficacy (level of success of an innovation). volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu özlem yaşar uğurlu, mustafa kurt emerging markets journal | p a g e |75 figure 1. conceptual model of the research source: figure complied by authors 4. research methodology this study aims to examine the effects of organizational learning capability on the dimensions of product innovation performance. to this end, a survey was conducted with 407 firms that were among the largest 1000 firms of turkey according to istanbul chamber of commerce’s 2008 data, and that had their head offices in istanbul. istanbul was chosen because it is the province with the largest manufacturing capacity in turkey, making the largest contribution to overall economy, and is the city from which the greatest numbers of patent applications originate according to the turkish patent institute. a decision was made to conduct a survey with high level executives of 120 manufacturing companies, representing 30% of the population, who were selected using stratified random sampling from each sector. appointments were made with high level executives (general manager, assistant general manager, r&d manager, etc.) of the 120 firms selected using stratified random sampling. the survey was conducted using face to face interviews with the executives whenever possible, and via e-mail or phone when that option was not available. the following table reports the total number of firms by sector and the number of firms that participated in the study, and provides a description of the 31 nace codes used to identify sectors. table 1: the number and distribution of firms to sectors using the 31-item nace list nace code nace description number of firms in the sector number of firms participating in the study, 30% of the total, selected using stratified sampling da manufacture of food products, beverages, and tobacco 49 14 db manufacture of textiles and textile products 72 21 dc manufacture of leather and leather products dd manufacture of wood and wood products 5 1 de manufacture of pulp, paper, and paper products; publishing and printing 22 7 df manufacture of coke, refined petroleum products, and nuclear fuel 11 3 dg manufacture of chemicals, chemical products and manmade fibers 44 13 dh manufacture of rubber and plastic products 22 7 di manufacture of other non-metallic mineral products 33 10 dj manufacture of basic metals and fabricated metal products 69 21 dk manufacture of machinery and equipment n.e.c. 48 14 dl manufacture of electrical and optical equipment 10 3 dm manufacture of transport equipment 20 6 dn manufacturing n.e.c. total 405 120 source: table complied by authors volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu the impact of organizational learning capability on product innovation performance: evidence from the turkish manufacturing sector page |76| emerging markets journal the questionnaire consisted of 53 items, eight of which were multiple choice questions, and 43 likert scale items. of the 43 five-point likert scale items in the questionnaire, 32 measured dimensions of organizational learning capability, and 11 measured product innovation performance. the questionnaire was developed using scales that are shown to have high validity and reliability in the literature. to measure dimensions of organizational learning capability, the scale used in garbi’s (1998) doctoral dissertation titled “contingencies of learning: essays on the strategic implications of organizational learning, organizational environments and knowledge sharing” was implement, along with the scale used by yeung et al. (1999). six dimensions of organizational learning capability were examined: failure detection and correction, operation and implementation routines (organizational memory), scanning, variety of ideas, continuous renewal, and problem solving. the reliability figure for the dimensions of organizational learning capability varied between 0.721 and 0.817. kmo (kaiser-meyer-olkin measure of sampling adequacy) sampling adequacy coefficient, which is a measure of appropriateness of exploratory factor analysis, was 0.749. the results of bartlett’s test of sphericity, conducted to determine whether meaningful factors could be extracted, were satisfactory (665,579; p<0.000). the six factors extracted explain 62.806% of the total variance. the scale used to measure product innovation performance, on the other hand, consisted of two dimensions: product efficacy, which measures the level of success of an innovation, and product efficiency, which measures the effort spent on successful innovation. to measure product innovation, the scale used by alegre and chiva (2008) in their article titled, “assessing the impact of organizational learning capability on product innovation performance: an empirical test” was implemented. product efficacy dimension consists of items that measure market performance of products, such as the expansion of product range, market share, and expansion into new markets. performance criteria for product efficiency, on the other hand, underlined the importance of the efficiency of the product development process, and focused on the speed and total cost of product development. this scale has been used in a number of previous studies (valle and avella, 2003; alegre et al. 2006). the reliability coefficient of the scale is 0.743 for the efficiency dimension, and 0.751 for the efficacy dimension. kmo (kaiser-meyer-olkin measure of sampling adequacy) sampling adequacy measure was 0.833. the results of bartlett’s test of sphericity were satisfactory (336,278; p<0.000). the two factors extracted explain 60.669% of the total variance. 5. analysis of findings in terms of the demographics of participants, most executives who participated in the study were heads of human resources or r&d, followed by general managers and board members. a great majority of the participants had 5 to 15 years of management experience. most firms who participated in the study were active in their sector for at least 15 years, and had more than 250 employees. almost all of the firms who participated in the study had a formal r&d department, and more than half cooperated with a technology development institute such as tekmer (technology development center), volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu özlem yaşar uğurlu, mustafa kurt emerging markets journal | p a g e |77 tübi̇tak (the scientific and technological research council of turkey), or teknokent (technocity). as a result, the number of utility model patents developed by the firms that participated in the study was relatively high. the contribution of new products, developed within the last five years, to total sales, was around 50-60% for most of the participants. a great majority of the firms that participated in the study have export levels of about 50%, and many have no foreign partners. table 2: research and development activities of the firms has partnership with a technology development institute n % yes 69 57.5 no 51 42.5 the number of utility model patents registered within the last five years n % less than 5 10 8.3 5–10 17 14.2 11–15 6 5.0 15–20 69 57.5 more than 20 18 15.0 formal r&d department n % yes 103 85.8 no 17 14.2 share of new products developed within the last five years in total sales n % less than 10% 8 6.7 15-20% 9 7.5 25-35% 7 7.5 40-50% 6 5.0 50-60% 60 50.0 more than 60% 30 25.0 share of exports n % less than 5% 7 5.8 5-10% 11 9.2 11-20% 3 2.5 21-35% 9 7.5 36-49% 67 55.8 more than 50% 23 19.2 foreign partner n % yes 26 21.7 no 94 78.3 table 3: correlations between organizational learning capability and dimensions of product innovation performance ** significant at 0.01 level (two-way) table 3 shows that there is a strong relationship between innovation efficiency and innovation efficacy. in other words, when the effort spent on successful innovation increases, so does the level of success of the innovation. failure detection and correction, which is an important dimension of organizational learning capability, has a very strong and positive relationship with both innovation efficacy; that is to say, the level of success of an innovation, and innovation efficiency. operation and implementation routines are also highly positively correlated with the effort spent on innovation and the level of innovation success. the other dimensions of organizational learning capability have moderate positive correlations with the dimensions of product innovation performance. higher levels of organizational learning capability are associated with higher levels of product innovation performance. failure detection and correction, scanning, and operation and implementation routines are the leading dimensions that improve product innovation performance. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu the impact of organizational learning capability on product innovation performance: evidence from the turkish manufacturing sector page |78| emerging markets journal table 4: results of the multiple regression analysis between dimensions of organizational learning capability and innovation efficiency independent variables standar d error beta t values signifi cance level failure detection and correction 0.098 0.517 4.765 0.000 operation and implementation routines 0.084 0.213 2.580 0.011 scanning 0.115 0.385 3.931 0.000 continuous renewal 0.080 0.053 0.634 0.527 variety of ideas 0.093 -0.048 -0.555 0.580 problem solving 0.095 0.026 0.304 0.762 r= 0.688 r 2 = 0.473 f= 16.939 p=0.000 table 4 reports the results of the multiple regression analysis between the dimensions of organizational learning capability and product innovation efficiency; that is to say, the amount of effort spent on developing new products. the table shows that three of the independent variables are significant predictors of the dependent variable: failure detection and correction, operation and implementation routines, and scanning. these variables have high levels of statistical significance (p=0.00 and p<0.005). the r value (0.688) represents the correlation between the dependent variable and independent variables. higher r values indicate that there is a highly significant relationship between dependent and independent variables. the r2 shows the percentage of variation in the dependent variable that is explained by independent variables. dimensions of organizational learning capability explain 48% of the variation in this dimension of product innovation performance. timely detection and correction of the failures in the processes of an organization, and effective analysis of the internal and external environment have positive effects on the effort spent on developing new products. these findings provide partial support to hypothesis 1. table 5: results of the multiple regression analysis between dimensions of organizational learning capability and innovation efficacy independent variables standard error beta t values signific ance level scanning 0.116 0.359 3.894 0.000 variety of ideas 0.094 0.209 2.436 0.016 problem solving 0.100 0.180 1.963 0.048 continuous renewal 0.083 0.33 0.386 0.363 failure detection and correction 0.088 0.569 5.717 0.000 operation and implementation routines 0.072 0.249 2.754 0.001 r= 0.770 r 2 = 0.593 f= 27.420 p=0.000 table 5 reports the results of the multiple regression analysis conducted to examine the relationship between dimensions of organizational learning capability and innovation efficacy; that is to say, the level of innovation success, in more detail. the table shows that five of the independent variables are significant predictors of the dependent variable: failure detection and correction, scanning, problem solving, variety of ideas, and operation and implementation routines. these variables have high levels of statistical significance (p=0.00 and p<0.005). dimensions of organizational learning capability explain 60% of the variation in this dimension of product innovation performance. in other words, the model has a high predictive power. the ability of an organization to solve problems quickly and efficiently, to adapt to changes in its internal and external environments and detect opportunities, to facilitate the sharing of different ideas, to analyze the failures in business processes and prepare action plans to address volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu özlem yaşar uğurlu, mustafa kurt emerging markets journal | p a g e |79 these failures, to make successful use of past experiences and accumulated knowledge, and to make these part of its operating routines positively effects the level of innovation success. these findings provide partial support to hypothesis 2. 6. discussion and conclusions this study focused on an interesting topic in the literature: the relationship between organizational learning capability, and a performance indicator affected by this capability, namely, product innovation performance. the findings of the study have implications both for the specific literature and for practitioners. overall, it was found that most firms who participated in the study possessed organizational learning capability. the average scores, out of 5, for the dimensions of organizational learning capability were above 4.00. the lowest scores were received for the dimensions of problem solving and variety of ideas. the relatively lower scores received for problem solving and variety of ideas may be explained with reference to cultural factors, or to the inability on the part of the firms to establish flexible organizational structures. a flexible organizational structure facilitates knowledge sharing through informal communication and control mechanisms, and requires individuals to adapt to changing circumstances and positions rather than adhering to rigid job descriptions. failure to extend a flexible organizational structure to all the processes in an organization may have stunted the development of variety of ideas, which requires free circulation of knowledge, and problem solving capability, which requires associating activities with one another. in addition, the dominance of collectivism as opposed to individualism in turkey, and high levels of power distance may have presented obstacles to the free expression of ideas by individuals. in terms of product innovation performance, firms that participated in the study perceived themselves as having higher levels of innovation efficacy, also known as the level of innovation success, and higher levels of innovation efficiency, also known as the effort put into successful innovation, compared to their rivals. almost all of the firms that participated in the study had a formal r&d department. more than half of the participating firms either cooperated with a technology development institute in the past, or have ongoing cooperation on various projects. the firms that participated in the survey have registered a significant number of utility model patents within the last five years. all of these factors are thought to have contributed to the product innovation performance of the firms. the multiple regression analysis conducted showed that dimensions of organizational learning capability have a positive effect on product innovation performance. failure detection and correction, scanning, variety of ideas, problem solving, and operation and implementation routines (organizational memory) were found to affect the efficacy dimension of innovation. a firm’s ability to detect failures in existing processes and prevent the repetition of these failures in the future by preparing action plans is relatively important for the success of innovation activities. a firm’s ability to solve new problems that are not covered by the action plans; to perceive threats and opportunities in a timely manner and take proactive action; to create knowledge, experience, and lessons learned a part of the organizational memory; and to have a structure and a culture that allow the volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu the impact of organizational learning capability on product innovation performance: evidence from the turkish manufacturing sector page |80| emerging markets journal expression of new ideas have a positive effect on the level of success of a newly developed product. dimensions of organizational learning capacity that were found to affect the second dimension of product innovation performance, innovation efficiency were scanning, operation and implementation routines, and failure detection and correction. the ability of the firms to effectively detect failures in their processes and develop action plans to address them, to conduct detailed analyses of their internal and external environments, and to take proactive action to make good use of opportunities were factors that positively affected the effort to develop new products. similarly, the ability to make knowledge part of the organizational memory and to make effective use of memory increased the effort put into innovation and its efficiency. findings of the present study on the relationship between organizational learning capability and product innovation performance are in line with those of earlier studies in the literature (jerez, 2005; alegre and chiva, 2008; sinkula et al. 1997; calantone et al. 2002). after this brief recap of the main findings, the contributions of the study to the relevant literature and to business practitioners can be stated as follows: organizational learning has been the subject of many discussions both in the academic literature and in the business world, but the concept of organizational learning capability has received relatively scant attention to this day. in previous studies, organizational learning is usually measured using dimensions of a learning organization. the scale used in the present study emphasizes, unlike other scales commonly used in the literature, march’s (1991) perspective on organizational learning capabilities (exploitative and exploratory capabilities). thus, the focus in the present study on the dimensions of organizational learning capability, and the use of a scale to examine organizational learning capabilities constitutes an important contribution to the wider literature on organizational learning. this study provides an empirical measurement of organizational learning capability, and examines its relationship with product innovation, which has been the focus of many studies in recent years. there are very few studies in the literature that examine organizational learning capability in the context of product innovation, and the few studies that exist usually adopt a micro perspective and focus on developed economies, with virtually no studies conducted on developing countries (calantone et al. 2002; cohen and levinthal, 1990; hsu and fang, 2008). the sample of firms examined in this study is representative of manufacturing companies in a developing economy, adding to the significance of the study. for businesses operating in developing economies, possessing organizational learning capability is considered to be a must to be able to respond to changes in the environment in a timely and effective manner (çömlek et al. 2012; dekoulou and trivallas, 2015; vargas, 2015), indicating that further studies on this topic, to be conducted in developing economies, would be highly valuable. a notable finding of the study was that continuous renewal, one of the dimensions of organizational learning capability, did not have a significant effect on product innovation performance. this may be attributed to certain deficiencies in the organizational structure and mode of operation of the companies. as koç and ceylan (2007) argue, turkish volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu özlem yaşar uğurlu, mustafa kurt emerging markets journal | p a g e |81 companies lag behind their competitors in terms of teamwork, employee initiative, and organizational learning. these deficiencies may be presenting obstacles to achieving continuous renewal. the failure to detect a significant positive relationship between dimensions of product innovation performance and continuous renewal may also be attributed to the characteristics of the sample. sectors represented in the sample vary in terms of their innovation levels and other characteristics, which may be responsible for the finding in question. from the perspective of the business world, the present study calls attention to the importance of developing organizational learning capability and its role in improving performance, and can serve as a guide for companies willing to develop their organizational learning capability, by helping them identify areas in need of improvement. in other words, the findings of this study can help companies develop their organizational learning capability, and achieve sustainable competitiveness through innovation. 7. limitations of the study a standard questionnaire form was used to collect the data in this study, and attitude scales were used to measure firms’ organizational learning capability and product innovation performance. executives’ responses to the items in the questionnaire may have been affected by their current statuses, value judgments, beliefs, or expectations. in addition, this study examined the relationship between variables using a sample that consisted of large companies, and the relationship may not be the same in the case of smes (small and medium enterprises). 8. future research future studies may examine the relationship between organizational learning capability and innovation by including various mediating and moderating variables in the model, such as culture, structures, and social networks. to examine whether the relationship between organizational learning capability and product innovation varies by firm size, similar studies can be conducted with the participation of small and medium sized enterprises. references akgün, a.e., keskin, h., byrne, j.c. & aren, s. (2007). emotional and learning capability and their impact on product innovativeness and firm performance. technovation, 27, 501–513. alegre, j. & chiva, r. (2008). assessing the impact of organizational learning capability on product innovation perofrmance: an emprical test. technovation, 28, 315–326. argyris, c. & schön d. a.. (1996). organizational learning ii; theory, method and practice. u.s.a.: addisonwesley publishing company. atik, h. (2005). yenilik ve ulusal rekabet gücü. ankara: detay yayıncılık. aydemir, m. (2000). örgütsel öğrenme ve toplam kalite yönetimi. dokuz eylül üniversitesi, sosyal bilimler enstitüsü dergisi, 2 (3), 1–9 barr, p. s., stimpert, j.l. & huff, a.s. (1992). cognitive change, strategic action and organizational renewal. strategic management journal, 13, 15–36. batmaz, n. ve özcan, a. (2008). yeniliği etkileyen unsurlar ve toplumsal refah i̇lişkisi. international journal of economic and administrative studies, 1 (1), 43–66. calantone, r.j. çavuşgil, t. s., & zhao, y. (2002). learning orientation, firm volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu the impact of organizational learning capability on product innovation performance: evidence from the turkish manufacturing sector page |82| emerging markets journal innovation capability, and firm performance. industrial marketing management, 31, 515–524. cohen, w. m. & levinthal, d.a. (1990). absorptive capacity: a new perspective on learning and innovation. administrative science quarterly, 35 (1), 128–152. çömlek, o., kitapçı, h., çelik v. ve özşahin m. (2012). the effects of organizational learning capacity on firm innovative performance. procedia social and behavioral sciences, 41, 367-374. daft, r.l. & weick, k. e. (1984). toward a model of organizations as interpretations systems. academy of management review, 9 (2), 284–295. damanpour, f. (1991). organizational innovation: a meta-analysıs of effects of determinants and moderators. academy of management journal, 34 (3), 555–590. dekoulou, p ve trivellas, p. (2015). measuring the impact of learning organization on job satisfaction and individual performance in greek advertising sector. procedia social and behavioral sciences, 175, 367-375. durna, u. (2002). yenilik yönetimi. ankara: nobel yayınları. fiol, c.m. & lyles, a.m. (1985). organizational learning. the academy of management review, 10 (4), 803– 813. garbi, e. (1998). contingencies of learning: essays on the strategic implacations of organizational learning, organizational environments and knowledge sharing. (unpublished doctoral dissertation). university of california, los angeles. garcia, r. & calantone r. (2002). a critical look at technological innovation typology and innovativeness terminology: a litertaure review. the journal of product innovation management, 19 (2), 110–132. garcía-morales, víctor j., ruiz-moreno, antonia and llorens-montes, francisco j. (2007). effects of technology absorptive capacity and technology proactivity on organizational learning, innovation and performance: an empirical examination, technology analysis & strategic management, 19 (4), 527 — 558. goes, j. b. & park, s.h. (1997). interorganizational links and innovation: the case of hospital services. academy of management journal, 40 (3), 673–96. goh, s. (2003). improving organizational learning capability: lessons from two case studies. the learning organization, 10 (4), 216–27. gomez, p. j., lorente, j. c. & cabrera, r. v. (2005). organizational learning capability: a proposal of measurement. journal of business research, 58, 715-725. güleş, h.k. ve bülbül, h. (2004). toplam kalite yönetiminin i̇şletmelerde yenilik çalışmalarına katkıları. g.ü. i̇.i̇.b.f. dergisi, 1, 115–129. hambrick, d. c. (1982). environmental scanning and organizational strategy. strategic management journal, 3 (2), 159–174. hsu, y.h. & fang, w. (2008). intellectual capital and new product development performance: the mediating role of organizational learning capability. technological forecasting and social change, http://dx.doi.org/10.1016/j.techfore.200 8.03.012, 1–14. huber, g.p. (1991). organizational learning: the contributing process and the literature. organization science, 2 (1), 88–115. hult, g.t.m., hurley, r.f. & knight, g.a. (2004). innovativeness: its antecedents and impact on business performance. industrial marketing management, 33, 429–438. kirchhoff, a.b. (1994). entrepreneurship economics. w.d. bygrave (eds.) the portable mba in entrepreneurship (410–436). new york:wiley&sons inc. http://dx.doi.org/10.1016/j.techfore.2008.03.012 http://dx.doi.org/10.1016/j.techfore.2008.03.012 volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu özlem yaşar uğurlu, mustafa kurt emerging markets journal | p a g e |83 koç, t ve ceylan, c. (2007). factors impacting the innovative capacity in large-scale companies. technovation, 27, 105-114. koffman, f. & senge, p.(1993). the heart of learning organizations. organizational dynamics, autumn, 4–23. lynn, g.s., skov, r.b.& abel, k.d. (1999). practices that support team learning and their impact on speed to market and new product success. journal of product innovation management, 16: 439–454. lynn, g.s., reilly, r.r. & akgün, a.e. (2000). knowledge management in new product teams: practices and outcomes. ieee transactıons on engineering management, 47 (2), 221– 231. march, j.g. (1991). exploration and exploitation in organizational learning. organization science, 2 (1), 71–87. mcgill, m.e. & slocum, j.w. (1993). unlearning the organization. organizational dynamics, autumn, 67–79. nederhof, p.c.w., bacitti, b.j., gomes, j. & pearson a. (2002). tools for the improvement of organizational process in innovation. journal of workplace learning, 14 (7/8), 320– 331. nonaka, s. & takeuchi, n. (1995). the knowledge creating company. new york: oxford university press. oskarsson, g. (2003). the ancedents and process of innovation. the iv conference in social sciences, university of iceland, february 21–22, 1–14. özen, ü. ve bingöl, m. (2007). i̇şletmelerde bilişim teknolojileri ve yenilikçilik: erzurum, erzincan ve bayburt’taki kobi̇’lerde bir araştırma. atatürk üniversitesi sosyal bilimler enstitüsü dergisi, 10 (2), 399–417. pınar, i̇. ve arıkan, c. (2015). örgütsel öğrenme yeteneği ile örgütsel yenilik arasındaki i̇lişki: tekstil sektöründe bir araştırma. istanbul university journal of the school of business, 44 (2), 65-76. prahalad, c. k. & hamel, g. (1994). strategy as a field of study: why search for a new paradigm?. strategic management journal, 15, 5–16. prieto, i.m. & revilla, e. (2006). assessing the impact of learning capability on business performance: empirical evidence from spain. management learning, 37 (4), 499–522. phromket, c. & ussahawanitchakit, p. (2009). effects of organizational learning effectiveness on innovation outcomes and export performance of garments business in thailand. international journal of business research, 9 (7), 6– 31. santosvijande, m.l. & alvarez-gonzalez, l.i. (2007). innovativeness and organizational innovation in total quality oriented firms: the moderating role of market turbulence. technovation, 27, 514– 532. senge, p. m. (2007). beşinci disiplin; öğrenen organizasyon düşünüşü ve uygulaması. i̇stanbul: yapı kredi yayınları. simon, h. a. (2000). observations on the sciences of science learning. journal of applied developmental pshycology, 21(1), 115–121. singh, k. (2006). assessing organizational learning in indian business organizations: an integrated approach to learning organizations. second interantional conference on business, management and economics, 15–18 june, i̇zmir, 3, 33–48. sinkula, j.m., baker w.e. & noordewier t.a. (1997). framework for market-based organizational learning: linking values, knowledge, and behavior. journal of academy marketing science, 25 (4), 305– 18. spicer, d.p. & smith, e.s. (2006). organizational learning in small manufacturing firms. international small business journal, 24 (2), 133– 158. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.99 | http://emaj.pitt.edu the impact of organizational learning capability on product innovation performance: evidence from the turkish manufacturing sector page |84| emerging markets journal ussahawanitchakit, p. (2008). organizational learning capability, organizational commitment, and organizational effectiveness: an empirical study of thai accounting firms. international journal of business strategy, 8 (3), 1– 12. yeung, a.k., ulrich, d.o., nason, s.w. & glinow, m.a. v. (1999). organizational learning capability. new york: oxford university press. walsh, j. p. & ungson, g.r. (1991). organizational memory. the academy of management review, 16 (1), 57–91. weick, k. e. (1991). the nontraditional quality of organizational learning. organization science, 2 (1), 116–124. van de ven, a.h. & polley, d. (1992). learning while innovating. organization science, 3 (1), 92–116. vargas, m.i.r. (2015). determinant factors for small business to achieve innovation, high performance and competitiveness: organizational learning and leadership style. procedia social and behavioral sciences, 169, 4352. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu accounting education approach in the context of new turkish commercial code and turkish accounting standards cevdet kızıl yalova university, department of management | email: cevdetkizil@yahoo.com ayşe tansel çetin yalova university, department of management | email: aysetanselcetin@gmail.com ahmed bulunmaz yalova university, department of management | email: ahmedbulunmaz@yahoo.com abstract the aim of this article is to investigate the impact of new turkish commercial code and turkish accounting standards on accounting education. this study takes advantage of the survey method for gathering information and running the research analysis. for this purpose, questionnaire forms are distributed to university students personally and via the internet. this paper includes significant research questions such as “are accounting academicians informed and knowledgeable on new turkish commercial code and turkish accounting standards?”, “do accounting academicians integrate new turkish commercial code and turkish accounting standards to their lectures?”, “how does modern accounting education methodology and technology coincides with the teaching of new turkish commercial code and turkish accounting standards?”, “do universities offer mandatory and elective courses which cover the new turkish commercial code and turkish accounting standards?” and “if such courses are offered, what are their names, percentage in the curriculum and degree of coverage?” research contributes to the literature in several ways. firstly, new turkish commercial code and turkish accounting standards are current significant topics for the accounting profession. furthermore, the accounting education provides a basis for the implementations in public and private sector. besides, one of the intentions of new turkish commercial code and turkish accounting standards is to foster transparency. that is definitely a critical concept also in terms of mergers, acquisitions and investments. stakeholders of today’s business world such as investors, shareholders, entrepreneurs, auditors and government are in need of more standardized global accounting principles thus, revision and redesigning of accounting educations plays an important role. emphasized points also clearly prove the necessity and functionality of this research. keywords: accounting, law and ethics, mergers and acquisitions, commercial code, accounting standards, accounting education new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu | mailto:cevdetkizil@yahoo.com mailto:aysetanselcetin@gmail.com mailto:ahmedbulunmaz@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu dr. cevdet kızıl, dr. ayşe tansel çetin, ahmed bulunmaz emerging markets journal | p a g e |72 accounting education approach in the context of new turkish commercial code and turkish accounting standards dr. cevdet kızıl dr. ayşe tansel çetin ahmed bulunmaz i. introduction rapid improvement in information technologies, globalization, fierce competition, demands of creditors, internationalization of capital, developments in financial instruments and highering risks have made the presentation of financial statements more important. today’s business world demands comparable financial statements. moreover, the process of adaptation to the european union (eu) requires publicly traded companies, banks, insurance firms as well as small and medium sized enterprises (smes) to implement accounting standards. (kizil a., fidan, kizil c., keskin, 2013). additionally, the new turkish commercial code requires companies operating in turkey to implement turkish financial reporting standards (tfrs) and turkish accounting standards (tms), that are parallel to international financial reporting standards (ifrs) and international accounting standards (ias) (kizil a., fidan, kizil c., keskin, 2013). basel committeee on banking supervision has also stated that they support the implementation of ifrs (gökçen, akgül, çakıcı, 2006). academicians, practitioners, accounting lecturers and business management should be well informed of accounting standards (örten, kaval, karapınar, 2007). analyzing the impact of new turkish commercial code and turkish accounting standards on accounting education is an essential source of motivation for this research because of mentioned reasons. ii. literature review it has been stated in a previous research that, turkey, business world and accounting atmosphere are experiencing big changes as a result of implementation of international financial reporting standards (ifrs), international standards on auditing (isa), and new turkish commercial code (karğın and aktaş, 2012). it is thought that new code shapes the commercial law concerning transparency, auditing, and reliability. necessities of preparing financial statements parallel to ifrs and isa present several subjects such as internal controlling, independent auditing, and risk management which create many responsibilities for managers, accounting managers and professionals (karğın and aktaş, 2012). implementation of ifrs and the new turkish commercial code forces new policies, strategies, and applications in business life. managers who are obligated to maximize firm’s value for shareholders are obligated to implement ifrs and the new code and simultaneously they experience global financial crises and big rivalry (karğın and aktaş, 2012). another former research indicates that, ifrs have seriously been brain-stormed and implemented by several countries and authorities after the enron case. international standard setters and law smaker of the mentioned nations are making it a necessity to implement ifrs in practice (pekdemir and turel, 2010). after that, a study run by american institute of certified public accountants (aicpa, 1998) indicates that cpas must have specific expertise like communication, leadership, strategic thinking, and customer concentration to stay competitive in the organization environment besides traditional accounting and auditing information (bui and porter, 2010). institute of chartered accountants in australia (icaa, 1998) explains the abilities for future accountants as strategic skills, accounting and finance skills, people skills, and information technology skills. institute of chartered accountants in england and wales (icaew, 1996) expresses that, in addition to the classical jobs accountants must run, they must also integrate technical expertise with strategic vision and strategic planning (howieson, 2003). bui and porter (2010) pointed out the demanded competencies which professional accountants must own. parallel to this, accountants must reflect technical accounting skills, a broad business viewpoint and general business expertise, and personal competencies. personal competencies cover strategic thinking and management, communication expertise, leadership expertise, interpersonal expertise, and the capacity of adopting to fast changing business atmosphere. demir and süer öztek (2006) researched the effects of turkey’s accession to european union (eu) concerning accounting education. parallel to their results, majority of academicians who did take the questionnaire thought that future accountants should not only be armed with the courses to have basic accounting knowledge. they must also be armed with courses and teaching methods to gather strategic thinking expertise. karğın and aktaş’s research (2012) also points out that, congoing development of accounting education will assist new graduates to be successful in their jobs. moreover, cpa trainees and cpas must receive life-long education for improving strategic thinking competencies and to get used to the changes in accounting standards. some level volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu accounting education approach in the context of new turkish commercial code and turkish accounting standards emerging markets journal | p a g e |73 of training programs must especially exist, that are developed by the profession bodies (for example public oversight accounting and auditing standards authority and the union of chambers of certified public accountants and sworn-in certified public accountants of turkey). some scholars do also argue that, the fall of the soviet union was because of the failure to distribute resources efficiently under a socialist accounting system (sennholz 2002; rothbard 1991). preobragenskaya and mcgee did run a study about the link between ias and foreign direct investment (fdi) in russia (2003a) and on the situation of auditing in russia (2003b). their fdi research indicated that, the low trust level in russian financial statements was restricting inflows of foreign capital. their audit research also showed that, the level of auditing in russia can not yet be compared to western standards. according to another study, the legal atmosphere should be learned parallel to each country’s legal and financial regimes. furthermore, as accounting is getting more and more global every day, the effect of international financial reporting standards and law reforms like the sarbanes-oxley act in the us are basic issues to understand the impacts that are experienced by accountants globally. this topic must be an ongoing issue for continuing education (ifac, 2005). parallel to former studies, potential advantages of ifrs practice cover greater transparency in financial statements (jermakowicz & gornik-tomaszewski, 2006; tyrrall, woodward, & rakhimbekova, 2007), lower cost of capital (jermakowicz & gornik-tomaszewski, 2006; jones & higgins, 2006) enhancing comparability of financial statements (aljifri & khasharmeh, 2006), increasing internal reporting reliability (ballas et al., 2010), attracting foreign direct investment (aljifri & khasharmeh, 2006; tyrrall et al.,2007), providing greater access to capital (ballas et al., 2010; jermakowicz & gornik-tomaszewski, 2006; jones & higgins, 2006), applying for ratings to international agencies (tyrrall et al., 2007), easing financial reporting requirements for international corporations (tyrrall et al., 2007), facilitating the quotation of shares on foreign stock exchanges (jermakowicz & gornik-tomaszewski, 2006; jones & higgins, 2006; tyrrall et al., 2007), and satisfying the requirements of supranational institutions (i.e. world bank) for granting financial aid (tyrrall et al., 2007). uyar and güngörmüş ‘s (2013) research aimed to investigate basic knowledge and perceptions of accountants regarding ifrs for smes. the respondents were not highly informed about the omission of certain topics in ifrs for smes. their awareness of valuation methods/concepts in ifrs for smes was at a moderate level. inadequacy of accounting personnel’s training and lack of training programs arranged by professional bodies were considered to be the most serious barriers concerning the practice of the standards. the majority of the participants were not informed about the key distinctions between full ifrs and ifrs for smes and simplifications made in ifrs for smes (uyar and güngörmüş, 2013). accounting professionals who were trained about ifrs for smes and the employees of big4 auditing firms were more knowledgeable about the standards in comparison to others. education level and experience of respondents had partial positive impact on knowledge of the standards (uyar and güngörmüş, 2013). jackling, howieson and natoli (2012) reported that, the potential effect about accounting education in ifrs implementing countries do differ seriously because not all nations begin the implementation steps from the same starting point. accounting educators in the world must improve their familiarity with the principles-based approach to teach ifrs. teaching resources, educational research and continuing professional development operations concerned with principles-based approach to teach ifrs are a must for educators to improve the learning experience of students considering the transmission from a rules-based to a principles-based set of accounting standards (jackling, howieson & natoli, 2012). the preparedness of accounting educators in the united states to lecture ifrs has been often questioned (leone 2008; mintz 2009; munter and reckers 2009; kpmg and aaa 2011). starting from 2008, kpmg and the american accounting association (aaa) have surveyed together the accounting educators in united states annually to detect where ifrs-related education stands at collegiate accounting curricula (kpmg and aaa 2011). the latest of the mentioned surveys was run in 2011. these surveys have pointed out serious uncertainty concerning united states academicians as to the likely implementation of ifrs for domestic goals and in their reactions to that potential event. for example, in 2009 68% of the individuals taking the questionnaire (out of a total of 500 respondents) thought that the united states would implement ifrs domestically, but this had decreased to 54% in 2011 (out of a total of 638 respondents). approximately, 60% of the individuals taking the questionnaire in 2011 thought that implemention of ifrs was not a top priority for the sec and only 40% reported that they had seriously integrated ifrs into their curriculum (kpmg and aaa 2011). several disincentives and adoptation issues have been volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu dr. cevdet kızıl, dr. ayşe tansel çetin, ahmed bulunmaz emerging markets journal | p a g e |74 detected by the help of mentioned surveys and by remaining authors. these also cover the issue of creating a place in a curriculum for ifrs at the same time us gaap remain the required standards (munter and reckers 2008; kpmg and aaa 2011). this problem is actually related to educators who consider the teaching of accounting as being based on rules instead of principles. definitely, there also exists the problem related to the ageing demographic of accounting academics. this means a decreased number of academicians who cover teaching. it is stated that, there is no or very little source of encouragement for academicians who are close to retirement to ‘regain’ a new set of standards) (leone 2008; munter and reckers 2009). according to the 2011 kpmg/aaa questionnaire, 91% of the accounting educators reflected no practical experience concerning the implementation of ifrs. furthermore, improving ‘new’ materials and making textbook authors/publishers to integrate ifrs material is considered as a tough issue in the united states since there exists less encouragement to make changes until the sec requires the domestic implementation of ifrs (leone 2008; munter and reckers 2009; kpmg and aaa 2011). besides, academicians in united states defend that, they are not adequately supported to make the required changes to their curricula since university managers can not clearly perceive the future effects of ifrs implementation (munter and reckers 2009; kpmg and aaa 2011). at last, one big source of demotivation to integrate ifrs into us curricula is that many programs are developed for students to help them only succeed in the cpa exam (leone 2008; mintz 2009). thus, curricula will probably not be changed until the exam is altered to cover. (leone 2008). however, the 2011 kpmg/aaa questionnaire showed that, 61% of individuals who took the questionnaire thought that, the cpa exam would cover an important part of ifrs in approximately three years (kpmg and aaa 2011). coetzee and schmulian (2012) indicate that accounting educators should take advantage of many innovative techniques of pedagogy, like simulations, role playing, problem-based learning, case studies with alternative solutions and oral presentations. research by henry and dodson (2009) distributed a survey to find out the opinions of college business majors and their attitude toward accounting fraud and ethical education. their findings suggested that, ethics education did have a positive effect on the reduction of accounting fraud. malone (2006) stated with this research that, more education in ethics could and would improve decisions of accountants and other professionals. black at. al. (2010) investigated the benefits of professional ethics training on three levels of ethical improvement, which are moral motivation, moral reasoning, and ethical intention. they did find important results, which show that professional ethics training did have an impact on practicing accountants based on their cultural history, other ethics training, and demographic features. black et. al. (2010) pointed out that professional ethics training has an impact on the moral motivation dimensions especially for individuals coming from middle east and southeast asian countries. moreover, professional ethics training had greater impact on moral reasoning for individuals who expressed that they are not religious. besides, if an individual was from a culture with high uncertainty avoidance [which means they are more in favor of structure and rules rather than uncertainty], then professional ethics training had more impact in terms of moral reasoning. results of black et. al. (2010) indicated that individuals who took part in ethics standards setting and ethics training had to be knowledgeable that ethics education effectiveness did change based on the ethical development level and was influence by cultural issues in addition to demographic issues, like gender, educational stage, age, and religiosity besides the culture and demographics of the students who get the training. the impact of training would be different based on the mentioned issues. ezeani nneka and rotimi (2012) indicated that, first of all the curricula of nigerian institutions should be controlled and investigated to integrate ifrs. that way, accountants and auditors would get familiar with ifrs guidelines and standards. garuba and donwa (2011) also defends the same perspective, stating that there is a necessity to educate the educators to increase the knowledge about ifrs. adhikari, flanigan and tondkar’s research (1999) showed that, some steps had been taken to internationalize the accounting curriculum. however, there is still a long way to go in terms of internationalizing the accounting curriculum. one eyecatching point is that, until that time, more steps are taken at the graduate level compared to the undergraduate level for both non-us and us institutions. also, some variances were detected between non-us and us schools regarding the considered significance of specific international subjects and underlying motivation for internationalization. adhikari, flanigan and tondkar’s research (1999) also reflected that, both non-us and us schools considered the less number of international accounting topic in doctoral programs and the weakness of faculty expertise as important problems for internationalization. the mentioned two factors must be resolved if more steps in internationalization of the accounting curriculum needs to be taken. aktaş (2013) emphasized that, education was among the principle issues related to the application of international financial reporting standards (ifrs). because ifrss were principle-based, changing volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu accounting education approach in the context of new turkish commercial code and turkish accounting standards emerging markets journal | p a g e |75 continuously as a result of improvements, “frameworkbased teaching” method was advised for teaching them to both professional accountants and future accountants. fowler, tan and hawkes’ (2002) study showed that accounting educators gave more importance to recent management accounting methods than practitioners. thıs, their research results were not paralel to former criticisms that the management accounting curriculum was not recent as practice. results from the mentioned research also indicated that, practitioners still preferred traditional over contemporary management accounting methods for use in their firms and to educate students. on the other hand, academics preferred contemporary methods. yildiz (2004) underlined with his research that, number of undergraduate students in the faculty of economics and four year vocational schools was high, and most programs also had evening education. thus, the workload of assistant professors in turkey was high, limiting their research abilities and possibilities. research by durak (2009) showed that, 40% of accounting professionals believed they had a general knowledge of accounting during their two years vocational school education. also, 12% of accounting professionals reported that they had a low level of accounting knowledge through their vocational school years. in terms of accounting professionals with undergraduate diploma, 52% said they had general knowledge of accounting through their four years in the university. also, 12% stated that they had a low level of accounting education and knowledge during four years. research by durak (2009) also showed that, turkish firms did not give adequate importance to accounting education and they generally prefered to employ experienced staff. this was causing the firms to be unfamiliar to the concept of accounting education. durak (2009) defended that turkish firms had to focus more on accounting education and they had to implement innovative traning programs towards accounting professionals. private sector-university cooperation was required at that point and current ties had to be strengthened. that would help accounting theory and practice to complete each other in turkey. yereli at. al.(2010) analyzed and investigated papers with the topic of “accounting education” which were published between the years 1997-2008 in international journals. 789 papers had been investigated concerning international accounting education. as a result of investigation, they realized that the number of ampiric research was higher than the number of theorical studies for 1997-2008. concerning the categorization of papers into their topics, the most frequent studied topic was “curriculum and instructions”. concerning the emphasized years, it was detected that “descriptive model” was the most preferred model. also, “the survey method” was the most frequently used data collection technique in the papers. the papers with more than two authors were higher than others in mentioned years. miller, van daniker and relmond (1999) did run a questionnaire to discover the changes that were observed in government accounting education in the last 5 years and others which would happen in the next 5 years. a questionnaire containing 21 questions was distributed to 517 members of the government/not-for-profit section of the american accounting association to obtain information. the results of the survey showed that government accounting education was in the midst of a number of significant changes and that these changes would continue to evolve. one of the most significant findings of the survey was the increasing use of the internet in government accounting courses. süer’s study (2007) observed the students at 11th class in the commerce profession high schools and the teachers who did teach accountancy at these schools in i̇stanbul between 2006-2007 education years. prepared inquiry was applied to 411 students at 7 random selective schools and 147 profession teachers at 18 random selective school. then the information from the inquiry was processed at spss software. the responses, the percent and the frequency graphics were prepared. at the and of the observation, the information which was received from the observation showed that there were lots of problems concerning accountancy education at the commerce profession high schools. gökgöz (2007) applied a questionnaire consisting 26 questions to 755 students who were trainees in different regions of i̇stanbul in order to determine the problems which are confronted with training education in organizations. when the questionnaire form was evaluated, it was determined that trainees choose trade vocation high schools for variety of reasons which are inappropriate with the school’s foundation aims. problems detected were deficiency of materials at school, the inadequacy of teachers, the inadequacy of the education at school, the inappropriateness of the training place for improving, no integration between the school and practice, no cooperation between the school and business world, the fact that trainees work in other departments apart from their own fields, trainees are not paid the amount of money that they deserve according to their work and the inappropriateness of training time. marshall et. al. (2010) did also run a questionnaire and investigated the thoughts of a group of accounting academicians concerning the value of the cpa title as a teaching measure. the results showed that teaching experience was the most effective factor to acquire all of the assessed abilities. however, the performance concerning to run a research was an exception, since volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu dr. cevdet kızıl, dr. ayşe tansel çetin, ahmed bulunmaz emerging markets journal | p a g e |76 doctoral program preparation was the most important factor here. stolowy and tenenhaus’s research (1997) took advantage of a questionnaire and provided information concerning two issues. first of all, although some variances were observed between nations, most courses were specific, contrary to general lectures uniting specific international accounting issues. second, a serious number of institutions did achieve to include both comparative dimensions and accounting aspects of multinational firms. ayboğa’s research (2002) stated that, accounting practices in turkey had differences due to the legal arrangements. on the other hand, turkey’s accounting practices were under the effect of tax regulations. prepared financial schedules did not show the real situation of the establishments and present important differences, compared with international practices. ayboğa (2002) also reported that, in the process of globalization, turkey needed a common accounting language either at national level or at international level. this common language could be provided with national accounting standards which is harmonious with international accounting standards. for adapting developments in the world, professional trainings of accounting professionals had gained much importance. iii. data and methdology data were collected from vocational school and undergraduate students in turkish universities. as a result of the study, 513 responses were gathered via the questionnaire. the sample includes students from yalova university, marmara university, atatürk university, bayburt university, ordu university, sakarya university, uludağ university and van 100. yıl university. questionnaires were distributed with cargo (carriers) and also personally. the research questions are listed below in consequence. the questions included in the questionnaire are parallel to the research questions. since the first three survey questions are concerned with demographical information, they are not taken into consideration as research questions. thus, the research questions start with q4.  q4= are turkish commercial code and turkish accounting standards included to higher education curricula as mantatory or elective courses?  q5= is it beneficial to include turkish commercial code and turkish accounting standards to higher education curricula?  q6= is the ratio of turkish commercial code and turkish accounting standards courses sufficient to all courses included in higher education curricula?  q7= do turkish accounting academicians provide detailed information to students about turkish commercial code and turkish accounting standards during the courses?  q8= is it advantageous for university students to gather a deep knowledge of turkish accounting standards and turkish auditing standards through their education?  q9= are students taught in detailed about turkish accounting standards and turkish auditing standards through their education?  q10= do turkish university students take multidisciplinary international business courses that cover accounting topics?  q11= do turkish universities teach international accounting to students separately as a course?  q12= do turkish universities teach international tax law to students separately as a course?  q13= do turkish universities integrate international dimension and perspective into accounting courses?  q14= do financial (general) accounting courses in turkey include some topics and elements of international accounting?  q15= do turkish universities offer curricula and courses which never include international accounting subjects?  q16= are contemporary issues related to accounting courses discussed in turkish universities?  q17= are fundamental changes required for accounting education?  q18= are partial changes required for accounting education?  q19= should accounting education programs be designed specially, which supports the self learning and improvement of students?  q20= do accountants of future receive the required accounting background, which matches the increasing demand of society?  q21= should accounting education programs primarily focus on national and international volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu accounting education approach in the context of new turkish commercial code and turkish accounting standards emerging markets journal | p a g e |77 exams organized for employment opportunities?  q22= should accounting education put more emphasis on tax practices and applications?  q23= should accounting education give more importance to analysis and interpretation compared to recording and entries?  q24= should students be trained in a specific way which will make them very familiar with professional accounting and auditing standards?  q25= should accounting education put more weight on written and oral communication ability?  q26= should accounting education concentrate more on personal skills?  q27= should accounting education give more importance to mental ability?  q28= should accounting education value ethical concepts more?  q29= should accounting education go through fundamental changes in teaching/lecturing techniques?  q30= are current technical (technological) background in turkish universities adequate for the implementation of teaching/lecturing techniques?  q31= is the number of accounting academicians in turkish universities enough for the implementation of teaching/lecturing techniques?  q32= do the current teaching/lecturing techniques in turkey encourage students to think and run brainstorming through courses?  q33= should accounting education and teaching the courses be based on problem solutions included in books?  q34= should group study and teamwork be implemented extensively for accounting courses?  q35= should case studies and role playing be implemented extensively for accounting courses?  q36= are written projects and assignments a critical element of accounting courses in turkey?  q37= should internship be definitely included for accounting education?  q38= does the current grading system in turkey motivate students to learn accounting?  q39= do the current practices and implementations encourage accounting academicians for a more effective accounting education in turkey? for this research, a total of 513 respondents did take the survey. 239 were males and 274 were females. in other words, 46.6% were male students and 53.4% were female students. figure 1: demographics of respondents – gender in terms of study, 3 respondents were below age 18 (%0.6), 404 were between the ages 18-22 (%78.8), 101 were between 23-27 (%19.7), 3 were between the ages 28-32 (%0.06), 1 was between 33-37 (%0.02), 1 was between the ages 43-47 (%0.02). figure 2: demographics of respondents – age volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu dr. cevdet kızıl, dr. ayşe tansel çetin, ahmed bulunmaz emerging markets journal | p a g e |78 this research was run at 9 different universities. 154 students from yalova university, 130 students from marmara university, 99 students from bayburt university, 77 students from ordu university, 48 students from sakarya university, 2 students from uludağ university, 1 student from ankara university, 1 student from atatürk university and 1 student from van 100. yıl university did participate in this study. figure 3. demographics of respondents – universities iv. research results the most important and eye-catching research results are indicated below. q4: turkish commercial code (tcc) and turkish accounting standards (tas) are included to the curriculum in your university as mandatory or elective course? 17.1% of respondents said they definitely disagree, 16.8% said they do not agree, 13.2% are indecisive, 11.2% said they agree and 14.3% said they definitely agree. finally, 27% of respondents did not answer this question figure 4. tcc and tas are included to the curriculum in your university as mandatory or elective course? q5: is it beneficial to include tcc and tas to higher education curricula? 8.8% of respondents reported that they never agree, 13.5% of respondents stated that they do not agree, 21.1% of respondents were uncertain, 30.6% did agree and 26.1% did definitely agree. figure 5: is it beneficial to include tcc and tas to higher education curricula? q6: is the ratio of tcc and tas courses sufficient to all courses included in higher education curricula? 11.1% of respondents indicated that they definitely disagree, 23.4% indicated that they disagree, 37.6% of respondents were indecisive, 18.9% of respondents did agree, 9.0% of respondents did definitely agree. figure 6: is the ratio of tcc and tas courses sufficient to all courses included in higher education curricula? q7: do turkish accounting academicians provide detailed information about tcc and tas? volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu accounting education approach in the context of new turkish commercial code and turkish accounting standards emerging markets journal | p a g e |79 1.5% of respondents reported that they definitely disagree, 23.2% of respondents said they disagree, 33.1% were indecisive, 17.2% of students did agree and 9.0% of students did definitely agree. figure 7. do turkish accounting academicians provide detailed information about tcc and tas? q8: is it advantageous for university students to gather a deep knowledge of tas and turkish auditing standards? 8% of respondents answered that they definitely disagree. 12.7% did disagree. 18.1% could not make a decision. on the other hand, 34.5% of students did agree and 26.7% did definitely agree. figure 8. is it advantageous for university students to gather a deep knowledge of tas and turkish auditing standards? q9: are students taught in detail about tas and turkish auditing standards through their education? 12.9% here did definitely disagree and 25.1% did disagree. 32.7% of students were indecisive. also, 21.8% did agree and 7.4% did definitely agree. figure 9. are students taught in detail about tas and turkish auditing standards through their education? q14: do financial (general) accounting courses in turkey include some topics and elements of international accounting? 9.2% of respondents did definitely disagree, 17.5% did disagree, 22% were indecisive, 34.7% did agree and 16.6% did definitely agree. figure 10. do financial (general) accounting courses in turkey include some topics and elements of international accounting? q16: are contemporary issues related to accounting courses discussed in turkish universities? for this survey question, 11.5% said they definitely disagree, 20.7% mentioned that they disagree, 21.4% were indecisive, 28.8% agreed, 17.5% did definitely agree. volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu dr. cevdet kızıl, dr. ayşe tansel çetin, ahmed bulunmaz emerging markets journal | p a g e |80 figure 11. are contemporary issues related to accounting courses discussed in turkish universities? q21: should accounting education programs primarily focus on national and international exams organized for employment opportunities? concerning this question, 5.7% of students defintely disagreed, 14.2% did disagree, 25.1% were indecisive, 30.2% did agree and 24.8% did definitely agree. figure 12. should accounting education programs primarily focus on national and international exams organized for employment opportunities? q23: should accounting education give more importance to analysis and interpretation compared to recording and entries? here, 5.1 % of students did definitely disagree, 14% did disagree, 24.8% were indecisive, 33.5% did agree and 22.6% did definitely agree. figure 13. should accounting education give more importance to analysis and interpretation compared to recording and entries? q24: should students be trained in a specific way which will make them very familiar with professional accounting and auditing standards? 5.5% of students did definitely disagree here. additionally, 9.4% of respondents disagreed. 22.8% could not provide a decision. however, 30.8% of students did agree and 31.6% did definitely agree. figure 14. should students be trained in a specific way which will make them very familiar with professional accounting and auditing standards? q28: should accounting education value ethical concepts more? for this question, 9.0% of students did definitely disagree, 15.2% did agree, 26.3% were volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu accounting education approach in the context of new turkish commercial code and turkish accounting standards emerging markets journal | p a g e |81 indecisive, 29.8% did agree and 19.7% did definitely agree. figure 15. should accounting education value ethical concepts more? q34: should group study and teamwork be implemented extensively for accounting courses? here, 7.8% of students did definitely agree, 16.2% did agree, 25.1% were indecisive, 32.2% did agree and 18.7% did definitely agree. figure 16. should group study and teamwork be implemented extensively for accounting courses? q35: should case studies and role playing be implemented extensively for accounting courses? parallel to responses of students, 4.9% definitely disagee, 11.9% agree, 28.1% is indecisive, 31.0% agree and 24.2% do definitely agree. figure 17. should case studies and role playing be implemented extensively for accounting courses? q37: should internship be definitely included for accounting education? 5.3% of students definitely disagree, 9.4% disagree, 24.4% are indecisive, 28.1% agree and 32.9% do definitely agree. figure 18. should internship be definitely included for accounting education? v. conclusion the results of our research lead us to draw important conclusions. first of all, the study shows that turkish commercial code and turkish accounting standards do volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu dr. cevdet kızıl, dr. ayşe tansel çetin, ahmed bulunmaz emerging markets journal | p a g e |82 not exist as mandatory or elective courses in the curriculums of universities in general. secondly, most of the students believe that, it will be beneficial to include courses related to turkish commercial code and turkish accounting standards to curriculums of universities. thirdly, students in general are indecisive about the ratio of turkish commercial code and turkish accounting standards courses to all courses in the curriculums. in other words, they can not decide if the rate is sufficient of not. again, university students in general can not decide if turkish accounting academicians provide detailed information about turkish commercial code and turkish accounting standards in the courses. a great majority of university students have indicated that, it is advantageous for them to gather a deep knowledge of turkish accounting standards and turkish auditing standards in the courses. then, a high percentage of students have stated that they are indecisive about the fact that they are getting detailed information on turkish accounting standards and turkish auditing standards in their courses. furthermore, a great number of students have emphasized that, they should be familiar with professional accounting standards and auditing standards through their education. in addition, parallel to thoughts and perceptions of most students in turkey, financial (general) accounting courses do include some topics and elements of international accounting. moreover, most of the students in turkey underlined the fact that, contemporary accounting issues and topics are discussed in classrooms. after that, a high majority of univerity students in turkey have pointed out that, they believe accounting education should focus on national and international exams designed for employment opportunities. next, most of the students have mentioned that, accounting education should focus more on analysis and interpretation compared to recording of transactions. plus, a high ratio of students have stressed that, they believe the accounting education should focus more on the ethical concepts. thus, according to most university students in turkey, the ethical dimension in accounting courses are not discussed adequately. then, most university students in turkey think that, education technique based on cases and role playing should be implemented more through accounting courses. finally, according to most university students in turkey, internship is an essential part of accounting education. vi. limitations and recommendations for future research although the sample of our research includes 513 respondents from 9 different universities, we believe that the researchers can study a larger sample in the future since the number of turkish state and private universities has increased tremendously in the recent years. also, similar researches can be run on academicians teaching accounting, big4 auditing firms, cpas, private sector and state sector accounting employees to gather a wider perspective of issue. references adhikari, a., flanigan, m.a., tondkar, r.h. (1999). “a survey of international accounting education in the us and some other countries”, journal of accounting education. aicpa (1998). “the cpa vision project”. aktaş, r. (2013). “i̇lke temelli finansal raporlama standartları nasıl öğretilmeli? tfrs 10 – konsolide finansal tablolar standardı örneği”, mali çözüm dergisi, ocak-şubat 2013, pp. 133-168. aljifri, k., khasharmeh, h. (2006) “an investigation into the suitability of the international accounting standards to the united arab emirates environment”, international business review, vol. 15, no. 5, pp. 505-526. ayboğa, h. (2002). “globalleşme sürecinde muhasebe alanındaki gelişmelere ülkemizin uyumu”, balıkesir üniversitesi sosyal bilimler dergisi, http://www.sbe.balikesir.edu.tr/dergi/edergi/c5s8/makale/ c5s8m3.pdf ballas, a., d. skoutela, and c. tzovas. (2010). “the relevance of ifrs to an emerging market: evidence from greece”. managerial finance, vol. 36 issue: 11, pp. 931-948. black, b.s., de carvalho, a.g., gorga, e. (2010). “corporate governance in brazil”, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1152 454 bui, b and porter, b. (2010), the expectationperformance gap in accounting education: an exploratory study. accounting education: an international journal, 19 (1-2), pp. 23-50. coetzee, s.a., schmulian, a. (2012). “a critical analysis of the pedagogical approach employed in an introductory course to ifrs”, issues in accounting education, vol. 27, no: 1: pp.83–100. demir, v., öztek süer, ö. (2006). “avrupa birliği’ne giriş sürecinin türkiye’deki muhasebe eğitimine etkileri”, muhasebe ve denetime bakış dergisi, türmob yayını, no: 20, 31-44. durak, g. (2009). “üniversitelerde verilen muhasebe eğitiminin kırklareli yöresi'nde faaliyet gösteren küçük ve orta büyüklükteki işletmelerin beklentilerini karşılama düzeyinin incelenmesi”, trakya üniversitesi sbe i̇şletme anabilim dalı yüksek lisans tezi. http://researchindex.net/author/adhikari,_a./5365e1b326184454e404bf42 http://researchindex.net/author/flanigan,_m.a./5372064226184448c58edae0 http://researchindex.net/author/tondkar,_r.h./536fd78b26184448c50766a4 http://193.255.140.91/jspui/handle/1/860 http://193.255.140.91/jspui/handle/1/860 http://193.255.140.91/jspui/handle/1/860 http://193.255.140.91/jspui/handle/1/860 volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu accounting education approach in the context of new turkish commercial code and turkish accounting standards emerging markets journal | p a g e |83 ezeani nneka s., rotimi, o. (2012). “auditing as a tool for accountability for efficient and effective school administration.” arabian journal of business and management review (oman chapter) 5, pp. 48-55. fowler, m., tan, l., hawkes, l. (2002). “management accounting education: is there a gap between teaching and practice?” chartered accountants journal of new zealand. vol. 81, no:10, pp.58-62. garuba, a. o.,donwa, p. (2011). “the challenges of adopting international financial reporting system in nigeria”, jorind i (9). pp. 313-317. gökçen g., akgül, b. a., çakıcı, c. (2006). “türkiye muhasebe standartları uygulamaları”, beta basım yayım. gökgöz, a. (2007). “ticaret meslek liselerinde muhasebe eğitimi alan öğrencilerin stajyerlikte karşılaştıkları problemleri ve çözüm öneileri: i̇stanbul örneği”. sakarya üniversitesi sbe yüksek lisans tezi. howieson, b. (2003). “accounting practice in the new millenium : is accounting education ready to meet the challenge?”, the british accounting review, 35, pp.99-103. icaa, the institute of chartered accountants in australia. (1998). “the vision 2020 taskforce report: chartered accountancy in the next century radical change or diminished influence?” icaew. (1996).“added-value professionals: chartered accountants in 2005 (report)”, london. ifac. (2005). “code of ethics for professional accountants.” revised in june. jackling, b., howieson, b., natoli, r. (2012). “some implications of ifrs adoption for accounting education, australian accounting review, vol. 22., issue: 4. jermakowicz, e.k., gornik-tomaszewski, s. (2006) “implementing ifrs from the perspective of eu publicly traded companies”, international accounting, auditing and taxation, vol. 15, pp.170–196. jones, s., higgins, a. d. (2006) “australia’s switch to international financial reporting standards: a perspective from account preparers”, accounting & finance, vol. 46, pp. 629-652. karğın, m., aktaş, r., “ufrs’ye geçiş sürecinde yükseköğretimde muhasebe eğitiminin değerlendirilmesi”, uluslararası türk coğrafyasında ufrs sempozyumu, trabzon, turkey, 16 -17 june 2012. kızıl, a., fidan, m. m., kızıl, c., keskin, a. i̇. (2013). "tms tfrs, türkiye muhasebe ve finansal raporlama standartları: uygulamalar, yorumlar, muhasebeleştirme", der publishing. kpmg and american accounting association, (2011). “2011 kpmg/aaa ifrs in the accounting curriculum survey”, kpmg official website (amr.kpmg.com), https://clients.amr.kpmg.com//facultyportal//nr//rdonlyr es//2f117ede‐ee64‐‐4c87‐‐9eee‐f02daf3b7a09//0// 2011kpmg_ifrs_facultysurvey.ppt. leone, m. 2008, ‘dying for a date’. available at:http://www.cfo.com//article.cfm//11566491//c_298436 8//?f=archives, 1 march 2012. malone, f. (2006). “the ethical attitude of accounting students”. journal of the american academy of business 8 (march). pp. 142-146. marshall, p. d., dombrowski, r., garner, m., smith, k. (2010). “the accounting education gap”. the cpa journal. 6-10. miller, g. j., daniker, v., ralmond, p. v. (1999). “trends in government accounting education approaching the new millennium a survey was conducted to uncover the changes that have taken place in government accounting education during the past five years and those that will occur in the coming years”, the government accountants journal, vol. 48., pp.12-19. mintz, s.m. 2009, ‘the impact of ifrs on accounting professionals and accounting education’, today's cpa , november/december: 24–7. munter, p. and reckers, m.j. 2009, ‘ifrs and collegiate accounting curricula in the united states: 2008 a survey of the current state of education conducted by kpmg and the education committee of the american accounting association’, issues in accounting education , vol. 24 issue: 2, p.131. örten r., kaval, h., karapınar, a. (2007). “türkiye muhasebe-finansal raporlama standartları, tms-tfrs”, seçkin publishing. pekdemir, r., türel, a. g., “ethics in professional accounting education program: the turkey experience”, accounting studies in turkey, pekdemir r., ed., i̇stanbul üniversitesi i̇şletme fakültesi muhasebe enstitüsü, istanbul, pp.63-77, 2010. preobragenskaya, g. g., mcgee, r. w., (2003a). “international accounting standards and foreign direct investment in russia”,presented at the international trade and finance association’s thirteenth international conference, vaasa, finland, may 28-31, 2003. preobragenskaya, g. g., mcgee, r. w. (2003b). “the current state of auditing in russia”. in jerry biberman & abbass f. alkhafaji (eds.), business research yearbook: global business perspectives, volume x (pp.499-503) saline, mi: mcnaughton & gunn, inc. javascript:void(0); javascript:void(0); javascript:void(0); http://proquest.umi.com.ezyproxy.wintec.ac.nz/pqdweb?rqt=318&pmid=11901&ts=1127640206&clientid=21763&vtype=pqd&vname=pqd&vinst=prod http://proquest.umi.com.ezyproxy.wintec.ac.nz/pqdweb?rqt=318&pmid=11901&ts=1127640206&clientid=21763&vtype=pqd&vname=pqd&vinst=prod http://econbiz.zbw-kiel.de/search/results?lookfor=%22miller%2c+gerald+j.%22&type=author&limit=20 volume 4 no 1 (2014) | issn 2158-8708 (online) | doi 10.5195/emaj.2014.62 | http://emaj.pitt.edu dr. cevdet kızıl, dr. ayşe tansel çetin, ahmed bulunmaz emerging markets journal | p a g e |84 rothbard, m. n. (1991). “the case for a 100 percent gold dollar”. ludwig von mises institute. sennholz, h. (2002). “russia’s march from communism”, mises institute. stolowy, h., tenenhaus, m. (1997).”international accounting education in western europe”, hec school of management. süer, h. m. (2007) “ticaret meslek liselerinde muhasebe eğitimi, muhasebe eğitiminden beklentiler ve karşılaşılan sorunlar”, yayınlanmamış yüksek lisans tezi, i̇stanbul üniversitesi, sosyal bilimler enstitüsü, i̇stanbul. tyrrall, d., woodward, d., rakhimbekova, a. (2007) “the relevance of international financial reporting standards to a developing country: evidence from kazakhstan", the international journal of accounting, vol. 42, no. 1, pp. 82-110. uyar, a., güngörmüş, a. h. (2013). “perceptions and knowledge of accounting professionals on ifrs for smes: evidence from turkey”, research in accounting regulation, vol. 25, issue: 1, pp. 77-87. yereli, a. n., kayalı, c., özdoğan, b., gacar, a., ata, f. i̇. (2010), “uluslar arası muhasebe eğitimi literatür taraması: 1997-2008 dönemi”, ege akademik bakış dergisi, vol. 10, no:3, pp. 885-910. yıldız, f. (2004). “üniversitelerimizde görev yapan muhasebe ve finansman öğretim üyesi yardımcı doçentler ile i̇lgili bir araştırma”, muhasebe ve finansman dergisi, sayı: 24, pp.128-145. http://www.sciencedirect.com/science/article/pii/s1052045712000446 http://www.sciencedirect.com/science/article/pii/s1052045712000446 volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu the role of monetary policy announcements on turkish banks' stock returns nida abdioğlu bandirma onyedi eylul university | e-mail: nidaabdioğlu@yahoo.com sinan aytekin balikesir university | e-mail: saytekin@balikesir.edu.tr abstract this paper investigates the impact of monetary policy committee decisions of the central bank of the republic of turkey on the stock returns of the deposit banks listed in borsa istanbul banks index (xbank). the cumulative abnormal returns of the banks are calculated for 2008 and 2012. we report that the monetary policy announcements affect cumulative abnormal returns of the deposits banks both in 2008 and 2012. since the announcement of the monetary policy decisions created abnormal returns, we conclude that the market does not have semi-strong form efficiency. keywords: monetary policy, cumulative abnormal returns, event study, emerging markets, borsa istanbul new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.98 | http://emaj.pitt.edu | mailto:nidaabdioğlu@yahoo.com mailto:saytekin@balikesir.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.98 | http://emaj.pitt.edu nida abdioğlu, sinan aytekin emerging markets journal | p a g e |63 the role of monetary policy announcements on turkish banks' stock returns nida abdioğlu sinan aytekin 1. introduction investigation of the impact of monetary policy decisions on the financial markets has been an important topic both for the investors and policy makers. investment decisions of financial market participants are affected by the results of monetary policy shocks on asset prices (bohl et al., 2008). the effect of monetary policy on financial markets is accepted as the most direct and immediate effects of monetary policy decisions. in order to reach their goals, policy makers adjust economic behaviour by affecting asset prices and returns (bernanke and kuttner, 2005). thus, to determine the association between asset returns and monetary policy is important for both policy makers and investors. in this study, the monetary policy decisions of the central bank of the republic of turkey (cbrt) and their effects on stock returns of 12 turkish deposits banks listed in borsa istanbul are examined. we distinguish this study from the existing literature by investigating our hypothesis in a crisis year (2008) and in a year with new monetary policy environment (2012). second contribution of this study is to examine the hypothesis for turkish banks. after 2010, monetary policy committee of the cbrt interfere in market mechanism by applying a new monetary policy in order to reduce macro financial risks. the aim of the cbrt was to apply inflation at low and stable level. turkey had to change its monetary policy after 2008 financial crisis. although the interest rates in developed countries decreased after the crisis, the interest rates in developing countries were relatively high and the economic growth predictions were strong. as a result, the emerging markets attracted the liquidity from developed markets. this resulted in a new period in turkey which applied a monetary policy mix that includes interest rate corridor, reserve requirements and a liquidity policy (kucukkocaoglu, 2013). the change in interest rates with the new monetary policy should change the stock prices and returns. following this idea, we choose 2012 to examine the stock returns after the monetary policy amendment. the aim of this study is to investigate whether abnormal returns are obtained from the banks during the event window of monetary policy announcements. in other words, the efficiency of turkish market is tested. "a market in which prices fully reflect available information is called as efficient market" (fama, 1970). when new information enters into the efficient market, the prices are adopted to the new information. in an efficient market, the investors cannot obtain abnormal returns (karan, 2013). in semi-strong form efficiency, prices reflect all publicly available information. thus if the market is in semi-strong efficiency form, the announcement of monetary policy decisions to the public will not create abnormal returns. in other case, the announcement of these decisions will result in abnormal returns obtained by the investors. event study methodology is used in order to calculate abnormal returns in our testing period. market model adjusted return is used to calculate expected returns of the banks. cumulative abnormal returns for each month are reported. for 2008 significant abnormal returns are reported in march, april, may, june, july, august, september, november and december. when the event study is applied for 2012, it is found that except may and september the banks have significant cumulative abnormal returns. in some months, we report negative or positive cumulative abnormal returns for both of the years. therefore, we conclude that turkish market is not in a semi-strong efficiency form in 2008 and 2012. monetary policy decisions of the cbrt impact the stock returns. the rest of the study is organised as follows: overview of the literature on the relation between monetary policy decisions and stock returns is provided in section 2. section 3 presents the data and methodology used in this study. in section 4, we report our empirical results. finally, section 5 provides the conclusion. 2. literature review several strands of the existing literature investigate the influence of monetary policy decisions on stock returns. while one set of studies focus on developed countries, another stream addresses this relation for developing countries. patelis (1997) is among the studies which focus on a developed country. by using the monthly nyse value-weighted excess stock returns, patelis (1997) finds that fed monetary policy shocks affect expected excess returns, but they have little impact on expected real returns. jensen et al. (1996) use expected stock and bond returns for the period february 1954 through december 1992. they show that change in fed monetary policy affects security returns. rigobon and sack (2004) investigate the impact of monetary policy on asset prices. they analyse the response of the short term interest rate to the stock market even when the stock market is endogenously reacting to the interest rate simultaneously. by considering this endogeneity issue, they report a decline in stock prices when short term interest rates increase. according to their results, the increase in three months interest rates results in declines in s&p 500 index and nasdaq index. bernanke and kuttner (2005) and ehrmann and fratzscher (2004) are among the studies which report a relation between monetary policy shocks and equity prices in the unites states (us). ehrmann et al. (2005) show that, changes in short term interest rates affect the equity markets in the us. in addition, compared to the us they report much more influence of bond yields and exchange rates on euro area short rates and equity markets. bohl et al. (2008) investigate the impact of unexpected interest rate decisions of european central bank on european stock market returns. they report a negative relation between unexpected interest rate decisions and stock market performance. scharler (2008) finds that monetary policy volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.98 | http://emaj.pitt.edu the role of monetary policy announcements on turkish banks' stock returns page |64| emerging markets journal tightening causes higher nominal interest rates in the us. this increases the opportunity cost of holding stocks and decreases dividend payments. these factors reduce the stock prices. kholodilin et al. (2009) examine the response of european stock markets to the monetary policy changes by the european central bank. they find that an increase in interest rate causes a decrease of the stock market on the announcement day of monetary policy shock. farka (2009) examines the effect of fed monetary policy on the stock returns and their volatilities by taking into account the endogeneity, omitted variable biases and potential asymmetries because of the type of policy shocks and policy actions. they report a decrease in stock returns following an increase in the policy rates. chulia et al. (2010) investigate the impact of federal fund target rate decisions on stock returns, volatilities and correlations. they conclude that the expected changes in target rate do not matter but surprises in the target rate change matter which is consistent with market efficiency. an increase in the target rate causes negative stock return within 5 minute after the announcement. the increase in the target rate also increases the stock volatility during the 60-minute window around the announcement. they explain another finding of their study as follows: "..we find that positive surprises in the target rate (bad news for stocks) trigger a stronger reaction in stock prices than negative surprises (good news for stocks)." (chulia et al., 2010). andersson (2010) examines the effect of monetary policy decision on bond and stock market volatility in the euro area and in the us between 1999 and 2006. by using intraday data on the us and euroarea bond and stock markets, they report an increase in intraday volatility at the time of the policy announcements by the two central banks. and this increase is more pronounced for the us market. hussain (2011) investigates the influence of monetary policy announcements on european and the us stock index returns and volatilities. both european and the us stock index returns and volatilities are affected by monetary policy surprises. he reports that the impact of monetary policy surprises on stock indexes is very quick and disappears within 5-10 minutes after the announcement. he also finds that volatilities of european stock indices are affected by european central bank press conference which contains information for market participants. bomfim (2003) investigates the impact of preannouncement and news effect on monetary policy decisions on the us stock market for the period 1989 and 1998. they conclude that us market is quite prior to the policy announcements. abnormally low conditional volatility proves this result. another stream of the literature focuses on developing countries and examines the impact of monetary policy decisions on stock returns. in this study, we investigate this relation for turkish financial markets. there are some studies which report the impact of monetary policy decisions of the central bank of the republic of turkey on either the index returns or individual stock returns. aktas et al. (2009) examine the impact of interest rate decisions of central bank on istanbul stock exchange-100 index (ise-100), exchange rates and risk premium for the period 20012008. they report an impact of interest rates changes on financial markets, especially on bond interest rates. however, they do not find a significant impact of policy changes on stock prices. demiralp and yılmaz (2010) investigate the effect of monetary policy decisions of central bank of turkey on capital markets between the period 2002 and 2009. they report that bond market behaves consistent with the efficient market hypothesis which states that financial markets react to expected policy actions prior to a policy announcement. but they do not find such an evidence for stock market. duran et al. (2012) examine the impact of monetary policy decisions between 2005 and 2009 on ise all, ise 100, ise 30, and the indices of manufacturing, services, trade, financial and it sectors. they find that when policy rates increase, stock prices decrease and government bond yields with longer maturities increase. they conclude that the monetary policy transmission in turkey is very similar to that in developed economies. ibicioglu and kapusuzoglu (2012) investigate the effect of policy interest rate decisions of cbrt on the decisions of share investors for the period 2002-2010. put it differently, they analyse whether ise is an efficient market of monetary policy. they analyse the changes in ise national 100 index pre and post policy interest rates announcements. they do not find any impact of interest rate decisions on stock investors investing in ise. soylu et al. (2014) examine the impact of interest rate announcement of central bank on financial markets in the period between 2005 and 2013. they use data on bist 30 index, us dollar/try and euro/try exchange rates both spot and future daily return series. they find that the return of us dollar /try exchange rate is negative on the announcement days. their analyses also show that the interest rate announcements do not affect the return of bist 30 index and euro/try exchange rate. kucukkocaoglu et al. (2013) investigates the impact of monetary policy committee announcements on turkish banks using gmm analyses. they report that increases in the policy rates result in declines in stock returns of the banks. in addition, domestic banks are most affected by policy changes. according to kucukkocaoglu et al. (2013), the banks depend on money market funding and the banks which have large interest payments in their balance sheets respond more forcefully to the changes in monetary policy changes. 3. data and methodology we include 12 deposit banks that are listed in borsa istanbul banks index (xbank) in order to evaluate sensitivity of deposit banks’ cumulative abnormal returns (car) to monetary policy decisions. we use bist datastore database to collect data on turkish deposit banks for the years 2008 and 2012. banks used in our study are listed with akbnk, alntf, deniz, finbn, garan, halkb, isctr, skbnk, tebnk, tekst, vakbn, yakbnk codes in borsa istanbul. event dates are collected from the website of the central bank of the republic of turkey. table 1 shows the announcement days of monetary policy decisions in 2008 and 2012. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.98 | http://emaj.pitt.edu nida abdioğlu, sinan aytekin emerging markets journal | p a g e |65 table 1: event days (announcement days of monetary policy decisions) event days 17.01.2008 24.01.2012 14.02.2008 21.02.2012 19.03.2008 27.03.2012 17.04.2008 18.04.2012 15.05.2008 29.05.2012 16.06.2008 21.06.2012 17.07.2008 19.07.2012 14.08.2008 16.08.2012 18.09.2008 18.09.2012 22.10.2008 18.10.2012 19.11.2008 20.11.2012 18.12.2008 18.12.2012 source: table complied by authors in order to measure the abnormal returns we use event study methodology. an event study involves an empirical analysis of the reaction of the relation between an event and stock prices. an assumption of the event study is that the stock markets are efficient. thus, the value relevance of an event can be estimated by the change in the stock returns of a firm. the event day (t=0) in this study is announcement day of monetary policy decisions every month. the period that covers 5 days prior to the event day (t=-5) and 5 days after the event day (t=+5) is defined as testing period. estimation period is between t=-10 and t=-5. estimation period is chosen to calculate the expected returns of the banks in the absence of the event. natural logarithms of the stock returns are used in this study. in equation 1, rjt is return of a particular bank's stock, pjt is the closing price of the bank at time t and p jt-1 is closing price at time t-1. we use equation 2 in order to calculate the return of the market. in this equation, rmt is return of the bist100 index, pmt is the closing price of the index at time t and pmt-1 is the closing price of the index at time t-1. )/ln( 1 jtjtjt ppr (1) )/ln( 1 mtmtmt ppr (2) market model adjusted return is used in order to calculate the expected return. in equation 3, e(rjt) is market model adjusted return and rmt is return of borsa istanbul-100 index. we estimate the parameters of market model (alpha and beta) by linear regressions in the estimation period. by using this model, the relation between the stock's return and the market return is controlled. this increases the power of the statistical test by creating adjusted returns with lower standard errors. mtjjjt rre *)(   (3) average abnormal returns for each stock are calculated with equation 4 and cumulative abnormal returns (car) are calculated with equation 5. after abnormal returns are calculated (e(ujt)), the sum of it is divided by the number of companies and average abnormal return is calculated for each month. sum of the abnormal returns is defined as cumulative abnormal returns. we aim to analyse whether any significant abnormal returns or cumulative abnormal returns are obtained during the testing period in any month.    n j jtt u n ar 1 1 where )()( jtjtjt rerue  (4)  ttp arcar (5) as a last step, we test the null hypothesis which states that cumulative abnormal return is equal to zero. rejecting the null in this case means the monetary policy decisions affect the stock returns and the turkish financial market does not have semi-strong form efficiency so that investors can obtain abnormal returns from these stocks. in contrast, the financial market has semi-strong form efficiency and investors can not obtain abnormal returns if the null can not be rejected. 4. empirical results 24 monetary policy decisions of the monetary policy committee for the years 2008 and 2012 are used in this study. cumulative abnormal returns for each bank in each month are calculated. table 2 shows the cumulative abnormal returns (car) during the testing period in 2008. as it can be seen from the table, overall car values are positive on the event window (-5, +5) in march, april, july and november. the car value is completely negative only in august. other months’ car values contain both positive and negative coefficients. table 2: cumulative abnormal returns (car) during the testing period (2008) event wind ow janua ry februa ry march april may june -5 -1,27% 0,18% 0,83% 1,27% -1,13% 0,05% -4 -1,40% -0,42% 2,70% 1,89% -0,46% -2,27% -3 -1,29% -1,48% 3,66% 3,50% -0,32% -2,26% -2 -1,97% -1,20% 4,91% 4,23% -0,64% -1,04% -1 -1,04% -0,14% 6,56% 4,61% 0,43% -1,48% 0 -0,76% 0,28% 5,51% 5,42% 0,43% -3,15% 1 -0,56% -0,16% 6,52% 5,12% 0,26% -3,01% 2 0,77% 0,21% 6,92% 3,94% -1,22% -3,04% 3 1,23% 0,50% 6,57% 4,44% -2,31% -1,72% volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.98 | http://emaj.pitt.edu the role of monetary policy announcements on turkish banks' stock returns page |66| emerging markets journal 4 1,32% 0,57% 5,88% 6,51% -3,13% -1,03% 5 -0,30% 1,10% 5,51% 6,66% -3,94% -1,54% event wind ow july august septe mber octob er nove mber decem ber -5 0,34% -0,58% 0,34% 0,54% 0,61% -0,14% -4 0,14% -4,25% 0,19% 0,31% 1,95% 1,39% -3 4,09% -7,83% 0,75% 0,64% 4,14% -0,55% -2 4,89% -6,53% -0,80% 0,40% 6,88% -1,02% -1 6,94% -8,36% -0,79% 0,66% 7,06% -2,18% 0 9,20% 10,96% -2,34% 0,18% 8,89% -3,12% 1 10,36 % 11,24% -2,29% 0,30% 8,89% -2,57% 2 12,79 % 10,70% -0,91% 1,57% 9,90% -2,09% 3 13,52 % 12,53% -1,53% 2,21% 10,63 % -2,03% 4 14,64 % 16,54% -1,88% 1,12% 12,97 % -1,52% 5 14,21 % 20,61% -2,66% 2,09% 15,81 % -1,45% source: table complied by authors figure 1 represents the graphs of cumulative abnormal returns (car) in 2008. it is seen from figure1 that, cumulative abnormal returns generally do not continuously decrease or increase before or after the event days. car values steadily increase after the event day only in november. when we take into account the days prior to the event days, we report that car values steadily increase in march, april and november. other months’ car values show a fluctuating structure. figure 1. cumulative abnormal returns (car) graphs (2008) source: figure complied by authors table 3 shows the results of cumulative abnormal returns (car) during the testing period in 2012. overall car values are positive on the event window (-5, +5) only in march. the car values are completely negative in february and august. car values of the other months contain both positive and negative coefficients. table 3: cumulative abnormal returns (car) during the testing period (2012) event wind ow januar y februar y march april may june -5 -0,51% -3,96% 7,37% 0,69% 1,86% -0,29% -4 0,29% -8,26% 15,22% 1,12% 1,37% -0,30% -3 1,33% -12,05% 22,78% -0,48% 1,35% -1,30% -2 0,98% -15,89% 30,16% 0,32% -0,44% -0,91% -1 1,24% -19,25% 37,15% 0,36% -1,62% -0,93% 0 0,30% -21,46% 44,83% -0,75% -0,37% -0,34% 1 0,28% -25,99% 52,79% -1,67% -1,40% -0,18% 2 0,86% -31,23% 59,87% -1,77% -2,14% -1,92% 3 0,68% -35,93% 67,07% -2,82% -1,95% -1,87% 4 0,49% -39,55% 75,32% -1,92% -1,54% -1,40% 5 0,90% -43,94% 83,37% -1,52% -1,65% -1,82% event wind ow july august septem ber octobe r novem ber decem ber -5 0,24% -0,42% -0,14% -0,48% 0,00% 0,16% -4 0,26% -0,30% -0,37% -0,73% 0,30% -0,61% -3 -0,13% -0,33% -0,27% -1,05% 0,61% -0,68% -2 -0,84% -0,11% 0,48% -1,25% -0,23% -0,94% -1 -1,42% -0,08% 0,20% -1,45% -0,31% -1,59% 0 -1,15% -0,64% -0,24% -0,87% 0,51% -1,88% 1 -1,41% -0,80% 0,06% -1,46% 1,59% -2,29% 2 -1,89% -0,69% -0,25% -1,06% 1,48% -3,39% 3 -1,21% -0,65% 0,32% -0,61% 2,36% -2,94% 4 -0,46% -0,61% 0,33% -0,42% 2,69% -0,93% 5 -0,70% -0,77% -0,17% -1,46% 2,41% -0,09% source: table complied by authors figure 2 represents the graphs of cumulative abnormal returns (car) in 2012. cumulative abnormal returns generally do not continuously decrease or increase before or after the event days except in february and in march. car values steadily decrease before and after the event day only in february. on the other hand, car values steadily increase before and after the event day only in march. the car values of the other months show a fluctuating structure. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.98 | http://emaj.pitt.edu nida abdioğlu, sinan aytekin emerging markets journal | p a g e |67 figure 2. cumulative abnormal returns (car) graphs (2012) source: figure complied by authors table 4 presents the t-statistics of car values. firstly, in 2008 car (-5, +5) value is positive and statistically significant for march, april, july and november. on the other hand, car (-5, +5) value is negative and statistically significant for may, june, august, september and december for ten days event window around the decision of the monetary policy committee. since we reject the null, we conclude that the decision of the monetary policy committee have impact on stock prices of deposit banks listed in borsa istanbul and investors can get positive or negative abnormal returns among the days of event window. for the other months, car value is not statistically significant. hence, we can report that the car value is not significantly different from zero for january, february and october. secondly, in 2012 car (-5, +5) value is positive and statistically significant for january, march and november. on the other hand, car (-5, +5) value is negative and statistically significant for february, april, june, july, august, october and december for ten days event window around the decision of the monetary policy committee. so, the null hypothesis is rejected for these months. car value is not statistically significant for the other months. therefore, the decisions of the monetary policy committee for these months have no impact on stock prices. when we compare the car values for 2008 and 2012, we report that cars are positive in march and in november for both of the years. in addition, cars are negative in june, august and december for both of the years. table 4: t-statistics for car values year month 2008 2012 t-stat. p value (sig.) t-stat. p value (sig.) january -1,421 0,186 3,911*** 0,003 february -0,219 0,831 -5,918*** 0,000 march 8,760*** 0,000 5,987*** 0,000 april 8,537*** 0,000 -2,001* 0,073 may -2,477** 0,033 -1,342 0,209 june -6,182*** 0,000 -4,980*** 0,001 july 5,111*** 0,000 -3,708*** 0,004 august -6,003*** 0,000 -6,356*** 0,000 september -3,089** 0,011 -,047 0,964 october 0,377 0,714 -8,344*** 0,000 november 5,829*** 0,000 3,089** 0,011 december -3,638*** 0,005 -3,999*** 0,003 source: table complied by authors note: ***, ** and * indicate significant at 1%, 5% and 10% levels respectively. 5. conclusion in this study, we investigate whether the decisions of the monetary policy committee have an impact on stock returns of deposit banks listed in bist by using the event study methodology. we test this relation for the year 2008 as the global financial crisis period and for 2012. the average abnormal returns (ar) and cumulative abnormal returns (car) are calculated. although there are many studies using the event study methodology, there is no study that focuses on whether the decisions of the monetary policy committee have an impact on stock returns of turkish deposit banks listed in bist by using the event study method in literature. in this aspect, we believe our study will contribute to finance literature. the results of this study show that the decisions of the monetary policy committee for both 2008 as a global financial crisis year and 2012 as the other year (and a year in which new monetary policy rules are applied) have impact on stock prices of turkish deposit banks listed in borsa istanbul in march, april, june, july, august, november and december. for 2008, car value is positive and statistically significant for march, april, july and november, negative and statistically significant for may, june, august, september and december for the ten days event window surrounding the decision of the monetary policy committee. for 2012, car value is positive and statistically significant for january, march and november, negative and statistically significant for february, april, june, july, august, october and december. so, investors can get positive or negative abnormal returns among the days of event window in these months. consequently, we can conclude that turkish deposit banks listed in borsa istanbul give inconsistent results volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.98 | http://emaj.pitt.edu the role of monetary policy announcements on turkish banks' stock returns page |68| emerging markets journal with efficient-market hypothesis for 2008 and 2012. both in the crisis year and in a year with the new monetary policy environment, the market is not in a semi-strong efficient form. monetary policy decisions have an impact on the banks' return both in 2008 and in 2012 references aktaş, z., alp, h., gürkaynak, r., kesriyeli, m. & orak, m. (2009). türkiye’de para politikasının aktarımı: para politikasının mali piyasalara etkisi. i̇ktisat, i̇şletme ve finans, 24 (278), 924. andersson, m. (2010). using intraday data to gauge financial market responses to federal reserve and ecb monetary policy decisions. international journal of central banking, 6(2), 117-145. bernanke, b., & kuttner, k. (2005). what explains the stock market’s reaction to federal reserve policy? journal of finance, 60 (3), 1221-1257. bohl, m.t., siklos, p.l. & sondermann, d. (2008). european stock markets and the ecb's monetary policy surprises. international finance, 11 (2), 117-130. bomfim, a. (2003). pre-announcement effects, news effects and volatility: monetary policy and the stock market. journal of banking and finance, 27 (1), 133151. chulia, h., martens, m. & dijk, d. (2010). asymmetric effects of federal funds target rate changes on s&p100 stock returns, volatilities and correlations. journal of banking and finance, 34 (4), 834-839. demiralp, s. & yılmaz, k. (2010). para politikası beklentilerinin sermaye piyasaları üzerindeki etkisi. tüsi̇adkoç university economic research forum working paper series. no:1008 duran, m., özcan, g., özlü, p. & ünalmış, d. (2012). measuring the impact of monetary policy on asset prices in turkey. economics letters, 114, 29-31. ehrmann, m. & m. fratzscher (2004). taking stock: monetary policy transmission to equity markets. european central bank working paper series, no: 354. ehrmann, m., fratzscher, m. & rigobon, r. (2005). stocks, bonds, money markets and exchange rates: measuring international financial transmission. nber working paper series no:11166. fama, f. (1970). efficient capital markets: a review of theory and empirical work. the journal of finance, 25 (2), 383417. farka, m. (2009). the effect of monetary policy shocks on stock prices accounting for endogeneity and omitted variable biases. review of financial economics, 18, 47–55. hussain, s. m. (2011). simultaneous monetary policy announcements and international stock markets response: an intraday analysis. journal of banking & finance, 35 (3), 752-764. ibicioglu, m. & kapusuzoglu, a. (2012). an empirical analysis of impact of central bank policy interest rate on the decisions of share investors: evidence from turkey. procedia social and behavioral sciences, 62, 489 – 493 jensen,g.r., johnson,r.r., & mercer, j.m. (1996). business conditions, monetary policy, and expected security returns. journal of financial economics, 40, 213–37. karan, mehmet b. (2003). yatırım analizi ve portföy yönetimi. gazi kitabevi, ankara. kholodilin, k., montagnoli, a., napolitano, o. & siliverstovs, b., 2009. assessing the impact of the ecb’s monetary policy on the stock markets: a sectoral view. economics letters, 105, 211– 213. kucukkocaoglu, g., unalmis, d. & unalmis, i. (2013). how do banks’ stock returns respond to monetary policy committee announcements in turkey? evidence from traditional versus new volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.98 | http://emaj.pitt.edu nida abdioğlu, sinan aytekin emerging markets journal | p a g e |69 monetary policy episodes. central bank of the republic of turkey working paper, no: 13/30 patelis, a. d. (1997). stock return predictability and the role of monetary policy. journal of finance, 52 (5), 1951–72. rigobon, r., & sack, b. (2003). measuring the reaction of monetary policy to the stock market. quarterly journal of economics, 118, 639–70. rigobon, r. & b. sack (2004). the impact of monetary policy on asset prices. journal of monetary economics, 51(8), 1553–1575. scharler, j. (2008). bank lending and the stock market's response to monetary policy shocks. international review of economics and finance, 17 (3), 425435. soylu, n., korkmaz, t. & cevik, e.i. (2014). merkez bankası faiz duyurularının finansal piyasalara etkisi. business and economics research journal, 5(4), 89-118. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu a research on the responsibility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample semanur adalı istanbul university | semanuradali@gmail.com cevdet kızıl istanbul medeniyet university | cevdetkizil@yahoo.com abstract in this study, the ethical dimensions of accounting professionals related to accounting errors and frauds were examined. firstly, general and technical information about accounting were provided. then, some terminology on error, fraud and ethics in accounting were discussed. study also included recent statistics about accounting errors and fraud as well as presenting a literature review. as the methodology of research, a questionnaire was distributed to 36 accounting professionals residing in edirne city of turkey. the collected data were then entered to the spss package program for analysis. the study revealed very important results. accounting professionals think that, accounting chambers do not organize enough seminars/conferences on errors and fraud. they also believe that supervision and disciplinary boards of professional accounting chambers fulfill their responsibilities partially. attitude of professional accounting chambers in terms of errors, fraud and ethics is considered neither strict nor lenient. but, most accounting professionals are aware of colleagues who had disciplinary penalties. most important and effective tool to prevent errors and fraud is indicated as external audit, but internal audit and internal control are valued as well. according to accounting professionals, most errors occur due to incorrect data received from clients and as a result of recording. fraud is generally made in order to get credit from banks and for providing benefits to the organization by not showing the real situation of the firm. finally, accounting professionals state that being honest, trustworthy and impartial is the basis of accounting profession and accountants must adhere to ethical rules. keywords: accounting, accounting professionals, error, fraud, edirne new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu | mailto:semanuradali@gmail.com mailto:cevdetkizil@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu a research on the responsibility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample page |53| emerging markets journal a research on the responsibility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample semanur adalı cevdet kızıl 1introduction accounting explains the financial situation of an organization, produces information about the firm’s situation as well as transmitting this information to related individuals or organizations (sevilengül, 2016). accounting represents the process of recording, classifying, summarizing, reporting, and commenting financial transactions and events expressed in monetary terms. accounting records processes and events which can be expressed with money. the first financial transaction of an organization is related to capital investment. recording in accounting is realized with journal entries. then, accounting also has the classifying (categorizing) function which is realized with ledger. in terms of summarizing function, accounting takes advantage of trial balance. also, information which is produced in an accounting information system related to organization is presented to related groups with a global language. investors, creditors, government and regulatory bodies all take advantage from the mentioned language. accounting realizes the reporting function with main and assisting financial statements. finally, accounting has the commenting function, which is realized by providing necessary interpretations based on financial statements. the mentioned accounting function is very crucial and critical in today’s business world. (kızıl & kızıl, 2007). financial statements of an organization emerge by the help of accounting processes. the international accounting standards committee (iasc) has acknowledged that the purpose of financial statements is to offer information about the financial position, performance and capability of an enterprise that is valuable to a wide range of users in making economic decisions (elliott & elliott, 2011). accounting is classified to three sub categories which are financial accounting, managerial accounting and cost accounting. there are some differences among them. financial accounting is responsible for announcing the financial situation of an organization to other parties which means external parties, whereas cost accounting and managerial accounting is responsible for providing information to the executives in an organization for healthy decision making (sevilengül, 2016). while financial accounting is back-wise, managerial accounting is forward-wise to report the mathematical records and calculations. managerial accounting benefits from financial accounting to foresee the future of organization due to the fact that it includes the previous information about the organization. besides, managerial accounting classifies organizations as merchandise, manufacturing and service companies as well as making calculations about the future according to that classification (büyükmirza, 2016). in 2008, a new regulation was in effect classifying accountants only as certified public accountant (cpa) or sworn-in public accountant (spa) in turkey. before this regulation, in addition to these titles, there were also professional accountants based on the law that was published in 1989. cpas keep the books, prepare balance sheets, profit and loss statements in addition to other documents, in accordance with generally accepted accounting principles (gaaps) and relevant legislative provisions. cpas are also responsible for establishing or developing accounting systems, arranging issues related to business administration, accounting, finance, financial legislation and their applications or consulting on these issues. further, cpas are responsible for analyzing, conducting audits, giving written opinions on financial statements and declarations, besides organizing reports. there are important differences between cpas and spas. sworn-in public accountants can’t keep books related to accounting, they can’t operate an accounting office and they can’t be partners in accounting offices (turmob, 2017). sworn-in public accountants also can’t establish or develop accounting systems. accounting professionals are communicators to transform the information for global language in accounting. accountancy is the art of communicating financial information about a business unit to users such as shareholders and managers. the communication is generally in the form of financial statements. financial statements are prepared in monetary terms showing economic resources under the control of administration. selecting the information should be relevant to the user volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu semanur adalı, cevdet kızıl emerging markets journal | p a g e |54 and data contained on financial statements should also be reliable. shareholders require periodic information about the firm and they need to be sure that managers are working properly for the resources under their control. this information helps shareholders to evaluate the performance of managers (elliott & elliott, 2011). accounting professionals are responsible towards their colleagues, customers and the public, since they are obliged to comply with ethical rules during their work. as in other professions, there may be some uncertainties in practice in the accounting profession, sometimes related to ethical responsibilities. in order to overcome these uncertainties, efforts are being made to establish rules of professional ethics in turkey and in the international area (bayraktar, 2007). regulations on accounting ethics were made by türmob, the ministry of finance and the capital markets board (cmb) on the national arena of accounting professional ethics in turkey. it is aimed to direct the behaviors of members of these professions parallel to these regulations. in the international platform, the principles and rules developed by international federation of accountants (ifac) and american institute of certified public accountants (aicpa) have made important contributions to accounting ethics (karaman, 2015) . accounting errors refer to unsuitable behaviors against generally accepted accounting principles (gaaps). errors do not include any intention, but there exists unawareness and neglect. in other words amnesia, carelessness, unawareness, neglect and inexperience cause errors in accounting. however, sometimes it is a hard job to determine if it is an error or a fraud. if there is no proof for intention, then it is called an error. in case there is an error, that should definitely be corrected (bayraklı, erkan, & elitaş, 2012). potential current period errors which are discovered in that period must be corrected before the financial statements are authorized and published. still, material errors sometimes cannot be discovered until a subsequent period, and these prior period errors are corrected in the relative information presented in the financial statements of the period succeeding (marcos & tayse, 2013). there is also a difference between error and fraud in the formation of the spiritual element of the crime. according the tax procedure law, errors are not subject to penalties. generally, errors are made on accounting records while frauds are made on documents intentionally (erdoğan, elitaş, erkan, & aydemir, 2014). fraud is to act in contradiction to national or international legislation. as it is stated formerly, the definition of fraud includes intention (erdoğan, elitaş, erkan, & aydemir, 2014). business frauds have both financial and non-financial evil results. the results of fraudulent financial reporting have become more visible, especially in the last 10-15 years. moreover, accounting deeds lead to the inefficiency of capital markets. as a result, disadvantages in the distribution of economic resources occur (anuk, 2015). at this point, the fraud triangle which originated from donald cressey's hypothesis should also be mentioned. trusted individuals sometimes become trust violators when they have a financial problem, which is nonshareable. mentioned individuals are in some situations responsive to this problem by hurting the financial trust. there are three factors that must be present simultaneously in order for an ordinary person to commit fraud (acfe, 2017) . figure 1. the fraud triangle resource: brumellgroup, 2015 pressure: managers often want to show good financial results. this is because wages, premiums and revenues depend on financial results and performance. employees may need a lot of money for different reasons, so they do fraud. such pressures emerge from personal and monetary interests. opportunity: the most important leg of the trick triangle is the opportunity to cheat on the employees' businesses. each entity has assets that have various characteristics. these assets are in constant circulation as a matter of necessity. for this reason, it is possible that assets are in some way under the control of, for example, business associates, sellers or customers. for this reason, there is always an opportunity for fraud. rationalization: when there is an excuse for fraud behavior, it will serve as a bridge between oppression and opportunity. those who commit fraud say themselves: “everyone does, i do not hurt anyone, i try to justify myself by hiding behind the agenda i make for the company” (yardımcıoğlu, koca, günay, & kocamaz, 2014). some features of individuals who committed fraud were investigated by association of certified fraud examiners (acfe) with studies run in 2012, 2014 and volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu a research on the responsibility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample page |55| emerging markets journal 2016. the results of these studies are indicated with figures and relative comments below. figure 2. gender distribution perpetrator resource: acfe, 2016 according to the report which was published by acfe in 2016, males commit fraud more than females. as it is easy to recognize, males committed fraud more than females in all periods, which were 2012, 2014 and 2016. we can expect the possibility of fraud to increase, because males are generally more likely to take higher positions compared to females and they are still more effective in business decisions. figure 3. age of perpetrator resource: acfe, report to the nations, 2014 according to the report which is published by the association of certified fraud examiners (acfe), it is seen that employees aged 41-45 are more likely to commit fraud compared to other age groups. for this reason, we can commend that the 41-45 age group is more ambitious and they seem to have more reasons for making money as well as guaranteeing their future. figure 4. position of perpetrator resource: acfe, report to the nations, 2014 the frequency of fraud performed in business also varies according to positions. as it can be seen from the figure above, fraud is mostly committed by employees. they are followed by managers and executives. the most common reason for this is the fact that, employees are authorized to access funds and assets. these personnel, who are trusted because of their long working periods and positions in the firm, are sometimes kept away from the control mechanism and commit fraud by abusing this confidence (anuk, 2015) . furthermore, it can be commented that employees are paid lower compared to managers and executives, so they sometimes don’t have much to lose. on the other hand, a manager or executive generally has many things to lose, which definitely keeps him away from committing fraud. figure 5. tenure of perpetrator resource: acfe, report to the nations, 2014 2012 2016 65% 66,80% 69% 35% 33,20% 31% gender distribution perpetrator male female <26 2630 3135 3640 4145 4650 2010 5,20% 9,60% 16,10 19,30 19,30 13,70 2012 5,80% 9,80% 16,10 18% 19,60 13,50 2014 3,90% 11,30 15,90 17,60 18,10 14,60 0,00% 5,00% 10,00% 15,00% 20,00% 25,00% age of perpetrator 0% 16,90% 41% 42,10% 3,20% 17,60% 37,50% 41,60% 3,20% 18,60% 36,20% 42% other executive manager employee position of perpetrator 2014 2012 2010 less than 1 year 1-5 years 6-10 years more than 10 years 2010 5,70% 45,70% 23,20% 25,40% 2012 5,90% 41,50% 27,20% 25,30% 2014 6,80% 40,70% 27,30% 25,20% 0,00% 5,00% 10,00% 15,00% 20,00% 25,00% 30,00% 35,00% 40,00% 45,00% 50,00% tenure of perpetrator volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu semanur adalı, cevdet kızıl emerging markets journal | p a g e |56 according the results of fraud report which was published by acfe in 2014, the highest rate of fraud is observed for 1-5 years of experience (tenure). the rate of fraud is lower for 6-10 years and more than 10 years’ experience (tenure). figure 6. frequency of schemes based on perpetrator's department resource: acfe, report to the nations, 2014 when the table above is examined, it can be observed that accounting department has the highest rate for frauds in 2014, which is then followed by the operations department. on the other hand, finance department is subject to lower rates of fraud. also, corruption is indicated as most risky in terms of fraud format. the second part of this study continues with literature review. third section includes data and methodology of research. fourth section is the conclusion, which discusses results and recommendations for future research. 2. literature review a research was run by köpri, civan and kara in 2016, which examined fraud risk on financial statements. their research investigated firms that were traded in borsa istanbul (bist) istanbul stock exchange. factors determining the fraud risk were revealed. categorical dependent variable was created by coding firms that carry the risk of ailing and firms which do not carry the risk of fraud. a data set was created with 10 independent variables selected from the literature. according to the results of the analysis, differences among groups were observed in which the variables did not show normal distribution. it has been found that, all the variables are different among groups that carry the cheating risk and which do not carry the cheating risk. a statistically significant relationship was found among turnover rate, financial leverage ratio, gross profit margin, firm size, trading period and fraud risk variables. on the other hand, there was a negative relationship between the big four (big 4) audit firms and risk of fraud (köpri, civan, & kara, 2016). another research was run by özcan in 2016. the study which is about firm characteristics and accounting frauds reveal variables such as assets, current ratio, working capital to total assets, return on assets, return on equity, profit margin, debt to equity, accounts receivable turnover, inventory turnover ratio and interest coverage ratio. the proposed multivariate model has a satisfactory performance in correctly identifying the firms that commit accounting fraud. an accurate and reliable model that identifies fraudulent financial statements would serve as a critical analytical tool for fraud investigators. early detection of accounting frauds helps government authorities in maintaining the stability of financial markets. the results of analysis indicate that accounting ratios can shed light on the probability of financial statements fraud. with more sophisticated empirical models and a greater number of accounting ratios, it is possible to create a more effective empirical model (özcan, 2016). kızıl, çelik, akman and şener made a study about creative accounting methods and manipulation of financial information in 2016. the research conducted interviews with certified public accountants (cpas) and internal auditors, which included questions about creative accounting and manipulation of financial data. according to the results of study, leading results of accounting manipulation were insufficient internal control system, inadequate external auditing team, personal interests of managers, weak management structure, personal expectations of accounting professionals, career and monetary concerns, low knowledge level of accountants and concern of firms to find necessary funds (kızıl, çelik, akman and şener, 2016). according to a study which was run by anuk in 2015 at istanbul, when the age of accounting professionals goes up, agreement level on ethics about accounting increases. also, this study’s participants agreed that, the most important factors to prevent errors and frauds were internal audit and independent audit. the leading reasons of errors were indicated as lack of personnel attention, recording mistakes and incorrect data. when the reason of frauds was examined, purpose of tax evasion had the highest percentage. moreover, frauds were made in order to benefit the business by not showing the real situation of company, as well as counterfeiting document editing and using (anuk, 2015). in 2015, a research was run by kızıl, akman, aras and erzin about the accounting ethics perception of volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu a research on the responsibility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample page |57| emerging markets journal accounting professionals residing in yalova. for the study, survey forms were distributed to 40 accountants living in yalova and 32 of them returned the questionnaire sheets. thus, the return rate of questionnaire as the research methodology was 80%. research data were then entered to the spss program and reports were received. the research questionnaire used 5-point likert scale. most of the questionnaire respondents were male, between 30-39 years old, had undergraduate degree, cpa title, had more than 15 years of experience and owned more than 50 clients. based on the results of research, it was found that accounting professionals in yalova were generally not insensitive to ethics and professional ethics issues. they were mainly trying to improve themselves concerning the ethical concepts. it was determined that, accounting professionals were following ethical principles at several points. however, ethical guidelines were disregarded on some specific subjects (kızıl, akman, aras and erzin, 2015). another research was made in the mediterranean region by keskin in 2014. the main reason of errors and frauds were explained. according to the study, constant changes in the legislation increase the risk of mistakes by members of profession. another reason of errors was shown to be numerical ones. then, it was emphasized that, some errors occur because law and regulation provisions are not always followed up to date. for frauds, almost 50% of respondents agree that, informal processes without documents are eye-catching reasons. also, accountant professionals who participated in the survey agreed that, there should not be big differences between the daily cash collections of enterprises and bank reports (keskin, 2014). a research was made by başkan in 2013 at i̇stanbul. this study concentrated on big companies and revealed that, most important tools used in determining errors and frauds were internal auditing, internal control and independent auditing. as type of frauds, the most commons were disguised debt and liabilities, counterfeit incomes and wrong evaluations of assets. also some techniques to detect fraud used by accounting professionals were stated in this study. the most common used techniques were inventory technique, customer observation technique and examination of documents method. there were also some results and findings for enhancing audit effectiveness. these were audit rotation, commitment to accounting standards, detailed analysis of client business and obtaining information from the client's previous auditor (baskan, 2013). according to a study run by okay in 2011 at diyarbakır, the main reasons of errors in accounting were shown as ignorance and no attention. most of the accounting professionals thought that, just auditing was not enough to detect errors and frauds in accounting. most accounting professionals said that, one of the leading reasons of fraud was to get more loans from credit institutions. in other words, firm were sometimes committing fraud to get credits from banks. also, motivations to pay less tax were shown as another reason (okay, 2011). a crucial technique was emphasized in another study by kirkos, spathis and manolopoulos in 2007 to detect fraud in accounting. the aim of this study was to investigate the usefulness and compare the performance of three data mining techniques in detecting fraudulent financial statements by using published financial data. the results which were obtained from the experiments pointed out similar findings with previous research results. they showed that published financial statement data contain fraudulent indicators. this information, coupled with data mining algorithms, can provide models capable of achieving considerable classification accuracies. the use of proposed methodological framework could be help to auditors, both internal and external, taxation and other state authorities, individual and institutional, investors, stock exchange, law firms and banking systems (kirkos, spathis, & manolopoulos, 2007). another study was run by kirik in 2007 at afyonkarahisar about accounting errors and frauds. according to data results, the main reasons of errors were carelessness, ignorance and heavy workload. a great majority of accounting professionals thought that, the source of errors was actually employers, not themselves. another reason of errors was tight tax reporting periods. this was always equivalent to high workload and risk. the changes in tax laws also caused differences in interpretation. moreover, most of accounting professionals thought that just audit was not enough to prevent errors and frauds. in this research, accounting professional reported that they had experienced balance sheet mask requests as high as 49% even though afyonkarahisar had mainly small and medium-sized enterprises. the main reasons of this situation were trying to get more loans from banks and paying low taxes (kirik, 2007). another research was published by bierstake, brody and pacini in 2006, which investigated the extent to which accountants, internal auditors, and certified fraud examiners use assorted fraud prevention and detection methods and software, as well as their perceptions for fraud detection. the results did put forward that firewalls, virus and password protection, and internal control review and development were quite frequently used to battle fraud. nonetheless, continuous auditing, discovery sampling, data mining, forensic accounting, volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu semanur adalı, cevdet kızıl emerging markets journal | p a g e |58 and digital analysis software were less often used, notwithstanding receiving the high ratings of usefulness. especially, organizational use of forensic accountants was the least often used of any anti-fraud method, but had the highest mean effectiveness rating. smaller firms came into view to be the most unwilling to supply in fraud prevention and revealing methodology. this could be because of concerns about cost, although a fraud incident can be more costly for small businesses than large ones. the results pointed out that even at larger firms; anti-fraud methods and software were underutilized (bierstaker, brody, & pacini, 2006). durtschi, hillison and pacini’s research in 2004 emphasized that; benford law was effective to detect accounting frauds. the goal of this study was to help auditors more appropriately for applying benford’s lawbased analysis to boost their ability to identify fraud. it was concluded that when used correctly, benford’s analysis is a useful tool to detect suspicious accounts. it was also stated that, due to its helpfulness, digital analysis tools based on benford’s law were now included in many popular software packages and were being touted in the popular press. it was also mentioned that, benford law was helpful to identify possible errors, potential fraud or other irregularities. benford analysis was a particularly useful analytical tool because it does not use aggregated data; rather it is conducted on specific accounts using all the data available. it can be very useful in identifying specific accounts for further analysis and investigation (durtschi, hillison, & pacini, 2004). the study which was conducted by knapp and knapp in 2001 provided empirical tests of experience and unambiguous fraud risk. this study also focused on auditors' ability to use analytical procedures to successfully assess the risk of falsified financial reporting. audit managers and seniors were asked to read either a fraud case or a no fraud case, perform an analytical procedures task, and provide fraud risk assessments. with respect to experience, audit managers were significantly more efficient in assessing the risk of financial statement fraud with analytical procedures than audit seniors. furthermore, risk assessments of audit seniors did not differ significantly when fraud was present or was not present. with respect to explicit fraud risk assessment instructions, the results indicated that auditors' fraud risk assessments were more effective when explicit fraud risk assessment instructions were present (knapp & knapp, 2001). one of the earliest studies in literature by bonner, palmrose and young dated 1998 stated the importance of fraud type to detect frauds. it documents that, fraud type matters in auditor’s legal action and provides proof on specific characteristics of fraud. documenting fraud type is a required first step to better comprehend the role of fraud in auditor’s legal action (bonner, palmrose, & young, 1998). 3. data and methodology this study took advantage of the questionnaire method in terms of implementation section. in this regard, surveys were distributed to 36 accounting professionals residing in the city of edirne, turkey. responsibility of accounting professionals to determine and prevent accounting errors and fraud was investigated. research results and findings are presented on tables below: table 1: age frequency percent valid percent cumulative percent v al id 23 1 2,8 2,8 2,8 28 1 2,8 2,8 5,6 30 2 5,6 5,6 11,1 31 1 2,8 2,8 13,9 32 1 2,8 2,8 16,7 33 1 2,8 2,8 19,4 34 1 2,8 2,8 22,2 35 2 5,6 5,6 27,8 36 2 5,6 5,6 33,3 38 1 2,8 2,8 36,1 40 1 2,8 2,8 38,9 41 2 5,6 5,6 44,4 44 1 2,8 2,8 47,2 45 1 2,8 2,8 50,0 46 2 5,6 5,6 55,6 50 1 2,8 2,8 58,3 51 2 5,6 5,6 63,9 52 2 5,6 5,6 69,4 57 1 2,8 2,8 72,2 58 2 5,6 5,6 77,8 59 1 2,8 2,8 80,6 60 2 5,6 5,6 86,1 61 1 2,8 2,8 88,9 62 1 2,8 2,8 91,7 63 1 2,8 2,8 94,4 67 1 2,8 2,8 97,2 68 1 2,8 2,8 100,0 to tal 36 100,0 100,0 as observed on table 1, 50% of accounting professionals completing the questionnaire were over 45 years old. therefore, we can say that the average age was not young and low for accounting professionals in edirne, who were subject to this study. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu a research on the responsibility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample page |59| emerging markets journal table 2: gender frequency percent valid percent cumulative percent v al id male 26 72,2 72,2 72,2 female 10 27,8 27,8 100,0 total 36 100,0 100,0 for the edirne sample, table 2 shows that 72,2% of accounting professionals were males. on the other hand, 27,8% of accounting professionals subject to this study were females. table 3: job title frequency percent valid percent cumulative percent v al id professional accountant 3 8,3 8,3 8,3 certified public accountant 33 91,7 91,7 100,0 total 36 100,0 100,0 as mentioned earlier in the literature review section, according to a new regulation published in 2008, accounting professionals are now classified as certified public accountant (cpa) or sworn-in public accountant (spa) in turkey. before this regulation, there were also professional accountants. therefore, edirne sample subject to this study only included 3 professional accountants. no sworn-in-public accountant (spa) residing in edirne participated in this study. table 4: experience of accounting professionals (number of years in occupation) frequency percent valid percent cumulative percent v al id 1 1 2,8 2,8 2,8 3 2 5,6 5,6 8,3 4 1 2,8 2,8 11,1 6 2 5,6 5,6 16,7 7 2 5,6 5,6 22,2 8 1 2,8 2,8 25,0 9 1 2,8 2,8 27,8 10 2 5,6 5,6 33,3 11 1 2,8 2,8 36,1 15 1 2,8 2,8 38,9 16 1 2,8 2,8 41,7 17 1 2,8 2,8 44,4 18 2 5,6 5,6 50,0 20 2 5,6 5,6 55,6 21 1 2,8 2,8 58,3 25 1 2,8 2,8 61,1 27 1 2,8 2,8 63,9 28 2 5,6 5,6 69,4 30 1 2,8 2,8 72,2 31 1 2,8 2,8 75,0 34 2 5,6 5,6 80,6 35 2 5,6 5,6 86,1 37 1 2,8 2,8 88,9 40 1 2,8 2,8 91,7 42 2 5,6 5,6 97,2 43 1 2,8 2,8 100,0 total 36 100,0 100,0 as observed on table 4, accounting professionals have a high experience in their fields. according to the acfe report published in 2014, accounting professionals who have over 10 years of experience do not reflect a very high rate for fraud tendency. high working experience also depends on high age range. table 5: education level (education status) of accounting professionals frequency percent valid percent cumulative percent v al id commercial high school 7 19,4 19,4 19,4 associate degree 2 5,6 5,6 25,0 bachelor degree 25 69,4 69,4 94,4 postgraduate degree 2 5,6 5,6 100,0 total 36 100,0 100,0 volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu semanur adalı, cevdet kızıl emerging markets journal | p a g e |60 when the education level (education status) of accounting professionals residing in edirne is analyzed, it is observed that 69,4% of accounting professionals have a bachelor degree. this is followed by accounting professionals who has the commercial high school diploma, which is equivalent to 19,4%. accounting professionals who have associate degree and postgraduate degree has the same percentage of 5,6%. table 6: number of employees in organizations (accounting firms) frequency percent valid percent cumulative percent v al id 1-3 30 83,3 83,3 83,3 4-6 4 11,1 11,1 94,4 7 and over 2 5,6 5,6 100,0 total 36 100,0 100,0 when the number of employees in organizations (accounting offices) are investigated, between 1-3 employee(s) option has the highest rate, which is equivalent to 83,3%. between 4-6 employees option is ranked second with 11,1%, and then 7 and over employees option ranks third with the lowest rate of 5,6%. table 7: number of clients frequency percent valid percent cumulative percent v al id 30 and below 10 27,8 27,8 27,8 31-60 14 38,9 38,9 66,7 61-90 6 16,7 16,7 83,3 91 and over 6 16,7 16,7 100,0 total 36 100,0 100,0 when number of clients of accounting professionals are examined, it is observed that 38,9% of accounting professionals have clients between 31 and 60. 27,8% have 30 clients and below. then, 16,7% of accounting professionals have 61-90 customers and 91 and over clients. table 8: employees with penalty records in organizations frequency percent valid percent cumulative percent v al id yes 5 13,9 13,9 13,9 no 31 86,1 86,1 100,0 total 36 100,0 100,0 according to table 8, 13,9% of accounting professionals have employees with penalty records in their organizations. however, 86,1% of accounting professionals do not have employees with penalty records. table 9: opinion of accounting professionals about the adequacy of seminars/conferences organized by accounting chambers on errors and fraud according to table 9, 30,6% of accounting professionals believe that accounting chambers organize adequate seminars/conferences on errors and fraud. on the opposite side, 69,4% of accounting professionals think that accounting chambers do not organize enough seminars/conferences on errors and fraud. table 10: opinions of accounting professionals whether supervision and disciplinary boards of professional accounting chambers fulfill their responsibilities frequency percent valid percent cumulative percent v al id yes 11 30,6 30,6 30,6 no 4 11,1 11,1 41,7 partially 21 58,3 58,3 100,0 total 36 100,0 100,0 when answers of participants are examined on the responsibilities of supervision and disciplinary boards of professional accounting chambers, 58,3% think that professional accounting chambers fulfill their responsibilities partially, 30,6% believe the chambers fulfill their responsibilities and 11,1% state that chambers don’t fulfill their responsibilities. frequency percent valid percent cumulative percent v al id yes 11 30,6 30,6 30,6 no 25 69,4 69,4 100,0 total 36 100,0 100,0 volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu a research on the responsibility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample page |61| emerging markets journal table 11: attitude of professional accounting chambers in terms of errors, fraud and ethics frequency percent valid percent cumulative percent v al id strict 3 8,3 8,3 8,3 neither strict nor lenient 19 52,8 52,8 61,1 lenient 12 33,3 33,3 94,4 strongly lenient 2 5,6 5,6 100,0 total 36 100,0 100,0 based on table 11, 52,8% of accounting professionals believe that attitude of professional accounting chambers in terms of errors, fraud and ethics is neither strict nor lenient. 33,3% think attitude of professional accounting chambers in terms of errors, fraud and ethics is lenient. these are followed by the opinions of strict (8,3%) and strongly lenient (5,6%). table 12: colleagues of accounting professionals who had disciplinary penalties frequency percent valid percent cumulative percent v al id yes 25 69,4 69,4 69,4 no 11 30,6 30,6 100,0 total 36 100,0 100,0 table 12 indicates that, 69,4% of accounting professionals were aware of their colleagues who had disciplinary penalties. however, 30,6% of accounting professionals reported the opposite. table 13: most important and effective tools to prevent errors and fraud frequency percent valid percent cumulative percent v al id internal audit 9 25,0 25,0 25,0 internal control 7 19,4 19,4 44,4 custom error and fraud examination 1 2,8 2,8 47,2 external audit 13 36,1 36,1 83,3 tax audit 4 11,1 11,1 94,4 whistleblowing 2 5,6 5,6 100,0 total 36 100,0 100,0 when accounting professionals were asked about the most important and effective tools to prevent errors and fraud, 36,1% answered this question as external audit. then, 25% suggested internal audit, 19,4% recommended internal control, 11%1 advised tax audit, 5,6% mentioned whistle blowing and 2,8% stated customer error and fraud examination. table 14: reliability statistics cronbach's alpha n of items error ,733 12 fraud ,908 13 ethics ,630 14 total ,844 39 table 14 shows the cronbach ‘s alpha values for reliability analysis of the scales. based on the reliability test, cronbach’s alpha for the error scale is 0,733. also, cronbach’s alpha for the fraud scale is 0,908 and it is 0,630 for the ethics scale. in total, the cronbach’s alpha is 0,844. the scales meet the reliability criteria except ethics, since a minimum cronbach’s alpha value of 0,7 is required (nunnally, 1978). table 15: frequency distribution for error concept volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu semanur adalı, cevdet kızıl emerging markets journal | p a g e |62 when the frequency distributions are examined, it is determined that the highest mean belongs to the "errors occurred due to incorrect data which was received from clients" expression with 4,14. "errors occurred during recording" followed with a mean of 4,11. the lowest mean belonged to the expression of “errors occurred due to the inadequacy of technology that professionals use” with 2,14. the expression of “errors occurred due to package program or system (software)” also had a low mean of 2,25. table 16: frequency distribution for fraud concept when the frequency distributions are examined, it is determined that the expression of "fraud is made in order to get credit from banks" had the highest mean of 3,56. this was followed by the expression of "fraud is made in order to provide benefits to the organization by not showing the real situation of the organization" with a mean of 3,39. in the case of expressions with lowest means, it is determined that the expression of "members of profession commit fraud to exploit the gaps in tax laws” had a mean score of 2,39. the expression of “fraud is made to hide the corruption of business people” also had a low mean of 2,61. table 17: frequency distribution for ethics concept when the frequency distribution table of expressions is examined, the highest average, namely, the highest participation level is observed as 4,86. this expression states that, "the condition of being honest, trustworthy and impartial is the basis of accounting profession". this is followed by the expression of "professional accountants must adhere to ethical rules" with a mean of 4,69. the lowest mean belongs to the expression of “anxiety about losing customer is the most important reason for ethical dilemma” with 2,19. another expression with a low mean is “it is not true that the fees paid by the members of the profession are determined by the union”, which scored 2,97. 4. conclusion a total of 36 accounting professionals participated in this research to reveal their thoughts and opinions. the majority of participants were male and the majority of participants were certified public accountants (cpas). the majority of participants had undergraduate (bachelor) degree. also, a high percentage of participants had 1-3 employee(s) in their organizations and a great deal of accounting professionals had clients between 31 and 60. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu a research on the responsibility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample page |63| emerging markets journal a very limited number of participants reported employees in their organizations with penalty records. however, many accounting professionals were aware of colleagues who had disciplinary penalties. the majority of participants stated that, number of seminars/conferences organized by accounting chambers on errors and fraud is not adequate. a high percentage of participants stated that, supervision and disciplinary boards of professional accounting chambers fulfill their responsibilities partially. a high ratio of participants stated that, most important and effective tool to prevent errors and fraud was external audit. according to research findings, errors mostly occurred due to incorrect data which was received from clients. study also showed that, a big deal of errors also occurs during the recording process. however, errors occurring due to the inadequacy of technology that professionals were using and errors occurring due to package programs or systems (software) were low. another important finding of the research indicates that, fraud is mostly made in order to get credit from banks. also, fraud is made in order to provide benefits to the organization by not showing the real situation of organization. on the other hand, based on study findings, members of profession are less likely to commit fraud to exploit the gaps in tax laws. moreover, research findings signal that, fraud is not generally made to hide the corruption of business people. finally, in line with research findings, a great majority of accounting professionals believe that the condition of being honest, trustworthy and impartial is the basis of accounting profession. also, parallel to the results of study, a high population agrees that professional accountants must adhere to ethical rules. but, from the perspective of accounting professionals, anxiety about losing customers is not the most important reason for ethical dilemma. accountants also disagree with the expression, which denies that fees paid by the members of the profession are determined by the union. references acfe. (2014). report to the nations. us: acfe. acfe. (2016). acfe. association of certified fraud examiner. us: acfe. retrieved mart 28, 2017, from acef web sites: https://www.acfe.com/rttn2016/docs/2016report-to-the-nations.pdf acfe. (2017). retrieved mart 28, 2017, from acef web sitesi: http://www.acfe.com/fraudtriangle.aspx anuk, s. a. (2015). muhasebe hata ve hileleri ile muhasebe mesleğinde etik. i̇stanbul: bahçeşehir üniversitesi sosyal bilimler enstitüsü, 54-103. baskan, t. d. (2013). muhasebe hata ve hilelerinin önlemesinde bağımsız denetimin rolü ve etkinliği: bir uygulama. kırıkkale: kırıkkale üniversitesi sosyal bilimler enstitüsü, 184186. bayraklı, h. h., erkan, m., & elitaş, c. (2012). muhasebe ve vergi denetiminde muhasebe hata ve hileleri. bursa: evin yayınevi, 19-20. bayraktar, a. (2007). türkiye'de muhasebe hileleri tarihi. edirne: trakya üniversitesi sosyal bilimler enstitüsü, 3. bierstaker, j. l., brody, r. g., & pacini, c. (2006). accountants' perceptions regarding fraud detection and prevention method. managerial auditing journal, 520-535. bonner, s. e., palmrose, z. v., & young, s. m. (1998, october). fraud type and auditor litigation: an analysis of sec accounting and auditing enforcement releases. american accounting association, pp. 503-532. brumellgroup. (2015, mart 25). retrieved mart 28, 2017, from brumellgroup web sitesi: http://brumellgroup.com/news/the-fraudtriangle-theory/ büyükmirza, k. (2016). maliyet ve yönetim muhasebesi. ankara: gazi kitabevi, 23. durtschi, c., hillison, w., & pacini, c. (2004). the effective use of benford's law to assist in detecting fraud in accounting data. journal of forencsic accounting, 17-34. elliott, b., & elliott, j. (2011). financial accounting and reporting. london: pearson education, 22. erdoğan, m., elitaş, c., erkan, m., & aydemir, o. (2014). muhasebe hilelerinin denetiminde benford yasası. ankara: gazi kitabevi, 44-46. karaman, e. s. (2015). muhasebe meslek etiği ve muhasebe meslek mensuplarının etik kurallara bakışı (balıkesir i̇li örneği). ankara: gazi üniversitesi sosyal bilimler enstitüsü, 47. keskin, s. (2014). muhasebe hata ve hileleri karşısında etik tutumlar: meslek mensupları üzerine bir araştırma. isparta: süleyman demirel üniversitesi sosyal bilimler enstitüsü, 131. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.129 | http://emaj.pitt.edu semanur adalı, cevdet kızıl emerging markets journal | p a g e |64 kirik, z. (2007). muhasebe hata ve hileleri ile muhasebe mesleğinde etik: afyankarahisar'da muhasebeciler üzerine bir araştırma. eskişehir: anadolu üniversitesi sosyal bilimler enstitüsü, 93-94. kirkos, e., spathis, c., & manolopoulos, y. (2007). data mining techniques for detections of fraudulent financial statements. expert systems with applications, 995-1003. kızıl, a., & kızıl, c. (2007). accounting: financial, cost, managerial. i̇stanbul: bahar yayınevi. kızıl, c., akman, v., aras, s., erzin, n.o. (2015). yalova i̇linde i̇kamet eden muhasebe meslek mensuplarının muhasebe etik algısı. beykent üniversitesi sosyal bilimler dergisi (busbd), cilt: 8, sayı: 1 (8/1), 6-31. kızıl, c., çelik, i̇. e., akman, v. and şener, s. (2016). yaratıcı muhasebe yöntemleri ve finansal bilgilerin manipülasyonu: profesyonel muhasebe meslek mensupları üzerinde örnek bir uygulama. beykent üniversitesi sosyal bilimler dergisi (busbd), cilt: 9, sayı: 1 (9/1), 1-18. knapp, c. a., & knapp, m. c. (2001). the e€ects of experience and explicit fraud risk assessment in detecting fraud with analytical procedures. accounting, organizations and society, 25-37. köpri, m., civan, m., & kara, e. (2016, mart 2). hileli finansal raporlama riskini ortaya çıkaran faktörler: bist’da bir uygulama. journal of accounting, finance and auditing studies, pp. 271-291. marcos, l., & tayse, g. (2013, september-october). the prevention of error and fraud in accounting. international journal of advances in management and economics, pp. 125-131. nunnally, j. c. (1978). psychometric theory (2nd ed.). new york: mcgraw-hill. okay, s. (2011). muhasebe hata ve hilelerinin meslek etiği açısından i̇rdelenmesi. karaman: karamanoğlu mehmetbey üniversitesi sosyal bilimler enstitüsü, 110-111. özcan, a. (2016). firm characteristics and accounting fraud: a multivariate approach. journal of accounting, finance and auditing studies, 128-144. sevilengül, o. (2016). genel muhasebe. ankara: gazi kitapevi, 24. turmob. (2017). retrieved march 08, 2017, from turmob web site: http://www.turmob.org.tr/turmobweb/mbs/t urmobmevzuatdetay.aspx?param=czocfylkk sm= yardımcıoğlu, m., koca, n., günay, y., & kocamaz, h. (2014). yolsuzluk, muhasebe hileleri ve örnekleri. kahramanmaraş sütçü i̇mam üniversitesi i̇i̇bf dergisi, 4(2), 171-187 volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.81 | http://emaj.pitt.edu an analysis of the relationship between ifac code of ethics and cpi ayşe i̇rem keskin ph.d., kadir has university, turkey | e-mail: ayseirem@hotmail.com elçin yılmaz işık ph.d., kadir has univerity, turkey | e-mail: elcinyilmaz@gmail.com volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.81 | http://emaj.pitt.edu | abstract code of ethics has become a significant concept as regards to the business world. that is why occupational organizations have developed their own codes of ethics over time. in this study, primarily the compatibility classification of the accounting code of ethics belonging to the ifac (the international federation of accountants) is carried out on the basis of the action plans assessing the levels of usage by the 175 ifac national accounting organizations. it is determined as a result of the classification that 60,6% of the member organizations are applying the ifac code in general, the rest 39,4% on the other hand, is not applying the code at all. with this classification, the hypothesis propounding that “the national accounting organizations in highly corrupt countries would be less likely to adopt the ifac ethic code than those in very clean countries,” is tested using the “corruption perception index-cpi” data. it is determined that the findings support this relevant hypothesis. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.81 | http://emaj.pitt.edu ayşe i̇rem keskin, elçin yılmaz işık emerging markets journal | p a g e |41 an analysis of the relationship between ifac code of ethics and cpi ayşe i̇rem keskin elçin yılmaz işık introduction the issue of ethics has increasingly become an important field of study as regards to the business behavior in enterprises. a number of companies, various educational institutions and occupational organizations show a high level of interest to the subject. when ethics is considered to be the code of conducts internalized by the society, it becomes evident that it is necessary for all the organizations which interact with their close circles to act sensitively in terms of ethical standards. taylor (1975) defines ethics as an “inquiry into the nature and grounds of morality”; barry (1979), on the other hand, defines the concept as “the study of what constitutes good and bad human conduct, including related actions and value.” the fundamental function of the code of ethics is to influence people in their decision-making processes to show a tendency to take decisions which are acceptable by the organization (ferrell and fraedrich, 1991). the code of ethics incorporates the responsibilities that the company management has towards its shareholders, in other words, briefly the environment they act in; and provides standards indicating what is within the line of “right and acceptable course of conduct” definition. when the international accounting code of ethics is reviewed, the international federation of accountants (ifac) contributes to the development, adoption and implementation of high quality ethical standards for the accountants through the international ethics standards board for accountants’ (iesba) support (iesba, 2). iesba’s long-term objective is to converge the rule of code of ethics, which is valid for the accountants, with the standards published by the regulators and standard setters. convergence to only one set of standards may well increase the quality and consistency of the services provided by the accountants all over the world, and improve the efficiency of the global capital markets (iesba, 1). the code of ethics for the iesba accountants is composed of three major parts: (iesba, 5) • general application of the code • professional accountants in public practice • professional accountants in business literature review it can be deduced from the literature review that the codes of ethics are prevalently used in businesses and subjected to research as regards to many aspects (farrell and farrell, 1998). while hite et al. (1988), schlegelmich and houston (1989), pelfrey and peacock (1991) refer to the content and scope of the code of ethics in their studies, certain other scholars scrutinize the level of usage of code of ethics by companies on country basis (farrel and cobbin, 2000). pelfrey and peacock (1991) have found out in their studies that 50% of the companies within fortune 500 in the u.s.a. have their own codes of ethics. this rate is expressed to be 41% for europe by langlois and schlegelmilch (1990), and 50% for australia by farrel and cobbin (1996) (farrel farrel, 1998). langlois and schlegelmich (1990) have compared 600 european companies with their american counterparts in their studies, and explicated that the code of ethics in europe started to be used later than their counterparts in the u.s.a., and there are certain indications suggesting that the european codes were inspired from the american codes of ethics. aydınlık and dönmez (2006) have drawn the conclusion from their studies they conducted in turkey that the codes of ethics are being used in low rates within the country. when relevant studies are examined, various other studies, through which the codes of ethics are scrutinized with respect to socio-cultural perspective, are acquired. cohen, laurie and sharp (1992) have underlined the impact of the socio-economic and cultural factors on the acceptance and national application of code of ethics. similarly, clements, neill, stovall (2008) examined the impact of the socio-cultural factors on the decision to apply the codes of ethics relevant to the international federation of accountants-ifac in the accounting organizations of countries on the basis of hofstede’s study, which includes cultural dimensions, as well. in another study, on the other hand, even though the countries have similar moral values, the challenges they come across in the developing international environment while taking decisions in the inter-cultural management because of the practical differences are underlined and a model is proposed for the inter-cultural ethical dichotomies (wines, napier, 1992). another area of analysis is relevant to the language of the codes of ethics. attention is drawn to the fact that the grammatical structures used in the codes create a powerful sense of obligation and constitute an impediment to take decisions with free will. it is further elaborated in this study that the written codes shall not include complicated messages other than those aimed to be communicated (farrell, cobbin 2000). another point of view for the codes of ethics, on the other hand, is framed on the comparative analysis of the codes of ethics belonging to national occupational volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.81 | http://emaj.pitt.edu an analysis of the relationship between ifac code of ethics and cpi page |42| emerging markets journal organizations. in their study, cobbin and farrell (2000) have determined the fundamental features of the codes of ethics adopted by 57 national occupational organizations of accountants, elaborated on the naming of the codes, and examining their contents. additionally, different integrated code types (allodial and decretal) utilized by the national occupational organizations are determined in this study, and the level of these codes’ congruence with the code of ethics published by ifac is detected. cobbin and farrell (2000)’s study demonstrate that “most of the respondents' codes were decretal, rule-based in content (96%), with varying amounts of allodial material incorporated” and “the position taken by ifac in selecting a decretal code (with inspirational content) is congruent with the codes analyzed in this research.” another research conducted on this issue by cobbin and farrell (2000) includes the analysis of ethical environment of the international accounting occupation. the objective of the research, which is based on the mainstreaming research model, is to determine the importance the national occupational organizations attribute to ethics, as a group. yet another research is on the comparison of the english translations of the code of ethics proposed by the occupational organizations of 28 countries and provision of a general perspective as regards to the code of ethics (shachaf, 2005). this relevant study reveals the principles of code of ethics regulated as 20 different categories. the most frequently used ones of these codes are professional competency, honesty, confidentiality, and free and equal access to information. another study about the subject is on the analysis of the international accounting code of ethics. this study is carried out through 158 national accounting organizations. 80 of these organizations have been applying the ifac codes as they are (with a slight modification under certain circumstances), and 78 of them have chosen not to use the ifac code as a model. after making the necessary distinction, the researchers tested the hypothesis that countries with lower income levels are less willing to apply the ifac code. the findings did not support the hypothesis. the reason for that is propounded to be the fact that applying the ifac code was way less costlier for a country with low income level than creating a new code of ethics (clements, neill, stovall, 2009). as to the concept of corruption macrea (1982, 678) defined it as an agreement that leads to exchanges between two people (supplier and demandant). according to macrea, this agreement has an impact on the distribution of resources immediately or in near future, and includes abuse of common responsibilities or public resources for an individual desire. stapenhurst (2000) and worldbank (1997) defined corruption in the simplest term as personal gain or abuse of public force to gain favor for a group to which the perpetrator is affiliated. tanzi (1998) mentioned that it should not be deduced from this definition that there is not any corruption in the private sector activities. he further asserted that there is evident corruption in processes such as recruitment or purchasing especially in large-scale private enterprises. worldbank (1997) stated that corruption always results from the policies, bureaucratic traditions, political development and social histories of the countries. although husted (1999) uttered in many of his hypotheses that the reasons of corruption are economic and political factors; he stated that economic, political, cultural and psychological factors should be concomitantly examined by theoreticians while seeking the reasons for corruption. corruption perception index (cpi) is an index published regularly -every yearby a research company named as transparency international as of 1995. the corruption perceptions in countries are determined in the index as a result of the expert opinions and public opinion polls. cpi is a composite indicator used to measure the public sector corruption perception in different countries all over the world (ti, technical methodology note, 1). it is a composite index based on individual researches from various sources (saha, gounder and jen-je su, 2012). the power of the cpi comes from the usage of more than one year averages increasing the reliability of the index, and provision of the data from various sources (selingson, 2006). the index methodology is composed of four fundamental phases being the selection of the source data, re-scaling of the source data, combining the re-scaled source data, and reporting the measurement of uncertainty (ti, technical methodology note, 1). cpi 2014 is calculated through using 12 different source data from 11 different organizations. the standardization of the source data are carried out through a scaling from 0 to 100. 0 indicates highest level of corruption, and 100 indicates the lowest level of corruption (ti, short methodology note, 1). research and empirical results the classification of countries applying the ifac code, which is one of the variables in clements, neill, stovall’s (2009) studies, is updated in the light of the studies conducted by the ifac in 2013-2014 and expanded to include the numbers of countries, and occupational organizations in the first part of the study. thereby, the development of the ifac code of ethics used by the different countries’ accounting organizations within years is determined. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.81 | http://emaj.pitt.edu ayşe i̇rem keskin, elçin yılmaz işık emerging markets journal | p a g e |43 following that, the corruption perception index-cpi is incorporated into the study. in this analysis, the national occupational organizations applying the ifac code as it is or with slight modifications and other organizations which do not apply the ifac code are compared on the basis of the corruption perception index. in this sense, an analysis is carried out in order to determine whether there is any difference in the application of the ifac code by the countries taking place in the upper and lower levels of the corruption perception index. the data as regards to the application of the ifac code of ethics by the occupational organizations are acquired from the ifac’s website. statement of member obligations-smo action plan covering the years of 2013-2014 is benefited to obtain the relevant data. this action plan can be deemed to be a continuation of the previous surveys conducted in the field and is composed of 7 chapters. the 4th chapter, iesba code of ethics, is used in this study. iesba code of ethics data are gathered from 179 member and associate member organizations. some of these organizations apply the ifac code, while others do not. action plans are studies prepared and declared by the national accounting organizations themselves. although it is determined whether the ifac code is used by the organizations through benefiting from the action plans; the organizations are grouped via taking the classifications, including the level of usage of the ifac code by the organizations as a reference. these classifications are presented in the aforesaid surveys in the ifac website. transparency international’s corruption perception index (cpi) of 2014 data are also categorized. 4 of the countries within the 179 member and associate member organizations are not evaluated in the cpi. these countries are brunei darussalam, fiji, palestinian territory occupied and cayman islands. therefore, occupational organizations belonging to these four countries are excluded from the list in the analysis of the relationship between the cpi and code of ethics. table 1: accounting organizations that completely apply the ifac code of ethics country organization 1 albania albanian institute of certified accountants 2 armenia association of accountants and auditors of armenia 3 azerbaijan the chamber of auditors of azerbaijan republic 4 bahamas the bahamas institute of chartered accountants 5 bangladesh the institute of chartered accountants of bangladesh 6 bangladesh the institute of cost and management accountants of 7 barbados the institute of chartered accountants of barbados 8 bolivia colegio de auditores de bolivia 9 bosnia and herzegovina association of accountants and auditors of republic of srpska 10 bosnia and herzegovina union of accountants, auditors and financial workers of 11 botswana botswana institute of chartered accountants 12 bulgaria institute of certified public accountants of bulgaria 13 cambodia kampuchea institute of certified public accountants and 14 cameroon the institute of chartered accountants of cameroon 15 colombia instituto nacional de contadores públicos de colombia 16 cote d'ivoire ordre des experts comptables et comptables agréés de côte 17 croatia croatian audit chamber 18 cyprus the institute of certified public accountants of cyprus 19 czech republic chamber of auditors of the czech republic 20 czech republic union of accountants of the czech republic 21 denmark fsr danske revisorer 22 el salvador instituto salvadoreño de contadores públicos (iscp) 23 finland htm-tilintarkastajat ry grmrevisorer rf 24 finland kht-yhdistys-föreningen cgr ry 25 georgia georgian federation of professional accountants and auditors 26 ghana the institute of chartered accountants (ghana) 27 greece institute of certified public accountants of greece (soel) 28 iceland félag löggiltra endurskodenda 29 ireland the institute of certified public accountants in ireland 30 jamaica the institute of chartered accountants of jamaica 31 japan the japanese institute of certified public accountants 32 jordan jordanian association of certified public accountants 33 kazakhstan chamber of professional accountants of the republic of 34 kazakhstan chamber of auditors of the republic of kazakhstan 35 korea, republic of korean institute of certified public accountants 36 kosovo society of certified accountants and auditors of kosovo 37 kyrgyzstan union of accountants and auditors 38 latvia latvian association of certified auditors 39 lebanon lebanese association of certified public accountants 40 macedonia, the former yugoslav institute of certified auditors of the republic of macedonia 41 malawi the society of accountants in malawi 42 mauritius mauritius institute of professional accountants 43 moldova, republic of association of professional accountants & auditors of the 44 montenegro (republic of) institute of certified accountants of montenegro (icam) 45 montenegro (republic of) institute of accountants and auditors of montenegro 46 nigeria association of national accountants of nigeria 47 papua new guinea certified practising accountants papua new guinea 48 paraguay colegio de contadores de paraguay 49 peru junta de decanos de colegios de contadores publicos del peru 50 poland national chamber of statutory auditors 51 romania the chamber of financial auditors of romania 52 serbia (republic of) serbian association of accountants and auditors 53 sierra leone the institute of chartered accountants of sierra leone, 54 slovakia slovenska komora auditorov 55 slovenia the slovenian institute of auditors 56 south africa the south african institute of chartered accountants 57 swaziland swaziland institute of accountants 58 sweden far 59 switzerland treuhand-kammer -swiss institute of certified accountants 60 tanzania, united republic of national board of accountants and auditors (nbaa) 61 thailand federation of accounting professions 62 togo ordre national des experts-comptables et comptables agréés 63 trinidad and tobago the institute of chartered accountants of trinidad & tobago 64 turkey expert accountants' association of turkey 65 turkey union of chambers of certified public accountants of turkey 66 ukraine ukrainian association of certified accountants and auditors 67 ukraine ukrainian federation of professional accountants and auditors 68 united kingdom institute of financial accountants 69 united kingdom the chartered institute of management accountants (cima) 70 united kingdom the chartered institute of public finance and accountancy 71 uruguay colegio de contadores, economistas y administradores del 72 uzbekistan chamber of auditors of uzbekistan 73 uzbekistan national association of accountants and auditors of uzbekistan 74 zambia zambia institute of chartered accountants 75 zimbabwe the institute of chartered accountants of zimbabwe source: ifac: 2014, “compliance responses and action plans”, https://www.ifac.org/aboutifac/membership/compliance-program/complianceresponses. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.81 | http://emaj.pitt.edu an analysis of the relationship between ifac code of ethics and cpi page |44| emerging markets journal table 2: accounting organizations that apply the ifac code of ethics with slight modifications country organization 1 albania institute of authorized chartered auditors of albania 2 australia cpa australia 3 australia institute of public accountants 4 australia the institute of chartered accountants in australia 5 costa rica colegio de contadores públicos de costa rica 6 guyana the institute of chartered accountants of guyana 7 hong kong (special hong kong institute of certified public accountants 8 kuwait kuwait association of accountants and auditors 9 lesotho lesotho institute of accountants # luxembourg institut des réviseurs d'entreprises # luxembourg ordre des experts-comptables du luxembourg # madagascar ordre des experts comptables et financiers de madagascar # malaysia malaysian institute of accountants # malaysia the malaysian institute of certified public accountants # mongolia mongolian institute of certified public accountants # nepal the institute of chartered accountants of nepal # netherlands nederlandse beroepsorganisatie van accountants # nigeria the institute of chartered accountants of nigeria # pakistan institute of cost and management accountants of pakistan # pakistan pakistan institute of public finance accountants # pakistan the institute of chartered accountants of pakistan # philippines philippine institute of certified public accountants # romania corpul expertilor contabili si contabililor autorizati din romania # russian federation russian collegium of auditors # senegal ordre national des experts comptables et comptables agréés du sénégal # singapore institute of singapore chartered accountants # sri lanka institute of certified management accountants of sri lanka # sri lanka the institute of chartered accountants of sri lanka # tunisia ordre des experts comptables de tunisie # uganda institute of certified public accountants of uganda # vietnam vietnam accounting association source: ifac: 2014, “compliance responses and action plans”, https://www.ifac.org/aboutifac/membership/compliance-program/complianceresponses. as can be seen from table 1, 75 of the 175 ifac member occupational organizations apply the ifac rules without modifications. 31 national accounting organizations are presented in table 2. these national accounting organizations apply the ifac ethic codes with slight modifications. although the 54 organizations, which are ifac members, presented in table 3 have their own ethic codes, they plan to converge their codes to the ifac code or change their ethic codes completely with the ifac code in the long term. 7 accounting organizations are presented in table 4. these organizations use their own ethical requirements and have different approach to the usage of ifac code of ethics. none of the 8 accounting organizations presented in table 5 applies the ifac code or plans to converge its code to the ifac code or use the code completely on future dates. the rate of the occupational organizations completely applying the ifac rules in totally 175 occupational organizations is 42.9%. the rate of the ones applying the ifac ethic codes with slight modifications is 17.7%. the rate of the organizations that have used their own ethical requirements with a process to eliminate differences between their ethical requirements and the ifac code of ethics is 30.8%. the rate of the organizations that use their own ethical requirements and have different approach to the usage of the ifac code of ethics, on the other hand, is 4%. the rate of the organizations that do not apply the ifac code or plan to converge their codes to the ifac code or use the code completely on future dates is 4.6%. consequently, the total number of occupational organizations generally applying the ifac code is 106. this constitutes 60.6% of all the occupational organizations. the total number of occupational organizations that generally do not apply the ifac code is 69 and constitutes 39.4% of all the occupational organizations. table 3: accounting organizations that plan to converge to or completely apply the ifac code of ethics country organization 1 argentina federación argentina de consejos profesionales de ciencias económicas 2 austria institut österreichischer wirtschaftsprüfer 3 austria kammer der wirtschaftstreuhänder 4 bahrain bahrain accountants association 5 belgium institut des experts-comptables et des conseils fiscaux – instituut van de accountants en de belastingconsulenten 6 belgium instituut van de bedrijfsrevisoren institut des réviseurs d'entreprises 7 benin ordre des experts-comptables et comptables agréés du bénin (oecca) 8 brazil conselho federal de contabilidade 9 brazil instituto dos auditores independentes do brasil 10 canada certified general accountants association of canada 11 canada certified management accountants of canada (now operating as cpa canada effective april 1, 2013) 12 canada the canadian institute of chartered accountants (now operating as cpa canada effective april 1, 2013) 13 chile colegio de contadores de chile 14 china the chinese institute of certified public accountants 15 chinese taiwan federation of cpa associations of chinese taiwan 16 croatia croatian association of accountants and financial experts 17 dominican republic instituto de contadores públicos autorizados de la república dominicana 18 egypt the egyptian society of accountants & auditors 19 estonia estonian association of auditors 20 germany wirtschaftsprüferkammer 21 guatemala instituto guatemalteco de contadores públicos y auditores 22 haiti ordre des comptables professionels agrees d'haiti 23 hungary chamber of hungarian auditors 24 india the institute of cost accountants of india 25 india the institute of chartered accountants of india 26 iran (islamic republic of) iranian association of certified public accountants 27 iran (islamic republic of) the iranian institute of certified accountants 28 iraq iraqi union of accountants and auditors 29 ireland accounting technicians ireland 30 ireland chartered accountants ireland 31 israel institute of certified public accountants in israel 32 italy consiglio nazionale dei dottori commercialisti e degli esperti contabili 33 latvia association of accountants of the republic of latvia 34 malta the malta institute of accountants 35 mexico instituto mexicano de contadores públicos, a.c. 36 morocco ordre des experts comptables du royaume du maroc 37 namibia institute of chartered accountants of namibia 38 new zealand new zealand institute of chartered accountants 39 nicaragua colegio de contadores públicos de nicaragua 40 norway den norske revisorforening (dnr) 41 panama colegio de contadores públicos autorizados de panamá 42 poland accountants association in poland 43 portugal ordem dos revisores oficiais de contas (oroc) 44 russian federation the institute of professional auditors 45 russian federation moscow audit chamber 46 russian federation audit chamber of russia 47 russian federation the institute of professional accountants of russia 48 rwanda institute of certified public accountants of rwanda 49 saudi arabia saudi organization for certified public accountants 50 south africa the south african institute of professional accountants 51 sri lanka association of accounting technicians of sri lanka 52 united kingdom association of accounting technicians (aat) 53 united kingdom the institute of chartered accountants in england and wales 54 united states american institute of certified public accountants source: ifac: 2014, “compliance responses and action plans”, https://www.ifac.org/aboutifac/membership/compliance-program/complianceresponses. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.81 | http://emaj.pitt.edu ayşe i̇rem keskin, elçin yılmaz işık emerging markets journal | p a g e |45 table 4: accounting organizations that have a different approach to the usage of ifac code of ethics and use their own code of ethics country organization france compagnie nationale des commissaires aux comptes france conseil supérieur de l'ordre des expertscomptables honduras colegio de peritos mercantiles y contadores públicos indonesia ikatan akuntan indonesia lithuania lithuanian chamber of auditors united kingdom association of chartered certified accountants (acca) united kingdom the institute of chartered accountants of scotland source: ifac: 2014, “compliance responses and action plans”, https://www.ifac.org/aboutifac/membership/compliance-program/complianceresponses. table 5: accounting organizations that do not apply and consider applying the ifac code of ethics country organization 1 germany institut der wirtschaftsprüfer 2 guatemala colegio de contadores publicos y auditores de guatemala 3 jordan the international arab society of certified accountants 4 kenya institute of certified public accountants of kenya 5 liberia the liberian institute of certified public accountants 6 portugal ordem dos técnicos oficiais de contas 7 spain instituto de censores jurados de cuentas de españa 8 united states institute of management accountants source: ifac: 2014, “compliance responses and action plans”, https://www.ifac.org/aboutifac/membership/compliance-program/complianceresponses. all national accounting organizations are classified in 5 categories according to the corruption perception index prepared by the non-governmental organizations (ngo) named as the “transparency international the global coalition against corruption.” these 5 categories are acquired through dividing a 100-points scale into 20points sections. the first category between 0-20 point intervals is identified as “highly corrupt.” the second category of 20-40 points is identified as “corrupt.” the third category of 40-60 points is identified as “neither clean nor corrupt.” the fourth category of 60-80 points is identified as “clean.” and finally, the fifth category of 80-100 is identified as “very clean.” table 6 shows the results of the chi square 2 which examines whether the decision to apply the ifac ethic code is influenced by the national corruption. the hypothesis of the research is “the national accounting organizations in highly corrupt countries would be less likely to adopt the ifac ethic code than those in very clean countries”. table 6: 2 test of the relationship between the ifac code application and cpi ifac total 1 2 cpi 1 2 2 4 2 51 24 75 3 28 16 44 4 13 22 35 5 12 5 17 total 106 69 175 2 = 10,852 df = 4 p = 0,028 it is observed that there is a statistically significant (p=,002) relationship between the usage of the ifac code by the national accounting organizations and corruption. accordingly, the national accounting organizations in highly corrupt countries would be less likely to adopt the ifac ethic code than those in very clean countries. conclusion and recommendations the number of national accounting organizations that apply the ifac ethic code has shown an increase compared to the past years. the number of these organizations is detected to be 106; therefore it is observed that 60.6% of the organizations apply the ifac code completely or with slight modifications. 69 of the national accounting organizations, on the other hand, do not apply the ifac ethic code. the relevant organizations constitute a rate of 39.4% in the grand total. increasing usage of the ifac ethic code by different accounting organizations in the future is within the bounds of possibility. the hypothesis, which is articulated as “the national accounting organizations in highly corrupt countries would be less likely to adopt the ifac ethic code than those in very clean countries,” is supported by the research results. rules, laws and similar regulatory structures in countries, where the corruption level is observed to be lower, gain further acceptance in societies. this has provided an opportunity for the creation of ethical rules in the occupational organizations of the countries and application of these ethical rules as necessary. as a result, we believe that the acceptance of regulatory mechanisms such as ifac code and its becoming functional for volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.81 | http://emaj.pitt.edu an analysis of the relationship between ifac code of ethics and cpi page |46| emerging markets journal implementation will be way easier in countries that are distanced from corruption. this study can comparatively be expanded to analyze the changes in the numbers of the organizations applying and not applying the ifac code of ethics in the coming years and reveal the periodic differences between the current and future status. references a. ulgen a., dönmez d., "türkiye'de faaliyet gösteren en büyük 500 i̇şletme'de etik kodlar araştırması", marmara üniversitesi sosyal bilimler enstitüsü hakemli dergisi: öneri, sayı:28, yıl:14, cilt:7, haziran 2007, 151-158. barry, v,: 1979, moral issues in business (wadsworth publishing co., new york), 39-70. clements, c. e., neill, j., & stovall, o. s. (2009). an analysis of international accounting codes of conduct, journal of business ethics. 87, 173-183 (a). clements, curtis and neill, john d. and stovall, o. scott (2008). the impact of cultural differences on the convergence of international accounting codes of ethics (september 30, 2008). aaa 2009 midyear international accounting section (ias) meeting. http://ssrn.com/abstract=1275950 (b). cohen, jeffrey r. ; pant, laurie w. & sharp, david j. (1992). cultural and socioeconomic constraints on international codes of ethics: lessons from accounting. journal of business ethics 11 (9), 687 – 700. farrell, b. and cobbin, d. (2000), an analysis of the ethical environment of the international accounting profession. business ethics: a european review, 9, 20–30. farrell, brian; cobbin, deirdre. a content analysis of codes of ethics from fiftyseven national accounting organisations business ethics: a european review. jul2000, vol. 9 issue 3, 180190. farrell, h. and farrell, b. j.: 1998 the language of business codes of ethics: implications of knowledge and power journal of business ethics 17: 587-601, gluer academic publishers. printed in the netherlands. ferrell, o. c. and j. fraedrich: 1991, business ethics: ethical decision making and cases (houghton mifflin company, boston), p. 60. https://webmail.khas.edu.tr/owa/redir.aspx?surl=yckapmx0rhcaiy2ceame7clbrt8h5lvyhcvxouaq9u-wjuspelbscggadab0ahaaogavac8acwbzahiabgauagmabwbtac8ayqbiahmadabyageaywb0ad0amqayadcanqa5aduamaa.&url=http%3a%2f%2fssrn.com%2fabstract%3d1275950 http://ehis.ebscohost.com/eds/search/basic?sid=7aaf5c70-6c11-4004-87b7-e68e6036cd86%40sessionmgr4003&vid=1&hid=4102 http://ehis.ebscohost.com/eds/search/basic?sid=7aaf5c70-6c11-4004-87b7-e68e6036cd86%40sessionmgr4003&vid=1&hid=4102 http://ehis.ebscohost.com/eds/search/basic?sid=7aaf5c70-6c11-4004-87b7-e68e6036cd86%40sessionmgr4003&vid=1&hid=4102 http://ehis.ebscohost.com/eds/search/basic?sid=7aaf5c70-6c11-4004-87b7-e68e6036cd86%40sessionmgr4003&vid=1&hid=4102 http://ehis.ebscohost.com/eds/search/basic?sid=7aaf5c70-6c11-4004-87b7-e68e6036cd86%40sessionmgr4003&vid=1&hid=4102 http://ehis.ebscohost.com/eds/search/basic?sid=7aaf5c70-6c11-4004-87b7-e68e6036cd86%40sessionmgr4003&vid=1&hid=4102 volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.81 | http://emaj.pitt.edu ayşe i̇rem keskin, elçin yılmaz işık emerging markets journal | p a g e |47 “helping countries combat corruption: the role of the world bank,” prem network, the world bank, washington, d.c., september 1997, http://www1.worldbank.org/publicsecto r/anticorrupt/corruptn/corrptn.pdf . hite, r., bellizzi, j. and fraser, c. 1988. 'a content analysis of ethical policy statements regarding marketing activities'. journal of business ethics, 7:10, 771-776. husted, b.w. (1999). wealth, culture and corruption. journal of international business studies, vol.30, no.2, 339359. iesba handbook of the code of ethics for professional accountants 2014 edition, http://www.ifac.org /sites/default/files/publications/files/201 4-iesba-handbook.pdf. ifac: 2014, “compliance responses and action plans”, https://www.ifac.org/aboutifac/membership/complianceprogram/compliance-responses. ifac: 2015, “history”, http://www.ifac.org/aboutifac/organization-overview/history. langlois, c. and schlegelmilch, b. 1990, 'do corporate codes of ethics reflect national character? evidence from europe and the united states'. journal of international business studies, 21:4, 519-539. macrae,john.(1982).underdevelopment and the economics of corruption: a game theory approach. world development, vol.10, no.88,pp. 677-687. pelfrey, s. and e. peacock: 1991, 'ethical codes of conduct are improving', business forum (spring), 14-18. saha, shrabani; gounder, rukmani; jen-je su. is there a "consensus" towards transparency international's corruption perceptions index?. international journal of business studies. dec2012, vol. 19 issue 2, 1-9. schlegelmilch, b. and j. houston: 1989, 'corporate codes of ethics in large u.k. companies: an empirical investigation of use, content and attitudes', european journal of marketing (u.k.) 23(6), 7-24. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.81 | http://emaj.pitt.edu an analysis of the relationship between ifac code of ethics and cpi page |48| emerging markets journal seligson, mitchell a.. in part special issue (pp. 324-404). the measurement and impact of corruption victimization: survey evidence from latin america. corruption and development: analysis and measurement , world development. 2006 34(2):381-404. shachaf, p. (2005). a global perspective on library association codes of ethics. library & information science research, 27(4), 513-533. stapenhurst, r. (2000). the media’s role in curbing corruption [working paper], world bank institute, world bank. tanzi, v. (1998). corruption around the world: causes, consequences, scope, and cures [imf working paper, 98/63]. washington: international monetary fund. taylor, paul w.; 1975, principles of ethic: an introduction (dickerson publishing co., inc., encino, california). transparency international. corruption perceptions index 2014 technical methodology note, http://www.transparency.org/cpi2014/in _detail 2015. transparency international. corruption perceptions index 2014 short methodology note, http://www.transparency.org/cpi2014/in _detail 2015. wines, william a. & napier, nancy k. (1992). toward an understanding of crosscultural ethics: a tentative model. journal of business ethics 11 (11), 831 – 841.  volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu global online entrepreneurship and the impact of innovation on brands ipek krom assistant professor, beykent university, | e-mail: ipekkrom@outlook.com volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu | abstract the purpose of this paper is to evaluate the significance of innovation driven online entrepreneurship as well as the impact of innovation on brand trust, customer satisfaction and brand loyalty in the extent of service innovations. global online entrepreneurship was explored on a theoretical basis and correlation as well as regression analyses were used in order to evaluate the impact of the innovations of google on brand trust, customer satisfaction and brand loyalty. furthermore, correlation and regression analyses were used in order to find out the relationship between brand loyalty and brand trust as well as the relationship between brand loyalty and customer relationship in the extent of service industry. the results show a direct and positive relationship between innovation and brand loyalty, a direct and positive relationship between innovation and brand trust and a direct and positive relationship between innovation and customer satisfaction. furthermore, according to the research findings brand trust and customer satisfaction have a direct and positive relationship with brand loyalty. this research is limited to google users, since it is the most popular search engine worldwide. in this article the impact of innovation on brand trust, customer satisfaction and brand loyalty was evaluated. for future research, the impact of innovation on other variables of brand loyalty can be studied. the findings of this study inform the readers about the impact of brand trust, customer satisfaction and brand loyalty on innovation in the extent of service innovations driven by global online entrepreneurship. keywords: brand loyalty, brand trust, customer satisfaction, global online entrepreneurship, innovation, service innovation new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu global online entrepreneurship and the impact of innovation on brands page |90| emerging markets journal global online entrepreneurship and the impact of innovation on brands ipek krom 1. introduction entrepreneurship is the dynamic process of bringing resources, labor, materials, and other assets into combinations that make their value greater than before. that introduces changes, innovations, as well as a new order (hisrich, peters, and shepherd, 2005). according to schumpeter, all truly important changes in the economy are set off by the entrepreneur. an entrepreneur is an innovator creating new products/services, introducing new methods of production, new markets and new organizational models (schumpeter, 1934). however, considering the advances in information communication technology (ict), the fast moving characteristics of internet business and the different demographic and geographic background of the users, internet entrepreneurs are faced with a very unstable, uncertain, challenging and highly competitive environment. in terms of opportunity creation and market change, the internet environment can thus be described as change based and fast moving. even though this state offers many market opportunities, it is also characterized by continuous turmoil since it includes the participation of users from all demographic and geographical backgrounds. furthermore as new businesses and new business models develop, new online ways of generating income are searched, and as a result new social activities as well as new groups of people with common interests emerge. as these multiple participatory items occur, change, evolve and adapt, they each have the potential to cause a ripple effect since they have the potential to change the behavior of the users (zhao, 2008). on the other hand, global online entrepreneurs (goe) or in other words born global enterprises like google, ebay and amazon successfully keep up with this pace and what is more, they bring new standards to the industry. google has had and still has a very strong impact on ebusiness activities of existing international businesses. virtual enterprises also use google and its applications widely. today, google is the most popular global search engine occupying 53.74 percent of the global search engine market (marketshare statistics for internet technologies, 2014). starting as a predominantly online bookstore in 1994, today amazon serves 209 million customers. 68.6 percent of smartphone users have an amazon application. today, 70.000 books are available on amazon’s match program in various areas of interest. enabling the users to buy and sell in nearly every country on earth, ebay on the other hand has more than 120 million users globally (smith, 2014). when compared with the owners of ventures that are not fully dedicated to electronic commerce, distinctive innovative behaviors appear to characterize the emerging group of internet entrepreneurs. although they are not different from other enterprises, the internet entrepreneurs operate in a universe of transforming change. as pioneers of the new networked society, they are both defining and learning new ways of doing business (morino, 1999). researchers divide the innovation generation phase into five stages: idea generation, project definition, problemsolving, design and development, and marketing or commercialization (gopalakrishnan and damanpour, 1997). carrier, raymond and eltaif (2004) state that, idea generation amongst internet entrepreneurs is different from the traditional idea generation of other enterprises. internet entrepreneurs are more likely to search the market for opportunities, rather than creating a new product or service and then test its market feasibility. furthermore, internet entrepreneurs initially search the market or analyze the need and generate ideas or solutions in response. in addition kickul and gundry (2002) describe internet firms that emphasize information and rapid response to change as probably the best positioned enterprises for recognizing and identifying new opportunities. as a result of globalization, the demands of the customers are moving towards innovation; and because of the global competition, more and more customers are opting to adopt or choose new products. therefore, new technologies are trying to be developed to draw the attention of the customers, and create customer satisfaction and brand loyalty as the advancement in technology enables the companies to respond to the needs and demands of the customers better (schickler, 1994). according to hausman (1995), who researches customer satisfaction and innovation, innovation has an important role in customer happiness and customer satisfaction, since the firm takes innovative actions according to the complaints received from the customer. furthermore, according to the research carried by naveed, akhtar, cheema (2013), there is an important connection between innovation, customer satisfaction and brand loyalty. when a firm produces an innovative product, the satisfaction of the customers and their brand loyalty increases. brand trust and customer satisfaction are among the important variables of brand loyalty. according to upamannyu, gulati and mathur (2014), and turker and turker (2013) brand trust has a significant positive impact on volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu ipek krom emerging markets journal | p a g e |91 brand loyalty. furthermore a variety of studies state that higher levels of customer satisfaction lead to greater customer loyalty (anderson and sullivan, 1993; bearden and teel, 1983; bolton and drew, 1991; ghafoor et al. 2012). several studies in the literature study the impact of innovation on customer satisfaction including hussain, munir, and siddiqui (2002), naveed, akhtar, cheema (2013), and hausman (1995). according to all these studies, innovation has a direct and positive relationship with customer satisfaction and brand loyalty. however, this article will focus on the relationship between brand trust, customer satisfaction, brand loyalty and innovation in the extent of service innovations. in this article, the impact of innovation on the variables of brand trust, brand loyalty and customer satisfaction will be questioned within service innovation industry carrying a research on google’s innovative developments offered to the users. 2. literature review 2.1 global online entrepreneurship morgan-thomas and reubar (2013, p.4), who have enlarged the international entrepreneurship definition of mcdougall and oviatt (2000, p.903), and adapted it to the online entrepreneurship field, define global online entrepreneurship (goe) as “a combination of innovative, proactive and risk-seeking technologies to cross national boundaries and create value in organizations.” the term goe both refers to internationalizing companies that are internet based at birth as well as the e-business activities of existing international businesses. the e-business new ventures are new type of entrepreneur firms that owe their existence in the (ict) field to the goes. international entrepreneurship extends the impact of the roles and actions of entrepreneurs beyond their domestic frontiers and into the international markets and environments over time. as a result, the international entrepreneurs both have an impact on their own enterprise and the environment (aldrich and martinez, 2003). globalization of markets and technological advances in ict are among the two environmental reasons for the early adoption of born globals (knight and cavusgil, 2004). furthermore, the ict technologies decrease the costs and risks for born globals to internationalize. however, the key factor for their widespread emergence and success is their internal environment. generally, in spite of their constrained resources and inexperience, born-global companies, develop their competitive advantage from a combination of sources and theories including research and development, membership in the network (network theory), flexible responsiveness to the environment, and the learning organization theory (jaw and chang, 2006). among the important features of the antecedents of the goes are entrepreneurial orientation, risk taking, the identification of opportunities, market orientation, networks and social capital (colton, roth, and bearden 2010; houghton & winklhofer 2004; mostafa, wheeler and jones 2006). in addition, the importance of open innovation and consumer relationships has recently been recognized (bell and loane, 2010). 2.2 service innovation according to the oslo manual, which is internationally been recognized regarding the definition of innovation: “an innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations (oecd and eurostat, 2005, p.46).” as a driver of growth and structural change across the whole economy, service innovation enables the economy to become more productive and provides fuel for innovation in other industries. as it is in the google case, service innovation even has the potential to create new growth poles and lead markets that have a macro-economic impact. by transforming the way we live, do business and interact with each other, service innovation can bring about structural and economic change in our societies (european union, 2012). on the other hand, the customers and the changes in customer needs are of critical importance within this innovation chain since the customers are an important driver of innovation, a major influence in the innovation process within companies and the most important factor determining whether a product or service is accepted in the market (business decisions limited, 2003). through service innovation, new or significantly improved service concepts are introduced into the market. these service concepts of service companies or manufacturing companies comprise service infrastructure, customer processing, business models, commercialization (sales, marketing, delivery), service productivity and hybrid forms of innovation serving several user groups in different ways simultaneously (european union, 2012). regarded as positive developments by the customers, through service innovation, the customers develop of a positive perception towards the company (karaca, 2009). 2.3 brand loyalty oliver defines brand loyalty as “a deeply held commitment to re-buy or repatronize a preferred product or service consistently in the future, causing repetitive same brand or same brand-set purchasing, despite situational influences or marketing efforts” (oliver, 1999, p.34). information about the brand plays a key role in the product choice of the customers. when the consumers perceive distinctive features in a brand and get impressed, their brand loyalty towards this brand increases. the basic feature of a brand is the fact that it creates a loyal consumer (uztug, 2003). volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu global online entrepreneurship and the impact of innovation on brands page |92| emerging markets journal customers with brand loyalty are a group consumers who are loyal to the brand, who think that the rival products or services do not satisfy them like the chosen brand and who constantly purchase the brand. this consumer group is the target audience, which brings the highest income to the firms and should definitely need to be preserved and even get widened. upon brand building step, customer satisfaction has a key role in creating brand loyalty. if the consumers do not get pleased with the product, then their brand loyalty does not develop and they begin to look for new alternatives. for these reasons, the concept of brand loyalty is evaluated within the concept of brand equity (aaker, 1991). brand loyalty is one of the basic factors that constitute the brand equity and it develops through the consumers trust towards the brand. the most important feature of a strong brand is that it has a loyal mass of consumers. while acquiring new customers is a hard and expensive process, holding on to existing customers is a relatively easy and inexpensive one. high brand loyalty means a high market share and steady revenue that is acquired through repetitive purchases. what is more, a brand with a high brand loyalty can constitute an obstacle for products that are new to the market and can prevent the increase in competition. since loyal customers are less price sensitive, the firms can work with higher profit shares. today, all firms have the aim of creating a loyal customer portfolio. every year, the thousands of new products that enter the market cause an increase in product costs and change costs and this creates a positive situation for the customers to hold on to the brands they know and trust. this evaluation is based on the inclination of the decrease in risk taking and conservatism. however, in such dynamic and unsteady market conditions, the question of how will the brand be able to turn this conservative attitude into its own advantage or how will it be able to direct the customers to itself prevails (aydin, 2009). 2.4 brand trust brand loyalty, which develops through a brand’s continuation in realizing its responsibilities, refers to the good intentions of a firm and to the fact that the firm will act in consideration of the customers’ interests. (doney and cannon, 1997). according to delgado (2003, p.11), brand trust is defined as the “feeling of security held by the consumer in his/her interaction with the brand, that it is based on the perceptions that the brand is reliable and responsible for the interests and welfare of the consumer.” brand trust has two dimensions. reliability, which has a technical or competencebased nature, is the first dimension of brand trust that comprises the ability and willingness of the firm to keep promises and satisfy the needs of the consumers. in relation to the interests and welfare of the consumers', the second dimension involves the attribution of good intentions to the brand. for instance, when unexpected problems with the product arise, the customers can still have good intentions regarding the brand if they hold brand trust (delgado et al. 2003; doney and cannon, 1997). brand trust comprises concepts like product quality, meeting the needs of the consumers’, support, consistency and honesty. the in depth relationship between the firm and the customer increases the customers’ potential of sharing their private and secret information with the brand. later on, this information can be used in the development of products and services which the firms had not initially thought of producing or financing (bozkurt, 2003). brand trust enables the brands to build strong consumer relationships (fournier, 1998; urban, sultan, and qualls, 2000), and has a positive impact on brand loyalty (lau and lee, 1999). 2.5 customer satisfaction customer satisfaction is the way a person feels after comparing a product’s perceived performance according to his or her expectations (kotler and armstrong, 1996). the concept of customer satisfaction extends beyond meeting the needs and expectations of customers. customer satisfaction emerges with the evaluation of a product or service in terms of variables like quality and performance. according to this, customer satisfaction or dissatisfaction develops through a comparison of customers’ expectations and perception. at the point where the advantages provided by the purchased product or service and the customer expectations meet, customer satisfaction emerges (turk, 2005). in influencing customers’ decisions in order for them to buy new products or services, three factors stand out as the most important: awareness of new products and their benefits, quality and price compared to alternatives, as well as customer satisfaction among those who have tried the products or services (business decisions limited, 2003). critical to any product or service company, customer satisfaction is a strong predictor of customer retention, customer loyalty and product repurchase. according to research, a single unsatisfied customer can spoil five satisfied customers (sreenivasulu and rajasekhar, 2014). 3. hypothesis on the basis of literature review and considering the critical role innovation plays in service industry in ict sector as well as the impact of brand trust and consumer satisfaction on brand loyalty, five hypothesis were developed. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu ipek krom emerging markets journal | p a g e |93 figure 1. the model of the impact of innovation on brand trust, brand loyalty and customer satisfaction h1: innovation has a direct and positive relationship with brand trust. h2: innovation has a direct and positive relationship with customer satisfaction. h3: innovation has a direct and positive relationship with brand loyalty. h4: brand trust has a direct and positive relationship with brand loyalty. h5: customer satisfaction has a direct and positive relationship with brand loyalty. 4. research methodology in order to conduct this study, quantitative methods were used. research data were collected through a questionnaire and research was conducted on university students. people falling in the age group of 18 to 34 years were chosen for the study, since that is considered as the most information and communication technology oriented group. the research is limited to google users, since google is the most popular search engine globally. the research was conducted in t.c. beykent university and yildiz technical university (ytu). the reason for the selection of these universities is to receive a sampling of students from different socioeconomic backgrounds, because t.c. beykent university is a private university with public entities and ytu is a state university, and also because both universities highly support information communication technology applications. a total of 395 questionnaires were received showing a response rate of % 87.7. the demographics of the respondents are shown in table 1. table 1 respondent’s demographic information groups frequency(n) percentage (%) university beykent 219 55.4 ytu 176 44.6 total 395 100.0 gender male 204 51.6 female 191 48.4 total 395 100.0 age 17-21 195 51.6 22-24 185 48.4 25-34 15 3.8 total 395 100.0 according to the survey results carried in this research, some examples of innovative developments of google like android, autocomplete, gmail, internet balloons, google academic, google art project, google books, google driveless cars, google earth, google fiber, google glass, google maps, google now, google streetview, google translate, google tv, google voice search and universal search are known by students on the below listed ratios listed in table 2. table 2 innovative developments of google known by students google’s innovations frequency percentage android 308 78.0 autocomplete 96 24.3 gmail 373 94.4 internet baloons 50 12.7 google academic 98 24.8 google art project 54 13.7 google books 152 38.5 google driveless cars 59 14.9 google earth 325 82.3 google fiber 41 10.4 google glass 128 32.4 google maps 319 80.8 google now 21 5.3 google streetview 55 13.9 google translate 334 84.6 google tv 93 23.5 google voice search 184 46.6 universal search 163 41.3 furthermore, among these innovative developments of google, the ones that are used by students are android (%59.7), autocomplete (%16.7), gmail (%87.1), google volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu global online entrepreneurship and the impact of innovation on brands page |94| emerging markets journal academics (%14.2), google art project (%4.6), google books(%20.3), google earth (%65.1), google maps (%66.8), google now (%4.1), google streetview (%7.6), google translate (%73.7) , google voice search (%23.8) and universal search (%38.7). these innovative services that are actively used by participants also provide a basis for brand loyalty. the research questionnaire was designed on 5 point likert rating scale. 5=strongly agree, 4=agree, 3=neutral, 2=disagree, 1=strongly disagree. these questions were based on brand trust, brand loyalty, customer satisfaction and innovation. a new scale on brand trust was developed using the scales of simsek and noyan (2009), caceres and paparoidamis (2007) as a reference. also, other new scales were developed on brand loyalty, customer satisfaction and innovation. the scale on brand loyalty was developed using the scale of simsek and noyan (2009), making an adaptation to the search engine field. the scale on customer satisfaction was developed adapting the scale of lin and wang (2006) to the search engine field. finally, the scale on innovation was developed according to the oslo manual (oecd and eurostat, 2005). the items in the scales were 18 in number. the data were analyzed by the help of spss software. while comparing the quantitative data, the difference between two groups was tested using t-tests. furthermore, correlation and regression techniques were used to analyze the received data. the correlation analysis showed the relationship between the variable innovation and the variables of brand trust, brand loyalty and customer satisfaction brand loyalty while regression analysis showed the strength of relationship between these variables. innovation is treated as an independent variable; brand trust and customer satisfaction as moderating variables while brand loyalty as dependent variable. the research findings were evaluated in between %95 confidence interval and %5 meaningfulness level. the reliability and validity of the scales were checked. the results show that, the scales are highly reliable. the reliability of the brand trust scale was found as α=0.880. at the end of the kmo and barlett analysis for the brand trust scale, it was configured that kmo value is 0.869 and barlett value is smaller than 0.05 and that the factor analysis could be applied. after the factor analysis, one factor was formed with a total variance of % 67.98. the reliability of the customer satisfaction scale was found as α=0.904. after the kmo and barlett analysis for the customer satisfaction scale, it was configured that kmo value is 0.751 and barlett value is smaller than 0.05 and that the factor analysis could be applied. after the factor analysis, one factor was formed with a total variance of % 83.96. the reliability of the brand loyalty scale was found as α=0.882. after the kmo and barlett analysis for the customer satisfaction scale, it was configured that kmo value is 0.833 and barlett value is smaller than 0.05 and that the factor analysis could be applied. after the factor analysis, one factor was formed with a total variance of % 74.24. finally, the reliability of the innovation scale was found as α=0.884. after the kmo and barlett analysis that were conducted for innovation scale, it was configured that kmo value is 0.884 and barlett value is smaller than 0.05 and that the factor analysis could be applied. after the factor analysis, one factor was formed with a total variance of % 63.61. the conducted analyses showed that the scales were all valid. 5. research findings in this section, the research findings on innovation, brand trust, customer satisfaction and brand loyalty levels are described. figure 2. the innovation, brand trust, customer satisfaction and brand loyalty levels of the students according to the research findings, the students who have participated in the research have a high level of brand trust (3.613 ± 0.829); a high level of customer satisfaction (3.945 ± 0.778); a high level of brand loyalty (4.048 ± 0.818) and a high level of innovation (3.788 ± 0.735). table 3 the differentiation of innovation, brand trust, customer satisfaction and brand loyalty according to each university groups beykent university (n=219) ytu (n=176) t p mean sd mean sd brand trust 3.659 0.848 3.555 0.803 1.250 0.212 customer satisfaction 4.009 0.829 3.866 0.705 1.828 0.068 brand loyalty 4.097 0.826 3.986 0.807 1.345 0.180 innovation 3.823 0.792 3.745 0.657 1.041 0.289 3.613 3.945 4.048 3.788 3,2 3,4 3,6 3,8 4,0 4,2 brand trust customer satisfaction brand loyalty innovation volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu ipek krom emerging markets journal | p a g e |95 according to the t-tests that were conducted; the innovation, brand trust, customer satisfaction and brand loyalty levels do not have a meaningful difference according to the university variable. this shows us that, the students of both universities have equal access to information communication technologies. table 4 the relationship between innovation, brand trust, customer satisfaction and brand loyalty mea n sd brand trust customer satisfactio n brand loyalt y innovatio n brand trust 3.613 0.82 9 1.000 customer satisfactio n 3.945 0.77 8 0.803* * 1.000 brand loyalty 4.048 0.81 8 0.666* * 0.754** 1.000 innovation 3.788 0.73 5 0.687* * 0.719** 0.749* * 1.000 according to the correlation analysis that was conducted, a statistically meaningful relationship exists between customer satisfaction and brand trust (r=0.803; p=0.000<0.05). according to this finding, brand trust increases as customer satisfaction increases. the relationship between brand loyalty and brand trust is also statistically meaningful (r=0.666; p=0.000<0.05). according to this result, as brand trust increases, brand loyalty also increases. according to the research findings, the relationship between brand loyalty and customer satisfaction is statistically meaningful (r=0.754; p=0.000<0.05). according to this result, as customer satisfaction increases, brand loyalty also increases. the relationship between innovation and brand trust is also statistically meaningful (r=0.687; p=0.000<0.05). according to this result, as innovation increases, brand trust increases. when the relationship between innovation and customer satisfaction was examined, the relationship was found as statistically meaningful (r=0.719; p=0.00<0.05). according to this finding, as innovation increases, customer satisfaction also increases. finally, according to the correlation analysis that was carried out, the relationship between innovation and brand loyalty was found as meaningful (r=0.749; p=0.000<0.05). according to this finding, as innovation increases, brand loyalty also increases. table 5 the impact of brand trust on brand loyalty dependen t variable independe nt variable ß t p f mode l (p) r2 brand loyalty constant 1.67 4 12.15 9 0.00 0 312.53 2 0.000 0.44 2 brand trust 0.65 7 17.67 9 0.00 0 312.53 2 0.000 0.44 2 the regression analysis that was made to figure the relationship between brand trust and brand loyalty was found as statistically meaningful (f=312.532; p=0.000<0.05). the explaining power of brand trust is very strong (r2=0.442). according to this result, brand trust increases the level of brand loyalty (ß=0.657). therefore, h4 hypothesis is confirmed. table 6 the impact of customer satisfaction on brand loyalty dependen t variable independe nt variable ß t p f mode l (p) r2 brand loyalty constant 0.92 1 6.575 0.00 0 518.25 1 0.000 0.56 8 customer satisfaction 0.79 3 22.76 5 0.00 0 the regression analysis carried out in order to figure the relationship between customer satisfaction and brand loyalty was also found as statistically meaningful (f=518.251; p=0.000<0.05). as the determinant of brand loyalty level, the explaining power of customer satisfaction is found as very strong r2=0.568). according to this result, customer satisfaction increases the brand loyalty level (ß=0,793), which confirms the h5 hypothesis. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu global online entrepreneurship and the impact of innovation on brands page |96| emerging markets journal table 7 the impact of innovation on brand trust, customer satisfaction and brand loyalty dependent variable indepe ndent variabl e ß t p f mo del (p) r2 brand trust constan t 0.6 76 4.23 9 0.0 00 351. 567 0.00 0 0.4 71 innovati on 0.7 75 18.7 50 0.0 00 dependent variable indepe ndent variabl e ß t p f mo del (p) r2 customer satisfaction constan t 1.0 60 7.39 6 0.0 00 420. 643 0.00 0 0.5 16 innovati on 0.7 62 20.5 10 0.0 00 dependentv ariable indepe ndent variabl e ß t p f mo del (p) r2 brand loyalty constan t 0.8 89 6.18 8 0.0 00 502. 238 0.00 0 0.5 60 innovati on 0.8 34 22.4 11 0.0 00 according to table 7, the regression analysis that was conducted in order to find the relationship between innovation and brand trust was figured as statistically meaningful (f=351.567; p=0.000<0.05). the relationship of brand trust with innovation variable, in other words, its explaining power is figured as very strong (r2=0.471). according to this finding, the innovation level increases the level of the brand trust of the users (ß=0.775). so, the h1 hypothesis is confirmed. the regression analysis that was conducted in order to find the relationship between innovation and customer satisfaction was also found as statistically meaningful (f=420.643; p=0.000<0.05). the explanatory power of the relationship between innovation and customer satisfaction is figured as very strong since r2=0.516. the increase in the innovation will also increase the customer satisfaction level (ß=0.762). so the h2 hypothesis is confirmed. the result of the regression analysis also showed that the relationship between innovation and brand loyalty is meaningful (f=502.238; p=0.000<0.05). the r2 value equaled 0.560, which shows that the explaining power of the variables is very high. according to this finding, the innovation level increases the brand loyalty level (ß=0.834). so, the h3 hypothesis is also confirmed. figure 3. the impact of innovation on brand trust, customer satisfaction and brand loyalty according to the above figure, the beta value is describing that, if innovation changes one unit, the brand trust will change 0.775 percent, the customer satisfaction will change 0.762 percent and the brand loyalty will change 0.834 percent. also according to the above figure, beta value in between brand trust and brand loyalty is 0.657, which means that if brand trust increases one unit, then brand loyalty will increase 0.657 percent. furthermore, if customer satisfaction changes one unit, then brand loyalty will increase 0.793 percent. according to this result, all five hypothesises are confirmed. 6. conclusion in this research, global online entrepreneurship concept is evaluated in terms of its relativity to innovation through literature review and through a conducted survey, it is confirmed that innovation has a positive impact on brand trust, customer satisfaction and brand loyalty within the context of service innovations. according to the results of this survey, it is observed that a global online entrepreneur like google, which embraces innovation as a positioning strategy, also increases the brand trust, customer satisfaction and brand loyalty of the users through its innovations in the information communication technology field. considering the research conducted, a very limited number of researches exist regarding the impact of innovation on brand trust, customer satisfaction and brand loyalty. new research need to be done on the impact of innovation on brand trust, customer satisfaction, brand image, perceived quality and customer expectations. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu ipek krom emerging markets journal | p a g e |97 references aaker, d. a. 1991. managing brand equity, n.y.: free press. aldrich h.e. and martinez, m. 2003. “entrepreneurship as social construction: a multi-level evolutionary approach’, in z.j. acs and d.b. audretsch (eds.), handbook of entrepreneurship research: a multidisciplinary survey and introduction, boston, ma: kluwer academic publishers. anderson e. w. and sullivan, m.w. 1993. “the antecedents and consequences of customer satisfaction for firms”, marketing science, 12(2):125-143. aydin, g. 2009. “marka değeri ve finansal performans itu shortened phd thesis, istanbul sanayi odası: iso 2009/11. bell j. and loane, s. 2010. “’new-wave’ global firms: web 2.0 and sme internationalization,” journal of marketing management, 26(3/4):213-229. bearden, o.w. and teel, j. e. 1983. “selected determinants of consumer satisfaction and complaint reports,” journal of marketing research, 20(1):.21-28. bolton, r. n. and drew, j. h. 1991. "a multi-stage model of customers' assessments of service quality and value," journal of consumer research, 17(4):375-384. bozkurt, i. 2003. “müşteri i̇lişkileri yönetimi ve perakende sektöründe bir uygulama,“ masters thesis, ytu, sbe business decisions limited, (may 2003), “the power of customers to drive innovation: a report by business decisions limited for the enterprise directorate general of the european commission,” available at: ftp://ftp.cordis.europa.eu/pub/innovatio npolicy/studies/studies_the_power_of_cu stomers_to_drive_innovation.pdf (accessed 16.12.2014). caceres r.c. and paparoidamis, n.g. 2007. “service quality, relationship satisfaction, trust, commitment and business-to-business loyalty,” european journal of marketing, 41(7/8):836-867. carrier, c. raymond l. and eltaif, a. 2004. “cyberentrepreneurship: a multiple case study,” international journal of entreprenurial behavior & reasearch, 10(5):349-363. colton, d. a., roth, m. s., and bearden, w. o. 2010. “drivers of international e-tail performance: the complexities of orientations and resources,” journal of international marketing, 18(1):1-22. ftp://ftp.cordis.europa.eu/pub/innovation-policy/studies/studies_the_power_of_customers_to_drive_innovation.pdf ftp://ftp.cordis.europa.eu/pub/innovation-policy/studies/studies_the_power_of_customers_to_drive_innovation.pdf ftp://ftp.cordis.europa.eu/pub/innovation-policy/studies/studies_the_power_of_customers_to_drive_innovation.pdf ftp://ftp.cordis.europa.eu/pub/innovation-policy/studies/studies_the_power_of_customers_to_drive_innovation.pdf volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu global online entrepreneurship and the impact of innovation on brands page |98| emerging markets journal delgado-ballester, e. 2003. “development and validation of a brand trust scale,” journal of market research, 13(1):1-28. delgado-ballester, e., munuera-aleman, j.l. and yagüe-guillen, m.j. 2003. "development and validation of a brand trust scale", international journal of market research, 45(1):35-53. doney, p.m. and cannon, j.p. (1997), "an examination of the nature of trust in buyer-seller relationships," journal of marketing, 61(4):35-51. european commission, 2012. guidebook series: how to support sme policy from structural funds: the smart guide to service innovation, european union,belgium. available at: http://ec.europa.eu/enterprise/policies/s me/regional-sme policies/documents/no.4_service_innov ation_en.pdf (accessed 12.10.2014). f. zhao (ed.) 2008. “information technology entrepreneurship and innovation,” in information science reference, pa, usa,159-160. fournier, s. 1998. “consumers and their brands: developing relationship theory in consumer research,” journal of consumer research, 24(4):343-373. ghafoor, m. m., iqbal, h. k., tariq, u. and murtaza, f. 2012. “the impact of customer satisfaction and brand image on brand loyalty,” progress in business innovation & technology management, 2(2):69-77. gopalakrishnan s. and damanpour f. 1997. “review of innovation research in economies, sociology and technology management,” omega int. j. mgmt. 25(11):15-28. hausman, j. 1995. “competition in long-distance and telecommunications equipment markets: effects of the mfj,” managerial and decision economics 16(4):365-383. hisrich, r.d., peters, m.p. and shepherd, d.a. 2005. entrepreneurship. new york: mcgraw-hill irwin. houghton, k. a. and winklhofer, h. 2004. “the effect of website and e-commerce adoption on the relationship between smes and their export intermediaries,” international small business journal, 22(4):369-388. http://ec.europa.eu/enterprise/policies/sme/regional-sme%20policies/documents/no.4_service_innovation_en.pdf http://ec.europa.eu/enterprise/policies/sme/regional-sme%20policies/documents/no.4_service_innovation_en.pdf http://ec.europa.eu/enterprise/policies/sme/regional-sme%20policies/documents/no.4_service_innovation_en.pdf http://ec.europa.eu/enterprise/policies/sme/regional-sme%20policies/documents/no.4_service_innovation_en.pdf volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu ipek krom emerging markets journal | p a g e |99 hussain, m., munir, a. and siddiqui, m. 2012. “impact of innovation in fmcg products on customer loyalty and satisfaction: a case study of confectionary producer “english biscuit manufacturers” in pakistan, interdisciplinary journal of contemporary research in business , 4(8):4-23. jaw, y-l. and chang, s-h.2006. “the internationalization of born globals: entrepreneurship, internet, and entry strategies,” the journal of global business management, 2(2): 1-7. morino, m. 1999. “netpreneurs: a new breed of entrepreneur,” e-commerce, may. netmarketshare.com. 2014. “marketshare statistics for internet technologies,” http://www.netmarketshare.com/searchengine-marketshare.aspx?qprid=4&qpcustomd=0 (accessed 24.11.2014). schumpeter, j. a. 1934 (2008). the theory of economic development: an inquiry into profits, capital, credit, interest and the business cycle, translated from the german by redvers opie, london: transaction publishers. smith, c. 2014. “by the numbers: 58 amazing amazon statistics,” available at: expandedramblings.com/index.php/amazonstatistics/ (accessed:20.11.2014). kitchul j. and gundry, l.k. 2002. “prospecting for strategic advantage: the proactive entrepreneurial personality and small firm innovation,” journal of small business management, 40(2):85-97. knight, g. a. and cavusgil, s. t. 2004. “innovation, organizational capabilities, and the bornglobal firm,” journal of international business studies, 35(2):124-141. lau, g.t. and lee, s.h. 1999. “consumers’ trust in a brand and the link to brand loyalty,” journal of marked focused management, 4(4):341-370. lin h. and wang, y. 2006. “an examination of the determinants of customer loyalty in mobile commerce contexts,” information & management, 43(3):271-282. mcdougall, p.p. and oviatt, b. m. 2000. “international entrepreneurship: the intersection of two research paths. “academy of management journal, 43(5):902-906. http://www.netmarketshare.com/search-engine-market-share.aspx?qprid=4&qpcustomd=0 http://www.netmarketshare.com/search-engine-market-share.aspx?qprid=4&qpcustomd=0 http://www.netmarketshare.com/search-engine-market-share.aspx?qprid=4&qpcustomd=0 volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu global online entrepreneurship and the impact of innovation on brands page |100| emerging markets journal mostafa, h. a. r., wheeler, c., and jones, m. v. 2006. “entrepreneurial orientation, commitment to the internet and export performance in small and medium sized exporting firms,” journal of international entrepreneurship, 3(4): 291-302. naveed, t. akhtar, i. and cheema, k. 2013. “the impact of innovation on customer satisfaction and brand loyalty: a study of the students of faisalabad, “international journal of management and organizational studies, 2(2):62-68. oecd and eurostat, 2005. “oslo manual: guidelines for collecting and interpreting innovation data”, 3rd ed. available at: http://www.oecd.org/science/inno/oslo manualguidelinesforcollectingandinterp retinginnovationdata3rdedition.htm oliver, r. 1999. “whence consumer loyalty?” journal of marketing, 63(special issue): 3344. schickler, e. 1994. “democratizing technology: hierarchy and innovation in public life,” palgrave macmillan journals, 27(2): 175199. simsek g.g. and noyan, f. 2009. “turkiye’de cep telefonu cihazi pazarinda marka sadakati icin bir model denemesi,” odtu gelisme dergisi, 36(1): 121-159. sreenivasulu m. and rajasekhar, m. 2014. “customer satisfaction and brand loyalty towards corporate retail store-[a case study of big bazaar retail store in banglore city],” iosr journal of economics and finance, 16(4):1-8. thomas m. and reubar, r. “global online entrepreneurship: past research and future directions,” univeristy of glasgow. adam smith working paper series 2013:04 available at: http://www.gla.ac.uk/media/media_278 200_en.pdf (accessed 24.10.2014). turk, m. 2005. “perakendeci i̇şletmelerde personelin davranışsal özellikleri ile müşteri memnuniyeti arasındaki i̇lişki”, süleyman demirel üniversitesi i̇ktisadi bilimler fakültesi dergisi, 10(1): 195-219. turker, g.o. and turker, a. 2013. “gsm operatorleri sektorunde marka sadakatini etkileyen faktorlerin belirlenmesi; universite ogrencileri uzerine bir uygulama,” electronic journal of vocational colleges, 3(1):49-67. upamannyu, n.k. gulati c. and mathur g. 2014. “effect of brand trust, brand image on consumer loyalty in fcmg sectorat gwalior region,” scholars worl-irmjcr, 2(2): 83-93. http://www.oecd.org/science/inno/oslomanualguidelinesforcollectingandinterpretinginnovationdata3rdedition.htm http://www.oecd.org/science/inno/oslomanualguidelinesforcollectingandinterpretinginnovationdata3rdedition.htm http://www.oecd.org/science/inno/oslomanualguidelinesforcollectingandinterpretinginnovationdata3rdedition.htm http://www.gla.ac.uk/media/media_278200_en.pdf http://www.gla.ac.uk/media/media_278200_en.pdf volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.90 | http://emaj.pitt.edu ipek krom emerging markets journal | p a g e |101 urban, g.l., sultan, f. and qualls, w. 2000. “placing trust at the center of your internet strategy,” sloan management review, 42(1):39–48. uztug, f. 2003. markan kadar konus, istanbul: mediacat. appendix a. survey items used in the study brand trust t1: i completely trust the search engine that i use. t2: the search engine that i use gives me the best service. t3: i believe that the search engine that i use will not disappoint me. t4: even the name of the search engine that i use guarantees that i will be satisfied with the service. t5:the search engine that i use entirely takes care of my needs. customer satisfaction s1: i am satisfied with the service the search engine that i use. s2: the search engine that i use is successful. s3: the search engine that i use has met my expectations. brand loyalty l1: the search engine that i use will be my first choice. l2: i also recommend this search engine to other people. l3: i think i am a loyal customer of this search engine. l4: i intend to keep using this search engine. innovation i1: the search engine that i use constantly provides new services. i2: the search engine that i use is environment friendly. i3: the search engine that i use preserves its popularity. i4: the search engine that i use increases its service quality. i5: the search engine that i use decreases time loss. i6: the search engine that i use has brought new standards to the market with innovative projects. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu testing the ‘black swan effect’ on croatian stock market between 2000 and 2013 anita radman peša university of zadar | anitapessa@gmail.com ana brajković university of zadar | anabrajkov@hotmail.com abstract we tested the economic activity and stock exchange of croatia as a new country of european union (eu) in order to investigate the ‘black swan effect’ from 2000 to 2013. the empirical findings obtained in application of ols methodology and chow breaking point test provide evidence and show that resignation of the croatian ex-prime minister did lead country successfully to eu. also, ‘the black swan’ event, being unpredictable and having huge impact on political and economic environment in croatia obtained through crobex, had effect on croatian stock exchange indices. authors conclude that, the resignation was connected to one of the first significant cases of corruption in croatia which had a negative impact on the economic development of the country in general, dealing at the same time with global recession. jel-classification: e44, f36, f43, f47, g15 keywords: financial integration, stock exchange, world crisis, corruption, black swan new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu | mailto:anitapessa@gmail.com mailto:anabrajkov@hotmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu anita radman peša, ana brajković emerging markets journal | p a g e |1 testing the ‘black swan effect’ on croatian stock market between 2000 and 2013 anita radman peša ana brajković 1. introduction after the collapse of communist and socialist regimes in early 1990s, a number of central and eastern european (cee) economies established capital markets as part of their transition process of adopting market economy mechanisms (kim et al. 2005). following the removal of restrictions on capital flows, the opening up to foreign investors, the creation of appropriate corporate governance structures and the establishment of ownership rights, both market capitalization and daily trading volumes increased rapidly in the ceecs during the transition period (égert and kočenda, 2007). in recent years, croatia has reduced the lag in the development of its financial system to the more advanced transition countries. the greatest progress has been made in increasing the size and activity of banks, where the croatian banking system cannot compare equally with the banking systems of advanced transition countries. however, comparison with the activity of banks in developed countries shows that, in all transition countries there is scope for further strengthening bank activities towards the private sector. initiating pension reform and the rapid growth of open investment funds soon will close the gap in the development of croatian non-bank intermediaries. the largest lag behind advanced transition countries is therefore in capital market development. however, perspectives of development of the capital market today are different than before. development of pension and investment funds created active institutional investors. in other words, obstacles to the development of capital market that are arising from the absence of quality demand are removed (dalić, 2002). although the capital marketing in our area is quite young and undeveloped, in recent years it has increased its popularity and many citizens have became owners of shares through public offerings, or before that, the privatization of enterprises. still, there are many uncertainties which investors face every day. croatia has been struggling with recession and poor prospects of recovery for the sixth year in a row. structural adjustment measures are still lacking, while positive developments in net exports and growth in manufacturing (spurred primarily by foreign demand) are slowly fading. the necessary preconditions for a recovery are still not in place, and on the contrary, most of the well-known structural problems (low competitiveness, weak labour market, administrative barriers, etc.) remain. domestic demand is still hampered by the weaknesses in the labour market, continued corporate deleveraging and widespread consumer pessimism (croatia country report, 2014). the zagreb stock exchange in croatia was founded in 1991 as a profit-making corporation with hrk 2.7 million in registered capital, with the main stock indices crobex which were launched on 1 september 1997 with an initial value of 1000 points. while the capital market in croatia remains small, fragmented and underdeveloped compared to the capital markets of developed countries, the zagreb stock exchange has the highest market capitalization and volume of trade (25 companies) in the region. drawing upon the methods used by authors who have dealt with the correlation of stock market indices, we researched and analyzed the correlation of stock market indices in croatia (as a country preparing for eu accession) in order to investigate “the black swan” effect. black swan (taleb, 2009) is an unpredictable event with serious consequences, and after its occurrence, people tend to think of explanations making this event predictable. events with black swan label have appeared and keep appearing in variety of activities such as world trade center terrorist attack, economic crisis 2008 and rise of the internet . a major field of interest is black swan that occurs in financial management and risk management. what they have in common is the fact that nobody could even imagine their existence, based on all available information on past events, and because of the impossibility of their forecast or adjustment to these consequences, people classify them as impossible. the topic of research is croatian capital market in which authors wanted to examine the effect of black swan event on case of resignation of prime minister ivo sanader in 2009. the purpose of the following research is to prove that the resignationof croatian prime minister sanader, who had been previously successfully preparing the country for eu membership, is associated with corruption. this corruption has influenced the slow down of economic activity, together with the impact of the global crisis. this research was done with the aid of ols (ordinary least square) regression. we examined the procyclicality of the croatian stock market over a thirteen years transitional period from january 2000 to december 2013 on monthly bases. the local stock price indices (closing prices) crobex (croatia) is in the focus of our research. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu testing the ‘black swan effect’ on croatian stock market between 2000 and 2013 page |2| emerging markets journal the following chapters are structured as follows: chapter 2 presents the theoretical background of the empirical analysis and an empirical literature on assessing financial integration in eu. political and economical environment are following in chapter 3. the macro-economic environment and stock exchange development in croatia are described in chapter 4. an explanation of the methodology and data underpinning the empirical analysis is given in chapter 5, as are the findings and discussion. the implications of the empirical analysis are revisited in the conclusion in chapter 6. 2. the theoretical background of empirical analysis and empirical literature concerning the stock exchange and black swan 2.1. measuring the stock exchange baltzer et al. (2008) considered three broad categories of financial integration in the measures proposed by adam et al. (2002) and baele et al. (2004). the market is considered fully integrated if all economic agents with similarly relevant characteristics acting in a market face a single set of rules, have equal access and are treated equally. this serves as an imaginary state of perfect integration, which is not often seen in practice but provides a useful benchmark for measuring the degree of financial integration. adam et al. (2002) adopted the law of one price to assess the degree of financial integration. according to the law of one price, the financial market is integrated if the 'law of one price' holds. this, however, cannot be measured when different stock exchange indices are involved as it would require a different methodology of calculation. according to the 'law of one price', assets with identical risks and return characteristics should have the same price regardless of where they are traded.1 additionally, the law of one price does not necessarily hold true in the presence of market frictions. nevertheless, while the law of one price represents a rather long-term phenomenon, an alternative argument for why we could expect the equalization of stock market returns in the long to medium run is based on the walras law of markets, as applied to the financial system: if n–1 (financial) markets are in equilibrium (i.e. the exchange rate, money and bond markets), then the stock exchange market cannot be in disequilibrium. adam et al. (2002) also divided indicators for measuring financial integration into four categories: 1) indicators of credit and bond market integration; 2) indicators of stock market integration; 3) indicators of 1 however, there are cases where the law of one price is not directly applicable. for more details see baltzer et al. (2008). integration based on the economic decisions of households and firms, and 4) indicators of institutional differences that may induce financial market segmentation. indicators of european stock market integration generally suggest an increasing degree of stock market integration in the euro area. with regard to the indicators of stock market integration, adam et al. (2002) proposed the correlation of stock market returns as an alternative indicator, especially because of its consistency. this is in contrast to a price-based indicator which relies on the asset pricing model and is difficult to estimate as it requires longer time series to provide reliable estimates. baltzerat al. (2008) also suggests more sophisticated measures of co-movements (see also: gerard et al. 2003). therefore, baele et al. (2004) agree that, the alternative measures proposed by adam et al. (2002) based on stocks and the flow of assets -quantity-based measures2 and news-based measures -may complement price-based measures. news-based measures, which were applied in this empirical research, analyze the impact that common factors have on the return process of an asset. the prediction is that the degree of systematic risk is identical across assets in different countries. they are designed to distinguish the information effects from other frictions and barriers. in a financially integrated area, one would expect news of a regional character to have little impact on prices, whereas global news should be relatively more significant. regional financial integration should increase the supply of finance in the less financially developed countries of the integrating area. baale at al. (2004) maintain that when markets are fully integrated, bond yields should react only to news that is common to all observed markets. there is no clear evidence that full integration of financial markets is the result of monetary integration. the level of integration depends on the debt levels of the financial sector, and the economy abroad, as well as on the structure of the financial sector and its abilities to repay its loans abroad (current events inside the euro area are proof of this). 2quantity-based measures that aim to quantify the effects of friction on the demand for, and supply of, securities by using variables such as money, bonds, shares and loans through the statistic of cross-border activities and listings. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu anita radman peša, ana brajković emerging markets journal | p a g e |3 the fratzscher (2002) and cappiello's et al. (2006) findings indicated that, although new eu member states experienced rapid development in their financial markets, they exhibited differing degrees of integration and different speeds of convergence with the eurozone. while global trends significantly increased index movements, regional characteristics nevertheless remained the most significant determinants of integration. authors conclude that european equity markets have become mutually more integrated and have gained in importance in world financial markets since 1996, with exchange rate variability having been reduced in the meantime. the convergence of interest rates is suggested to be the driving force behind these outcomes and there has been an increased correlation between stock returns within the euro since the announcement of new eurozone members in may 1998. the world capital markets, definitely, have become more and more integrated in the last 30 years, although some exceptions and some dispersion across the countries and sectors need to be acknowledged (see: carrieri et al., 2007). european financial markets (erdogan, 2008) have faced crucial structural and institutional adjustments with the aim of accelerating financial integration in the money, credit, bond, and equity markets. integrated stock markets generate better opportunities for international investors by eliminating country-specific risks and allowing them to diversify their portfolios across countries. a larger pool of funds, other than limited local financing, is available for corporations. integrated stock markets decrease the cost of capital. in an economic environment where better risksharing opportunities exist, households will be able to smooth their consumption more efficiently. moreover, interdependent stock markets are subject to spillovers resulting from shocks. many authors dealing with financial integration have tested the procyclicality of stock exchange indices of whom we will single out those who have tested equity market integration in the eu. financial markets of new member states are significantly less integrated than those of the eu financial market and more susceptible to euro market shocks after eu accession. the process of financial integration of new eu member states is probably driven by factors different from those in the euro area. nevertheless, there is strong evidence that their process of integration is well under way and has accelerated since accession to the eu. the transition from centrally planned to market economies has led to rapid financial developments boosted by a strong foreign, primarily eu banking, presence (baltzer et al., 2008). 3 baele et al. (2004) investigated comovements between the stock markets in new eu member states from former communist states of central and eastern europe in the period from 2000 to 2007. they found empirical evidence that the stock markets of entrant countries in the euro area were more exposed to adverse comovements, volatility, and persistence after their accession. this result suggests that the flip side of financial-market integration is stronger cross-country shock propagation. horská (2005) found that, the correlation among the czech, us and european stock markets has increased over time, leaving less room for portfolio diversification. syllignakis and kouretas (2006) used granger's (1995) methodology to identify, estimate and test a number of common trends among a group of examined stock markets. author also applied the markov switching arch-l (swarch-l) model applied by hamilton (1994) to study the structural breaks in volatility of the examined markets during the relevant period. savva and aslanidis (2007) used the stccgarch methodology to investigate the degree of stock market correlation among five new eu members and the eurozone and demonstrated that the correlation between the czech and polish markets and the euro zone has been increasing over the past years, although the phenomenon cannot be said to be widely present in all the transition countries. they have also shown that new eu members have closer ties with the eurozone market than with the us market. onay (2007) used the engle-granger (1987) causality test to present evidence of a causal flow from european and us equity markets to the croatian stock market, and from the turkish to the bulgarian stock market. the long-term stock market interdependence indicated no long-term relationship between the secondround countries and the eu and us stock markets. christiansen and ranaldo (2008) used a multinomial logit model to investigate stock market integration in ten new eu member states. they demonstrated a higher degree of mutual relationship and dependence on the european stock market, especially after eu enlargement in 2004. the new eu markets have become more integrated with old eu markets and more related to the euro. 3the percentage of asset shares of foreign-owned banks (relative to total bank sector assets) increased from 30% in 1997 to cca 75% in 2005 ( baltzer et al. 2008). volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu testing the ‘black swan effect’ on croatian stock market between 2000 and 2013 page |4| emerging markets journal vizek and dadić (2006) used the johansen cointegration test for measuring equity markets in cee. the findings indicate multilateral integration between the equity markets of analyzed cee economies. latković (2002) and levaj et al. (2005) used the main croatian stock market index (podravka company’s stock data) and a few company indices to estimate a garch model and illustrate how this model can be used in volatility forecasting. žiković (2006) applied a var (value-at-risk) methodology and historical simulation of the croatian stock market indices in an effort to measure var, calendar effects, and their impact on conditional volatility. hanousek et al. (2009) estimated the impact of macroeconomic news on composite stock returns in three emerging european union financial markets (the budapest bux, prague px-50, and warsaw wig-20), using intraday data and macroeconomic announcements. they found that all three new eu stock markets are subject to significant spillovers directly through the composite index returns from the eu, the u.s. and neighboring markets; budapest exhibits the strongest spillover effect, followed by warsaw and prague. the czech and hungarian markets are also subject to spillovers indirectly through the transmission of macroeconomic news. the impact of eu-wide announcements is evidenced more in the case of hungary, while the czech market is more impacted by u.s. news. the polish market is marginally affected by eu news. in other case, egert and kočenda (2007) examined intraday comovements among three developed (france, germany, and the united kingdom) and three emerging (the czech republic, hungary and poland) european stock markets. they applied a dynamic conditional correlation garch model to five-minute tick intraday stock price data (2003–2006) and found a strong correlation between the german and french markets and also between these two markets and the uk stock market. however, very little systematic positive correlation during a trading day can be detected between the developed and emerging stock markets, or within the emerging group itself. hungary exhibits higher correlation with the developing markets and the emerging markets, and its dynamics show a rising trend. intraday data were also in the focus of černý and koblas (2008) who studied stock market integration and the speed of information transmission on intraday data or even less frequent observations. they also studied the effect of macroeconomic releases (market returns, volatility and trading volumes) from different countries on different markets through high-frequency index data from markets in the u.s. and london. the authors suggest that, the speed of information transmission on stock markets is very high and that in most cases it is within one hour that a reaction to stock prices occurs. with integrated stock markets, information originating from one market should be important to other markets. they found out that, stock markets in warsaw and krakow depend on the movements of the frankfurt stock exchange, but not vice versa. the three small eastern european markets in warsaw, prague and budapest react to information revealed in the market in frankfurt – usually within 40 minutes to an hour. the u.s. market seems to be an important source of information for the markets in london and frankfurt which react to such information within approximately 30 to 40 minutes, with the strongest reaction in the first ten minutes. the markets in london, frankfurt and paris react to information within one hour, while the strongest reaction is detected after 20 minutes. they found that the strongest reaction is in the ftse index. dvorák and podpiera (2006) applied the betaconvergence method and observed an increase in stock prices in candidate countries once eu enlargement was announced. they investigated the hypothesis that the rise in stock prices was the result of the reprising of systematic risk due to the integration of accession countries into the world market. they found that firmlevel stock price changes were positively related to the difference between a firm’s local and world market betas. the evidence suggests that at least part of the stock price increase can be explained by the difference between stocks’ local and world betas. stocks that had a high local beta but a low world beta experienced a higher price increase than other stocks. égert and koubaa (2004) investigated the conditional variance patterns in the daily return series of stock market indices in the g-7 and six selected economies of central and eastern europe. the stock markets in the transition economies exhibit much more asymmetry because negative shocks hitting these markets offset the positive news. 2.2. the black swan theory before the discovery of australia, people in the old world were convinced that all swans were white (taleb, 2009). among other animal species in australia, willem de vlamingh discovered the dark, feathered birds that are reminiscent of the swans (taleb, 2007). seeing the first black swan came as a surprise to ornitologists (as well as others who are interested in the colors of birds). since then, the emergence of black swans, although previously completely unthinkable, became common (taleb, 2004). volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu anita radman peša, ana brajković emerging markets journal | p a g e |5 wall street trader and philosopher, professor and author n.n.taleb, is creator of the term "black swan" (brunaker, 2013). black swan was first mentioned intaleb’s book "fool by randomness" (2001), and is used as a metaphor for very rare events. according to taleb (2004), in his second book, black swan: the impact of highly improbable, he defines in detail the black swan and explains the three criteria that describe it: a rarity, extreme impact, and retrospective explanation (brunaker, 2013). what is called the black swan is an event with three specific characteristics. first, it is atypical, since it is beyond the scope of regular expectations, and since for it there is no indication in the past. second,the impact is extreme. and third, despite the atypical status, human nature tries to explain its occurrence and make it explanatory and predictable (taleb, 2009). black swan is atypical because it lies outside of regular expectations, and nothing in the past can not point its appearance (estrada, 2009). furthermore, black swan has an extreme impact because its appearance affects the whole society and has great consequences. the impact of this unpredictable phenomenon can be classified as positive or negative. positive black swan has favorable implications for development, such as the discovery of a new drug, the internet or the development of mobile phones. all of these examples were not conceivable before they were created, but they left positive impact upon their success. in contrast, negative black swan comes with unsuitable and potentially catastrophic consequences, such as the economic crisis or the september 11 attack. behind each characteristic of black swan, the importance of this type of event is in a large impact on daily activities. the impact of the black swan can radically change the way of life of the entire society. characteristic of retrospection has its origins in the beliefs that human thought is comprehensive in its ability to explain the phenomenon of huge amounts, when in fact, explains a lot less than it is believed (casto, 2012). estrada (2009) points out that the retrospective explanation implies that, despite being an atypical event, people are trying to find it in some past events, to explain its formations and making it predictable event. a few black swans can explain almost everything in this world, from the success of ideas and religions, through dynamic historical events to the elements of our own lives. (taleb, 2009). the effect of black swan events increased over the years, and during the industrial revolution began to be accelerated. the world has become more complicated, while the usual events, the ones that we learn and discuss about, have became less important (taleb, 2004). characteristics of the element of surprise (black swan) cause a condition that can not be directly learnt from the past, considering that it is already incorporated in the expectations of agents, thus leading to amodification of their behavior. to put it simply, the next time such an event occurs, it stops being asurprise and the damage will no longer be the same. unfortunately, we can not perform methods in order to interfer the probability of developing the black swan event from inductive statistical methods (those based on observations from the past) and derivation of probability of future events (based on discoveries). however, statistics is what we instinctively resort to in social sciences. scientific research on rare events, especially in the economy, are hampered because of a mechanism that is called in psychology hindsight bias, that assumes that after the actual occurrence of the event, it suddenly becomes convincing, even obvious (taleb, 2003). many investors believe that their long-term returns are earned smoothly and steadily over time and that their capital came slowly, but as such is safe. this point of view is advocated by many academics who based on the hypothesis of normally distributed returns think that the black swans are extreme events that do not occur frequently and appear as an anomaly that is easy to ignore. the reality is, however, different .(estrada, 2009) . the black swan is an event that can not be predicted in advance. in econometrics and statistics, black swan is considered atypical and represents the value or number that differs from the rest of the known and available.through his book, taleb believes all changes in human life are the result of randomnesa and uncertainty, and the human inability to predict these events even by experts. also, black swan is not only the occurrence of an unexpected event, but also the absence of the expected (brunaker, 2013). according to sniedovich (2012), black swan has a large impact on the lives of individuals and the evolution of the organization as it shapes each direction of history. however, because of its specific features (such as the one that it is a rare event), it comes out of the scope of the formal mathematical treatment. taleb argues that reliance on such formal models, over the years, resulted in the wrong sense of security of decision makers in the financial sector and severe damages to the global financial system. therefore, progress in this area will be achieved only if there is awareness that "we do not know how to deal with black swans" (sniedovich,2012). 3. political and economical environment in croatia in last decade huckshorn (1984) defined political party as an autonomous group of citizens having the purpose of volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu testing the ‘black swan effect’ on croatian stock market between 2000 and 2013 page |6| emerging markets journal making nominations and contesting elections in hope of gaining control over governmental power through the capture of public offices and the organization of the government (koruga et al., 2011). croatia today is a parliamentary democracy and is organized as a unitary republic. the social state, freedom, equality, equal rights and the rule of law are among the highest values of the constitutional order (the miroslav krleža institue of lexicography, 2013). according to bertelsmann stiftung in croatia country report (2014), croatia’s transition to democracy and a market economy in the 1990s was accompanied and constrained by the wars following the breakup of the former yugoslavia. political liberalization and slobodan milošević’s nationalist mobilization campaign in yugoslavia enabled the nationalist croatian democratic union (hdz) and its charismatic leader, franjo tuđman, to win the country’s first democratic elections in may 1990. the new political leadership transformed croatia into an ethnic nation-state by adopting a new constitution and by holding (and winning) a referendum on independence in may 1991. croatia declared its independence in june 1991 (bertelsmann stiftung, 2014). between 1990 and 2000, croatia had a semi-presidential system, and since 2000 it has had a parliamentary system (european parliament, 2010). the political system is based on the principle of the division of power into three branches: the legislative, the executive and the judiciary (the miroslav krleža institue of lexicography, 2013). two decades of political and economic transformation in croatia can be divided into two phases. the first phase from 1990 until 2000 was marked by a highly complex and difficult triple transition: from an autocratic to a democratic political system, from a planned towards a market economy, and from a multinational yugoslav federation into an independent national state. this third element of transition proved the most important, and it had a decisive effect on the dynamic and character of political and economic transformation (bertelsmann stiftung in croatia country report, 2012). the first political opposition parties also emerged at this time, among whom were the croatian democratic union (hdz) and the croatian social liberal alliance (hsls), who fought the first free elections held in 1990. at those elections, hdz won, becoming the dominant party in the period of the establishment of an independent croatian state and the democratic political order in the 1990s (the miroslav krleža institue of lexicography, 2013). these elections set the foundations for democratic legislative and executive government. at the same time, formal democratic institutions were out of sync with the predominantly authoritarian style of governance of croatia’s first president, franjo tuđman. such tendencies were further exacerbated by the semipresidential system and the absolute majority that tuđman’s hdz held in parliament (bertelsmann stiftung in croatia country report, 2012). as the party of franjo tuđman, who is widely seen as the father of independent croatia, the right-ofcentre hdz continues to be a major force in croatian politics. in its more than 20 years of existence, the party underwent a number of transformations. in the 1990s, it was often characterized as a nationalistic and conservative-populist political entity. at the time of the 2011 parliamentary elections, there were 116 parties officially registered in croatia. however, a much smaller portion of these have established and maintained a major electoral presence on the political scene. the two parties that have consistently enjoyed the most electoral support in the past two decades are the hdz and the sdp (european policy center, 2014). the second phase of transformation started with the death of franjo tuđman in 1999 and the full change in government at the 2000 parliamentary and presidential elections (bertelsmann stiftung, 2012). according to bertelsmann stiftung (2014), after a decade of semi-authoritarian rule of by president tuđman and the hdz, an opposition coalition led by the social democratic party (sdp) won the 2000 parliamentary elections. that was a boost for democratization in croatia. these critical elections heralded a break with the previous hybrid regime and they forced hdz to reform itself. during its period in office, the new government introduced institutional changes that aimed to strengthen the role of parliament and government in creating and implementing policies, to stem irregularities in the privatization process which were common in the previous decade and which destroyed part of the economy, and to increase the level of civil and political rights and freedoms in the country. constitutional changes affected the abandonment of a semi-presidential system of government in favor of a parliamentary system (bertelsmann stiftung, 2014). despite undeniable economic and political accomplishments, the center-left coalition lost the subsequent election in 2003 (bertelsmann stiftung, 2012). nevertheless, as the hdz returned to power in 2003, the party did not signal its reluctance to cooperate and extradite indicted croatian war criminals to icty.4 4international criminal tribunal for the former yugoslavia or icty, is a body of the united nations established to prosecute serious crimes committed during the wars in the former yugoslavia, and to try their volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu anita radman peša, ana brajković emerging markets journal | p a g e |7 the best example of this was the arrest of fugitive general ante gotovina in 2005, which was conducted by the hdz-led government (bertelsmann stiftung, 2014). hdz returned to office under the leadership of ivo sanader. the coalition government led by the croatian democratic union (hdz) was in power for eight years between 2003 and 2011 (bertelsmann stiftung, 2012). the strongest opposition party is the social democratic party (sdp) with 56 seats in parliament, which came out at the 2007 general elections almost as strong as the hdz. only the votes from the significant croatian diaspora decided in hdz's favour (european parliament, 2010). research of european parliament (2010) stated that, croatia became a member of the north atlantic treaty organization (nato) together with albania in april, 2009. joining the european union and nato were important factors influencing croatia’s political transformation and democratization. both organizations, especially the eu, offered clearly defined criteria for croatian membership. this is particularly true for judicial reforms, the fight against corruption and emphasis on foreign policy, which should contribute to the stabilization of southeastern europe (bertelsmann stiftung, 2014). the evolving political crisis was symbolically announced by the surprise resignation of ivo sanader (hdz) from the post of prime minister in july 2009 (bertelsmann stiftung, 2012). in july 2009, jadranka kosor became prime minister and the hdz party leader following the surprise resignation of ivo sanader. she had to take over this position at a very critical moment, when the eu accession negotiations had been held up and an economic crisis had severe repercussions within the country. besides the lost presidential elections, where the hdz candidate andrija hebrang was already eliminated in the first round, she has succeeded in unblocking the accession negotiations. furthermore, she is seen as the person who has been the most successful in boosting efforts to fight corruption. on 3rd january 2010, the former prime minister ivo sanader announced, without having informed his party colleagues, his return to politics in order to „tackle the evident leadership problems in the hdz". this came as a shock to both the prime minister as well as to the coalition parties. as a consequence, the hdz board expelled sanader from the party on 4th january 2010 with the majority of hdz members supporting this decision. jadranka kosor has further perpetrators. the tribunal is an ad hoc court which is located in the hague, netherlands. strengthened her position and her control over the party. (european parliament, 2010). in both mandates, the hdz has left behind an economically, socially and morally devastated country with a negative gdp rate, high unemployment, high internal insolvency, widespread corruption and a clientelist web, as well as non-transparent and authoritarian practices of political decision-making. however, in comparison with 2000, there have been some positive developments such as the much-improved international status of croatia, reduced ethnic tensions in the country and indications that the rule of law is functional (bertelsmann stiftung, 2012). in december 2011, amid parliamentary elections the croatian democratic union (hdz) lost power and the social democratic party of croatia (sdp) formed a new coalition government, led by prime minister zoran milanović. finally, the effects of the economic crisis begun at the end of 2008, have yet to abate. in november 2012, a court in zagreb convicted former prime minister ivo sanader on corruption charges and sentenced him to 10 years in jail. he was found guilty of accepting bribes for brokering a loan between the government and an austrian bank in the mid-1990s, and for providing mol, a hungarian oil company, control over croatian energy company ina in 2008. while other corruption cases against other politicians and businessmen continue, sanader’s case is unprecedented in the history of modern croatia as he is one of the highest-ranking state officials to be indicted. the sanader case, among the many corruption cases being heard, not only shows that a serious effort to fight corruption is finally underway but also outlines the extent to which corruption has spread through croatian society (bertelsmann stiftung, 2014). 4. the macroeconomic environment and stock exchange development in croatia croatia signed the stabilization and association agreement (saa) with the eu in 2001 and submitted a formal application for eu membership in 2003. the european commission recommended opening accession negotiations and the european council granted croatia the status of an official candidate for eu membership in 2004. in 2005, accession negotiations were opened between the republic of croatia and eu. although croatia signed the saa in 2001, eu member states postponed the start of negotiations to march 2005 because they deemed croatia’s cooperation with the international criminal tribunal for the former yugoslavia insufficient. croatia’s eu accession negotiations were concluded in june 2011. the signing of the accession treaty and the referendum on eu accession took place in december 2011, with the full accession in july 2013. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu testing the ‘black swan effect’ on croatian stock market between 2000 and 2013 page |8| emerging markets journal recently, the croatian government and other state agencies have started implementing demanding reforms, just as other countries of the see region, which have resulted in a record-breaking inflow of foreign investments and improved entrepreneurial climate until the global crisis started in 2008. the stock markets of see (including the croatian stock market) have moved to align their standards with international ones by improving corporate disclosure practices, order execution, ownership rights, and by bringing down limitations to international capital flows (syllignakis and kouretas 2006). during eu accession negotiations, stock markets in croatia received massive foreign investment inflows (32% of equity investment), just as was the case with other eu candidate countries such as bulgaria, romania and slovenia. less encouraging is the fact that those investments are directed more to the real estate and financial services, which means that they are less likely to generate exports revenue than if investments flowed into production. stock exchanges in croatia declined parallel to the world stock exchanges due to crisis. the eu has adopted a financial package of eur 3.7 billion for the first two years of croatia’s membership which were available through cohesion and structural funds. after the initial stages of the global crisis, croatia has shown slower recovery than other see countries but the currency is strong and inflation is low thanks to the strict monetary policy of the croatian national bank. the main problem lies in the growing trade deficit and huge unemployment rate. in the course of 12 months, unemployment has risen by around 20%. between 1994 and 2008, croatian economy expressed relatively high rates of economic growth. one of the main drivers of growth of the national economy was the domestic demand, which in the period between 2001 and 2008 grew more than six percent per year (faster than growth of gdp). one of the signs of progress in the region was the inflow of direct foreign investments, especially before the crisis of 2008 started. less encouraging is the fact that the investments were directed more to real estate and financial services, which means less of a probability of realizing export income than if investments were directed towards production. world crisis 2008 didn’t bypass croatia, but the country has got also its inner structural and economical problems. between 2009 and 2010, there was a fall in real household consumption for nearly 10%, as a result of the decline in the net real incomes which was reflected also as a reduction in the volume of imported goods. over the years, the increased domestic demand, especially private consumption based on borrowing, was one of the causes of the continuous increase in total external debt (benolić, 2012). the fall of the gdp rate and rise of unemployment in eu had a significant impact on croatian economy due to croatian economic dependence on other eu members. the focus of the new croatian government was on domestic economic and social policies, with the promise to pull the country out of the crisis, but by the end of 2012 croatia’s gdp continued to fall. the government introduced a tax reform and began the restructuring of large state-owned companies. but projects that were supposed to boost the economy, such as investments, fell short. moreover, the government failed to implement structural reforms to reduce public spending, and at the end of 2012, this failure resulted in a reduction of croatia’s debt rating. although croatian economic analysts often forecast lower economic growth numbers than those anticipated by the government, it was precise because of the country’s expected entry into the european union in 2013 that experts predicted had higher gdp growth in coming years (bertelsmann stiftung, 2014). generally, croatia is a small open transition economy which has been largely connected to other foreign markets (deskan – škrbić et al., 2013). currently, germany is croatia’s very important trading partner and ranks third among foreign direct investors. also, austria is one of croatia’s most important partners in the foreign trade, direct investments, tourism and financial-banking sectors (cbs5, 2014). according to sen et al. (2014), fdi generates positive productivity effects for host countries. the main mechanisms for these effects are the adoption of foreign technology and know-how, products by foreign firms, and the creation of linkages between foreign and domestic firms (sen et al., 2014). macroeconomic stability in croatia is under strong influence of global financial crisis. from 2009 to 2012, there have been a 11% loss for the real gdp, while personal consumption is reduced for 35%, and investments is down for 11%. thus, poor results of the croatian economy in the period from 2008 to 2013 generated increase in unemployment and government debt (alpeza et al., 2014). 5. methodology and data 5.1. data specification based on the studies investigating the correlation of stock market indices and macro economic variables in empirical literature, we constructed a data set of explanatory variables that are usually included in models: cap: capital inflow expressed in percentage of gdp; exr: exchange rate expressed as the price of one 5 croatian bureau of statistics volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu anita radman peša, ana brajković emerging markets journal | p a g e |9 unit of foreign currency in units of domestic currency; int interest rate, cpi: in bnp of domestic currency deflated by gdp deflator; une: unemployment expressed in percentage of the total labor force, npl: non performing loanshare of all nominal loans that are at least 90 days overdue; we relied on the database of the european commission (2010)6, and on the databases of the national statistical bureau. we examined thirteen-year transitional period of research – a monthly time series from january 2000 to december 2013. for crobex, we also used the monthly average indices from january 2000 to december 2013. 5.2. methodology the individual ordinary least square (ols) method was used to uncover empirical evidence of a relationship between stock return indices and economic variables of croatia. an ols estimation was applied for the procyclicality of croatian stock markets through the ten-year period of historical data (main economic indicators and crobex stock price (closing), on monthly bases from january 2000 to december 2013, in order to find the structural break when the analyzed cycles started to accelerate by using a chow stability test (andrews 1993 and hansen 1997). the period from 2000 to 2013 was divided into two sub-periods. the first period between january 2000 and june 2009 was the period before the resignation of croatian ex-vice premier sanader. the second period from july 2009 to december 2013 was the period after the sanader’s resignation. we included the structural break in july 2009 which marks the resignation. before applying linear regression methods, we eliminated the overly correlated explanatory variables (appendix, table a). we also collected variables such as exports and imports of goods and services, as well as trade balance and gdp, but we eliminated them in further analysis because they were highly correlated. trade variables are known to be highly correlated and gdp is connected to a whole range of macroeconomic activities (aizenman and noy 2005). all variables were seasonally adjusted through the seasonal adjustment method (eviews 7) on the basis of 2000-2013 monthly data of croatia’s regression. we used the augmented dickey-fuller (1979) test to examine a series for the presence of a unit root. according to test results, all variables are stationary in the form dlog (x) i.e. variables were integrated of order 1 (table 1) (dickey and fuller 1979, esaka 2003). 6source:http://ec.europa.eu/economy_finance/db_indicat ors/cpaceq/index_en.htm (2010). table 1: the stacionarity (augmented dickey-fuller) variable level dlog(x) capital inflow -1.987277 (0.2923) -12.81857 (0.0000) exchange rate -0.103444 (0.9462) -11.61809 (0.0000) gdp -1.435608 (0.5637) -12.81589 (0.0000) government debt 0.041906 (09601) -1.039897 (0.0000) industrial production index -1.766906 (0.3959) -12.81373 (0.0000) interest rate -2.793340 (0.0614) -12.82575 (0.0000) cpi -2.448295 (0.1303) -12.81967 (0.0000) trade balance -3.448841 (0.0107) -8.647871 (0.0000) unemployment -1.361674 (0.5999) -12.82600 (0.0000) to determine the lag length, we used the schwarz information criterion because the schwarz criterion and its parsimonious model perform better over a longer period of research (ashgar and abid 2007) as well as the akaike and hannan-quinn information criterion (akaike 1987). a maximum of twelve lags was considered for each variable when determining the lag length. for testing serial correlation, we used the qstatistic and the breusch-godfrey lm test (appendix: table b). q-statistics were estimated to check autocorrelation in the residuals (iwaisako 2004) by a test statistic for the null hypothesis that there is no autocorrelation of residuals with high probabilities and low q-statistics. the results indicated that residuals are not serially correlated and, therefore, suitable for analysis. 5.3. results and discussion croatia, as an eu new country, proved to be a suitable case study for the empirical research of procyclicality with reference to ‘black swan’ examination on a monthly basis from january 2000 to december 2013. the structural break was presumed to have occurred in july 2009, when the resignation of croatian ex-prime minister ivo sanader was announced. in light of that unexpected event, the transition period in croatia was divided into a first sub-period (from january 2000 to june 2009), while the second one was stretched from july 2009 to december 2013. second sub-period involved the resignation of ex-prime minister, as well the global financial crisis which spread beyond the national borders and didn’t pass-by croatia. the results of the stability test confirmed the hypothesis of the structural break due the resignation of croatian prime minister and due the global financial crisis (probability 0.32) (see: cappiello volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu testing the ‘black swan effect’ on croatian stock market between 2000 and 2013 page |10| emerging markets journal et al. 2006, dvorák and podpiera 2006). rock and bonnett (2004) verified the negative relationship between corruption and economic growth, and between corruption and investment. they came to the conclusion that, corruption is much more destructive to investment and economic growth in small against great developing countries. the rise in stock prices in croatia, as in other eu candidate countries were also followed by a significant capital inflow, stronger currency and low inflation. arguably the most important factors driving the acceleration of financial integration are related to the policy measures undertaken by “new” member states in order to meet european financial standards, including the liberalization of capital accounts, as well as legal and institutional reforms (see: poghosian 2008). the reforms in croatia started in 2005 with the opening of official negotiations (see: mohammad and abdelhak 2009, glazar and striekolwski 2010). reforms implementation including cuts in government spending was a requirement for eu accession and a strong incentive for see countries on their way to eu membership. just as other eu candidate countries in the process of eu accession, croatia had to implement reforms aimed at spending cuts (for instance in the pension and welfare systems), while maintaining budgetary discipline and restructuring the public sector due to high deficits in the balance of payments and overspending (see vizek and dadić 2006, dolenc and laporšek 2010). the positive environment that accompanied eu accession started reversing at the end of 2008, with the global recession and inner political instabilities (significant cases of corruption followed by many court trials) as well as lower consumer spending and lower industrial output (see andrei et al., 2009). in 2008, croatian ex-premier sanader claimed that there is no crisis in croatia. but after his resignation, croatia faced serious economical and political problems produced by internal factors (corruption, decline of gdp, industrial production and employment) as well as external factors (global crisis). in 2011, croatia government and other state bodies have started implementing demanding reforms, which have resulted in the slow rise of gdp in 2015 for the first time after 6 years and a better entrepreneurial climate. table 2: ols – croatia dependent variable: dlog(x) (01m 2000 to 12m 2013) variable (from january 2000 to december 2013) (from january 2000 to june 2009) (from july 2009 to june 2013) dlog (cap) (-8) 0.041599 (0.0269)** 0.047800 (0.0295)** 0.044783 (0.0250)** dlog (exr) (-12) -0.514578 (0.0174)** -0.684046 (0.0086)*** -0.718885 (0.0140)** dlog (int) (-11) -0.050348 (0.0588)** -0.092007 (0.0108)** -0.083066 (0.0019)*** dlog (cpi) (-4) 0.064830 (0.0069)*** 0.084424 (0.0146)** 0.084784 (0.0142)** dlog (une) (-12) -0.243750 (0.0044)** -0.275572 (0.0107)** -0.222322 (0.0343)** dlog (npl) (-3) -0.182037 (0.0068)*** -0.203318 (0.0125)** -0.258597 (0.0125)** weighted statistic weighted statistic weighted statistic r-squared 0.311777 0.377188 0.464384 adjusted r-squared 0.280961 0.337007 0.386001 s.e. of regression 0.050692 0.052389 0.035909 durbinwatson stat. 2.005705 2.000497 1.760090 s.d. dependent. var 0.059782 0.064341 0.045827 stability test (chow breakpoint test)i 0.3193 variables: cap: capital inflow expressed in percentage of gdp; exr: exchange rate expressed as the price of one unit of foreign currency in units of domestic currency; int interest rate p.a.; cpi: consumer price index (in bnp of domestic currency deflated by gdp deflator); une: unemployment expressed in percentage of the total labor force, npl: non performing loan (loan share of all nominal loans that are at least 90 days overdue) notes: the time lag of the variables is given in subscript; (probabilities)*** are in parentheses below. significance levels are denoted as: *** significant at 1%; ** significant at 5%; * significant at 10%. i probability of the chi-square distribution (0.3193) as expected, we found a correlation among the main economic indicators and stock exchange indices of croatia. we can confirm the positive influence of capital inflow and inflation on stock exchange indices volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu anita radman peša, ana brajković emerging markets journal | p a g e |11 (crobex) (see: table 2). we also confirmed that exchange rate (depreciation), interest rate, unemployment and non-performing loans have a negative impact on stock exchange indices. the rising stock prices in croatia presented in our study provide evidence of economic growth in the region and financial integration process in general, and the eu integration process in particular. the increase in stock prices usually goes hand in hand with large foreign direct investment as well as the implementation of reforms related to eu integration. european financial markets (see: erdogan 2008) have faced crucial structural and institutional adjustments with the aim of accelerating financial integration in the money, credit, bond, and equity markets. the process of integration should increase cross-border investments among countries which have joined the eu and are in the process of joining the european and economic monetary union (more in: de santis and gerard 2006, dvorák and podpiera 2006, christiansen and ranaldo 2008). the positive influence of capital inflow which is obvious in the findings concerning croatia’s regression reinforces the theory that foreign direct investments in developing economies have grown rapidly, following financial and political transformations (see: berben and jansen 2005, horobet and ilie 2007). the dramatic increase in stock prices in eu accession countries clearly followed the announcement of eu enlargement (for bulgaria, romania and slovenia, and subsequently croatia and montenegro). croatia’s fdi inflows increased by up to eur 1 billion, especially in 2005 (after the announcement of its eu candidate status). the most part of fdi inflow in croatia was through the acquisition of existing companies (mostly through privatization of services sector, telecommunications and financial services). the findings also confirmed the exchange rate as an important explanatory variable that has a significant impact on crobex. the depreciation of exchange rates has adverse effects on exporters and importers alike. exporters have an advantage over those in other countries as their sales increase and their stock prices go up (see: berben and jansen 2005, yau and nieh, 2006 andhorobet and ilie 2007, adjasi et al. 2008, knif et al. 2008). while croatia imports goods and services rather than export them, the depreciation of exchange rates has a negative impact on the stock exchange rate. like many other countries in the early phases of transition, croatia relied mainly on exchange rate anchors to lower inflation. however, in the early 1990s most southeastern and central european countries pegged their currencies to the dollar or currency baskets, which contained both the dollar and european currencies, exchange rate strategies have been gradually redirected towards the euro (see: schnabl 2004). increased financial integration implies that the benefits from adopting the euro will increase over time. the croatian kuna has gradually appreciated since the beginning of 2005 and exchange rate movements in croatia are characterized by the usual seasonal pattern reflecting tourism. evidence of a strong relationship between stock prices and exchange rates in the case of croatia can also be explained by the fact that the croatian economy partly depends on services such as tourism. every year the exchange rate of the kuna vis-àvis the euro appreciates before the summer and depreciates by some 2.7% between august and october. due to strong foreign exchange inflows in the high tourist season, the croatian real exchange rate is under constant pressure to appreciate (holzner 2005). copeland (1991) showed that, appreciation of the real exchange rate is a significant mechanism allowing tourism to benefit the economy (dajčman et al. 2013). a negative result of interest rate and nonperforming rate is in line with the theory that stock market returns are usually negatively correlated to interest rates. a rather high interest rate is typical for transition countries due to insufficient national accumulation and available credit supply. the transition from planned to market economies in the see region has led to rapid financial developments. a strong presence of foreign banks (in the case of croatia, italian and austrian banks feature the most) in those countries in the last decade did not seriously help in reducing interest rates, but it widened the supply of different financial products and services to the government, companies and households. together with improved access to foreign loans provided by new private banks, this has helped to fuel a boom in lending in croatia (see: poghossian 2008 and festić et al. 2009). until 2008, croatia had the highest growth rate of loans that have been given to the private sector what is also one of the characteristics of transition countries. many of these loans have been given to private individuals for the households which, after the crisis, become non performing loans because many people lost their jobs and payment ability. in poland, hungary as well as in croatia, a large number of house buyers took out loans in foreign currencies, especially swiss francs, before the crisis. in the past, those customers were lured by lower interest rates, yet they were not fully aware of the currency risk related to those loans (e.g. reiffeisen bank and erste bank). in particular, exchange rate depreciations might lead to an increase of nonperforming loans in countries with a high degree of lending in foreign currencies to unhedged borrowers (approximated by international claims which are mainly denominated in foreign currencies). a drop in stock prices also negatively affects bank asset quality, in particular in countries with large stock markets relative to the economy (beck, 2013). volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu testing the ‘black swan effect’ on croatian stock market between 2000 and 2013 page |12| emerging markets journal inflation and the stock exchange in croatia are positively correlated in our research, confirming the fisher hypothesis7 about positive correlation between inflation and stock exchange volatility (see more in:muradoglu et al. 2001, maysami et al. 2004, knif et al. 2008, adam and tweneboah 2009). croatia faced the highest inflation rate in 2009 but the national currency, the kuna, is stable. in an environment of ample liquidity and depressed economic activity, the croatian national bank did not change its accommodative monetary policy stance in 2010. in 2011, the alarming unemployment rate in croatia stood at nearly 20% and this remains one of the main problems of the croatian economy, together with a growing trade deficit, uneven regional development, a strained state budget and an over-reliance on tourism revenue. in 2011, croatia government and other state bodies have started implementing demanding reforms, which have resulted in the slow rise of gdp in 2015 for the first time after 6 years and a better entrepreneurial climate. 6. conclusion since its formal application for eu membership in 2001, croatia has faced different political and economic problems such as the delayed start of accession negotiations over its deficient cooperation with the international criminal tribunal, significant cases of corruption, effects of global recession, lack of institutional reforms, growing budget deficit and high unemployment. despite these problems, croatia has over the past decade also seen some positive trends such as strong foreign direct investment followed by the establishment of a capital market, as part of its opening up to market economy. capital inflow in croatia (expecially high following the start of eu accession negotiations in 2005) boosted stock exchanges and occasioned a rise in gdp, industrial production and trade relations, especially with eu. the results of measuring the procyclicality of the croatian stock market from january 2000 to december 2013 also implies that the resignation of premier sanader was a trigger for decline in stock prices and economic activities, following with belated recession in region. facing the new economic conditions, country faced serious problems produced by internal factors (corruption, decline of gdp, industrial 7the fisher hypothesis (1930) is that the market rate of interest comprises the expected real rate of interest and expected inflation. this hypothesis, when applied to stock markets, postulates a positive one-to-one relation between stock returns and inflation. production and unemployment etc) as well as external factors (global crisis). the findings of empirical analysis also proved that stock indices in croatia are negatively correlated to exchange rates, interest rates, non-performing loans and unemployment rates. real exchange rates are symptomatically procyclical in croatia, as was the case with other countries in transition, because croatia relied mainly on exchange rate anchors to keep inflation in check. a negative correlation was also confirmed for the interest rates due to a strong presence of foreign banks in croatia and a different range of financial products they offer. high interest rates in croatia, especially after the 2008 global recession, caused a decline in consumption and private and public sector lending. in 2011, croatia government and other state bodies have started implementing demanding reforms, which have resulted in the slow rise of gdp in 2015 for the first time after 6 years and a better entrepreneurial climate. references adam, k., japelli, t., menichini, a., padula m., and pagano, m. 2002. analyse, compare, and apply alternative indicators and monitoring methodologies to measure the evolution of capital market integration in the european union. european commission. 1–95. adam, a. m., and tweneboah, g. 2009. foreign direct investment and stock market development: ghana's evidence. international research journal of finance and economics. 26: 178-185. adjasi, ch., harvey, s.k., and agyapong, d. 2008. effect of exchange rate volatility on the ghana stock exchange. african journal of accounting, economics, finance and banking research, 3(3). aizenman, j., and noy, i. 2005. fdi and trade two way linkages. nber working paper. 11403. akaike, h. 1987. factor analysis and aic. psychometrika, 52(3): 317-332. andrei, t., matei, a., stancu, s., and oancea, b. 2009. some notes about volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu anita radman peša, ana brajković emerging markets journal | p a g e |13 decentralization process implication on public administration corruption in romania. prague economic papers, 1: 26-37. andrews, d.w.k. 1993. test for parametar instability and structural change with unknown change point. econometrica, 61:821 – 856. ashgar, z., and abid, i. 2007. performance of lang lenth selection criteria in three different situtations. interstat. babetskii, i., komârek, l., and komârkovâ, z. 2007. financial integration of stock markets among new eu member states and the euro area. finance aúver czech journal of economics and finance, 57, 341-362. baele, l., ferrando, a., hördahl, p., krylova, e., and monnet, c. 2004. measuring financial integration in the euro area. occasional paper series, european central bank, 14: 1–93. baltzer, m., cappiello, l., de santis, r., and manganelli, s. 2008. measuring financial integration in the new eu member states.occasional paper series, european central bank, vol.81. beck,r., jakubik, p., and piloiu, a. 2013. non-performing loans what matters in addition to the economic cycle? vol.1515. berben, r.p., and jansen, w.j. 2005. comovement in international equity markets: a sectoral view. journal of international money and finance, 24: 832-857. bertelsmann stiftung, bti 2012 croatia country report. breusch, t. s., and pagan, a. r. 1979. a simple test for heteroskedasticity and random coefficient variation. econometrica. 48: 1287–1294. brunaker, f., and nordqvist, a. 2013. a performance evaluation of black swan investments. university of gothenburg, department of economics, bachleor thesis. cappiello, l. kadareja, g.a., and manganelli, s. 2006. financial integration of new eu member states. ecb working paper series. no.683. carrieri, f., errunza, v., and hogan, k. 2007. characterizing world market integration through time. journal of financial and quantitative analysis. 42(4): 915-940. castro, c. c. 2012. black swan theory: we know absolutely nothing & the finding of atypical events optimization-method. copeland, b. 1991. tourism, welfare and deindustrialization in a small open economy. economica, 58: 515-529. černý, a., and koblas, m. 2008. stock market integration and the speed of information transmission. czech journal of economics and finance, 58: 2-20. dajčman, s., festić, m., and kavkler, a. 2013. long range dependence in the returns of three central and eastern european stock markets a time-varying analysis. transformations in business & economics (tibe) in print, vol 12, 1 (28): 206-220. dalić, m. 2002. usporedna analiza hrvatskog financijskog sustava i financijskih sustava naprednih tranzicijskih zemalja. privredna kretanja i ekonomska politika. 92: 27-51. de santis, r. a., and gérard, b. 2006. financial integration, international portfolio choice and the european monetary union. european central bank, working paper series no.626. dickey, d.a., and fuller, w.a. 1979. distribution of the estimators for autoregressive time series with a unit root. journal of the american statistical association. 74: 427–431. dolenc, p., and laporšek, s. 2010. tax wedge on labour and its effects on employment growth in the european union. prague economic papers, 4: 344 – 358. dvorák, t., and podpiera, r. 2006. european union enlargement and equity markets in accession countries. emerging markets review, 7(2): 129–146. http://www.jstor.org/stable/2286348 http://www.jstor.org/stable/2286348 http://www.jstor.org/stable/2286348 volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu testing the ‘black swan effect’ on croatian stock market between 2000 and 2013 page |14| emerging markets journal égert, b.,and kočenda, e. 2007. interdependence between eastern and western european stock markets: evidence from intraday data. economic systems, 31(2):184–203. égert, b., and koubaa, y. 2004. modelling stock returns in the g-7 and in selected cee economies: a nonlinear garch approach. william davidson institute working paper no.663. engle, r.f., and granger c.w. 1987. cointegration and error correction: representation, estimation and testing. econometrica. 55:51–276. erdogan, b. 2008. financial integration in the european stock markets’, working paper d. 1.1.a., finess, european commision. esaka, t. 2003. panel unit root tests of purchasing power parity between japanese cities, 1960 – 1998: disaggregated price data. japan and the world economy. 15 (2): 233–244. estrada, j. 2009. black swans in emerging markets. journal of investing, 18(2): 50-56. european commission, 2010. eu candidate and pre-accession countries economic quarterly. european parliament, directorate general for internal policies. 2010. the economic and political situation in croatia. european policy center, 2014. eu integration and party politics in the balkans. pc issue no.77. festić, m., repina, s., and kavkler, a. 2009. the overheating of five eu new member states and cyclicality of systemic risk in the banking sector. journal of business economics and managemen. 10 (3): 219-232. fisher, i. 1930. the theory of interest. new york, macmillan. fratzscher, m. 2002. financial market integration in europe: on the effects of emu on stock markets. international journal of finance and economics. 7:165-193. gerard b., hillion, p., and roon, f. 2003. international portfolio diverzification: industry, country and currency. effects revisited, working paper. glazar, a., and striekolwski, w. 2010. turkey and the european union: possible incidence of the accession on migration flows. prague economic papers. 3: 218 – 234. godfrey, l.g. 1978. testing for multiplicative heteroscedasticity. journal of econometrics. 8: 227– 236. hanousek, j., kočenda, e., and kutan, a.m. 2009. the reaction of asset prices to macroeconomic announcements in new eu markets: evidence from intraday data. journal of financial stability, 5(2): 199-219. hansen, b. e. 1997. approximate asymptotic p-values for structural-change tests. journal of business and economic statistics. 15:60-67. holzner, m. 2005. fear of croatian disease. is there a danger of a dutch disease effect with respect to a boom in the tourism sector in croatia in the long run ’the croatian disease’? wu vienna university of economics and business, doctoral thesis. horobet, a., and ilie, l. 2007. on the dynamic link between stock prices and exchange rates: evidence from romania. munich personal repec archive, mpra paper no.6429. horská, h. 2005. český akciový trh – jeho efektivnost a makroekonomické souvislosti. finance a úvűr. the czech journal of economics and finance. 55(56): 283–301. iwaisako, t. 2004. stock index autocorrelation and crossautocorrelation of size sorted portfolios in the japanese market. journal of financial economics. 3:283–301. johansen, s. 1988. statistical analysis of cointegration vectors. journal of volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu anita radman peša, ana brajković emerging markets journal | p a g e |15 economic dynamics and control. 12: 231-254. kim, s.j., lucey, b.m., and wu, e. 2005. dynamics of bond market integration between existing and accession eu countries. the institute for international integration studies discussion paper series. knif, j., kolari, j., and pynnönen, s. 2008. stock market reaction to good and bad inflation news. journal of financial research. 31(2):141–166. koruga, p., et al. 2011. comparison of communication of political parties over the internet in slovenia and croatia. international conference on information society. latković, m. 2002. risk management: identification, measurement and control. finansijska teorija i praksa. 26(2): 463-477. levaj, l., kamenarić, t., mišković, j., and mokrovčak, i. 2005. metode obrade signala u ekonomiji. sveučilište u zagrebu, fakultet elektrotehnike i računarstva. maysami, r. c., howe, l. c., and hamzah, m. a. 2004. relationship between macroeconomic variables and stock market indices: cointegration evidence from stock exchange of singapore's all-s sector indices. journal pengurusan. 24: 47-77. mohammad, b., and abdelhak, b. 2009. the relationship between money and prices in the maghreb countries: a cointegration analysis. mpra paper. no.1274. muradoglu, g., metin, k., and argac r. 2001. is there are long run relationship between stock return and monetary variables: evidence from emerging market. applied financial economic. 11: 641 – 649. onay, c. 2007. integration of bulgaria and romania to the european union. the business review. 1: 119-126. poghossian, t. 2008. are “new” and “old” eu members becoming more financially integrated? a threshold cointegration analysis. international economics and economic policy. 6(3): 259 – 281. raiffaisen research, 2014. croatia country report. rock, m. t., and h. bonnett, 2004. the comparative politics of corruption: accounting for the east asian paradox in empirical studies of corruption, growth and investment. world development. 32 (6): 999-1017. savva, s.c., and aslanidis, n. 2007. modelling stock market correlations between new eu member states and the eurozone. empirical economics. 39(2): 337-351. schnabl, g. 2004. de jure versus de facto exchange rate stabilization in central and eastern europe. aussenwirtschaft. 59(2): 171–90. sniedovich, m. 2012. black swans, new nostradamuses, voodoo decision theories, and the science of decision making in the face of severe uncertainty. international transactions in operational research. 19(1-2): 253281. syllignakis, m., and kouretas, g. 2006. long and short-run linkages in cee stock markets: implications for portfolio diversification and stock market integration. william davidson institute working papers series. no.832. stiftung, bti 2014 croatia country report. taleb, n. n. 2004. few and far between: black swans and the impossibility of prediction. change this. 33(4): 1-16. taleb, n. n. 2003. the black swan: why don’t we learn that we don’t learn? highland forum. taleb, n. n. 2007. the black swan: the impact of the highly improbable. get abstract the random house publishing group, inc. taleb, n. n. 2009. crni labud: utjecaj krajnje nevjerojatnog. zagreb, jesenski i turk. the miroslav krleža institue of lexicography. 2013. croatia – land and people. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu testing the ‘black swan effect’ on croatian stock market between 2000 and 2013 page |16| emerging markets journal vizek, m. and dadić, t. 2006. integration of croatian, cee and eu equity markets: cointegration approach. ekonomski pregled. 57 (9-10): 631-646. yau, h.y., and nieh, ch. 2006. interrelationships among stock prices of taiwan and japan and ntd/yen exchange rate. journal of asian economics. 17: 535–552. žiković, s. 2006. implications of measuring var using historical simulation; an example of zagreb stock exchange index – crobex in j. roufagalas (ed.), resource allocation and institutions: explorations in economics, finance and law. 367-389. appendix appendix a. correlation of the explanatory variables (sample: 2000:1 2013:12) cap exr int cpi une npl cap 1.0000 00 0.5466 84 0.3926 89 0.4550 45 0.2338 12 0.7287 17 exr 0.5466 84 1.0000 00 0.0633 56 0.3202 44 0.7644 08 0.4119 68 int 0.3926 89 0.0633 56 1.0000 00 0.5889 58 0.0940 77 0.3122 74 cpi 0.4550 45 0.3202 44 0.5889 58 1.0000 00 0.2260 00 0.1845 20 une 0.2338 12 0.7644 08 0.0940 77 0.2260 00 1.0000 00 0.0018 87 npl 0.7287 17 0.4119 68 0.3122 74 0.1845 20 0.0018 87 1.0000 00 symbols: cap: capital inflow expressed in percentage of gdp; exr: exchange rate expressed as the price of one unit of foreign currency in units of domestic currency; int interest rate p.a.; cpi: consumer price index (in bnp of domestic currency deflated by gdp deflator); une: unemployment expressed in percentage of the total labour force, npl: non-performing loan (loan share of all nominal loans that are at least 90 days overdue) appendix b. serial correlation (sample: 2000:1 2013:12) volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu development of trade communication of iran with selected countries hamidreza alipour assistant professor, department of management and economics, rasht branch, islamic azad university rasht, iran | tel: +989111311776 | alipour@iaurasht.ac.ir leila gholamipour phd student in economics, islamic azad university kerman, iran | gholamipour@ymail.com abstract the present study aimed to determine the trade potential of iran with 13 countries that have made up the largest volume of foreign trade in the last decade. for this purpose, we have utilized the generalized gravity model and multivariate regression technique with panel data to estimate it. the results show that the most important variables affecting the trading volume of iran are gross domestic product per capita and population, and that geographical distance variable had insignificant impact. on the other hand, the most trade gap of iran is attributed to turkey and the united kingdom and the minimum gap is related to afghanistan. jel-classification: f15, e1, f1, c23 keywords: economic integration, globalization, gravity model, panel data, trade gap. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.105 | http://emaj.pitt.edu | mailto:alipour@iaurasht.ac.ir mailto:gholamipour@ymail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.105 | http://emaj.pitt.edu hamidreza alipour, leila gholamipour emerging markets journal | p a g e |1 development of trade communication of iran with selected countries hamidreza alipour leila gholamipour i. introduction islamic republic of iran is unable to accept or reject globalization conditions at once. therefore, in terms of various economic integrations it can realize the existing opportunities and clarify problems and challenges of globalization process. the main objective of this study was to ground a basis for iran to enter into world trade. therefore, considering the foreign trade process of iran in recent years, first the countries with higher trade potential should be determined and then their trade potential should be estimated. hence, trade gap of selected countries is estimated by utilizing the gravity model. ii. theoretical basis turning to regionalism and economic integrations are such solutions that developing economies adopt in order to cope and deal with globalization. thereby they protect themselves from globalization problem and reach competitive advantage in the global market. in fact, understanding the national trade potential as a step towards global economy through removing tariff barriers can fulfill countries' access to wider markets, eliminate investment and technology transfer barriers, and as an opportunity can clarify ambiguous points of economic globalization. developing countries are trying to resolve commercial and economic issues at a smaller scale in order to promote investment and economic growth (tayebi and azerbaijani, 2001). in a world where globalization has remarkable speed, regionalism is very important because inter-regional relationships can facilitate globalization. regionalism take place in a structure based on positive peace and often starts from non-political processes and eventually leads to political and legal processes (simbar, 2008). moreover, it is possible to insure the economy during globalization process by gaining higher competitive power in the international trade aspect. in other words, attending trade arrangements and regional integration can provide the basics of attending global economy and encourages national economy towards interacting with global economy to seize the opportunities resulting from the impact of globalization process. it also keeps away the challenges and negative impacts of this process (karimi, 2006). iii. literature gravity model was first used by tinbergen (1962) and poyhonen (1963) in order to analyze mutual trade among european countries. however, the origin of the use of gravity models in social sciences fields and trends for fields such as astronomy, sociology and regional economy dates back to the 1930s. bendjilali (1997) examined the main factors in the relationships within oic using gravity model and found out that trading volume is positively correlated with economic size of countries and negatively associated with transport cost as a barrier to distance variable. al atrash and yousef (2000) using gravity model suggested that trading within the arab world countries and trading of arab world with other countries are less than that predicted by the gravity equation. the results indicate that, there is considerable scope for regional integration. ghani (2007) has studied the effects of membership in oic relative to trading volume. using a standard gravity model, he stated that the oic member countries are exposed to conflict and on average their institutional quality is lower than non-member countries. meanwhile, raimi and mobolaji(2008) investigated the possibility of "faith-based integration" under the protective umbrella of the oic. their studies and the results are strong for increasing trade within the oic. ismail (2008) investigated malaysian trade model with its 80 trading partners so that 20 countries are oic members. the results showed that, malaysia's trade is with countries that are similar in size but different in terms of interruption factor. edmonds et al (2008) used the generalized gravity model to compare china's export prosperity with the east and southeast asian countries. the results indicate too much orientation of china to other countries. ab rahman and abu-hussin (2009) investigated malaysia's trade relationships with the countries of the persian gulf cooperation council (gcc), which includes the united arabic emirates (uae), bahrain, saudi arabia, oman, qatar and kuwait. using trade intensity index, they demonstrated that malaysian trade with each single gcc countries and gcc countries as a group of countries was very low during 1990-2007. karagoz and ozansaray (2010) detected factors affecting trade flows of turkey with guinea, peru, myanmar, mexico, laos, and brunei. coefficients from the fixed effect model show that trading volume between turkey and the above mentioned countries is directly and positively influenced by the countries' economy, whereas distance has a negative role on trade relationships and population had no significant effect on trade volume. abu-hussin (2010) investigated trade relationships of malaysia and persian gulf cooperation council (gcc) countries. using a clear comparative advantage (rca) trade intensity index, he suggested that trade relationship was negligible compared to the traditional trading partners. nazia gul volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.105 | http://emaj.pitt.edu development of trade communication of iran with selected countries page |2| emerging markets journal and hafiizyasin (2011) have measured trade potential of pakistan with 42 countries during 1981-2005. finally, it turned out that pakistan has the highest potential with the countries of asia, europe union, middle east, latin america and north america. evelyn et al found that based on the gravity model, culture and religion had no significant effect in enhancing mutual trade between malaysia and the gcc countries. zainalabidin (2013) assessed the impact of economic factors on mutual exports between malaysia and oic member countries. panel data model is used to estimate the gravity model and covers the period 1997 to 2009.estimating the gravity model refers to the importance of economic size, degree of economic openness, inflation rate, and exchange rate, which are the factors affecting exports of malaysia with oic members. estimating the effects of individual variables shows that distance and economic enterprises have significant influence on increased exports between malaysia and oic. soori and tashkini (2011) discussed factors affecting symmetric trade of iran with countries of trade party in asean, gcc, eco and eu regional blocks. the results from estimating the model show that economic size, per capita income and distance are the most important variables that explain mutual trade of iran and countries of trade party. ashrafzadeh (2005) used the gravity model to study the economic integration among a group of asian, european and african countries, included new variables such as the ratio of exports and imports in the gravity model, and refused the use of dummy variables and distance variable. the gravity model was specified based on matyas technique (matyas, 1997) and it was found that long-run tension of exports was greater than imports and in the long term after integration the trade balance will be positive. tayebi and azerbaijani (2003) used effective factors and studied both iran and ukraine. the results indicate that the studied variables not only have negative signs as expected, but also are not significant. in the other words, as a result of comparing the economic indicators of the two countries, their economic situation still makes integration between the two countries impossible. in addition, it affects on this claim. iv. results the following function shows the relationship between the trade potential of iran and affecting factors. after estimation of model economic relationships, it is possible to identify and detect the effect of each factor. since the purpose of this paper is to analyze the impact of these factors on increasing the national trading volume, it is necessary to calculate the tension of each of these variables. thus, the most suitable form is cobb-douglas non-linear function. by finding the logarithm of the model, we turn it into a linear function. the final form of the model is thus as follows: , where tr: trading volume between iran and selected business partners; gdp: gross domestic product per capita of selected countries; gdpi: gross domestic product per capita of iran; pop: population of selected countries; popi: population of iran; dis: geographical distance of iran with selected countries; lin: linder variable. t: the time period from 2001 to 2011 i: iran; j: the desired sections, including united arabic emirates, china, republic of korea, turkey, switzerland, germany, india, italy, france, japan, britain, iraq and afghanistan. these countries were chosen because in the past 11 years, on average, had the highest volume of trade with iran. a. durability test one way to avoid spurious regression is to be ensured of stability of the data. thus, before estimating the model, the statistical properties of panel data are examined in terms of durability or unit roots. for this purpose, unit root test, which is the most common test to recognize durability, is used. llc test results for the variables of the model are presented in table (1): table 1: llc test results b. cointegration test the economic concept of cointegration is that, when two or more time series variables are related together based on theoretical basis, they form a long-term equilibrium relationship. although it is possible for the time series to have random process (to be unstable), over time they follow each other well. according to table 2 and both adf and pp tests and their zero probability, the null hypothesis of non-cointegration between the variables of p-value test statistic variable 0.00 -3.88 0.00 -9.84 0.00 -6.02 0.00 -30.28 0.00 -12.24 0.00 -2.89 volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.105 | http://emaj.pitt.edu hamidreza alipour, leila gholamipour emerging markets journal | p a g e |3 both panels is rejected. the results show that, variables in both panels form long-term equilibrium relationship. table 2: pedroni cointegration test results result (p-value), test statistic test method null hypothesis is rejected. (0.00), -20.39 group ppstatistic null hypothesis is rejected. (0.00)-3.77 group adfstatistic c. model estimation now in order to determine the presence or absence of a separate intercept for each country, we first examine lm test and choose between combined data and noncointegrate data (fixed effects or random effects). in this study, pooled model is adopted. the results of estimating by pooled method are presented in table (3): table 3: estimation results pooled variable prob t-statistics coefficient 0.00 5.16 0.54 log(gdp) 0.03 2.11 0.56 dlog(gdpi) 0.00 -4.79 -0.0002 logdis 0.00 4.63 0.42 log( pop) 0.00 3.63 0.51 log(popi) 0.04 2.00 0.01 loglin as can be seen from the estimated output, all coefficient signs are consistent with economic theory and all coefficients are significant. the coefficient of determination obtained explains that variables are independent. this means that, around 60% of the changes in the trading volume of iran with selected countries are explained by the independent variables. meanwhile, there is no significant space between d-w statistics and 2. on the other hand, panel data and the short period of the study years have some limitations in terms of reliability of correlation. v. discussion gross domestic product per capita as economic size indicator of countries, play an important role in foreign trade and it is expected that, as it increases, national trade potential increases as well. the coefficient of this variable is equal to 0.54. it means if gdp of partner countries increases by 1%, trade potential of iran will increase by more than 0.50%. asprob=0, it can be claimed to be significant. another contributing factor to the trade potential of iran is iran's per capita gross domestic product with coefficient equal to 0.56 and has the most influence on foreign trade volume among the existing variables. also, prob<0.05 indicates that the variable is significant. the third factor in this study is the geographical distance between the capital cities. it is expected that countries that are far from each other have less potential to increase trade due to reasons such as transportation cost, lack of cultural commonalities, and so on. the coefficient of this variable (0.0002) indicated a slight negative correlation between geographic distance and trade volume. another factor examined in the present study is the population of iran and the selected trade partners. as seen from table 3, there is a positive and significant relationship between these variables and the volume of trade. population tension of iran and partner countries is 0.51 and 0.42, respectively. that means if the population increases by 1%, trade volume of the two countries will increase by about 0.50%. also, linder variable is used as economic similarity index of countries and it is expected that the higher the linder value is, the more the volume of trade between the two countries increases. the coefficient of this variable is equal to 0.01, indicating a positive and significant relationship with the dependent variable. vi. conclusion among the factors affecting the trade potential of countries, gdp of iran and its trade partners has effective and similar contribution. after that the population of the countries has a positive effect on increasing the volume of trade between iran and other countries, while economic similarity of countries has a far smaller contribution. finally, geographical distance has the minimum influence that is very little and also negative. after estimating the parameters and determining the final form of the function, trade potential values of countries can be obtained by placing the actual values of the explanatory variables during the study years. then, by comparing trade volume in recent years, the trade gap of iran with 13 surveyed countries is determined. in order to compare the countries with each other, the mean trade gap is presented in figure 1. as can be seen, the greatest trade gap of iran is with turkey and england, therefore there is a high potential to increase trade exchanges with these two countries, and the lowest trade gap is with afghanistan. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.105 | http://emaj.pitt.edu development of trade communication of iran with selected countries page |4| emerging markets journal fig.1. mean trade gap of iran with selected countries references ashrafzade, hamid reza, 2005, the economic integration of developing countries; application of gravity model with fusion data in gmm method and convergence, journal of commerce, no. 36, pp 1-28. simbar, reza, iran and regionalism in southeast asia: strategies and solutions in iranian foreign policy, 2 journals of theoretical politics, no. 5, winter 1999 and spring 2009. souri, amir reza, shakini, ahmad, 2011, factors influencing mutual trade of iran with regional blocks, journal of economic modelling, vol. iii, no. 3. tayebi, komeil, azerbaijani, karim, 2001, investigation of trade potential between iran and ukraine: using a gravity model, journal of commerce, no. 21. karimi, hossein, 2006, globalization, economic integration and trade potential: investigation of gravity model in iran trade analysis, journal of modern economics and business, no.5, p 118. abu-hussin, m. f. (2010). exploring international trade between malaysia and gcc countries: empirical analysis on trends. al atrash, h., & yousef, t. (2000). intra-arab trade: is it too little?. imf working paper, 00/10, international monetary fund (imf). bendjilali, b. (1997). an intra-trade econometric model for oic member countries: a cross country analysis. irti research papers,no. 55. evelyn s., ahmad, z., &thirunaukarasu, s. (2011). leveraging trade opportunities with non-traditional partners: the malaysia-gcc ghani, g. m. (2007). does oic membership reduce trade? journal of economic cooperation, 28(4): 39-62. gul, nazia , hafiz, m. yasin,2011, the trade potential of pakistan: an application of the gravity model, the lahore journal of economics,no 16 : 1: pp. 23-62 hassan, m. k. (1998). an empirical investigation of economic cooperation among the oic member countries. economic researchforum. karagoz, kadir, ozansaray,m. ,(2010), trade potential of turkey with asia-pacific countries: evidence from panel gravity model, international economic studies, vol. 36, no. 1 (new issue), pp. 19-26. ismail, n. (2008). explaining malaysian bilateral trade using the gravity model. the empirical economic letters, 7(8): 811-818. poyhonen, p. (1963). a tentative model for the volume of trade between countries. welwirtschaftlichesarchiv, 90: 93-99. raimi, l. &mobolaji, h. i. (2008). imperative of economic integration among muslim countries: lessons from europeanglobalisation. humanomics, 24 (2): 130-144 t inbergern, j. (1962). shaping the world economy: suggestions for an international economic policy. journal of farm economics,46(1): 271-283. zarzoso, m.i., &felicitas nowak lehmann., (2003). augmented gravity model: an emprical application to mercosur – european union trade flows, journal of applied economics, 5, 2, 219-316 0 0,5 1 1,5 2 2,5 trade gap between the countries mutual fund performance: evidence from south africa ömer faruk tan research assistant, mef university faculty of economics, administrative and social sciences, department of economics, turkey | e-mail: omerfaruk.tan@mef.edu.tr / omerfaruktan34@gmail.com volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.83 | http://emaj.pitt.edu abstract this paper aims to evaluate the performance of south african equity funds between january 2009 and november 2014. this study period overlaps with the period of quantitative easing during which developing economies in financial markets have been influenced severely. thanks to the increase in the money supply directed towards the capital markets, a relief was experienced in related markets following the crisis period. during this 5-year 10-month period, in which the relevant quantitative easing continued, johannesburg stock exchange (jse) yielded approximately 16% compounded on average, per year. in this study, south african equity funds are examined in order to compare these funds’ performance within this period. within this scope, 10 south african equity funds are selected. in order to measure these funds’ performances, the sharpe ratio (1966), treynor ratio (1965), jensen’s alpha (1968) methods are used. jensen’s alpha is also used in identifying selectivity skills of fund managers. furthermore, the treynor & mazuy (1966) and henriksson & merton (1981) regression analysis methods are applied to ascertain the market timing ability of fund managers. furthermore, treynor&mazuy (1966) regression analysis method is applied for market timing ability of fund managers. keywords: mutual fund, south africa, performance evaluation, equity funds new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. mailto:omerfaruk.tan@mef.edu.tr mailto:omerfaruktan34@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.83 | http://emaj.pitt.edu omer faruk tan emerging markets journal | p a g e |49 mutual fund performance: evidence from south africa ömer faruk tan 1. introduction mutual fund performance has always been one of the most researched areas of finance studies. using diverse technical measurement methods, these types of studies analyze fund performances of various markets from different perspectives. especially, following the period of liberalization of the financial markets, mutual funds have gained much more significance in the eyes of investors, resulting in numerous studies that have been carried out on performance evaluations. mutual funds bring investors who share a common goal together. according to deepak (2011), investors invest the money they collect into capital market instruments such as shares, debentures and other investment securities. the total income acquired from investments and the capital appreciation is equally shared among unit holders by taking into account the units owned by them. as a consequence, mutual funds are a suitable investment for the common man, as they provide the opportunity to invest various professionally managed securities at a relatively low cost. the main objective of investing in a mutual fund scheme is to diversify risk. the mutual funds invest in diversified portfolio and the fund managers take different levels of risk so as to achieve the scheme’s objectives. hence, while evaluating and comparing the schemes, the returns should be measured by taking into account the risks involved in achieving the returns. (rao, 2006). the global crises emerged in america in 2008 and later spread to other countries, affecting especially the economies of europe and america and their financial markets a great deal. the american and european economies went into recession and some significant financial investment banks collapsed, such as lehman brothers. also, in europe, banking crises occurred in various countries led by portugal, ireland, spain, greece, and italy. this situation, in the eyes of investors, made america and europe lose their reputation of being the “safe port” and making investors turn towards other stock markets for investment purposes. to ease the recession, the fed applied a policy of quantitative easing. between december 2008 and october 2014, the fed bought huge quantities of government bonds and bills from the markets to enhance the money supply for the sake of encouraging the revival of the economy. quantitative easing policy started in december 2008 and finished in october 2014. quantitative easing policy separates four terms qe1 (december 2008june 2010), qe2 (november 2010june 2011), qe3 (september 2012october 2014) and finally qe4 (january 2013october 2014). (useconomy). during the period, huge amount of money influx from developed countries to developing countries experienced. hence, in this paper, it is tried to analyze fund performances of south african equity funds between 09 january 2009 31 0ctober 2014 in the era of quantitative easing. south africa is considered as one of the emerging markets and over the study period of 5 years 10 months, johannesburg stock exchange (jse) grew by 15.9% compounded annually on average. johannesburg stock exchange performed better than major developed european markets. in the sample period, developed market indices dax, ftse 100, cac 40 yielded 12.1%, 6.8% and 4.1%, respectively. 2. literature review beginning from the 1960s, there have been several studies carried out on mutual fund performance. treynor (1965), sharpe (1966) and jensen (1968) are among those who measure fund performance related to risk and return measurements. sharpe (1966) measured 34 open-ended mutual funds between 1954-1963 using the sharpe ratio and treynor ratio. as the result of the study, it has been found out that while 11 funds out of 34 show a better performance than the index, 23 funds underperform their benchmarks. jensen (1968) examined 115 mutual funds which were active between 1945-1964 – by using an alpha indicator that he generated. his alpha indicator shows the selectivity skills of fund managers. based on his results, funds could not outperform the market performance, revealing that mutual fund managers, in general, did not have selective ability. malkiel (1995) used the jensen method to calculate the performance of american funds between the years 1972 and 1990. he revealed that mutual funds could not show positive excess return. detzler (1999) searched 19 global bond funds by using monthly returns between the years 1985 and 1995. in the study, a multiple regression analysis was used and it was found out that funds could not show better performance than indexes. dahlquist, engström and söderlind (2000) evaluated 201 swedish mutual funds – including only domestic funds from the period between 1993 and 1997. they found that regular equity funds seemed to over perform while bond and money market funds performed less. furthermore, actively managed funds demonstrated better performance than passively managed funds. mutual fund performance: evidence from south africa page |50| emerging markets journal volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.83 | http://emaj.pitt.edu with the aim of detecting the market timing ability of the fund managers, treynor and mazuy (1966) established the quadratic regression analysis method. they applied this method to 57 open-end mutual funds (25 growth funds and 32 balanced funds). they revealed only a single fund as having statistically significant market timing ability. henriksson and merton (1981) and henriksson (1984) developed both parametric and nonparametric statistical models to the test market timing ability of portfolios. having been introduced by henriksson and merton (1981), the parametric and non-parametric tests in question were applied by henriksson (1984) to evaluate the market timing ability of 116 open-end funds between 1968 and 1980 in the u.s. market. the results revealed that there wasn’t any support for market timing ability. moreover, henriksson found an inverse relationship between selection ability and market timing ability. chang and lewellen (1984) tested the market timing ability of 67 u.s. funds covering the period from 1971 to 1979 by using the henriksson & merton (1981) method. it was found that there were weak indications of fund manager market timing ability. gallo and swanson (1996) tested 37 u.s. mutual funds by using the treynor & mazuy model for market timing, yet found no evidence of market timing of funds. christensen (2005) evaluated 47 danish funds between january 1996 and june 2003. he found that fund managers did not have selectivity skills in general and, in terms of timing ability, the results were also negative, due to the fact that only two funds had significant timing ability. gilbertson and vermaak (1982) evaluated seven south african mutual funds over the period 1974 to 1981. according to results, in general, returns of funds were lower than market indexes. only one fund guardbank – showed significantly outperformed than indexes. manjezi (2008) investigated 15 south african funds during the period between 2001 and 2006. according to his results, the index showed a better performance than funds. in addition, only one fund displayed both selective and market timing ability during the study period. mbiola (2013) examines 64 south african domestic general equity unit trusts over the period from 1992 to december 2011. according to his result, funds could not show strong evidence of superior performance than market. 3. methodology and data 3.1. methodology in this study, it is tried to evaluate both funds and funds managers’ performance of south african equity funds. a total of 10 equity funds performances’ are analyzed. in order to evaluate fund performance, sharpe (1966), treynor (1965) and jensen’s alpha (1968) ratios are computed. jensen’s alpha method also shows the selectivity skills of fund managers. in order to test mutual fund managers’ market timing ability, the treynor & mazuy (1966) and henriksson & merton (1981) methods are applied. 3.1.1. treynor ratio according to kouris, adam, & botsaris (2011) the treynor ratio is the first risk-adjusted performance measure of mutual funds that was put forward by treynor in 1965. it is calculated as the ratio of the excess return of the mutual fund divided by its beta (systematic risk) and is defined as: ti = (rp-rf) / p (1) where ti = treynor’s performance index rp = portfolio’s actual return during a specified time period rf = risk-free rate of return during the same period p = beta of the portfolio according to reilly (1992), whenever rp > rf and p > 0, a larger t value means a better portfolio for all investors regardless of their individual risk preferences. in two cases, a negative t value may result: when rp < rf or when p < 0. if t is negative because rp < rf, then we deduce that the portfolio performance is very poor, whereas if the negativity of t comes from a negative beta, the fund’s performance is excellent. 3.1.2. sharpe ratio according to noulas &lazaridis (2005), the sharpe technique was developed in 1966 and is fairly similar to the treynor technique, but the sharpe technique uses the total risk of the portfolio rather than systematic risk. this technique computes the risk premium earned per unit of the total risk. the sharpe value can be calculated as follows: sp =(rp – rf /) p (2) where sp = sharpe ratio rp = the average rate of return for a fund rf = the average risk-free return p = the standard deviation of the fund. the sharpe ratio (sp) evaluates the performance of its level of total risk. a higher value of this ratio indicates volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.83 | http://emaj.pitt.edu omer faruk tan emerging markets journal | p a g e |51 that the fund delivers a higher performance by using standard deviation ( p). (duggimpudi, abdou, & zaki, 2010, p. 79). 3.1.3. jensen’s alpha as jensen (1968) explained, “a portfolio manager’s predictive ability – that is, his ability to earn returns through the successful forecast of security prices that are higher than those which we could presume given the level of his riskiness of his portfolio” (p. 389). jensen’s model can be written as: rpt – rft = p + p (rmt – rft) + ept (3) p = the excess return on the portfolio after adjusting for the market rpt = the return on the portfolio p at time t rft = the return on a riskless asset at time t rmt = the return on the market portfolio at time t p = the sensitivity of the excess return on the portfolio t with the excess return on the market. the sign of the alpha displays whether the portfolio manager are superior to the market after adjusting for risk. a positive alpha denotes better performance relative to the market, and a negative alpha designates poorer performance. (mayo, 2011). 3.1.4. treynor&mazuy regression analysis investment managers may well beat the market, if they are able to adjust the composition of their portfolios in time when the general stock market is going up or down. that is, if fund managers believe the market is going to drop, they alter the composition of the portfolios they manage from more to less volatile securities. if they think the market is going to climb, they shift in the opposite direction. (treynor&mazuy, 1966). mutual fund managers may hold a higher proportion of the market portfolio if they are qualified to predict future market conditions and envisage the stock market as a bull market. on the other hand, mutual fund managers may hold a lower proportion of the market portfolio if they expect the market to underperform in the future. treynor and mazuy (1966) developed the following model to evaluate market-timing performance: (4) where i is the timing-adjusted alpha, which represents the timing-adjusted selective ability of mutual fund managers. the quadratic term in equation (4) is the market timing factor and the coefficient of the market timing factor, , represents mutual fund managers’ market timing ability. if is positive, mutual fund managers have superior market timing ability i.e., the investment portfolios of mutual funds are adjusted actively to well-anticipated changes in market conditions. a negative implies that mutual fund managers do not exhibit market timing ability. (chen et al., 2013). 3.1.5. henriksson&merton regression analysis another return-based approach for estimating performance is the option approach developed by merton and henriksson. the regression used is similar to the treynor & mazuy regression. in contrast to the linear beta adjustment of the treynor and mazuy framework, the portfolio beta in the henriksson and merton study is assumed to switch between two betas. a large value if the market is expected to do well, i.e., when rm>rf up market and a small value otherwise i.e., when rm<rf (down market). therefore, it is argued that a successful market timer would select a high up market beta and a low market beta. thus, such a relationship can be estimated by equation using a dummy variable (tripathy, 2005). the formula is: rit-rft = i + i0 (rmt – rft) + i [d (rmt – rft)] + (5) when rmt>rft (up market), d is equal to 1 and when rmt<rft, d is equal to 0. we can rewrite to formula as: rmt > rft rit-rft = i + i (rmt – rft) + i1 + rmt<rft rit-rft = i + i (rmt – rft) + 3.2. data in this study, the mutual fund performances of 10 south african equity funds are analyzed using the sharpe (1966), treynor (1965) and jensen’s alpha (1968) ratios. jensen’s alpha also shows the selectivity skills of fund managers. in order to test mutual fund managers’ market timing ability, the treynor & mazuy (1966) and henriksson & merton (1981) methods are applied. the time period between january 2009 and october 2014, during which quantitative easing (qe) took place is chosen. weekly returns of funds are used and 304 weeks are observed for this study. all data are taken from the thomson reuters datastream. 3.2.1. selection of equity funds according to the investment institute database (2014:q3), there are 1,200 mutual funds in south africa. there are two main funds in south africa: a class and r class funds. a class funds are open-end while r class funds are close-end. in this study, r class funds are ignored. there are different fund types in south africa such as equity, bond, balanced, financial, industrial, money markets and real estate funds. among these types of mutual funds, equity funds are chosen since they carry company stocks that mutual fund performance: evidence from south africa page |52| emerging markets journal volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.83 | http://emaj.pitt.edu are riskier and more vulnerable to volatility in price. in the study period, funds were disregarded if they were closed, newly established or had merged with another fund. funds that had less than 50% equity shares in their portfolio were also not considered. in the end, 10 equity funds were chosen for this study; they are shown on table 1. table 1. south african equity funds fund name old mutual investors fund a allan gray equity fund class a sanlam general equity fund coronation equity fund a nedgroup investments rainmaker fund a foord equity fund investec equity a aylett equity fund huysamer equity fund a prudential equity fund 3.2.2. returns on funds when calculating returns of south african funds, weekly returns of the price index of funds are logarithmically computed. for the study, 304 weeks (january 9, 2009october 31, 2014) are observed. rp = ln (pt /pt-1) where rp = return on the fund pt = price of the fund at week t pt-1 = price of the fund at week t-1 3.2.3. benchmark in this study, the johannesburg stock exchange (jse) price index is used to find whether or not mutual funds beat the market. rm= ln (pmt / pmt-1) where rm = returns on the jse pmt = value of the jse price index on week t pmt-1 = value of the jse price index on week t-1 3.2.4. risk-free rate in this study, south african 91-day t-bills are selected as the appropriate risk-free rate and are sourced from the thomson reuters datastream. manjezi (2008) previously used this risk-free rate in his study. 4. empirical results descriptive statistics of south african equity funds, benchmarks and risk-free rates are given in table 2. the average column indicates returns of funds, benchmarks and risk-free rates. the average returns of the foord equity fund, the coronation equity fund, the sanlam equity fund, the prudential equity fund, the allan gray equity fund, and the aylett equity fund are higher than the johannesburg stock exchange (jse). the skew column displays the skew of equity funds and the corresponding value of their benchmarks. all funds and benchmarks are skewed negatively, denoting a distribution with an asymmetric tail extending toward more negative values. only 91-day t-bills have are skewed positively, which indicates a distribution with an asymmetric tail extending toward more positive values. all funds, benchmarks and riskfree rates have positive kurtosis, which implies typical heavy tailed financial distributions. the r column depicts correlation between funds and benchmarks. the average correlation of funds and their benchmarks is 0.88835, which means that there is a strong positive correlation. the investec equity fund has the highest correlation (0.91912) and the aylett equity fund has the lowest correlation (0.81560). the standard deviation column shows the volatility of equity funds, benchmarks and risk-free rates. the jse has the highest standard deviation and the huysamer equity fund, the old mutual fund investors fund a and the coronation equity fund follows the jse, in that order. the last column exhibits the betas of equity funds, which measure the systematic risks of the funds. all funds’ betas are less than 1, thereby implying all ten funds carry less risk compared to the benchmark jse index. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.83 | http://emaj.pitt.edu omer faruk tan emerging markets journal | p a g e |53 table 2. descriptive statistics of south african mutual funds fund name aver age ske w kurt osis r std. dev. bet a allan gray equity fund a 0.00 294 0.14 658 0.47 853 0.88 851 0.01 671 0.7 008 2 aylett equity fund a 0.00 274 0.60 731 2.23 169 0.81 560 0.01 491 0.5 742 0 coronation equity fund a 0.00 311 0.40 631 1.60 011 0.90 683 0.01 959 0.8 387 0 foord equity fund 0.00 341 1.16 657 4.79 512 0.84 114 0.01 908 0.7 577 5 huysamer equity fund a 0.00 196 0.36 986 0.73 769 0.91 590 0.02 101 0.9 086 6 investec equity fund a 0.00 249 0.45 212 0.87 945 0.91 912 0.01 942 0.8 427 5 nedgroup invs.rain maker fund a 0.00 296 0.43 856 0.94 558 0.86 200 0.01 791 0.7 287 8 old mutual investors fund a 0.00 266 0.39 145 1.51 906 0.91 580 0.02 002 0.6 758 6 prudential equity fund a 0.00 303 0.42 926 0.75 831 0.89 968 0.01 807 0.7 673 3 sanlam general equity fund a 0.00 309 0.34 637 1.96 319 0.91 900 0.01 844 0.8 000 7 johannesb urg stock exchange (jse) 0.00 272 0.37 635 1.08 352 0.02 119 91 days tbills 0.00 111 1.81 350 4.05 245 0.00 019 table 3 shows the performance of the sharpe ratio. the higher the sharpe ratio the more return the investor is getting per unit of risk. the lower the sharpe ratio, the more risk the investor is carrying to earn additional returns. a higher sharpe ratio implies that funds have a better performance. the foord equity fund, the allan gray equity fund and the aylett equity fund have the highest the sharpe ratios. on the other end, the huysamer equity fund and the investec equity fund have the lowest sharpe ratios. table 3. results of the sharpe ratio for south africa fund name sharpe rank foord equity fund a 0.12015 1 allan gray equity fund a 0.10911 2 aylett equity fund a 0.1091 3 sanlam general equity fund a 0.10723 4 prudential equity fund a 0.10592 5 coronation equity fund a 0.10194 6 old mutual investors fund a 0.09250 7 nedgroup invs.rainmaker fund a 0.08622 8 investec equity fund a 0.07065 9 huysamer equity fund a 0.04016 10 table 4 shows the performance of the treynor ratio. a fund with a higher treynor ratio indicates that the fund has a better risk-adjusted return compared to a fund with a lower treynor ratio. a higher treynor ratio implies that funds have better performances. the foord equity fund, the allan gray equity fund and the aylett equity fund have the highest the treynor ratios. the huysamer equity fund and the investec equity fund have the lowest treynor ratios. table 4. results of the treynor ratio for south africa fund name treynor rank foord equity fund a 0.00302 1 aylett equity fund a 0.00283 2 allan gray equity fund a 0.00260 3 prudential equity fund a 0.00249 4 sanlam general equity fund a 0.00247 5 coronation equity fund a 0.00238 6 old mutual investors fund a 0.00214 7 nedgroup invs.rainmaker fund a 0.00212 8 investec equity fund a 0.00163 9 huysamer equity fund a 0.00093 10 table 5 displays us the results of jensen’s alpha measure that indicates the selectivity skills of fund managers. fund managers have either a higher performance or a lower performance relative to the market. nine out of the 10 funds have positive alphas, but only the foord equity fund is both positive and statistically significant at the 10% level. on the other hand, the huysamer equity fund a has only negative alpha. mutual fund performance: evidence from south africa page |54| emerging markets journal volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.83 | http://emaj.pitt.edu table 5. results of jensen's alpha for south africa fund name jensen's alpha t stat pvalue foord equity fund* 0.00108 1.8112 5 0.071 10 aylett equity fund a 0.00071 1.4202 7 0.156 56 allan gray equity fund a 0.00070 1.5836 4 0.114 32 sanlam general equity fund a 0.00070 1.6587 7 0.098 20 prudential equity fund a 0.00068 1.5036 1 0.133 73 coronation equity fund a 0.00065 1.3715 6 0.171 22 old mutual investors fund a 0.00046 1.0024 1 0.316 95 nedgroup invs.rainmaker fund a 0.00038 0.7188 8 0.472 77 investec equity fund a 0.00002 0.0480 5 0.961 71 huysamer equity fund a -0.00061 1.2611 1 0.208 24 significance levels: * indicates 10%, ** indicates 5%, *** indicates 1% the treynor & mazuy (1966) analysis analyzes the market timing ability of fund managers. if fund managers believe that the market is going up, they change their portfolio composition from less volatile to high volatile securities. when the market is going down, they shift their portfolio composition from high volatile to less volatile securities. if fund managers have market timing ability, they create their portfolios according to their estimates of the tendency of the markets. table 6 shows the results of the treynor & mazuy (1966) method. only the allan gray equity fund a has a positive result, but is statistically insignificant. the other nine funds have negative market timing ability and only the old mutual investors fund a is statistically significant at the 10% level. it is concluded that fund managers did not have market timing ability during the quantitative easing policy era. table 6. results of the treynor & mazuy regression analysis for south africa fund name t & m t-stat pvalue allan gray equity fund a 0.50666 0.88948 0.374 45 aylett equity fund a 0.93854 1.46723 0.143 36 coronation equity fund a 0.59628 0.97207 0.331 79 foord equity fund 1.19570 1.56380 0.118 91 huysamer equity fund a 0.22466 0.35809 0.720 53 investec equity fund a 0.29696 0.52182 0.602 18 nedgroup invs.rainmaker fund a 0.31096 0.46058 0.645 43 old mutual investors fund a* 1.46072 2.48106 0.013 64 prudential equity fund a 0.59436 1.01461 0.311 11 sanlam general equity fund a 0.35064 0.64866 0.517 05 significance levels: * indicates 10%, ** indicates 5%, *** indicates 1% another approach for market timing ability is the henriksson & merton (1984) regression analysis method. market timing ability allows fund managers to forecast whether returns of funds will be higher than the risk-free rate or vice versa. table 7 shows the results of the henriksson & merton (1981) method. the allan gray equity fund has positive results, but is statistically insignificant. nine funds have negative market timing ability and are not statistically significant. table 7. results of the henriksson & merton regression analysis for south africa fund name h & m t-stat p-value allan gray equity fund a 0.00463 0.1298 0.8968 1 aylett equity fund a 0.03272 0.81571 0.4153 1 coronation equity fund a 0.03503 0.91272 0.3621 2 foord equity fund 0.04335 0.90395 0.3667 4 huysamer equity fund a 0.00686 0.17483 0.7221 5 investec equity fund a 0.02862 0.80443 0.4217 8 nedgroup invs.rainmaker fund a 0.00348 0.08243 0.9343 6 old mutual investors fund a 0.03807 1.02526 0.3060 6 prudential equity fund a 0.03166 0.86363 0.3884 8 sanlam general equity fund a 0.02094 0.61917 0.5362 7 volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.83 | http://emaj.pitt.edu omer faruk tan emerging markets journal | p a g e |55 5. conclusion in this study, south african equity funds performances’ are analyzed over the period from 09 january 2009 to 31 october 2014. during this quantitative easing policy term, fed increased money supply in order to lower the interest rates and this excess of money in financial markets made a significant contribution to capital influx from developed countries to developing countries. the study period coincides with the qe era when stock market sizes have improved remarkably. south africa is accepted as one of the developing markets and during the study period 5 years-10 months, south african stock market surpassed developed stock market indices. johannesburg stock exchange yielded 15.9 % compounded on average, per annum. in the sample period, the developed market indices like s&p 500, dax, ftse 100 and cac 40 yielded 15.1%, 12.1%, 6.8% and 4.1%, respectively. south african equity fund performances and funds managers’ performances were analyzed in this study by using sharpe ratio (1966), treynor ratio (1965), jensen alpha (1968), treynor& mazuy (1966) and henriksson&merton (1981) regression analysis method. to the best of knowledge, this is the first study that considers how south african funds performed in the recent quantitative easing era. in order to find fund performances, it has been utilized sharpe (1966) and treynor (1965) ratio. higher sharpe and treynor ratio implies funds have better performances. in general, these risk-adjusted performance ratios give similar rankings of mutual funds. the foord equity fund, the allan gray equity fund and the aylett equity fund have the highest the treynor and sharpe ratio. jensen’s alpha (1968), treynor&mazuy (1966) and henriksson&merton (1981) regression analysis methods are used for determining selectivity skills and market timing ability of fund managers, respectively. in this study, it is revealed that in the era of quantitative easing, although the financial market in south africa made an incredible progress, south african fund managers could not display a good performance both in selectivity skills and market timing abilities. jensen (1968) alphas indicate that over this period fund managers did not have selective ability, only 1 of the 14 funds had statistically significant positive alpha. furthermore, treynor&mazuy (1966) regression analysis shows that over the same period fund managers did not also have market timing ability, as none of the 14 funds had statistically significant positive coefficients. it can be deduced that south african fund managers had neither selective ability nor market timing ability during the quantitative easing era. at the end of this research, along with the outcomes, it is observed similarities with the results of earlier studies in literature. in future, this study can be developed using persistence analysis. to the best of knowledge, this is the first study that considers how south african funds performed in the recent quantitative easing era. references chang, e., & lewellen, w. (1984). market timing and mutual funds investment performance. journal of business, 57, 57-72. chen, d., gan. c., & hu, b. (2013). an empirical study of mutual funds performance in china. social science research network. retrieved january 10, 2015 from ssrn: http://ssrn.com/abstrat=2220323. christensen, m. (20059. danish mutual fund performance; selectivity, market timing and persistence. working paper, department of accounting, finance and logistics, aarhus school of business, 1-37. dahlquist, m., engström, s., & söderlind, p. (2000). performance and characteristics of swedish mutual funds. journal of financial and quantitative analysis, 35, 409-423. deepak, a. (2011). measuring performance of indian mutual funds. social science research network. retrieved november 15, 2014 from ssrn: http://papers.ssrn.com/sol3/papers.cf m?abstract_id=1311761. http://ssrn.com/abstrat=2220323 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1311761 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1311761 mutual fund performance: evidence from south africa page |56| emerging markets journal volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.83 | http://emaj.pitt.edu detzler, m. l. (1999). performance of global bond mutual funds. journal of banking & finance, 23, 1195-1217. duggimpudi r. r., abdou, h. a., & zaki, m. (2010). an investigation of equity diversified mutual funds: the case of indian market. investment management and financial innovations, 7(4), 77-84. gallo, j, g., & swanson, p. e. (1996). comparative measures of performance for u.s. – based international equity mutual funds. journal of banking & finance, 20, 1636-1650. gilbertson, b. p., & vermaak, m. n. (1982). the performance of south african mutual funds: 1974-1981. investment analysts journal, 11(20), 35-45. henriksson, r. d. (1984). market timing and mutual fund performance: an empirical investigation. the journal of business, 57(1), 73-96. henriksson, r. d., & merton, r. c. (1981). on market timing and investment performance. ii. statistical procedures for evaluating forecasting skills. the journal of business, 54(4), 513-533. investment company institute (ici) -unit investments trust data. retrieved from february, 15, 2015 from http://www.ici.org/research/stats. jensen, m.c. (1968). the performance of mutual funds in the period 19451964. the journal of finance, 23(2), 389-416. kouris, a., beneki, c., adam, m., & botsaris, c. (2011). an assessment of the performance of greek mutual equity funds selectivity and market timing. applied mathematics sciences, 5(4), 159-171. malkiel, b, g. (1995). returns from investing in equity funds: 1971-1991. journal of finance, 50, 549-572. manjezi, l. (2012). portfolio performance evaluation of south african mutual funds 2001-2006. unpublished master’s thesis. university of agder, kristiansand, norway. mayo, h. b. (2011). introduction to investments (10th. edition). southwestern cengage learning, mason, usa. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.83 | http://emaj.pitt.edu omer faruk tan emerging markets journal | p a g e |57 mbiola, o. j. (2013). performance evaluation of unit trusts in south africa over the last two decades. unpublished master’s thesis. university of witwatersrand, johannesburg, south africa. noulas, g., papanastation, j. a., & lazaridis, j. (2005). performance of mutual funds. managerial finance, 31(2), 101-112. rao, d. n. (2006). investment styles and performance of equity mutual funds in india. social sciences research network. retrieved november 15, 2014 from ssrn: http://ssrn.com/abstract=922595 or http://dx.doi.org/10.2139/ssrn.922595 reilly, f, r. (1992). investments (3rd. edition). orlando, florida: the dryden press. sharpe, w. f. (1996). mutual fund performance. journal of business, 34, 119-138. treynor, j. l. (1965). how to rate management of investment funds. harvard business review. 43(1), 131-136. treynor, j. l., & mazuy, k.k. (1966). can mutual funds outguess the market? harvard business review, 44, 131136. tripathy, n. p. (2005). an empirical evaluation of market timing abilities of indian fund managers on equity linked savings scheme. delhi business review, 6(2), 19-27. what is quantitative easing? definition and explanation. retrieved january 23, 2015 from http://useconomy.about.com/od/gloss ary/g/quantitative-eaing.htm. http://ssrn.com/abstract=922595 http://dx.doi.org/10.2139/ssrn.922595 http://useconomy.about.com/od/glossary/g/quantitative-eaing.htm http://useconomy.about.com/od/glossary/g/quantitative-eaing.htm volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu an exploratory study of presenteeism in turkish context mehmet çetin beykent university | mehmetcetin@beykent.edu.tr abstract presenteeism has been an emerging research era, where many exploratory questions may be produced. literature is not very definitive for the conceptualization of the construct in many aspects. there are few studies about the reasons, measurement approaches and positive outcomes of the concept. studies conducted in turkish context are even fewer. paper combines two studies; first study aims to investigate different conceptualizations, possible reasons, negative and positive outcomes of presenteeism. the purpose of the second study is to find out how those concepts structure and relate to each other. findings provide useful insights for reasons, outcomes and criteria of presenteeism. they also indicate different conceptualization of the concept and there are significant relationships between variables according to the research. keywords: presenteeism, absenteeism, performance new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu | mailto:mehmetcetin@beykent.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu mehmet çetin emerging markets journal | p a g e |25 an exploratory study of presenteeism in turkish context mehmet çetin 1. introduction presenteeism, briefly, showing up at work despite being sick (aronsson and gustafsson, 2005), is becoming more and more a focus of attention as its cost and importance for the organizations is realized. it is relatively a new concept which became a popular subject not earlier than the last two decades. although there are many significant studies about it, this relatively new concept still provides lots of fruitful questions to be answered. first of all, what exactly is presenteeism? is it only illness that prevents someone from working fully functional or makes it reasonable not to attend work? how do employees perceive it? how being sick is really measured? how much illness is enough to take someone out of work? is someone working with chronic illness always a case of presenteeism? does presenteeism really have to be a negative concept that never give positive results? what employees think about it? simply, why employees come to work despite they are sick? can those reasons be clustered? what consequences and reasons for this act are perceived by employees? what may be the negative and positive consequences of presenteeism? this paper aims to address some of these questions by investigating what literature suggests about these issues and also asking the experiences and perceptions of the employees’ with open ended questions. in the second stage of the study, these answers are shaped and given in a survey to respondents for measuring their perceptions in order to understand how they are clustered and to find out possible associations among them. 2. literature review although there is no agreed upon definition of presenteeism, the most common conceptualization is “attending to work despite being ill” (mckevitt, et al. 1997, aronsson, gustafsson and dallner, 2000, johns 2010). in order to better understand the conceptualization of presenteeism, we should reveal the reasons for the need of such a concept. all concepts in the literature arise or became a more popular research era for some needs or realizations. the philosophy behind this conceptualization of presenteeism may be the fact that, being at work despite everything is not always the best option. other alternative, absenteeism, as a relatively older and more frequently studied concept, is only one of the options when someone is ill. absenteeism is sure costly and has been a concept that managers combat to decrease its level. that is why anti-absenteeism efforts increased, but they may have caused some unseen costs (koopmanschap et al. 2005). also, the aging population in many countries made it more important to deal with health related matters of productivity lost (cancelliere et al. 2011). one of the main reasons of the growing interest in presenteeism may be the idea that an ill employee on work is worse than an absent one. there are many studies that suggest presenteeism is more costly than absenteeism in many ways (hemp 2004, collins et al., 2005, goetzel et al. 2004; schultz and edington 2009, stewart et al. 2003). it is very reasonable that, an ill employee underperforming on work may cause productivity loss. but doesn’t an absent employee also cause productivity loss? on the other hand, there are also studies which suggest that absenteeism is more costly than presenteeism. rantanen and tuominen (2011) indicated that absenteeism demonstrated higher monetary value than presenteeism. this finding supports the idea that nonperforming is likely to be less than underperforming, and an underperformance of let’s say 30 percent is more than 0 percent. but this approach oversee that underperforming may have serious negative externalities like work accidents, decreased work satisfaction, burnout or future sickness (demerouti et al., 2009; aronsson and gustafsson 2005). for example, an absent employee may be replaced by a performing one, but an underperforming employee may create customer dissatisfaction which may not be reassured. burton et al. (1999) define the concept as “decrease in productivity for the much larger group of employees whose health problems have not necessarily led to absenteeism and the decrease in productivity for the disabled group before and after the absence period.’’ this definition, in a way, suggest that there is a level of sickness that doesn’t necessitates absenteeism but still causes presenteeism. it may be interpreted that, by this approach absenteeism is a more serious case than presenteeism in the level of health condition and the level of productivity lost. assuming the productivity loss is the important matter for the conceptualization of the phenomenon, one might say that there might be other reasons for productivity loss for an employee to come work instead of not coming. if illness is not only reason for absenteeism, it might not be for presenteeism too. one early definition on the concept made by smith (1970) as “attending work, as opposed to being absent” supports this idea. parallely, hemp (2004)’s approach to concept, “presenteeism: at work – but out of it” widens the volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu an exploratory study of presenteeism in turkish context page |26| emerging markets journal boundaries of presenteeism concept. adding to that, if presenteeism was asked as ‘being at work but not being there, let’s say, mentally or fully’, it would be something that everyone would experience many work days. accordingly, evans (2004)’s definition of the concept adds phrases like “events that might normally compel absence” or “feeling unhealthy”. this may include an employee feeling obligated to attend a meeting with his/her son’s teacher about his education, but deciding to work at that hour is also acting in presenteeism according to the mentioned definition. according to this criteria, one missing an important family event due to work is also in presenteeism. does someone in situations like these, not feeling unhealthy but feeling obligated to do something else or be somewhere else, decrease productivity? it seems likely for someone, who is not present for the family when needed, to willingly or unwillingly underperform due to the grief or burden about the situation or the perception of organizational injustice. hummer, sherman and quinn (2002) indicates other events decreasing employees’ full productivity rather than health issues in the concept of presenteeism. some authors label the concept as “sickness presenteeism” (e.g. bergström et al. 2009), but there is no agreement upon classification provided for differentiating sickness presenteeism and other types of presenteeism (if any). there are some authors who added some other types or aspects of presenteeism, but they are not clearly identified or differentiated with different labels. for example, lowe (2002) brought another approach to the concept by adding a second type of presenteeism to the earlier one (being sick and being at work) as working excessively after work to show commitment or deal with job insecurity. middaugh, (2007)’s definition is also supporting that approach, being present at work, “even if one is too sick, stressed, or distracted to be productive; the feeling that one needs to work extra hours, even if one has no extra work to do". all these different definitions and conceptualizations suggest different ways to measure presenteeism. for example, one would ask ‘how many days did the respondents attend to work despite they were ill’, and another would ask ‘the number of days they attended to work despite there were things that normally necessitates absence’. questions produced with phrase like “feeling sick enough to require you not to come work” and “knowing your productivity will be low because of your health condition” may also yield to different responses. how the answers for different questions generated for these varying definitions would separate, becomes an essential question to be addressed in order to understand the influence of those different definitions on measurement of the concept and enlighten the appropriate way to measure presenteeism. so one of the main purposes of the study is to address this matter. on the question of ‘how much ill is really ill to consider for presenteeism’, or ‘how much illness we are talking about for presenteeism’, some definitions of the concept suggest that if the illness causes employees work less than full capacity, it is presenteeism (e.g. burton, et al. 1999). those definitions give a very large range for health conditions in type and severity. a little cold or headache may cause employees perform in less than full capacity. it is hard to claim that in order to avoid presenteeism, any employee having less than full productivity must be sent home and managers should wait for them to regain their full capacity. here another important issue is to conceptualize “full capacity”. how many days does an employee really work in full capacity? these arguments indicate how it becomes hard and complex to conceptualize and measure presenteeism, if it is defined in the mentioned approach. many measurement tools used in the literature for assessing presenteeism are not specially created for the purpose of measuring presenteeism. (e.g. health and work performance questionnaire (hpq) kessler, et al. 2003; work limitations questionnaire (wlq) lerner, et al., 2001; health-related productivity questionnaire diary, kumar et al. 2003). when scientists ask for absenteeism, they ask for the number of days people don’t attend work when they are supposed to. generally, absenteeism related production loss or absenteeism cost are the consequences of the concept and they are different than absenteeism itself. if presenteeism is measured or conceptualized as the production loss or cost, it may create the same misinterpretation. jumping to measure the consequences of a concept rather than measuring the concept itself may cause losing valuable information. in the case of an employee attending work while ill and performing normally because of the nature of the work, but developing negative feelings towards the management because of the mandatory presenteeism and changing the attitudes towards work, it is hard to measure the cost of this attitude change. also, if the prolonged illness causes the employee to be absent more than it was supposed to (as suggested by hansen and andersen, 2009), or if it affects the general health of the employee negatively in the future (as suggested by bergström, et al. 2009 and taloyan, et al. 2012) it would be very difficult to realize, measure and track this kind of costs. opposed to that complexity, there are measurement approaches that turn presenteeism into monetary dollar values (mattke, et al., 2007). another important matter here is that, conceptualizing an issue with only negative aspects may cause losing an open eye on its possible positive aspects. thus, we suggest that, it is more proper to measure volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu mehmet çetin emerging markets journal | p a g e |27 presenteeism in number of days and investigate further for its positive or negative consequences. this measurement approach (to ask the number of days or hours worked despite being ill) was also adapted by many studies (e.g. munir, yarkir, haslam, 2008, rantanen and tuominen, 2011). this approach also has its own disadvantages. first, it depends on the memory of employees to remember how many times they came to work despite they felt sick. second, it assumes that employees will understand the same thing from being sick, but this approach still seems more suitable with the conceptualization. there isn’t a certain line that determines a person as healthy or unhealthy enough to work. when a person is sick and decides to have a rest for a while, there is a fuzzy point that the illness still has its traces, but the person may work pretty well. waiting for being %100 healthy after an illness to continue work may not be the best decision both for the employee and the organization. so, here is a subjective assessment point where the employees decide on their health condition whether they should attend work or stay home. another purpose of the current paper is to investigate how employees assess their health condition and decide on to show up or not for work. 3. data set and methdology (study 1 procedure) open ended questions were given to respondents from differing sectors and jobs in istanbul with simple random sampling method in order to reach a generalizable ground. all respondents were currently working. 126 surveys were delivered to respondents and they were assured about their confidentiality and no personal questions like name or identity information was asked. they were encouraged to write as much as possible answers for the open ended questions. questions were produced in accordance to literature and the aim of the study. so the five open ended questions were shaped as: 1. why did you attend work while you were ill? could you please list your reasons? 2. what negative outcomes did you observe when you attended work despite you were ill? 3. what positive outcomes did you observe when you attended work despite you were ill? 4. thinking of the times that you were present despite you were ill, how would you describe your productivity? 5. how do you evaluate your health condition while you decide whether it compels absence or not? answers collected from the respondents for each question were examined, irrelevant ones or domain specific ones (e.g. specific to only one organization) were excluded and the resembling ones were clustered. the frequency of the answers were determined. also, the structure of the item pool that would be used in the second study was determined. from the responses given for the first question “why did you attend work while you were ill? could you please list your reasons?”, possible reasons for presenteeism and their frequencies in the responses were determined in the way described in the procedure part. table below lists the reasons for presenteeism provided by respondents. table 1: reasons provided for presenteeism by respondents reason frequency 1. avoiding cancellations or disruptions of work 59 2. avoiding increases of the work load for future 52 3. heaviness of the work load 48 4. feeling responsible even in the case of illness 42 5. manager not welcoming absence 39 6. the absence putting the organization in a hard situation 31 7. feeling in debt to organization when engaging in frequent absenteeism 27 8. pay reduction in the salary 24 9. hardness of collecting the necessary legal papers that evidence illness 24 10. ethically believing that if possible, one must attend to work 21 11. thinking that you can still be helpful even you are sick 19 12. the nature of the work that doesn’t allow anyone else to substitute 17 13. the will to save the right for absenteeism for possible worse situations, despite being ill currently 16 14. feeling responsible to customers 14 15. organizational culture that doesn’t tolerate absenteeism 11 16. feeling better when attending to work 11 17. performance evaluation system that punishes the absence 9 18. feeling bored when not attending to work 8 19. manager not believing the illness is real despite the legal papers are collected from the hospital 8 20. being afraid of losing the job 8 21. avoiding to present an image who is ill and weak 5 22. high competition in the organization 5 volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu an exploratory study of presenteeism in turkish context page |28| emerging markets journal the responses for the question “what negative consequences did you observe when you attended work despite you were ill?” help to explore the negative consequences of presenteeism. responses are clustered and the frequencies are given on the table. table 2: negative outcomes provided for presenteeism by respondents negative outcome frequency my illness was cured later than it ought to be 72 my illness continued for a long time 65 my performance decreased 62 my illness affected other employees negatively 56 customer satisfaction was affected negatively 47 i behaved more aggressive and less agreeable 39 my illness defected other employees 30 my commitment and attitude towards the work were affected negatively 19 i had a work accident 9 my love towards my job decreased 5 answers for the third question, “what positive consequences did you observe when you attend to work despite you were ill?” demonstrate the positive consequences of presenteeism. responses are clustered and the frequencies are given on the table. table 3: positive outcomes listed for presenteeism by respondents positive outcomes frequency i felt mentally relaxed (by getting free from the burden of absenteeism) 57 my work load wasn’t cancelled to further increase the future work load 53 there was no extraction from my salary/pay 40 i realized that i will feel better next time when i will not attend work 34 my superiors appreciated my attendance 27 i didn’t bother to collect legal report or else documents 24 i could get permission to leave work early 19 i could benefit the health service of workplace 12 i felt more identified with my work 9 i proved that i am strong and hard working 7 the fourth question asking how respondents would describe their productivity yielded lots of responses indicating very low productivity to better than normal productivity. many responses ranging from “i could do nothing”, “i was very unproductive that costumers were unhappy” or “i couldn’t do the job as productive as usual” to “i was more productive than normal” structured a brief classification of possible performance levels as “better than normal”, “normal”, “lower than normal” and “very low”. from the responses given for the first question, “how do you evaluate your health condition while you decide whether it compels absence or not?”, possible criteria for deciding on the severity of the health condition whether it necessitates attending work or not are explored. many criteria and story provided by respondents were integrated as they could represent and describe the whole picture and idea for each criterion. table 4: criteria used for deciding on presenteeism 1. i would consider if i could reach the workplace and continue my job without disruptions all day. if i would feel good enough to continue my work this way or another, i would go. if i thought i would feel bad as much as it would necessitate me to return home, i wouldn’t go. 2. i would consider if my condition enables me physically to stand up and reach the workplace. if i was in a condition that i could go to workplace, i would go. 3. if there were critical symptoms like nausea, vomiting, diarrhea, high fever, i would not go to work. if there were conditions like headache, which is not very severe, tiredness or sleeplessness, i would attend work. 4. i would consider the duration of the time that my illness would get better. if i felt that it would prolong for a few days, i would try to shorten that time by relaxing the first day. if i believed it would get better in short time, i would go work. 5. i would consider my health condition if it was bad enough to make the doctor give me a legal report that allows me not to work for the day. 6. i would consider if there was any condition that prevented me from doing my job in an average performance level. 7. i would consider how much pain i would suffer if i went to work. if i would think that i would suffer long time and harm myself, i wouldn’t attend work. 8. i would consider the probability of defecting others in the workplace. if there was a chance for it, i wouldn’t go. 9. i would consider if my health condition was chronic or only a one time thing. if it was an illness that repeated frequently, i would attend work. if it was for one time, i wouldn’t go. 10. i would consider what other people would do if they would feel like me. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu mehmet çetin emerging markets journal | p a g e |29 11. i would decide by considering my observations on how other employees behaved when they were in my situation. 4. data set and methdology (study 2 procedure) the items developed in the first study were distributed to a sample of 145 respondents from various sectors and occupations in i̇stanbul in order to investigate if those items factor reliably and make meaningful clusters that would help us understand the structure and the dimensionality of the reasons for presenteeism, the perceived negative and positive outcomes of presenteeism and the criteria employees use for assessing their health condition when deciding between presenteeism and absenteeism. there was no discrimination against respondents about demographics or any other matters except all participants were required to be employees. the confidentiality of the respondents and the information they provide were assured. respondents were kindly requested to provide genuine responses as no identity (id) related questions were asked. one of the main purposes of the study was to reconsider the definition of the concept by searching in the literature and investigating how it was perceived and experienced by employees. as mentioned, the definitions provided by the literature varies among some aspects. different definitions and conceptualizations yielded different questions to ask for presenteeism. four different questions were added to survey in order to investigate how they differed in the eyes of the employees. the responses given to those questions were analyzed in order to understand how they resembled and differed statistically. as it was hard to recall and remember how many days one comes to work despite an illness, we chose to ask for a six months period of time. the respondents were instructed to think and answer each question independently and as they were asked separately. the four questions addressed to measure the same concept alone and their means and correlations are provided on the tables below. table 5: questions asking presenteeism and their means question asking presenteeism mean p3. how many times in last 6 months did you attend work despite you knew your productivity would be low because of your health condition? 4.2276 p1. how many times in last 6 months did you attend work despite you were ill? 4.0552 p.4 how many times in last 6 months did you attend work despite there were things 3.7448 normally compelling absence? p2. how many times in last 6 months did you attend work despite you were feeling sick enough to require you not to come work? 2.1172 table 6: correlations among different measures of presenteeism correlation is significant at the 0.01 level (2-tailed). surely, those questions ask conceptually resembling factor, but they show difference as their means vary from 4.2276 to 2.1172, and their correlations are not high. difference tests indicate significant difference (sig<0.05) among variables for each possible combination. respondents’ answers’ means varied most between the questions numbered 3 and 2. this may be interpreted as there are cases which employees may think their productivity would be low, but still they do not consider themselves as sick as it requires absence. also questions number 1 and 2 indicate difference. this shows that employees perceive “being ill” and “being ill enough to require not to attend work” differently. this means that, there is a gap between times people feel sick, but not that sick to require absence, so show up for work and when people know they are sick enough not to attend work. so, there are times people believe they are sick, but they evaluate their sickness as it doesn’t necessitate absenteeism. this kind of preesenteeism and the one that people know their health condition require absence may have different consequences. for example, the former may enable people to work in a higher level of performance than the latter. there are medium to high correlations among different questionings of presenteeism. question number 3 shows relatively lower correlations with others. the correlations are not as high that the questions may be interpreted as they are asking the same concept. none of the correlations are upper than .90, or even .70. table 7 supports that interpretation by showing that their means are different. to understand the distribution of the reasons for presenteeism, the means for reason items are listed below. 1 2 3 presenteeism1 1 presenteeism2 .655** 1 presenteeism3 .467** .574** 1 presenteeism4 .678** .468** .348** volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu an exploratory study of presenteeism in turkish context page |30| emerging markets journal table 7: reasons for presenteeism and their means the most common reasons seem to be the ones about work load, avoiding any delays and cancellations in work, avoidance to have the extra work burden carried from the sick day to the future, and morally believing in presenteeism, feeling responsible despite being ill. by looking at the table and the one in the collection phase, the reasons seem to be clustered conceptually in a resembling logical way. to investigate the factor structure of the reasons given for presenteeism, exploratory factor analysis using principal components and varimax approach was conducted. results demonstrated a 5 factor structure for reasons of presenteeism. factors were labeled as managerial reasons, normative reasons, workload reasons and engagement reasons. all factors were highly reliable except engagement reasons (.690) factor, but still it was high enough to consider as a factor. table 8: results of exploratory factor analysis for reasons for presenteeism factor 1: managerial reasons α=,831 %var: 33,907 factor loading 11. hardness of the process of collecting the necessary legal papers that evidence illness .844 6. manager not welcoming absence .770 9. manager not believing the illness is real despite the legal papers are collected from the hospital .740 8. pay reduction in the salary .701 21. being afraid of losing the job .697 factor 2: normative reasons α=,741 %var: 17,770 factor loading 13. feeling responsible even knowing that you are ill .767 18. ethically believing that if possible one must attend to work .753 17. feeling in debt to organization when engaging in frequent absenteeism .707 12. the will to save the right for absence for more serious situations that may happen in the future .628 16. thinking that you can still be helpful even you are sick .622 factor 3: work load reasons α=,766 %var: 9,976 factor loading 15. feeling responsible to customers .878 4. avoiding increases of the work load for future .802 14. avoiding cancellations or disruptions of work .779 3. the absence would make organization to be in a hard situation .661 factor 4: engagement reasons α=,690 %var: 6,665 factor loading 20. even being ill, attending to work makes me feel better .836 19. feeling bored when not attending to work .765 these results provides a fruitful path to understand, cluster and conceptualize the reasons for presenteeism in the organizations. to investigate how frequent the positive outcomes of presenteeism are reaons for presenteeism mean reason14 avoiding cancellations or disruptions of work 4.5724 reason13 feeling responsible even knowing that you are ill 4.4759 reason1 heaviness of the work load 4.2621 reason4 avoiding increases of the work load for future 4.2000 reason18 ethically believing that if possible one must attend to work 4.0414 reason12 the will to save the right for absence for more serious situations that may happen in the future 4.0414 reason2 the nature of the work that doesn’t allow anyone else to substitute 3.9724 reason15 feeling responsible to customers 3.8897 reason17 feeling in debt to organization when engaging in frequent absenteeism 3.8897 reason3 the absence would make the organization to be in an hard situation 3.8414 reason16 thinking that you can still be helpful even you are sick 3.7379 reason6 manager not welcoming absence 3.3862 reason10 organizational culture that doesn’t tolerate absenteeism 3.2207 reason11 hardness of the process of collecting the necessary legal papers that evidence illness 3.1915 reason22 avoiding to present an image who is ill and weak 2.9103 reason19 feeling bored when not attending to work 2.7262 reason21 being afraid of losing the job 2.7103 reason5 performance evaluation system that punishes the absence 2.6414 reason20 even being ill, attending to work makes me feel better 2.6345 reason8 pay reduction in the salary 2.6000 reason7 high competition in the organization 2.5793 reason9 manager not believing the illness is real despite the legal papers are collected from the hospital 2.4621 volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu mehmet çetin emerging markets journal | p a g e |31 perceived, the means of the positive consequences items are provided on the following table. table 9: positive outcomes of presenteeism and their means positive outcomes of presenteeism mean i felt mentally relaxed (by getting free from the burden of absenteeism) 4.3172 my work load wasn’t cancelled to further increasing the future work load 4.1724 i didn’t bother to collect legal report or else documents 3.8552 there was no extraction from my salary/pay 3.7931 i realized that i will feel better next time when i will not attend work 3.7586 i could get permission to leave work early 3.3724 i felt more identified with my work 3.2621 my superiors appreciated my attendance 3.0690 i could benefit the health service of workplace 3.0138 i proved that i am strong and hard working 2.8690 the positive outcome which has the highest mean score is about being mentally free from the burden of absenteeism. interpreting from other findings of the study in the item generation phase, we may say that people find it hard to think about dealing with the paper work, the left over work load, management’s attitude, and the image they build. also, when they attend work despite they feel sick, they free themselves from all those burden mentally. the work load not being carried over from the sick day is another positive outcome that had high frequency in study 1 and has high level of mean score in the study 2. saving unused sick days for future is another powerful positive outcome of presenteeism. also managers observe and realize the sacrifices of the employees and maybe because of this, employees can also get an early timeout. the mean for employees that felt more identified with their jobs is also not low. plus, employees also could use the health services of the workplace. a quick interpretation on the results may indicate that, there are positive outcomes that are about getting rid of negative outcomes of absenteeism and positive outcomes that are actually providing additional positive consequences directly related with act of presenteeism. results of exploratory factor analysis demonstrates a 2 factor structure in accordance with this conceptualization. factors structured were highly reliable and differentiated as positive reinforcement and negative reinforcement positive outcomes. table 10: results of exploratory factor analysis for positive outcomes of presenteeism to realize how powerful the negative outcomes of presenteeism are perceived by the employees, the mean scores of the negative consequences items are given on the following table. table 11: negative outcomes of presenteeism and their means negative outcomes of presenteeism mean 1. my illness was cured later than it ought to be 4.2966 2. my illness continued for a long time 4.2552 6. my performance decreased 3.9379 3. my illness affected other employees negatively 3.4690 4. my illness defected other employees 3.2708 7. customer satisfaction was affected negatively 2.9172 10. i behaved more aggressive and less agreeable 2.8759 9. my love towards my job decreased 2.4552 8. my commitment and attitude towards the work were affected negatively 2.4276 5. i had a workplace accident 1.7862 two resembling but different items about the length of the time that the illness got better had the highest mean scores among negative outcomes of presenteeism. the negative effect on performance and other employees is followed by the negative externalities on customer satisfaction. presenteeism causing workplace accident is relatively rare, maybe because the factor 1: positive outcomes positive reinforcement α=,801 %var: 42,183 factor loading 2. my superiors appreciated my attendance .756 5. i proved that i am strong and hard working .706 1. i felt more identified with my work .663 10. i could benefit the health service of workplace .629 4. i realized that i will feel better next time when i will not attend work .603 9. i could get permission to leave work early .516 3. there was no extraction from my salary/pay .500 factor 2: positive outcomes neg. reinforcements α=,726 %var: 11,555 factor loading 7. my work load wasn’t cancelled to further increasing the future work load .903 8. i felt mentally relaxed (by getting free from the burden of absenteeism) .744 6. i didn’t bother to collect legal report or else documents .607 volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu an exploratory study of presenteeism in turkish context page |32| emerging markets journal study was mostly conducted in a white collar environment which is less prone to work accidents. to investigate how the items of negative outcomes structure under factor analysis, an exploratory factor analysis using principal components and varimax approach was conducted. results demonstrated a 3 factor structure for negative consequences of presenteeism. table 12: results of exploratory factor analysis for negative outcomes of presenteeism factor 1: commitment and performance related negative outcomes α=,823 %var: 46,640 factor loading 8. my commitment and attitude towards the work affected negatively .873 9. my love towards my job decreased .864 10. i behaved more aggressive and less agreeable .788 7. customer satisfaction was affected negatively .621 6. my performance decreased .578 factor 2: illness related neg. outcomes α=,808 %var: 19,835 factor loading 2. my illness continued for long time .945 1. my illness was cured later than it ought to be .935 3. my illness affected other employees negatively .571 study also aimed to investigate how people determined the severity of their health condition while deciding whether to go to work or not. as the earlier phases of the study demonstrated, employees could evaluate their health conditions with different criteria. the criteria used for this assessment was provided to respondents and the mean score of these criteria are demonstrated on the following table: table 13. criteria used for deciding between presenteeism and absenteeism and their means severity of the health condition in means of serious symptoms and the ability to reach and continue working seems to be the most powerful criteria in the decision process of presenteeism. thinking about how others would feel and behave according to observations seems to be the least significant criteria used for deciding whether to show up or not. criteria used for deciding between presenteeism and absenteeism mean 11. if there were critical symptoms like nausea, vomiting, diarrhea, high fever, i would not go to work. if there were conditions like headache, which is not very severe, tiredness or sleeplessness i would attend work. 4.8138 2. i would consider if i could reach the workplace and continue my job without disruption all day. if i would feel good enough to continue my work this way or another, i would go. if i thought i would feel bad as much as it would necessitate me to return home, i wouldn’t go. 4.7172 1. i would consider if my condition enabled me physically to stand up and reach the workplace. if i was in a condition that i could go to workplace, i would go. 4.6966 10. i would consider the duration of the time that my illness would get better. if i felt that it would prolong for a few days, i would try to shorten that time by relaxing the first day. if i believed it would get better in short time, i would go work. 4.3793 5. i would consider if there was any condition that prevented me from doing my job in an average performance level. 4.2621 6. i would consider my health condition if it was bad enough to make the doctor give me a legal report that allowed me not to work for the day. 4.2483 4. i would consider how much pain i would suffer if i went to work. if i would think that i would suffer for a long time and harm myself, i wouldn’t attend work. 3.8552 9. i would consider if my health condition was chronic or only a one time thing. if it was an illness that repeated frequently, i would attend work, if it was for one time, i wouldn’t go. 3.8000 3. i would consider the probability of defecting others in the workplace. if there was a chance for it, i wouldn’t go. 3.4138 7. i would consider what other people would do if they would feel like me. 2.8966 8. i would decide by considering my observations on how other employees behaved when they were in my situation. 2.6690 volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu mehmet çetin emerging markets journal | p a g e |33 table 14: results of exploratory factor analysis for deciding between presenteeism and absenteeism factor 1: severity of the illness α=,841 %var: 36,332 factor loading 2. i would consider if i could reach the workplace and continue my job without disruption all day. if i would feel good enough to continue my work this way or another, i would go. if i thoght i would feel bad as much as it would necessitate me to return home, i wouldn’t go. .799 4. i would consider how much pain i would suffer if i went to work. if i would think that i would suffer for a long time and harm myself, i wouldn’t attend work. .657 5. i would consider if there was any condition that prevented me from doing my job in an average performance level. .631 1. i would consider if my condition enabled me physically to stand up and reach the workplace. if i was in a condition that i could go to workplace, i would go. .593 3. i would consider the probability of defecting others in the workplace. if there was a chance for it, i wouldn’t go. .592 factor 2: observation on others α=,683 %var: 22,389 factor loading 7. i would consider what other people would do if they would feel like me. .910 8. i would decide by considering my observations on how other employees behaved when they were in my situation. .908 table 15: correlations among reasons and outcomes of presenteeism **correlation is significant at the 0.01 level (2-tailed). * correlation is significant at the 0.05 level (2-tailed). in order to understand how different reasons for presenteeism are related with different outcomes of presenteeism and perceived performance level during presenteeism, a correlation analysis was conducted. the correlations between performance perception of employees during presenteeism and their scores of reasons for presenteism reveal very essential aspects about presenteeism. only the ‘engagement reasons’ factor is significantly and positively related with performance perception while other reasons didn’t show any significant correlations. employees coming to work while they are ill because of reasons related with their high engagement perceive their performance during presenteeism as higher. also if they do it for more managerial, work load or normative reasons, they don’t perceive a higher performance. these relationships support the idea that not all kinds of presenteeism cause low level of productivity. the reason behind presenteeism may change the level of performance during presenteeism. so it may be inferred that, employees coming to work while they are ill because of their high sense of engagement may demonstrate higher performance than others do it because organizational culture or managerial practices requires to do so. engagement related reasons are positively and significantly related with positive reinforcement outcomes while shows no significant relationship with negative reinforcement related ones. commitment and performance related negative outcomes show only significant and positive association with managerial practices sourced reasons of presenteeism. normative reasons and engagement reasons show no significant relationship with any of the negative outcomes. table 16: correlations among reasons and outcomes of presenteeism **correlation is significant at the 0.01 level (2-tailed). * correlation is significant at the 0.05 level (2-tailed). 1 2 3 4 5 6 7 8 1. manageri al reasons 1 2. normativ e reasons .383 ** 1 3. work load reasons .108 .478 ** 1 4. engagem ent reasons .373 ** .420 ** .211 * 1 5. illness related n. outcomes .413 ** 190* .064 .076 1 6. commitm ent and performa nce r. n. o. .332 * .101 .011 .108 .42 1** 1 7.p.outco mes n. reinforce ment .287 .375 ** .435 ** .055 .18 2* .0 07 1 8.p. outcomes p. reinforce ment .431 ** .371 ** .395 ** .315 ** .19 7* .0 79 .58 4* 1 9. performa nce per. .107 .098 .069 .218 ** .01 8 .1 97 .03 8 .0 46 1 2 3 4 1. presenteeism 1 1 2. presenteeism 2 .655** 1 3. presenteeism 3 .467** .574** 1 4. presenteeism 4 .678** .468** .348* 1 5. age .100 .281** .218** .074 volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu an exploratory study of presenteeism in turkish context page |34| emerging markets journal age shows positive and significant relationship with second and third kind of measurements we used in the study, while it shows no significant relationship with other two. table 17: performance perceptions of employees during presenteeism performance levels during presenteeism percentage better than normal % 6.9 normal % 24.1 less than normal % 55.9 very low % 13.1 24.1% of the respondents evaluated their performance as ‘normal’ and 55.9% assessed their performance as ‘less than normal’. 13.1% of the participants found their performance ‘very low’ and 6.9% of them determined their performance better than normal. this shows that, majority of the respondents experienced a level of performance which is less than normal during presenteeism, while a considerable percentage (31%) of them felt that their performance were normal or even better. table 18: correlations among different measures of presenteeism and outcomes **correlation is significant at the 0.01 level (2-tailed). * correlation is significant at the 0.05 level (2-tailed). the correlation analysis helped to see how different conceptualizations and measures of presenteism associated with study variables. fourth question addressed to measure presenteeism is not directly asking about sickness. but, ‘things normally compel absence’ is the only presenteeism type that doesn’t relate significantly with illness related negative outcomes. only third form of measurement of presenteeism indicated significant association with commitment and performance related negative outcomes. table 19: correlations among different measures of presenteeism and reasons **correlation is significant at the 0.01 level (2-tailed). * correlation is significant at the 0.05 level (2-tailed). engagement based reasons only correlate significantly with second form of presenteeism, which was about attending to work despite being ill enough to require absence. normative reasons show significant positive relationship with all measures of presenteeism, except the third one. workload reasons and managerial reasons demonstrate no significant associations. 5. discussion and conclusion presenteeism is an emerging research era, where many exploratory questions may be produced. literature is not definitive for the conceptualization of the construct. there are few studies about the reasons, measurement and positive outcomes of the concept. literature conducted in turkish context is even more limited. 1 2 3 4 5 6 7 1. presenteeis m 1 1 2. presenteeis m 2 .655* * 1 3. presenteeis m 3 .467* * .574 ** 1 4. presenteeis m 4 .678* * .468 ** .348* * 1 5. p.outcomes n. reinforcem ent .016 166* .177 .05 0 1 6. p. outcomes p. reinforcem ent -.038 .158 -.053 .03 5 .584 ** 1 7. illness related n. outcomes .176* .166 * .170* .14 7 .182 * .197 * 1 8. commitme nt and performanc e r. n. o. .031 .007 .237* * .04 7 .007 .079 .421* * 1 2 3 4 5 6 7 1. presenteei sm 1 1 2. presenteei sm 2 .655* * 1 3. presenteei sm 3 .467 ** .574* * 1 4. presenteei sm 4 .678* * .468* * .348 ** 1 5. manageria l reasons .107 .111 .065 .042 1 6. normative reasons .212 * .312 ** .153 .207 * .383 ** 1 7. work load reasons .014 .143 .100 .054 .108 .478 ** 1 8. engageme nt reasons .074 .232 ** .078 .047 .373 ** .420 ** .211 * volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu mehmet çetin emerging markets journal | p a g e |35 study generated answers for many of the research questions that were set at the beginning of the paper. to begin with, the definitions of the concept yielded to differing measurement approaches and the means of the answers given to those questions were different and not showing strong correlations among each other. how you conceptualize and measure presenteeism create differing answers. asking how many days did the employees attend to work despite they were ill, or asking the number of days they attended to work despite there were things that normally compelled absence, or asking the number of the days they felt sick enough to require them not to come work, or the number of days that they acknowledged their productivity would be low because of their health condition, produced differing answers. their correlations with other factors were also demonstrating differences. some of the questions measuring presenteeism correlated with some variables of the study while some others didn’t. for example, fourth question addressed to measure presenteeism is not directly asking about sickness, but the ‘things normally compel absence’ is the only presenteeism type that doesn’t relate significantly with illness related negative outcomes. only third form of measurement of presenteeism indicated significant association with commitment and performance related negative outcomes. that may be because this one represents a more serious condition that requires absence, but believing so employees still shop up for work. age shows positive and significant relationship with second and third kind of measurements we used in the study. decreased productivity and feeling sick enough to require not to come work may be associated with what increasing age brings. this is another finding that supports different measures and conceptualizations of presenteeism may show differing associations with other variables. looking at the differing means of different measuring tools and their different correlations with study variables, it is hard to claim that they will not correlate with other variables differently. this may be one of the reasons behind opposite findings in the literature like hemp (2004) and rantanen and tuominen (2011). more studies on this issue may further enlighten this path. it may be suggested tha,t presenteeism levels of the respondents are parallel with the levels that aronsson, gustafsson and dallner (2000) indicated. they indicated that at least one third of respondents experienced presenteeism 2-5 times a year and nearly one sixth of them showed up to work while ill more than 5 times. aronsson and gustafsson (2005) indicated even more frequency for presenteeism as more than half of the respondents declared that they experienced presenteeism two or more times in a year. open ended question asking about the reasons for presenteeism revealed the reasons why respondents engage in presenteeism and further analysis on them in the second study demonstrated a structure which suggests 4 sub dimensions. the reasons for presenteeism were clustered, as one group of items represents the managerial practices and organizational rules addressing issues like burden of providing evidence for sickness and convincing the managers for it, so not having pay cuts or losing the job. there are empirical evidence in the literature that supports these findings by indicating associations between sick pay, job insecurity and presenteeism (e.g. lovell 2004; virtanen, et al. 2003; virtanen 1994). grinyer and singleton (2000) also supports the findings of the study that, managerial practices and management policies may be a reason for presenteeism . second group of items that factored reliably contains the ethical and normative side of presenteeism, feeling responsible and believing one must show up if it is still possible and there is a chance to be helpful. third group of items describe reasons based on keeping the things in order like not passing the work load on other days, not disrupting the work or put the organization in a hard situation. fourth group is representing the reasons which roots from the positive attitudes towards work like feeling better at work despite being ill and feeling bored not attending to work. johns (2010) supports that approach by suggesting that presenteism may be seen as a citizenship behavior. reasons listed for the presenteeism by the respondents are parallel with the other studies’ findings and conceptualizations. bracewell et al. (2010) emphasize the link between presenteeism culture and presenteeism. managerial practices and organizational atmosphere may be taken as components of organizational culture. there are also some other reasons not factored in the exploratory factor analysis, but were provided by respondents like ‘high competition in organization’. this reason was also mentioned by simpson, (1998), as he mentioned ‘competitive presenteeism’ as a result of the high competitive culture of the organization. one of the main research purposes was to explore possible positive outcomes of the presenteism. presenteeism is generally conceptualized as a phenomenon, that yields to negative outcomes (e.g. collins et al., 2005). but there may also be some positive ones. asking an open ended question on the issue provided many items to evaluate as possible positive outcomes of presenteeism. many of them are about getting rid of the negative outcomes of absenteeism. but, there are also ones that may be claimed solely arising from presenteesim itself, like feeling more identified with the work. hansen & andersen (2008) also support a positive approach by suggesting that employees engage in presenteeism because of high commitment. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu an exploratory study of presenteeism in turkish context page |36| emerging markets journal proving that you are a hard worker and impressing the managers, and making use of workplace health care facilities are also other benefits of presenteeism listed by respondents that may be evaluated as positive reinforcements rather than negative reinforcements. also, more frequently experienced ones are avoiding the negative outcomes like pay cut or getting rid of the mental burden of absenteeism. the factor structure of positive outcomes when they are investigated with explanatory factor analysis demonstrated a parallel construct. 24.1% of the respondents evaluated their performance as ‘normal’ and 55.9% assessed their performance as ‘less than normal’. 13.1% of the participants found their performance ‘very low’ and % 6.9 of them determined their performance better than normal. this shows that, majority of the respondents may experience a level of performance which is less than normal during presenteeism while still a considerable percentage (31%) of them feel that, their performance is normal or even better. employees evaluate their performance level differently while experiencing presenteeism. it may be summarized that, majority of the respondents experience a level of performance which is less than normal during presenteeism, while still a considerable percentage (31%) of them feel that, their performance is normal or even better. differing levels of performance perceptions during presenteeism may be for many factors like the nature and structure of work, personality or the severity of the health condition. study provides some valuable information about this difference. differing presenteeism forms, age or positive outcomes didn’t show significant correlations with performance perception. but, evidence indicates that the reason behind presenteeism may be important to understand the performance level of employees when they come to work despite they are ill. coming to work despite an illness because of the work load related reasons or managerial practices against presenteeism is not significantly related with presenteeism, while it is positively and significantly related with doing it for engagement reasons like feeling better at work or getting bored out of the work. this difference may be considered as a voluntary presenteeism which is powered by intrinsic motivation, while another presenteeism is mandatory that takes its energy from extrinsic motivators. more studies may help to better conceptualize and differentiate these presenteeism forms. study also revealed some negative outcomes of presenteeism experienced by employees. the outcomes were clustered as health related negative outcomes, which is about prolonging sickness or defecting others; and commitment and performance related negative outcomes which caused decrease in customer satisfaction and commitment and love towards work. engagement related reasons are positively and significantly related with positive reinforcement outcomes, while shows no significant relationship with negative reinforcement related ones. commitment and performance related negative outcomes show only significant and positive association with managerial practice sourced reasons of presenteeism. commitment related negative outcomes show no other significant relationship with other reasons for presenteeism. this means that, when employees come to work despite they are ill because of the management and culture related reasons, their organizational commitment is affected negatively. but if they do it for normative and engagement reasons, their organizational commitment is not significantly affected. this is another evidence for differently characterized presenteeism and their differing consequences. normative reasons and engagement reasons show no significant relationship with any of the negative outcomes. this study must be considered as an exploration of essential questions about presenteeism, hopefully opening new windows for further studies and inspiring some new questions, classifications and associations about the concept. positive and negative consequences of the concept and how may negative ones be avoided while benefiting the positive ones, require more investigations. the research provides many useful insights for managers and leaders. as presenteeism has both positive and negative outcomes, leaders may change the perception and circumstances for presenteeism to avoid the negative sides and they can further benefit the positive sides. one fact that study revealed is, if engagement related reasons are the drive behind presenteeism, or in another saying presenteeism is voluntary, it doesn’t relate with negative outcomes. when the drive is normative, employees experience more health related negative outcomes, but not performance or commitment related ones. but if the reason is management related, it may affect commitment and performance negatively. so leaders, by setting an unsporting climate or practices may cause involuntary presenteeism, which will cause negative outcomes on the attitude of employees toward work and their commitment. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu mehmet çetin emerging markets journal | p a g e |37 references aronsson g, gustafsson k. (2005). sickness presenteeism: prevalence, attendancepressure factors, and an outline of a model for research. journal of occupational and environment and medicine, 47(9):958–966. aronsson, g, gustafsson, k. and dallner, m. (2000). sick but yet at work. an empirical study of sickness presenteeism, journal of epidemiology and community health, 54, 7, 502–9. bergström, g, bodin, l, hagberg, j, lindh, t, aronsson, g, & josephson, m. (2009). does sickness presenteeism have an impact on future general health?. international archives of occupational and environmental health, 82, 10, 1179-1190. bracewell, l. m., campbell, d. i., faure, p. r., giblin, e. r., morris, t. a., satterthwaite, l. b., simmers, c. d., ... holmes, j. d. (2010). sickness presenteeism in a new zealand hospital. the new zealand medical journal, 123, 1314, 31-42. burton wn, conti dj, chen c-y, schultz ab, edington dw. (1999). the role of health risk factors and disease on worker productivity. journal of occupational and environment and medicine, 41:863–877. cancelliere, carol, cassidy, j david, ammendolia, carlo, & côté, pierre. (2011). are workplace health promotion programs effective at improving presenteeism in workers? a systematic review and best evidence synthesis of the literature. (biomed central ltd.) biomed central ltd. collins, jj., baase, cm., sharda, ce., ozminkowski, rj., nicholson, s., billotti, gm., turpin, rs., ... berger, ml. (2005). the assessment of chronic health conditions on work performance, absence, and total economic impact for employers. journal of occupational and environment and medicine, 47, 6, 547557. demerouti, e, blanc, pml, bakker, ab, schaufeli, wb., & hox, j. (2009). present but sick: a three-wave study on job demands, presenteeism and burnout. career development international, 14, 1, 50-68. evans, cj. (2004). health and work productivity assessment: state of the art or state of flux? journal of occupational and environmental medicine, 46, s3–s11. goetzel rz, long sr, ozminkowski rj, hawkins k, wang s, lynch w. (2004). health, absence, disability, and presenteeism cost estimates of certain physical and mental health conditions affecting us employers. journal of occupational and environment and medicine, 46(4):398–412. grinyer, a. and singleton, v. (2000). sickness absence as risk-taking behaviour: a study of organisational and cultural factors in the public sector, health, risk and society, 2, 7–21. hansen, cd. and andersen, jh. (2009). sick at work – a risk factor for long-term absence at a later date? journal of epidemiology and community health, 63: 397– 402. hansen, cd, and andersen, jh. (2008). going ill to work: what personal circumstances, attitudes and workrelated factors are associated with sickness presenteeism? social science and medicine, 67, 956–964. hemp p. (2004). presenteeism: at work—but out of it. harvard business rev. 82(10):49–58, 155. hummer, j, sherman, b, & quinn, n. (2002). present and unaccounted for. occupational health & safety, 71, 40– 44, 100. johns, g. (2010). presenteeism in the workplace: a review and research agenda. process and outcome: gender differences in the assessment of justice, 31, 4, 519. kessler, rc., ames, m., hymel, pa., loeppke, r, mckenas, dk., richling, de., et al. (2004). using the world health organization health and work volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.93 | http://emaj.pitt.edu an exploratory study of presenteeism in turkish context page |38| emerging markets journal performance questionnaire (hpq) to evaluate the indirect workplace costs of illness. journal of occupational and environmental medicine, 46, s23–s37. koopmanschap m, burdorf a, jacob k, meerding wj, brouwer w, severens h. (2005). measuring productivity changes in economic evaluation. setting the research agenda. pharmacoeconomics 23(1):47–54. kumar, rn., hass, sl., li, jz., nickens, dj., daenzer, cl., & wathen, lk. (2003). validation of the health-related productivity questionnaire diary (hrpq-d) on a sample of patients with infectious mononucleosis: results from a phase 1 multicenter clinical trial. journal of occupational and environmental medicine, 45, 8, 899907. lerner, d., amick, bc., rogers, wh., malspeis, s, bungay, k, & cynn, d. (2001). the work limitations questionnaire. medical care, 39, 72– 85. lovell v. (2004). no time to be sick: why everyone suffers when workers don’t have paid sick leave. washington dc.: institute for women’s policy research. lowe, g. (2002). ‘here in body, absent in productivity: presenteeism hurts output, quality of work-life and employee health’. canadian hr reporter: the national journal of human resource management, december, 1–2. mattke, s, balakrishnan, a, bergamo, g, & newberry, sj. (2007). a review of methods to measure health-related productivity loss. the american journal of managed care, 13, 4, 211-7. mckevitt c, morgan m, dundas r, holland ww. (1997). sickness absence and ‘working through’ illness: a comparison of two professional groups. journal of public health medicine, 19: 295–300. middaugh, dj. (2007). presenteeism: sick and tired at work. dermatology nursing; 19(2), 172-185. munir, f, yarker, j, & haslam, c. (2008). sickness absence management: encouraging attendance or ‘risktaking’ presenteeism in employees with chronic illness?. disability & rehabilitation, 30, 19, 1461-1472. rantanen, i., & tuominen, r. (2011). relative magnitude of presenteeism and absenteeism and work-related factors affecting them among health care professionals. international archives of occupational and environmental health, 84, 2, 225-30. schultz ab, edington dw. (2007). employee health and presenteeism: a systematic review. journal of occupational rehabilitation, 17:547–579. simpson, r. (1998). presenteeism, power and organizational change: long hours as a career barrier and the impact on the working lives of women managers. british journal of management, 15, 3752. smith, dj. (1970). absenteeism and presenteeism in industry. archives of environmental health, 21, 670–677. stewart wf, ricci ja, chee e, morganstein d. (2003). lost productive work time cost from health conditions in the united states: results from the american productivity audit. journal of occupational and environment and medicine, 45:1234–1246. taloyan, m., aronsson, g., leineweber, c., magnusson, h. l., alexanderson, k., & westerlund, h. (2012). sickness presenteeism predicts suboptimal selfrated health and sickness absence: a nationally representative study of the swedish working population. plos one, 7, 9.) virtanen m, kivimaki m, elovainio m, vahtera j, ferrie je. (2003). from insecure to secure employment: changes in work, health, health related behaviours, and sickness absence. occupational and environmental medicine 60: 948–953 virtanen, p. (1994). ‘an epidemic of good health’ at the workplace, sociology of health and illness, 16, 3, 394–401. a country specific approach to ifrs accounting policy choice in the european, australian and turkish contextab prof. dr. nalan akdogan full professor of accounting, baskent university department of accounting and financial management | email: nalanakdogan@hotmail.com assist. prof. dr. can ozturk assistant professor of accounting, cankaya university department of management | email: cozturk@cankaya.edu.tr abstract ias 8 defines the concept of accounting policy as "the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements". within the framework of this concept, this research that is derived from international financial reporting standards (ifrs) contributes to the accounting literature by focusing on the alternative accounting policies' debate related to presentation and recognition issues in the european, australian and turkish context and concludes that there is an influence of local accounting policies over ifrs practice in turkey and this influence still exists in europe and australia based on the 2008/2009 annual reports. this shows that as long as diversity in accounting policies of ifrs is present, entities are expected to be inclined to select their local accounting policies by leading to comparability of financial statements within the country rather than between countries in the ifrs context. keywords: accounting policy, ifrs, europe, australia, turkey jel classification: m41, m48 new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu | mailto:nalanakdogan@hotmail.com mailto:cozturk@cankaya.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu a country specific approach to ifrs accounting policy choice in the european, australian and turkish context page |60| emerging markets journal a country specific approach to ifrs accounting policy choice in the european, australian and turkish context prof. dr. nalan akdogan assist. prof. dr. can ozturk 1. introduction in today's worldwide accounting, the objective of providing understandable, transparent, and comparable financial information as the common denominator of the accounting and financial reporting became an important issue as a result of the increase in commercial activities and foreign direct investments(iasb, 2010: v) because differences in local accounting practices between countries prevent the flow of capital across borders necessary for the optimal allocation of scarce resources in the global context(ding et al. 2008, 145). in order to achieve this objective, international accounting standards committee(iasc) and subsequently international accounting standards board(iasb) have been working since their inception(tarca 2005, 67) to prepare international accounting and financial reporting standards(ias-ifrs) that try to reduce the diversity of accounting policies since 1974. the objective of this paper is to investigate the trends in alternative accounting policy choices of ifrs related to presentation and recognition in terms of selected european countries, australia and turkey to determine whether there is an influence of local accounting practice over ifrs. this study is important because it proves that as long as the diversity of alternative accounting policy choices exist under ifrs practice, financial statement preparers are expected to be inclined to select the accounting policy choice that specifically refers to their local accounting policy, if any. in this context, this paper proves that the local patterns of ifrs practice is valid for turkey and local patterns of ifrs practice, still, exist for australia, france, britain, germany and italy compared to prior research of kvaal and nobes(2010) and nobes(2011). this research is different from others. first of all, this is the first comprehensive research regarding the trends of accounting policy choices of ifrs in terms of turkish entities because it not only strengths the findings of marsap et al.(2007) but also it contributes to the turkish ifrs accounting policy choice debate in terms of ias 1, ias 7, ias 31, and ias 40. second, it considers the trends of accounting policy choices of ifrs that have not been volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu prof. dr. nalan akdogan, assist. prof. dr. can ozturk emerging markets journal | p a g e |61 mentioned in the papers of cairns et al.(2008), mueller et al. (2008), kvaal and nobes(2010), nobes(2011), kvaal and nobes(2012), nobes(2013) regarding the early adoption of ias 1(2007), ias 2, and ias 16 in the general context. our observations will be of interest to financial statement preparers and the users of financial information because they provide evidence that if preference is given to local accounting policy under ifrs practice, this situation is expected to make financial statements comparable within the country rather than between countries by leading to consistent use of local accounting policies under ifrs practice. 2. review of alternative accounting policy debate under ifrs ias 8 defines the concept of accounting policies as "the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements"(iasb 2010, a360). within the framework of this definition, review of alternative accounting policy debate related to ifrs covers the following studies as far as we are concerned. for the first time, marsap et al.(2007) examined the trends in alternative accounting policy choices of ifrs in turkey in terms of the listed turkish entities. the sample of this research consists of entities from food, service and textile industries and their financial statements belong to the reporting period ended up december 31, 2006. this research, only, covers the trends in alternative accounting policy choices in terms of ias 2, ias 16, ias 23 and ias 38. on the other hand, we pointed out that alternative accounting policy debate related to ifrs keeps going on within the framework of ias 16, ias 38 and ias 40. the selection of historical cost or fair value was tested by cairns et al.(2008) regarding british and australian entities, by mueller et al. (2008) regarding the european real estate sector after ifrs adoption, and by christensen and nikolaev(2009) in terms of british and german entities. the latest research articles that we should mention to finalize alternative accounting policy debate related to ifrs, consist of the research made by kvaal and nobes(2010), nobes(2011), kvaal and nobes(2012) and nobes(2013). kvaal and nobes(2010) examined the annual reports of german, french, british, spanish, and australian entities to find out the trends of 16 ifrs policy choices and determined that there is a reflection of local accounting policies under ifrs practice. in 2012, they verified that local patterns of accounting policy choice, still, exist for these countries. in addition, nobes determined that the local patterns of accounting policy choice are valid for italian, dutch, and swedish entities in 2011 and for canadian entities in 2013 under 14 ifrs policy choices. 3. data and research methodology 3.1. sample set volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu a country specific approach to ifrs accounting policy choice in the european, australian and turkish context page |62| emerging markets journal the sample of this research is mostly made up of large quoted entities whose financial reporting period ends either in 2008 or 2009 depending on the end of annual accounting period and whose primary operating activities are either manufacturing or providing service or retailing. in addition, our sample is different from prior research because it does not include any financial entities compared to the studies of cairns et al.(2008), christensen and nikolaev(2009), kvaal and nobes(2010), nobes(2011), kvaal and nobes(2012) and nobes(2013) as well as any real estate entities compared to mueller et al. (2008). within the framework of the determinants of our sample set that consist of the market capitalization rate of 54 stock exchanges, ifrs adopted countries and the availability of financial information in english, our sample was formed by the following countries: germany, france, britain, italy, australia, and turkey. as a result of this selection, we created a sample consisting of 162 entities as shown in table 1. table 1: number of entities selected from each country sectors / countries germ any fran ce brit ain ita ly austr alia turk ey manufact uring 13 14 17 15 16 23 service 8 8 8 8 5 7 retailing 4 3 4 2 4 3 total 25 25 29 25 25 33 3.2. research method this research used the frequency distribution method as the research tool. in this regard, this method helped us to determine the trends in alternative accounting policy choices of ifrs. based on this method, all empirical results are presented in table 2. table 2: trends in alternative accounting policy choices policy trends by country % germa ny fran ce brita in ital y austra lia turk ey 1 early adoption of ias 1(2007) n = all entities 25 25 29 25 25 33 early adopting entities 52% 48% 97% 24 % 60% non-early adopting entities 48% 52% 3% 76 % 40% 2 title of balance sheet n = early adopting entities 13 12 28 6 15 0 balance sheet 100% 100 % 100% 100 % 94% statement of financial position 6% 3 presentation of balance sheet 25 25 29 25 25 33 n = all entities assets = liabilities + equity 100% 100 % 24% 100 % 100% volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu prof. dr. nalan akdogan, assist. prof. dr. can ozturk emerging markets journal | p a g e |63 assets liabilities = net assets(equit y) 76% 100% 4 order of assets and liabilities n = all entities 25 25 29 25 25 33 liquidity decreasing 16% 76% 8% 100% %100 liquidity increasing 84% 100 % 24% 92 % 5 statement of comprehens ive income n = early adopting entities 13 12 28 6 15 0 one statement approach two statement approach 100% 100 % 100% 100 % 100% 6 traditional income statement n = all entities 25 25 29 25 25 33 by function 48% 52% 83% 20 % 48% 100% by nature 52% 48% 17% 80 % 52% 7 cost flow assumptions n = all entities 25 25 29 25 25 33 wa, only 52% 40% 21% 68 % 25% 88% fifo, only 20% 32% 16 % 46% 3% wa + fifo 12% 8% 7% 12 % 4% undetermine d 32% 32% 32% 4% 13% 6% 8 cash flows from operating activities n = all entities 25 25 29 25 25 33 direct method 41% 100% indirect method 100% 100 % 59% 100 % 100% 9 property, plant and equipment( ppe) n = all entities 25 25 29 25 25 33 cost model 100% 84% 100% 68 % 92% 88% cost + revaluation 4% 8% 12% undetermine d 16% 28 % 10 depreciation methods in ppe n = all entities 25 25 29 25 25 33 straight-line 100% 92% 97% 80 % 88% 97% straight-line + units of production 8% 3% 8% 3% undetermine d 20 % 11 borrowing costs n = all entities 25 25 29 25 25 33 benchmark treatment 72% 44% 52% 60 % 28% 58% alternative treatment 24% 36% 48% 40 % 72% 39% undetermine d 4% 20% 3% 12 investment in joint ventures n = entities with joint 17 13 19 16 13 12 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu a country specific approach to ifrs accounting policy choice in the european, australian and turkish context page |64| emerging markets journal ventures proportionate consolidatio n 42% 85% 32% 44 % 8% 83% equity method 58% 15% 58% 56 % 92% 17% undetermine d 10% 13 intangible assets n = all entities 25 25 29 25 25 33 cost model 100% 40% 97% 44 % 80% 97% undetermine d 60% 3% 56 % 20% 3% 14 investment property n = entities with investment properties 10 7 4 6 1 15 cost model 100% 86% 100% 100 % 67% fair value model 14% 100% 33% 4. empirical results and discussion 4.1. ias 1 presentation of financial statements under ias 1(2007), we determined 5 accounting policies of which 2 of them were observed in terms of the early adopting entities of ias 1(2007) and 3 of them were examined in terms of all entities as the following. 1. title of balance sheet: ias 1(2007) provides financial statement preparers the opportunity to call this statement as "statement of financial position" rather than balance sheet(iasb 2010, a296). for this reason, we questioned the following hypothesis: h1: early adopting entities of ias 1(2007) are inclined to use the title "statement of financial position" rather than "balance sheet" within the framework of this hypothesis, we determined that all early adopting entities from germany, france, italy and united kingdom are inclined to use the title "balance sheet", because this title is generated from their local accounting practice due to the reflection of the 4th directive of the european council. therefore, it seems that early adopting countries from europe are conservative in this context. however, it is expected that australian entities would be willing to use the title "statement of financial position" due to their local accounting practice regulated by the former standard aasb 1040 statement of financial position. 2. presentation of balance sheet: ias 1 does not prescribe any format of balance sheet(iasb 2010, a303). for this reason, we pointed out that presentation of balance sheet is diversified. that's why, we questioned the following hypothesis: h2: turkish and european entities except some of british ones are fully inclined to use the format of "balance sheet" that refers to "assets = liabilities + equity" c rather than "assets liabilities = net assets(equity)" d . volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu prof. dr. nalan akdogan, assist. prof. dr. can ozturk emerging markets journal | p a g e |65 3. liquidity order: ias 1 requires the use of current/non-current distinction but entities are free to classify their assets and liabilities on the balance sheet either in liquidity decreasing or liquidity increasing order(iasb 2010, a304). for this reason, we observed that classification of assets and liabilities is diversified. for this reason, we questioned the following hypothesis: h3: european entities except majority of british ones are inclined to classify their assets and liabilities in liquidity increasing order compared to australian, turkish and minority of british ones that prefer liquidity decreasing order. these two hypotheses were accepted by our findings and due to the diversity of the format of balance sheet and the liquidity order; we analyzed h2 and h3 on a country basis as follows. france: french regulations on consolidated accounts are in favor of the preparation of a consolidated balance sheet either by term or by nature while imposing the format by nature since 2000(ding et al. 2008, 147). even if this is the case, preference was still given to the consolidated balance sheet by term(ding et al. 2008, 147). by term is also a reflection of article 9 of the 4th directive which refers to non-current/current distinction over the french local accounting practice because accounting regulation in france was essentially influenced by european directives and regulations(bocqueraz 2010, 51). in this regard, our results show that french entities, still, keep their format of their consolidated balance sheets by term under ifrs practice. italy: in italy, accounting regulation was strongly improved by the 4th directive and article 9 of this directive was approved as the local balance sheet format(cameran and pettinicchio 2010, 100-101). in this context, our results reflect the influence of this local balance sheet format over the ifrs practice. germany: before the adoption of ifrs in 2005, german entities whose shares that were quoted in stock exchange, were authorized to prepare either us gaap or ifrs based financial statements(beckman et al. 2007, 254). that's why, the companies whose financial reporting was us gaap or ifrs based, prepared their balance sheets according to us gaap format or according to the article 9 of the 4th directive. in this regard, given the flexibility provided by ifrs practice to present a specific format of balance sheet, our results indicate that some german entities, still, use us gaap format of balance sheet under ifrs practice as a reflection us gaap over ifrs. britain: british accounting system has been influenced by the 4th directive. companies act 1981 introduced new formats of balance sheet(napier 2010, 266). as of 2008, related british regulations provide two formats of balance sheet which refer to article 9 and 10 of the 4th directive. however, many companies do not absolutely and precisely use these formats(nobes and parker 2008, 336). as a reflection of this situation, we observed that the majority of british entities use the anglovolume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu a country specific approach to ifrs accounting policy choice in the european, australian and turkish context page |66| emerging markets journal saxon balance sheet e format which creates the concept of "net assets" rather than "net current assets" as it is in article 10. our results indicate that the adoption of anglo-saxon balance sheet is stronger than the adoption of european one in britain. australia: before the full adoption of ifrs, presentation of balance sheet in australian local accounting practice was regulated by the former accounting standard aasb 1040 statement of financial position that provides two formats either by term or by nature. also, a balance sheet by term can be presented based on either us gaap or anglo-saxon format. in this context, our results show that australian entities prefer the anglo-saxon format f . this constitutes a reflection of local accounting practice over ifrs practice. turkey: since 1960s, turkish accounting regulations have been established based on the united states model(catalin nicolae albu et al. 2013, 150) because successful individuals that have been trained and have taken graduate degrees from the late 1950s, particularly, in the us, implemented their accounting expertise over the turkish accounting system and a uniform chat of accounts was developed for state economic enterprises in 1974 under the heavy influence of the american system(simga-mugan 1995, 354). that's why, a us gaap based balance sheet was adopted in turkey. in 1992, the first communiqué on accounting system that regulates local accounting system, was published under the influence of the 4th directive; however, the format of the balance sheet has been kept(akdogan 1991, 26). in this context, our observations indicate that turkish entities still present their balance sheets according to the existing format as a reflection of local accounting practice over ifrs. 4. presentation of statement of comprehensive income: this is a new financial statement under ifrs and became compulsory via ias 1 (2007). it can be presented either as a single statement or as two separate statements(traditional income statement and statement of comprehensive income)(iasb 2010, a308). in this context, we questioned the following hypothesis: h4: early adopting entities of ias 1(2007) are inclined to use two statement approach rather than one statement approach. our observations accepted this hypothesis, because we determined that all early adopting entities prefer two statement approach. the reasons behind this preference are based on the fact that this financial statement does not exist in local accounting practice of all countries except britain and entities do not want to make any complicated presentation of profit/loss for the period and total comprehensive income. on the other hand, this statement volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu prof. dr. nalan akdogan, assist. prof. dr. can ozturk emerging markets journal | p a g e |67 was regulated by the former accounting standard frs 3 reporting financial performance in britain according to two statement approach(accounting standards board 1992, 32). since our results show that all early adopting british entities prefer the two statement approach, this is a reflection of local accounting practice over ifrs. 5. presentation of traditional income statement: according to ias 1, traditional income statement can be prepared either by function or by nature(iasb 2010, a312). in this context, we questioned the following hypothesis: h5: all entities are inclined to prepare their income statements by function rather than by nature our observations rejected this hypothesis within the framework of the following cases: france: in french accounting practice, even though an individual income statement by nature is required, a consolidated income statement either by function or by nature can be prepared(ding at al. 2008, 147). in this context, our results show that french entities do not strongly dominate an income statement either by function or by nature. italy: in italy, an income statement can only prepared by nature(cameran and pettinicchio 2010, 101). as a reflection of this local accounting practice, we observed that the majority of italian entities are inclined to report their income statement by nature under ifrs practice. germany: in german accounting practice, even if an income statement by function or by nature is allowed, the most widely selected format has been by nature(nobes and parker 2008, 46). in addition, we should recall that financial reporting based on either us gaap or ifrs have been permitted until the adoption of eu-adopted ifrs for the listed entities. within the framework of this analysis, our findings indicate that an income statement by nature does not strongly dominate an income statement by function under ifrs practice and even we can relatively say that entities selected an income statement by function would be the ones that switched from us gaap to ifrs because an income statement by function is the most preferred under us gaap(meek 2003, 81). britain: in britain, entities are allowed to prepare their income statements either by function or by nature under local accounting practice according to the former standard frs 3 but the most accepted format is by function(walton 2003, 166). in this regard, our results prove that the majority of british entities are inclined to prepare an income statement by function as a reflection of british local accounting over ifrs. australia: according to the local accounting practice in australia, entities are allowed to prepare an income statement either by function or by nature according to the former standard aasb 1018 statement of financial performance. in this context, our results show that an income statement either by function or by nature does not strongly dominate with each other. turkey: under local accounting regulations in turkey, particularly, generated from the influence of us volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu a country specific approach to ifrs accounting policy choice in the european, australian and turkish context page |68| emerging markets journal gaap that we have mentioned before(catalin nicolae albu et al, 2013: 150), entities can prepare an income statement by function, only(koc yalkin 1991, 89). this accounting policy, also, exists in the first communiqué on accounting system as the influence of the article 25 of the 4th directive(koc yalkin 1991, 88). in this context, we pointed out that all turkish entities continue to prepare an income statement by function as a reflection of local accounting practice over ifrs. 4.2. ias 2 inventory ias 2 permits the use of the following cost flow assumptions: specific identification method, first-in firstout(fifo) and weighted average(wa)(iasb 2010, a333). by taking these accounting policies into account, we questioned the following hypothesis: h6: the continental european and turkish entities are more inclined to use wa method rather than fifo as done by anglo-saxon entities our observations accepted this hypothesis within the framework of the following cases: in europe, the 40th article of the 4th directive regulates the inventory costing methods as specific identification method, fifo, lifo and wa; however, lifo method has been eliminated since 2003 as part of ifrs(jaafar and mcleay 2007, 156). france: in french local accounting practice, entities can use fifo, lifo or wa. according to the research of jaafar and macleay(2007), wa and fifo are, respectively, the most preferred methods of inventory costing and this study indicates that french entities gradually moved from lifo to either wa or fifo. in this context, our observations indicate that french entities are inclined to select wa rather than fifo as it was before as a reflection of local accounting practice over ifrs. italy: under italian local accounting practice, fifo, lifo and wa are allowed and lifo is the most widely used in practice(zambon 2003, 209); however, while the process of eliminating lifo has been in progress from 1995 to 2004 as part of ifrs, the study of jaafar and mcleay(2007) indicates that italian entities, gradually, switched from lifo to either wa or fifo. in this context, our findings show that the majority of italian entities(wa + (wa+fifo)) are inclined to prefer wa as the inventory costing method. germany: according to german accounting practice, fifo, lifo and wa are allowed(haller 2003, 118); however, wa method is common under local practice(nobes and parker 2008, 150). in addition, the research of jaafar and mcleay(2007) verifies this fact. in this regard, our results indicate that the majority of german entities(wa + (wa+fifo)) are inclined to prefer wa as a reflection of local accounting practice over ifrs. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu prof. dr. nalan akdogan, assist. prof. dr. can ozturk emerging markets journal | p a g e |69 britain: in britain, fifo and wa are allowed except lifo(nobes and parker 2008, 82). but, fifo is the most widely preferred method under local accounting practice(walton 2003, 169). this is also proved by study of jaafar and mcleay(2007). in this context, our observations indicate that british entities are inclined to select fifo(fifo + (fifo + wa)) as a reflection of local accounting practice over ifrs. australia: inventory costing methods are locally regulated by the former standard aasb 1019 inventories. in this context, fifo and wa are allowed, only. according to heazlewood(2003), the predominant measures of cost were wa(32%) and fifo(42%) in 1999. under the ifrs practice, our results indicate, almost, the same tendency as a reflection of local accounting practice over ifrs. turkey: in turkey, wa and fifo are solely allowed under local accounting practice according to turkish tax procedure law. our results indicate that the majority of turkish entities prefer the wa method under ifrs practice. 4.3. ias 7 statement of cash flows ias 7 regulates the principles to prepare a statement of cash flows(iasb 2010, a342). the following accounting policy was questioned under ias 7. 6. direct or indirect method: in terms of financial reporting, cash flows from operating activities can be prepared according to direct or indirect method(iasb 2010, a346). since this is the case, we questioned the following hypothesis: h7: all entities are inclined to report cash flows from operating activities by using the direct method rather than indirect method our observations rejected this hypothesis within the framework of the following cases: france: in france, regulation 99-02 provides guidance on how to prepare a statement of cash flows in terms of consolidated accounts under local accounting practice. in this context, either direct or indirect method can be used to report the cash flows from operating activities. however, recommendation 2004-r-02, 2009-r-03 and 2013-03 does not even mention direct method and states that indirect method is the most appropriate to determine the cash flows. for this reason, our observations indicate that all french entities are inclined to choose indirect method as a reflection of local accounting practice over ifrs. italy: under local accounting practice in italy, standard 12 offers three different statements of cash flows that one of them is particularly similar to ias 7(oig 2005, 84). in this context, either direct or indirect method can be used to report the cash flows from operating activities; however, this standard forwards financial statement preparers to select indirect method by stating that the application of direct method is more complex than the other. within this framework, our findings show that all italian entities preferred the indirect method as a reflection of local accounting practice over ifrs. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu a country specific approach to ifrs accounting policy choice in the european, australian and turkish context page |70| emerging markets journal germany: statement of cash flows is required in terms of consolidated financial statements and regulated by the gas 2 cash flow statements under local accounting practice. reporting cash flows are similar to ias 7 and cash flows from operating activities can be presented using either the direct method or indirect method. this standard does not push the financial statement preparers to use any one of these methods. on the other hand, indirect method is the most preferred under us gaap(meek 2003, 84). for this reason, if it is assumed that german entities whose financial reporting that was based on us gaap before the eu-adopted ifrs had reported their cash flows from operating activities under indirect method, this constitutes a reflection of us gaap over ifrs practice. within this framework, our findings show that german companies are significantly inclined to use the indirect method in the reporting of cash flows from operating activities. britain: in british local accounting practice, the former standard frs 1 cash flow statements regulates this financial statement. in this context, all cash flows are reported under similar practice given in ias 7; however, the reporting structure of cash flows from operating activities is different from ias 7 and cash flows from operating activities can be reported using either direct or indirect method. on the other hand, this standard forwards the financial statement preparers to use indirect method unless the benefit of reporting cash flows from operating activities under direct method exceeds the cost of acquisition of this benefit(accounting standards board, 1996: 65). for this reason, our results show that british entities are significantly inclined to use indirect method as a reflection of local accounting practice over ifrs. australia: statement of cash flows is locally regulated by the former standard aasb 1026. it similarly reports all cash inflows and cash outflows according to ias 7. to report the cash flows from operating activities, the direct method is allowed only. in this context, our observations indicate that australian entities are significantly inclined to report their cash flows from operating activities under direct method as a reflection of local accounting practice over ifrs. turkey: in turkey, statement of cash flows had not been a compulsory financial statement until ifrss were adopted; however, it was regulated by the first communiqué on accounting system as one of the supplementary financial statements(simga-mugan 1995, 357). compared to the statement of cash flows in ias 7, all cash inflows and outflows were not classified and were prepared according to direct method(akdogan ve tenker. 2006, 286-287). however, our results show that turkish entities are inclined to use indirect method under ifrs practice. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu prof. dr. nalan akdogan, assist. prof. dr. can ozturk emerging markets journal | p a g e |71 4.4. ias 16 property, plant and equipment 7. valuation after initial recognition: property, plant and equipment are measured either according to cost or revaluation model(iasb 2010, a448). in this context, we questioned the following hypothesis: h8: entities whose local accounting practice permits revaluation model are inclined to prefer revaluation rather than cost model under ifrs practice compared to other entities whose local accounting practice is based on cost model this hypothesis was rejected within the framework of the following cases: france: in france, revaluation is possible as replacement cost or historical cost adjusted for general price inflation in the context of consolidated financial statements. however, french entities do not prefer these alternative valuation options(hoarau 2003, 148). this indicates that the common practice is the cost model under local accounting. in this regard, our data indicates that french entities are inclined to select cost model as a reflection of local accounting practice over ifrs. on the other hand, we observed that a number of french entities did not pay attention to state their accounting policy. italy: under italian local accounting practice, revaluation is allowed under exceptional circumstances(zambon 2003, 210). that's why, it is not a common practice. in this context, we observed that italian entities are inclined to use cost model under ifrs but a considerable percentage of italian entities did not express their accounting policy in this context. germany: in germany, revaluation is not allowed under local accounting practice(haller 2003, 121). on the other hand, german listed entities whose financial reporting based on us gaap before the eu-adopted ifrs, also, implemented cost model because revaluation is prohibited under us gaap(meek 2003, 82). within this framework, we pointed out that german entities are inclined to prefer cost model as a reflection of both local accounting practice and us gaap over ifrs. britain & australia: in britain and australia, revaluation was respectively regulated by the former standard frs 15 tangible fixed assets and aasb 1041 revaluation of non-current assets. due to this fact, it is estimated that british and australian entities are inclined to choose revaluation model under ifrs practice. however, our findings show that british and the majority of australian entities prefer the cost model as a conservative approach under ifrs. turkey: in turkey, revaluation is an accounting policy that has to be implemented under inflationist periods(simga-mugan 2002, trk-30). that's why, cost model rather than revaluation is the common practice under turkish local accounting. within this framework, we observed that the majority of turkish entities are inclined to use cost model as a reflection to local practice over ifrs. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu a country specific approach to ifrs accounting policy choice in the european, australian and turkish context page |72| emerging markets journal 8. depreciation: according to ias 16, the allowed methods of depreciation are straight-line, double declining balance and units of production(iasb 2010, a452). based on this accounting policy, we provided the following hypothesis: h9: entities are inclined to use the same accounting policy to depreciate their property, plant and equipment after the adoption of ifrs except some sectorspecific circumstances this hypothesis was accepted within the framework of the analysis of the following cases: france & germany: in terms of the local accounting practice of france and germany, prior research indicates that the combination of straight-line and double-declining methods has been essentially a common practice, because of the potential tax savings(jaafar and mcleay 2007, 184). however, our findings show that straight-line became the dominant method under ifrs practice. in addition, we determined that french resource-based entities use the units of production method. italy: former research shows that the straight-line method is the common practice in italy(jaafar and mcleay 2007, 184) with respect to local accounting. in this context, our data indicates that straight-line is the most preferred method of depreciation as an evidence of local accounting practice over ifrs. on the other hand, we pointed out that 20% of italian entities did not attach necessary importance to express their accounting policy regarding depreciation. britain: in british local accounting practice, frs 15 regulates the depreciation methods as straight-line and reducing balance. in this context, the ex-post results of prior literature (jaafar and mcleay 2007, 184) determined that straight-line is the typical method of depreciation in britain. also, our findings are in parallel to these results as an evidence of local accounting practice over ifrs. australia: in australia, depreciation was regulated by the former standard aasb 1021 depreciation under local practice. three methods were offered: straight-line, reducing balance and a method of overall output or service which the asset is expected to yield to the entity, for example, estimated production units, operating hours or distance travelled. in this context, it is known that the straight-line method constitutes the common practice (heazlewood 2003, 292). within the framework of this fact, our findings proved that straight-line method is still the dominant practice for australian entities as a reflection of local accounting practice over ifrs. also, we determined that resources-based entities use units of production method in addition to straight-line. turkey: under local accounting practice in turkey, tax procedure law allows both straight-line volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu prof. dr. nalan akdogan, assist. prof. dr. can ozturk emerging markets journal | p a g e |73 depreciation(normal depreciation) and double declining, only(simga-mugan 2002, trk-18). our findings show that straight-line depreciation is the dominant practice in turkey under ifrs practice. in addition, a limited number of entities operated in resource-based industries started to use units of production method under ifrs practice. 4.5. ias 23 borrowing costs 9. benchmark treatment and alternative treatment: ias 23 had two methods to recognize the borrowing costs which were benchmark treatment and alternative treatment until the cancellation of benchmark treatment in 2009. since this research data covers the period before the adoption of new ias 23, we questioned the following hypothesis: h10: australian entities are inclined to choose alternative treatment rather than benchmark treatment compared to other entities this hypothesis was accepted by taking the capitalization of interest into account. in this context, we pointed out that the local accounting policy of australia on borrowing costs regulated by the former standard aasb 1036 borrowing costs is in conformity with ias 23's alternative treatment because it requires the capitalization of the interest if borrowing costs are directly attributable to the acquisition, construction or production of a qualifying asset. for this reason, alternative treatment is the dominant practice in australia as a reflection of local accounting over ifrs. on the other hand, even if capitalization of interest was defined, it remained probable or uncommon under local accounting practice in france(stolowy 2002, fra34), germany(haller 2003, 118), italy(andrei and bisaschi 2002, ita-19) and united kingdom(walton 2003, 167). in turkey, capitalization of interest is limited and only interest costs incurred during construction are capitalized (simgamugan 2002, trk-16). in this context, generally speaking, our observations indicate that benchmark treatment is the dominant practice in other countries. 4.6. ias 31 investments in joint-ventures 10. proportionate consolidation or equity method: the recognition of joint-ventures has been regulated by the new standard ifrs 11 joint arrangements and ias 28 investments in associates and joint-ventures starting from 2013 by cancelling the proportionate consolidation. even if this is the case, this research is based on the time period that both methods existed under ias 31(iasb 2010, a665). that's why, we questioned the following hypothesis. h11: french entities are inclined to choose proportionate consolidation as a reflection of local accounting policy over ifrs. h12: british and australian entities are inclined to select equity method as a reflection of local accounting policy over ifrs. both hypotheses were accepted within the framework of the analysis of the following cases: france: in france, proportionate consolidation is the only local accounting policy to recognize joint-ventures on a balance sheet(stolowy 2002, fra-60). in this regard, our data indicate that the majority of french entities prefer volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu a country specific approach to ifrs accounting policy choice in the european, australian and turkish context page |74| emerging markets journal proportionate consolidation under ifrs practice as an influence of local accounting practice over ifrs. italy: both proportionate consolidation and equity method are acceptable under local accounting practice(zambon 2003, 207). our findings show that italian entities are inclined to select equity method rather than proportionate consolidation. germany: joint-ventures are recognized by using proportionate consolidation in accordance with gas 9 accounting for investments in joint-ventures in consolidated financial statements under local accounting practice. it is common under german accounting practice(alexander and nobes 2007, 284) however, our observations show that equity method is more preferable than proportionate consolidation. in this context, even if there are still some german entities that use proportionate consolidation as a reflection local accounting practice over ifrs, we should recall that there were listed german entities whose financial reporting based on us gaap before the eu-adopted ifrs. for these entities, equity method was the sole method to recognize joint-ventures under us gaap(meek 2003, 85). that's why; it is possible to state that this is an influence of us gaap over ifrs practice. britain: according to the local accounting practice in britain, proportionate consolidation has not been acceptable but it is available in companies act published in 1989(walton 2003, 167). within the framework of this fact, we observed that equity method is still dominant practice in britain as a reflection of local accounting practice over ifrs. on the other hand, a limited number of joint-ventures did not express their accounting policy in this context. australia: under australian local accounting practice, interests in joint-ventures are regulated by the former standard aasb 1006 which states that jointventures are recognized in accordance with equity method. in this context, our results show that equity method is common in australia as a reflection of local accounting practice over ifrs. turkey: in turkey, there is no local accounting policy to recognize joint-ventures as stated in ias 31. on the other hand, under ifrs practice, preference was given to proportionate consolidation. 4.7. ias 38 intangible assets 11. valuation after initial recognition: according to ias 38, intangible assets are valued using either the cost model or the revaluation model. in this volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu prof. dr. nalan akdogan, assist. prof. dr. can ozturk emerging markets journal | p a g e |75 context, we questioned the following hypothesis as the following: h13: entities whose local accounting practice allows revaluation model are inclined to prefer revaluation under ifrs practice. h14: entities whose local accounting practice allow cost model are inclined to prefer revaluation model under ifrs practice. both hypotheses were rejected within the framework of the analysis of the following cases: france & italy: in france, local accounting practice does not allow to recognize intangible assets above cost(tarca 2005, 79). in italy, revaluation of intangible assets is not allowed except when an ad hoc revaluation law is issued(zambon 2003, 213). as an evidence of the influence of local accounting practice over ifrs, our results show that french and italian entities prefer the cost model. germany: under local accounting practice in germany, intangible assets cannot be revalued(tarca, 2005: 79). in addition, listed german entities whose financial reporting based on us gaap before the eu-adopted ifrs had to apply cost model as an accounting policy because us gaap prohibits the revaluation model(tarca, 2005: 71). in this context, we pointed that german entities prefer the cost model as a reflection of both local accounting practice and us gaap over ifrs. britain & australia: both countries allow revaluation under their local accounting practices(tarca, 2005: 71). however, our observations indicate that british and australian entities are inclined to select cost model under ifrs practice as a conservative approach. turkey: in turkey, the revaluation of the intangible assets is not allowed(simga-mugan 2002, trk-30). for this reason, turkish entities prefer cost model as a reflection of local accounting practice over ifrs. overall, the analysis that we pointed out above also indicates that there is no active market for these assets such that their fair values of intangible assets can be relatively easily determined according to ias 38(iasb 2010, a859). 4.8. ias 40 investment property 12. valuation after initial recognition: items of investment property are valued according to cost model or fair value model(iasb 2010, a974). in this regard, we questioned the following hypothesis by taking the sample size into account: h15: entities whose local accounting policy for property, plant, and equipment is at cost are inclined to select cost model for their investment properties under ifrs practice. h16: entities whose local accounting policy for investment properties allows fair value model are inclined to select fair value model for their investment properties under ifrs practice. first hypothesis was accepted in terms of german and turkish entities because there is no investment volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu a country specific approach to ifrs accounting policy choice in the european, australian and turkish context page |76| emerging markets journal property classification under german and turkish local accounting practice(ozturk 2009, 101). that’s why, investment properties were classified under property, plant and equipment at cost, only. under ifrs practice, they were reclassified. in this context, the sample size is relatively meaningful to state that there is a reflection of local accounting policy over ifrs because they are valued at cost. the latter hypothesis may be accepted in terms british entities due to the fact that these assets were classified as investment properties under local practice(ozturk 2009, 101-103) and regulated by the former standard ssap 19 investment properties that is based on fair value. that's why, it is highly expected that british entities will continue to select fair value model under ifrs practice. 5. conclusion in this research, we observed the trends of 12 accounting policy choices under ifrs practice in the european, australian and turkish context based on the 2008/2009 annual reports and the following conclusions were drawn: in terms of alternative accounting policy choices of ifrs, we determined for the first time that the influence of local accounting policies over ifrs is valid for turkish entities and we pointed out that the influence of local accounting policies over ifrs, still, exists in the european and australian context compared to prior research. due to the diversification of accounting policy choices and the reflection of local accounting policies over ifrs, we pointed out that the comparability of financial statements are mostly possible within the country rather than between countries. in order to make the financial reporting globally comparable in the ifrs context, accounting policy choices should be eliminated. a specific format of balance sheet should be introduced. income statement by function or nature and cost flow assumptions should be selected on a sector specific basis rather than country specific. direct method of cash flow statement should be adopted to provide relevant information related to operating cash flows. accounting policies should be clearly stated in the notes of financial statements. otherwise, it looks like that ifrs will remain as a "title" common denominator of international financial reporting. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu prof. dr. nalan akdogan, assist. prof. dr. can ozturk emerging markets journal | p a g e |77 references aasb. 1997a. aasb 1026 statement of cash flows. available from: <http://www.aasb. com.au/admin/file/content102/c3/aasb1026_1097.pdf> [accessed april 2011]. aasb. 1997b. aasb 1036 borrowing costs. available from: <http://www.aasb. com.au/admin/file/content102/c3/aasb1036_1297.pdf> [accessed april 2011].. aasb. 1997c. aasb 1021 depreciation. available from: <http://www.aasb. gov.au/admin/file/content102/c3/aasb1021_897.pdf> [accessed january 2014]. aasb. 1998a. aasb 1006 interests in joint-ventures. available from: <http://www.aasb. gov.au/admin/file/content102/c3/aasb1006_1298.pdf> [accessed january 2014]. aasb. 1998b. aasb 1019 inventories. available from: <http://www.aasb.gov.au/admin/ file/content102/c3/aasb1019_3-98.pdf> [accessed january 2014]. aasb. 1999. aasb 1040 statement of financial position. available from: <http://www.aasb. com.au/admin/file/content102/c3/aasb1040_1099.pdf> [accessed april 2011].. aasb. 2001. aasb 1041 revaluation of non_current assets. available from: <http://www.aasb.gov.au/admin/file/content102/c 3/aasb1041_07-01.pdf> [accessed july 2013]. aasb. 2002. aasb 1018 statement of financial performance. available from: <http://www. aasb.gov.au/admin/file/content102/c3/aasb1018 _06-02.pdf> [accessed july 2013]. accounting standards board. 1992. frs 3 reporting financial performance. united kingdom. available from: <http://www.frc.org.uk/ourwork/pub lications/asb/frs-3-reportingfinancial-performance/frs-3-reportingfinancial-performance.aspx> [accessed january 2014]. accounting standards board. 1996a. ssap 19 accounting for investment properties. united kingdom. available from: <http://frc.org.uk/ourwork/publications/asb/ssap-19-accountingfor-investment-proper ties-file.pdf> [accessed january 2014]. accounting standards board. 1996b. frs 1 cash flow statements. united kingdom. available from:<http://www.frc.org.uk/ourwork/publications/asb/frs-1-(revised-1996)cashflow-statements/frs-1-cash-flowstatements.aspx> [accessed january 2014]. accounting standards board. 1999. frs 15 tangible fixed assets. united kingdom. available from: <http://www.frc.org.uk/getattachment/49cd6559ed66-4a22-9866ea 01bf9a3b58/frs-15tangible-fixed-assets.aspx> [accessed january 2014]. accounting standards committee of germany. 1999. gas 2 cash flow statements. available from: <http://www.drsc.de/service/drs/standards/index_ volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu a country specific approach to ifrs accounting policy choice in the european, australian and turkish context page |78| emerging markets journal en.php?ixstds_do= show_details&entry_id=3> [accessed january 2014]. accounting standards committee of germany. 2001. gas 9accounting for investments in joint ventures in consolidated financial statements. available from: <http://www.drsc.de/service/drs/standards/index_ en.php?ixstds_do=show_details&entry_id=15> [accessed january 2014]. akdogan, n. 1991. dördüncü yönergenin öngördüğü bilanço tablosu ve ülkemizdeki uygulamalarla karşılaştırılması, avrupa topluluğuna entegrasyonda muhasebe standartları. a.ü.s.b.f.yayını no:574:5-61 türkiye 12. muhasebe eğitimi sempozyumu. ankara akdogan, n. and tenker, n. 2006. finansal tablolar ve mali analiz teknikleri. ankara: gazi publications. 10. edition alexander, d., and nobes, c. 2007. financial accounting: an international introduction. england: prentice hall. 3. edition andrei, p. and bisaschi, a. 2002. accounting in italy. l. orsini, j. p. mcallister ve r.n. parikh(editors), world accounting: ita-1 ita128 autorité des normes comptables. 1999. regulation 99-02, 29/04/1999 relating to consolidated accounts of commercial companies and public enterprises. available from: <http://www.anc.gouv.fr/files/live/sites/anc/files/ contributed/normes%20franca ises/r%c3%a9glements/1999/reg1999_02_ang. pdf> [accessed january 2014]. autorité des normes comptables.2013. recommendation n° 2013-03 du 7 novembre 2013 relative au format des comptes consolidés des entreprises établis selon les normes comptables internationales (hors établissements du secteur bancaire et organismes d'assurance). available from: <http://www.anc.gouv.fr/files/live/sites/anc/files/ contributed/normes%20francaises/recommanda tions/reco2010_2014/reco2013/reco mmandation_2013_r03/recommandation_2013_ r03.pdf> [accessed july 2014]. beckman, j., brandes, c., eierle, b. 2007. german reporting practices: an analysis of reconciliations from german commercial code to ifrs or us gaap. advances in international accounting. vol. 20: 253-294 bocqueraz, c. 2010. chapter 2: france. a global history of accounting, financial reporting and public policy: europe studies in the development of accounting thought, vol. 14a: 37-57 cairns, d., massoudi, d. r., taplin, r. and tarca, a. 2009. ifrs fair value measurement and accounting policy choice in the united kingdom and volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu prof. dr. nalan akdogan, assist. prof. dr. can ozturk emerging markets journal | p a g e |79 australia. aaa 2009 mid-year international accounting section (ias) meeting. mart 2010. available from : <http://ssrn.com/abstract=1274024>. [accessed april 2011]. catalin nicolae albu et al. 2013. implementation of ifrs for smes in emerging economies: stakeholder perceptions in the czech republic, hungary, romania and turkey. journal of international financial management & accounting vol. 24(2): 140-166 cameran, m., pettinicchio, a. 2010. chapter 4: italy. a global history of accounting, financial reporting and public policy: europe studies in the development of accounting thought, vol. 14a: 89-106 christensen, h. b., nikolaev, v. 2009. who uses fair value accounting for non-financial assets after ifrs adoption?. chicago booth school of business research paper no. 09-12. available from: <http://faculty.chicagobooth.edu/workshops/acco unting/archi ve/pdf/christensennikolaev 2008_chicago.pdf> [accessed april 2011]. conseil national de la comptabilité. 2004. recommendation n° 2004-r.02 du 27 octobre 2004 relative au format du compte de résultat, tableau des flux de trésorerie et tableau de variation des capitaux propres, des entreprises sous référentiel comptable international (hors entreprises de banque et d'assurance) available from: <http://www.anc.gouv.fr/files/live/sites/anc/files/ contributed/normes%20francaises/r ecommandations/2004r02_format_etat_compte.p df> [accessed january 2014]. conseil national de la comptabilité. 2009. recommendation n° 2009-r.03 du 02 juillet 2004 relative au format des etats financiers des entreprises sous référentiel comptable international (hors entreprises de banque et d'assurance) available from: <http://www.anc.gouv.fr/files/live/sites/anc/files/ contributed/normes%20francaises/r ecommandations/recomm2009_r03.pdf> [accessed january 2014]. ding, y., jeanjean, t. and stolowy, h. 2008. the impact of firms' internationalization on financial statement presentation: some french evidence. advances in accounting, incorporating advances in international accounting 2008(24):145–156 european council. 1978. fourth council directive of 25 july 1978 based on article 54 (3) (g) of the treaty on the annual accounts of certain types of companies (78/660/eec) available from: <http://eur-lex.europa.eu/legalcontent/en/txt/pdf/?uri=celex :31978l0660&from=en> [accessed january 2014]. haller, a. 2003. accounting in germany. p. walton, a. haller ve b. raffournier (editors), international accounting: 91-128. london:thomson. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu a country specific approach to ifrs accounting policy choice in the european, australian and turkish context page |80| emerging markets journal heazlewood, t. 2003. accounting in australia. p. walton, a. haller ve b. raffournier (editors), international accounting: 272-303. london:thomson. hoarau, c. 2003. accounting in france. p. walton, a. haller ve b. raffournier (editors), international accounting: 129-152. london:thomson. iasb. 2010. international financial reporting standards: volume a. united kingdom: iascf department of publications jaafar, a., mcleay, s. 2007. country effects and sector effects on the harmonization of accounting policy choice. abacus, vol. 43(2): 156 189 koc yalkin, y. 1991. dördüncü yönergenin öngördüğü gelir tablosu ve ülkemizdeki uygulamalarla karşılaştırılması, avrupa topluluğuna entegrasyonda muhasebe standartları. a.ü.s.b.f.yayını no:574:5-61 türkiye 12. muhasebe eğitimi sempozyumu. ankara kvaal, e., nobes, c. 2010. international differences in ifrs policy choice: a research note. accounting and business research, vol. 40(2): 173-187 kvaal, e., nobes, c. 2012. ifrs policy changes and the continuation of national patters of ifrs practice. european accounting review, vol. 21(2): 343-371 marsap, b., cil kocyigit, s., cina bal, e. 2007. i̇mkb’de işlem gören gıda, tekstil ve hizmet sektörlerinde faaliyet gösteren şirketlerin finansal tablo dipnotlarında açıklanan muhasebe politikalarının seçilen ufrs’ler açısından incelenmesi. muhasebe bilim dünyası, 2007(4): 99-120 meek, g. k. 2003. accounting in the united states. p. walton, a. haller ve b. raffournier (editors), international accounting: 66-90. london:thomson. mueller, k. a. iii, riedl, e. j., sellhorn, t. 2008. consequences of voluntary and mandatory fair value accounting: evidence surrounding ifrs adoption in the eu real estate industry. harvard business school working paper 09-033. available from: <http://www.hbs.edu/faculty/publication%20file s/09-033.pdf> [accessed january 2014]. napier, c. 2010. chapter 10: united kingdom. a global history of accounting, financial reporting and public policy: europe studies in the development of accounting thought, vol. 14a: 243-273 nobes, c. 2011. ifrs practices and the persistence of accounting system classification. abacus vol. 47(3): 267-283 nobes, c. 2013. the continued survival of international differences under ifrs. accounting and business research, vol. 43(2): 83-111 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.70 | http://emaj.pitt.edu prof. dr. nalan akdogan, assist. prof. dr. can ozturk emerging markets journal | p a g e |81 nobes, c., parker, r. 2009. comparative international accounting. prentice hall, 10. edition organizmo italiano di contabilita. 2005. oic 12 composizione e schemi del bilancio di esercizio di imprese mercantili, industriali e di servizi. available from: <http://www.fondazioneoic.eu/wpcontent/uploads/downloads/2010/11/2005-0530_p rincipio-12_schemi-bilancio.pdf> [accessed january 2014]. ozturk, c. 2009. yerel ve uluslararası muhasebede yatırım amaçlı gayrimenkul kavramı ve türkiye muhasebe sistemine yansımaları. mali çözüm. 96:97-126 available from: <http://archive.ismmmo.org.tr/docs/malicozum/9 6malicozum/5%20can%20ozturk.pd> [accessed december 2014]. ozturk, c. 2011. finansal tabloların dipnotlarında sunulan muhasebe politikalarının uluslararası finansal raporlama standartları açısından i̇ncelenmesi, basılmamış doktora tezi, ankara simga-mugan, c. (1995) accounting in turkey. the european accounting review. vol. 4(2): 351-371 simga-mugan, c. 2002. accounting in turkey. l. orsini, j. p. mcallister ve r.n. parikh(editors), world accounting: trk1 trk81 stolowy, h. 2002. accounting in france. l. orsini, j. p. mcallister ve r.n. parikh(editors), world accounting: fra-1 fra125 tarca, a. 2005. international convergence of accounting standards: an investigation of the use of ias "options" not acceptable under us gaap. international journal of business studies, 2005(13): 67-86 walton, p. 2003. accounting in united kingdom. p. walton, a. haller ve b. raffournier (editors), international accounting: 153-173. london:thomson. zambon, s. 2003. accounting in italy. p. walton, a. haller ve b. raffournier (editors), international accounting: 195-219. london:thomson. a this paper was derived from can ozturk's doctorate dissertation(2011) whose title is "examination of accounting policies presented in the notes of financial statements in terms of international financial reporting standards". b this paper was presented in the 2014 international conference for critical accounting on april 16, 2014 at baruch college of the city university of new york in the us. we would like to thank prof. anthony tinker, prof. aida sy and prof. jean-guy degos for their valuable comments. c this format refers to either article 9 of 4th directive or us gaap format. d this format refers to either article 10 of the 4th directive or british or australian anglo-saxon balance sheet. e british anglo-saxon balance sheet is different from the australian anglo-saxon balance sheet because cash is not at top of the balance sheet and assets are classified from the lowest to the highest liquid assets. the asset side of the british balance sheet was obviously influenced by the article 9 of the 4th directive. f australian anglo-saxon balance sheet is different from the british anglo-saxon balance sheet because cash is at top of the balance sheet and assets are classified from the highest to the lowest liquid assets. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu comparison between brazil and the 30 most innovative countries in the world marisa moser universidade federal de são paulo | marisa.moser@gmail.com mauri aparecido de oliveira unifesp | mauriao2@gmail.com ricardo luiz pereira bueno unifesp | ricardo.bueno@unifesp.br abstract innovation can be defined as the implementation of a new or significantly improved product (good or service), or a process, a new marketing method, a new organizational method in business practices, workplace organization, or external relations. this innovation can be measured by several factors such as investments in research and development, the concentration of high-tech companies traded on the stock exchange, among others. the present study aims to perform a cluster analysis to investigate the behavior of the most innovative countries compared to brazil. the study contemplates a historical series from the years 2012 to 2015 of the 30 most innovative countries in the world having been added to brazil. in addition, a series of macroeconomic, political and social variables are considered. keywords: innovation, technologic innovation, innovative countries, stem, education, government, cluster analysis new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.141 | http://emaj.pitt.edu | mailto:marisa.moser@gmail.com mailto:mauriao2@gmail.com mailto:ricardo.bueno@unifesp.br http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.141 | http://emaj.pitt.edu marisa moser, mauri aparecido de oliveira, ricardo luiz pereira bueno emerging markets journal | p a g e |19 comparison between brazil and the 30 most innovative countries in the world marisa moser mauri aparecido de oliveira ricardo luiz pereira bueno 1. introduction studies on innovation have emphasized that, knowledge developed in universities and research institutes can and must be incorporated by society to promote regional economic development. this new model centralized the role of science and altered the university's end-activity, introducing a third mission: regional economic development, along with the existing missions of human resource training and knowledge generation (torkomian, 2011; hayter, 2011). therefore, innovation has come to be understood as a driving force for the generation of wealth of organizations and consequently of nations, an element of definition of competitiveness (lawson and samson, 2001). the expression innovation has been widely used, sometimes recklessly. however, the technological innovation appears when the results from universities, research institutes, or companies are transformed into marketable products and/or services. thus, invention and innovation are different. the invention is a new solution for a specific technical problem. for a solution to be considered as invention, it must be necessarily new, i.e., the idea could not be created, or disclosed, or even made available for the public; while the innovation is an introduction of new goods with inventive features or new technologies in the market. there is an obligation to sell goods, services, processes, among others (macedo; barbosa, 2000). the oslo manual determines that, there are four types of innovations which can occur in companies: product innovation, process innovation, organisational innovation, and marketing innovation. the product innovation comprises significant improvements in goods and services, i.e., goods and services completely new or improved. the process innovations describe significant changes in the production and distribution methods. the organisational innovations are the new methods created by corporations resulting in changes in business, better work organisation, or interference in the external relations of the company. finally, there are the marketing innovations that comprise the new methods of marketing, including changes in goods and packaging, product placing, promotion, or pricing (oecd, 1997). another important concept related to innovation is the degree of innovation. thus, these innovations may present themselves in the form of radical or incremental innovation. radical or disruptive innovation has a significant impact on the market and business activity, resulting in product obsolescence, technology change, and even the creation of new markets. the standards previously used by the company undergo a process of reorientation, however, involve risks and unpredictability. in an incremental innovation, small adaptations can occur. most of the innovations developed are incremental, with small improvements in the goods or services already developed (oecd, 1997; hitt et al., 2008). for the innovation to happen, the organisation for economic co-operation and development (oecd) argues that it must be influenced by several factors; as the environment surrounding the institutions, the legal systems, the macroeconomic context, and other conditions independent of any considerations about innovation itself. besides these factors, the interaction among these agents and institutions (private companies; science and technologic institutions, and government entities) create a favourable environment for the creation of a national innovation system, allowing the innovations to happen and promote the national development. what is known is that, there are elements which can facilitate or hinder the emergence of innovation. the culture of innovation and technological development, national policies, taxes brakes, public spending on r&d, and the incentive for innovation may represent these factors (esteves and feldman, 2016). on the other hand, to create a national innovation system, some conditions must be met, as the formation of a science and technology base; structural conditions; transfer factors; and, finally, the innovation dynamo, as can be seen on figure 1. figure 1. the field of innovations policies source: adapted from vasconcellos and amato neto 2012. a national innovation system is a social and dynamic system where the main activity is the interactive learning between the participants (lundvall, 1992). the formation of a science and technology base guarantees the development of scientific and technological knowledge, which are, therefore, the basis for the further development of innovation, since science and technology institutions can be the drivers of staff training. the structural conditions correspond to entities that would support the development of innovation such as financial institutions, the legal context, market access, among other promoting sources. the transfer factors represent human, social, and cultural factors; which include the interactions, the cooperation and the information channel for the efficient operation of the innovation at the organisational level. finally, the dynamo of innovation portrays a complex system of factors that conform the innovation in the organisational level and include the employees involved, the structure, internal facilities, strategy, financial structure, among other corporate aspects. the need to develop internal and external competencies for innovation to materialize is also noted (vasconcellos and amato neto, 2012; oecd, 1997). when analysing the specific case of brazil in patents indices, scientific publications, and the number of students with a background in science, technology and engineering, one can note that brazil does not occupy a relevant position in these indices (esteves and feldman, 2016). volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.141 | http://emaj.pitt.edu comparison between brazil and the 30 most innovative countries in the world page |20| emerging markets journal 2. research and development in the innovative process in brazil, the sectoral funds for research development resemble the american process. the federal government allocates part of the proceeds from contributions levied on the result of the exploitation of natural resources belongingto the state and portions of the industrialized products tax (ipi – in portuguese) from certain sectors to create an investment fund to finance science, technology and innovation in companies, universities, technological institutes and other public or private institutions. to receive financing for project execution, the interested bodies must submit their proposals, which are evaluated by the management committee, that is composed of representatives from various segments of the federal government, academia, business and the like. in the case of universities and research institutions, a non-profit foundation supported by the ministry of education can play this role (dietrich et al., 2013). the allocation of public resources destined for science and technology becomes increasingly scarce since the resources destined to this area compete with areas considered priority by the government as health, education and security (contini et al., 1998). companies in established sectors that dedicate part of their resources to r&d and innovate regularly can be challenged if they cannot interpret signs of transformation in their markets and technology. in dynamic environments, you need to develop skills to capture some signs of change as well as competence and agility to move to new areas and technologies that emerge. this means developing and building capacities, adapting and absorbing new knowledge when necessary, and surpassing redundant or obsolete knowledge (tidd et al., 2001). to keep innovating, companies carry out internal and external efforts. internal efforts include internal r&d activities, internal training of human resources for skills development, use of financial resources to support developments, ability to deal with change, and others. external efforts include outsourcing r&d, use of new technologies, acquisition of external know-how materialized as know-how, patents and licenses, acquisition of software, external training of the team, among others. in general, innovating corresponds to engaging efforts in several innovative activities (anpei, 2009). there are places that the ability to innovate is concentrated, as it is the case of the already developed countries in europe, usa, and japan. however, this assumption is beginning to change with emerging markets as china and india that are transitioning their production capacities to an innovative capability (altenburg et al., 2008). in brazil, systematic and sustained efforts to innovate are still incipient, according to the brazilian institute of geography and statistics (ibge – in portuguese). most innovative activities correspond to the acquisition of machines and equipment, followed by industrial project, and market innovation. few companies carry out r&d activities; or acquire external knowledge or even the use patent licenses. these results differ when compared to other countries, as mentioned before e.g., with european countries, although they also use the acquisition of machines and equipment associated with innovation, they are also more involved in r&d activities (anpei, 2009). the role of research and development is to boost innovation, and they are fundamental for increasing the productivity and competitiveness of the countries. according to the global competitiveness report of the world economic forum (2015-2016), the competitiveness corresponds to a set of institutions, policies and factors that determine a level of productivity of a country. from competitiveness, it is possible to calculate an indicator – the global competitiveness index – that essentially contemplates the key factors responsible for the economic growth and the prosperity level of a country. this index is composed of the following pillar: institutions; infrastructure; macroeconomic environment; primary health and education; higher education and training; efficiency in the market of goods; efficiency in the labour market; development in the financial market; availability of technologies; the size of the market; sophistication of business, and, finally, innovation. although all pillars are important, developing innovative activities can generate better indices, and, consequently, achieve better competitive positions. thus, r&d activities contribute to innovation and consequently the competitiveness of the countries. it also collaborates with the index which proves the innovative process of the countries. this index is called as the global innovation index that is published by the cornell university, insead business school, and the world intellectual property organization (wipo). global innovation index takes in consideration 82 indicators related to innovation. in 2016, brazil ranked 69th, what turned out to be the worst positioned country among the brics. china was the 25th, russia was 43rd and south africa was 54th (wipo, 2016). this way, it is necessary to encourage efforts in r&d, focusing on the market so that the development can be achieved by production and marketing of goods as well as services that meet the expectations of the society. according to unesco, brazil invested 1.2% of its gdp in 2015 for r&d, and in the same year ranked 69th in the global innovation index, while switzerland, which was in the first place, invested 3% of its gdp in this field. the table below shows the 10 most innovative countries in the world. table includes ranking of countries based on their expenditures on r&d as % of gdp for the period of 2012-2015. table 1. top 10 innovative countries and brazil based on expenditures on r&d as % of gdp (2012-2015) expenditure expenditure expenditure expenditure rank ranking global on r&d as on r&d as on r&d as on r&d as innovation index 2016 % of gdp % of gdp % of gdp % of gdp 2015 2014 2013 2012 1º switzerland 3.0 3.0 2.9 3.0 2º sweden 3.3 3.1 3.3 3.3 3º united kingdom 1.7 1.7 1.7 1.6 4º united states of america 2.7 2.7 2.7 2.7 5º finland 2.9 3.2 3.3 3.4 6º singapore 2.0 2.2 2.0 2.0 7º ireland 1.3 1.5 1.6 1.6 8º denmark 3.0 3.0 3.0 3.0 9º netherlands 2.0 2.0 2.0 1.9 10º germany 2.9 2.9 2.8 2.9 69º brazil 1.2 1.2 1.2 1.1 source: oecd: cornell university; insead; wipo. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.141 | http://emaj.pitt.edu marisa moser, mauri aparecido de oliveira, ricardo luiz pereira bueno emerging markets journal | p a g e |21 we can notice on table 1 that, among the most innovative countries in the world, considering the top 10 in the ranking, only two invest less than 2% of its gdp on r&d, and when compared to brazil which has the 69th place, they also have an increase of 0.5% in investment. thus, it is possible to perceive that there is one way to influence the technological innovation process. that is by investing in research and development. the increase in r&d investment has contributed to the emergence of patents, and these have played an important role in the market. because through them, companies show a greater competitive advantage. the increasing use of patents is related to the changes in patents regime of the countries, making them more valuable and easier to obtain through the enabling environment generated (oecd, 2004). 3. the importance of patents for technological innovation according to the oecd glossary of terms, a patent is a sole right granted by a government to an inventor in exchange for the use of the invention. this authorizes the inventor to prevent third parties from using the invention in any manner for an agreed period. according to the science, technology and innovation in europe (eurostat, 2008) report, an invention must meet several conditions to be patentable; it must involve an innovative step and be fit for the industry. a patent is a right of intellectual property for inventions of technical nature and it is valid for 20 years. although patents do not cover all types of innovation, they include a large proportion of them. it is important to note that patents are territorial. this means, they only prevent use by third parties in countries where they have been required. there are good reasons why patents have become one of the broader data sources in the construction of indicators for innovations of results. patents aim to promote innovation in the private sector, allowing the inventor to benefit from their inventions, but the positive effect of patents on innovation as an incentive mechanism has been traditionally contrasted with the negative effect on the competition and the diffusion of technology. the patents have been considered, on the one hand, a representative of the compromise between the incentive for the innovation and on the other, market competition and the diffusion of technology. the impact of patents on innovation and economic development is complex and adjustment in patent design is crucial to becoming an effective policy instrument. increasing levels of business patents help inventors to match their investment returns and facilitate cooperation through market-based knowledge transactions (oecd, 2004). 4. the role of stem in technological innovation another factor that can affect the development of technological innovation is education, more properly science and technology education. this way, the term stem which is the abbreviation of "science, technology, engineering and mathematics" comes to the scene. the development of universities in the united states in nineteenth century, world war ii and its countless scientific and technological developments, such as the launch of sputnik by the former soviet union and the space race contributed to initiatives in stem education (white, 2014). the technological education is based on learning from problems of science, engineering and technology, using technological devices as means of learning. it is intended to technologically educate citizens since scientific knowledge has become a crucial factor in the production and distribution of wealth. that is the teaching of science in schools as justified by economic logic (white, 2014). this fact is fully confirmed by the rapid transformation of society that happened in the twentieth century, with the increase of urbanization; development of new production techniques; development of computing and the internet; creation of new chemicals and inventions in the health area; space exploration; nuclear energy, among many others. these advances contributed to the individuals who, after this period, sought a basic understanding of scientific concepts and had the ability to communicate, synthesize, and exploit this knowledge in an applied way. this started to motivate greater requirements from people according to their occupations. the new requirement was the ability to solve complex problems in a creative manner, self-management, sophisticated communication, ability to solve unconventional problems, building and evaluation of arguments based on proof and systematic as well as critical thinking. it means that in an environment where there is an excessive supply of information, it is essential to be able to make sense of available information, and this becomes a scarce and required resource, especially in environments where there is no training (frey and osborne, 2013). in a world where knowledge and technology renew at a rapid pace, and competition is around the globe, it is necessary to find new strategies for educational processes. these reforms also need to be based on the evaluation of identified market needs. the excuse is that to face the challenges of globalization and market requirements, improvements in education and training are essential. people compete for jobs not only locally, but also internationally, based on the knowledge. therefore policymakers, educators and researchers need to create educational and training programs based on assessments of real needs. besides the revindication for educational systems should be accessible to whole population, not only the wealthy portion (mouzakitis, 2010; oecd 2013). thus, it is possible to perceive that the problem of the poorest countries does not only correspond to the fact that they have fewer resources, but also to the inability to create and benefit from scientific knowledge generated from these resources (thomas & watters, 2015). stem education has its importance at national, regional, local and individual levels. the us government and private companies understand that investments in this type of education can contribute to the economy and competitiveness of the country, as it will form individuals capable of making decisions of political engagement, democracy and social development. on the other hand, training students in science and technology can guarantee increased income and employment (saxton et al., 2014). the stem education is an essential element for the solution of several problems faced by society and economic development. it is hoped that with the prominence of stem education, a workforce with knowledge in sciences will be reached, with the ability to use tools and technological products in the workplace to increase productivity. in addition, there are expectations that these professionals will have research experiences to apply them in the industry; be able to plan and implement change and develop new technologies (egarievwe, 2015). a group of actors is involved in this type of education: representatives of the government, the scientific community and private companies that aim to stimulate science education, since volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.141 | http://emaj.pitt.edu comparison between brazil and the 30 most innovative countries in the world page |22| emerging markets journal in many western countries there is a low interest of the students in this area. that way, creating campaigns for diffusion can be a relevant strategy based on school programs, didactic materials, scientific competitions, events among others (aandree and hansson, 2015). countries that wish to maintain leadership positions in the world economy know their dependence on stem education. this is justified as the world becomes more and more technological, and dependent on a more technical workforce (christensen et al., 2014). there is no international examination that measures the ability of students or society, in knowledge in science, technology, engineering and mathematics. however, there is an approximate way, through pisa. the pisa program for international student is a sample and comparative evaluation organized by the oecd considering students enrolled in the 8th year of elementary school. the evaluation has national coordination in each participating country. there are currently 34 member countries, but additional countries are invited to the mentioned program as well. the pisa assessments occur every three years and cover the areas of reading, mathematics and science. it aims to create indicators that provide information for the analysis of the quality, equity and efficiency of school systems in the participating countries and to provide support for the creation of policies to improve education, as well as comparison with other participating countries. the premise of the results is that every country has room for improvement, including those with the highest performance indices (oecd, 2017). evaluation systems like pisa seek to assess more than knowledge per se. there is an attempt to respond to the economic demands of a population, supported by creativity and innovation. on the other hand, it is important to highlight that these tests have an impact on the content to be addressed by the communities. the reason is that, for teachers and the schools, it is not interesting and appealing to present low grades in these tests, causing schools to focus on areas and practices that will be evaluated. in this way, it is possible to note the influence of these tests on the construction of the curriculum (frey and osborne, 2013). ethnic and socioeconomic aspects tend to influence careers in stem areas. low-income youth and minority groups often lack the fundamentals needed to develop skills in the areas of science and technology. these courses are often considered difficult and unrelated to the realities of these groups. this is generally due to lack of scientific background (christensen et al., 2014). brazil has participated in pisa since its first edition, beginning the work with this group in 1998. in 2000, 4893 students were evaluated, with participation increasing in the following years of 2003, 2006, 2009, 2012, reaching 23141 students in 2015, focusing on science (inep, 2017). pisa aims to evaluate if the students can reproduce the knowledge acquired and extrapolate this knowledge, applying in unknown fields, such as situations inside and outside the school. this new approach reflects the fact that for modern economies, it is important that individuals not only know a certain content but, that they also know how to take advantage of their knowledge by solving complex and real problems (oecd, 2016). concerning brazil, the performance of students is below the oecd average in science (brazil = 401 points, oecd = 493 points), mathematics (brazil = 377 points, oecd = 490 points) and reading (brazil = 407 points, oecd = 493 points). the average in science has remained stable since 2006, without significant change. the same occurred in reading since 2000. there is a small improvement only in mathematics, with an increase of 21 points in the average of students between 2003 and 2015. however, when analysing the period of 2012-2015, we can see a decline of 11 points on average (oecd, 2016). when analysing the accumulated expenses per student aged 6-15, this value is equivalent to 42% of the average in relation to the oecd countries. in the 2012 assessment, this figure was 32%. in contrast, when analysing countries such as colombia, mexico and uruguay, it was found that these countries with lower costs per student, obtained better results in 2015 compared to brazil (oecd, 2016). this may bring some thought, such as probably the amount itself brings some results. however, better management of this resources can result in greater impact. some countries have satisfactory results in pisa such as canada, china, finland, japan and singapore. performance is closely related to the distribution of learning opportunities, spending on education, teacher quality, and the economic context of these countries, which have a variety of educational policies and practices that can serve as a model (oecd, 2011). at pisa 2015, singapore has outperformed all other participating countries, represented by major economies such as japan, estonia, finland and canada. another important fact is that approximately 20% of students are below level 2. that is, these students have a low level of science proficiency. in addition, this becomes alarming when considering scientific literacy linked to economic growth. it means that to find complex solutions to a range of problems, including environmental problems, one cannot rely solely on the support and engagement of future scientists. there will be problems to be faced by all citizens. however, in most countries, science performance has remained unchanged since 2006, apart from colombia, israel, macau (china), portugal, qatar, and romania (oecd, 2016). 5. innovation in brazil finally, it is necessary to discuss and reflect on innovation in brazil. studies on innovation in emerging countries are still not frequent. most research is on innovation in countries that have well-structured and mature innovation systems, as already mentioned. brazil is one of the largest emerging economies in latin america, with an incipient national innovation system. in this context, brazil stands out in general for maintaining low investments in r&d; economic and political volatility; high levels of corruption; decline in recognition of the number of workers in slave condition; low quality of education, low capacity of industries to generate innovation, often transferred from foreign sources and financial constraints. another disadvantage is the percentage of gdp invested in r&d that is below 1.2%, while eu countries invest over 2% and oecd members above 2.5% (frank et al, 2016). but, brazil has carried out a set of large-scale policies and successful investment programs aimed at fostering innovation in the recent years. the national innovation system has evolved in recent years between 1980 and 2008, with increased investments in r&d, increased intellectual property, implementation of policy instruments that support innovation, improvement in education, improvement in the performance of science and technology institutions (s&t) in terms of publications, visibility and innovation; institutional support to more structured innovation and development modalities being created by the financier of studies and projects (finep – in portuguese), or by the national bank for economic and social development (bndes – in portuguese) (frank et al., 2016). there is a set of research, development and business institutions that play a major role in brazilian innovation, such as finep, the são paulo state research foundation (fapesp) the small volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.141 | http://emaj.pitt.edu marisa moser, mauri aparecido de oliveira, ricardo luiz pereira bueno emerging markets journal | p a g e |23 business innovation research program (pipe), the brazilian agricultural research company (embrapa), the brazilian industrial research and innovation company (embrapii), and embraer. finep was created in july 1967 to finance the preparation of studies for economic development projects and programs, as well as to improve national technology. with the creation of the then ministry of science and technology (mct) in march 1985, finep became associated with it. according to finep's operational policy (2016), lines of action have been developed for types of innovation, such as: (a) pioneering innovation: strategic innovation plans that present a high degree of innovation and relevance for the economic sector, resulting in innovations through the development of products, processes or services unprecedented for brazil; (b) innovation for competitiveness: strategic plans of innovation focused on the development or improvement of products with the potential to impact the competitive ranking of the company in the market; (c) innovation for performance: innovation of products in the scope of the company that can impact the productivity of the company, costs or the performance of products and services; (d) preinvestments: pre-investment projects, which include technical feasibility studies. finep‟s financing was responsible for several brazilian technological innovations. one of them was the prototype of the bem-312, the first brazilian military training turboprop aeroplane. in addition to financing the project, finep contributed funds for the development of another embraer defence aircraft, used by the brazilian air force (fab) and others, such as the super tucano. embraer was created with the support of the federal government. the operations of the company began in the early seventies and did not stop since. embraer‟s history was always subject to challenges and overcoming. today embraer is one of the largest aerospace companies in the world. in 2012, the l.i.f.e project (lighter, integrated, friendly and eco-efficient aircraft cabin), a joint project between embraer and a consortium of portuguese companies was the winner of the crystal cabin award in the category of visionary concepts (embraer, 2017). pipe-fapesp supports the scientific and technological research in micro, small and medium-sized business in the state of são paulo, with the aim of promoting technological innovation, business development and business competitiveness (fapesp, 2017). when it comes to innovation in brazil, not mentioning embrapa is not possible. the company was created in 1973 and it was linked to the ministry of agriculture, livestock and food supply (mapa), with the mission of enabling research, development and innovation solutions for the sustainability of agriculture of the brazilian society. embrapa has accumulated international, national and regional awards. it also actively participates in the elaboration and execution of several government policies, such as the brazil without poverty scheme (brasil sem miséria, in portuguese), which promotes the participation of family farmers in the markets and several others such as the amazon fund (fundo amazônia), national plan of agroecology and organic production (planapo plano nacional de agroecologia e produção orgânica). its mission as defined in the master plan (v pde 2008-2023) is to research for feasible solutions, development and innovation for the sustainability of agriculture, and the benefit of brazilian society. finally, embrapii is an association that aims to cooperate with public and private research and technology institutions focusing on business demands and the targeting of risk sharing in the precompetitive phase of innovation. thus, by sharing project risks with companies, they feel more comfortable to invest in internal r&d programs (embrapii, 2017). 6. methodology the research used macroeconomic variables from the 30 most innovative countries in the world according to the global innovation index, which is carried out by cornell university, insead and the world intellectual property organization (wipo) for 2012-2015. in addition, brazil was added to this group of countries. the variables were taken from the euromonitor international‟s passport database, and are presented below: human development index (hdi), which provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), knowledge (measured by adult literacy) and having a decent standard of living (measured by purchasing power parity and income). index of economic freedom ranking (iefr), based on 10 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom: rule of law (property rights, freedom from corruption); limited government (fiscal freedom, government spending); regulatory efficiency (business freedom, labour freedom, monetary freedom); open markets (trade freedom, investment freedom, financial freedom). each of the ten economic freedoms within these categories is rated on a scale of 0 to 100, where the highest score presents best economic freedom. the overall score of a country is obtained by the average of these ten economic freedoms, with equal weight each. the ranking is obtained from the index that reflects the best score in a higher position. global competitiveness ranking (gcr), which is obtained from the global competitiveness index, a high position in the ranking reflects a high score in the index. it measures the microeconomic and macroeconomic fundamentals of national competitiveness, taking into account 12 pillars: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation. all of them have different weights, which vary from country to country to evaluate the stage of economic development of each. the final score is obtained by the average of the subscripts, according to the 12 pillars. the scoring of each subscript is from 1 to 7, where the best score is 7. political stability and absence of violence (psavr), measures the perception of the probability of political instability and/or politically motivated violence, including terrorism. regulatory quality ranking (rqr) measures the perception of the government's ability to formulate and implement sound policies and regulations that allow and promote the private sector development. corruption control ranking (ccr) measures perceptions about the extent to which public power is exercised volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.141 | http://emaj.pitt.edu comparison between brazil and the 30 most innovative countries in the world page |24| emerging markets journal privately, including both small and large forms of corruption, as well as the "capture" of the state by elites and private interests. corruption perceptions ranking (cpr), is obtained from the corruption perceptions index, a high position in the ranking reflects a high score in the index. it is a composite index and uses surveys with businessmen and reviews from analysts of these countries. the percentage of the gross domestic product (erd) invested in r&d is formed by the investment of gdp in r&d. it is carried out in the nation during a certain period, which includes r&d carried out within a country and financed from abroad. but, it excludes payments made abroad in r&d. 7. data analysis for the data analysis, grouping technique was used. this technique uses the euclidean distance and represents the groups through dendrograms. the software used as computational support was ibm spss. before showing the results with the clusters generated from the variables of interest, the distributions of these variables are presented from 2012 to 2015, to observe the brazil‟s position compared to 30 most innovative countries according to the oecd. on figure 2, we have the boxplots considering the variables: iefr – index of economic freedom ranking gcr global competitiveness ranking psavr political stability and absence of violence rqr regulatory quality ranking ccr corruption control ranking cpr corruption perceptions ranking erd percentage of gross domestic product (gdp) invested in r&d for the variables that are being used, the larger the boxplot value the worse the country's situation for that macroeconomic variable, except for the gross domestic product (gdp) invested in r&d (erd). thus, in 2012, brazil presented a weak performance in four of the seven variables surveyed, moving away from the most innovative countries and approaching latvia to a bad position in the ranking of corruption control (ccr). on figure 2, israel appears as the worst country in terms of political stability and absence of violence. figure 2. bloxpot of the macroeconomic variables of the 30 most innovative countries and brazil for 2012. in 2013, brazil still had a poor performance in four of the seven variables. but this time italy joined it also with a poor position in the ranking of corruption control, as it can be seen on figure 3. figure 3. bloxpot of the macroeconomic variables of the 30 most innovative countries and brazil for 2013. in 2014, brazil's performance in terms of the macroeconomic variables analysed remained below the most innovative countries. but this time china entered the ranking in the category of innovative country. both china and brazil are brics countries. but what can be observed for the years 2014 and 2015 is that these countries show inferior results jointly, when compared to the traditionally more innovative countries. it is highlighted on figure 4 that china, even belonging to the 30 most innovative countries, had the worst ranking in terms of human development index, ranking of regulatory quality and ranking of corruption perceptions. in that year, slovenia appears alone with the worst positioning in the global competitiveness ranking. that is, the 30 most innovative countries change annually as they are improving and evolving in terms of their macroeconomic, political, social, technological and other variables. despite this, the distancing of brazil is so great that it cannot be within the distribution of typical values of these variables. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.141 | http://emaj.pitt.edu marisa moser, mauri aparecido de oliveira, ricardo luiz pereira bueno emerging markets journal | p a g e |25 figure 4. bloxpot of the macroeconomic variables of the 30 most innovative countries and brazil for 2014. by 2015, brazil, by the results presented of the variables of interest, could be considered a country with little economic freedom, the second worst in regulatory quality and the most corrupt among the 31 countries analysed. compared with the other more innovative countries, brazil had the worst corruption control and the second worst foreign perception. figure 5. bloxpot of the macroeconomic variables of the 30 most innovative countries and brazil for 2015. figure 6 shows the clusters formed from the distances between the variables (iefr, gcr, psavr, rqr, ccr cpr and erd), where human development index (hdi) is also added. if we consider two groups, we notice that brazil is isolated when compared to the most innovative countries. it is an outlier, has no similarity in terms of macroeconomic, political and social variables present in other countries classified as the most innovative in 2012. in that year, the northern european countries (switzerland, finland, sweden and denmark) formed an isolated group. israel and south korea are similar in accordance with the criteria used in the formation of clusters. also, the clusters that will follow these two countries will always be close. the other countries form clusters as shown in figure 6. figure 6. formation of clusters of the most innovative countries (in 2012) and brazil‟s position figure 7. formation of clusters of the most innovative countries (in 2013) and brazil‟s position in 2013, the same happens with brazil. it does not form a cluster with any country. it remains isolated from the others and the previously mentioned pair israel and south korea continues in the same cluster. france and belgium, which in 2012 were in volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.141 | http://emaj.pitt.edu comparison between brazil and the 30 most innovative countries in the world page |26| emerging markets journal the same cluster, now form an isolated pair. the northern european countries that were grouped in 2012, remain the same, just like japan and austria. the united states and germany show the same pattern of characteristics being in the same cluster as in 2012. singapore, new zealand, the netherlands and canada remained similar in the four years analysed. figure 8. formation of clusters of the most innovative countries (in 2014) and brazil‟s position in 2014, china joined the group of the 30 most innovative countries in the world according to the oecd global innovation ranking. we can see in figure 8 that brazil groups with china and forms a cluster according to the similarity generated by the variables used. this fact reinforces the idea of brics, a group of the main emerging economies, which consists of brazil, russia, india, china and south africa. for that year, we had seen that china among the 30 most innovative countries had the worst economic freedom index, the worst regulatory quality ranking, and the second worst country rank in terms of corruption control. even so, china joined the group of most innovative economies and brazil was in the 61st position. figure 9. formation of clusters of the most innovative countries (in 2015) and brazil‟s position in 2015, brazil continued to cluster with china, just as south korea and israel remained clustered. northern european countries (denmark, finland, iceland and sweden) also remained in the same cluster. 8. final considerations we have seen the importance of technological innovation in the economic development of a country and how this development is linked to the improvement of the living conditions of this population. the macroeconomic variables presented refer to these improvements such as the human development index, which has a more qualitative concept including the allocation of resources by the different sectors of the economy, to improve indicators of economic and social wellbeing. brazil seems to move slowly in the innovative process, which entails a series of negative characteristics for the country as reduction in the number of patents and a low performance in macroeconomic, political and social variables. by the help of our analysis, we presented an unfolding of the relevance of variables associated with innovation as percentage of gdp invested in r&d, number of patents, public spending on education, and focus on stem education among others. in cluster analysis, we identified brazil as distant from all the countries on the list, approaching china only when it appears in the years 2014 and 2015. to that fact, we can make an association with the brics, which is an international political mechanism of cooperation among brazil, russia, india, china, and south africa. the only country belonging to brics that appears in the list of the most innovative countries is china, which stood out with brazil presenting bad results in many presented variables. according to the brics 2017 innovation and competitiveness report, science, technology and innovation are crucial driving forces in the development of a country and a volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.141 | http://emaj.pitt.edu marisa moser, mauri aparecido de oliveira, ricardo luiz pereira bueno emerging markets journal | p a g e |27 society. in the context of globalization, a country with such solid capabilities is in a more advantageous position against others, which do not reflect these capabilities. the brics has already been a reason for high expectations. but currently according to the ibge website, when we compare brics gdp growth with the group of seven (g7) that consists of germany, canada, the united states, france, italy, japan and the united kingdom, it is well below the seven world powers. this shows how the role of government is fundamental in the innovation of a country. it is essential that the government promotes partnerships between public and private institutions, provides a suitable environment for research, invests in education, has political and economic stability, and reflects control against corruption. in the four years analysed, from 2012 to 2015, brazil went from 58 to 70 in the ranking of global innovation. the lava a jato operation which is the largest corruption investigation in the country's history began in 2014 to investigate politicians and suspects involved in corruption schemes and money laundering. so far, 198 temporary and preventive arrests were made, which gives us hope that, in the years to come, brazil will be among the 50 most innovative countries in the world. references altenburg, t.; schmitz, h.; stamm, a. (2008) breakthrough? china‟s and india‟s transition from production to innovation. world development vol. 36, no. 2, pp. 325–344. andree, m. and hansson, l. (2015). recruiting the next generation scientists and industrial engineers: how industrial actors engage in and motivate engagement in stem initiative. procedia social and behavioral sciences, 167, 75-78. cgee. centro de gestão e estudos estratégicos; anpei. associação nacional de pesquisa e desenvolvimento das empresas inovadoras. (2009). the new tools to support innovation: an initial assessment. brasilia (df). [online]: http://www.cgee.org.br/publicacoes/nov_instr_i nov.php. accessed march 12, 2016. christensen, r.; knezek, g.; tyler-wood, t. (2014) student perceptions of science, technology, engineering and mathematics (stem) content and careers. computers in human behavior, n. 34, p.173–186. contini, e.; avila, a,f,d.; souza, f,b,de. (1998) priorities in scientific research: a methodological proposal. cadernos de ciência & tecnologia. v, 15.n, 1. p.9-28. dietrich, e.; cabral, a. s.; dias, r. (2013) the management of the procurement process as a success factor in the execution of innovation projects. gariewe, s. u. (2015) vertical education enhancement – a model for enhancing stem education and research. procedia social and behavioural sciences, n. 177, p. 336 – 344. embraer. [online] www.embraer.com.br accessed july 13, 2017. embrapii. [online] http://embrapii.org.br/ . accessed may 22, 2017. esteves, k.; feldmann, p. r. (2016) why brazil does not innovate: a comparison among nations. rai-revista de administração e inovação, n. 13, p. 29–38. eurostat. (2008). science, technology and innovation in europe. luxembourg: publications office of the european union. accessed july 11, 2017 http://www.urenio.org/wpcontent/uploads/2008/04/science-technologyand-innovation-in-europe.pdf fapesp. [online] www.fapesp.br/en . accessed july 31, 2017. finep. [online] http://www.finep.gov.br/images/afinep/politica-operacional/20_102016_politica_operacional_2016.pdf . accessed july 22, 2017. frey, c; osborne, m. a (2013), “the future of employment: how susceptible are jobs to computerisation?” oxford martin school working paper. hayter, c.s. (2011) in search of the profit-maximizing actor: motivations and definitions of success from nascent academic entrepreneurs. in.: journal of technology transfer, n.36. hitt, m. a.; ireland, r. d.; hoskisson, r. e. (2008) strategic management: competitiveness and globalization. 2. ed. são paulo: thomson learning. inep. [online] http://portal.inep.gov.br . accessed april 13, 2017. inep. [online] http://portal.inep.gov.br/web/guest/pisa . accessed july 13, 2017. lawson, b.; samson, d. (2001). developing innovation capability in organizations: a dynamic capabilities approach, international journal of innovation management, 5 (3), 377400. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.141 | http://emaj.pitt.edu comparison between brazil and the 30 most innovative countries in the world page |28| emerging markets journal lundvall, b.-å. (1992). national innovation systems: towards a theory of innovation and interactive learning, london, pinter publishers. macedo, maria fernanda g.; barbosa, a. l. (2000) figueira. patentes, pesquisa e desenvolvimento: um manual de propriedade intelectual. rio de janeiro: fiocruz. mouzakitis, g. (2010) the role of vocational education and training curricula in economic development. procedia social and behavioral sciences, n.2, p. 3914–3920. oecd (2014). patents and innovation: trends and policy challenges, [online] https://www.oecd.org/sti/scitech/24508541.pdf. accessed july 20, 2017 oecd. programme for international student assessment. [online] http://www.oecd.org/pisa/ . accessed july 2017. oecd. summary of national pisa results (2015). [online] http://download.inep.gov.br/acoes_internaciona is/pisa/resultados/2015/pisa_2015_brazil _prt.pdf accessed july 15, 2017. saxton, e; burns, r.; holveck, s.; kelley, s.; prince, d.; rigelman, n.; skinner, e. a. (2014) a common measurement system for k-12 stem education: adopting an educational evaluation methodology that elevates theoretical foundations and systems thinking. studies in educational evaluation, n.40, p.18– 35. thomas, b.; watters, j. j. (2015) perspectives on australian, indian and malaysian approaches to stem education. international journal of educational development n. 45, p. 42–53. tidd, j.; bessant, j.; pavitt, k. (2001) managing innovation: integrating technological, market and organizational change, wiley, chichester. torkomian, a. l. v. (2011) technology transfer, technological innovation and development. in: azevedo, a. m. m.; silveira, m. a. (organização). organizational sustainability management: development of collaborative ecosystems. campinas: cti, cap.4, p.101-114. vasconcellos, r.r; amato, neto, j.a. (2012). critical factors in technology transfer in the space sector: a case study of the partnership programs between the space agencies from brazil („aeb‟) and the usa („nasa‟). white, d. w. (2014) what is stem education and why is it important? florida association of teacher educators journal v, n.14, p.1-9. wipo (2016). [online] http://www.wipo.int/edocs/pubdocs/en/wipo_p ub_941_2016.pdf accessed may 2017. appendix a – variables description variables sources description year ranking global de inoaçao the global innovation report (cornell university, insead, wipo) provides detailed metrics about the innovation performance of 127 countries and economies around the world. its 81 indicators explore a broad vision of innovation, including political environment, education, infrastructure and business sophistication 2012 s 2015 human development index euromonitor international the human development index (hdi) is an index used to rank countries by level of "human development". the hdi provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and gross enrolment in education) and having a decent standard of living (measured by purchasing power income). 2012 a 2015 index of economic freedom ranking euromonitor international the hdi sets a minimum and a maximum for each dimension, called goalposts, and then shows where each country stands in relation to these goalposts expressed as a value between 0 and 1, where 0 shows the lowest hdi value and 1 shows the highest. the scores for the three hdi dimension indices are then aggregated into a composite index using the geometric mean economic freedom based on 10 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom: rule of law (property rights, freedom from corruption); limited government (fiscal freedom, government spending); regulatory efficiency 2012 a 2015 financial management challenges in small and medium-sized enterprises: a strategic management approach hande karadag wharton school, university of pennslyvania, sol c. snider entrepreneurial research center, | email: hkaradag@wharton.upenn.edu abstract due to their significant role in creation of new jobs, rise in gdp, entrepreneurship and innovation, small and medium-sized enterprises (smes) are recognized as the drivers of socio-economic growth, both in developed and developing economies. in turkey, 99.9 % of all enterprises fall into sme category. therefore, the significance of smes for turkish economy and society is much higher in turkey, compared to other emerging and developed countries. small and medium-sized companies are faced with a number of challenges whereas the problems arising from “poor financial management” are reported as the major causes of business failures in smes. strategic financial management (sfm) which is a research area that has attracted the interest of researchers after 2010, is one of the key managerial areas of smes, due to its vital role on the survival, growth and performance of smes. the purpose of this paper is to analyze the central role of financial management and identify the financial management challenges and practices that influence the organizational performance in turkish smes, from a strategic management perspective. within the course of this paper, the importance and challenges of smes in turkey are presented in the first section, while the literature on strategic and financial management in smes is reviewed in the second part. in the third section, the recent strategic financial management concept, the implications of strategic financial management practices for smes in turkey and the relationships between strategic financial management practices and sme performance, are discussed. small and medium sized enterprise finance in turkey is a developing research area; therefore this paper aims to make a significant contribution to the existing literature by analyzing the major challenges at the conduct of financial management in turkish smes and the influence of strategic financial management practices on the performances of small and medium sized companies in turkey. additionally, the conceptual framework developed is expected to be useful to academics in developing an agenda for future empirical research. keywords : smes, financial management, strategic management, strategic financial management (sfm) practices new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu | mailto:hkaradag@wharton.upenn.edu http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu financial management challenges in small and medium-sized enterprises: a strategic management approach page |26| emerging markets journal financial management challenges in small and medium-sized enterprises: a strategic management approach hande karadag 1. introduction small and medium sized enterprises (smes) form a large part of economy and are regarded as the drivers of socio-economic development in all countries. in oecd countries, over 95% of all enterprises fall in the sme category, while over 50% of the private sector employment is supplied by smes (lukacs, 2005). although most of the enterprises in all countries are smes (özdemir, ersöz & sarıoğlu, 2011) the interest to micro, small and mediumsized companies both among practitioners and academics is quite recent. the importance of smes in the economy has been widely recognized after 1980’s, as the focus shifted from large corporations smaller sized enterprises. since then, these economic units are regarded as the core of developmental macro and socioeconomic policies on both national and international levels. in turkey, the significance of smes is relatively higher, which is caused by not only their large share, amounting to 99.9% of all formally declared businesses in the economy, but also from their resilience to the shocks in turbulent turkish macro economy. turkish smes, which were faced with serious challenges during and after the severe economic crises that hit the turkish economy within the last three decades, increased their share in the economy significantly, while turkish government took radical steps towards attaining a more stable macro economy and sustainable growth. during that restructuring period, smes became one of the key elements of the macroeconomic improvements in turkey, due to their significant role in the growth of overall gdp, new job creation and exports. despite the positive outlook and growth trends of the sector, smes in turkey, as in most developing economies, are faced with a number of challenges, such as insufficient managerial skills, lack of trained personnel, poor access to financial resources and low utilization of new technologies. among these, lack of an efficient and effective financial management system is a core problem area for turkish smes. as financial management is the centre of the overall management system in a small business (meredith, 1986) the ineffectiveness and inefficiencies of financial conduct have detrimental effects on the longevity and performance of an sme. as most problems of smes have a financial nature (oecd, 2006), poor financial management is a critical and common cause of business failures in smes (jindrichovska, 2013). particularly lack of financial management knowledge combined with uncertainty of the business environment often leads smes to face serious problems regarding financial and overall performances, which can even threaten the survival of the enterprise (kaya & alpkan, 2012). as turkey is a developing country where insufficient levels of equity capital and poor access to external finance are considered as the major financial challenges for smes (öndeş and güngör, 2013; şahin, 2011; çetin, akyüz and genç, 2011; güler, 2010; koyuncugil and özgülbaş, 2008), previous literature on financial characteristics of turkish smes focused mainly on financial problems of small and medium sized companies with respect to their funding requirements (uluyol, 2013; koyuncugil & özgülbaş, 2008; topal, erkan & elitaş, 2006; arslan, 2003), the research area of financial management practices in smes in turkey has been significantly neglected up to date. therefore, this paper aims to make a contribution to the literature by analyzing the major financial management challenges of smes in turkey, and the practices of financial management which are closely related to sme performance, in other terms, which have a “strategic” importance in terms of improving or worsening the performance of the sme. the conduct of financial strategies formulated by the owners and/or managers of the enterprises is a concept which can show variations among different contexts, as which financial practices are more common or more strategic importance in the overall financial management of smes can differ from one setting to another, depending on the development of the context of corporate sector (butt, hunjra and rehman, 2010). however, the questions regarding how these practices can be identified within their own contexts and used as strategic tools for overcoming the financial and overall managerial challenges and attaining a higher organizational performance, have not been investigated in depth. thus, as an additional contribution, the conceptual framework developed within this study can provide a basis to academics for future empirical research. within the course of the paper, section 2 briefly reviews the literature on the concept of sme and the importance and challenges of smes in turkey. section 3 starts with the analysis on strategic management in smes, and continues with identification of strategic financial management practices in small and medium sized companies, both in international and local contexts, by introducing a “strategic management model of financial practices in smes”. the details of the model constructs as well as their role on the overall performance of the sme are presented in the same section. the implications of strategic financial management practices for academics and practitioners are discussed in section 4. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu hande karadag emerging markets journal | p a g e |27 ii . significance and challenges of sme sector in turkey the sme concept there are different categorizations of small and mediumsized enterprises due to varying socio-economic conditions of each economic region or country focused. while storey (1994) argues that “there is no single definition” of the sme concept, bolton committee report (1971) describes smes as the “enterprises with a relatively small share of the market, managed by owners or part-owners in a personalized way, and not through the medium of a formalized management structure; and acting as separate entities, in the sense of not forming part of large enterprise or group” (bolton report, 1971). smes and entrepreneurship are accepted “to be a key source of dynamism, innovation and flexibility in advanced industrialized countries, as well as in emerging and developing economies” (oecd, 2006). smes are called as the “backbone of the european economy” as they constitute 98% of all enterprises with a total of 20.7 million businesses and account for 67% of total employment and 58% of gross value added in european union, as of 2012 (ec,2012). the role of sme’s in social and economic development has been widely recognized in developed countries as well as developing economies (oecd,2006) particularly after 1980’s. sme development is “closely linked with growth” (ardiç, mylenko and saltane, 2011; beck, 2010) as the researchers found out “a robust, positive relationship between the relative size of the sme sector and economic growth, even when controlling for other growth determinants” (ardıç, et al., 2011; beck, 2010). apart from their role in gdp growth, smes have other significant socio-economic characteristics such as their contribution to new job creation and reduction of poverty. the potential economic and social benefits of smes can be stated as “creating jobs at low cost of capital, contributing positively to the gross domestic product (gdp), improving forward and backward linkages between sectors, creating opportunities for employing appropriate technology, providing an opportunity to expand the entrepreneurial base, expanding a pool of skilled and semiskilled workers, providing support to large-scale enterprises, providing the required flexibility to adapt to market failures, entering into market niches which are not profitable for larger enterprises, contributing to development policies that are more oriented towards decentralization and rural development, supporting governments’ efforts alleviate the negative aftermath of structural adjustment programs” (zonooz, farzam, satarifar & bakshi, 2011; tolentino, 1995). small and medium-sized companies are often viewed as being more innovative than larger firms and considered to follow niche strategies in developed countries, while adopting “high product quality, flexibility and responsiveness to customer needs as means of competing with large-scale mass producers” (hallberg, 2000; snodgrass and biggs, 1996). smes emerged as the key economic actors in both developed and developing economies, within the last three decades, particularly due to the shift towards a more global business context and developments in information technologies. despite their several advantages over large-sized competitors, small and medium sized enterprises have weaknesses and challenges of their own. zimmerer and scarborough (2005) state “managerial mistakes, failure to develop a strategic plan and poor financial control” among the most important reasons of business failures in small businesses, ranking “poor management” as the primary cause. among various problems of smes, financial challenges have a unique situation as, according to oecd reports, most problems of smes have a financial nature (oecd, 2004, 2006). in the study performed by hall and young in uk (1991), 86,6% of the respondents reported that, the reasons of their business failures had a financial nature (hall and young, 1991). the correlations between outcomes of the financial strategies and decisions and the performance of the enterprise have also been well documented by various researchers (salazar, soto and mosquedo, 2012). smes in developing economies are more prone to experiencing finance-related difficulties, particularly with respect to external funding (oecd, 2006). smes in turkey according to the bylaw dated 04.11.2012 and published in the official gazette of turkish republic, the sme definition in terms of employee number and annual revenue in turkey is as follows: number of employees annual turnover micro enterprises < 10 < 1 million tl small enterprises < 50 < 8 million tl medium-sized enterprises < 250 < 40 million tl smes are the most significant tools for economic development, gross domestic product and workforce in turkish economy (nurrachmi, abd samad & foughali, 2012). there are a total of 3,222,133 small and mediumsized enterprises in turkey, which constitute 99.9% of all enterprises, while 76% of total employment, 53% of total wages and salaries, 63% of annual sales turnover, 53.3% of value added at factor cost and 53.7% of gross investment intangible goods are supplied by sme sector (turkstat, 2013). according to main groups of industry, 40.8% of smes operate in wholesale and retail trade together with the repairing of motor vehicles and motorcycles, while 16.4% operate in transportation and storage industries and 12.8% work in manufacturing industry. the percentage share of smes within the total exports is 62,6% in 2012, volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu financial management challenges in small and medium-sized enterprises: a strategic management approach page |28| emerging markets journal rising from a 56% in 2009, where the share of micro enterprises is 20.6%, small enterprises is 24.3% and medium-sized enterprises is 17.7% in total exports. the proportion of the smes’ export and import volumes indicate the contribution of sme sector to the balance of payments deficit of turkish economy, as the percentage share of smes in total exports is 38.5% in 2012, compared to their % 62,6 share in total exports. despite their vital importance within the economy, smes in turkey are faced with major challenges. while common problems of smes particularly in developing economies are mainly reported as insufficient use of new technologies, lack of business related training, inadequate managerial capabilities, high rate of taxes and other bureaucratic problems (abdulsaleh and worthington, 2013, ardıç, et,al, 2011), kosgeb, which is the main public body responsible from smes, reported the basic challenges experienced by smes in turkey, as follows (kosgeb, 2012) : technology and innovation insufficient know-how and low levels of technology are common in most turkish smes. most manufacturers in turkey currently operate in medium-low and low level industry sectors, reaching to a very high percentage of 89%, which prevent them from benefiting low cost advantage. low regard for innovation, due to high costs of r&d, is a major cause of low levels of technology of smes. smes face various challenges when conducting r&d projects and realizing business ideas which can be turned into business opportunities. in 2012, 16.6 percent of r&d expenditure was performed by smes and regarding r&d personnel distribution, 25.3 percent was employed in smes (turkstat, 2013). marketing and exporting: as lack of information on foreign market opportunities, inadequate financing and technical knowledge lower the competitiveness of products and services, smes in turkey mostly target the domestic market. entrepreneurship: with its young demographic structure, turkey has a significant but mostly unutilized potential for entrepreneurship, where the main causes are insufficient technical knowledge on preparing business plans and difficulties in finding the startup capital, needed to undertake the high costs of launching the business. environment: in turkey, as in most parts of the world, the demand for environmentally-friendly products and services is increasing. however, the complexity of environmental legislation and the height of costs to comply with the legislation are discouraging the sme owners and entrepreneurs from meeting that demand. labor: due to high percentage of social security premiums, cost of skilled labor in turkey is higher than most developing economies. this, combined with low levels of education and technical capabilities of employees, creates a major disadvantage for competitiveness of smes. administrative costs and burdens: the complexity and cost of bureaucratic transactions and the costs of launching a new business are also among the major challenges smes face in turkey. while significant developments have been made regarding the attainment of a more sme-friendly business climate and “simplified legislative procedures”, reduction of red-tape is an important issue for new venture launches and encouraging entrepreneurship. among other countries, turkey ranked as the 69rd in the “world bank doing business report”(worldbank,2014). however, at the ranking of “starting a business”, the country’s rating fell significantly from 73. place to 93 between 2013 and 2014, resulting mainly from the high costs of launching a new business as illustrated in table 1 . table 1. turkey’s ratings for starting a business source : world bank doing business report (2014) financial challenges: as in most developing economies, financial difficulties are very common for most of the smes in turkey. due to collateral, personal and financial statement-related problems in utilizing bank loans and low levels of equity, sme credits are still at a low level of around 25% , which is an important factor behind the low technological capacity and less modernized production facilities of smes. alternate sources of finance such as angel investors, credit guarantee funds and venture capital companies are insufficient and most of the time, inaccessible, for smes in turkey. in addition to that, background and knowledge level of sme owners, play an important role financial problems of smes. as most sme owners/managers come from a technical or engineering background, their knowledge about finance and accounting is most cases, is significantly limited. whilst that, most sme owner/managers refrain from hiring professional finance managers for not delegating their “managerial power”, which causes their financial problems to grow and even threaten the survival of their enterprises. indicator turkey europe & central asia oecd the total number of procedures required to register a firm 6 5 5 the total number of days required to register a firm 6 12.8 11.1 cost is recorded as a percentage of the economy’s income per capita 12.7 6.7 3.6 the amount that the entrepreneur needs to deposit in a bank or with a notary before registration and up to 3 months following incorporation (recorded as a percentage of the economy’s income per capita) 13.2 3.5 10.4 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu hande karadag emerging markets journal | p a g e |29 previous studies have shown that, among these several problems, challenges related with financial decisions and actions have a strategic importance for smes in turkey, as the efficient and effective conduct of financial management has the potential to elevate or diminish the performance of a small and medium sized company (öndeş and güngör, 2013; şahin, 2011; çetin, akyüz and genç, 2011; güler, 2010; koyuncugil and özgülbaş, 2008). regarding the financial management challenges, the following section analyzes the major practices of financial management conduct in turkish smes, from a fresh strategic management perspective. 3 . strategic financial management practices strategic management in smes strategic management is “a set of managerial decisions and actions that determines the long-run performance of a corporation” (wheelen and hunger, 2010) as the description emphasizes, strategic management of an enterprise concerns with attaining a sustainable positive performance and contains four basic elements, which are environmental scanning, strategy formulation, strategy implementation and evaluation and control. strategic management creates “ a clearer sense of strategic vision for the firm, sharper focus on what is strategically important” and “improved understanding of a rapidly changing environment” (wilson, 1994). within that respect, conducting strategic management in smes have a crucial importance as smes have to operate and compete within contexts of high risk and uncertainty. zimmerer and scarborough (2005) describe “strategic management” in small businesses as “the process of developing a game plan to guide a company as it strives to accomplish its vision, mission, goals, and objectives and to keep it straying off-course” (zimmerer and scarborough, 2005: 65). strategic management behavior in small and medium sized enterprises involves “an attempt to cope more effectively with the great and rising demands emanating from both outside and inside the firm by (i) giving the development of the firm a long-range direction; (ii) formulating and applying an overall concept of the firm; (iii) generating, implementing, and controlling basic strategies and sub-strategies; and (iv) utilizing such special "strategic" tools as strengths/weaknesses analysis and opportunity/risk analysis, among others” (pleitner and barney; 1989). the need for applying the methods and techniques of strategic management in small and medium sized businesses can be attributed to the changing conditions of conducting business. although small businesses are exposed to higher risks and uncertainty compared to large sized enterprises, the traditional business management style of sme owners or entrepreneurs generally tended to overlook the strategic management processes, which had to go through serious changes with the developments in the business environment, as the entrepreneurs and small business owners became more aware of the challenges and the opportunities of the contexts they are competing in and the sustainable competitive advantages their enterprises had to develop, for reaching their organizational goals (zimmerer and scarborough, 2005). within that respect, the potential advantages of a strategic outlook for sme owner/managers, summarized by wickham (2006) as: “encouraging the entrepreneur or small business owner to evaluate and articulate a vision, ensuring the scanning and analyzing of the organization and its environment, facilitating the discovery of new opportunities and strengths, guiding the restructuring of the enterprise, guiding the processes of decision making, within the enterprise, providing a starting point for the specification of objectives, acting as a common language for the enterprise’s stakeholders” (wickham, 2006) were soon realized by sme owner/managers, to targeted to maintain a sustainable organizational performance and improved levels of competitiveness. in academic studies, until 1980’s the general perspective of strategic management is regarded to be broad and non-distinctive among types of businesses, assuming a general applicability of strategic management concepts and processes of large firms to all businesses (davig,1986). among the few researchers whose views contrasted with this generalization were cohn and lindberg (1972), who stated that smaller firms needed specific strategies for survival and growth, pleitner, et.al. (1989: 72) who pointed out the criteria of firm size and entrepreneurial types as the two bases of distinction between management of companies, and carter (1990) who suggested that small companies faced higher adaptation problems due to “higher regulatory and competitive uncertainty” (carter, 1990). in this new stream of thought, entrepreneur and entrepreneurial characteristics were considered to be the core of the discussion. (dean, brown and bamford,1998). a recent study by liberman, jaoni and hooper (2010) supported that argument, revealing that, personal characteristics of sme owner-managers, such as experience, social relationships, level of information and ethical values, strongly affects strategic decision-making processes in micro enterprises, while further models and analyses regarding the distinctions between large and small companies were not limited solely to entrepreneurial characteristics, taking other factors e.g. industry environment, firm specific competitive behaviour and strategic decision making processes in these firms, into consideration. in an empirical study, chen and hambrick (1995) studied 28 us airline companies and found out that, small business competitive behavior is different from that of larger firms and suggested that, small firms had higher speed in initiating strategic behavior but were low-key, even secretive in their strategy implementation. following their study, dean, brown and bramford (1998) conducted an empirical research on a large sample of us small and large manufacturing firms, where they found strong volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu financial management challenges in small and medium-sized enterprises: a strategic management approach page |30| emerging markets journal evidence for their proposition that “small and large firms possess different resources and capabilities that make them particularly well suited to different environmental contexts”. due to the growing interest to the impact of strategic management on the improvement of sme performance, the role of financial decisions and actions within the overall strategic management system is becoming more popular among the scholars, particularly after the introduction of the recent strategic financial management theory by liu, in 2010. the theory and its implications on the practices of financial management both at the international context and in turkey, are analyzed in the following section. strategic financial management practices after the studies showing that “the main causes of business failure are the lack of financial planning, limited access to funding, lack of capital, unplanned growth, low strategic and financial projection, excessive fixed-asset investment and capital mismanagement” (salazar,soto&mosqueda, 2012), the concept of strategic financial management practices in enterprises started to gain popularity among researchers. strategic financial management (sfm) refers to “financial management theories according to which financing should be conducted in the most proper way, the collected capital should be utilized and managed in the most effective way in enterprises and decisions on the reinvestment and distribution of profits should be made most reasonably” (liu, 2010). strategic financial management consists of “financial strategies which are goals, patterns or alternatives designed to improve and optimize financial management in order to achieve corporate results” where financial strategy “represents a path to achieve and maintain business competitiveness and position a company as a world-class organization” (salazar,et.al, 2012). studies show that, despite the importance of strategic thinking and implementation on the conduct of financial management in smes which have to operate in contexts of high risks and uncertainty with limited resources, sme owner/managers regard production/service or marketing functions as priorities particularly in the startup phase of new ventures, which eventually results with poor financial management, and in most cases failure of business (jindrichovska, 2013). it is also reported that, sme owners or entrepreneurs, until recently have a general tendency to overlook the elements of strategic management (zimmerer and scarborough, 2005), whereas the lack of “strategic outlook” in the financial issues is a major threat on the longevity of smes as “many of the factors that contribute to failure can be managed properly with strategies and financial decisions that drive growth and the organization’s objectives” (salazar, soto, mosqueda, 2012). while smes are reportedly more distant from traditional “deliberate” approach of strategic management which strictly requires the formal planning and controlling activities, their chaotic environment and the limited resources force them to be much closer to the “emergent” strategic management approach led by mintzberg (1994), which is more flexible, leaving room to changes and developments in the environment. however, the need for the deliberate (planned) strategic management is evident in the phases of environmental scanning and the strategy formulation, while the emergent approach can be argued to be useful in the strategy implementation phase for small and medium sized companies. within the financial management literature, there has been a considerable amount of research focusing classifying of main constructs of financial management. among these, mc mahon, hutchinson and forsaith (1993) have been leading researchers, analyzing and categorizing the practices of financial management in australia, uk and us smes. later, various scholars worked on several aspects of financial management practices in different contexts (okafor,2012; chung and chuang, 2011; hunjra,butt,rehman,2010; pham,2010; nguyen 2001). with regard to the independent variable of financial management practices in these studies, in contrast to the previous studies advocating a general categorization for the elements of financial management, butt, hunjra & rehman (2010) argued that, major constructs of financial management practices in smes can vary from one country to another, depending on the development of the context of corporate sector. empirical studies conducted on smes of different countries supported their argument, indicating existence of a significant variance among the major constructs of financial management practices in different contexts of research. for example, peel and wilson (1996) regarded capital budgeting and financing activities as the major elements of financial management practices for small businesses in uk, while nguyen (2001), conducting a research study on vietnamese smes, argued that the practices which are more related to the profitability and performance of smes in vietnam are the practices related to the ‘accounting information systems, financial planning, working capital management, fixed-asset management and financial reporting and analysis” (nguyen, 2001). later, kennedy and tennent (2006) used “financial record keeping” the general indicator of financial management conduct in small businesses in australia’ and butt, hunjra and rehman addressed “capital structure decision, dividend policy, investment appraisal techniques, working capital and financial assessment” as the most common financial management practices in pakistan (butt, hunjra & rehman, 2010). in turkey, studies conducted up to date on financial management of smes, indicate both similarities and diversifications with regard to previous studies conducted in other contexts, which is explained in detail in the following section. interestingly, no research study, to date, attempted to analyze the variances in the practices of financial management in smes within different contexts and volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu hande karadag emerging markets journal | p a g e |31 approach the conduct of these practices from a strategic management viewpoint, taking the influence of these practices on organizational performance, as a base. the following section presents a conceptual model as a new perspective of looking at the financial conduct in small and medium sized companies, by firstly identifying the “strategic” practices of financial management in turkey, followed by a discussion on their interrelationships and their impact on organizational performance. 4. strategic financial management practices and sme performance in turkey, as in most developing economies, lack of capital and poor access to finance are considered as the main financial challenges for small and medium sized companies (öndeş & güngör, 2013; şahin, 2011; çetin, akyüz & genç, 2011; güler, 2010; koyuncugil & özgülbaş, 2008). while turkey experienced the greatest expansion in sme lending among oecd countries within the period of 20072011, the proportion of the sme share in total credits is still significantly below the sme credit utilizations of the developed economies (oecd, 2012). whilst commercial banks are still the most common sources of sme finance in turkey mainly due to the underdevelopment of venture capital and credit guarantee systems, problems related to collateral, credibility and financial statements inhibit the effective utilization of banks loans by the smes. therefore, majority of turkish smes finance their working capital needs by either using equity financing (şahin, 2011) or other external sources such as family financing or individual loans (kosgeb, 2011). regarding other challenges related to financial management, inefficient use of financial resources (uluyol, 2013) and insufficient working capital management in terms of cash inventory and receivables management constructs, are reported as key financial challenges for smes in turkey. among these, cash-flow problems have a unique situation, as the deterioration of cash-flow in an enterprise causes the owners to finance daily operations with equity capital or personal funds, and when this situation continues for long, the melting equity capital threatens the survival of an enterprise (kosgeb, 2011). in addition to that, an efficient inventory management is stated to lead to improved competitiveness in smes (kosgeb, 2011). the importance of cash and inventory management for smes in turkey is also well documented in other studies (uluyol, 2013; kaya & alpkan, 2012). as other important constructs, insufficient overall and financial planning, lack of feasibility analyses before making investment decisions, inadequate keeping of financial records and lack of analyses of financial reports due to insufficient financial knowledge of sme owner/managers, are among the main problem areas of smes in turkey, with respect to financial management (kaya & alpkan, 2012; alkış a& temizkan, 2012; güler,2010; kutlu & demirci, 2007; arslan, 2003). as turkish smes are mainly dependent on external sources of funding, previous literature on financial problems and practices of smes in turkey, has mainly focused on funding challenges in smes (uluyol, 2013; koyuncugil & özgülbaş, 2008; topal, erkan & elitaş, 2006; arslan, 2003), leaving the research area of other important financial management constructs of smes significantly neglected, up to date. the following findings have been reported as the results of some of the empirical studies regarding financial management practices of smes in turkey: çakır (2013) studied 58 manufacturing companies in turkey and found out that higher cash conversion cycle is associated with higher profitability (çakır, 2013). güngör and öndeş (2013) conducted a research study on 30 smes in erzurum region of turkey. their findings indicated that, lack of financial management knowledge and collection of receivables in working capital management are among the most common financial problems in smes in addition to that, 97% of these smes used equity financing instead of debt financing, and capacity utilization ratio in these smes were found to be very low, causing significant amounts of financial losses and decreases in the rate of employment. (öndeş and güngör, 2013). uluyol (2013) implemented an empirical research on financial management practices of 260 smes in kahramanmaraş, hatay, şanlıurfa, adıyaman and gaziantep cities of southeastern region of turkey. the findings implied that, the conduct financial management practices is “unsatisfactory” in smes, as most practices are reported to be “partially” undertaken. the major implication of the research study was the reporting of a general lack of financial knowledge in practices of financial management. güler (2010) investigated the working capital management and other financial management practices in 111 smes in ankara region of turkey and found that smes mostly use the payback period method, when making fixed-asset investment decisions. the findings also indicate that, smes have the highest regard for the collection of receivables and cash flow management, as practices of working capital management. çetin and bıtırak (2009) carried out an empirical study about financial management, working capital and investment budgeting practices of 40 smes in antalya city of turkey. findings of their research indicated that, followup of doubtful receivables and managing cash are the basic working capital management practices in smes, while payback period method is the most widely used method in fixed-asset investments. çetin, akyüz and genç (2008) conducted a research on smes in usak city of turkey and found out that 80% of the smes did not have a finance department, volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu financial management challenges in small and medium-sized enterprises: a strategic management approach page |32| emerging markets journal and majority of them faced difficulties at collecting their receivables and utilizing bank loans, while 85% had to postpone their investment plans during the economic crisis period of 2008-2009. koyuncugil and özgülbaş (2008) studied the financial data of 697 smes which are quoted to i̇stanbul stock exchange. the findings of their analysis presented that, 62% of these smes’ financial performance was weak, compared to with the others. the smes with lower scores had the common problems of low roe and net profit margin, faced difficulties in the collection of receivables and had financial management problems (koyuncugil and özgülbaş, 2008). çetin (2006) studied financial management, working capital and fixed-asset budgeting practices of 42 smes in antalya and isparta cities in the mediterennian region of turkey. findings of the study indicated that the sme owner/managers are not wellinformed about money and capital markets, as well as about basic concepts of financial management. about the practices of working capital management, smes considered collection of receivables and practices of inventory management, as important. smes also regarded acquisition of basic machinery and equipment, as their core investments in fixed-assets. topal, erkan and arıtaş (2006) conducted a study about financial management practices of 48 smes in afyonkarahisar city of turkey. findings of their study indicated that, machinery and equipment acquisitions, conducted with the motivation of growth of business volumes, are the basic fixed-asset investments and smes use profitability and pay-back analyses in assessing their fixed-asset investments. smes also reported frequent uses of working capital management practices, most important ones being receivables and inventory management, but also including cash budgeting and follow-up of periodical monetary target while the literature on sme strategic management suggests that sme owner/managers do not always employ the processes of strategic management when running their businesses (zimmerer & scarborough, 2005), the empirical studies conducted on financial management constructs of turkish smes present indicators of employment of an “emergent” approach of strategic management at the implementation phase of the conduct of financial management practices, particularly when managing daily financial operations and during processes of large investments. on the other hand, the owner/managers of smes experience problems in taking a “deliberate” approach of strategic management, regarding the strategy formulation and feedback and control phases of financial management, which results in poor financial and overall organizational performance results. the flow of financial management practices and the phases deliberate and emergent illustrated in the strategic management model of financial management practices in smes, as shown in figure 1. within the three basic phases of strategic financial management, sme owner/managers in turkey tend to have a higher regard for the implementation phase of financial management practices, such as paying more attention to the daily transactions related to various working capital management practices including cash, receivables, inventory and accounts payables management, as well as making detailed evaluations before making fixed-asset investments. this indicates that, the “emerging” approach of strategic management which also facilitates finding immediate solutions to unanticipated financial problems with its unstructured and flexible nature is common among turkish smes, in their conduct of financial management. on the other hand, the “deliberate” strategic management approach, regarding the elements of strategy formulation and control, is found to be in much lower levels, as most sme owner/managers reportedly do not show a great interest or lack the technical knowledge related with the financial planning and the financial reporting and control practices, which eventually become significant factors of poor performance results and even failure of business. the flow and interrelationships of the strategic financial management practices with respect to sme performance are illustrated in the strategic management model of financial management practices in figure 1. the strategic financial management elements of the model, namely financial planning, working capital management with three sub-constructs of cash, receivables and inventory management, fixed-asset management and finally, financial reporting and control, are determined according to the significance of their correlations with the overall performance of the company, as regarded by the sme owner/managers. other elements of financial management, such as accounting information systems, are not included in the model, as these practices have been reported by the sme owner/managers, as being significantly correlated with sme performance in turkey. figure 1: strategic management model of financial management practices in smes volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu hande karadag emerging markets journal | p a g e |33 the inadequacy of an effective and efficient conduct of financial management and the challenges regarding main practices of financial management in turkish smes are well documented in several studies (uluyol, 2013; koyuncugil & ozgulbas, 2008; cetin, 2006). therefore, the conceptual model is designed to identify the key practices of financial management and deriving proposals about how the model can be used as a “strategic tool’ for overcoming the financial management problems in order to attain a higher organizational performance in small and medium size companies. strategic financial planning: problems related with access to financial resources are vital for turkish smes. however, studies show that the planned, accurate and goal-oriented utilization of the acquired funds is more critical for a successful sme performance (uluyol, 2013). a high regard for financial planning resulting with the development of “a solid financial plan” (zimmerer and scarborough, 2005) is considered as the key for launching and operating a successful enterprise, as the lack of financial planning and projection is argued to be one of the major causes of business failures, particularly in smes (malette, 2006). within the overall financial management system, financial planning can have several major functions, such as raising the required capital for the start-up phase of the enterprise or efficient and effective management of enterprise’s daily operations. any process of strategic management starts with “strategy formulation”, where environmental scanning is undertaken for identifying the factors which have the potential to affect the organization’s survival and success, followed by the formulation of strategies for reaching organizational goals. while the conduct of financial planning is executed when managing daily operations of the company, such as making deciding on the receivables collection period or bank credit maturities and amounts, a more strategic outlook adds a ‘long-ranged view’ and ‘goal-orientation’ elements to overall managerial perspective, resulting with the direction and focusing of the limited financial resources towards the required ends. therefore, this “seeing the big picture” and formulating financial plans and actions accordingly, contributes to the improvement of both financial and overall performance of the company, to a large extent. this phase is very critical for every company, as lack of strategy formulation results in a “going with the flow” style of management and eventually ineffective and inefficient use of resources and low organizational performance. formulation of financial strategies is important for small and medium sized companies as well as large corporations, as smes have to compete with very limited resources in contexts of high risk and uncertainty. therefore, it can be proposed that, an effective and efficient strategic financial planning would result with improved performance in small and medium sized companies. proposition 1 : strategic financial planning has a positive impact on sme performance. strategic working capital management: working capital management has a particular importance for firms in emerging markets, as the companies operating in these countries are mostly smes who have limited access to long-term capital markets, therefore are much reliant on owner financing,, trade credits and inventories to finance their funding requirements for cash, accounts receivables and inventories (abuzayed, 2011). studies show that, in turkey, as in most developing economies, cash, receivables and inventory management are the key areas of financial management where sme owner/managers allocate most of their time as they regard these practices as “strategic” for their enterprises. despite this high managerial awareness, interestingly, most business failures are reported to result from the ineffective and inefficient management of working capital, particularly cash and receivables (uluyol, 2013; kaya and alpkan, 2012), implying the presence of serious deficiencies in the strategic thinking and implementation processes regarding the management of working capital. as the follow-up and collection of doubtful receivables and bad debts, the management of inadequate or excess cash and the finding and keeping of optimum levels of inventory are highly important for the survival and performance of small and medium sized enterprises, sme owner/managers create snapshot solutions to immediate crises at these areas. therefore, it can be argued that they tend to apply a more emergent strategic management approach when dealing with conflicts and problems about the management of working capital. the key point therefore, which would differentiate a successful and highly performing sme from an unsuccessful one, is how effectively and efficiently the process of strategic management is carried out by the sme owner/managers. empirical studies show that, the profitability of the enterprise can be increased by accurately managing the cash in and out movements, besides minimizing the amount of excess cash (block and hirt, 2004) or reducing the number of days of cash collection period, showing that the enterprise has the ability to shorten its receivables collection period or lengthen its accounts payable period (cakir, 2013; gul, et. al, 2013). efficiency and effectiveness in inventory management is the final critical factor in working capital management in smes as inventories generally form the largest asset on the balance sheet. sme owner/managers are more prone to utilize the “observation method” for detecting the amount of inventory, which causes them to face problems due to having too much or too little inventories, resulting with either low customer satisfaction or high costs of financing excess levels of inventory (hodgetts and kuratko, 1998). however, in turkey, management of inventories has the least managerial priority compared to cash and receivables management, which constitutes the other important reason for high inventory costs, decreasing profitability and eventually poor financial performance (cetin, 2006; topal, erkan & arıtaş, 2006). combining the influence of the three key factors of working capital management over sme performance, it can be stated that, an sme which has a volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu financial management challenges in small and medium-sized enterprises: a strategic management approach page |34| emerging markets journal higher regard for a strategic approach when managing its working capital would be more successful in terms of financial and overall performance. proposition 2: strategic working capital management has a positive impact on sme performance. strategic fixed-asset (capital budgeting): despite that the decision about whether to make a fixed-asset investment is crucial to smes regarding the impact of this decision on the long-term cash-flow of a small or medium sized company, lack of a well-structured strategic approach when making fixed-asset decisions is a major problem area for smes operating in turkey (guler, 2010; çetin & bıtırak, 2009). as generally the funds tied to the acquisitions of fixed-assets, such as buildings or equipment, are in large amounts with long maturity periods,, problems in fixed asset investment decisions potentially carry the risk of threatening the cash requirements of daily production/service operations, particularly when the cashflow impact is not clearly analyzed before making the investment. a careful and detailed technical evaluation is a major requirement for making a successful fixed-asset acquisition, as in most cases, the contribution of the investment to the overall productivity and performance of the company becomes highly questionable without a feasibility analysis conducted beforehand. as the basic motivation behind fixed-asset investments in small businesses is “to increase the efficiency, thus profitability of the enterprise” (zimmerer and scarborough, 2005), the errors and deficiencies in making these decisions and acting accordingly harm the profitability thereby the financial and overall performance of the company, while inadequate investments towards having more advanced production or service facilities limits the growth of the organization, which underline the importance of a strategic outlook when taking and implementing fixed asset investment decisions. the outcomes are likely to be more positive when these vital decisions are made considering the organizational goals such as growth or profitability and directing the limited resources accordingly, starting with the basic questions of “how much that investment is needed for a better overall performance?” and “how can we allocate our limited resources to this investment in the best way possible, if that investment is a requirement for our short and long-term goals and objectives?”. this way, the means and ends would be managed in a more proper way, in terms of maximizing the effectiveness and efficiency of the fixedasset acquisition. proposition 3 : strategic fixed-asset management has a positive impact on sme performance. strategic financial reporting and analysis: in turkey, the inadequacy of financial literacy of sme owners and the impact of that problem area on poor managerial and overall performance of smes is well documented in various studies (uluyol, 2013: kaya & alpkan, 2012, cetin, 2006). financial reports and statements, particularly main statements such as balance sheet, profit and loss statement and cash flow statement, are “powerful tools” small business owners can use in managing their companies (hogetts and kuratko, 1998). however, mostly due to the inadequacy of accounting and finance knowledge of sme owner/managers, studies show that, only 11% of small business owners/managers “analyze their financial statements as part of the managerial planning and decisionmaking processes” (zimmerer and scarborough, 2005). evaluation of financial reports presenting the trends and snapshots of past and current financial performance of the company act as the “control and feedback” function of strategic financial management process., thus, lack of information on the financial situation and crucial performance indicators threatens the overall awareness of the company owner required for a sound strategy formulation and implementation., whereas the performance of the enterprise is positively impacted when this important follow-up function is executed on a timely, rational and knowledge-based basis. therefore, it can be proposed that, the utilization of a “deliberate” strategic management approach, resulting from the formal and rational nature of the feedback and control phase of the strategic management, would significantly improve of sme performance, by pointing out the red and green signals about the past and current major financial performance indicators such as sales growth, profitability or debt/total assets ratio and about the optimum and actual levels of critical balance sheet items such as cash, receivables, inventory, payables and fixed-assets, when managing the financial operations of the company. proposition 4: strategic financial reporting and control has a positive impact on sme performance. 4 . discussion and conclusion the significance of smes in the social and economic context, have been recognized worldwide, particularly after 1980’s, and since then, factors affecting the development and growth of smes have been among the key concerns of public authorities, academicians and business circles. although a number of empirical studies investigated various financial management practices and their impact on organizational performance in different countries, the main focus of previous sme finance literature, particularly in developing countries, have been the challenges smes face to access to financial resources. however, the efficient utilization of the obtained funds, such as having a sound cash management system, is equally important, for the survival of smes. thus, the shift of research on financial management in smes from the one-dimensional “funding focus”, towards a more comprehensive “strategic financial management” perspective has the potential to provide positive implications for academics and policy makers, as volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu hande karadag emerging markets journal | p a g e |35 well as practitioners of sme financial management in terms of introducing new dimensions and factors to the concept of improving sme performance. the conceptual model, which is designed to present how the strategic management practices are interrelated with each other and with the overall organizational performance and which type of strategic management approach is more appropriate for a specific financial management practice, underlines the importance of a strategic perspective for an efficient and effective conduct of the financial management, in order to achieve a successful business performance. the analysis of specific elements of strategic financial management practices of the model, namely strategic financial planning, strategic working capital management, strategic fixed-asset management and strategic financial reporting and control practices, and to what extent the execution of an “emergent” or “deliberate” strategic management approach in the conduct of these financial management practices would lead to better performance results, can provide significant contributions to sme financial management. this new approach also has the potential to lead a way to future empirical studies conducted to test the impact of the strategic financial management practices on indicators of sme performance, such as growth or profitability. this way, it can contribute to the previous studies investigating the factors of success and failure in smes, from a financial management perspective, combined with a strategic management outlook. the key practices regarding financial management conduct can differ from one context to another, therefore other interesting research areas would be the investigations on the variance of the strategic management practices in smes operating in different contexts, or with that of larger companies. references alkış, h., & temizkan, v. (2012). kobi’lerin yönetsel sorunlarının cözümünde japon yönetim sisteminin rolü. karabük üniversitesi sosyal bilimler enstitüsü dergisi, 2(1). ardic, o.; mylenko, n. and saltane, v. (2011). small and medium enterprises a cross-country analysis with a new data set. world bank policy research paper 5538. arslan, ö. (2003). küçük ve orta ölçekli i̇şletmelerde çalışma sermayesi ve bazı finansal yönetim uygulamaları. cumhuriyet üniversitesi, i̇.i̇.b.f. dergisi, 4 (1): 121-135. arı, a. (2013). kobi̇’ler, esnaf ve sanatkarlar özel i̇htisas komisyonu raporu. trakya kalkınma ajansı. http :// www .trakya 2023 .com /uploads /docs /0907 2013y l8aau.pdf ayrıçay, y. (2010). ekonomik krizin sanayi kuruluşları üzerine etkisi: i̇şletme finansına i̇lişkin bir çalışma/effects of economic crisis on industrial enterprises: a study about business finance. atatürk üniversitesi sosyal bilimler enstitüsü dergisi, 14(1). beck, t. (2010). sme finance: what have we learned and what do we need to learn? the financial development report: 187-195. bolton, j. e. (1971). small firms: report of the commission of inquiry on small firms. london, her majesty’s stationary office. butt, b.; hunjra, a.; and rehman, k. (2010). financial management practices and their impact on organizational volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu financial management challenges in small and medium-sized enterprises: a strategic management approach page |36| emerging markets journal performance. world applied sciences journal, 9(9): 997-1002. carter, n. m. (1990). small firm adaptation: responses of physicians' organizations to regulatory and competitive uncertainty. academy of management journal, 33(2): 307-333. chen, m.j. and hambrick d. c. (1995). speed, stealth, and selective attack: how small fırms differ from large firms in competitive behavior. academy of management journal, 38(2): 453-482. chung, s. and chuang, j. (2011). the effect of financial management practices on profitability of small and medium enterprise in vietnam. miho university, http://ir.meiho.edu.tw/handle/98765432 1/1473. cohn, t. and lindberg r.a. (1974). survival and growth: management and strategies for the small firm. new york: american management association. çakır, h.m.(2013). nakit döngüsünün firma karlılığına etkisinin sektörel analizi. journal of yaşar university, 30 (8): 4948-4965. çetin, a. c.; akyüz, y; and genç e. (2011). küresel kriz sürecinde i̇malat sanayi i̇şletmelerinin finansal sorunlarının değerlendirilmesi uşak i̇li örneği. journal of suleyman demirel university institute of social sciences, 1(13): 55-68. çetin, a. c. and bıtırak, i̇. a. (2009). antalya i̇li küçük ve orta ölçekli i̇şletmelerinde finansal yönetim, i̇şletme sermayesi ve yatırım bütçelemesi uygulamaları. akdeniz üniversitesi alanya i̇şletme fakültesi dergisi, 1(1): 119-137. davig, w. (1986). business strategies in smaller manifacturing firms. journal of small business management, 24(1): 38-46. dean, t. j.; brown, r. l.; and bamford, c. e. (1998). differences in large and small firm responses to environmental context: strategic implications from a comparative analysis of business formations. strategic management journal, 19(8): 709-726. european commission. (2012). annual report on small and medium-sized volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu hande karadag emerging markets journal | p a g e |37 enterprises in the eu: eu smes in 2012: at the crossroads. güler, s. (2010). i̇stanbul menkul kıymetler borsasına (i̇mbk) kayıtlı küçük ve orta büyüklükteki i̇şletmelerin (kobi̇) sermaye yapıları üzerine bir uygulama. suleyman demirel university, the journal of faculty of economics and administrative sciences, 15(3): 353-371. güngör, n. and öndeş, t. (2013). kobi’lerin finansmanı erzurum organize sanayi bölgesinde bir araştırma. i̇ktisadi ve i̇dari bilimler dergisi/journal of economics and adminstrative sciences, 27(1): 59-71. hall, g. and young, b. (1991). factors associated with insolvency amongst small firms. international small business journal, 9(2): 54-63. hallberg, k. (2000). a market-oriented strategy for small and medium-scale enterprises. ifc discussion paper 40. hunjra, a. i.; butt, b. z.; and rehman, k. u. (2010). financial management practices and their impact on organizational performance. world applied sciences journal, 9(9): 9971002. jindrichovska, i. (2013) financial management in smes. european research studies journal, 16 (special issue on smes): 79-96. jindrichovska, i.; ugurlu, e.; and kubickova, d.. (2013). changes in capital structure of czech smes: a dynamic panel data approach, ekonomika a management, 2(3): 36-49. kaya, s. and alpkan, l. (2012). problems and solution proposals for smes in turkey, emaj: emerging markets journal, 2(2): 178-196. kennedy, j. and tennent, b. (2006). financial management practices in small businesses: regional and metropolitan. small enterprise research, 14(1): 5563. kosgeb. (2011) kobi̇ stratejisi ve eylem planı 2011-2013, http: //www . sanayi. gov . tr / files/documents/kosgeb_katalog.pd f kosgeb.(2012). enhancing the competitiveness of smes in turkey, country volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu financial management challenges in small and medium-sized enterprises: a strategic management approach page |38| emerging markets journal report.http://www.comcec.org/userfil es/file/%c3%bclkeraporlar%c4%b1/ 28_isedak_%c3%bclke_rap/t%c3% bcrkiye.pdf. koyuncugil, a. s.; and ozgulbas, n. (2006). is there a specific measure for financial performance of smes. the business review, cambridge, 5(2): 314-319. kutlu, h. a. and demirci, n. s. (2007), kobi’lerin finansal sorunları ve çözüm önerileri. 4. kobi̇’ler ve verimlilik kongresi. liberman-yaconi, l.; hooper, t.; and hutchings, k.. (2010). toward a model of understanding strategic decisionmaking in micro-firms: exploring the australian information technology sector. journal of small business management, 48(1): 70-95. liu, z. (2010). strategic financial management in small and mediumsized enterprises, international journal of business & management, 5(2): 887894. lukács, e. (2005). the economic role of smes in the world economy, especially in europe, european integration studies, 1(4): 3-12. mcmahon, r. holmes, p.; hutchison, s.; and forsaith, m. (1993). small business financial management: theory and practice, journal of management, l (15): 5-19. meredith, g. g. (1986). financial management of the small enterprise. mcgraw-hill, sydney, new south wales. mintzberg, h. (1994). rise and fall of strategic planning. simon and schuster. nguyen, k. m. (2001). financial management and profitability of small and medium enterprises. theses.. nurrachmi, r. n.; abd samad, k.; and foughali, i. (2012). the development of smes in turkey. strategic management journal, 11: 124–136. oecd, organisation for economic cooperation and development (2004). small and medium-sized enterprises in turkey, issues and policies. http:// www. oecd. org/ industry /smes /3193 2173.pdf oecd, organisation for economic cooperation and development (2006). the sme financing gap (vol. i): theory and evidence. oecd. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu hande karadag emerging markets journal | p a g e |39 oecd, organisation for economic cooperation and development (2012). sme policy index western balkans and turkey,2012. oecd. okafor, r. g. (2012). financial management practices of small firms in nigeria: emerging tasks for the accountant, european journal of business and management, 4(19): 159-169. ondes, t. & gungor, n. (2013). kobi’lerin finansmani erzurum organize sanayi bolgesinde bir arastirma. ataturk university journal of economics and admistrative sciences, 27 (1). özdemir, s.; ersöz, h. y.; and sarıoğlu, h. i̇. (2011). küçük girişimciliğin artan önemi ve kobi̇’lerin türkiye ekonomisindeki yeri. sosyal siyaset konferansları dergisi, 12(3): 67-83. peel, m. j. and wilson, n. (1996) working capital and financial management practices in the small firm sector, international small business journal, 14(2): 52-68. pham, h. (2010). the impact of financial management practices on profitability of small and medium enterprises (smes) in vietnam. master’s thesis. pleitner, hans j. (1989). strategic behavior in small and medium-sized firms: preliminary considerations.". journal of small business management, 27 (4): 70-75. salazar, a. l.; soto, r. c.; and mosqueda, r. e. (2012). the impact of financial decisions and strategy on small business competitiveness, global journal of business research (gjbr), 6(2): 332-349. snodgrass, d. r. and biggs, t. (1996). industrialization and the small firm: patterns and policies. ics press. storey, d. j. (1994) understanding the small business sector. cengage learning emea. şahin, o. (2011). kobi'lerde finansal performansı belirleyen faktörler. zonguldak karaelmas university journal of social sciences, 7(14): 7691. topal, y.; erkan, m.; elitaş, c. (2006). küçük ve orta boy i̇şletmelerin finansal yönetim uygulamaları: afyonkarahisar örneği, süleyman demirel üniversitesi, i̇.i̇.b.f. dergisi, 11(1): 281-298. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.67 | http://emaj.pitt.edu financial management challenges in small and medium-sized enterprises: a strategic management approach page |40| emerging markets journal tolentino, a. l. (1995. guidelines for the analysis of policies and programmes for small and medium enterprise development, international labour office. turkstat, turkish statistical institute. (2013). http://www. turkstat . gov . tr / pre haberbultenleri.do?id=15881.. wheelen, l. t. and hunger, d. (2010). strategic management and business policy–achieving sustainability. pearson international edition. wickham, p. a. (2006). strategic entrepreneurship. pearson education. wilson, i. (1994). strategic planning isn't dead—it changed. long range planning, 27 (4): 12-24. worldbank. (2014). doing business report. http://www.doing business .org /data /explore economies/turkey/ zimmerer, t. w. and scarborough, n. m. (2005). essentials of entrepreneurship and small business management: the foundations of entrepreneurship, the united states of america: pearson education. zonooz, b. h.; farzam, v.; satarifar, m.; and bakhshi, l. (2011). the relationship between knowledge transfer and competitiveness in "smes" with emphasis on absorptive capacity and combinative capabilities, international business and management, 2(1): 56-78. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu evaluating banking profit performance in ghana during and post profit decline: a five step du-pont approach baah aye kusi university of ghana, ghana | e-mail: baahkusi@gmail.com kwadjo ansah-adu valley view university, ghana | e-mail: joe_thwart@yahoo.co.uk albert agyei valley view university, ghana | e-mail: agyeialbert@gmail.com volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu | abstract in this study we aimed at three objectives. first, identify and rank banks based on a composite score comprising of all five dupont variables. second, we identify variables in the five step du-pont set up that are most likely to influence bank roe during and post profit declining periods. and third, we estimate a model to capture the variables that drive bank roe during and post profit declining periods. we first establish from our rankings that, foreign banks in ghana performed better during profit declining periods while the local banks performed better in post profit decline periods using the top ten banks as a benchmark in both periods. employing pearson correlation coefficients matrix, we recognized that operating profit margin, asset turnover and leverage were most likely to influence bank roe in both time periods. we further employ ols regression and find that bank roe was impacted by operating profit margin and leverage during profit declining periods and post profit decline while tax effect added up in post profit declining periods. keywords: du-pont model, operating profit margin, asset turnover, leverage, interest burden, tax effect new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu baah aye kusi, kwadjo ansah-adu, albert agyei emerging markets journal | p a g e |29 evaluating banking profit performance in ghana during and post profit decline: a five step du-pont approach baah aye kusi kwadjo ansah-adu albert agyei 1. introduction traditional accounting ratios have gained much popularity among academics and policy makers despite the challenges that confront its usage (altman, 1968). it is argued that ratio analyses are one dimensional and do not show a holistic picture of the financial health of a business and it is also said to be backward looking as it is computed based on past financial records (see altman, 1968). despites these criticism and many more, ratio analysis remains one of the most popular, easy and fastest way among practitioners in assessing the financial health of corporate entities for further evaluation. gill (1994) argues that the continuous and persistent evaluation of the financial health of corporate entities is imperative for firm stability and success and this can be achieved through the use of the dupont ratio analysis. hence, the du-pont ratio analysis initiated by donaldson brown in 1914 has gained much attention among the ratio family as it explains return on equity (roe) as a function of three ratios overcoming the problem one dimensionality of ratios. the du-pont ratio analysis initially explained return on equity to emanate from three (3) sources namely profit margin (pm), asset turnover (ato) and financial leverage (fl). this decomposition broadly represented operation efficiency, asset utilization and equity multiplier effect (moyer et al., 2007, ross et al., 2008). however, hawawini and viallet (1999) presented modification to the du-pont model. this modification resulted in the five step du-pont which explained roe as a function of five different ratios that combining to explain roe in an attempt to overcome the shortcomings of the three step du-pont ratio. in the five step du-pont ratio analysis, hawawini and viallet (1999) admit that annual financial statements of firms are not only useful to managers, but also to creditors and tax agencies in making operational and financial decisions. hence, the three step du-pont did not capture cost of debts (creditor reward) and tax effects (government reward) as conditions that affect return on equity. these setbacks highlighted above led to the development of an expanded, five-step model of dupont analysis, which breaks down the net profit margin even further to assess the impact of higher borrowing costs associated with increased leverage (brigham and houston, 2001). the five step du-pont explains that, where companies have high cost of borrowing, their interest expense on more debt could offset the positive effects of increased leverage. in addition, interest expenses for most companies are non-taxdeductible, so the extended model considers interest charges and the company’s tax burden (soliman, 2008; richardson et al., 2006; ross et al., 2008; mcclure, 2005). we are further fascinated about the five step du-pont as it is able to capture both industry and macroeconomic level variables (see nissim & penman, 2001; fairfield and yohn, 2001; ge and soliman 2007). despite the five step du-pont ratio analysis overcoming the challenge of one dimensionality to explain roe as coming from five different factors, we cite no study that employs the five step du-pont ratio analysis in empirical studies. however, we cited some studies that have used the three step du-pont ratio analysis in empirical studies (see moss, mishra and dedah, 2009; moss et al., 2009; selvarasu et al., 2010; weeden and langemeier, 2008). we however cite liesz (1999) who employed all the five variables in the five step du-pont ratio, but substituted equity multiplier with equity turnover. the du-pont ratio analysis is employed to investigate the profitability of banks in ghana, because roe which indicates the return to equity holders kept declining from 2003, until it began to rise from 2009 till 2013. hence, the purpose of this study is in two folds. first, identify and rank banks using the variables of the five step du-pont model and second, the study estimates the driver of roe during its declining and rising periods. 2. the du-pont model traditional financial ratios have gained much acceptability among financial analysts, lenders and academic researchers (osteryoung & constand, 1992; devine & seaton, 1995; or burson, 1998). however, popularity of the du-pont began in 1981 four year after donaldson brown was hired by the du-pont corporation. at this period, roa maximization was the sole aim of financial managers (blumenthal, 1998). donaldson brown identified the mathematical relationship that existed between two commonly computed ratios, namely net profit margin (obviously a profitability from volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu evaluating banking profit performance in ghana during and post profit decline: a five step du-pont approach page |30| emerging markets journal operating activities) and total asset turnover (an efficiency measure), and roa (net income / sales) x (sales / total assets) = (net income / total assets). once this was identified, it named the two step du-pont and led the improvement of a system of planning and control for all operating decisions in a firm (blumenthal, 1998). gitman (1998) suggests that, the sole aim of financial managers was modified and changed from roa maximization to roe maximization (that is equity or shareholder value maximization). hence, the original du-pont (roa) was also modified to suit the corporate goal, shareholder (roe) maximization. the maximization of shareholder value (roe ratio) was decomposed as emanating from net operating margin (profit from operating activities), asset turnover (efficient usage of assets) and additional leverage (usage of debts). this was named as the three step du-pont and expressed as roe = (net income / sales) x (sales / total assets) x (total assets / equity). this remained as the most popular du-pont model until when the interest of creditors and the tax agencies (government) began a concern for corporate entities. hence, the three step du-pont did not capture the effect of cost of debts (interest burden) and tax effects of a firm (hawawini and viallet, 1999). consequently, the five step du-pont model was initiated to capture these effects and was expressed as roe = (ebit / sales) x (sales / invested capital) x (ebt / ebit) x (invested capital / equity) x (eat / ebt). the five step dupont model argues that roe is also affected by cost of debts and the tax requirements enforced the domain of the firm (hawawini and viallet, 1999). 3. empirical review penman (2001) shows that, although roe can be mechanically increased through leverage (assuming positive spread), the increase in the discount rate results in no change in equity value. fairfield and yohn (2001) were the first to address the question of future predictive power and found that ato is positively associated with future changes in return on net operating assets (rnoa), but that level of pm and ato have no predictive value. this result is intuitive because the levels of pm and ato are more informative toward a firm’s operating structure or industry membership (ge and soliman 2007). further, increases in ato indicate that the firm’s ability to generate sales from a given investment has increased and this is an indicator of future efficiency of generating sales from assets. thus, this type of increase in profitability tends to persist. collins (2010) used a general form of the du-pont expansion to develop a model of optimal debt, which emphasizes the choice of equity. in order to effectively evaluate operational managers, nissim and penman (2001) suggest using a modified version of the traditional du-pont model in order to eliminate the effects of financial leverage and other factors that are not under the control of those managers. using operating income to sales and asset turnover based on operating assets limits the performance measure of management to those factors over which management has the most control. the modified du-pont model has become widely recognized in the financial analysis literature. see, for example, pratt & hirst (2008), palepu & healy (2008), and soliman (2008). liesz (1999) determined that, the failure of small business is always a debate topic by using the financial statement of small firms. opm, equity turnover, cost ratio, structure ratio, and tax ratio are considered. du-pont techniques have been used. the result shows that, poor financial planning and control rank are the reasons of business failure. weeden and langemeier (2008) investigated the performances of different age farmers by using continuous data of 2002 to 2006. profit margin, asset turnover, financial leverage, roe and capital gain were considered. t test techniques had been used. the result showed tha,t performance of older farmer was lower than younger farmers. little et al. (2009) investigated and compared the performance of retail firms by selecting 111 retail firms for years 2006-2009. retail strategy, recession, differentiation, cost leadership and du-pont methods were considered. anova techniques had been used. the result showed that differentiation firms (profit margin is high and asset turnover is low) outperform cost leadership firms (profit is low and asset turnover is high). moss et al. (2009) investigated the effect of roe on agriculture by using usda data from 1960 to 2004. profit margin, asset turnover and financial leverage were considered. correlation techniques had been used. the result showed roe effect of regional and national level. selvarasu et al. (2010) investigated those strategies for humanizing the performance of a medium volume indian apparel company by using annual and financial report of 2007. roe, profit margin, asset turnover and financial leverage were considered. spm techniques had been used. the result showed that, company success depend upon two things: increasing sales and decreasing expense. herciu et al. (2011) found out that, most profitable companies are not necessarily most attractive for investors by using annual reports of 20 companies for 2009. profit margin, roe, ros, roa, financial leverage and du-pont model were considered. du-pont model techniques had been used. the result showed that, the ranking relied on factors like roe, volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu baah aye kusi, kwadjo ansah-adu, albert agyei emerging markets journal | p a g e |31 ros, roa and financial leverage. abdoli et al. (2011) investigated the comparison of dea and du-pont model by using 13 financial ratios. ahp, dea and du-pont models were considered. correlation techniques had been used. the result showed that there is weak correlation between dea and du-pont model. alaghi (2010) investigated the effect of financial leverage on systematic risk by using data of listed companies of tehran stock exchange. financial leverage, capital structure, systematic risk, operating leverage, earnings per share (eps), and earnings before interest and taxes (ebit) were considered. regression techniques had been used. the result emphasized on financial leverage-systematic risk relationship. 4. methodology we employ ranking, correlation analysis and ordinary least squares (ols) regression to achieve the stated objectives of the study. first we rank banks with a composite score by including all five variables of the dupont model. second, we use the pearson correlation coefficient matrix to identify which of these variables are most likely to influence roe for periods before (20062009) and after (2009-2012) decline of bank profit. third, we employ ordinary least squares (ols) to show which variables with the framework of the five step du-pont impacts bank return on equity before and after bank profit decline. concerning our third objective, we test for normality of variable and residuals, multicollinearity, heterskedasticity and autocorrelation. employing the shapiro-wilk normality test (see appendix 14) with a null hypothesis of non-normal distribution in both variable and residuals, we rejected the null hypothesis of variable normality and residual normality at a p-value of 5% (for both during 2006-2009) and after (2009-2012) roe decline. we further test for multicollinearity and set the threshold for collinearity to 0.7 following kennedy (2008). hence, we find no evidence of multicollinearity in our data for both periods (see table 2 and table 3). as further robust check, we use variance inflation factor (vif) acceptability criteria to access the acceptability of the variables in the model (see appendix 7 and 8). with a threshold 10 for vif, none of the variables exceeded the threshold implying that all the variables can be used in the du-pont model. with a null hypothesis of consistent variance, we use breusch-pagan / cook-weisberg test for heteroskedasticity and concluded that models were homoskedastic for periods during profit decline and post profit decline (see appendix 5 and 6). finally, we employ the graphical approach to test for the presence of autocorrelation. wooldridge (2008) suggests that where plotted residuals are vertically plotted, no patterns can be traced through the residuals in the years plotted. this is an evidence of no autocorrelation. as observed in appendix 9 and 10, we find evidence of no autocorrelation. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu evaluating banking profit performance in ghana during and post profit decline: a five step du-pont approach page |32| emerging markets journal during profit decline periods post profit decline periods table 1: du-pont variable ranking during and post profit decline periods banks opm ato lr ib te composi te score overa ll bank ranki ng banks opm ato lr ib te composit e score overal l bank rankin g gcb 5 11 19 7 20 12.4 8 gcb 6 17 24 2 23 14.4 2 adb 18 12 23 11 1 13 6 adb 21 15 24 8 2 14 4 stanbic 3 20 7 7 22 11.8 9 stanbic 13 25 2 12 10.4 14 boa 16 15 18 2 2 10.6 14 boa 24 24 20 4 9 16.2 1 bbg 15 10 7 4 4 8 23 bbg 11 16 8 9 1 9 23 cal 9 14 5 9 7 8.8 19 cal 9 22 6 7 11 11 12 eco 7 13 17 5 17 11.8 9 eco 4 18 6 6 17 10.2 15 fambl 19 19 7 1 3 9.8 16 fambl 20 20 1 5 4 10 17 hfc 13 18 1 3 8 8.6 22 hfc 15 19 1 10 14 11.8 9 icb 8 16 20 10 23 15.4 1 icb 17 23 4 11 16 14.2 3 mbgl 10 9 4 6 5 6.8 24 mbgl 25 21 2 1 20 13.8 5 nib 22 3 2 19 21 13.4 4 nib 23 5 14 22 3 13.4 6 scb 6 6 20 13 9 17 scb 2 1 3 20 18 8.8 24 utb 11 7 21 6 9 17 utb 14 4 3 21 7 9.8 19 uba 24 4 7 18 18 14.2 3 uba 8 9 3 17 24 12.2 8 zenith 12 2 7 22 11 10.8 13 zenith 10 8 3 19 8 9.6 21 gtb 1 6 22 15 19 12.6 7 gtb 3 10 9 16 13 10.2 15 fbl 21 5 7 23 16 14.4 2 fbl 18 6 3 25 6 11.6 10 bsic 23 8 13 8.8 19 bsic 22 11 3 14 10 17 sg-ssb 2 1 21 16 15 11 11 energy 5 13 3 15 10 9.2 22 pbl 14 3 24 9 10 15 sg-ssb 12 7 2 18 19 11.6 10 bob 4 7 7 14 12 8.8 19 pbl 19 2 1 23 22 13.4 6 uniban k 17 7 17 14 11 11 bob 1 14 1 12 15 8.6 25 access 20 17 7 12 10 13.2 5 uniban k 16 3 1 24 5 9.8 19 compos ite score 12.5 8.75 9.6 3 12. 5 11. 5 access 7 12 1 13 21 10.8 13 variab le rankin g 1 5 4 2 3 composi te score 13 13 5.8 4 12. 96 12 variabl e rankin g 1 1 5 3 4 volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu baah aye kusi, kwadjo ansah-adu, albert agyei emerging markets journal | p a g e |33 5. empirical results our first objective is to rank the banks in a descending order with a composite score that comprises all five variables of the five step du-pont model during and post profit decline in ghana. we first find the average of each variable for each period, then rank the averages in a descending order. we again find the averages of the ranked values and this gives us the composite score. hence, we rank the composite score for each bank and variable for the two time periods. we find that the positions of banks changed or varied across the two time periods. for instance, international commercial bank (icb now fbn) was ranked 1st from the composite score during profit declining periods, but ranked 3rd for post profit decline, while bank of africa (boa) ranked 14th during profit declining periods, but ranked 1st for post profit decline periods. from the bottom, merchant bank ghana limited (mbgl) ranked 24th during profit declining periods, but ranked 5th for post profit decline periods, while standard charted bank (scb) ranked 17th during profit declining periods, but ranked 24th for post profit decline periods. this implies that the performances of banks are greatly affected by the two periods investigated. we further find that six foreign banks occupied the first ten top ranked positions during profit decline periods while leaving four slots for local banks. however, the ranking changed as seven local banks dominated the top ten banks, ranked after or post profit decline periods. it is interesting to however find that, six banks remained in the top ten ranked banks for both profit decline periods and post profit decline periods. out of these six banks, three of them, namely international commercial bank (icb), united bank of africa (uba) and fidelity bank limited (fbl) were foreign banks while ghana commercial bank (gcb), national investment bank (nib) and agricultural development bank (adb) were local banks. finally, on the part of variables, operating profit margin (opm) and asset turnover (ato) ranked 1st and 5th respectively during profit decline periods, implying that opm and ato were the highest and lowest variables of the du-pont model during profit decline periods. however, opm and ato ranked 1st while leverage ranked 5th after or post profit decline. table 2: pearson correlation matrix during profit decline (2006-2009) roe opm ato lr ib taxe ffi roe 1 opm 0.447 *** 1 ato 0.473 6*** 0.05 09 1 lr 0.636 8*** 0.11 27 0.6086 *** 1 ib 0.004 1 0.03 32 0.0355 0.00 12 1 taxef fi 0.073 1 0.00 53 0.0421 0.12 73 0.09 48 1 significant level: 10% (*), 5% (**) and 1% (***) roe= return on equity, opm= operating profit margin, ato= asset turnover, lr= leverage, ib= interest burden, taxeffi= tax effect table 2 and table 3 present the pearson correlation coefficient matrix, which is very important. first of all, it is significant to check multicollinearity during and post periods of profit decline as highlighted in the methodology section. second, it is important because we employ the pearson correlation coefficient to identify and detect the variables that are most likely to influence the dependent variable (dependent variable: bank roe) in either periods in a du-pont model. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu evaluating banking profit performance in ghana during and post profit decline: a five step du-pont approach page |34| emerging markets journal table 3 pearson correlation matrix during profit decline periods (2009-2012) roe opm ato lr ib tax effi roe 1 opm 0.469 *** 1 ato 0.258 8** 0.0681 1 lr 0.222 2** 0.2425 ** 0.6694 ** 1 ib 0.038 3 0.1123 0.0842 0.05 2 1 taxef fi 0.115 4 0.1362 0.0234 0.18 1* 0.12 91 1 significant level: 10% (*), 5% (**) and 1% (***) roe= return on equity, opm= operating profit margin, ato= asset turnover, lr= leverage, ib= interest burden, taxeffi= tax effect from tables 2 and 3, we identify that bank profitability (roe) is likely to be influenced by operating profit margin (operating activities), asset turnover (asset utilization efficiency) and leverage (usage of debts) for both periods (that is periods during and after roe decline). however, the level of significance differed across the two time periods. operating profit margin (opm) was significant in both time periods under 1%, signifying that the core activities of banks have superior influence on their return to shareholders. however, we find asset turnover (ato) and leverage (lr) to be significant under 1% during periods of return on equity decline and under 5% post profit decline. this indicates that leverage and asset turnover were more persistent and robust during periods of profit decline than in post profit decline. these finding are consistent with herciu et al. (2011) as they also identify that operating profit margin, asset turnover and leverage can significantly influence profitability using the top twenty (20) most profitable companies in the world for 2009. concerning our regression estimates below, operating profit margin (opm) is reported to be positively related to bank return on equity in both time periods at 1% significance level. however, the impact during post profit decline is higher than during profit decline. that is, a unit increase in operating profit margin will lead to a 0.186 and 0.372 unit increase in bank return on equity during profit decline and post profit decline periods respectively. our finding is consistent with that of fairfield and yohn (2001), nissim and penman (2001) and penman and zhang (2003). however, they argue that operating profit margin is not persistent as higher operating profit margins will attract new entrants while competitors can easily emulate to normalize operating profit margin in the industry. this is so because, operating profit margin is derived from pricing power such as product innovation, product positioning, first mover advantage and brand name recognition which can be easily imitated by competitors and new entrants. as operating profit margin appears to have the greatest impact in both time periods, it implies that bank return on equity in ghana cannot be persistent as roe’s highest contributor is not persistent. we suggest that opm being significant can be attributed to the integration of information technology as shown by darmika (2008). however, asset turnover which is more persistent and accrues from efficient use of resources was not significant and negatively related to roe in both time periods. from the regression results, we further report that leverage (equity multiplier) is also positively related to roe in both time periods, but significant at 1% during profit declining periods and 5% in post profit decline periods. this indicates that a unit increase in equity multiplier leads to nearly 0.01 unit increase in roe in time periods. our finding support that of penman (2001) and modigliani and miller (1958) who argue a positive relationship between roe and leverage. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu baah aye kusi, kwadjo ansah-adu, albert agyei emerging markets journal | p a g e |35 6. conclusion in this study, we employed the five step du-pont model to capture the drivers of bank return to equity holders during periods of declining profits and post profit declining periods. we take advantage of the less used five step dupont model which overcomes the one dimensional problem of other ratios and is able to capture bank specific, industry level and macroeconomic variables. our du-pont set up was able to capture 45% and 42% of the total variation in roe during profit declining periods and post profit decline respectively. in this study, we find that operating profit margin, asset turnover and leverage are the likely variables in the du-pont set up to influence bank return on equity during profit declining periods and post profit decline periods. however, a further analysis through ols regression revealed that operating profit margin and leverage were positive and significantly persistent during profit declining periods and post profit decline periods. however, positive impact of operating profit margin is not persistent and robust as it can be easily learned by new entrants and copied by existing competitors. however, asset turnover which is expected to be more persistent was not significant in both time periods. hence, roe in the banking industry of ghana cannot be stable. however, we partly attribute the turn of events to the universal banking systems which gives less room for developing core competences and specialties which are unique to banks and are more persistent for industry profit stability. for this reason, we advise that banks focus on effective and efficient deployment of assets for more persistent influences and stability of bank roe. we also find that, the tax system helped banks to improve roe. this means that, banks are able to pass on the cost of corporate tax charged by tax agencies to their client in post profit decline periods. with tax effect being a variable outside the control of bank management, it reechoes the fact that the five step du-pont captures industry level and macroeconomic conditions as indicated by nissim and penman (2001). this therefore asserts that the use of the five step du-pont model is comprehensive enough to capture bank specific, industry level and macroeconomic variables and hence researchers can adapt its use in empirical studies in other industries like construction and manufacturing industries where leverage is high. acknowledgement we wish to express our gratitude to mrs. charlotte abena frempomaa mensah of bank of ghana for her relentless efforts in assisting us to acquire the needed data for this study. roe during profit decline periods roe post-profit decline periods opm 0.186 0.372 (3.68)*** (6.48)*** ato -0.115 0.002 (1.65) (0.03) lr 0.008 0.009 (2.73)*** (2.28)** lb 0.001 -0.005 (0.18) (0.74) taxeff 0.043 0.138 (0.51) (1.71)* _cons 0.024 -0.167 (0.32) (2.27) r2 adj r2 0.45 0.39 0.42 0.38 n banks f test f prob. 56 24 8.14 0.0000 74 25 9.98 0.0000 volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu evaluating banking profit performance in ghana during and post profit decline: a five step du-pont approach page |36| emerging markets journal references alaghi, k. (2010). financial leverage and systematic risk. african journal of business management, vol.5, (1), 39-43. altman e. i. (1968). financial ratios, discriminant analysis and the prediction of corporate bankruptcy. the journal of finance vol xxiii, no. 4. athanasoglou, p. p., sophocles, n. b., and delis, m. d. (2008). bank-specific, industryspecific and macroeconomic determinants of bank profitability. international financial markets, institutions and money, 18(2), 121-136. athanasoglou, p.p., brissimis, s.n. and delis, m.d. (2005). bank-specific, industryspecific and macroeconomic determinants of bank profitability. bank of greece working paper, no. 25. blumenthal, r. g. (1998). ‘tis the gift to be simple: why the 80-year-old du pont model still has fans. cfo magazine, january, 1998, pp. 1-3. burson, r. (1998). tools you can use for improved ratio analysis. san diego business journal, 12/07/98, vol. 19, issue 49, pp. 19-23. collins, d., roman, f., and chan, h. (2010). an empirical investigation of the relationship between profit margin persistence and firms’ choice of business model: evidence from the us airline industry. business lawyer, (54), 921-963. conrad, d.a. (2010). returns on equity to notfor-profit hospitals: theory and implementation. international journal of managerial finance; emerald group publishing limited, vol. 6, (3), 190-219. darmika, r. (2008). dupont analysis of an information technology enables competitive advantage. journal compilation blackwell publishing ltd, vol. 15, (2), 239-250. devine, k. and seaton, l. (1995). an examination of quarterly financial ratio stability: implications for financial decision making. journal of applied business research, winter, 1995, pp. 8198. escudero, w.s. (2011). ceo salary and return on equity. “journal of finance and accountancy”, (61), 7-14. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu baah aye kusi, kwadjo ansah-adu, albert agyei emerging markets journal | p a g e |37 fairfield, p. and yohn. t. (2001). using asset turnover and profit margin to forecast changes in profitability. review of accounting studies (december): 371– 385. ge, w., and soliman, m. (2007). achieving competitive advantage through product differentiation and cost efficiency: a new approach with new insights.working paper, university of washington. gill, j. (1994). financial basics of small business success, crisp publications, 1994. gitman, l. (1998). principles of financial management, 8th edition, addison wesley publishers, 2000. hawawini, g. and viallet, t. (1999). finance for executives, south-western college publishing, 1999. herciu, m., belascu, l., ogrean, c. (2011) a dupont analysis of the 20 most profitable companies in the world. international conference on business and economics research, vol. 1, 2011, pp. 45-48. kose, j., & yiming, q. (2003). incentive features in ceo compensation in the banking industry. federal reserve bank of new york economic policy review, 9, 1, 107. lauzen, l. (1985). small business failures are controllable, corporate accounting, summer, 1985, pp. 34-38. liesz, t.j. (2004). really modified dupont analysis: five ways to improve return on equity. the economics review, vol. 81, (3), 231-243. liesz, t. (2002). really modified du pont analysis: five ways to improve return on equity. proceedings of the sbida conference. n.p. little, p., little, b. and coffee, d. (2009). evaluating alternative strategies in the retail industry. academy of strategic management journal; vol. 8, 41-53. little, p.l., mortimer, w.j., keene, m.a., and henderson, l.r. (2009). evaluating the effect of recession on retail firms’ strategy using dupont method. journal of financial and quantitative analysis, vol. 38, (1), 1-36. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu evaluating banking profit performance in ghana during and post profit decline: a five step du-pont approach page |38| emerging markets journal macay, j. r., & o’hara, m. (2003). the corporate governance of banks. federal reserve bank of new york economic policy review, 9, 1, 91-107 mark, t.s. (2008). the use of dupont analysis by market participants. “the accounting review”, vol. 83, (3), 307-320. mcclure, b. (2005). roa and roe give clear picture of corporate health http://www.investopedia.com/articles/bas ics/05/052005. mehra, r. (2006). the equity premium in india, managerial auditing journal, vol. 23, (8), 744-778. mihaela, h., claudia, o., and lucian, b. (2011). a du pont analysis of the 20 most profitable companies in the world. international conference on business and economics research, vol.1, (2), 87–106. modigliani, f., & miller, m. h. (1958). the cost of capital, corporation finance and the theory of investment. the american economic review, 48(3), 261-297. moss, c.b., mishra, a.k. and dedah, c. (2000). decomposing agricultural profitability using dupont expansion and thiele’s information approach. asia pacific journal of management, (22), 257–283. moyer, c., mcguigan, j. and rao, r. (2007). fundamentals of contemporary financial management. thomson south-western, usa, 2007, pp.113. nissim, d., & penman, s. (2001). ratio analysis and valuation: from research to practice. review of accounting studies, 6, 109154. http://dx.doi.org/10.1023/a:10113382216 23 osteryoung, j. and constand, r. (1992). financial ratios in large public and small private firms, journal of small business management, july, 1992, pp. 35-47. palepu, k., & healy, p. (2008). business analysis and valuation: using financial statements (fourth edition). mason, oh: thomson southwestern. pratt, j., & hirst, d. (2008). financial reporting for managers: a value-creation perspective. new york, ny, wiley. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu baah aye kusi, kwadjo ansah-adu, albert agyei emerging markets journal | p a g e |39 richardson, s., sloan, r., soliman, m. and tuna, i. (2006). the implications of firm growth and accounting distortions for accruals and profitability. the accounting review 81: 713–743. ross, s., westerfield, r., jaffe, j. and jordan, b. (2008). modern financial management, eighth edition. mcgraw hill, new york, 2008, pp. 53. selvarasu, a., agarwal, y., antonio, f., jha, w., and ferreira, m. (2010), model predicting profit and turnover path of apparel-retail company, journal of economics and engineering, vol. 1, (7), 631-649. soliman, m. (2004). using industry-adjusted du pont analysis to predict future profitability and returns. ph.d. dissertation, university of michigan. http://dx.doi.org/10.2308/accr.2008.83.3. 823 soliman, m. (2008). the use of du pont analysis by market participants. the accounting review, 83(3), 823-853. weeden, g. and langemeier, m. (2008). an examination of financial performance among age cohorts. international review of business research papers, vol. 4, (4), 190-198 appendix appendix: 1 shapiro-wilk normality test (residual during 2006-2009) variable obs w v z prob>z redupre 56 0.94077 3.047 2.392 0.00838 appendix: 2 shapiro-wilk normality test (data normality during 2006-2009) variable obs w v z prob>z roe 85 0.9232 5.5400 3.7640 0.0001 opm 81 0.9626 2.5950 2.0910 0.0183 ato 64 0.6787 18.3930 6.3000 0.0000 lr 85 0.7765 16.1240 6.1130 0.0000 ib 83 0.1745 58.4020 8.9300 0.0000 taxeffi 80 0.7075 20.0800 6.5730 0.0000 appendix 3: shapiro-wilk normality test (data normality during 2009-2012) obs w v z prob>z roe 98 0.8212 14.5170 5.9280 0.0000 opm 98 0.9406 4.8260 3.4880 0.0002 ato 87 0.7846 15.8430 6.0820 0.0000 lr 98 0.7779 18.0340 6.4090 0.0000 ib 98 0.1513 68.8990 9.3790 0.0000 taxeffi 86 0.8284 12.5020 5.5570 0.0000 appendix 4: shapiro-wilk normality test (residual during 2009-2012) obs w v z prob>z redupost 74 0.9119 5.6740 3.7870 0.0001 appendix 5: heteroskedasticity test for periods for profit decline (2006-2009) breusch-pagan / cook-weisberg test for heteroskedasticity ho: constant variance variables: fitted values of roe volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.79 | http://emaj.pitt.edu evaluating banking profit performance in ghana during and post profit decline: a five step du-pont approach page |40| emerging markets journal chi2(1) = 3.41 prob > chi2 = 0.0646 appendix 6: heteroskedasticity test for post decline (2009-2012) breusch-pagan / cook-weisberg test for heteroskedasticity ho: constant variance variables: fitted values of roe chi2(1) = 0.33 prob > chi2 = 0.5681 appendix 7: vif during periods of proft decline (2006-2012) variable vif 1/vif lr 1.67 0.600288 ato 1.65 0.604702 taxeffi 1.15 0.865892 opm 1.13 0.884641 ib 1.03 0.972954 mean vif 1.33 appendix 8: vif post profit decline (2009-2012) variable vif 1/vif lr 2.23 0.4488 ato 2.01 0.497591 opm 1.24 0.806155 taxeffi 1.08 0.927124 ib 1.05 0.956647 mean vif 1.52 appendix 9: autocorrelation graph for periods during profit decline appendix 10: autocorrelation for post profit decline -.2 0 .2 .4 r es id ua ls 2006 2007 2008 2009 year -.6 -.4 -.2 0 .2 .4 r es id ua ls 2009 2010 2011 2012 year volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the complexity of relationship between corporate social responsibility (csr) and financial performance golrida karyawati p brawijaya university, indonesia | golridda@yahoo.com bambang subroto brawijaya university, indonesia | bambang@ub.ac.id sutrisno t brawijaya university, indonesia | sutrisno@ub.ac.id erwin saraswati brawijaya university, indonesia | erwin_saraswati@yahoo.com abstract this study argues that, inconsistent results of the corporate social responsibility (csr) relationship with financial performance is due to the complexity of relationship between two variables. the complexity of relationship stems from the nature of csr, which is unseparable from its environment. this nature of relationship brings unfavourable impact on empirical research. the conclusion obtained from empirical evidents of such relationship will be highly contextual and lack generalization. this study proposes variables that led to the complexity of csr relationship and financial performance, which are country characteristics as well as csr forms and dimensions. country characteristics determine the tendency of csr practices, which finally influence the strength of csr relationship with financial performance. the selection of csr forms and dimensions to be done is part of a company’s strategy in an effort to achieve legitimacy. keywords: csr, financial performance, country characteristics, form and dimension of csr new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.155 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:golridda@yahoo.com mailto:bambang@ub.ac.id mailto:sutrisno@ub.ac.id mailto:erwin_saraswati@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.155 | http://emaj.pitt.edu golrida karyawati p, bambang subroto, sutrisno t, erwin saraswati emerging markets journal | p a g e |19 the complexity of relationship between corporate social responsibility (csr) and financial performance golrida karyawati p bambang subroto sutrisno t erwin saraswati 1. introduction this study arques that, the inconsistent results of previous studies on the relationship between corporate social responsbility (csr) and financial performance is stemmed from the complexity of the relationship, which cause limitations to the empirical research of such relationship (macdonald & maher, 2013). empirical research limitations on csr relationship with financial performance even occurs on the conceptual level. csr is a concept with a wide and detailed nature (valiente et al, 2012; hutchins & sutherland, 2008; jamali and mirshak, 2007; mehar and rahat, 2007). the concept of csr is even embedded with other concepts such as citizenship, ethics, sustainability, corporate governance, etc (sprinkle & maines, 2010; kang et al, 2010; grosbois, 2012; zheng et al, 2014; weber, 2008; taysir & pazarcik, 2013). this nature of csp concept raises the operational and methodological differences on examining the relationship between csr and financial performance (aupperle et al., 1985; griffin & mahon, 1997). in collecting csr data, it is often difficult to determine whether a particular activity is included in the csr definition or not. the wide and detailed nature of csr concept on the other side, creates problems of measurement. different csrs may require different measurements. csr studies tend to have conceptual and methodical social critics (elsayed and paton. 2005; filbeck & gorman. 2004; brammer and millington. 2008). testing the relationship between csr and financial performance suffers from procedural and methodological limitations (aupperle et al., 1985; griffin & mahon, 1997). on the practical level, csr practices can not be separated from the environment, because csr issues are basically environmental issues. institutional characteristics such as economic condition, social issues, culture, law etc. determine the tendency and preference of companies in doing csr. institutional factors also influence forms and intensity of csr practices. csr practices are changing over time along with the changing environement. in the begining, csr issues were only issues related to employees and firm owners. as the environment changed, new issues emerged and the issue of csr became wider and detailed. currently, the issues of corporate governance and environment have become more critical as well. therefore, empirical testing of csr and financial performance generates contextual conclusions. it will be difficult to make a generalization on csr research as explained by griffin and mahon (1997). csr research nature is actually far from the ideal research (macdonald & maher. 2013). the inconsistent results of previous studies on csr and financial performance proves the imprefection of that kind of research. this study aims to disclose the complexity of the relationship between csr and financial performance. 2. csr relationship with financial perfomance previous research on the relationship between csr and financial performance showed inconsistent results. among those research, some proved and indicated positive relationship between the two variables (wang et al. 2011; jo & harjoto, 2011; mishra & suar, 2010; cheung et al.2010; rettab et al.2009; sembiring, 2005; goll & rasheed, 2004; billings, 1999; mcguire et al. 1988). analysis of the relationship between csr and financial performance on different dimensions such as employees, customers, social issues, environment and suppliers showed a positive relationship between csr and financial performance (mishra & suar, 2010). research also found out that, environment variables determine the relationship between csr and financial performance (goll & rasheed, 2004). discretionary csr environment enhances financial performance and vice versa. however, some research found inconsistent relationship between csr and financial performance (aupperle et al. 1985; mcguire et al., 1988; mcwilliam & siegel, 2000; seifert et al. 2003; brammer et al., 2006; mehar & rahat, 2007; chih et al.2010). empirical evidence of the previous reserach indicated a non-linear relationship between csr and financial performance. brammer & millington (2008) and barnett & salomon (2006) for example, found that, the relationship between csr and financial performance varies according to disclosure of csr intensity. on low and high level csr disclosure enhancing financial performance, low level csr enhances short term financial performance, and high level csr enhances long term financial performance. inconsistent results of previous studies analyzing the relationship between csr and financial performance, critisize the work of stakeholder and legitimacy theories in explaining csr relationship with financial performance. stakeholder and legitimacy theories suggest that, the relationship between csr and financial performance is positive. however, testing the relationship between csr and financial performance using stakeholder and legitimacy theories is oversimplifying the relationship and ignoring the complexity of the relationship that generates very contextual conclusions. analyzing csr relationship with financial perfomance should include institutional characteristics, which influence csr practices. country characteristics also determine the tendency of csr practices (falck & heblich, 2007). volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.155 | http://emaj.pitt.edu the complexity of relationship between corporate social responsibility (csr) and financial performance page |20| emerging markets journal previous research generally classify csr practices under developed and developing countries. csr practices in developing countries to some extent are different from csr practices in developed countries (beddewala & herzig, 2012; welford r, 2004; baughn et al, 2007). economic development influences csr practices as well. companies in developed countries do more csr practices than companies in developing countries (baughn et al, 2007). many developing countries are rich of natural resources, but because of weak terms of corporate governance, csr practice is even proving what is called resource curse, instead of providing benefits (wiig & koldtad, 2010). so far, analysis about csr relationship with financial performance are done more in developed countries than in developing countries (rettab et al, 2009). motivation of doing csr practices influences companies in selecting forms and dimensions of csr that will be done. companies in asia and developing countries tend to engage in philanthropic activities compared to companies in developed countries (beddewela & herzig, 2013; jamali & mirshak, 2007). zheng et al (2014) stated that, philanthropic actions are expected to gain external legitimacy, while csr sustainability is generally expected to gain internal legitimacy. therefore, company's preference for csr forms and dimensions carried out describes the company's strategy. 3. the relationship of csr and financial perfomance stakeholder theory (freeman, 2001) and legitimacy theory (zheng et al, 2014; tilling, 2004; suchman, 1995) indicate that, csr generates benefit for the company. stakeholder theory explains the certainty relationship of a company and its stakeholders. as a consequence, companies should maintain their relationship with stakeholders for the continuity of their business. csr is considered as an important tool in maintaining the relationship with stakeholders (jones, 1995). legitimacy theory requires companies to be legitimate for keeping their business, enabling continuity and securing the organization from external or internal threats. companies with higher legitimacy get access to varies resources easier, which bring benefit to the organization. internal legitimacy encourages employees’ performance, which finally enhances financial performance (wang et al, 2011; harjoto & jo, 2011; mishra & suar, 2010; cheung et al, 2010; rettab et al, 2009; sembiring, 2005; goll & rasheed, 2004 ; william & siegel, 2001; billings, 1999; mcguire et al, 1988). the inconsistent findings of csr and financial relationship is due to the complexity of the relationship (valiente et al, 2012; hutchins & sutherland, 2008; jamali & mirshak, 2007). csr practices are related to social issues as well (husted. 2000), which are very dinamic. fiori (2007) summarized that, the increasing attention towards csr begins with the awareness that, csr practices will enhance a company’s performance. stakeholder theory perceives that, stakeholder fulfillment expectation improves financial performance (porter & van der linde, 1995). stanwick (1998) and verschoor (1998) emphasized that, good csr will simplify the relationship between company and its stakeholders. according to the instrument theory, csr issues can be managed to generate profit for company (jones, 1995). if a company communicates its csr practices well which satisfy the stakeholder needs, it can affect financial perfomance for the organization (rettab, 2009). even though a company may spend a lot of resourcess to execute csr, according to williams & siegel, (2001), market equality will work to compensate the cost of csr activities with profit. however, some csr activities require too much resources in a way that can worse a company’s competition (friedman, 1970). in that case, csr behavior may generate negative relationships with financial performance, since it violates againts company’s value maximization due to social constraints (jensen, 2001). negative relationship can also occur when a manager misuses csr discretionary to fulfill his or her interest, instead of considering shareholders or other parties (williamson, 1964; jensen & meckling, 1976). husted and allen (2009) argued that, the relationship between csr and financial performance is positive as long as csr is directed on value creation drivers. husted & allen (2009) also identified ways to manage csr for value cretion drivers which are centrality, visibility, and voluntarism. company’s ability to manage csr determines its effectivity in influencing financial performance. csr will generate financial performance if it is managed in an appropriate way. 4. country characteristic on the relationship of csr and financial perfomance stakeholder and legitimacy theories indicate a positive relationship between csr and financial performance. however, both theories are absent in explaining the complex process of csr in influencing financial performance, so that the inconsistent results of csr relationship with financial performance examination can be explained. institutional theory explains the process of csr in influencing financial performance along with institutional factors. previous reseachers have recognized institutional influence on csr practices at the country level (husted & allen, 2006; baughn et al, 2007). husted & allen (2006) recognized that, institutional pressure takes more important role in csr decision making than strategic related social and stakeholder issues. wiig & koldstat (2010) indicated that, institutional factors determine the effectivity of csr practice as a company strategy. the strength of csr relationship with financial performance is influenced by a country’s institutional factors (li et al, 2010; griffin & mahon, 1997). countries which have similarity in terms of institutional characteristics tend to have a lot of similarity in csr practices. generally, analysis of csr practices on the country level refers to institutional characteristics. previous researchers did tend to classify csr practices based on developing and developed countries characteristics (beddewela & herzig, 2013; jamali & mirshak, 2007; baughn et al, 2007; chapple & moon, volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.155 | http://emaj.pitt.edu golrida karyawati p, bambang subroto t, sutrisno, erwin saraswati emerging markets journal | p a g e |21 2005; ewing & windisch, 2007; kimber & lipton, 2005 ; de oliviera, 2006; qu, 2007; roper & weymes, 2007; welford, 2004), because grouping countries under specific classifications results similarity in terms of analyzing csr practices (baughn et al, 2007). firstly, economic conditions is important in understanding csr practices. on the country level, csr practices are influenced by economic development (baughn et al, 2007). resource base view states that, csr practices depend upon a company's resources, since the cost of csr commitment in many cases is high. generally, economic conditions of developed countries are better than developing countries. previous research on csr practices on the country level prove that, csr practices in developing countries tend to be lower than those in developed countries (welford, 2004), because economic development in those countries is lower than in developed countries (baughn et al, 2007). secondly, governance of developing countries is generally weaker than developed countries (beddewela & herzig, 2013; jamali & mirshak, 2007). institutional legal framework of developing countries that have not yet well developed, weakens companies' efforts in doing csr practices (rettab et al., 2009). beddewela & herzig (2013) found what is called "duality" on multination corporations (mncs) in developing countries, which is the contradiction between the government institution of the host (parent) company and the government institution of the country where the subsidiary operates. institutional duality causes differences in csr practices between two countries. thirdly, csr practices on the country level is also influenced by culture, social issues and politics (gerson, 2007). differences in culture and other social contexts explain differences in csr practices (halme & laurila, 2009; midttun et al, 2006). many companies in developing countries lack awareness of good communication of csr to stakeholders (rettab et al. 2009), due to cultural, social and political issues. 5. forms and dimensions variation of csr halme & laurila, (2009); zheng et al, (2014) emphasized that, a company’s decision concerned with the forms and dimensions of csr to be exercised is part of the company's strategy. orlitzky et al. (2003) argued that, the effectiveness of csr in improving financial performance also depends on how a company is managing its csr initiatives. the csr management strategy in finding the best way to implement csr should also be mentioned at this point. how the csr is planned and carried out also affects the expected outcomes such as financial performance (halme & laurila, 2009; porter & kramer, 2006). branco & rodrigues, (2006); mcwilliams et al, (2006), porter & kramer (2006), donaldson & preston, (1995) argued that, csr is the source of competitive advantage if it is integrated with a company’s strategy. part of csr strategy is to determine the forms and dimensions of csr in an effort to achieve legitimacy. issues about csr forms have attracted the attention of researchers (halme & laurila, 2009; porter & kramer, 2006). halme & laurila (2009) suggested that, csr should be integrated with the core business to enhance financial performance. companies tend to adjust their csr activities with contemporary issues. currently, issues such as employement, environment and society are still attracting the attention of stakeholders. many studies were run analyzing these issues and dimensions by affif & ananta (2013); fiori et al (2007); uadiale & fagbeni (2012); and brammer et al, (2006). other issues such as product, diversity and corporate governance are becoming more important as found out by inoue & lee (2012), schreck (2011) and michelon et al (2013). however, the attention towards csr issues varies around the world. according to visser (2009), csr issues on economic dimension tend to occur in developing countries, since many developing countries are still having economic and poverty problems. on the other side, developing countries lack interest on csr dimension of law. previous research also found significant relationship between philanthtopy and company’s reputation (brammer & millington, 2005). philanthropy affects the perception towards varying stakeholders such as investors, customers, suppliers, employees and other stakeholders (saiia, et al, 2003; smith, 1994). building public perception is increasingly important in condition, where stakeholders are getting stronger. philanthropic activities are more easily seen by stakeholders compared to other forms of csr activities, thus easier to build positive perceptions and gain a positive reputation in the eyes of stakeholders. literature on reputation show the relationship between company reputation and csr (fryxell & wang, 1994; mcguire et al, 1988). according to halme & laurila (2009), philanthropy activities generate social outcome more than other csr acitvities. wang & qian (2011) analyzed the effect of philanthropy on company’performance in various conditions, and suggested that companies adopt philanthropy, because it made easier for companies to get socio-political legitimacy that brought positive stakeholder responses and facilitated political access. zheng et al. (2014) found out that, companies prefer philanthropy activities for the purpose of external legitimation. through philanthropy activities, stakeholder trust can be achieved which will let the company to get easier access to the resources needed, alleviate business risks, reduce transaction costs (hillman & keim, 2001; jones, 1995; wang et al, 2008) and finaly enhance the company's performance. however, it is still a debate whether philanthropy activities contribute to financial performance (orlitzkye et al, 2003; saiia et al, 2003; seifert et al, 2004). muller & kraussl (2011) argued that, stakeholders response on philanthropy is dependent on how they perceive genuity of the philanthropy action. philanthropy activities are expected to provide tangible benefits, if philanthropy strategy is connected to a whole business purpose (muller & kraussl, 2011; hess et al, 2002; porter & kramer, 2002). however, philanthropy activities will negatively affect financial performance if it is perceived as a blunt effort (godfrey, volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.155 | http://emaj.pitt.edu the complexity of relationship between corporate social responsibility (csr) and financial performance page |22| emerging markets journal 2005). in return, philanthropy will positively affect financial performance if it is perceived sincere (dean, 2003). 6. conclusion csr improves financial performance, but the analysis of relationship between csr and financial performance must also consider variables that affect the relationship between csr and financial performance, including country characteristics as well as forms and dimensions of csr. future research should find and consider other variables in csr relations with financial performance by expanding the analysis of institutional factors. references afiff, s & anantadjaya,s.p.d. 2013. csr & performance: any evidence from indonesian lq45?, review of integrative business & economics research, 2 (1), 85-101. aupperle, k.e, carroll, a.b, & hatfield j.d. 1985. an empirical examination of the relationship between corporate social responsibility and profitability, the academy of management journal, 28 (2 ), 446-463. barnett, m.l. & salomon, r.m. 2006. beyond dichotomy: the curvilinear relationship between social responsibility dan financial performance, strategic management journal, 27 (1), 1101-1122. baughn, c, bodie.n & mcintosh. 2007. corporate social and environmental responsibility in asian countries and other geographical regions, corporate social responsibility and environmental management, 14 (4), 189-205. beddewela, e. & herzig, c. 2013. corporate social reporting by mncs’ subsidiaries in sri lanka, accounting forum, 37, 135-149. billings, b.k. 1999. revisiting the relation between the default risk of debt dan the earnings response coefficient, the accounting review, 74 (4), 509-522. brammer, s & millington, a. 2008. does it pay to be different? an analysis of the relationship between corporate social and financial performance, strategic management journal, 29 (12), 1325-1343. brammer, s, brooks, c & pavelin, s. 2006. corporate social performance and stock returns: uk evidence from disaggregate measures, financial management, 35 (3), 97-116. brammer, s & millington, a. 2005. corporate reputation and philanthropy: an empirical analysis, journal of business ethics, 61, 29-44. branco, m.c & rodrigues, l.l. 2006. corporate social responsibility and resource-based perspectives, journal of business ethics, 69 (2), 111-132. chapple, w & moon, j. 2005. corporate social responsibility (csr) in asia: a seven country study of csr website reporting, business and society, 44 (4), 415-441. cheung, y.l, tan, w, ahn, h.j & zhang, z. 2010. does corporate social responsibility matter in asian emerging markets?, journal of business ethics, 92 (3), 401-413. chih, h.l, chih, h.h, & chen, t.y. 2010. on the determinants of corporate social responsibility: international evidence on the financial industry, journal of business ethics, 93 (1), 115-135. dean, d. 2003. consumer perceptions of corporate donations: effects of company reputationfor social responsibility and type of donation, journal of advertising, 32 (4), 91-102. deoliveira, j.a.p. 2006. corporate citizenship in latin america: new challenges for business, the journal of corporate citizenship, 21, 17-20. donaldson, t & preston, l.e. 1995. the stakeholder theory of the corporation: concepts, evidence, and implications, the academy of management review, 20 (1), 65-91. elsayed, k & paton, d. 2005. the impact of environmental performance on firm performance: static and dynamic panel data evidence, structural change and economic dynamics, 16 (2005), 395-412. ewing, m.t. & windisch, l.e. 2007. contemporary corporate social responsibility in china: an extension of confucian philosophy?, asian business and economics research unit discussion paper 44, monash university. falck, o & heblich, s. 2007. corporate social responsibility: doing well by doing good, business horizons, 50, 247-254. filbeck, g & gorman, r.f. 2004. the relationship between the environmental and financial performance of public utilities, environmental and resource economics, 29, 137-157. fiori, g, donato, f.d.d & izzo, m.f. 2007. corporate social rersponsibility and firms perfomance an analysis on italian listed companies, http://ssrn.com/abstract=1032851. freeman, r. 2001. a stakeholder theory of the modern corporation, perspectives in business ethics, 3 (144), 38-48. friedman, m. 1970, september 13. the social responsibility of business is to increase its profi ts, new york times magazine. fryxell, g.e. & wang, j. 1994. the fortune corporation reputation index: reputation for what?, journal of management, 20 (1), 1-14. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.155 | http://emaj.pitt.edu golrida karyawati p, bambang subroto t, sutrisno, erwin saraswati emerging markets journal | p a g e |23 gerson, b. 2007. csr best practices, china business review, may-june, 20-25. godfrey. p.c. 2005. the relationship between corporate philanthropy and shareholder wealth: a risk management perspective, academy of management review, 30 (4), 777-798. goll, i & rasheed, a.a. 2004. the moderating effect of environmental munificence and dynamism on the relationship between discretionary social responsibility and firm performance, journal of business ethics, 49 (1), 41-54. griffin, j.j & mahon, j.f. 1997. the corporate social performance and corporate financial performance debate, business and society, 36 (1), 5-31. grosbois, d.d. 2012. corporate social responsibility reporting by the global hotel industry: commitment, initiatives and performance, international journal of hospitality management, 31, 896-905. halme, m & laurila, j. 2009. philanthropy, integration or innovation? exploring the financial and societal outcomes of different types of corporate responsibility, journal of business ethics, 84 (3), 325-339. harjoto, m & jo, h. 2011. corporate governance and csr nexus, journal of business ethics, 100, 4567. hess, d, rogovsky, n & dunfee, t. 2002. the next wave of corporate community involvement: corporate social initiatives, california management review, 44 (2), 110-125. hillman, a.j & keim, g.d. 2001. shareholder value, stakeholder management, and social issues: what's the bottom line? strategic management journal, 22 (2), 125-139. husted, b.w & allen, d.b. 2009. strategic corporate social responsibility and value creation: a study of multinational enterprises in mexico, management international review, 49 (6), 781799. husted, b.w & allen, d.b. 2006. corporate social responsibility in the multinational enterprise: strategic and institutional approaches, journal of international business studies, 37 (6), 838849. husted, bryan w. 2000, a contingency theory of corporate social performance, business and society, 39 (1), 24-48. hutchins, m.j & sutherland, j.w. 2008. an exploration of measures of social sustainability and their application to supply chain decisions, journal of cleaner production, 16, 1688-1698. inoue, y & lee, s. 2012. effects of different dimensions of corporate social responsibility on corporate financial performance in tourismrelated industries, tourism management, 32 (2011), 790-804. jamali, d, safieddine, a.m & rabbath, m. 2008. corporate governance and corporate social responsibility synergies and interrelationships, corporate governance, 16 (5), 443-459. jamali, d & mirshak, r. 2007. corporate social responsibility (csr): theory and practice in a developing country context, journal of business ethics, 72 (3), 243-262. jensen, m.c. 2001. value maximisation, stakeholder theory, and corporate objective function, european financial management, 7 (3), 297317. jensen & meckling 1976. theory of the firm: managerial behaviour, agency costs and ownership structure, journal of financial economics, 3 (4), 305-360. jo, h & harjoto, m.a. 2011. corporate governance and firm value: the impact of corporate social responsibility, journal of business ethics, 103 (3), 351-383. jones, t. 1995. instrumental stakeholder theory: a synthesis of ethics and economics, academy of management review, 20, 404-437. kang, k.h, lee, s & huh, c. 2010. impacts of positive and negative corporate social responsibility activities on company performance in the hospitality industry, international journal of hospitality management, 29, 72-82. kimber, d & lipton, p. 2005. corporate governance and business ethics in the asia-pacific region, business & society, 44 (2), 178-210. li, s, fetscherin, m, alon, i, lattemann, c & yeh, k. 2010. corporate social responsibility in emerging markets: the importance of the governance environment, management international review, 50 (5), 635-654. macdonald, j.b. & maher, m. 2013. the relationship between equity dependence and environmental performance, journal of leadership, accountability and ethics, 10 (2), 35-45. mcguire, j.b, sundgren, a. & schneeweis, t. 1988. corporate social responsibility and firm financial performance, the academy of management journal, 31 (4), 854-872. mcwilliams, a, siegel, d.s & wright, p.m. 2006. corporate social responsibility:strategic implications. journal of management studies, 43 (1), 1-18. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.155 | http://emaj.pitt.edu the complexity of relationship between corporate social responsibility (csr) and financial performance page |24| emerging markets journal mcwilliams, a & siegel, d. 2001. corporate social responsibility: a theory of the firm perspective, the academy of management review, 26 (1), 117-127. mcwilliams, a & siegel, d. 2000. corporate social responsibility and financial performance: correlation or misspecification? strategic management journal, 21 (5), 603-609. mehar, a & rahat, f. 2007. impact of corporate social responsibility on firm’s financial performance, south asian journal of management sciences, 1 (1), 16-24. michelon, g, boesso, g & kumar, k. 2013. examining the link between strategic corporate social responsibility and company performance: an analysis of the best corporate citizens, corporate social responsibility environmental management, 20, 81-94. midttun, a, gautesen, k & gjølberg, m. 2006. the political economy of csr in western europe, corporate governance international journal of business in society, 6 (4), 369-385. mishra, s & suar, d. 2010. does corporate social responsibility influence firm performance of indian companies?, journal of business ethics, 95 (4), 571-601. muller, a & kräussl, r. 2011. the value of corporate philanthropy during times of crisis: the sensegiving effect of employee involvement, journal of business ethics, 103 (2), 203-220. orlitzky, m, schmidt, f.l & rynes, s.l. 2003. corporate social and financial performance: a meta-analysis, organization studies, 24 (3), 403441. porter, m. & kramer, m. 2006. strategy and society: the link between competitive advantage and corporate social responsibility, harvard business review, 85 (12), 1-14. porter, m. & kramer, m. 2002. the competitive advantage of corporate philanthropy, harvard business review, 80, 56-68. porter, m.e & linde, c.v.d. 1995. toward a new conception of the environmentcompetitiveness relationship, the journal of economic perspectives, 9 (4), 97-118. qu, r. 2007. corporate social responsibility in china: impact of regulations, market orientation and ownership structure, chinese management studies, 1 (3), 198-207. rettab, b, brik, a.b & mellahi, k. 2009. a study of management perceptions of the impact of corporate social responsibility on organisational performance in emerging economies: the case of dubai, journal of business ethics, 89 (3), 371-390. roper, j. & weymes, e. 2007. reinstating the collective: a confucian approach to well-being and social capital development in a globalised economy, journal of corporate citizenship, 26, 135-144. saiia, d.h, carroll, a.b & buchholtz, a.k.. 2003. philanthropy as strategy: when corporate charity begins at home, business & society, 42 (2), 169-201. schreck, p. 2011. reviewing the business case for corporate social responsibility: new evidence and analysis, journal of business ethics, 103 ( 2), 167-188. seifert, b, morris, s.a & bartkus, b.r. 2004. having, giving, and getting:slack resources, corporate philanthropy,and firm financial performance, business & society, 43 (2), 135-161. seifert, b, morris, s.a & bartkus, b.r. 2003. comparing big givers and small givers: financial correlates of corporate philanthropy, journal of business ethics, 45 (3), 195-211. sembiring, e.r. 2005. karakteristik perusahaan dan pengungkapan tanggung jawab sosial: study empiris pada perusahaan yang tercatat di bursa efek jakarta, prosiding sna viii, 379-395. smith, c.n. 1994. the new corporate philanthropy, harvard business review, 72 (3), 105-116. sprinkle, g.b. & maines, l.a. 2010. the benefits and costs of corporate social responsibility, business horizons, 53, 445-453. stanwick, p.a. & stanwick, s.d. 1998. the relationship between corporate social performance, and organizational size, financial performance, and environmental performance: an empirical examination, journal of business ethics, 17, 195-204. suchman, m.c. 1995. managing legitimacy: strategic and institutional approaches, academy of management review, 20, 571-610. taysir, e.a & pazarcik, y. 2013. business ethics, social responsibility and corporate governance: does the strategic management field really care about these concepts?, procedia social and behavioral sciences, 99, 294-303. tilling, m. 2004. communication at the edge: voluntary social and environmental reporting in the annual report of a legitimacy threatened corporation. apira conference proceedings. uadiale, o.m & fagbemi, t.o. 2012. corporate social responsibility and financial performance in developing economies: the nigerian experience, journal of economics and sustainable development, 3 (4), 44-55. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.155 | http://emaj.pitt.edu golrida karyawati p, bambang subroto t, sutrisno, erwin saraswati emerging markets journal | p a g e |25 valiente, j.m.a, ayerbe, c.g & figueras, m.s. 2012. social responsibility practices and evaluation of corporate social performance, journal of cleaner production, 35, 25-38. verschoor, c.c. 1998. a study of the link between as corporation’s financial performance and its commitment to ethics, journal of business ethics, 17, 1509-1516. visser, w. 2009. corporate social responsibility in developing countries, https://www.researchgate.net/publication/285925 758. wang, h. & qian, c. 2011. corporate philanthropy and corporate financial performance: the roles of stakeholder response and political access, academy of management journal, 54 (6), 11591181. wang, h, choi, j & li, j. 2008. too little or too much? untangling the relationship between corporate philanthropy and firm financial performance, organization science, (1), 143159. wang, m, qiu, c & kong, d. 2011. corporate social responsibility, investor behaviors, and stock market returns: evidence from natural experiment in china, journal of business ethics, 101 (1), 127-141. weber, m. 2008. the business case for corporate social responsibility: a company-level measurement approach for csr, european management journal, 26, 247-261. welford, r. 2004. corporate social responsibility in europe and asia: critical elements and best practice, journal of corporate citizenship, 13 (1), 31-47. wiig, a. & kolstad, i. 2010. multinational corporations and host country institutions: a case study of csr activities in angola, international business review, 19 (2), 178-190. williamson, o.e. 1964. the economics of discretionary behavior: managerial objectives in a theory of the firm, new york: prentice-hall. zheng, q, luo, y & maksimov, v. 2014. achieving legitimacy through corporate social responsibility: the case of emerging economy firms, journal of world business, 687, 1-15. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the impact of perception related social media marketing applications on consumers’ brand loyalty and purchase intention ayben ceyhan beykent university, turkey | aybenceyhan@hotmail.com abstract social media offers a social interaction environment where consumers have the opportunity to communicate with brands, exchange ideas with other users, produce content and influence the masses. brands also create various social media marketing applications by turning these opportunities in their favor. in this study, it was aimed to measure the effect of consumer perception on marketing applications of brands on instagram pages and their impact on brand loyalty as well as purchase intention. in this context, the research model developed was tested on beykent university students. data obtained by the survey method were analyzed using spss and amos package programs. according to research findings, the functional value, hedonic value and self-brand image congruency perceptions towards the instagram page of the brand in question positively affected the purchase intention, whereas the social value and co-creation perceptions did not have a significant effect on purchase intention. the functional value, social value and self-brand image congruency perceptions towards the instagram page of the brand in question positively affected brand loyalty, whereas the hedonic value and cocreation value perceptions were found to be unrelated to brand loyalty. furthermore, it was observed that brand loyalty mediates the whole effect of the functional value and co-creation perceptions towards the instagram page of the brand in question on purchase intention. keywords: social media, brand loyalty, purchase intention, marketing, instagram *this paper is developed from author’s doctoral thesis titled “the impact of perceptıon related social media marketing applications on consumers’ brand loyalty and purchase intention”. the doctoral thesis was accepted on 8 april 2019 by beykent university, institute of social sciences, department of business administration and was supervised by prof. dr. erdoğan taşkın. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:aybenceyhan@hotmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu the impact of perception related social media marketing applications on consumers’ brand loyalty and purchase intention page |88| emerging markets journal the impact of perception related social media marketing applications on consumers’ brand loyalty and purchase intention ayben ceyhan i. introduction along with the emergence of the internet at the end of the 20th century, the roles of businesses and consumers began to change. by the 21st century, consumers began to have a say in the digital world by getting the title of "user". while businesses started to create contents for users, users started to create their own contents on various forums, media and content sharing sites and social networks, and thus they were able to share them with their friends, other users, and even the whole world. nowadays, the power of social media in communication between the masses has gained increasing momentum. businesses that have realized it have begun to exist in social media with corporate or brand pages. social media, where consumers can freely share their ideas and discuss them with other users, provides businesses with an opportunity to develop marketing applications that are different from traditional methods and that inspires consumers. along with these developments in the digital world, the consumer has also begun to evolve. factors such as speed, practicality, and usability have now come to the forefront more for consumers in communication. therefore, consumers have begun to use social media, which contains these features, more frequently; and while using social media, consumers have started to follow brand accounts that will also provide benefits for them and where there is a fast flow of information and where they can share their ideas, do brand or product research, reach positive or negative opinions about brands and get faster response to their requests and needs from brands. consumers have even started to do shopping on them. among social media networks, instagram is one of the most successful social networks that appeal to this new consumer group. marketers are now aware of this, and therefore, they act according to the new market dynamics. in the study carried out by crofton and parker (2012), considering social media as an effective marketing mechanism was demonstrated to have a significant and positive impact on businesses' ability to develop customers' loyalty and purchase behaviors. nowadays, since businesses are aware of this importance, they create and implement social media marketing plans by keeping social media within their marketing plans (alalwan et al. 2017). however, they have limited information on consumer perception regarding their marketing applications on brand pages in social media networks and to what extent this perception affects users' brand loyalty and purchase intention. in this study, individuals who are instagram users, follow at least one brand and studying in beykent university in turkey were selected as the target group. it was attempted to statistically reveal the effects of their perceptions regarding marketing applications on brand loyalty and purchase intention. the study was based on functional value, hedonic value, social value, co-creation value and self-brand image congruency among the consumer perceptions regarding brand management, word-of-mouth marketing, and customer relationship management that are the social media marketing applications of brands. instagram we live in a visual era in which an average person is more likely to watch a video or look at a photo than to read a written text. studies indicating that 65% of the population are visual learners also support it. therefore, web pages with visual content receive 94% more views than those without it. according to another finding, the media with visual and video content increases the rate of return by 64%. the fact that twothirds of marketers say that visual assets are critically important in the communication of their brands indicates that they have adapted to the visual era. in this context, instagram is a valuable marketing tool for businesses that want to create loyal customers with its ability to share visual information desired by consumers (adage, 2019). instagram, a social network with visual content, reached 1.000.000 users approximately two months after being launched by the app store in 2010. twitter and foursquare reached the same number of users in a year. this also shows that instagram had a successful growth rate (latiff and safiee 2015). instagram is called as the "world's most powerful selling tool" by some people, which indicates the levels of passion and loyalty shown by instagram users (macarthy 2014). facebook is the market leader among social networking sites. however, social media users interact with brands on instagram 58 times more than on facebook and 120 times more than on twitter. 53% of adults ranging in age from 18 to 29 years use instagram. sharing an instagram photo with a product or service for sale increases return on sales by seven times. instagram constitutes the most powerful brand environment in the world (lindsey-mullikin and borin 2017). according to we are social and hootsuite's 2019 global digital report, instagram ranks third after facebook and youtube among social networks with the highest number of users in the last year, and it has one billion active users per month. the total number of instagram users based on instagram’s addressable advertising audience is 894.9 million. the users determined as over 13 years of age consisted of 50.3% women and 49.7% men, and 33% of them are in the 2534 age range and 32% of them are in the 18-24 age range. turkey shares the first place with sweden with a rate of 58% in the world ranking. when the increase in volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu ayben ceyhan emerging markets journal | p a g e 8 9 the number of users is considered, turkey ranks fourth in the world ranking with 38 million people with a 2.7% increase compared to the previous year. these results support that, the use of facebook has been on the decline and the use of instagram has been on the rise in turkey in recent years (wearesocial, 2019). the studies have revealed that, the campaigns conducted by businesses on instagram strengthen their relationship with consumers and increase the sense of trust. it is quite important that these campaigns increase interaction among users and have hedonic and social values in terms of stimulating the feelings and thoughts of consumers (erdoğmuş 2015). businesses and brands also began to communicate with their customers by creating profiles on instagram within a short time. they created hashtags with the names of their own brands, campaigns or social responsibility projects and sometimes included consumers in their campaigns, and also they sometimes created interaction with a remarkable hashtag by turning a crisis into an opportunity. the best example of this in recent times is the creative study conducted by lipton after the access problem experienced across instagram for several hours. lipton expressed its satisfaction with the problem that instagram had with the hashtag "if tea is ready #let'stalknow" by turning this problem in favor of itself and sharing the phrase "thanks, instagram. thanks to you, we have had the opportunity to talk face to face for two hours" in a visual format. with real-time marketing, lipton maintained the campaign that it prepared for november 17, the world neighbors’ day, with this hashtag on instagram (mediacat, 2018). in addition to businesses that have a physical store or e-commerce site and create an account on instagram, there are also businesses that make sales by creating their own stores on instagram and then open their physical store or e-commerce site. in this sense, instagram is also a quite appropriate media for entrepreneurs with low budget. instagram has now begun to turn into a shopping site with the shopping feature that was launched to the market in 2016 and that was introduced to turkey in 2018. instagram, which includes 25 million businesses, has only two million advertisers. they argued that, instagram launched this new feature to the market to increase its advertising revenues. with this feature, businesses can add tags that direct sales to their stories. users are directed to the page containing the product details when they click the tag once, and they are directed to the website of the business when they click it for the second time. businesses can also see the number of clicks on a shopping tag and the number of people directed to the website (webrazzi 2018). ii. problem statement and purpose nowadays when social media marketing is on the rise, businesses are implementing various social media marketing applications by including instagram, which is an important social network especially preferred by young consumers, in their digital marketing plans. businesses or brands are developing various marketing applications and spend significant resources to be able to communicate with their customers on social media in an attempt to create loyal customers and purchase intention. however, there is a limited information on how these applications affect brand loyalty and purchase intention. in this context, in the present study, it was tried to reveal the effect of perception regarding the marketing applications of businesses on instagram accounts on the brand loyalty and purchase intention of consumers, composed of instagram users. while the aim of the study was to examine the mediating role of the brand loyalty phenomenon in the effect of consumers' perception level regarding social media marketing applications on purchase intention, the investigation of the relationships between the effect of consumers' engagement levels towards the instagram page on the perceptions regarding social media marketing applications was also included within the scope of the study. considering the propose of the study, the model of the study carried out in the screening model can be visualized as in figure 1. figure 1. proposed conceptual model iii. theoretical background social media marketing applications businesses or brands can reach their consumers and customers, who constitute their target groups, at any time through social media marketing applications they create. they can give advertisements through social networks by determining the target groups they want to reach according to their demographic characteristics. they can take measurements of them, and they can respond to the requests and needs of their customers at any time and even make sales with the social media customer relationships management they have created. kim and ko (2012) classified the features of social media marketing activities as entertainment, interaction, trend, customization, and word-of-mouth. they applied these features to luxury brands. in the study on insurance services, sano (2015) applied interaction, trend, customization and perceived risk as four social media marketing activity components. lee (2017) classified social media activities of businesses as communication, information provision, support to daily life, promotion and sales, social response and activity. jo (2013) classified social media marketing activities of businesses as activities, information, and advertisements. kim (2017) defined the features of social media marketing as information, proximity, response and access (seo and park 2018). as a result of the literature review, it was observed that there was limited number of studies on this subject. according to the finding of a study on this subject, brand reliability in consumer's mind increases as the consumer's social media perception related to a brand volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu the impact of perception related social media marketing applications on consumers’ brand loyalty and purchase intention page |90| emerging markets journal increases, and the consumer feels closer to the brand. furthermore, the presence of the brand in social media tools allows consumers to perceive the brand as more prestigious in their mind (kazancı and başgöze 2015). in another study, it was concluded that social media marketing applications had a significant effect on brand loyalty and intention to revisit hotels that were the subject of the study (ibrahim and aljarah 2018). in a study in which the perceived social media marketing applications were measured, it was concluded that the perceived social media marketing applications had a positive effect on purchase intention and brand equity (yadav and rahman 2017). in a study examining the effects of social media marketing activities on brand equity and customer response in the airline industry, the findings indicated that the trend was the most important component of social media marketing activities and that airline social marketing activities had significant effects on brand image and brand awareness. furthermore, the results also showed that brand awareness had a significant effect on commitment and that brand image significantly affected online word-of-mouth and commitment (seo and park 2018). the results of the study carried out on 404 consumers following the facebook pages of brands demonstrated that the co-creation value, social value, usage intensity, and perceived brand strength affected customer engagement with brand pages. it was concluded that, functional value and hedonic value positively affected the usage intensity of the facebook pages of brands and that social value and co-creation value had no significant and positive effect on the intensity of use. according to another finding, the usage intensity had a positive effect on brand loyalty and customer engagement behaviors with facebook brand page. furthermore, it was concluded that, customer engagement behaviors towards the brand page and brand loyalty also affected the brand performance results (de vries and carlson 2014). functional value according to the consumption value theory, the functional aspect of value refers to rational and economic evaluations made by individuals that reflect the quality of using a product or service (carlson et al. 2019). within the context of a social media brand page, this evaluation includes a customer's ability to access a useful, helpful and practical content (jahn and kunz 2012). functional value is one of the most important factors in attracting social network users to the brand page. one of the main reasons for adopting a new type of media is functionality or information satisfaction (de vries and carlson 2014). for a customer to be satisfied with a brand page on the social network in terms of functional value, the content of that page should be functional, helpful, useful and practical. if the customer is satisfied in this sense, he/she will probably visit the brand page more often (jahn and kunz 2012). furthermore, it was determined that informative content on the social network page of a brand was one of the main factors allowing the users following the page to like the brand's shares, comment on them, and share them on their own pages (de vries and carlson 2014). hedonic value hedonic value is considered to be one of the key elements of online brand community participation. a brand page on the social network should have an amusing and exciting content to meet the customer's need for hedonic pleasure. high hedonic value perceived by the customer ensures that the customer visits the brand page more often (de vries and carlson 2014). entertainment on social media is an important component that arouses positive feelings, increases users' behaviors and causes continuous use intention. people who use social media for hedonistic reasons are considered to be those looking for fun and pleasure, and virtual communities are organized according to these interests for them (seo and park 2018). the findings of a study on this subject indicate that the entertainment value of social media pages positively affects the online brand community identity, which has a positive effect on brand-related social media interaction. furthermore, it was concluded that loyalty to the brand's social networking page and brand community identity positively affected the brand loyalty behavior (yoshida et al. 2018). in another study, hedonic and useful search engine website features were demonstrated to have a positive effect on affective commitment. hedonic shopping value creates long-term relations in services. emotional pleasure is determined by the hedonic value of the service and leads to online shopping intention. in the study carried out, it was concluded that hedonic shopping value is important for loyal customers and helps to establish close emotional connections with target customers (bilgihan and bujisic 2015). social value social networking websites like instagram provide a social interaction environment for users. customers should know that, other customers whom they perceive as similar to themselves are on the brand page and that they have the opportunity to meet and communicate with them when they need to interact, in order to fulfill their social interaction satisfaction. therefore, the high customer's social interaction perception of the brand page on the social network may ensure that the customer visits the page more frequently and increases commitment to the brand page (de vries and carlson 2014). users interact with each other by asking questions, commenting and inviting each other to the page through the competitions applied by the brand on its social network page. furthermore, visitors to the page may ask users who have bought and experienced the product or service of the brand to convey their knowledge and experience. through repeated conversations and exchange of ideas, some users may develop friendships that can continue at an interpersonal level. from this aspect, it can be said that brand pages on social networks are suitable media for the socialization of users (tsimonis and dimitriadis 2014). volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu ayben ceyhan emerging markets journal | p a g e 9 1 co-creation value the concept of co-creation is collaboration with the business or brand with which the customer can interact and communicate and which may provide better service to customers in some cases and which intends to create an offer, service, and experience (sawhney et al. 2005). from a brand point of view, the co-creation value allows customers to contribute to brand recognition and recall and the establishment of brand awareness by integrating their own experiences into talks about the brand (de vries and carlson 2014). the co-creation value is the process in which the consumer and business participate together to create a sustainable value for the business and specific to the individual consumer (see-to and ho 2014). co-creation is usually discussed within the context of an online brand community that creates value for individuals, brand communities and businesses in which members can play an active role as both providers and beneficiaries (essamri et al. 2019). the emergence of web 2.0 along with the developments on the internet and social media has authorized the consumers. consumers involved in social media create an added value through social interactions and cooperation and support businesses with co-creation value (hajli 2014). the research findings on consumer behaviors and co-creation value in the literature indicate that, customers are looking for co-creation value with brands on the facebook pages of brands and attach importance to this issue. consumers can quickly interact with brands in real-time on social media, which enable them to make real-time co-creation with the brand via social media by providing feedback, sharing, and interacting with the brand (de vries and carlson 2014; sashi 2012; gensler et al. 2013). social media has transformed customers from passive into active individuals who can share their experiences and ideas easily and at any time, which has also directed marketers to the "co-creation" process. in other words, the social media encourages customers to become individuals who are actively interested in the brand (akyüz 2013). the dart model, one of the conceptual models guiding the "co-creation" process, consists of the following concepts (ramaswamy 2008): dialogue: businesses should develop meaningful dialogues with consumers. access: businesses should provide customers with access to each other and to the business authorities to develop such a complex dialogue. risk-return relationship: businesses should consider how to manage the risk and return relationship for both the customer and for themselves. transparency: information should be shared transparently. self-brand image congruency self-brand image congruency refers to the harmony between the personality of the brand perceived by the consumer and the consumer's self-concept or the harmony between the consumer's own image and brand image. when these two concepts are highly matched, brand preference and brand loyalty also increase, in addition to pre-consumption evaluations such as attitude, preference, and intention (de vries and carlson 2014). brand personality is the transfer of human characteristics such as being innovative, exciting, reliable and energetic to the brand. demographic and psychographic characteristics and the requests as well as the needs of consumers in the brand's target group should be taken into consideration while creating a brand personality. the brand personality should be built by considering the fact that, people establish close relationships with individuals who are compatible with their own personalities and look like them. when the target group meets with the brand, they should see themselves in the brand and be able to establish emotional ties. furthermore, brand personality should be compatible with its target group as well as the values of the business in which it has emerged. the brand personality should be identified with all elements of the brand such as package, logo, and slogan (pazarlamailetisimi.com, 2019). the concept of brand image is widely accepted when a number of brand perceptions are reflected in the customers' memory. these associations may originate from the information obtained from the market offer or customers' direct experiences on purchasing the brand. a positive brand image may help businesses both to increase competition and to encourage customers to repeat their purchasing transaction (nisar and whitehead 2016). in the studies on self-brand image congruency, it was concluded that consumers exhibited more loyalty to the product, brand loyalty, and higher brand relationship quality when they perceived a brand as compatible with their own image. the reason is that, consumers usually tend to purchase the brands that are compatible with their self-images. thus, they can reinforce their personal identity and create their own internal self-consistency (phua and kim 2018). businesses also include brand image studies for the selfbrand image congruency of consumers in their marketing applications on instagram pages. they can do this by comprehending the personal images and preferences of their target groups via following their comments, ideas and interactions, and creating marketing applications that will enable them to identify with their brands. the result of a study on snapchat, which is a social media application that uses augmented reality (ar) technology to place geographic filter advertisements, consumers in photos decorated with branded contents, revealed that self-brand image congruency had a positive effect on consumers' brand attitude and purchase intention after using the application (phua and kim 2018). in a study on the conformity of brand personality to individuals, consumer's own image, after the data of 301 facebook users were analyzed. it was concluded that, self-brand image congruency, in other words, the conformity of brand personality to the consumer's image had a positive and significant effect on brand loyalty and purchase intention. furthermore, another finding is that, brand loyalty partially mediated the relationship between self-brand image congruency and purchase intention (lee et al., 2018). purchase intention purchase intention indicates the possibility that consumers will plan or want to purchase a certain product or service in the future. in other words, purchase intention is the basis of the exhibited purchasing volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu the impact of perception related social media marketing applications on consumers’ brand loyalty and purchase intention page |92| emerging markets journal behavior (martins et al. 2019). previous studies indicate that, the increase in purchase intention reflects the increase in the possibility of purchase. when the consumers have a positive purchase intention, this forms a positive brand commitment which propels consumers to take an actual purchase action (wu et al. 2011). after the literature review, it was observed that there was a limited number of studies on the effect of social media marketing applications on consumers' purchase intention. according to the result of a study on this subject, the social media perception positively affects the purchase trend. in other words, as consumers' social media marketing perception related to a brand increases positively, the trend to purchase a product of the relevant brand will also increase (kazancı and başgöze 2015). according to the finding of another study, it was concluded that the trust encouraged by social media had a significant effect on purchase intention. potential consumers' trust in both the seller and the social network through which they will purchase the product increases the possibility of purchasing that product. according to another finding of the same study, when social network users encounter a high level of system quality and information quality, the possibility of their purchasing products through social networking sites increases. therefore, consumers' purchase intention increases as the perceived usefulness increases. furthermore, analysis results also revealed that trust had a positive and significant effect on perceived usefulness, which emphasizes the mediating role of trust in the adoption of social commerce (hajli 2014). in another study, the effect of the social media marketing environment on brand loyalty and purchase intention of generation y was examined. it was concluded that online marketing communication, especially online word-of-mouth marketing, online communities, and online advertising were effective in the development of brand loyalty and purchase intention (balakrishnan 2014). in a study in which the factors affecting the evaluation of purchase on instagram were analyzed with the participation of 414 people, it was observed that participants' reasons for shopping on instagram were the inability to find the product or service needed in their cities, price affordability, saving of time, friend's recommendation and especially the excess range of products, and that they mostly purchased clothing products. it was concluded that the perceived seller optimism, other customers' positive comments on the brand page, trust in the seller, and the confidentiality of personal and financial information positively affected the evaluation of purchase by consumers (fırat 2017). in a study in which the effect of thai consumers on accessory purchase intention on instagram was investigated, it was concluded that the cognitive experience status and word-of-mouth marketing intentions had a positive effect on accessory purchase intention on instagram (prasertsith et al., 2015). in another study carried out on instagram users, it was concluded that trust, price, quality and perceived risk significantly affected consumer purchase decisions in online stores on instagram. another result is that, price is one of the absolute factors of consumer purchase behavior, within these variables (kusumah 2015). in a study carried out to determine what encourages consumers to shop from online stores on instagram, it was found out that perceived benevolence, perceived integrity, and opinion leader approval were the factors with a positive effect on consumer trust in the instagram store. it was concluded that trust was a strong determinant of consumer's purchase intention from the instagram page (che et al. 2017). according to the findings of another study carried out with 392 social network users, purchase intention increases positively as consumer brand resonance increases (shang et al. 2017). in the study in which it was attempted to determine the factors affecting the purchase intention of a smartphone among 367 university students in malaysia, it was revealed that there was a significant and positive relationship between product features and purchase intention and between social impact and purchase intention, which was consistent with the results of similar studies in the literature (rahim et al. 2016). along with the conducted studies, considering that instagram users consist of young consumers, 33% of whom are in the 25-34 age range and 32% of whom are in the 18-24 age range, the study was tested on university students who are instagram users. brand loyalty brand loyalty, which has a significant effect on consumer's purchase intention, is also another issue on which businesses focus. in addition to the contributions to the brand by a customer, who is committed to the brand, including a positive word-of-mouth and being a supporter of the brand, the consumer exhibits behavioral patterns such as purchase intention of the brand or repurchase intention in the future, low sensitivity to price change, and identification of self-image with the brand. previous studies have shown that brand loyalty in social media has offered brands many important opportunities to create value, present interesting and real-time contents, ensure co-creation with customers, and encourage them to new ideas (machado et al. 2019). brand communities consisting of customers with brand loyalty offer new ways for businesses and customers to connect with each other. while businesses aim to interact with their loyal customers, influence brand community members' perceptions regarding the brand, spread information and obtain information from them, applications performed online and offline by customers have gained value (gummerus et al. 2012). some studies investigating the effect of brand loyalty on purchase intention were found in the literature. in a study in which luxury brand communities in social media in south korea were investigated, data were collected from 252 luxury brand facebook fan page members, and it was concluded that the luxury brand attitude positively affected brand loyalty and purchase intention and that brand loyalty positively affected purchase intention (kim and lee, 2017). according to the findings of a study on brand loyalty in social media, 73% of the participants followed brand pages on social media. the first reason why participants followed brand pages was to get general information about new products. in this study, it was concluded that there was a significant and positive volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu ayben ceyhan emerging markets journal | p a g e 9 3 relationship between brands, customer satisfaction and customer loyalty. based on this finding, researchers propose that brand pages can be used positively to achieve and maintain customer loyalty. furthermore, it was concluded that users exhibited behavioral loyalty more than attitudinal loyalty and that they were more likely to purchase the products and services of the brands they follow on social media (nisar and whitehead 2016). according to the findings of another study, brand communities created on social media positively affect the customer and product, customer and brand, customer and business, and customer and other customer relations, which positively affects brand trust. it was concluded that trust also had a positive effect on brand loyalty. furthermore, brand trust plays a mediating role in transforming the effects of improved relations in the brand community into brand loyalty (laroche et al. 2013). the research hypotheses created in the light of all this information are presented in table 1. table 1: research hypotheses iv. methodology study design students studying in associate’s, undergraduate and postgraduate programs in beykent university between the years 2017 and 2018 were selected as the universe. the number of students studying in associate’s, undergraduate and postgraduate programs at beykent university between the years 2017 and 2018 was 23.618. the questionnaire form, which was prepared in accordance with the objectives of the study, consists of five parts. the first part consists of nine categorical questions prepared to collect the statistics related to the demographic and descriptive characteristics of the participants. the second part is a ready scale consisting of 23 5-point likert-type questions designed to measure consumers' perceptions regarding social media marketing applications in five sub-dimensions. the third part is a ready scale consisting of five 5-point likert-type questions designed to measure consumer engagement with brand’s instagram page followed by the participants. the fourth part is a ready scale consisting of six 5-point likert-type questions designed to measure the level of consumers’ loyalty to the brand they follow. the last part is a ready scale consisting of three 5-point likert-type questions designed to measure consumers’ purchase intention of the products of the brand they follow. scales: the level of perception regarding social media marketing applications -functional value hedonic value social value co-creation value self-brand image congruency consumer engagement with brand’s instagram page (bip) brand loyalty purchase intention in this article, the perception scale regarding marketing applications consisting of functional value, hedonic value, social value, co-creation value and selfbrand image congruency, consumer engagement and the brand loyalty scale were taken from de vries and carlson’s article titled “examining the drivers and brand performance implications of customer engagement with brands in the social media environment”. in this article, the items measuring functional value, hedonic value, social value, and consumer engagement structures were adapted from jahn and kunz (2012). the co-creation value scale consisting of six items was adapted from o’cass and ngo (2011). the five-item scale of self-brand image congruency was adapted from hohenstein et al. (2017). the criteria used to evaluate brand loyalty were adapted from zeithaml et al. (1996) (de vries and carlson 2014). the purchase intention scale was taken from the article of shang et al. titled “generating consumer resonance for purchase intention on social network sites”. in this article, the purchase intention scale was adapted from lu et al. (2010) (shang et al. 2017). sample profile a total of 1.103 questionnaires were completed, and there were 1.078 questionnaires available after screening. based on this sample, 58% of respondents were female and 42% were male. the majority were in the 18-24 age group (86.3%) since the sample consisted of students, and 13.7% of them were at the age of 25 and older. while 27% of them were studying in the associate’s program, 65.1% and 7.9% of them were studying in the undergraduate and postgraduate programs, respectively. of the participants, 59.6% had an income level of 1.500 tl and below, 20.5% had an income level of 1.501-2.500 tl, and 19.9% had an income level of 2.501 tl and above. while 24% of the participants stated that they had been instagram users for 6 years or longer, 24.9% of them stated that they had used it for 5 years. 20.9% of them stated that they had used it for 4 years, 14.2% of them stated that they had used it for 3 years, 8.9% of them stated that they had used it for 2 years, and 7.1% of them volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu the impact of perception related social media marketing applications on consumers’ brand loyalty and purchase intention page |94| emerging markets journal stated that they had used it for 1 year or less. the statistics on the number of brands followed by the participants are as follows: 1 brand by 9.6%, 2-10 brands by 55.6%, 11-20 brands by 15.9%, 21-30 brands by 5.1%, 31-40 brands by 1.7%, 41-50 brands by 3.9%, and 51 brands and above by 8.3%. the brands that are most frequently followed by the participants are as follows: zara by 10.1%, nike by 6.1%, adidas by 3.5%, mavi by 3.4%, mercedes by 3.1%, and other by 73.7%. while 65.1% of the participants stated that they had followed the relevant brand before using instagram, 34.9% of them indicated that they had not followed the brand before instagram. v. empirical results and findings within the scope of the study, the data collected were first transferred to the microsoft excel program and then to ibm spss 23.0 version with the required numerical encodings. ibm spss amos 23.0 version for confirmatory factor analysis and structural equation modeling and ibm spss 23.0 package program for other analyses were used in the subsequent parts of the study. structural equation modeling (sem) was used to test the hypotheses based on the examination of interscale relationships from the research hypotheses. the maximum likelihood method was adopted as an estimation technique in the structural equation modeling study. baron and kenny's (1986) mediation relationship principles were adopted in the analysis of hypotheses based on the examination of the mediation relationship (baron and kenny 1986). h1, h2 involve the examination of direct relationships between the scale variables. in this respect, the relevant hypotheses were analyzed with a single structural equation modeling analysis. h5 involves the analysis of mediation relationship. there are 4 basic requirements for the mediating effect to be examined and tested. the first requirement is that the independent variables (perception regarding social media marketing applications) have a statistically significant predictive power on the dependent variable (purchase intention). the second requirement is that the independent variables have a statistical effect on the mediating variable (brand loyalty). the third requirement is that the mediating variable has a statistically significant effect on the dependent variable. the fourth requirement is that the effect of the independent variables on the dependent variable should be statistically reduced, eliminated or should change direction when the mediating variable is included in the analysis together with the independent variables (baron and kenny 1986). in order to examine these requirements, a second structural equation model was established by adding the mediating variable (brand loyalty) to the first structural equation model for h5, and the findings were examined in terms of the requirements of mediation relationship. on the other hand, when the brand loyalty variable was examined, hypotheses h3 and h4 were examined in the analysis of the second structural equation model. table 2: estimation statistics of the first structural equation model *symbolizes statistical significance at 95% confidence level. s.e.: standard error. table 3: estimation statistics of the second structural equation model *symbolizes statistical significance at 95% confidence level. s.e.: standard error. table 4: model 1 and model 2 findings *symbolizes statistical significance at 95% confidence level. s.e.: standard error. the results are presented in tables 2, 3 and 4. according to the estimation statistics of the first structural equation model, the level of engagement with the brand's instagram page has a statistically significant and positive effect on the functional value perception, hedonic value, social value, co-creation value, and selfbrand image congruency at a confidence level of 95%. the functional value perception, hedonic value and selfbrand image congruency had a statistically significant volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu ayben ceyhan emerging markets journal | p a g e 9 5 and positive effect on purchase intention at a confidence level of 95%. there was no statistically significant effect of the social value perception and co-creation value on purchase intention at a confidence level of 95%. when the first structural equation model was evaluated in terms of the hypotheses, hypotheses h1,a, h1,b, h1,c, h1d, h1,e, h2,a, h2,b and h2,e were accepted while hypotheses h2,c and h2,d were rejected. according to the results in table 3 including the estimation statistics of the second structural equation model, the functional value, social value and self-brand image congruency perception towards the brand's instagram page has a statistically significant and positive effect on the brand loyalty in question at a confidence level of 95%. there was no statistically significant effect of the hedonic value and co-creation value perception towards the brand's instagram page on the brand loyalty in question at a confidence level of 95%. furthermore, brand loyalty has a statistically significant and positive effect on purchase intention at a confidence level of 95%. according to the results in table 4 in which hypothesis 5 was examined, when the requirements of the mediating role of brand loyalty in the effect of functional value on purchase intention are examined, it is observed that a significant effect of functional value on purchase intention, which is the first requirement, was ensured in the first model (β = 0.121, sig.<0.05). it is observed that a significant effect of functional value on brand loyalty, which is the second requirement, was ensured in the second model (β = 0.136, sig.<0.05). it is observed that the effect of brand loyalty on purchase intention, which is the third requirement, was ensured in the second model (β = 0.587, sig.<0.05). when the fact that the effect of functional value on purchase intention in the first model after adding the brand loyalty variable to the first model slightly decreases or disappears in the second model, which is the last requirement, is examined, it is observed that the effect of functional value on purchase intention in the second model is not statistically significant at a confidence level of 95% (β = 0.040, sig.>0.05). in this case, it can be said that the four requirements of the mediation model were fulfilled. brand loyalty mediates the effect of functional value on purchase intention. more clearly, brand loyalty mediates the whole effect of the consumers' functional value perception towards the instagram page of the brand in question on the purchase intention. the effect of the level of self-brand image congruency on purchase intention is mediated by brand loyalty. more clearly, brand loyalty mediates the whole effect of the consumers' self-brand image congruency perception towards the instagram page of the brand in question on the purchase intention. when the requirements of the mediating role of brand loyalty in the effect of hedonic value on purchase intention are examined, it is observed that a significant effect of hedonic value on purchase intention exists. that is the first requirement, which was ensured in the first model (β = 0.092, sig.<0.05). it is observed that a significant effect of hedonic value on brand loyalty, which is the second requirement, was not ensured in the second model (β = 0.042, sig.>0.05). in this case, the mediating role of brand loyalty in the effect of consumers' hedonic value perception towards the instagram page of the brand on purchase intention cannot be mentioned. when the requirements of the mediating role of brand loyalty in the effect of social value on purchase intention are examined, it is observed that there is no significant effect of social value on purchase intention, which is the first requirement, in the first model findings (β = -0.052, sig.>0.05). in this case, it can be said that the social value perception towards the instagram page of the brand has no effect on the purchase intention of the brand. therefore, brand loyalty cannot mediate an effect which is not available. when the requirements of the mediating role of brand loyalty in the effect of co-creation value on purchase intention are examined, it is observed that there is no significant effect of co-creation value on purchase intention, which is the first requirement, in the first model findings (β = 0.004, sig.>0.05). in this case, it can be said that the co-creation value perception towards the instagram page of the brand has no effect on the purchase intention of the brand. therefore, brand loyalty cannot mediate an effect which is not available. when mediating roles were examined in terms of the hypotheses, it was observed that hypotheses h5,a and h5,e were accepted and hypotheses h5,b, h5,c and h5,d were rejected. vi. discussion in the findings obtained, it was observed that customers' perception regarding marketing applications consisting of functional value, hedonic value, social value, co-creation value and self-brand image congruency towards the instagram page of the brand increased as their level of engagement with the instagram page of the followed brand increased. in this context, it can be said that the fact that consumers are participatory and active members of the brand followed by them and interact with other users may increase their perception regarding marketing applications. at this point, it can be recommended for marketers to give instagram advertisements for their target groups and to organize campaigns and lots, that may increase interaction through their instagram pages so that their consumers become active and participatory members by visiting the instagram page of their brand frequently. it was observed that the consumers' purchase intention to the brand in question increased as their functional value perception, hedonic value and self-brand image congruency towards the instagram page of the followed brand increased. according to this finding, creating the functional value perception, hedonic value and self-brand image congruency from marketing applications in customers increases purchase intention. at this point, it can be recommended for marketers and social media managers that they should create practical, useful and functional instagram pages. they should also pay attention to the fact that instagram pages include useful, amusing and enjoyable information and post in the future in this direction, and they should bring the shares to reflect the brand personality to the forefront for consumers to be able to identify the brand with themselves. no statistically significant effect of social value and co-creation value on purchase intention was found. two factors can be considered at this juncture: firstly, the brands followed by the consumers who responded to the questionnaire may not have sufficiently developed or implemented marketing applications for social value and volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu the impact of perception related social media marketing applications on consumers’ brand loyalty and purchase intention page |96| emerging markets journal co-creation value. secondly, it can be thought that the fact that consumers have the opportunity to meet and interact with new people on the instagram page of the brand. also, the instagram page of the brand communicates with users to provide better service and cooperates to produce offers that will meet the needs of the consumer. this does not affect the purchase intention despite affecting other factors. as a result of the analyses, it was observed that the functional value perception, social value and selfbrand image congruency towards the instagram page of the brand had a significant and positive effect on the level of brand loyalty in question. based on this result, it can be said that, marketers and social media managers must ensure their instagram pages are functional. also, they must make sure that form contents reflect the brand personality and create interaction between users, who follow their pages. this contributes to the formation of brand loyalty in the customer. no significant effect of the hedonic value perception and co-creation value perception towards the instagram page of the brand on brand loyalty was found. it cannot be said that only the co-creation value of the brand has no effect on brand loyalty and purchase intention by considering the result that the co-creation value and purchase intention, which are unrelated. it is observed that many brands in turkey do not cooperate to create offers to meet consumers' needs through their brand’s instagram page in order to provide better service. few brands perform applications towards the co-creation value. in a face-to-face questionnaire study, the feedback was also received from respondents in this direction. the participants, who did not have this kind of marketing application on the instagram page of the brand, provided negative answers to the questions of the co-creation value scale. it is another finding of the study that, brand loyalty has a significant and positive effect on purchase intention. more clearly, as consumers' loyalty to the brand they follow on instagram increases, the purchase intention to the brand in question also increases. previous studies in the literature support this result. it was observed that, amusing and enjoyable content increased the consumer's purchase intention but did not affect brand loyalty. according to this finding, it can be said that purchase intention may occur in the consumer as long as there is an amusing content. however, there may not be a repeated purchase intention, since brand loyalty means that the consumer has the purchase intention of the same brand also in the future. when the mediating effect of brand loyalty was examined, it was observed that the effect of functional value and the level of self-brand image congruency on purchase intention was mediated by brand loyalty. based on this finding, it can be said that functional value and self-brand image congruency from the perceptions regarding marketing applications affect purchase intention of the customer whose brand loyalty has been formed previously. no mediating role of brand loyalty was observed in the effect of customers' hedonic value perception, social value and co-creation value towards the instagram page of the brand on purchase intention. by considering the fact that the social value perception and co-creation value has no effect on purchase intention, it can be said that only the hedonic value perception directly affects purchase intention. it was determined that, the top five most frequently followed brands were zara, nike, adidas, mavi and mercedes. no difference was found between the most followed brand and loyalty to the brand in question and between the most followed brand and the purchase intention to the brand in question. according to this finding, it can be said that brand loyalty and purchase intention do not occur with the fact that consumers follow the instagram page of a brand most frequently and that the marketing applications on the instagram pages of brands are not at the level to differ from other brands. it can be said that, the consumers who followed the brand that they had followed most frequently before instagram had a higher level of loyalty to the brand in question. according to this finding, it can be considered that the consumer had become loyal to the brand before following its page on instagram. this loyalty was probably strengthened with the instagram page. therefore, loyalty continued longer in comparison to consumers who had not followed the brand before instagram. according to the research findings, it can be stated that the consumers who followed the brand that they had followed most frequently before instagram had a higher level of the purchase intention to the brand in question. considering that brand loyalty affects purchase intention and that consumers who had followed the brand before instagram also had their trust and loyalty to the brand previously, it can be said that hesitations in mind, while purchase intention of the brand was forming, were at a lower level compared to consumers who had not followed the brand before instagram and purchase intention was higher. in this study, it was determined that functional value, hedonic value, and self-brand image congruency, which are the consumer perceptions regarding social media marketing applications, had a positive effect on the purchase intention of the most followed brand on instagram. the positive effect of functional value, social value and self-brand image congruency from the perceptions in question on brand loyalty is another finding. all these findings and the demonstration of the mediating role of brand loyalty in the effect of functional value and self-brand image congruency from consumer perceptions in question on purchase intention are considered to be the direct contribution of this study to the marketing literature. when the research results are considered, it is observed that some marketing applications do not affect brand loyalty or purchase intention. the reason for this is considered to be the fact that, some brands were successful and some were unsuccessful while creating or implementing social media marketing applications or all marketing applications of the same brand were not successful. on the other hand, it can be said that the consumer's perception regarding some marketing applications did not affect brand loyalty or purchase intention, although they were successful. for all these reasons, it is believed that this study provides a useful resource for brands to have an idea about the perceptions formed by each of social media marketing applications in customers while creating them and how these perceptions volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu ayben ceyhan emerging markets journal | p a g e 9 7 affect brand loyalty and purchase intention, as a contribution of this study to the business world. vii. limitations and further research within the scope of this study, the perception regarding marketing applications in social media and the effects of this perception on brand loyalty and purchase intention were focused on. however, the comparison of the research results among beykent university students, the fact that the opinions of students from other universities are not known, the fact that the study was carried out with a certain age, education and income group, insufficient analysis data to make an interpretation since age groups were combined, the fact that five consumers' perceptions were taken, the measurement of the effect of these perceptions only on brand loyalty and purchase intention, the fact that the perceptions and attitudes of people in professional business life on this subject are not known, and the possibility that changes may be observed in consumer attitudes and behaviors over time are important. therefore, marketers' applications may also vary appear. this is one of the limitations of this research. future studies can be carried out with student groups belonging to different universities and education, age and income groups, and people who are engaged in the business life. by receiving different perceptions of consumers regarding social media marketing applications, the effects of these perceptions on brand loyalty and purchase intention can be measured or the effect of five perceptions in this study on different variables can be investigated. furthermore, the perceptions and attitudes of businesses with regard to social media marketing applications can be investigated and compared with the findings of consumer perceptions in this study. as previously mentioned, market dynamics are also obliged to change along with the easy and quick change of the attitudes of consumers adapting to the digital age we live in. therefore, a similar study can be carried out with this new consumer group if social media changes or brings some innovations in the next periods, or in the period during which the next generation, generation z, will start to work. references adage.(2019). the adage.com official website. https://adage.com/article/digitalnext/smbsinstagram/308979/ (accessed: 01.03. 2019). akyüz, a. (2013). sosyal medya, müşteri etkileşimi ve sosyal crm. sosyal medya araştırmaları i içinde, yazan ali büyükaslan ve ali murat kırık. konya: çizgi kitabevi. alalwan, a. a., rana, n. p., dwivedi y. k., and algharabat r. (2017). social media in marketing: a review and analysis of the existing. telematics and informatics, 34: 1177-1190. balakrishnan, b. kpd, dahnil, m. i., and yi, w. j. (2014). the impact of social media marketing medium toward purchase intention and brand loyalty among generation y.» procedia social and behavioral sciences, 148: 177-185. baron, r. m., and kenny, d. a. (1986). the moderatormediator variable distinction in social psychological research: conceptual, strategic and statistical considerations. journal of personality and social psychology, 51 (6): 1173-1182. bilgihan, a. and bujisic, m. (2015). the effect of website features in online relationship marketing: a case of online hotel booking. electronic commerce research and applications, 14: 222-232. carlson, j., rahman, m. m., taylor, a., and voola, r. (2019). feel the vibe: examining value-inthe-brand-page-experience and its impact on satisfaction and customer engagement behaviours in mobile social media. journal of retailing and consumer services, 46: 149-162. che, j. w. s., cheung, c. m. k. ve thadani, d. r. (2017). consumer purchase decision in instagram stores: the role of consumer trust. proceedings of the 50th hawaii international conference on system sciences. hawaii, 2433. de vries, n. j. and carlson, j. (2014). examining the drivers and brand performance implications of customer engagement with brands in the social media environment. journal of brand management, 21 (6): 495-515. erdoğmuş, i̇. e. (2015). sosyal medyada ticaret: instagram üzerinden satış. çevrimiçi satış: bugünden geleceğe bir potansiyel içinde, yazan mehtap sümersan köktürk, emine çobanoğlu ve taşkın dirsehan. ankara: nobel. essamri, a., mckechnie, s., and winklhofer, h. (2019). co-creating corporate brand identity with online brand communities: a managerial perspective. journal of business research, 96: 366-375. fırat, duygu (2017). sosyal medya pazarlaması: instagramdan satın almanın değerlendirilmesine etki eden faktörler. i̇stanbul: beta basım. gensler, s., völckner, f., liu-thompkins, y., and wiertz, c. (2013). managing brands in the social media environment. journal of interactive marketing, 27 (4): 242-256. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu the impact of perception related social media marketing applications on consumers’ brand loyalty and purchase intention page |98| emerging markets journal gummerus, j., liljander, v., weman, e., and pihlström, m. (2012). customer engagement in a facebook brand community.» emerald insight, 35 (9): 857-877. hajli, n. m. (2014). a study of the impact of social media on consumers. international journal of market research, 56 (3): 387-404. ibrahim, b. and aljarah, a. (2018). dataset of relationships among social media marketing activities, brand loyalty, revisit intention. evidence from the hospitality industry in northern cyprus. data in brief, 21: 18231828. jahn, b. and kunz, w. (2012). how to transform consumers into fans of your brand. journal of service management, 23 (3): 344-361. kazancı, ş. and başgöze, p. (2015). sosyal medya algısının, marka kredibilitesinin ve marka prestijinin satın alma eğilimi üzerine etkileri. ankara üniversitesi sbf dergisi, 70 (2): 435456. kim, j. and lee, k. h. (2017). influence of integration on interactivity in social media luxury brand communities. sciencedirect. https://doi.org/10.1016/j.jbusres.2017.10.001 (accessed: 01.06.2018). kusumah, r. (2015). analyze the effect of trust, price, quality and perceived risk toward consumer purchase behavior in online shops instagram. jurnal berkala ilmiah efisiensi, 15 (5): 355366. laroche, m., habibi, m. r., and richard, m. (2013). to be or not to be in social media: how brand loyaltly is affected by social media? international journal of information management, 33: 76-82. latiff, z. a. and safiee, n. a. s. (2015). new business set up for branding strategies on social media-instagram. procedia computer science, 72: 13-23. lindsey-mullikin, j. and borin, n. (2017). why strategy is key for successful social media sales. business horizons, 60: 473-482. macarthy, andrew (2014). 500 social media marketing tips: essencial advice, hints and strategy for business: facebook, twitter, pinterest, google+, youtube, instagram, linkedin and more! uk: andrew macarthy. machado, j. c., vacas-de-carvalho, l., azar, s. l., andré, a. r., and santose, b. p. (2019). brand gender and consumer-based brand equity on facebook: the mediating role of consumerbrand engagement and brand love. journal of business research, 96: 376-385. martins, j., costa, c., oliveira, t., gonçalves, r., and branco, f. (2019). how smartphone advertising influences consumers' purchase intention. journal of business research, 94: 378-387. mediacat. (2018). https://mediacat.com/liptondaninstagrama-tesekkur/ (accessed: 21.11.2018). nisar, t. m. and whitehead, c. (2016). brand interactions and social media: enhancing user loyalty through social networking sites. computers in human behavior, 62: 743-753. pazarlamailetisimi.com. (2019). pazarlamailetisimi.com web. https://pazarlamailetisimi.com/markakisiligi-nedir/ (accessed: 26.02.2019). phua, j. and kim, j. j. (2018). starring in your own snapchat advertisement: influence of self brand congruity, self-referencing and perceived humor on brand attitude and purchase intention of advertised brands. telematics and informatics, 35: 1524-1533. prasertsith, k., kanthawongs, p., and kanthawongs, p. (2015). the factors affecting purchase intention of fashion accessories through instagram. researchgate.net website. https://www.researchgate.net/profile/penjuree_ kanthawongs/publication/280055838_the_fac tors_influencing_repurchase_intention_a_ca se_study_of_the_hotel_chain_a_in_bangkok /links/55b4fa0d08ae092e96558116.pdf (accessed: 03.01.2019). rahim, a., safin, s. z., kheng, l. k., abas, n., and ali, s. m. (2016). factors influencing purchasing intention of smartphone among university students. procedia economics and finance 37: 245-253. ramaswamy, v. (2008). co-creating value through customers’ experiences: the nike case. strategy and leadership, 36 (5): 9-14. sashi, c. m. (2012). customer engagement: buyer seller relationships, and social media. management decision, 50 (2): 253-272. sawhney, m., verona, g., and prandelli, e. (2005). collaborating to create: the internet as a platform for customer engagement in product innovation.» journal of interactive marketing 19, no. 4: 4-17. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu ayben ceyhan emerging markets journal | p a g e 9 9 see-to, e. w. k. and ho, k. k. w. (2014). value cocreation and purchase intention in social network sites: the role of electronic wordof-mouth and trust-a theoretical analysis. computers in human behavior, 31: 182-189. seo, e. and park, j. (2018). a study on the effects of social media marketing activities on brand equity and customer response in the airline industry. journal of air transport management, 66: 36-41. shang, s. s. c., wu, y., and sie, y. (2017). generating consumer resonance for purchase intention on social network sites. computers in human behavior, 69: 18-28. tsimonis, g. and dimitriadis, s. (2014). brand strategies in social media. marketing intelligence and planning, 32 (3): 328-344. wearesocial. (2019). wearesocial website, https://wearesocial.com/blog/2019/01/digital2019-global-internet-use-accelerates (accessed: 01.03.2019). webrazzi. (2018). the webrazzi website. https://webrazzi.com/2018/09/18/instagramalisveris-ozelligi-kesfet-sekmesinde-yerinialiyor/ (accessed: 24.03.2019). wu, p. c. s., yeh, g.y., and hsiao, c. (2011). the effect of store image and service quality on brand image and purchase intention for private label brands. australasian marketing journal, 19: 30-39. yadav, m. and rahman, z. (2017). measuring consumer perception of social media marketing activities in e-commerce industry: scale development and validation. telematics and informatics, 34 (7): 1294-1307. yoshida, m., gordon, b. s., nakazawa, m., and shibuya, s. (2018). bridging the gap between mocial media and behavioral brand loyalty. electronic commerce research and applications, 28: 208-218. appendix questionnaire first part: age o 18-24 o 25-35 o 36-45 o 46 and above gender o female o male educational level o associate’s o undergraduate o postgraduate faculty and department monthly income o 1.500 tl or less o 1.501-2.500 tl o 2.501-3.500 tl o 3.501-5.000 tl o 5.001-10.000 tl o 10.001 tl and above second part: how many years have you been an instagram user? o 6 years and more o 5 o 4 o 3 o 2 o 1 year and less than one year o how many brands / businesses do you follow on instagram? which brand / business’ page on instagram that you visit most frequently? please write your chosen brand / business. did you follow the brand / business before using instagram? o yes o no volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.173 | http://emaj.pitt.edu the impact of perception related social media marketing applications on consumers’ brand loyalty and purchase intention page |100| emerging markets journal volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu problems of accounting professionals residing in istanbul and the suggested solutions mustafa uçar biruni university, turkey | mustafaucar@biruni.edu.tr cevdet kızıl istanbul medeniyet university, turkey | cevdet.kizil@medeniyet.edu.tr oğuzhan oğuz kuveyt türk participation bank, turkey | oguzhanoguz22@hotmail.com.tr this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. abstract some problems of accounting professionals in turkey were solved with the introduction of law on public accountants, certified public accountants and sworn-in certified public accountants in 1989. however, many other problems still remain to be solved for accountants in turkey as of 2018. there were two main objectives of this study. the first one was to identify the problems faced by accounting professionals living in istanbul, turkey and the second one was to come up with solutions for these problems. the eesearch took advantage of questionnaire methodology. according to research findings, accounting occupation doesn’t have a professional identity in turkey. also, accounting education given in universities is perceived as inadequate. the leading reason why accounting professionals are only considered as bookkeepers in turkey is knowledge defficiencies. the main motivation behind choosing the accountant career path is commercial (monetary). the leading reason for lack of confidence against accountants in turkey is ignorance of accounting ethics. lack of practice is the leading deficiency concerning accounting education in turkey. this is followed by insufficient accounting ethics education. leading problems of accounting professionals in turkish business life are economical. our literature review shows that, expectations from public authorities, professional accounting chambers and bodies increase to solve the problems of accounting professionals. thus, the suggested solutions by this study to eliminate determined problems of accounting professionals should be evaluated and considered by public authorities, professional accounting chambers and bodies. moreover, effective communication, coordination and agreement on legal arrangements must be present among accounting professionals, chambers, bodies and public authorities to solve the problems of accounting professionals residing in istanbul, turkey. keywords: accounting, accounting professionals, problems, solutions, istanbul new articles in this journal are licensed under a creative commons attribution 3.0 united states license. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.150 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:mustafaucar@biruni.edu.tr mailto:cevdet.kizil@medeniyet.edu.tr mailto:oguzhanoguz22@hotmail.com.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.150 | http://emaj.pitt.edu problems of accounting professionals residing in istanbul and the suggested solutions page |18| emerging markets journal problems of accounting professionals residing in istanbul and the suggested solutions mustafa uçar cevdet kızıl oğuzhan oğuz 1. introduction the efficient operation and development of businesses that form the basis of economies depend on a well-functioning accounting and control system. there is no doubt that, inefficient accounting and control systems, particularly weak internal controls cause creative accounting practices, manipulation of financial data, fraud and risk (kızıl, şeker, akman, işık, demirkol and kefeli, 2015; kızıl, çelik, akman and şener, 2016; aslan, kızıl and din, 2017; adalı and kızıl, 2017). parallel to this issue, healthy functioning of the economic and financial structure depends on accounting professionals at macro level. also, accounting is called and known as the heart of business management in micro level (kızıl, çelik, akman and danışman, 2015). for this reason, accounting profession is among the most important occupational groups from the perspective of business world and government (terzi, 2015). along with changes in the economy, in addition to financial reporting, the audit function has also brought important responsibilities to the members of accounting profession. as a result of these responsibilities, there are some contradictions and disputes in the value proposition of accounting profession, rules and decisions, as well as perceived problems. members of accounting profession have to continue their activities while adhering to accounting ethics, despite the problems they experience (deran, erduru and keleş, 2016). although, the consciousness towards accounting ethics has improved tremendously in the recent years among accounting professionals, specific problems and missing points still exist (kızıl, akman, aras and erzin, 2015). today, in order to understand the development of accounting profession, it is necessary to examine the historical development of accounting. if the difficulties faced by the profession in this process and the issues affecting the profession are examined in relation to today’s conditions, the future of accountancy can be shed light on. developments such as globalization, new economic conception, political expansions, external and internal conjuncture have determined and also shaped the route of accounting profession. the accounting profession in turkey experienced a regulation and arrangement with the law numbered 3568 in the 1989. until this date, various foundations and associations had been involved in accounting activities and had prepared the infrastructure of an occupational law in order to give the accounting profession a legal status. with the acceptance of the law numbered 3568, the accounting profession began to earn its deserved reputation in turkey (kaya, 2015). but, it is still questionable if the accounting profession completely achieved to earn its desired reputation, image and identity in turkey (kızıl, akman, zorkalkan, türkmen, 2015). accounting professionals have a number of responsibilities towards the government, their clients, colleagues and even themselves. accounting professionals working with the consciousness of these responsibilities are trying to produce and present information that is understandable, accurate and reliable. while carrying out all these activities, accounting professionals encounter various problems in their lives and expect these issues to be solved (tükenmez and kutay, 2005). 2. literature review in the recent years, there has been a significant increase in the number of research conducted on the problems of accounting professionals. for example, uzay and gungor (2004) pointed out that the problems of accounting professionals in their jobs. this study revealed that, the taxpayers cannot keep track of the amendments that are frequently made in the legislation. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.150 | http://emaj.pitt.edu mustafa uçar, cevdet kızıl, oğuzhan oğuz emerging markets journal | p a g e |19 clients’ inability to pay accounting fees on time, excessive workload of accounting professionals and unfair competition among accountants were other determined problems. the study conducted by kalaycı and tekşen (2006) expressed clients’ pressure over members of the accouting profession in the direction of low tax calculation. regular changes in the legislation and arrangements, unfair competition among accounting professionals, excessive workload of accountants and clients’ not paying accounting fees on time were also other mentioned problems. the aim of usul and aslantaş’s (2007) study was to reveal the causes of conflict between accounting professionals and clients. the viewpoints of clients and accounting professionals were also presented in this research. according to the study, it was determined that conflicts between accounting professionals providing service and the clients requesting service from accountants existed. the conflicts were mainly as a result of viewpoint of clients towards accounting professionals. another research was carried out by özulucan, bengü and özdemir (2010). this study assessed the problems of accounting professionals under three titles (topics). these were the problems faced in practice, the problems experienced through the application of legislations and the problems related to accounting chambers. the motivation of karcıoğlu and yazarkan’s (2011) study was to determine the problems faced by accounting professionals residing in the provincial centers of i̇zmir and erzurum during their activities related to public institutions. according to the results of research, it was determined that accounting professionals had problems such as lack of knowledge, bureaucratic issues and legal arrangements. yıldırım and güney (2012) attempted to emphasize some of the problems of accountanting professionals. in the study, it was determined that the members of accounting profession were faced with job burden and difficulties much more than the advantages and benefits of their occupation. also, the frequent law and arrangement changes were impairing the relationship between clients and accounting professionals. tuğay and tekşen (2014) conducted a research investigating the problems of accounting professionals. this study argued that, the best accountant was perceived by the society as the one enabling and helping clients to pay least tax. additional problems of accounting professionals were underlined by the research such as frequent changes in laws and regulations which were not followed in a timely manner, accounting colleagues keeping books under the base salary determined by accounting chambers, the occupational (job) burden brought by the profession which is excessive and the clients not pay their fees to accountants on time. 3. society’s expectations from accounting professionals there are several stakeholders, who benefit from the information generated, produced and presented by accounting professionals. the timely delivery of accurate and reliable information is a major expectation of all stakeholders. the most evident expectation of investors and shareholders from accounting professionals in the recent years is especially transparency (kızıl, fidan, kızıl and keskin, 2013; kızıl, fidan, kızıl and keskin, 2016; tayyar, 2001). that is definitely a critical concept also in terms of mergers, acquisitions and investments. stakeholders of today’s business world such as investors, shareholders, entrepreneurs, auditors and government are in need of more standardized global accounting principles (kızıl, çetin and bulunmaz, 2014). in addition, the business community wants financial statements to be understandable, flexible and focused on needs. the accountant should present the information on the basis of materiality and priority. it should be noted that, a serious amount of information can be misleading and inaccuarate. providing and presenting less information compated to the required level should be evaluated in the same context. in order for financial statements to be more meaningful, accounting for inflation implementations is now also expected from accounting professionals (suadiye and yükselen, 2001). volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.150 | http://emaj.pitt.edu problems of accounting professionals residing in istanbul and the suggested solutions page |20| emerging markets journal accounting professionals want their clients to provide them timely and sufficient information, and to ensure that accounting service fees are paid on time. on the other hand, quality service demand by the business world is also important for the improvement of services offered by accountants. the main expectation of firms from accounting professionals is that, the accounting records are kept reliable and impartial in order to obtain the exact results (taner, korukoğlu dalgeç and susmuş, 2001). moreover, certified public accountants (cpas) and sworn-in certified public accountants do tax auditing by signing tax declarations and effectively implementing controls. in addition, accounting professionals are a source of tax revenue generations. without accounting and accountants, there would actually be no tax collection. thus, the governments always expect accounting professionals to carry out an effective, fair and responsible role in tax collection (seviğ, 2002). plus, the main responsibility of accounting professionals is to serve the society and protect its interests. for this reason, business ethics, accounting ethics and value judgments have become more prominent in recent years, as well as professional knowledge. acquiring moral and ethical values related to the occupation will also increase the value of the accounting profession in society. thus, one of the leading expectations of society from accountants today is adherence to ethical values (selimoğlu, 2001). in order for the accounting profession to be recognized at a desired level in society, it is necessary for the government, professional accounting organizations, chambers and bodies to work together continuously. turkey still does not make full use of knowledge of accounting professionals (güvemli, 2001). 4. data and methodology the target population of the study is accounting professionals residing in the city of istanbul, turkey. for this purpose, the sample of the study is selected from 35 accounting professionals. questionnaires were distributed to 35 accounting professionals, who are registered members of the istanbul chamber of certified public accountants and chamber of sworn-in certified public accountants of istanbul. they consist of 30 certified public accountants (cpas) and 5 sworn-in certified public accountants. the questionnaire used for this research included general items, demographical information, majors, perceptions, thoughts and problems about accounting professionals as well as items on accounting education, accounting ethics and accounting career path. 5. research findings questionnaire distributed to accounting professionals residing in istanbul firstly presented demographic information about the mentioned accountants. 71,4% of accounting professionals participating in the research were male. 28,6% of accountants taking the survey were female. figure 1. gender distribution of accounting professionals based on research findings, accounting professionals taking the questionnaire were mostly management and finance majors. 51,4% of accounting professionals had management and finance educations (diplomas). in other words, 51,4% of accounting professionals had management and finance degrees. 48,6% of accounting professionals had graduated from other departments. male 71,4% female 28,6% gender distribution of accounting professionals volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.150 | http://emaj.pitt.edu mustafa uçar, cevdet kızıl, oğuzhan oğuz emerging markets journal | p a g e |21 figure 2. majors of accounting professionals the questionnaire utilized by study also included a statement, which mentioned that accounting occupation now had a professional identity in turkey. reseach findings indicate that, this statement is not accepted by most of accounting professionals residing in istanbul, turkey. 68,5% disagreed with this statement while the agreement ratio was 31,5%. figure 3. accounting occupation now has a professional identity in turkey also, according to research findings, 80% of accounting professionals think that the accounting education given in universities is inadequate. on the other hand, 20% of accounting professionals believe that the accounting education given in universities is adequate. thus, research findings signal a problem concerning accounting education in turkish universities. figure 4. accounting education given in universities today’s business world has assigned several critical roles to accounting professionals. interpretation and analysis of financial statements, expertise in analytical thinking and auditing are only some of these critical roles. however, clients in turkey still mainly consider accounting professionals as only bookkeepers. the research also investigated the leading reason why accounting professionals were only considered as bookkeepers in turkey. parallel to research findings, the leading reason was the knowledge deficiencies of accounting professionals while they were interacting with clients. 54,2% of accounting professionals stated in the questionnaire that, accountants in turkey were only perceived as bookkeepers because of their knowledge deficiencies. 45,8% of accounting professionals disagreed at this point that the leading reason was knowledge deficiencies and they reported that other reasons were effective. figure 5. the leading reason why accounting professionals are only considered as bookkeepers in turkey yes 68,5% no 31,5% accounting occupation now has a professional identity in turkey inadequ ate 80% adequ ate 20% accounting education given in universities know ledge deficien cies 54,2% other reasons 45,8% the leading reason why accounting professionals are only considered as bookkeepers in turkey manage ment and finance 51,4% other 48,6% majors of accounting professionals volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.150 | http://emaj.pitt.edu problems of accounting professionals residing in istanbul and the suggested solutions page |22| emerging markets journal the research findings revealed that, 57,1% of accounting professionals chose this career path because of commercial (monetary) motivation. in other words, the accounting profession in turkey is mostly run with commercial (monetary) concerns. although main motivation behind choosing the accountant career path is commercial (monetary) with a ratio of 57,1%, other motives do exist which are equivalent to 42,9%. figure 6. main motivation behind choosing the accountant career path the study also investigated the reason for lack of confidence against accountants in turkey. 62,8% of respondents stated that, the leading reason for lack of confidence against accountants in turkey was ignorance of accounting ethics. 37,2% of respondents said other reasons did exist. figure 7. the reason for lack of confidence against accountants in turkey then, the research examined the leading deficiencies concerning accounting education in turkey. 60% of accounting professionals as the respondents of research said lack of practice was the leading deficiency concerning accounting education in turkey. this was followed by insufficient accounting ethics education with 25,7%. however, 14,3% of respondents stated that other deficiencies were present. so, accounting professionals generally believe that practial accounting knowledge is very significant in today’s business world. they also think that, junior accountants at the beginning of their careers experience big difficulties in transforming their theoretical knowledge into practice. figure 8. leading deficiencies concerning accounting education in turkey questionnaire utilized by the research also asked accounting professionals their leading problems in turkish business life. economical problems of accountants are taking the lead for this statement with 51,4%. in this regard, accounting professionals stated that they were experiencing great difficulties in fee (rate) collections from their clients. especially, it was emphasized that, no fee (rate) collections were possible especially during economical crisis periods. still, 48,6% of respondents believed that accounting professionals had other leading problems in turkish business life. commer cial (moneta ry) motivati on 57,1% other motives 42,9% main motivation behind choosing the accountant career path ignor ance of account ing ethics 62,8% other reasons 37,2% the reason for lack of confidence against accountants in turkey lack of practice 60% insuffi cient account ing ethics edu. 25,7% other deficien cies 14,3% leading deficiencies concerning accounting education in turkey volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.150 | http://emaj.pitt.edu mustafa uçar, cevdet kızıl, oğuzhan oğuz emerging markets journal | p a g e |23 figure 9. leading problems of accounting professionals in turkish business life 6. conslusion and recommendations accountants assist businesses through their financial decision-making process, and also build their communication bridge with various stakeholders. as one of the most important actors in modern economy, both the duties and responsibilities carried by accounting professionals have increased. that has caused accounting professionals to face various problems while sustaining their daily activities. although the law on public accountants, certified public accountants and sworn-in certified public accountants was enacted in 1989 in order to solve the problems of turkish accounting professionals and to bring a legal basis to accounting profession, it was never enough to eliminate all problems. parallel to the developments in business life, problems of accounting professionals have gained different dimensions. this research aimed to analyze the problems of turkish accounting professionals and offer possible solutions. the research presented some important findings related to the problems of accounting professionals residing in istanbul, turkey. first, based on research findings, accounting occupation still doesn’t have a professional identity in turkey. some solutions to this problem are possible. for example, laws and regulations related to accounting should be continuously updated in turkey to satisfy contemporary needs of all stakeholders. accounting chambers, bodies and the government should be more selective when accepting new certified public accountants (cpas) and sworn-in certified public accountants to the profession. in this context, the difficulty level of accounting exams can be highered. also, any new canditate for accounting profession with unethical records and history must be denied. similarly, present and existing accounting professionals committing unethical behavior should have their accounting licences terminated or they must face serious financial penalties. additionally, base fees of accounting professionals which they collect from clients must be higher. second, a high majority of accounting professionals think that the accounting education given in universities is inadequate. adopting a new approach to planning accounting education in universities and giving more emphasis to implementation/practice can be considered an important step for the solution of this problem. for a more effective solution, higher number of accounting elective courses may be offered to students who wish to become members of accounting profession. these students should also be supported by universities, faculty members and the government to have internship in accounting offices. also, more practical knowledge should be integrated in delivered accounting courses besides the theoretical knowledge. definitely, technology should be utilized much more through the semester. lecturing the course with powerpoint slides, using interative videos and introducing accounting programs (software) are all critical at this point, in addition to traditional accounting education. furthermore, accounting courses should also include case studies, reading materials, teamwork (group work) and brainstorming. plus, active learning must be adopted by giving assignments to students instead of insisting on passive learning. moreover, universities can also consider employing faculty members who hold the ph.d. and cpa/sworn-in public accountant titles together. third, the leading reason why accounting professionals were only considered as bookkeepers in turkey was the knowledge deficiencies of accounting professionals while they were interacting with clients. economi cal prob. 51,4% other prob. 48,6% leading problems of accounting professionals in turkish business life volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.150 | http://emaj.pitt.edu problems of accounting professionals residing in istanbul and the suggested solutions page |24| emerging markets journal we believe that, the constant changes in laws and regulations are making the job of accounting professionals harder at this point. this increases the responsibilities and job burden of accountants in turkey. as a result, knowledge deficiencies of accounting professionals are observed. in order to solve this problem, turkish accountants should improve themselves continuously and they must read the latest updates concerning laws and regulations daily. in other words, accounting professionals should definitely acquire reading habit. this is especially critical and important for following changes and updates in tax legislation. accounting chambers, bodies and the government should also support accounting professionals by organizing seminars, workshops, conferences and congresses which require no rates or low registration fees. in fact, accounting chambers, bodies and the government must always be active to solve the various problems of accounting professionals in turkey. fourth, the research findings revealed that, most accounting professionals chose accounting career path because of commercial (monetary) motivation. in other words, the accounting profession in turkey is mostly run with commercial (monetary) concerns. this finding is important in the sense of accounting ethics. in other words, that situation brings negative consequences in terms of accounting ethics. in order to keep accounting professionals away from solely commercial concerns, accounting chambers should focus on and communicate the contribution of accounting science for public welfare. the benefits and advantages of accounting for public must be underlined. also, accounting professionals should be motivated to see the big picture and understand the positive outcomes of their job performance. definitely, it must be ensured that the base rate (fee) application is followed very seriously by accountants. in this respect, accounting professionals should not try to keep books lower than standard fees (rates) determined by accounting chambers and bodies. such an action against laws and regulations solely based on unfair commerial (monetary) gains must be penalized. government, accounting chambers and bodies should give high penalties to accounting professionals ignoring accounting ethics. termination of certified public accountant (cpa) and sworn-in certified public accountant licences should also be discussed at this point. fifth, the study also investigated the reason for lack of confidence against accountants in turkey. most respondents stated that, the leading reason for lack of confidence against accountants in turkey was ignorance of accounting ethics. offering mandatory accounting ethics courses in universities besides elective ones can be a solution for this problem. also, the government, accounting chambers and bodies should organize conferences, congresses, seminars and workshops on accounting ethics frequently. moreover, accounting professionals adhering to accounting ethics can be awarded by the government, accounting chambers and bodies. financial penalties and termination of accounting licenses can also be matters of solutions for the mentioned problem of unethical behavior. sixth, the research examined leading deficiencies concerning accounting education in turkey. most accounting professionals as the respondents of research said lack of practice was the leading deficiency concerning accounting education in turkey. this was followed by insufficient accounting ethics education. a variety of solutions can be thought to solve these problems. one of them is integrating technology to accounting courses. modern accounting education methods should be implemented instead of traditional accounting education techniques. also, students should be made familiar with using accounting programs (software). through the semester accounting videos, case studies, reading materials, presentations, assignments, team work (group work), discussions and brainstorming should be utilized frequently. universities must also encourage and support students for accounting internships. absolutely, it would be better for faculties to employ academicians who hold both the ph.d. and certified public accountant (cpa)/sworn-in certified public accountant titles simultaneously. for sure, more business ethics and accounting ethics courses should be offered by universities as mandatory courses, not only as volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.150 | http://emaj.pitt.edu mustafa uçar, cevdet kızıl, oğuzhan oğuz emerging markets journal | p a g e |25 selective courses. this is of course only possible with broadening the number of accounting lecturers in faculties, which is a must for turkish universities. seventh, according to research findings, the leading problems of accounting professionals are economical. in this regard, most accounting professionals stated that they were experiencing great difficulties in fee 8rate) collections from their clients. especially, it was emphasized that, no fee (rate) collections were possible particularly during economical crisis periods. specific solutions are possible for this problem. for instance, insurance systems which guarantee the fee (rate) collections of accounting professionals can be activated and initiated. also, firms not paying their fees (rates) to accountants in turkey can be included in a blacklist, which would be accessible to accounting professionals, chambers, bodies and the government. serious financial penalties must apply for businesses not paying their fees (rates) to accountants. it is evident that, a high number of accounting professionals are keeping books under the required base rate causing unfair competition, and these low rates (fees) are still not sometimes paid. even if rates (fees) are collected, there are delays in payments. these problems of accounting professionals still wait to be solved as burning issues for several years, which are damaging the reputation of accounting in turkey. references adalı, s. and kızıl, c, (2017), a research on the responbility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample, emerging markets journal (emaj), vol. 7, no: 1, 53-64. aslan, t., kızıl, c. and din, a, (2017), muhasebe hata ve hileleri üzerinde etkili faktörlerin muhasebe meslek etiği kapsamında analizi: yalova örneği, journal of social and humanities sciences research, vol:4, issue:5, 1125-1138. deran, a., i̇ncilay e. and keleş, d, (2016), muhasebe meslek mensuplarının mesleki sorunları ve meslek odalarından beklentilerinin demografik özellikler ve faaliyet gösterilen ekonomik çevre açısından değerlendirilmesi: ordu örneği, selçuk üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi sosyal ekonomik araştırmalar dergisi (the journal of social economic research) issn: 2148 – 3043 / ekim 2016 / yıl: 16 / sayı: 32. güvemli, o, (2001), 3568 sayılı serbest muhasebecilik, serbest muhasebeci mali müşavirlik ve yeminli mali müşavirlik kanunu’nda değişiklik teklifi üzerine, mufad, sayı:10, 33-36. kalaycı, ş. and tekşen ö, (2006), muhasebe mesleğinde karşılaşılan sorunlar ve çözüm önerileri: isparta i̇l merkezi uygulaması, muhasebe ve finansman dergisi, sayı: 31, 90101. karcıoğlu, r. and yazarkan h, (2011), muhasebe meslek mensuplarının faaliyetleri sırasında kamu kurumlarında karşılaştıkları sorunlara i̇lişkin ampirik bir araştırma, muhasebe ve denetime bakış dergisi, sayı: 34, 1-12. kaya, g. a., (2015), muhasebe meslek mensuplarının sorunları ve çözüm önerileri: elazığ’da bir araştırma, international journal of social science, doi number: http://dx.doi.org/10.9761/jasss3089, number: 41 , p. 207-231, winter ii, 2015. kızıl, a., fidan m., kızıl, c. and keskin, i̇., (2013), tms-tfrs türkiye muhasebe ve finansal raporlama standartları, i̇stanbul: der yayınları. kızıl, a., fidan, m., kızıl, c., and keskin, i̇., (2016), tms-tfrs turkiye muhasebe ve finansal raporlama standartları, uygulamlar-yorumlarmuhasebeleştirme (2. basım). i̇stanbul: der yayınları. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.150 | http://emaj.pitt.edu problems of accounting professionals residing in istanbul and the suggested solutions page |26| emerging markets journal kızıl, c., akman, v., aras, s. and erzin, n. o, (2015), yalova i̇linde i̇kamet eden muhasebe meslek mensuplarının muhasebe etik algısı, beykent üniversitesi sosyal bilimler dergisi, 8(1), 631. kızıl, c., akman, v., zorkalkan, t., türkmen, r, (2015), muhasebenin tarihine küresel kapsamda ve türkiye kapsamında vergisel bir bakış, leges sosyal bilimler dergisi, 15 eylül 2014-15 ocak 2015, yıl: 5, sayı: 3, 70-87. kızıl c, çelik i̇. e, akman v, danışman d, (2015), muhasebe dersini ilk kez alan öğrencilerin başarısına etki eden faktörlerin tespiti: yalova üniversitesinde bir uygulama. i̇şletme bilimi dergisi 3(2): 127-165. kızıl, c., çelik, i̇. e., akman, v. and şener, s. (2016). yaratıcı muhasebe yöntemleri ve finansal bilgilerin manipülasyonu: profesyonel muhasebe meslek mensupları üzerinde örnek bir uygulama, beykent üniversitesi sosyal bilimler dergisi, 9(1), 118. kızıl, c., çetin, a. t., and bulunmaz, a, (2014), accounting education approach in the context of new turkish commercial code and turkish accounting standards. emerging markets journal, 4(1), 72. kızıl, c., şeker, ş.e., akman, v., işık, e. y., demirkol, v., kefeli, s, (2015), muhasebe finansman, yönetim organizasyon ve yönetim bilişim sistemleri yazıları, leges yayınları. özulucan, a., bengü h. and özdemir, f. s., (2010), muhasebe meslek mensuplarının güncel sorunları, uygulamada karşılaştıkları yetersizlikler ve meslek odalarından beklentilerinin unvanları ve mesleki deneyim süreleri yönüyle i̇ncelenmesi: türkiye genelinde bir araştırma, muhasebe ve denetime bakış dergisi, sayı: 31, 41-64. selimoğlu, s. k., (2001), muhasebe eğitiminin meslek mensubu adaylarına ahlaki doğruları kazandırmadaki rolü, xx. türkiye muhasebe eğitimi sempozyumu, ankara üniversitesi s.b.f., 23-27, 3-27. seviğ, v., (2002), muhasebe ve mesleğin önemi, dünya gazetesi, 26.09.2002. suadiye, g. ve yükselen c., (2001), mükelleflerin ve muhasebecilerin birbirlerinden beklentileri, mali çözüm, i̇smmmo yayını, sayı: 56, 5-26. taner, b., korukoğlu dalgeç a. and susmuş t., (2001), muhasebe mesleğinin müşterileri durumunda bulunan kesimlerin muhasebe mesleğinden beklentileri: i̇zmir i̇li uygulaması, v. türkiye muhasebe denetimi sempozyumu, yirmi birinci yüzyılda türk muhasebe mesleğinin vizyonu ve misyonu, i̇smmmo yayınları no:32, i̇stanbul, 169-182. tayyar, a., (2001), türk i̇ş dünyasında muhasebe mesleğinden beklenenler, v. türkiye muhasebe denetimi sempozyumu, yirmi birinci yüzyılda türk muhasebe mesleğinin vizyonu ve misyonu, i̇smmmo yayınları, 32, i̇stanbul, 163-168. terzi, a., (2015), muhasebe meslek mensuplarının meslekleri i̇le i̇lgili beklentilerine, sorunlarına ve algılarına yönelik bir araştırma: rize örneği, ardahan üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi, sayı: 2, ekim 2015, 193-212. tuğay, o. ve tekşen, ö, (2014), muhasebe meslek mensuplarının sorunları: burdur i̇linde bir araştırma, süleyman demirel üniversitesi i̇i̇bf dergisi, 19(1), 223-232. tükenmez, m. n. and kutay n, (2005), muhasebe meslek mensubunun karar alma sürecinde meslek ahlakının yeri: çok boyutlu analiz – i̇zmir örneği, muhasebe ve finansman dergisi, sayı 25, i̇stanbul, 155-164. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.150 | http://emaj.pitt.edu mustafa uçar, cevdet kızıl, oğuzhan oğuz emerging markets journal | p a g e |27 usul, h. and aslantaş, b.a, (2007), muhasebecimükellef çatışması, muhasebe ve denetime bakış dergisi, sayı: 22, 85-103. uzay, ş. and güngör ş, (2004), muhasebecilerin sorunları ve beklentileri: kayseri ve nevşehir i̇lleri uygulaması, muhasebe ve finansman dergisi, sayı:22, 94-104. yıldırım, s. and güney s, (2012), serbest muhasebeci mali müşavirlerin genel sorunları: erzurum i̇li örneği, muhasebe ve denetime bakış dergisi, sayı: 36, 35-48. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu what makes consumers recall banner ads in mobile applications mesut çiçek yalova university | mcicek@yalova.edu.tr i̇rem eren-erdoğmuş marmara university | ireme@marmara.edu.tr i̇kram daştan yalova university | ikramdastan@gmail.com abstract the uses of mobile advertisements are increasing their popularity across the world. companies can gather information about the mobile users based on their locations, lifestyle, and preferences via gps, cookies and browsing history and embed highly personalized banner ads in mobile applications. however, in the literature there is hardly any work on the effectiveness of these highly personalized in-app banner ads. the aim of the study is to reveal which factors affect the effectiveness of in-app banner ads. an experimental study was designed and 209 subjects participated. the results of ordinal logistic regression indicated that prior brand attitude and attitude towards application have a positive effect, while brand engagement with self-concept has a negative effect on the recall of in-app banner ads. moreover, in-app banner ads are recalled more when they are located in landscape applications and positioned at the top part of the screen. this research provides some implications for future studies and practitioners. keywords: mobile ads, application, banner advertising, in-app banner ads new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.122 | http://emaj.pitt.edu | mailto:mcicek@yalova.edu.tr mailto:ireme@marmara.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.122 | http://emaj.pitt.edu what makes consumers recall banner ads in mobile applications page |11| emerging markets journal what makes consumers recall banner ads in mobile applications mesut çiçek i̇rem eren-erdoğmuş i̇kram daştan 1. introduction the uses of mobile advertisements are increasing their popularity across the world. this increase couples with the recent decline in traditional forms of communication in favor of a shift of attention to other media (e.g., internet, mobile devices, social media) in the advertising industry (siemens et al., 2015a). mobile advertising provides several advantages to the companies such as high penetration rate, personal communication device, individual addressability, multimedia capability, and interactivity (chang and huo, 2011). research also supports that mobile advertising outperforms non-mobile advertising (rosenkrans and myers, 2012; mediamind, 2011). mobile advertising providers monitor the online users’ location, lifestyles, preferences and interests via gps systems, emails, social media activities, cookies (haddadi et al, 2010) and browsing history (lambrecht and tucker, 2013); then display the online ads of the products and services based on consumers’ interests, locations, mobility patterns and daily habits (haddadi et al, 2010). despite this strong interest, most marketers still exert mixed if not negative view towards the effectiveness of mobile advertising (bart et al., 2014), what makes one question whether marketers collect and use the right information in placing their in-app ads. hence, more research is needed to explore how to enhance its effectiveness (vatanparast and butt, 2010; nittala, 2011; xie et al., 2013). the current research aims to contribute to the nascent mobile advertising literature by trying to understand which factors impact mobile advertising effectiveness (recall) by conducting an experimental research on in-app advertising. in-app advertising includes campaigns that are portrayed through mobile applications (xie et al., 2013). the previously studied factors of advertising such as contextual factors (application orientation), advertisement factors (banner location), personal factors (brand engagement with self concept, product involvement, attitude towards application), and brand related factors (attitude) are adapted and examined this time for inapp mobile advertising effectiveness (recall) to provide a holistic view on this current and under investigated topic. the sample of the research compromises of generation y consumers in turkey. the statistics support that worldwide smartphone penetration is higher among these younger consumers (bart, stephen, and sarvary, 2014), and it is acknowledged that they use multiple features of their smartphones consistently and continuously on social networking sites, and various applications (jain and pant, 2012; bhave et. al., 2013). they are projected to enhance mobile commerce as they enter them prime income earning years and have more disposable income to spend (emarketer, 2012). therefore, this generation is suitable to study in-app mobile advertising. 2. conceptual framework and hypotheses development mobile advertising provides several advantages to the companies such as high penetration rate, personal communication device, individual addressability, multimedia capability, and interactivity (chang and huo, 2011). mobile advertising providers monitor the online users’ location, lifestyles, preferences and interests via gps systems, emails, social media activities, cookies (haddadi et al, 2010) and browsing history (lambrecht and tucker, 2013), then display the online ads of the products and services based on consumers’ interests, locations, mobility patterns and daily habits (haddadi et al, 2010). however, the effectiveness of these highly personalized ads has not been researched in the context of in app banner ads. 2.1. besc and self-brand concept in order to understand in-app mobile banner ad recall, our research proposes that brand engagement with self concept (besc) enhances the in-app mobile banner ad recall. besc is defined as “an individual difference measure representing consumers’ propensity to include important brands as a part of how they view themselves” (sprott, czellar & spangenberg, 2009, p. 92). it is a generalized conceptualization of the relationship of consumers with brands. increased levels of besc and brand-self connection create likelihood to include favorite brand/s with the self and increase strength of the brand/s in memory (sprott, czellar, and spangenberg, 2009). based on this discussion, our research proposes: h1: consumers’ level of besc positively increases recall of in-app mobile banner ads. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.122 | http://emaj.pitt.edu mesut çiçek, i̇rem eren-erdoğmuş, i̇kram daştan emerging markets journal | p a g e |12 2.2. product involvement product involvement refers to the personal relevance of the product, based on inherent needs, values, and interests of the consumer (zaichkowsky, 1985). level of involvement is determined with respect to how much active engagement is needed for productfocused judgment and decision-making (petty, cacioppo, and schumann 1983; zaichkowsky 1985). consumers develop diversified involvement levels through product categories (manzur et al., 2012). low-involvement products are consumable items that require minimal effort and consideration before purchasing whereas high-involvement products entail more effort and consideration prior to their purchase. recall, which requires sufficient attention, is more likely for high-involvement products. consumers pay more attention to advertisements of products that they have high involvement with (holbrook and lehmann 1980) since they have more important personal consequences (apsler and sears 1968); therefore, are personally relevant and intrinsically important to consumers (sherif and hovland 1961). thus: h2: consumers’ level of involvement with a product category increases brand recall of inapp mobile banner ads. 2.3. brand attitude it was ehrenberg (1974), who first argued that consumers typically only pay attention to advertising of brands for which they have a pre-existing favorable attitude. as such, users of a brand have a higher recall in advertising of the brand and hold a favorable attitude towards its advertising (rice and bennett, 1998). similarly, prior research in advertising recall suggests that well-known brands are better recalled than unfamiliar brands by consumers (kent and allen 2004; nelson, yaros, and keum 2006; schneider and cornwell 2005). nelson (2002), also showed in a series of experiments that a brand’s market prominence in the consumer mind positively affected the recall of the brand in product placements. similarly, in their study on product placement in computer games, mackaya et. al (2009) also found out that pre-existing high positive attitudes resulted in higher levels of both spontaneous and prompted recall. in mobile advertising, bhave, jain and roy (2013) found out that the recall was higher if the brand also used other media for advertisement as well and ensuring that consumers were already familiar with the brands. similarly, the study by siemens et al. (2015) located the positive impact of a well-known brand on brand recall within in-game advertising. thus: h3: pre-existing positive brand attitude increases recall of in-app mobile banner ads. 2.4. attitude towards application according to the limited capacity model of mediated message processing (lang, 2000), people have limited capacity information processing, and activate it automatically in response to motivationally relevant stimuli in the environment. thus, whether a consumer has a positive or negative attitude towards mobile application may influence consumer motivation, their information processing, and their memory in return. siemens et. al (2015b) concluded in their study that enjoyment and flow had a mediating positive influence on brand attitude in ingame advertising. similarly, yoo and pena (2001) showed in their study that the negative associations of a violent video game elicited low brand recall in in-game advertising. thus, it can be inferred from their results that consumer’s attitude (liking) towards the mobile applications may divert or focus consumer attention on the ad, and hence have an impact on brand recall. thus: h4: positive attitude towards the application increases recall of in-app mobile banner ads. 2.5. banner location since the screens of mobile phones are small, there are only limited places for banner ads within the applications. in-app mobile ads are mostly embedded at the top or bottom of the application (woolridge and schneider, 2011). although there is hardly ever study about the effect of mobile banner location on the ad effectiveness, there are some studies about banner location’s effectiveness in the context of computer web pages which come up with contradictory results. for example, resnick and albert (2014) revealed that top of the page is one of the most effective locations to get user’s attention. on the other hand, goodrich (2010) claimed that ads draw more attention when they are placed at the bottom of the page rather than at the top. furthermore, çalışır and karaali (2008) indicated that there is no significant relationship between the banner location and advertising recognition. in the context of mobile applications, the thumbs of the users generally located around bottom of the screen. therefore, the likelihood to miss the in-app banner ad is high when it is located at the bottom. thus: h5: embedding banner ads at the top of applications increases recall of in-app mobile banner ads. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.122 | http://emaj.pitt.edu what makes consumers recall banner ads in mobile applications page |13| emerging markets journal 2.6. application orientation mobile applications can be designed in two forms: landscape and portrait. the orientation of applications may affect the effectiveness of mobile banner ads since the holding position of the mobile phones and the dimensions of the banners are different for landscape and portrait orientations. in this context, it is hypothesized that; h6: application orientation affects recall of in-app mobile banner ads. 3. methodology in order to investigate the effects of application orientation (landscape and portrait) and banner location (top and bottom) on ad recall, an experimental study was designed. there were four experimental groups and subjects that were randomly assigned to each group and in each group there were at least 50 subjects. they were given a smart phone and requested to use a mobile application for 5 minutes. in order to prevent the possible effect of prior experiential effect, a professional mobile technology agency was hired to create two brand new applications (one is in portrait mode the other one is in landscape mode). the characteristics of experiment groups are shown in table 1. table 1: the characteristics of experiment groups subjects who used mobile application in portrait mode with the banner at the top (n: 54) subjects who used mobile application in portrait mode with the banner at the bottom (n: 53) subjects who used mobile application in landscape mode with the banner at the top (n: 51) subjects who used mobile application in landscape mode with the banner at the bottom (n: 51) adidas was chosen as advertised brand, which is among the lovemarks of turkey. a dynamic mobile banner ad that consisted of three different screens was created. the ad included adidas brand, background color, adidas’s slogan “impossible is nothing”, messi’s picture who is the brand ambassador of adidas, and picture of adidas shoes. unaided advertising recall was used as the dependent variable of the study. the items used to measure advertising recall were adapted from li and bukovac’s (1999) study. the subjects were first asked whether they noticed any banner ads while using the application. if the answer was a ‘yes’, then they were asked about the details of the advertisement to reveal their recall of the mobile banner ad. the subjects were not provided any cue about the banner advertising. the questions included “what was the brand in the banner?”, “who was the celebrity endorser in the banner?”, “what is the brand slogan in the banner?”, “which product was endorsed in the banner?”, “what color was used in the background of the banner?”. based on the answers, a recall score was calculated for each subject as an outcome variable which range between 0 and 5. after the application of the experiment, the subjects were requested to fill a questionnaire which consisted of questions about their attitude towards the application (measure adopted from muehling et al., 1991) that they used, attitude towards adidas brand (muehling et al., 1991), product category involvement (seiders et al., 2007) towards sneakers, brand engagement with selfconcept (sprott et al., 2009). 4. findings a total of 209 subjects (109 male and 100 female), who already owned a smart phone, participated in the study. their ages ranged from 18 to 30, with a mean of 23 and their education level varied from primary school graduation to phd degree. approximately 40% of the subjects have undergraduate degree and 47 % of them have high school degree. a factor analysis was conducted on the 14 items with varimax rotation. the kmo measure verified the sampling adequacy, kmo = .77. bartlett’s test of sphericity χç (91) = 2503, p < .001, indicated that correlations between items were sufficiently large for pca. four components had eigenvalues over kaiser’s criterion of 1 and in combination explained 75.51 % of the variance. table 2 shows the factor loadings after rotation. table 2: factor loadings of the constructs shapiro-wilks statistics (.584, p < 0.001) test indicated that recall score is not normally distributed. therefore, to test the model ordinal logistic regression was preferred. insignificance of test of parallel lines, which tests the proportional odds assumption, indicated that (χ2(18) = 27.31, p > .05) the model is suitable for the olp analysis. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.122 | http://emaj.pitt.edu mesut çiçek, i̇rem eren-erdoğmuş, i̇kram daştan emerging markets journal | p a g e |14 table 3: results of ordinal logistic regression the results of ordinal logistic regression analysis are shown in table 3. the significant chisquare statistic (p<.0001) indicates that the final model gives a significant r2 value (nagelkerke = .243) indicates that independent variables explain approximately 25 % of the ad recall. parameter estimates indicated that pre-existing brand attitude (h3: supported) and attitude towards mobile application (h4: supported) have positive effect on ad recall, while besc (h1: rejected) has negative effect. in addition, mobile banner ads are recalled more when the ads are located at the top (h5: supported) of the screen and in landscape applications (h6: supported). on the other hand, product involvement (h2: rejected) has no significant effect on advertising effectiveness. 5. discussion and conclusion this study was one of the preliminary studies in in-app mobile advertising research that tried to incorporate different factors of advertising effectiveness and test them together to foster knowledge in the field. mobile advertising is a useful, novel method that have already bypassed traditional forms of advertising in terms of effectiveness and usage, given the increasing number of smartphone and application users. one of the key characteristics of mobile advertising is that it enables the advertiser to customize the advertising process according to individual likes, behavior, and preferences. thus, it is important to understand which factors have an effect on advertising recall in in-app mobile advertising so that a direction could be provided to the practitioners on which dimensions to individualize their ads. the findings of this research are believed to help with this process. the research puts forward a seemly positive effect of brand attitude and attitude towards the application on brand recall, highlighting the importance of attitudes on brand recall. even though, attitude is treated as an outcome variable in most advertising research, this research preferred to treat it as an antecedent of brand recall and proved its effect on recall in in-app banner ads. this is one of the contributions of this research to existing literature. the implications of this result underline the importance of personalization in in-app ads for practitioners and offer perspective. accordingly, mobile advertisers should track and identify individual consumer brand preferences through social media follows and likes; and place the ads of each consumer’s most liked brands to applications that they use frequently. in other words, they should pay attention to both individual brand attitude/usage/purchase, and also application choice/usage/liking when deciding on in-app mobile banner ad strategy in order to increase ad effectiveness. as to the type of application and location of the banner, it is advisable for advertisers to choose landscape applications and locate the banner at the top of the screen. an interesting finding of this research was that besc has a negative impact on brand recall of in-app mobile banner ads. this was an unexpected result since it was thought that as people are more involved with brands and use them to define themselves, their likelihood of recall would be higher. one plausible explanation for this negative effect might be that the brand under question in this research (adidas) may not be in the set that consumer engage with and use to define themselves. given that brand attitude has a positive impact on brand recall contrary to besc, it is possible that if the brand is among the prominent brands that consumers identify with, the recall will be higher. thus, this finding needs further exploration. additional factors such as brand self-connection might be added to the model to develop the research. references apsler, r., & sears, d. o. (1968). warning, personal involvement, and attitude change. journal of personality and social psychology, 9(2p1), 162. bart, y., stephen, a. t., & sarvary, m. (2014). which products are best suited to mobile advertising? a field study of mobile display advertising effects on consumer attitudes and intentions. journal of marketing research, 51(3), 270-285. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.122 | http://emaj.pitt.edu what makes consumers recall banner ads in mobile applications page |15| emerging markets journal bhave, k., jain, v., roy, s. (2013), ‘understanding the orientation of gen y toward mobile applications and in-app advertising in india,’ international journal of mobile marketing, 8 (1), 62-74. chang, c. h., & huo, k. h. (2011). mobile advertising: triple-win for consumers, advertisers and telecom carriers. in sigir workshop on internet advertising, beijing, china. cmo council (2012), engage at every stage: the new mobile marketing mandate. palo alto, ca: chief marketing officer council world wide. ehrenberg, a. (1974) repetitive advertising and the consumer. journal of advertising research,14(2), 25–35. emarketer (2011), u.s. digital media usage, retrieved from: http:/www.emarketer.com emarketer. (2012). u.s. mobile commerce forecast retrieved from http://www.emarketer.com (accessed 30 january 2012). escalas, j. e. (2004), ‘narrative processing: building consumer connections to brands,’ journal of consumer psychology, 14 (1-2), 168-180. haddadi, h., hui, p., & brown, i. (2010, september). mobiad: private and scalable mobile advertising. in proceedings of the fifth acm international workshop on mobility in the evolving internet architecture (pp. 33-38). acm. holbrook, m. b., & lehmann, d. r. (1980). the role of message content versus mechanical features in predicting recognition of print advertisements. journal of advertising research, 20(1), 53-62. jain, v. and pant, s. (2012), ‘navigating generation y effective mobile marketing in india: a conceptual framework,’ international journal of mobile marketing, 7 (3), 56-65. kent, r. j., & allen, c. t. (1994). competitive interference effects in consumer memory for advertising: the role of brand familiarity. the journal of marketing, 97-105. lambrecht, a., & tucker, c. (2013). when does retargeting work? information specificity in online advertising. journal of marketing research, 50(5), 561-576. lang a. (2000). the limited capacity model of mediated message processing. journal of communication; 50:46–70. mackay, t., ewing, m., newton, f., & windisch, l. (2009). the effect of product placement in computer games on brand attitude and recall. international journal of advertising, 28(3), 423-438. mediamind (2011), iphone, ipad yield double click rate to android devices, retrieved from: http:/mediamind.com muehling, d. d., laczniak, r. n., & stoltman, j. j. (1991). the moderating effects of ad message involvement: a reassessment. journal of advertising,20(2), 29-38. nelson, m. r. (2002). recall of brand placements in computer/video games.journal of advertising research, 42(2), 80-92. nelson, michelle, ronald a. yaros, and heejo keum (2006), “examining the influence of telepresence on spectator and player processing of real and fictitious brands in a computer game,” journal of advertising, 35 (4), 87–99. nittala, r. (2011). registering for incentivized mobile advertising: discriminant analysis of mobile users. international journal of mobile marketing, 6(1), 42-53. patel, dev, jeremy schneider, and kushan surana (2013), “cracking the mobile advertising code,” harvard business review blog network, (september 11), (accessed february 27, 2014), [available at http://blogs.hbr.org/2013/09/cracking-themobileadvertisin/]. petty, r. e., cacioppo, j. t., & schumann, d. (1983). central and peripheral routes to advertising effectiveness: the moderating role of involvement. journal of consumer research, 135-146. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.122 | http://emaj.pitt.edu mesut çiçek, i̇rem eren-erdoğmuş, i̇kram daştan emerging markets journal | p a g e |16 rice, b. & bennett, r. (1998) the relationship between brand usage and advertising tracking measurements: international findings. journal of advertising research,38(3), pp. 58 66. rosenkrans, g. and myers, k. (2012), ‘mobile advertising effectiveness,’ international journal of mobile marketing. winter2012, 7 (3), 5-24. schneider, l. p., systems, b., & cornwell, t. b. (2005). cashing in on crashes via brand placement in computer games: the effects of experience and flow on memory. international journal of advertising, 24(3), 321-343. seiders, k., voss, g. b., godfrey, a. l., & grewal, d. (2007). servcon: development and validation of a multidimensional service convenience scale. journal of the academy of marketing science, 35(1), 144-156. seung-chul yoo, m.a., and pena, j. (2011), do violent video games impair the effectiveness of in-game advertisements? the impact of gaming environment on brand recall, brand attitude, and purchase intention, cyberpsychology, behavior, and social networking, 14 (7-8), 439-446. sherif, m., & hovland, c. i. (1961). social judgment: assimilation and contrast effects in communication and attitude change.oxford, uk: praeger sie siemens, j. c., smith, s., fisher, d., thyroff, a., & killian, g. (2015). level up! the role of progress feedback type for encouraging intrinsic motivation and positive brand attitudes in public versus private gaming contexts. journal of interactive marketing, 32, 1-12. siemens, j. c., smith, s., & fisher, d. (2015). investigating the effects of active control on brand recall within in-game advertising. journal of interactive advertising, 15(1), 43-53. sprott, d., czellar, s., & spangenberg, e. (2009). the importance of a general measure of brand engagement on market behavior: development and validation of a scale. journal of marketing research, 46(1), 92104. vatanparast, r. and butt, a.h. (2010), “an empirical study on study of factors affecting use of mobile advertising,” international journal of mobile marketing, 5 (1), 28-40. walsh, p., kim, y., & ross, s. d. (2008). brand recall and recognition: a comparison of television and sport video games as presentation modes. sport marketing quarterly, 17(4), 201-208. wooldridge, d., & schneider, m. (2011). monetizing free apps with iad and other in-app advertising opportunities. in the business of iphone and ipad app development (pp. 159-205). apress. xie, w., zhao, y., and xie, w. (2013), “the effects of interface design of hand-held devices on mobile advertising effectiveness among college students in china,” international journal of mobile marketing, 8 (1), 46-61. yoo, s. c., & peña, j. (2011). do violent video games impair the effectiveness of in-game advertisements? the impact of gaming environment on brand recall, brand attitude, and purchase intention. cyberpsychology, behavior, and social networking, 14(7-8), 439-446. zaichkowsky, j. l. (1985). measuring the involvement construct. journal of consumer research, 341-352. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu re-examining firm size and corporate social responsibility: the visibility approach golrida karyawati p universitas prasetiya mulya, indonesia | golridda@yahoo.com mira muliani kpmg indonesia, indonesia | mira.muliani@outlook.com prem lal joshi multimedia university, malaysia | prem@acadjoshi.com abstract in a previous study on the firm size and corporate social responsibility (csr) participation conducted by golrida, et al (2017), different result is reported with udayasankar’s hypothesis (2008) which states a u-shape relationship of firm size and csr participation. however, it is arqued that udayasankar hyppothesis is better applicable in developed countries, while in developing countries an inverted u shape relationship is found. but, golrida et al (2017) can only prove the form of relationship using two perspectives stated by udayasankar, which are operating scale and resourcess access. the proxy of visibility could not capture the inverted u shape relationship due to measurement problem in the previous study. this study aims at re-examining the relationship between firm size and csr participation from the visibility perpective by employing two proxies of visibility, which are analyst coverage and news coverage respectively. indonesian companies are chosen to capture the context of developing country. content analysis is done in obtaining csr data of 433 companies listed on indonesian stock exchange on 2012, while the data of visibility proxies are extracted from thomson reuters and selected news portal namely, detik.com. the result of study shows that both visibility proxies, which are analysts coverage and media coverage form inverted ushape relationship with csr participation. the findings in this study contribute to the literature that, the form of firm size and csr participation relationship in the context of developing countries is different than those in developed countries. keywords: csr participation, firm size, visibility, analyst coverage, news coverage new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:golridda@yahoo.com mailto:mira.muliani@outlook.com mailto:prem@acadjoshi.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu golrida karyawati p, mira muliani, prem lal joshi emerging markets journal | p a g e |1 re-examining firm size and corporate social responsibility: the visibility approach golrida karyawati p mira muliani prem lal joshi i. background this research emphasizes the importance of country characteristics in analyzing the relationship between firm size and csr participation. the previous research show the inconsistent relationship between firm size and csr participation. gamrh & dhammari (2016), tan et al (2016), shubiri et al (2012), gamerschlag et al (2011), and darnall et al (2009), for example, found a positive relationship between firm size and csr participantion. on the other hand, ebiringa et al (2013) and nawaiseh et al (2015) indicated a negative relationship between the two variables. additionally, pauly et al (2013) argued that both larger and smaller firms possess several favorable and unfavorable charactheristics in promoting csr practices. however, small businesses, in general, will experience more difficulties than their larger counterparts when engaging in socially responsible action, but they will overcome such constraints (lepoutre & heene, 2006). udayasankar (2008) argued that the relationship between firm size and csr participation is not linear shape in nature. he posits that large sized firms are more likely to have greater involvement in socially responsible activities as they are perceived to be more visible. small-sized companies may also be equally motivated to achieve legitimacy by doing csr inititives. therefore, udayasankar (2008) proposed the u shape relationship between firm size and csr practices. however, golrida et al (2017) argue that the hypothesis proposed by udayasankar (2008) may be only applied in developed countries, where the social, economic, and political conditions are more settled as well as such countries which have higher respect for their political, civil rights, international standards, and balance of power. the argument of udayasankar (2008) that small companies are also actively involved in csr practices, may be applied in those countries in which social and law enforcement strongly support csr partices. many csr practices require a huge of resources therefore, it needs strong commitment to do it. by collecting data from listed companies from indonesian context, which is a developing country, golrida et al (2017) shows that two perspectives of firm size which are resource access and operating scale, have an inverted u-shape relationship between firm size and csr participation. this finding relates to the culture in this country, where companies that have achieved high position and reputation tend to be reckless and do not put importance on csr participation. for instance, when a company is still small, they might feel the need for csr initiatives as the way to increase their reputation, but when the company reaches certain position and gets good reputation, they deem that csr is not that important anymore and will allocate fund to other activities that are considered more important to the firm. however, golrida et al (2017) can not reveal the inverted u-shape relationship using the third perspective proposed by udayasankar (2008) since that research use dummy variable to measure visibility. the present research re-examines the relationship between firm size and csr from the attribute of visibility which are analyst coverage and news coverage. this research conjectures that visible firms are the ones that are highly covered in news and the ones that are followed by many market analysts. this research contributes to body of knowledge which is macro analysis about csr practice among countries. ii. literature review and hypothesis development csr definition csr is not a standalone concept. instead it is embedded with other concepts such as ethics, citizenship, good corporate governance, and others (sprinkle & maines, 2010; kang et al, 2010; grosbois, 2012; zheng et al, 2014; weber, 2008; taysir & pazarcik, 2013). besides, csr is a very wide and contextual concept (mehar & rahat, 2007). some researchers for example, refer to philanthropy actions in defining csr (wang & qian, 2011; zheng et al, 2014; brammer & millington, 2005; williams & barrett, 2000; fombrun & shanley, 1990), while other focused on environmental and social such as definition published by european commission (2010). due to its nature, csr has many definitions and the definitions are very conditional as well as dynamic so that it is almost impossible to state a robust definition of csr. therefore, debating about the definition of csr bocomes less important if the focus of discussion is to get a comprehensive understanding about csr initiatives. orientation toward csr participation or involvement reveals more meaningful analysis. due to its complex characteristic, a perspective is needed to get a better understanding of csr definition. company’s perspectives from developing countries, for example, are different from developed countries. carrol construct (1999) provides a good guidance in explaining the scope of csr. carrol (1999) proposed four dimensions of csr which forms a pyramid construct, consisting of four layers. on the bottom layer is economic dimension responsibility, followed by legal responsibility on the second layer. ethical responsibility on the third layer and on the top is discretionary volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu re-examining firm size and corporate social responsibility: the visibility approach page |2| emerging markets journal responsibility or company philanthropy. economic responsibility is basic responsibility and the most mandatory obligation for all companies, followed by legal responsibility. not fulfilling these two dimensions of csr, will cause company in trouble. ethical responsibility is a responsibility which is not regulated by law, but morally companies have to do the responsibility as it is expected by society. however, the discretionary or philanthropy on the highest layer is purely a voluntary responsibility based on company discretionary or meritocracy. carrol construct (1999) is a good reference in determining whether a certain action can be classified as csr or not. caroll & shabana (2010) argued that carrol construct is very useful definition because it specifies the firm’s economic responsibility as a factor to be considered in csr, and this becomes very important in thinking about the business people, who in particular, think of their economic performance as something for themselves and for the society. furthermore, the definition separates legal, ethics and philanthropic categories of csr, and this helps to do a sharper examination of different motive for each category of socially responsible action. csr participation in developed and developing countries previous studies tend to analyse csr practices according to developing and developed countries classification (beddewela & herzig, 2013; jamali & mirshak, 2007; baskin, 2006; baughn et al, 2007; cappellin & giuliani, 2004; chapple & moon, 2005; ewing & windisch, 2007; kimber & lipton, 2005; oliviera, 2006; qu, 2007; roper & weymes, 2007; welford, 2004). classification of developing and developed countries in the view of institutional theory (north,1990) generate more homogen country characteristics in analysing csr practices ( baughn et al, 2007). companies in developing countries practice less csr compare to those in developed countries due to economic development (baughn et al.2007). husted dan allen(2006) indicated that institutional factors matter in explaining the csr decision such as governance institutional. governance institutional in developing countries is generally weaker than those in develped countries (beddewela & herzig, 2013; jamali & mirsha,.2007). csr practices in developed countries are mostly done for strategy purpose. western european and north american countries for example, conduct csr initiatives to increase the company’s performances and reputation, and to fulfill the demand from the government to contribute to society development (kumar & tiwari, 2011; mullerat, 2013). gamerschlag et al (2011) found that csr disclosure in german companies are affected by their visibility, shareholder structure and us stakeholders. a study by kan (2012) for us companies stated that csr is important in building their brands, creating innovative products, becoming more sustainable and become more financially stable. in developing countries however, csr practices emphasize the importance of helping each other to seek betterment in the communities (quazi, 2007; jamali & mirshak, 2007; rajapakse & fernando, 2014). bhattacharyya (2015) findings on indian companies suggested that firms in india conduct csr practices based on the strong influence of their cultural ethics and values in their society. quazi (2007) stated that the principal motivation of bangladesh firms to engage in csr activities has stemmed from a sense of their moral obligation to give back to society. amaeshi (2006) also found that csr understanding in nigeria is still largely philanthropic and altruistic. csr in the developed countries is more structured. in developed countries, csr is highly regulated by the government and these regulations serve as the pressure and standard for the companies to implement csr initiatives. li et al (2010) stated that institutional factors play an important role in encouraging csr practices in developed countries. it is argued that there is lack of a systematic, focused, and institutionalized approach to csr in developing countries and that the understanding and practice of csr are still grounded in the context of philanthropic action (jamali & mirshak, 2007). in developing countries, a csr practice is less formalized and is not specifically embedded in any code and standard. in these countries, mncs representatives play a big role in initiating csr required by the home country of the mncs. companies in developed countries explore more csr issues. csr conducts in developed countries also prioritize the environmental issues as they have high awareness regarding this matter (kumar & tiwari, 2011). for instance, in uk, there are regulations that become the basis for authorized bodies to assess environmental impact of companies, namely integrated pollution and prevention control (ippc) act 1999, which regulated a significantly wider range of pollution sources, and consequently, a larger number of british businesses than any previous legislation (bichta, 2003). in japan, the government issued a basic environment law in 1993, environmental reporting guidelines in 2000 and the environmental accounting guidelines in 2005 to ensure that all companies are aware of their tasks to preserve the environment while operating their businesses. other than that, the government ministries such as ministry of environment and ministry of health, labor, and welfare also issued statutory laws and various guidelines for social and environment responsibilities (krukowska, 2014). csr practices in developing countries often imitate the csr in developed countries’ companies. bedewella & herzig (2013) identified that csr practices of multinational companies in developing countries are generally initiated by host company from developed countries. in bangladesh, for example, csr practices have largely been influenced by the initiatives of mncs since this country is exposed to global standards (quazi, 2007). according to beddewela & hezig (2013), mncs representatives in sri lanka play a vital role in pressuring the companies to change their practices to put csr in higher consideration in conducting their business. csr conducted by indonesia’s listed companies lie in the area of philanthropy. csr is considered as volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu golrida karyawati p, mira muliani, prem lal joshi emerging markets journal | p a g e |3 social grants and charity issues that may seem obvious to fulfill the demands from stakeholders (hermawan & mulyawan, 2014). even though in indonesia, there are such as the limited liability company law no. 40 year 2007 and law no. 25 year 2007 that encourages companies which operate their business in the field or industry related to the natural resources must conduct socially and environmentally responsible activities, however, the enforcement of the law seems to be weak. trencansky & tsaparlidis (2014) collected empirical evidence on swedish companies and found that the pattern matches the findings of udayasankar´s study (2008). the study reports high levels of csr participation of small and large firms, while the levels of csr participation of middle-sized firms were considerable lower (udayasankar, 2008, p. 172). the study revealed that the u-shaped relationship between firm size and csr participation exist as a result of lowest motivation to engage in csr activities by medium-sized companies (udayasankar, 2008, pp. 167, 172). iii. hypothesis development visibility and csr participation motivation for firms to participate in csr is related to their efforts to enhance visibility and it is explained by legitimacy theory. according to legitimacy theory, legitimacy is an internal interest of firm or companies to operate inherently with the social and environment values to be accepted by the surrounding society (deegan, 2002). legitimacy is a general perception that the actions of an entity are desirable and are in alignment with society’s values (suchman, 1995). increased visibility in the public raises the profile of firms, enhancing their legitimacy in the eyes of the related stakeholders (mehran & peristiani, 2009). wang (2013) argued that csr participation is a response towards public pressure as well as media attention or social visibility resulting from major social incidents. the more visible the companies are, the more their actions and decisions are also monitored by many stakeholders, including the media. therefore, they need to conduct csr initiatives to gain legitimacy, thus increasing their social reputations by legitimizing their actions. ramdhony (2015) stated that companies with higher visibility provide more csr information disclosure to achieve legitimation. gamerschlag et al (2011) found that german companies’ disclosures of all csr issues are affected by their visibility. brammer & millington (2006) found that visibility found strong support for a positive relationship between organizational visibility and philanthropy. however, according to lepoutre & heene (2006), small companies eventhough facing difficulties in doing csr will overcome such constraints in order to increase their organizational visibility, udayasankar (2008) suggested that large-sized firms are more likely to have greater involvement in socially responsible activities as they are perceived to be more visible, thus, non-participation would bring unfavorable impact to those firms. however, he also stated that small-sized firms might be equally motivated to pursue csr initiatives, considering csr as a source for achieving legitimacy, and this legitimacy leads to increasing performance, which serves as an incentive for less visible firms to conduct csr. p. golrida et al. (2017) used company criteria of high and low profile as a proxy of visibility. their study found that high profile companies tend to practice csr than that of low profile companies. but the research did not reveal the non linear form of the relationship between firm size and csr as proposed by udayasankar (2008). therefore, hypothesis 1 and hypothesis 2 respectively are stated as follows: h1: visibility is positively associated with csr participation. h2: visibility is negatively associated with csr participation analyst coverage analyst coverage is useful for firms to signal information about company performances, and increasing their visibility (hassan & skinner, 2016). the more an analyst follows the company information, the more opportunity for the company to be known publicly or visible publicly. several researcherrs previously used analyst coverage as the proxies of visibility. for instance, jung (2012) analyzed the relationship between visibility and stock return. chang (2012) used analyst coverage to analyze the relationship between firm visibility, and corporate bond liquidity. another study explored the impact of s&p 500 index inclusion on firm visibility (blease & paul, 2003). ioannou & serafeim (2010) found that firms with higher analyst coverage tend to achieve higher corporate social performance. firms with more analysts following them will be more visible to the public, thus, those firms conduct csr to have higher return. however, there are also findings that proposed negative relationship between analyst coverage and csr participation. the reason for this relationship is that companies have to meet analyst’s expectations or estimations towards their financial performance; thus, they will cut back what they deem as unnecessary spending including csr activities (adhikari, 2014). based on the above, hypothesis ia and hypothesis2a are developed as follows: h1a: analyst coverage is positively associated with csr participation. h2a: analyst coverage is negatively associated with csr participation news coverage media has become the main source of information regarding current events around the world. company’s events are also recorded in the news, such as company ipo, big and influential transactions, and other positive and negative events of companies can be accessed through the news that are published through the media. according to the agenda-setting theory, news in media has strong influence towards public opinion. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu re-examining firm size and corporate social responsibility: the visibility approach page |4| emerging markets journal walter lippmann first wrote the concept of this theory in his 1922 classic, public opinion, in which he stated that the news media are a primary source of what we know about the larger world of public affairs (mccombs, 2005). carroll & mccombs (2003) stated that news regarding firms’ businesses will have impact in forming public’s opinion regarding the firms, and the more the company’s events are reported in the news, the more visible the company would be. hence, the higher the frequency of companies’ news covered in media, the more visible those companies will be in public. blease & paul (2003) used news coverage to analyze the relationship between visibility and index inclusion. fang & peress (2009) used number of companies’ news in new york times, usa today, wall street journal, and washington post as the proxy for news coverage and related it to stock return. there are few literatures that relate news coverage to corporate social responsibility such as the researchers conducted by ioannou & serafeim (2010) and ekowati (2014). ekowati (2014) found that the news coverage measured by dummy variable whether the firms publish csr news or not, has positive relationship towards csr participation. however, there are also findings that news coverage does not have any relationship towards the csr (nur, 2012). there are companies with low news coverage, meaning that it has lower visibility, still conduct good csr as a tool to increase their reputation. therefore, hypothesis ib and hypothesis 2b are developed as follows: h1b: news coverage is positively associated with csr participation h2b: news coverage is negatively associated with csr participation iv. methodology research data this study analyzes the relationship of firm size and csr participation from the visibility perpective by employing two proxies of visibility which are analyst coverage and news coverage. this research is conducted in indonesia as a representative of developing countries. data of csr participations are acquired using content analysis method from annual report of companies listed on indonesian stock exchanga in the year of 2012. table 1 provides sample screening of the companies. data of analyst coverage and news coverage acquired from thomson reuter and www. detik.com on the year of 2012. considering that csr data is acquired trough content analysis which take much time to collect the data. observation period is restricted to one year. variable measurement corporate social responsibility (csr) participation in this study, corporate social responsibility participation is a dependent variable. the assessment of csr participation level used in this study is based on the indicators adopted by sembiring (2005). these indicators are divided into three main categories: 1. economic: the economic indicators explain an organization’s sustainability development initiatives which have an impact on the economic conditions of stakeholders and also the economic performance in the region and international path. the economic indicators contain the business information and 16 indicators are used in this study. 2. environment: the environment indicators explain an organization’s sustainability development initiatives that are related to the ecosystem, nature, water, land and air. the environmental indicators concern about input from natural resources and materials, the result and impact of the output emission, and waste. it also includes the product responsibility performance and 20 indicators are used in this study. 3. social: the social indicators explain an organization’s sustainability development initiatives that affect the social operation. the social indicators consist of the practices of the labors and workers, human rights, and the responsibilities of products that are being produced by the companies in indonesia. a total of 47 indicators are used in this study. the analysis is carried out by evaluating the existence of each indicator in company’s annual reports. if the item is disclosed in annual report, it is given a score of 1 and if the items are not disclosed in the annual report, it is given a score of 0. the measurement formula is: notation: csrpj = corporate social responsibility participation index of company j nj = number of csr indicators of company j, nj ≤ 83 σxij = (1 = if item i disclosed and 0 = if item i is not disclosed) volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu golrida karyawati p, mira muliani, prem lal joshi emerging markets journal | p a g e |5 thereby, 0 ≤ csrdij ≤ 1 analyst coverage analyst coverage is measured by the number of analysts who follow the performance of the listed companies and publish the analyst research reports: analysts coverage = number of analysts following the companies the data of analyst coverage was extracted from the estimates section provided in thomson reuters. news coverage the variable of news coverage is measured by the frequency of company news covered in media in one year. news coverage = frequency of company news covered in media we followed several steps to select the media news. first, we used alexa rank to find the five best online news portals in indonesia in the year 2012. alexa rank is used because of its credibility and that it is widely used by people to search for best websites all over the world. furthermore, websites with high alexa rank have better image and credibility, as well as more web users (thakur, 2011). table 2 provides the top five online news portals for 2012 according to alexa.com. source: alexa.com second, further selection is done towards the five top online news portals which are shown on table 3. we used two criteria in this selection. in the first criteria, the news website provides the function to sort news published for a particular company on a yearly basis. in the second criteria, the results of news search in the related period must include the amount of news exactly as shown in the stated number of news on the websites to enable the researcher to sort the relevance of the news for each company one by one. from the first criteria, viva.com, okezone.com, and tribunnews.com were eliminated. for the second criteria, kompas.com was eliminated because even though the portal has year-sorting feature, the amount of news that are displayed did not match the number of news shown in the searching result. for example, the result showed the result of 500 news of a particular company, but they only display 100 news. finally, detik.com was selected as the source of data for news coverage. method of analysis the descriptive statistic is used to analyze various statistical calculations values such as minimum, maximum, mean and standard deviation respectively. this research also conducts multiple regression analysis. the regression process was done through eviews statistical software. the estimation technique used is ordinary least-squares (ols). this is the most frequently used method since it chooses the coefficient estimation that minimizes the summed squared residuals (studenmund, 2011). t-test is used to test level of statistical significance of this coefficient estimation and f-stat is used to examine the fit of the overall model. white test is also performed in this regression model in order to avoid the heterokedasticity problem in the proposed model. the research approach in this study focuses on the multiple regression models. this research employs several control variables as was done by golrida et al (2017) which are; total assets (assets), return on asset (roa), and debt to equity ratio (der). these three variables have been considered to have influence in determining the csr participation. total assets are being used to measure the firm size (uwalomwa, 2011). roa also has influence to determine company csr (chih, 2010). additionally, der also affects corporate social responsibility (nawaiseh, 2015). we extracted accounting data, such as net income, total assets, total liabilities, and total shareholders’ equity necessary to calculate the control variables from company financial statements that are available at thomson reuters. the regression is conducted separately for models 1 until 3 which exclude control variables. while models 4 until 6 include the regression with control variables (total assets, return on assets, and debt equity ratio). regression without control variables: 1. csrp = α+β1analyst+ β2analyst² + ℮ 2. csrp = α+β1media + β2media² + ℮ 3. csrp = α+β1analyst+ β2analyst² + β3media + β4media² + ℮ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu re-examining firm size and corporate social responsibility: the visibility approach page |6| emerging markets journal regression with control variables: 4. csr = α+β1analyst+ β2analyst² + β3assets + β4roa + β5der + ℮ 5. csr = α+ β1media + β2media² + β3assets + β4roa + β5der + ℮ 6. csr = α+β1analyst + β2media + β3analyst² + β5media² + β6assets + β7roa + β8der + ℮ notation: csrp = percentage of csr participation level; α = the estimate of constant term; β1.... β5 = estimated of regression coefficient of analyst, analyst², media, media², assets, roa, der; analyst = measure of visibility by the number of analysts following the companies analyst² = measure of visibility by the number of analysts following the companies quadratic function; media = measure of visibility by the frequency of company news in detik.com media² = measure of visibility by the frequency of company news in detik.com quadratic function; assets = control variable natural logarithm of total assets; roa = control variable return on assets; der = control variable debt to equity ratio ℮ = error term (permanent mistake estimate v. results and analysis statistic descriptive table 4 presents descriptive statistics for all research variables. the findings reveal that only 193 companies of the observed indonesian listed companies scored csr participation above the mean value which was 40.74%. while, the rest of the companies scored below the average of csr participation value. these figures imply that indonesian publicly listed companies still have low csr participation. note: csr is total percent (%) of csr participation, asset is the ratio of total assets over 1 billion, roa is the ratio of return to total assets, and der is ratio of total liabilities to total equity table 5 exhibits the sectors with at least average level of csr participation. among the high csr participants, most of the companies are those that are involved in the well-being of the environment and the welfare of the society, such as indofood sukses makmur tbk, medco energi international tbk, eagle high plantation, perusahaan gas negara, sampoerna agro tbk, and bank central asia tbk. analyst coverage findings reveal that only 89 out of 433 or 20.57% firms were followed by analysts. most of publicly listed companies or 79.43% were not followed by the analysts at all. therefore, the mean statistic of analyst coverage which amounts to 1.4319 is brought by few companies which were followed by many analysts. it is interesting to find the fact of those 67 companies that have no analysts following, have more than 50% csr participation level. given that the analyst coverage reflects company visibility, this finding indicates that company of no visibility is motivated to practice csr. among those observed companies, there are 27 firms that have at least 10 analysts following them, such as bank central asia tbk, semen indonesia tbk, astra agro lestari tbk, indofood cbp sukses makmur tbk, kalbe farma tbk, and bumi serpong damai tbk. the average csr participation for these 27 high visible companies is also more than 50%, which is considerably high. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu golrida karyawati p, mira muliani, prem lal joshi emerging markets journal | p a g e |7 meanwhile, the average csr panticipation for companies that have less than 10 following analysts is 40%. however, among firms with less than 10 following analysts, 42% firms perform csr at an average level of 51%. table 6 shows the summary of firms that were followed by analyst. table 6 also shows that three top companies that are widely followed by analysts are from real estate and construction, and trading, service and investment, and finance sectors. it is interesting to see that in year 2012, analysts prefer to follow those three sectors. however, it can be explained by the condition of those sectors. pt mega capital indonesia’s analysis found the sector of trading, service, and investment has experienced highest growth during 2011-2015 compared to the other sectors (cakti, 2015). in addition, an analyst from indo premier securities stated that in 2012, stocks in financial and property sectors performed really well and are largely transacted by investors (viva, 2012). this indicates that market analysts tend to follow stocks of companies that are highly prospective and have positive outlook. news coverage even though, the mean of news coverage is 4.7760, there are 192 companies or 44.34% from total observed companies that are not covered at all in the news during 2012. however, the csr practices of 40 companies are above the average. given the news coverage which reflects company visibility, similar with analyst coverage, this finding also indicates that not visible companies are also motivated to practice csr. finding for companies of high news coverage is also similar with what occur in analyst coverage. furthermore, 55 companies that were covered at least 10 times in the news practice, the csr participation is more than 50%. the finding also shows that the average csr participation for companies that have been covered less than 10 times is 39%, which almost reaches the average csr participation level. however, among companies that are covered in news less than 10 times, there are 90 companies which performed csr at the average level of 54%. these findings reveal the tendency of non linier relationship between news coverage or firm visibility and csr participation. table 7 exhibits the sectors with firms that have at least been covered 5 times. three top companies that have high news coverage are from trading, service and investment, transport, infrastructure and utility, and real estate and construction sectors respectively. this finding may be explained by the fact that in 2012, government established regulation called undang-undang (uu) republik indonesia no.2/ 2012 and presidential regulation called peraturan presiden republik indonesia (perpres ri) no. 71/2012. these regulations about land acquisition for construction and infrastructure projects were expected to bring many benefits for the firms in these industries in building their projects (mola, 2012). therefore, in 2012, the firms in these industries launch many new big projects and media covered these events quite intensely. moreover, along with those projects, several corruption and litigation cases in construction and infrastructure industries are also uncovered and are widely covered by the media. furthermore, csr news has low coverage in the news, which might be related to the average low csr participation of the observed companies. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu re-examining firm size and corporate social responsibility: the visibility approach page |8| emerging markets journal total news from all observed companies is 2,068 news, which contain 71% positive news, 22% negative news, and 6% neutral news. interestingly, 1% news is about companies csr initiatives and negative csr news, such as illegal forest fire which damaged the environment. table 8 provides all news categories. positive news mostly covered about increasing financial performance, such as increase in profits, increase in stock price, dividend payment, success in obtaining financing for business operation, business expansion, launch of new products or services, achievements of certain awards, and positive outlook of companies’ events. meanwhile, the negative news include decreasing financial performance, such as decrease in profits, stock suspension, struggle of debt settlement, corruption and other litigation cases, negative outlook for the companies. the neutral news mostly announced the general meeting of shareholders. regression results the purpose of this research is to capture the empirical evidence of argument of the study conducted by golrida et al (2017), about the inverted u-shape relationship between firm visibility and csr participation. this study uses two proxy of visibility which is analyst coverage and news coverage. table 9 provides the result of the regression. model 1 until 3 on table 9 shows the regression without control variables. model 3 is the regression between csrp, analyst, and media. these models could explain well the relationship between firm visibility and csr participation. the coefficient in model 3 indicates that this relationship is reflected in an inverted u-shaped curve. this pattern resulted from the positive and negative correlation between analyst and media variables toward csr participation. when the independent variables are regressed separately, the results show that the models are still good enough (fit) to explain the relationship between firm visibility and csr participation. model 1 in table 9, shows the result of analyst towards csrp, the coefficient of this model is statistically significant and could be used to explain csr participation. in model 2, the result of regression between media and csrp is also significant and it can be applied to explain the relationship between news coverage and csr participation. when three control variables are included in the model, the result of regression is still significant, and the model is fit. table 9 also provides the regression result for models 4 until 6. in model 4, we could see that the variable analyst still significantly relates to csr participation even though the significance level decreases a bit. in model 5, we could see that the variable media also still significantly relates to csr participation. the last model, which is model 6, shows the regression result between analyst, media, assets, roa, and der toward csrp. the regression results show that analyst coefficient is statistically significant to explain csr participation with 99% confidence level, media coefficients is also statistically significant to explain csr participation with 90% confidence level. however, the addition of control variables did not necessarily increase the significance of both variables of firm visibility, which are analyst coverage and news coverage. it is interesting to see that, the number of adjusted r² for model 3 is the highest, with the value of 16.69% for the adjusted r². this figure would not be significantly different from the adjusted r² of the other models, but it could show that the relationship between firm visibility and csr participation are best explained with this model. note: asterisks indicate significance at p<0.10 (*), p<0.05 (**) and p<0.01 (***) since analyst coverage and news coverage are proxies of firm visibility model, the overall regression model provided on table 9 shows that the models are good and can be used to explain the relationship between firm visibility and csr participation level with the f-stat significance levels within the 99% confidence level. to show that the regression models in this research are free from the issue of multicollinearity, table 10 presents the correlations between all the independent variables used in this research. the table indicates low volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu golrida karyawati p, mira muliani, prem lal joshi emerging markets journal | p a g e |9 correlations of each pair of variables, and the result shows that no correlation value is more than 0.8, meaning that there is no serious multicollinearity problem in this regression model. furthermore, regression models in this paper applied the white heterokedasticity consistent standard errors and covariance. table 11 shows the heterokedasticity white test result, where the prob. chi-square value is 0.9795, indicating that there is no heterokedasticity problem in this regression model since 0.9795 is more than the significance levels of 0.01, 0.05, and 0.1. vi. discussion findings of this study reveal that analyst coverage forms the inverted ushape relationship with csr participation. the previous research done by ioannou & serafeim (2010) found that the firms with higher analyst coverage tend to achieve higher corporate social performance, since they need to maintain their reputation. this is also because analysts could serve as external monitoring system towards the company (chou & shiah-hou, 2007). however, adhikari (2014) found negative relationship between analyst coverage and csr participation. the reason is that companies have to meet analyst’s expectations or estimations towards their financial performance; thus, they will cut back what they deemed as unnecessary spending including csr activities. a finding of this study also reveals that media coverage form inverted u shape relationship with csr participation. however, the previous research (kang & kim, 2013) found that the relationship between news coverage and csr performance does not necessarily to be only positive or negative. the effect will most likely be positive only when the tone of the news is negative, while there might be low or no effect when the tone of news is positive. these findings in this study are in accordance to the previous studies, that there is no guarantee of the direction of relationship between firm visibility and csr participation. since analyst coverage and media coverage are both the proxies of visibility, this study indicates that the relationships between firm visibility and csr participation are reflected in an inverted u-shaped curve. this result is in accordance to golrida et al. (2017) argument, which proposed inverted u-shape relationship between firm visibility and csr participation in developing countries. the findings of this research also strengthen golrida et al (2017) argument that udayasankar (2008) hypothesis only applied in developed countries. the previous research done by trencansky & tsaparlidis (2014) also prove that udayasankar (2008) hypothesis which proposed u-shape relationship between firm size and corporate social responsibility is applied in developed country. table 11 heterokedasticity-white test the inverted u-shape relationship between firm visibility and csr shows that when the company is still not too visible, it will increase csr participation. however, at certain point, when the companies already have high visibility, there is a tendency for the firms to decrease their csr participation. this situation occurs because of the culture of indonesian people that become careless or reckless whenever they already achieve the highest position. this causes the firms to feel that there will be unnecessary to conduct csr initiatives to increase public’s awareness of the company, or other specific reasons that results in the decline in their csr performances. vii. conclusion this research assessed the relationship between firm size and csr participation in indonesia using visibility approach. the analysis was performed using cross-sectional analysis of indonesian publicly listed companies for the year 2012. both proxies of visibility, which are the analyst coverage as well as news coverage, have positive and negative relationships with csr participation. furthermore, the relationship between those two variables and csr participation also shows significant relation, forming an inverted u-shaped curve relationship. the positive correlation happened between low to medium visibility companies and the negative correlation happened between medium to highly visible companies. this result indicates that the companies with medium level of visibility achieve the maximum level of csr participation. such indication could mean that the certain small-to-medium visible firms see csr as a good source to visibility of the companies. meanwhile, the highly visible firms that are already publicly well known tend to become reckless and feel that it will not be necessary to conduct csr since they are already in strong position in the market. the findings of the research show that large sized companies in developing countries do not yet volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu re-examining firm size and corporate social responsibility: the visibility approach page |10| emerging markets journal exercise their social responsibility optimally. the fact revealed by the study explain the existence of resource curse in developing countries which are rich in natural resourses, as stated by wiig & kolstad (2010). therefore, the results of the study is a good reference for government of developing countries in evaluating the contribution of large sized especially mnc. in a developing country such as indonesia currently, there is a trend of utilizing companies’s csr practices to support government programs. the findings of the study are expected to become a good reference in making csr related policies and regulations in order to make sure that large sized copanies especially mnc fulfill their social responsibility as it should be. for further research, it may be suggested to reexamine samples from other countries to confirm the form of relationship between size and csr participation and to enrich macro analysis regarding csr practices among countries. researchers may also expand the period of the firms that are being observed so that the results will be able to capture more of the movements of the relationship between firm visibility and csr participation. by adding more periods to the observations, the results will be more accurate, since companies’ csr behaviors tend to change from time to time additionally, more countries may be included as the observations to obtain a bigger picture whether the proposed relationship in this paper between firm visibility and csr participation also applies to other developing countries. researchers may specify the research to only a certain particular sector or industry to see whether the pattern of relationship would be different between on sector or industry to the others, since firms in certain industry would have different perspective and demands regarding the socially responsible behaviors. references adhikari, b. k., (2014) causal effect of analyst following on corporate social responsibility. alabama. amaeshi, k., (2006) corporate social responsibility (csr) in nigeria: western mimicry or indigenous practices? international centre for corporate social responsibility nottingham university. baskin, j., (2006) value, values and sustainability: corporate responsibility in emerging market companies. working paper, cambridge programme for industry, october 1. baughn, c, bodie, n, & mcintosh, j.c., (2007) corporate social and environmental responsibility in asian countries and other geographical regions, corporate social responsibility and environmental management,14 (4): 189-205. bauman, pauly dorothée., christopher, w., spence, laura j., scherer & andreas georg., (2013) organizing corporate social responsibility in small and large firms: size matters. journal of business ethics, 115(4): 693-705. beddewela, e., & hezig, c., (2013) corporate social reporting by mncs’ subsidiaries in sri lanka. accounting forum, 37 (2): 135-149. bhattacharyya, a., (2015) corporate social and environmental responsibility in an emerging economy: through the lens of legitimacy theory. australian accounting, business and finance journal, 9 (2): 79-92. bichta, c., (2003) corporate social responsibility: a role in government policy and regulation. centre for the study of regulated industries (cri). blease, john. r. becker., & donna, paul., (2003) does index inclusion improve firm visibility and transparancy? working paper, babson college. http://www.fsa.ulaval.ca/nfa2003/papiers/john %20r.%20becker-blease.pdf brammer, s., & millington, a., (2006) firm size, organizational visibility and corporate philanthropy: an empirical analysis. business ethics: a european review, 15 (1): 6-18. brammer, s., & millington, a., (2005) corporate reputation and philanthropy: an empirical analysis', journal of business ethics, 61(1): 29-44. cakti, g. a., (2015) sektor perdagangan, jasa, dan investasi diprediksi paling kuat. retrieved june 2016, from bisnis.com. http://market.bisnis.com/read/20150105/191/38 7903/sektor-perdagangan-jasa-dan-investasidiprekdiksi-paling-kuat-bulan-ini campbell, d., & slack, r., (2006) public visibility as a determinant of the rate of corporate charitable donations, business ethics: a european review, 15 (1): 19-28. cappellin, p., & giuliani, g., (2004) the political economy of corporate responsibility in brazil social and environmental dimensions, programme paper on technology, business and society (no. 14), united nations research institute for social development. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu golrida karyawati p, mira muliani, prem lal joshi emerging markets journal | p a g e |11 caroll, a., & shabana, k., (2010) the business case for corporate social responsibility: a review of concepts, research and practice, international journal of management reviews , 12(1): 85– 10. carroll, c. e., & mccombs, m.. (2003) agenda-setting effects of business news on the public's images and opinions about major corporations. corporate reputation review, 6 (1): 36-46. carroll, archie. b., (1999) corporate social responsibility: evolution of a definitional construct, business society 38: 268. chang, o, kedia, s., wei, j., & zhou, x., (2012). firm visibility and corporate bond liquidity. centerforpbbefr.rutgers.edu chapple, w., & moon, j., (2005) corporate social responsibility (csr) in asia: a seven country study of csr website reporting, business and society, 44(4): 415-441. chih, h. l., et al. (2010) on the determinants of csr: international evidence on the financial industry. journal of business ethics , 93(1): 115-135. chou, r., & shiah-hou, s.r., (2007) quality of corporate governance, analyst coverage, and analyst forecast error: do analysts serve as external monitors to managers? companies annual report. (2012). retrieved from http://www.idx.co.id darnall, nicole., henriques, i., & sadorsky, p., (2009) adopting proactive environmental strategy: the influence of stakeholders and firm size, journal of management studies, 47 (6): 1072– 1094. ebiringa, o. t., yadirichukwu, emeh., chigbu, e.e., & ogochukwu, o.j., (2013) effect of firm size and profitability on corporate social disclosures: the nigerian oil and gas sector in focus , british journal of economics, management & trade , 3(4): 563-574. ekowati, l., prasetyono, & wulandari, a., (2014) pengaruh profitabilitas, likuiditas, growth dan media exposure terhadap pengungkapan tanggungjawab sosial perusahaan (studi pada perusahaan manufaktur yang terdaftar di bei tahun 2010-2012). simposium nasional akuntansi xvii, mataram, lombok. ewing, m., & windisch, l. (2007 contemporary corporate social responsibility in china: an extension of confucian philosophy, asian business and economics research unit discussion paper (no. 44) monash university. fang, l., & peress, j., (2009) media coverage and the cross-section of stock returns, journal of finance, 64 (5): 2023-2052. forbrum, c., & shanley, m., (1990) what's in a name? reputation building and corporate strategy, academy of management journal, 33 (2): 233258. frederiksen, l., (2015) what high-visibility firms do to market themselves differently retrieved june 2016, from hinge marketing: http://www.hingemarketing.com/blog/story/ne w-rules-of-marketing-what-high-visibilityfirms -do-to-market-themselves-d gamerschlag, ramin., moller, k., & verbeeten, f., (2011) determinants of voluntary csr disclosure: empirical evidence from germany. rev manag sci, 5(2): 233–262. gamrh, bakr ali., & redhwan ahmed al dhamari ., (2016) firm characteristics and corporate social responsibility, international business management,10(18): 4283-4291. golrida, p. k, katon, angesty., & joshi, prem lal., (2017) a study of inverted u-shape relationship between firm size and corporate social responsibility – the case of indonesia. int. j. accounting, auditing and performance evaluation, 13(3). grosbois, danuta de., (2012) corporate social responsibility reporting by the global hotel industry: commitment, initiatives and performance, international journal of hospitality management,31 (3): 896– 905. hassan, o. a., & skinner, f. s., (2016) analyst coverage: does the listing location really matter? international review of financial analysis, 46: 227-236. hermawan, m., & mulyawan, s., (2014) profitability and corporate social responsibility: an analysis of indonesia's listed company, asia pacific journal of accounting and finance , 3 (1): 15-31. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu re-examining firm size and corporate social responsibility: the visibility approach page |12| emerging markets journal husted, bryan. w., &. allen, d. b., (2006) corporate social responsibility in the multinational enterprise: strategic and institutional approaches, journal of international business studies, 37(6): 838-849. investor guide., (2010) analyst coverage, retrieved june 2016, from http://www.investorguide.com/definition/analy st-coverage.html ioannou, i., & serafeim, g., (2010) what drives corporate social responsibility? international evidence from social, environmental and governance scores, harvard business school. working paper 11-016. jamali, d., & mirshak, r., (2007) corporate social responsibility (csr): theory and practice in a developing country context, journal of business ethics, 72 (3): 243-262. jung, m., (2012) analyst interest, market visibility, and stock returns. unpublished working paper, 2012 fisher.osu.edu kan, w. p., (2012) corporate social responsibility: a profitable alternative. university of albany. http://www.albany.edu/honorscollege/files/kan _thesis.pdf kang, j., & kim, h., (2013) the impact of media on corporate social responsibility, conference paper, http://www.apjfs.org/conference/ 2013/cafmfile/11-4.pdf kang, kyung ho., lee, l., & hu, c., (2010) impacts of positive and negative corporate social responsibility activities on company performance in the hospitality industry, international journal of hospitality management, 29(1): 72–82. kimber, d., & lipton, p., (2005) corporate governance and business ethics in the asia-pacific region, business & society, 44(2):178-210. krukowska, m., (2014) determinants of csr in japanese companies, journal of management and business administration, 22 (4): 39-57. kumar, s., & tiwari, r., (2011) corporate social responsibility: insights into contemporary research, iup journal of corporate governance, 10 (1): 22-44. lepoutre , jan., & heene, a., (2006) investigating the impact of firm size on small business social responsibility: a critical review, journal of business ethics, 67 (3) :257–273. li, shaomin., fetscherin, m., alon, ilan., lattemann, c., & yeh, k., (2010) corporate social responsibility in emerging markets: the importance of the governance environment, management international review, 50 (5): 635-654. mccombs, m., (2005) a look at agenda-setting: past, present, and future, journalism studies , 6 (4): 543-557. mcwilliams, a., & siegel, d., (2001) corporate social responsibility: a theory of the firm perspective, academy of management review, 26 (1): 117127. mehar, ayub., & rahat,f., (2007) impact of corporate social responsibility on firm’s financial performance, south asian journal of management sciences, 1(1): 16-24. mehran, h., & peristiani, s., (2009) financial visibility and the decision to go private. federal reserve bank of new york staff reports no 376. mola, t., (2012) kaleidoskop 2012: infrastruktur, jalan tol jadi primadona. retrieved june 2016, from bisnis.com: http:// industri .bisnis.com/read /20121231/45/112212/kaleidoskop-2012infrastruktur-jalan-tol-jadi-primadona montgomery, s., (2014) how to increase your firm's visibility and get more clients, marketer. https://www.smps.org/wpcontent/uploads/2016/10/august_2014_market er_how-to-increase-your-firms-visibilityand-get-more-clients.pdf mukasa, k., (2015) how do csr activities influence corporate reputation? evidence from korean firms, journal of applied business research, 31(2): 383-396. mullerat, r., (2013) corporate social responsibility: a european perspective, the jean monnet/robert schuman paper series, university of miami, 13 (6): 1-22. nawaiseh, m. e., (2015) influence of firm size and profitability on corporate social responsibility disclosures by banking firms (csrd): evidence from jordan, journal of applied finance & banking, 5 (6): 97-111. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu golrida karyawati p, mira muliani, prem lal joshi emerging markets journal | p a g e |13 north, d., (1990) institutions, institutional change and economic performance. cambridge: cambridge university press. nur, m., (2012) analisis faktor-faktor yang mempengaruhi pengungkapan csr di indonesia. jurnal nominal , 1 (1). peraturan presiden republik indonesia no. 71 tahun 2012, tentang penyelenggaraan pengadaan tanah bagi pembangunan untuk kepentingan umum. oliviera, j. de., (2006) corporate citizenship in latin america: new challenges for business. journal of corporate citizenship, 21: 17-20. qu, r., (2007) effects of government regulations, market orientation and ownership structure on corporate social responsibility in china: an empirical study. international journal of management, 24(3): 582-591. quazi, a. m., rahman, z. & keating, b., (2007) a developing country perspective of corporate social responsibility: a test case of bangladesh, proceedings of the australian and new zealand marketing academy conference: 2789-2795. rajapakse, r., & fernando, a., (2014) motives of managers for csr: evidence from sri lanka. misg , 1: 78-86. ramdhony, d., (2015) corporate social reporting by mauritian banks, international journal of accounting and financial banking, 5 (2): 5673. reverte, c., (2009) determinants of corporate social responsibility of disclosure ratings by spanish listed firms, journal of business ethics , 88(2): 351-366. rhb securities., (2016) research, rhb securities, indonesia. retrieved june 2016, from http://rhbinvest.co.id/index.php/tentangkami/research roper, j., & weymes, e., (2007) reinstating the collective: a confucian approach to well-being and social capital development in a globalized economy, journal of corporate citizenship, 26 (summer): 135-144. sembiring, e. r., (2005) karakteristik perusahaan dan tanggung jawab sosial: studi empiris pada perusahaan yang tercatat di bursa efek, jakarta, jurnal maksi, 6 (1): 69-86. shubiri, faris nasif., al-abedallat, abedalfattah zuhair., & orabi, marwan mohammad abu., (2012) financial and non financial determinants of corporate social responsibility, journal of knowledge management, economics and information technology, 5(2). issue 5,ctober, 2012 sprinkle, geoffrey b., & maines, l. a., (2010) the benefits and costs of corporate social responsibility, business horizons, 53(5) : 445453. studenmund, a., (2011) using econometrics. boston, us: pearson education, inc. suchman, m. c., (1995) managing legitimacy: strategic and institutional approaches. academy of management journal, 20 (3): 571-610. tan, andreas, benni, desmiyawati. & liani, warda., (2016) determinants of corporate social responsibility disclosure and investor reaction, international journal of economics and financial issues, 6(s4):11-17. taysir, eyub aygun., & pazarcik, y., (2013) business ethics, social responsibility and corporate governance: does the strategic management field really care about these concepts?, procedia social and behavioral sciences, 99: 294-303. thakur, a. e., (2011) quantitative measurement and comparison of effects of various search engine optimization parameters on alexa traffic rank, international journal of computer applications , 26 (5). trencansky, d., & tsaparlidis, d., (2014) the effects of company´s age, size and type of industry on the level of csr, umea universitet http://www.divaportal.org/smash/get/diva2:757602/fulltex t01.pdf udayasankar, k., (2008) corporate social responsibility and firm size, journal of business ethics, 83 (2): 167-175. undang-undang republik indonesia., (2012) tentang pengadaan tanah bagi pembangunan untuk kepentingan umum. no 2. file:///c:/users/fom/downloads/uu%20no% 202%20tahun%202012.pdf volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu re-examining firm size and corporate social responsibility: the visibility approach page |14| emerging markets journal uwuigbe, u., (2011) corporate social responsibility disclosures by environmentally visible corporations: a study of selected firms in nigeria, european journal of business and management , 3 (9): 9-17. viva., (2012) retrieved 2016, from http://bisnis.news.viva.co.id/news/ read/361573-saham-tiga-sektor-ini-paling-laku wall street prep team., (2011) investment banking vs. equity research. retrieved june 2016, from https://www.wallstreetprep.com/investmentbanking-vsequity-research/ wang, j. l. (2013) the determinants of corporate social responsibility disclosure: evidence from china, journal of applied business research, 29 (6): 1833-1847. wang, h., & qian, c., (2011) corporate philanthropy and corporate financial perfor-mance: the roles of stakeholder response and political access. academy of management journal, 54 (6): 1159–1181. weber, manuela., (2008) the business case for corporate social responsibility: a company-level measurement approach for csr, european management journal, 26 (4): 247-261. welford, r., (2004) corporate social responsibility in europe and asia: critical elements and best practice , journal of corporate citizenship,13(1): 31-47. wiig, arne., & kolstad, i., (2010) multinational corporations and host country institutions: a case study of csr activities in angola, international business review, 19 (2): 178– 190. williams, r. j., & barrett, j. d., (2000) corporate philanthropy, criminal activity, and firm reputation: is there a link?, journal of business ethics, 26 (4): 341-350. world business council for sustainable development., (2000) meeting changing expectations. switzerland: wbcsd. zheng, qinqin., luo, y., & maksimov, v., (2014) achieving legitimacy through corporate social responsibility: the case of emerging economy firms, journal of world business, 50 (3): 687: 15. appendix: list of csr disclosure environmental 1. polution control, research and development expenditure to alleviate pollution 2. a statement indicating that the operation of companies causes no pollution or fulfill the provisions of the laws and regulations of pollution 3. statements showing that pollution operation has been or will be reduced 4. prevention or environmental repairment due to natural resourcess utilization, for example land reclaiming or reforestation 5. natural resourcess conservation such as recycling glass, iron, oil, water and paper 6. utilization of recycling material 7. receiving award relate to environtmental reservation made by company 8. design facility environmental friendly 9. contributing in art which embellish environment 10. contribution in historic buildings restoration 11. waste recycling 12. monitoring environment impact 13. environmental protection 14. using energy in more efficient way in operations 15. utilizing recyling goods for producing energy 16. disclosure of energy saving as a result of products recyling 17. deliberation of company effort in reducing energy consumption 18. disclosing the increasing of product efficiency energy 19. research to support energy efficiency 20. disclosing company’s energy policy social 1. reducing pollution, irritation, or risk in work environment 2. promoting safety labor and physical or mental health 3. disclosing statistic of work accident 4. comply with regulation of health standard and safety working 5. receiving award pertaining to safety working 6. establishment of saftey working committee 7. participating research to enhance safety working 8. disclosing labor health service 9. recruiting or employing woman or people with disabilities 10. disclosing the percentage / number of woman /people with disabilities in managerial level position volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.160 | http://emaj.pitt.edu golrida karyawati p, mira muliani, prem lal joshi emerging markets journal | p a g e |15 11. disclosing the purpose of employing woman/people with disabilities in organization 12. the program to progress labor woman / people with disabilities 13. training employees through a particular program at work 14. giving financial support to educate employees 15. establish training centre for employees 16. disclosing guidance or councelling towards employee whom are processed for resignation or whose made a mistake 17. disclosing the plan for housing employees 18. disclosing recreation facilities 19. disclosing post employment benefits 20. disclosing policy relate to salary 21. disclosing the number of labor in the company 22. disclosing the managerial level position in company organization 23. disclosure of staff disposition where staff placed 24. disclosing the number of staff, tenure, and their age group 25. disclosing labor statistics , e g . sales per labor 26. disclosing qualification labor who were recruited 27. disclosing employees stock ownership plan 28. disclosing other profit sharing plan 29. disclosing information relate to management relation with employees in improving satisfaction and motivation work 30. disclosing information relate to job stability and the future of company 31. inform employees report separately 32. inform relationship between company and trade union 33. report employees action and breakdown 34. disclosing the information of how the actions of labor are negotiated 35. improvement working conditions in general 36. provide information of company reorganization that affects employees 37. provide information and statistic of labor turnover 38. disclosing the information of product development including the packaging 39. provide the figure of research and product development expenditure 40. disclosing the information of research and development project for improving the product 41. disclosing that the company product meet safety standard 42. produce product which safer for consumer 43. participating in research towards company product safety 44. the disclosure of improving cleanliness / health in product processing and setup 45. disclosure of information on a company product safety 46. the disclosure of product quality information that reflected in receipt of the award 47. verifiable information that the quality of the product has increased (for example iso 9000 ) economic 1. donation including cash, product, service to support social, education and art activities 2. part-time employment of the students 3. a sponsor to project community health 4. help medical research 5. a sponsor for the conference of education , colloquy or an exhibition of art 6. funding the scholarship program 7. open facilities to the community 8. sponsoring a national campaign 9. support the development of local industry 10. research towards customer satisfaction 11. make effort to provide renewable energy 12. dosclose the impact of infrastucture development 13. statement that product has complied with government regulation/certified 14. disclose heallth service for contract labor 15. the disclosure of company purpose / policy in general pertaining to social responsibility to the community 16. information relating to corporate social responsibility than those mentioned above volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu global portfolio diversification with emerging stock markets i̇lhan meriç rider university | meric@rider.edu jie ding rider university | ding@rider.edu gülser meriç rowan university | meric@rowan.edu abstract because of their low correlation with each other and with developed stock markets, emerging stock markets are generally mentioned as attractive portfolio diversification prospects for global investors. in this paper, we use the principal components analysis (pca) method to study the global portfolio diversification opportunities for the investors of seven developed stock markets in twenty emerging stock markets with data for the january 1, 2003-january 1, 2014 period. keywords: global portfolio diversification, emerging stock markets, correlation of national stock markets, principal components analysis, factor loadings of principal components new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.88 | http://emaj.pitt.edu | mailto:meric@rider.edu mailto:ding@rider.edu mailto:meric@rowan.edu http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.88 | http://emaj.pitt.edu ilhan meric, jie ding, gulser meric emerging markets journal | p a g e |59 global portfolio diversification with emerging stock markets i̇lhan meriç jie ding gülser meriç 1. introduction studying the co-movements of global stock markets has been a popular research topic in finance [see, e.g., makridakis and wheelwright (1974); philippatos et al. (1983); meric and meric (1996); meric et al. (2001)]. low correlation between national stock markets is often presented as evidence in support of the benefit of global portfolio diversification [see, e.g., levy and sarnat (1970), solnik (1974), lessard (1976), watson (1978), meric and meric (1989, 2004), and meric et al. (2011)]. because of their low correlation with each other and with developed stock markets, emerging stock markets can provide substantial portfolio diversification benefit to global investors [see, e.g., defusco et al. (1995) and ratner and leal (1996)]. however, global portfolio diversification opportunities with emerging stock markets have not been sufficiently studied. in this paper, we study this issue with a sample of seven developed and twenty emerging stock markets with data for the january 1, 2003-january 1, 2014 period. 2. emerging markets1 according to the world bank, the emerging markets can be divided into six regions: east asia & pacific, europe & central asia, latin american & caribbean, middle east & north africa, south asia, and sub-saharan africa. in table 1, we compare the descriptive statistics of these six emerging market regions with the world average. we can obtain the following observations from table 1: observation 1: east asia and pacific is the most important region. its gdp growth rate 7.1% is the highest among all the regions, and is also higher than the world average (2.2%). this region accounts for 15% of the world’s gdp and 28% of the world’s population. observation 2: latin america & caribbean is the richest region. its gdp per capita (us$ 9,536) is the highest among all the regions, and is very close to the world 1 the authors acknowledge the contribution of dr. yunxıa (peter) zhu to this section. average (us$ 10,584). there is potential to increase the trade percentage of the gdp for this region. observation 3: south asia and sub-saharan africa are the poorest regions. their gdp per capita is less than 20% of the world average. however, the bright side for these regions is that they are experiencing higher gdp growth rate than the world average. 3. data and methodology the weekly stock market index returns used in the study are computed with the msci global stock market indices downloaded from the datastream database for the january 1, 2003-january 1, 2014 period. the study includes the following seven major developed stock markets: us, canada, germany, uk, france, japan, and australia. the following twenty emerging stock markets are included in the study: argentina, brazil, chile, china, colombia, egypt, india, indonesia, jordan, malaysia, mexico, morocco, pakistan, peru, philippines, russia, south africa, south korea, thailand, and turkey. table 1: descriptive statistics of emerging markets: 2013 (using data from the world bank) principal components analysis (pca) is a statistical technique widely used in empirical studies to analyze the contemporaneous co-movements of global stock markets. a detailed discussion of the technique can be found in mardia et al. (1979) and marascuilo and levin (1983). the pca technique clusters global markets with similar movement patterns in the same principal component. stock markets with high factor loadings in the same principal component are highly correlated and can provide limited portfolio diversification benefit. global investors can maximize the benefit of portfolio diversification by choosing stock markets with high factor loadings in different principal components. makridakis and wheelwright (1974), philippatos, christofi, and christofi (1983), and meric and meric (1989) have made the use of the pca multivariate technique popular in studying the contemporaneous co-movements of national stock markets. we use the pca technique in this paper to study volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.88 | http://emaj.pitt.edu global portfolio diversification with emerging stock markets page |60| emerging markets journal the co-movements of seven developed and twenty emerging global stock markets with data for the january 1,2003-january 1, 2014 period. 4. principal components analysis method multivariate analysis often starts out with data involving a substantial number of correlated variables. the main purpose of principal component analysis (pca) is to reduce a set of observed variables into a smaller set of uncorrelated artificial variables called principal components, with minimal loss of information. the resulting principal components can then be used in subsequent analyses. pca is a mathematics procedure that uses an orthogonal transformation to convert a set of observations of possibly correlated variables into a set of values of linearly uncorrelated variables called principal components. the number of principal components is less than or equal to the number of original variables. this transformation is defined in such a way that the first principal component has the largest possible variance (that is, it accounts for as much of the variability in the data set as possible), and each succeeding principal component in turn has the highest variance possible under the constraint that it is orthogonal to (i.e., uncorrelated with) the preceding components. the principal components are orthogonal because they are the eigenvectors of the covariance matrix. that is, the covariance matrix of these principal components is a diagonal matrix in which the entries outside the main diagonal are all zeros. the diagonal values of the covariance matrix of these principal components are called eigenvalues and they are put in a descending order. these eigenvalues are the variances of all the principal components (new artificial variables). listed below are the steps for performing a principal component analysis, which we use in the next section of the paper to analyze the co-movements of the twentyseven national stock markets included in the study. 1. take the whole dataset consisting of ndimensional samples and find the covariance matrix of the data set 2. compute eigenvectors and corresponding eigenvalues 3. sort the eigenvectors by decreasing eigenvalues 4. use the first m-eigenvectors (m < n) to transform the samples onto the new subspace. 5. empirical findings to determine the principal components of the stock markets with similar contemporaneous movement patterns, the covariance matrix of the weekly index returns of the twenty-seven global stock markets is used as input in the spss/pca computer program. the varimax rotation is employed to maximize the factor loadings of the stock markets in each principal component with similar movement patterns. using kaiser's significance rule, statistically significant principal components with eigenvalues greater than unity are retained for analysis. the analysis yielded three statistically significant principal components. the factor loadings of the three principal components are presented in table 2. table 2: principle components analysis: january 1, 2003-january 1, 2013 stock markets p.c. #1 p.c. #2 p.c. #3 france canada uk us germany brazil south africa mexico peru australia russia chile argentina turkey colombia 0.862 0.853 0.848 0.847 0.846 0.789 0.782 0.745 0.693 0.686 0.662 0.633 0.587 0.521 0.487 0.516 0.443 indonesia philippines malaysia thailand south korea china india japan 0.413 0.453 0.422 0.410 0.757 0.732 0.725 0.708 0.687 0.680 0.648 0.517 jordan morocco egypt pakistan 0.683 0.629 0.591 0.326 variance explained 34.34% 20.92% 8.34% cum. variance explained 34.34% 55.26% 63.6% the factor loadings of the stock markets with the highest factor loading in each principal component are shown in dark font. if a stock market also has a high factor loading in another principle component, it is shown in italics in light font. the first principal component explains 34.34 percent of the total variation in the original data matrix. all developed stock markets, except the japanese stock market, have their highest factor loadings in this principal component. these stock markets are highly correlated and investing in these stock markets would provide only a minimal global portfolio diversification benefit to investors. investors who invest in these stock markets would maximize the benefits of global portfolio diversification by investing in the stock markets with high factor loadings in the other two principal components such as the indonesian, philippine, malaysian, and thai stock markets in the second principal component and the jordanian, moroccan, egyptian, and pakistani stock markets in the third principal component. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.88 | http://emaj.pitt.edu ilhan meric, jie ding, gulser meric emerging markets journal | p a g e |61 although they have their highest factor loadings in the first principal component, the australian and turkish stock markets also have high factor loadings in the second principal component. therefore, the investors in the australian and turkish stock markets can have limited portfolio diversification benefit if they invest in the stock markets with high factor loadings in the second principal component. however, they can obtain significant portfolio diversification benefit by investing in the stock markets with high factor loadings in the third principal component. the second principal component explains 20.92 percent of the total variation in the original data matrix and it is dominated by asian stock markets. these stock markets are highly correlated and investing in these stock markets would provide minimal global portfolio diversification benefit to investors. global investors who invest in the indonesian, philippine, malaysian, and thai stock markets, which have their highest factor loadings in the second principal component, can maximize their global portfolio diversification benefits by investing in the stock markets with high factor loadings in the first and third principal components. although they have their highest factor loadings in the second principal component, the south korean, chinese, indian, and japanese stock markets also have high factor loadings in the first principal component. therefore, investors in these stock markets can only have limited portfolio diversification benefit if they invest in the stock markets with high factor loadings in the first principal component. however, they can have substantial portfolio diversification benefit if they invest in the stock markets with high factor loadings in the third principal component. the third principal component explains 8.34 percent of the total variation in the original data matrix. the jordanian, moroccan, egyptian, and pakistani stock markets have their highest factor loadings in this principal component. these stock markets are highly correlated and investing in these stock markets would provide minimal global portfolio diversification benefit to investors. however, the investors of the stock markets with high factor loadings in the first and second principal components can obtain significant portfolio diversification benefit by investing in the jordanian, moroccan, egyptian, and pakistani stock markets. 6. summary and conclusions because of their low correlation with each other and with developed stock markets, emerging stock markets can provide a substantial portfolio diversification benefit to global investors. in this paper, we use the principal components analysis (pca) methodology to study the global portfolio diversification prospects of twenty emerging stock markets for the investors of seven major developed stock markets with data for the january 1, 2003-january 1, 1014 period. our pca results yielded three statistically significant principal components. the pca technique clusters the stock markets with similar contemporaneous movement patterns into the same principal component. stock markets with high factor loadings in the same principal component are highly correlated and they could provide only a minimal portfolio diversification benefit. investors can maximize the benefit of portfolio diversification by choosing stock markets with high factor loadings in different principal components. we find that developed stock markets are generally highly correlated and investing in these stock markets can provide limited diversification benefit to global investors. the investors who invest in developed stock markets can obtain greater portfolio diversification benefit by investing in emerging stock markets. however, some emerging stock markets such as the brazilian, south african, mexican, peruvian, russian, chilean, argentine, turkish, and colombian stock markets are highly correlated with the developed stock markets and they can provide a limited portfolio diversification benefit to investors in developed stock markets. our results indicate that the investors of the us, canadian, german, uk, and french stock markets, which have their highest factor loading in the first principal component, can obtain the greatest portfolio diversification benefit by investing in the indonesian, philippine, malaysian, and thai emerging stock markets, which have their highest factor loading in the second principal component, and in the jordanian, moroccan, egyptian and pakistani emerging stock markets, which have their highest factor loading in the third principal component. the investors of the australian and japanese stock markets, which have their highest factor loadings in the first and second principal components, respectively, can obtain the greatest portfolio diversification benefit by investing in the jordanian, moroccan, egyptian and pakistani emerging stock markets, which have their highest factor loading in the third principal component. references defusco, r.a., geppert, j.m. and tsetsekos, g.p. (1995), “long-run diversification potential in emerging stock markets”, financial review, vol. 31, no. 2, pp. 343-363. lessard, d.r. (1976), “world, country, and industry relationships in equity returns”, financial analysts journal, vol. 32, no. 1, pp. 32-38. levy, h. and sarnat, m. (1970), “international diversification of investment portfolios”, american economic review, vol. 60, no. 3, pp. 668-675. makridakis, s.g. and wheelwright, s.c. (1974), “an analysis of the interrelationships among the major world equity exchanges”, journal of volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.88 | http://emaj.pitt.edu global portfolio diversification with emerging stock markets page |62| emerging markets journal business finance and accounting, vol. 1, no. 2, pp. 195-215. marascuilo, l.a. and levin, j.r. (1983), multivariate statistics in social sciences: a researcher’s guide, brooks/cole publishing company, monterey, ca. mardia, k., kent, j. and bibby, j. (1979), multivariate analysis, academy press, new york, ny. meric, g., leal, r., ratner, m. and meric, i. (2001), “co-movements of u.s. and latin american stock markets before and after the 1987 crash”, international review of financial analysis, vol. 10, no. 3, pp. 219-235. meric, g., pati, n. and meric, i. (2011), “comovements of the indian stock market with other stock markets: implications for portfolio diversification”, indian journal of finance, vol. 5, no. 10, pp. 13-20. meric, i. and meric, g. (1989), “potential gains from international portfolio diversification and inter-temporal stability and seasonality in international stock market relationships”, journal of banking and finance, vol. 13, no. 4/5, pp. 627-640. meric, i. and meric, g. (1996), “inter-temporal stability in the long-term comovements of the world's stock markets”, journal of multinational financial management, vol. 6, no. 1, pp. 73-83. meric, i., and meric, g. (2004), “the diminishing benefit of global portfolio diversification”, global business and finance review, vol. 9, no. 2, pp. 43-51. philippatos, g.c., christofi, a. and christofi, p. (1983), “the inter-temporal stability of international stock market relationships: another view”, financial management, vol. 12, no. 4, pp. 6369. ratner, m. and leal, r. (1996), “causality tests for the emerging markets of latin america”, journal of emerging markets, vol. 1, no. 1, pp. 29-40. solnik, b.h. (1974), “why not diversify internationally?”, financial analysts journal, vol. 30, no. 4, pp. 48-54. watson, j. (1978), “a study of possible gains from international investment”, journal of business finance and accounting, vol. 5, no. 2, pp. 195-206. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu comparative studies of the use of management accounting information ewelina zarzycka university of lodz | ezarzycka@uni.lodz.pl justyna dobroszek university of lodz | jdobroszek@uni.lodz.pl alina almasan west university of timisoara | alina.almasan@e-uvt.ro cristina circa west university of timisoara | cristina.circa@e-uvt.ro abstract the paper uses the phenomenon of isomorphism to present the similarities and differences in the use of management accounting information by managers in poland and romania. in order to analyze the set of data obtained from the conducted survey, cluster analysis and descriptive statistics have been applied. the studied managers use mainly management accounting information for planning and control tasks (budgeting) and less for formulating strategy and decision making. in their work, they rather apply financial data than nonfinancial indicators. the findings confirm that management accounting in both countries is strongly influenced by the mechanisms of coercive, normative and mimetic isomorphism connected with their specific economic and political development. keywords: management accounting, information, managers, comparative studies new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.143 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.143 | http://emaj.pitt.edu ewelina zarzycka, justyna dobroszek, alina almasan, cristina circa emerging markets journal | p a g e |1 comparative studies of the use of management accounting information ewelina zarzycka justyna dobroszek alina almasan cristina circa 1. introduction the importance of comparative management accounting studies is undisputable, as they are especially relevant for corporate practices. particularly multinational corporations consider that country-specific conditions influence the effectiveness of management accounting practices in subsidiaries operating in different national settings. in this context, comparative studies help companies to identify and understand the inefficiencies of management accounting systems in country specific cases (see endenich et al., 2011). comparative studies of management accounting focus on management accounting practices from different countries or cultural regions (see shields et al., 1991; ahrens, 1996; chow et al., 1996), either matching companies from two or more countries, or checking practices identified in one country against literature. most comparative researches deal with japanese (see shields et al., 1991; chow et al., 1996) and western european management accounting techniques (see wagenhofer, 2006). the comparisons with the anglo-american world as well as the great interest in german management accounting are dominant. comparative studies of management accounting practices in central and eastern europe (cee) are rare. this is due to the fact that management accounting was brought into use in enterprises operating in cee after the fall of communism. from 1945 to 1989, given the planned economy and the centralized management system, management accounting was employed in cee countries only to an extremely low extent, limited to the use of some elements of cost accounting. with the change of the political system, the centrally planned economy was abandoned and foreign investments were attracted to this region, leading to a rapid development of management accounting, both in practice and in research. tools and methods were implemented first in companies with foreign capital, who brought solutions used by headquarters and parent companies (see grosu et al., 2014; albu and albu, 2012; szychta, 2002). in this context, the aim of the paper is to find answers to important questions regarding the use of management accounting information by managers from poland and romania:  to what extent the information provided by management accounting systems is used for performing management tasks;  how useful is the selected information provided by the management accounting system for the management process. worldwide, the number of comparative studies of management accounting is significant; yet, there are no studies of the use of management accounting information by managers. the increasing number of calls for papers on the topic of management accounting in transitional and emerging economies indicates the growing academic interest in these regions (endenich et al., 2011). our paper contributes to a better understanding of the management accounting design and use in foreign subsidiaries and companies operating in former communist cee countries. the direct comparison between poland and romania is focused on the application and transferability of management accounting practices, with a special attention paid to the usefulness of management accounting information for managerial tasks. as a result, the findings of the study are beneficial for both the theory of management accounting and the practices of companies operating in the central and eastern europe. our study employs the institutional theory, mainly the concept of isomorphism, in order to explain the similar use of management accounting by managers from the two countries. the institutional theory is expected to generate interesting results, especially in the area of comparative studies, as it helps to explore the influences of global trends and professionalization on the use and design of management control systems in developing countries. combining institutional theory and comparative studies can be also helpful for understanding country-specific styles and aims of management accounting information, as well as links between incentive structures and different institutional conditions (see endenich et al., 2011). according to the institutional theory, companies transfer institutionalized management accounting practices accepted by other companies or in other countries (see meyer and scott, 1992). management accounting is introduced and used as a consequence of coercive, mimetic and normative pressures (see dimaggio and powell, 1983). our study reveals many similarities in the use of management accounting information by managers from poland and romania. both in poland and in romania, managers use management accounting information for control and decisionmaking purposes, as well as for strategy implementation, while mainly financial data are employed in the management process. however, the study identifies some differences in the evaluation of management information by managers. the paper is divided into four sections. section one is the introduction. section two outlines the theoretical framework of institutional theory and isomorphism. the third section discusses the research methodology, presents the research sample and reports the findings of the cluster analysis. the final and fourth section consists of conclusions. 2. isomorphism as a theoretical framework for understanding similarities and differences the concept of institutional isomorphism, developed by dimaggio and powell (1983) is extremely useful for understanding the homogeneity and similarities of organizations. the authors, investigating the organizational uniformity of contemporary organizations, concluded that the isomorphism is a source of institutional change. the creation and structuring of an organizational field, defined as an institutionally separated system of relations between specific organizations, is subject to three isomorphic mechanisms: coercive, mimetic and normative. the first type of isomorphism results from political influences and concerns the problem of legitimacy. the second one has its source in typical reactions to volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.143 | http://emaj.pitt.edu comparative studies of the use of management accounting information page |2| emerging markets journal uncertainty, whereas the third one is related to the processes of professionalization. isomorphism can be formal or informal, as isomorphic pressure may come from direct collaborators, from other institutions on which the organization depends, from the legal context within which the organization operates and finally from the public. the concept of isomorphism was used by granlund and lukka (1998) to investigate the cause of the global homogenization of management accounting practices. the authors identified that coercive isomorphism resulting in the homogeneity of management accounting practices is reflected in international legislation (e.g.: eu directives), international trade agreements (e.g.: wto, nafta), in the harmonization of financial accounting and reporting rules as well as in the corporate influence of multinationals on local subsidiaries. professionalization and university education in business and management represent the normative isomorphism, which is, according to authors, another factor contributing to the similarities in management accounting practices. the last group of homogenization factors is related to the mechanism of mimetic isomorphism. the authors highlighted the influence of global advisory firms and the practice of copying competitors’ practices by companies on the homogeneity of management accounting (see granlund and lukka 1998, p. 157). also granlund (2001), explaining the consistency of management accounting practices drew attention to the effect of mimetic (copying management accounting methods and consultant opinion) and normative isomorphism (conservative organizational culture, accountants’ conservatism). 3. empirical research of the use of management accounting information 3.1. aim of the paper and research methodology in romania and poland, management accounting has been practiced and taught in universities for a relatively short period of time, due to the fact that the market economy was introduced to this region only in the 1990s. it was then that local companies discovered the need to take advantage of management accounting. yet, as regards foreign companies operating in cee through affiliates and branches, strategic decisions are taken by the head office. hence, at local level, there is no need to use a wide range of management accounting tools that would support, among others, those decisions (see grosu et al., 2014; albu and albu, 2012; szychta, 2002). therefore, the purpose of the study is to compare the use of management accounting information by managers in poland and romania. we aim at answering the following questions:  to what extent do the surveyed managers use management accounting information for the performance of the indicated management tasks;  how useful is the selected information provided by the management accounting system for the management process. the paper relies on an empirical research, performed by the authors from may 2015 to march 2016, on randomly selected companies operating in poland and romania. firstly, the questionnaire-based survey was pretested in both countries. then, the sample of 1000 enterprises was selected from the available databases of tax identification numbers of companies in each country. the questionnaire-based survey employed in our research was sent online to managers of selected companies. 154 companies completed the questionnaire correctly (response rate: 15.4%). out of 154 responses, 116 originated from poland and 38 from romania. the survey was conducted in the national language of the respondents. the questionnaire was structured in four different sections: the first two outlined a brief characterization of the company, respectively of the respondent, the third section was focused on the organization of the management accounting system within the companies, while the fourth section included questions meant to capture the managers’ assessment of the use of management accounting information. in order to thoroughly analyze the data obtained from the conducted survey, cluster analysis has been applied. this method allows for segregating the observed data into specific groups, so that the association degree of certain objects with other objects belonging to the same group is as high as possible, and with objects from other groups as low as possible. this tool systematizes the gathered information to a large extent into specific structures and, consequently, gives an overview of the surveyed objects. first, the variables were classified by means of the agglomerative (hierarchical) method, in which the euclidean distance was applied in order to calculate the distance between objects, and of ward's method. this way, the variables were divided into pairs or larger groups (agglomerations, clusters) most similar to each other. in the next stage, the data were grouped according to objects (respondents) using the k-means method that allows for imposing the number of created clusters. it was assumed that the respondents will be divided into 3 groups. 3.2. research sample the companies from poland and romania involved in the study were mainly manufacturing enterprises (52%, respectively 61%). about 30% of the companies from both countries were service providers, while slightly over 10% were trade companies. over 60% of the surveyed companies could be classified as large in terms of their number of employees. most companies from poland and romania had foreign capital: 42%, respectively 57% of the study population. the educational level of the surveyed managers should be pointed out. 98% of the polish managers hold a master's degree, 40% have completed an mba and 9% hold a phd, while 68% of the romanian managers hold a master's degree with only 13% having an mba degree. 3.3. the assessed use of management accounting information cluster analysis results the use of the agglomerative method showed an interesting overview of the extent to which managers use the information provided by management accounting for the performance of management tasks. in both countries, the agglomerative method showed three clusters at the lowest level of the agglomeration: planning and budgeting and cost and financial control (cluster 1), performance measurement (cluster 2), formulation and implementation of strategy and decision making (cluster 3) in poland, respectively planning and budgeting and performance measurement (cluster 1), cost and financial control (cluster 2), strategy formulation and implementation and decision making (cluster 3) in romania. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.143 | http://emaj.pitt.edu ewelina zarzycka, justyna dobroszek, alina almasan, cristina circa emerging markets journal | p a g e |3 fig. 1. the use of the information provided by the management accounting system for the performance of management activities in poland. source: authors’ own processing at the higher agglomerative level, both investigated countries showed the same two main clusters. the first one consists of traditional tasks of management accounting (related to control), i.e. planning and budgeting, cost and financial control, and performance measurement. the second one includes tasks related to decision making and strategy formulation and implementation (related to decision-making) (see figures 1 and 2). fig. 2. the use of the information provided by the management accounting system for the performance of management activities in romania source: authors’ own processing the figures above confirm that both in poland, and in romania, the respondents’ assessments as regards the use of management accounting information for control tasks and decision-making purposes are close to each other. this state of affairs may indicate that the respondents explicitly direct the use of management accounting information to the first or the second group of tasks, i.e. tasks related to control or to decision-making and strategy implementation. in conclusion, the respondents’ answers to the analyzed questions can be divided into three homogeneous structures of tasks, i.e. homogeneous within a cluster but significantly different between groups. considering the higher level of aggregation, we can introduce a division into two homogeneous groups, i.e. group 1 for control activities and group 2 for decision making. in the latter case, this may suggest a division of the managers into two homogeneous groups, i.e. those using information for control related activities (group 1) and those using management accounting information for decision making (group 2). both within group 1 and within group 2, the assessments of the respondents regarding the association of the information with a specific type of tasks were similar. this means that if respondents assessed e.g. the extent to which the information is used for budgeting tasks as very high, they usually assessed the suitability of this information for cost and financial control in a similar manner. the above conclusions are complemented with the result of grouping the objects (respondents) with the k-means method (where k=3), as shown in figures 3 and 4. fig. 3. the results of object (respondent) grouping with the k-means method as regards the use of management accounting information for indicated management tasks by managers in poland. source: authors’ own processing fig. 4. the results of object (respondent) grouping with the k-means method as regards the use of management accounting information for indicated management tasks by managers in romania source: authors’ own processing in the classification of the managers in poland into three clusters, there is a clear arrangement of the respondents who rated the suitability of management accounting information for the performance of the indicated activities as poor, moderate, and high. they can be divided into the socalled sceptics, neutral, and supporters. also, it should be stressed that the three clusters differ in terms of the average assessments of all the tools. as a rule, respondents belonging to the group who assessed the suitability of information for control purposes as higher than the respondents from the second and third group, also judged the suitability of the information for decision making and strategy implementation tasks as high. as for romania, it should be stressed that the three clusters differ in terms of average assessments. as a rule, respondents belonging to the group who rated the suitability of information for control purposes described above (cluster 3) higher than the second group (cluster 2), also judged the volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.143 | http://emaj.pitt.edu comparative studies of the use of management accounting information page |4| emerging markets journal suitability of information from the scope of decision making and implementation of strategy as high. the only exception is the use of the information for planning and budgeting, since it was assessed similarly by the respondents from group 2 and 3. the third group (cluster 1) made a similar and relatively poor average assessment of the use of the information for each of the examined areas. tables 1 and 2 provide information on the differences in the average assessments of these three groups, visible on the attached figures. it is worth noting that the sizes of individual clusters in poland are rather similar (26, 32, and 34), although the cluster of the persons rating the suitability of information as high is relatively the largest. table 1: the use of management accounting system information for the performance of the indicated activities – manager clusters in poland source: authors’ own processing in romania, we notice that the cluster who evaluated the suitability of information higher is the largest. table 2: the use of management accounting system information for the performance of the indicated activities – manager clusters in romania source: authors’ own processing in conclusion, the cluster analysis indicated a clear scope of the tasks for which management accounting information is used by the surveyed managers in poland. as part of this analysis, the agglomerative method enabled the detection of manager clusters who use the information for control and for decision-making purposes. in addition, the use of the k-means method for the analyzed data lead to the identification of three clusters of managers, the so-called sceptics, neutral, and supporters of management accounting information. 3.4. the assessed usefulness of management accounting information cluster analysis results the agglomerative method has also been used for the cluster analysis regarding the assessed suitability of selected management accounting information for management processes. following variables have been taken into account: financial information (financial result, costs and revenues), budgetary data, variance analysis and non-financial indicators. after the first stage of clustering, two main clusters were generated in both countries. in poland, the first cluster consists of financial information and budgetary data, while the second one includes non-financial indicators, as illustrated by figure 5. fig. 5. the assessed suitability of selected management accounting information in poland source: authors’ own processing this division shows clearly that, the respondents’ answers regarding the assessed suitability of financial information and budgetary data & variance analysis are close. more, the assessments of specific types of management accounting information can be divided into two homogeneous groups of information, which may affect the division of the two groups of managers, i.e. those applying financial information and budgetary data (group 1) and those using the non-financial indicators (group 2). the suitability assessments of financial and budgetary data were similar. for example, if respondents evaluated the suitability of financial information as high, they generally also evaluated the suitability of budgetary and variance information as high. slightly different than in the case of poland, in romania the first cluster includes financial information, and the second one consists of budgetary data & variance analysis, as well as non-financial indicators. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.143 | http://emaj.pitt.edu ewelina zarzycka, justyna dobroszek, alina almasan, cristina circa emerging markets journal | p a g e |5 fig. 6. the assessed suitability of selected management accounting information in romania source: authors’ own processing the respondents’ answers regarding the assessed suitability of budgetary data & variance analysis and indicators are close. the assessments of specific types of management accounting information can be divided into two homogeneous groups, pointing to two homogeneous manager groups: those applying financial information (group 1) and those applying the indicators and budgetary data & variance analysis (group 2). the suitability assessments of financial and budgetary information were similar, too. for both countries, the above results are complemented by the result of object (respondent) grouping with the k-means method (where k=3), as shown in figures 7 and 8. fig. 7. object (respondent) grouping with the k-means method in respect of the assessed suitability of selected management accounting information in poland source: authors’ own processing in the classification into three clusters from poland, we observe a clear division between respondents who evaluated the suitability of selected management accounting information as poor (cluster 1) and as high (cluster 3), establishing a border between sceptics and supporters. it should be noted that these two clusters differ in terms of the average assessments of all information. the third separated group (cluster 2) is placed between the two groups discussed above and assesses the suitability of the indicators as high, similar to cluster 3, respectively the suitability of financial and budgetary information as poor, similar to cluster 1. fig. 8. object (respondent) grouping with the k-means method in respect of the assessed suitability of selected management accounting information in romania source: authors’ own processing. in the case of romania, the division into 3 clusters indicates three groups of managers who rated management accounting information as a support of management tasks as poor (cluster 1), high (cluster 2), and moderate (cluster 3). hence we can define three manager groups: sceptics, supporters, and neutral. the three indicated clusters differ in terms of average assessments. as a rule, the managers from the group who evaluated the suitability of financial information as high also rated budgets and indicators as high, contrary to managers from the other group. the exception is financial information, which was judged as high by both manager groups. furthermore, budgetary data & variance were rated slightly higher by the group of managers called sceptics than by the group created by the so-called “neutral” managers. tables 3 and 4 present information on the differences in the average answers of the three groups for each of the two countries. in both countries, the largest cluster is the one of the supporters (cf. table 3 and 4). table 3: the assessed suitability of selected management accounting information in poland source: authors’ own processing table 4: the assessed suitability of selected management accounting information in romania source: authors’ own processing volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.143 | http://emaj.pitt.edu comparative studies of the use of management accounting information page |6| emerging markets journal 4. conclusions the results of the cluster analysis showed that management accounting information is employed in a similar manner in the two countries included in the study. both in poland and in romania, the agglomerative method enabled the detection of very similar clusters of responses within the examined scope. therefore, it is possible to isolate managers who use management accounting information rather for control purposes and managers who use the respective information for decision-making and strategy implementation. in both countries, we managed to separate groups with similar assessments of management accounting information, in terms of its use and usefulness, whereas the high rating cluster was larger than the other groups. we found minor differences between the two countries included in the study, regarding the assessed usefulness of management accounting information, i.e. the types of clusters were different, at the higher level of agglomeration. in poland, the first cluster consisted of financial information and budgetary data, while the second one – of nonfinancial indicators, while in romania, the first cluster included solely financial information, and the second one budgetary data & variance analysis, as well as non-financial indicators. as a result, it can be concluded that managers focus in both countries rather on financial data. in the case of the managers in poland, budgetary data & variance analysis belonged to the same group as financial information, and were used both for the support of tasks associated with planning as well as for control tasks. in romania, budgetary data & variance analysis belonged to the same group as the indicators. the high similarity in the use of management accounting information by managers can be explained by the isomorphism and the economic situation in both countries. management accounting systems in companies operating in poland and romania are strongly influenced by the mechanisms of isomorphism, both coercive, normative, and mimetic, which lead to system homogeneity. coercive pressure is translated in the transfer of management accounting methods and tools by multinational corporations and foreign companies to subsidiaries operating in poland and romania. this mechanism is also related to the harmonization of accounting and financial reporting rules, imposed in the two countries by their eu membership. professionalization, academic education and vocational training (normative isomorphism) are further factors contributing to the similar use of management accounting information in companies operating in poland and romania. this applies both to companies with local capital and to foreign ones. the influence of advisory firms and copying practices (mimetic isomorphism) is another factor, which strongly influences the shape of management accounting information in companies operating in such young market economies. management accounting methods used in companies operating in the researched countries are therefore copied from the models in developed countries. our paper contributes to a better understanding of the management accounting use in poland and romania. this comparison between two cee countries fills the existing gap in the comparative studies of management accounting and is useful for management accounting theory, as well as for corporate practices of companies operating in the central and eastern europe (sees endenich et al., 2011). it confirms the findings on the impact of isomorphism on similarities in the design and use of management accounting systems (see granlund and lukka, 1998; granlund, 2001). as to the limits of the research, we should point to the small number of responses we relied on, which doesn’t allow us to universalize our conclusions. moreover, the use of questionnaire-based surveys is generally not sufficient in thoroughly assessing the opinions of the managers. a second research stage, consisting in interviews of the questioned managers, would have supported the authors in drawing a complete picture of the use of management accounting. references ahrens, t. (1996). styles of accountability. accounting, organizations and society, 21(2/3), 139–73. albu, c. n., & albu, n. (2012). factors associated with the adoption and use of management accounting techniques in developing countries: the case of romania. journal of international financial management & accounting, 23(3), 50-69. chow, c. w., kato, y., & merchant, k. a. (1996). the use of organizational controls and their effects on data manipulation and management myopia: a japan vs. us comparison. accounting organizations and society, 21(2/3), 175–92. dimaggio, p. j., & powell, w. w. (1983). the iron cage revisited: institutional isomorphism and collective rationality in organisational fields. american sociological review, 48, 147-160. endenich, c., brandau, m., & hofjna, a. (2011). two decades of research on comparative management accounting-achievements and future directions. australian accounting review, 59(21/4), 365-382. granlund, m. (2001). towards explaining stability in and around management accounting systems. management accounting research, 12, 141166. ganlund, m., & lukka, k. (1998). it`s a small world of management accounting practices. journal of management accounting researches, 10, 153179. grosu, c., almasan, a., & circa, c. (2014). the current status of management accounting in romania: the accountants’ perspective. journal of accounting and management information systems, 13(3), 537-558. meyer, j. w., & rowan, b. (1991). institutionalized organisations: formal structure as myth and ceremony. in w.w. powell, p.j. dimaggio (eds.). the new institutionalism in organizational analysis. the university of chicago press: chicago. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.143 | http://emaj.pitt.edu ewelina zarzycka, justyna dobroszek, alina almasan, cristina circa emerging markets journal | p a g e |7 shields, m. d., chow, c. w., kato, y., & nakagawa, y. (1991). management accounting practices in the us and japan: comparative survey findings and research implications. journal of international financial management and accounting, 3(1), 61–77. szychta, a. (2002). the scope of application of management accounting methods in polish enterprises. management accounting research, 13(4), 401-418. wagenhofer, a. (2006). management accounting research in german-speaking countries. journal of management accounting research, 18, 1–19. appendix: the questionnaire survey volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu different approaches in recruiting young professionals martina fischerová university of economics, prague, czech republic | martina.fischerova@vse.cz kateřina půbalová university of economics, prague, czech republic | katerina.pubalova@vse.cz abstract young professionals as a significant part of generation y have already been examined in various studies that focused on their views, attitudes, values etc. this paper examines the differences in the importance of work and life values among peers of the same age with similar background, but from different study groups. to test the propositions, a life value inventory was distributed among 262 students and alumni from two different study programs at the same faculty between december 2016 and may 2017. the data were analyzed in the spss statistical software with the use of the k-means clustering. the hypotheses expecting differences in life and work values were partially confirmed. the findings are discussed within the framework of strategic leadership and the need of engaging stakeholders. keywords: young professionals, generation y, cems mim, life values, recruitment new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.149 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.149 | http://emaj.pitt.edu martina fischerová, kateřina půbalová emerging markets journal | p a g e |31 different approaches in recruiting young professionals martina fischerová kateřina půbalová 1. introduction in today’s rapidly changing environment, not only we are as individuals facing challenge how to cope with turns. the labour market is also undergoing various changes and both employers and employees are expected to adapt to a new reality. apart from a gentle shift to a subjective perception of career which can be observed for two decades already (kirovová, 2011), one of the current topics for the employers and recruiters is how to attract recent graduates. born in the 90’s, they form part of generation y (strauss, howe, 1993). at this moment, they are the youngest workforce in the companies. it is believed that they are different from their parents and grandparents. various studies show how their values vary from other generations (schullery, 2013; twenge et al., 2010a; twenge et al., 2010b). however, there might be in-group variances even within millenials, based on the year of birth and/or field of study. in the czech republic, members of generation y were born into two different eras. some of them came to the communist world that fell down in november 1989 and if they were old enough, they may remember those times. the elder of them were born before the transition of the regimes, the younger ones know about the time only from stories. due to this historical context, different life values and attitudes are expected even within the generation (flodrová, šilerová, 2011). part of generation y is formed by young professionals – people aged between 20–30 who are employed in white-collar professions. as the faculty of business administration at the university of economics, prague is focusing on education of this type of professions, this study aims at expected differences in life values among students from different study programmes. it is expected that about 70 % of students at the university of economics, prague work together with their study duties (chládová, lorenc, 2011). there are three main study programmes at the faculty of business administration that are offered to students. through all of them, students do prepare for their future careers. among the programmes, the cems mim programme is special in both the way of choosing students and connecting theoretical knowledge with practical application. it is a prestigious 2-year master’s programme awarded by the cems alliance. the alliance consists of 31 academic members and 70+ corporate partners. cems mim programme is focusing on international environment connecting knowledge of management, economics, finance, marketing and different leadership as well as managerial skills. it is taught completely in english and at the university of economics, prague its students are selected during a demanding 2-round selection process. for the 1st round, applicants have to fulfill various requirements, e.g. prove english knowledge at c1 level, have relevant experience from abroad, show outstanding study results etc. the 2nd round consists of a very intensive assessment centre, where students are selected by both academics and representatives from corporate partners. for successful completion of the programme, the students also have to attend several block and skills seminars, internship abroad, study abroad and presenting practical business project based on demand from one of the programme’s corporate partners. the programme has been continuously appraised in top 10 in various rankings, including financial times ranking and the economist ranking (key facts & figures, cems.org). as the students have to go through more demanding selection process than the one for the “regular” czech programme, the students of cems mim are expected to be more motivated, result oriented and self-driven, so their expectation should thus be higher (mayrhofer, nordhaug and obeso, 2009). apart from the prestigious cems mim programme, the faculty offers a czech study programme “management”. students from both programmes are peers. however, there are much more management students in each year-class and the classes have a different structure and content. both groups grew up with similar background, but their preparation for a professional career is diverse. that is why their work expectations may also differ. companies will thus have to align the environment and culture towards young professionals and/or generation y expectations and also life values. one of the reasons is that, the millenials are expected to volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.149 | http://emaj.pitt.edu different approaches in recruiting young professionals page |32| emerging markets journal form ½ of the workforce in 2020 (pricewaterhouscoopers, 2011). the companies are advised to implement changes in their strategic leadership strategy. especially because, a strategic leader is defined as someone who is able to flexibly adapt to changing situations (shoemaker, krupp and howland, 2013). according to shoemaker et al., there are 6 essentials strategic leadership skills that all leaders should implement. especially one of the skills, to align, is linked with building trust and engaging stakeholders. as part of the strategic management, these changes should be reflected in changing organizational structures, creating new jobs and job titles, updating job analyses, etc. in this context, the paper begins by a literature review and continues with main research question and development of hypotheses. research methodology, research model and results of analyses will take place thereafter. at the end, the results will be discussed and recommendations for the future research will be provided. 2. literature review and theoretical framework 2.1. young professionals as part of generation y the term “generation y” firstly appeared in literature at the beginning of 1990’s (strauss, howe, 1993). when limiting the age, the authors set the 12-years olds (teenagers) and amended the interval of 10 years older and younger ones. the generation y was thus established of persons born between 1982 and 2004. however, various authors specify the generation y differently. there are minor divergences (i.e. years 1980 1982), nevertheless these are not considered of importance, mainly because people born closely usually have similar (shared) experience defining their values and attitudes (parry & urwin, 2010; in schullery, 2013). the generation y is also called “millennials”, “net generation”, or “igen”. these names are linked with the fact that the member of the generation are first adults growing up with information and communication technologies (including internet) in day-to day basis. generation y is currently the youngest economical active generation but as of great importance, as it was already mentioned, by 2020 the millennials are expected to form half of all active workforce (pricewaterhousecoopers, 2011). the members of the generation y are strongly accenting their personal development. they expect to learn new things and processes through their whole life. contrary to their parents, they take such things as granted. accordingly, they seek emphasis on life-long learning, personal development and widening their horizons while looking for their future employers (pricewaterhousecoopers, 2011; 2008). such fact is important not only for them, but also for their future value at the job market. they consider their employment as a continuation of their education and pay attention to have something to offer to their future employers (de hauw, de vos, 2010). aside from all these facts, the members of the young generation also care for their personal life which they are not willing to completely sacrifice to their work life. more often than before, the work and salary are considered as a means of living in order to obtain sources for their ideal way of life (twenge et al., 2010a). the majority of fresh graduates also choose their employers based on social responsibility and behaviour matching their own values. they would also consider leaving a company not matching their ideas in social responsibility (hershatter, epstein, 2010). the changes at labour market are also related the flexibility of generation y peers. not only do they offer flexibility, but they also expect to be granted by one. however, the flexibility is bringing different notion of fluctuation. the loyalty to employer is much lower at the generation y comparing to the generations of their parents and grandparents (festing, schäfer, 2014). even while working well and gladly, they do not have any problem leaving the organization while seeing positive changes regarding their careers or lives in general. the change might be motivated not only by better financial offer, but also by the possibility of personal development, scope of employment, etc. the main goal of human resources (hr) department will change from gaining the generation y employees to maintaining them. ware (2014) confirms such idea and gives proof of results of work motivation research by integral talent systems inc. the survey says that 60 % of volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.149 | http://emaj.pitt.edu martina fischerová, kateřina půbalová emerging markets journal | p a g e |33 all respondents from generation y employed fulltime in a company are looking for another employment. not only because of the facts stated above, the employers change their strategies related to human resources: ways of work, reward systems, means of hiring employees, talent programmes, etc. twenge (2010b) recommends to employers willing to satisfy generation y employees to focus mainly on topics related with work-life balance and flexible work forms. 2.2. life values in the context of career because most of the fresh graduates choose their employers according to the behaviour matching their own values, it is advisable to focus especially on the perception of these values. for their exploration, the value based theory formulated by duane brown (1996) might be used. 2.2.1. values based theory the theory is taking into account the influence of so called work and cultural values on (not only) the choice of employment. it points out over-focusing of all current theories on values of euroatlantic civilization. brown expects that for clarification of own (not only career) direction, the orientation in own values is crucial. and not only for choosing and selecting life roles, but also for individual satisfaction related to those roles. after it was formed in 1996, the theory was revised at the beginning of a new millennium. brown has accented differences between work and cultural values. after additional research, brown (2002) has noted that work values are needed to be put into context also with the cultural values and individuals’ backgrounds as well as with their experience and the most influencing factors (upbringing, home, religion, work). main concept of the theory is a claim that each individual, during his or her life, is influenced by only several important values (for the individual), that create cognitive and affective behavioural patterns (brown, 1996; in patton, mcmahon, 2006). brown is emphasizing the fact that, different life roles can satisfy different (life) values and it is not necessary that our work-lives satisfy or saturate all important individual values (brown, crace, 1996). various life roles (work, family, free time, etc.) influence overall life satisfaction and saturate important life values. from this brown’s theory originates the “life values inventory” (brown, crace, 1996/2002) that is focusing on selecting the 14 most important relatively independent values. 2.2.2. life values inventory the inventory consists of 42 statements that measure 14 independent values: achievement, belonging, concern for environment, concern for others, creativity, financial prosperity, health and activity, humility, independence, loyalty to family or group (interdependence), privacy, responsibility, scientific understanding and spirituality. the intensity of approval or disapproval is marked on a 5-item likert scale. each of the 14 values is saturated by 3 statements. in the evaluation stage, the 3 items are summed up and than the list of 14 life values is created, based on agreement of disagreement with the particular statement. after filling in the inventory, the authors (brown, crace, 1996/2002) recommend to arrange the values according to their importance. the respondent is given the full list of 14 life values and creates the order based on the name and the importance he or she imposes on the values. after evaluating the results of the inventory, it is recommended to compare the results with the list created by the individual by summing up the statements with the list. in ideal case, the items should appear on similar level of importance in both lists. next step might be self-valuation and consideration of the particular values in three different life roles, such as: work, important relationships and leisure and community activities. it is probable that, in each role the list of values will be (slightly) different. it might be interesting for individuals to follow which values appear as the most important and which values are preferred in given roles. this deep evaluation is not considered for the uses of this article. the main research question is: are there significant differences in life values among students from different study groups and study backgrounds? the hypotheses are proposed as following: h1: there is a difference in the importance of life values both connected and not connected to the work life. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.149 | http://emaj.pitt.edu different approaches in recruiting young professionals page |34| emerging markets journal h1.1: for cems mim students, achievement, responsibility and concern for others is more important than for students of the study programme management. h1.2: for cems mim students, humility is less important than for students of the study programme management. h2: the importance of life values not connected to the work life (e.g. concern for others, humility, spirituality) of cems mim students and alumni is similar. 3. research method 3.1. sample and data collection the life values inventory was distributed among three groups: (1) management students – students from the czech study programme who filled the questionnaire during the leadership class in may 2017, (2) cems mim students – who answered the questions during classes in december 2016 and may 2017 and (3) cems mim alumni – who were asked to fill in the e-survey in march 2017. at this study, the third group is perceived as a control sample that should show if there are also differences among various groups of the same generation. the obtained data were analysed with ibm spss statistics software. the sample of management students (n=107) consists of 42 men and 65 women aged 22 to 28 years (m = 23.7, sd = 1.06). the majority of them (n = 96) stated that they also work while pursuing their studies, in 82 cases it is a part-time job or internship. this result confirms the statement that many students from czech programmes have some kind of a job while studying. within the sample of cems mim students (n = 61), there are 29 men and 32 women aged 21 to 32 years (m = 24.8, sd = 1.64). more than a half of the respondents (n = 38) stated that, they also work while pursuing their studies, in 30 cases it is a part-time job or internship. the control sample of cems mim alumni (n = 94) involves 53 men and 41 women. the age ranges from 25 to 38 years (m = 30.7, sd = 3.79). more than 75 % of them (n = 78) are employed, 18 respondents have their own business (of which 9 are also employed at the same time), 2 are unemployed and 5 are on maternity or parental leave and do not work at the moment. 3.2. reliability despite the fact that internal consistency and reliability of life values inventory has already been tested in the original version, the cronbach’s alpha for each life value was calculated again. in all cases, the values exceed 0.5. the coefficient is equal or higher than 0.7 in 10 out of 14 cases and only 4 life values take place in the lower interim 0.5 0.7. the lowest results are at the subscale “independence” and “interdependence loyalty to a family or group”. the inventory can be considered as consistent and reliable. table 1: cronbach’s alpha life value cronbach’s alpha achievement .73 belonging .69 concern for environment .86 concern for others .71 creativity .85 fin. prosperity .86 health & activity .85 humility .61 independence .55 interdependence .52 privacy .79 responsibility .76 scient. understand. .80 spirituality .87 3.3. cluster analysis for comparison of particular life values in the lvi (life values inventory), the cluster analysis was chosen. in this particular case, the k-means clustering was used. in this method, the number of centres and thus the resulting number of clusters is set before the analysis. as the existence of three clusters was expected, before running the non-hierarchical clustering, the hierarchical analysis was run as first to verify the rightness of the assumptions. the resulting dendrogram confirmed the existence of three expected centres, so the k-means analysis was then used. the number of interactions in recounting centres at final clusters was thus set at 10 standard interactions. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.149 | http://emaj.pitt.edu martina fischerová, kateřina půbalová emerging markets journal | p a g e |35 the data were standardized before analysing, especially because of the interpretative lucidity. after allocating the respondents into clusters, the distribution of particular groups of respondents was verified (i.e. cems mim students, cems mim alumni and management students) by pearson’s chi-squared test and analysis of adjusted residuals. both methods confirmed the distribution of respondents in clusters into statistically relevant groups, so the results of the analysis can be explained. 4. findings the k-means clustering of standardized data shows notable differences in the importance of life values among various groups of young professionals and generation y representatives. at the first sight, it seems that for cems mim students comparing to the other groups all values are important and the control sample, cems mim alumni, do not care at all. figure 1. cluster analysis of life values compared to the students, alumni show lower degree of importance in the majority of the life values. the only two values, where cems mim alumni show higher interest than mean, are concern for environment and spirituality. however, the value is still on the lower level compared to cems mim students. the highest differences between cems mim members can be found in the value “responsibility”. the importance of responsibility for cems mim students is 4th highest and for cems mim alumni, it is on the 4th lowest level. even some of the non-work life values show different importance for both compared groups. for example, value “concern for others” is the 3rd most important for cems mim students and the group of cems mim alumni market the importance in the middle of the values ladder. the value “spirituality” appears to be among the less important for cems mim students (marked as nr. 11), and for the cems mim alumni it is the 2nd most important one. the value “humility” is the most important for cems mim alumni and also 2nd most important for the cluster of cems mim students. hence, the h2 hypothesis is not supported. table 2: life values ranking life value cems mim alumni cems mim students management students achievement 10. 6. 5. belonging 8. 13. 4. concern for environment 1. 2. 14. concern for others 5. 3. 11. creativity 7. 1. 10. fin. prosperity 13. 14. 1. health & activity 6. 9. 7. humility 4. 10. 9. independence 14. 8. 3. interdependence 12. 12. 2. privacy 9. 7. 6. responsibility 11. 4. 8. scient. understand. 3. 5. 13. spirituality 2. 11. 12. the very similar situation can be found among the two groups of the same-aged young professionals students of two different programmes at the same faculty. the difference of importance can be seen e.g. in the value “creativity”, where cems mim students ranked it as nr. 1 and management students as nr. 10 (out of 14). the value “concern for environment” is the 2nd most important for cems mim students and management students marked it as the less important. the value “concern for others” is nr. 3 for cems mim students and nr. 11 for management students. very interesting is the importance of the value “financial prosperity” cems mim students marked it as the less important and management students as the most important. the h1 hypothesis is supported. nevertheless, there are values that appeared at similar positions of the value ladder for both groups. the value “spirituality” is among the less important values for both student clusters: 4th less important for cems mim students and 3rd less important for management volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.149 | http://emaj.pitt.edu different approaches in recruiting young professionals page |36| emerging markets journal students. the value “privacy” appears as nr. 7 for cems mim students and as nr. 6 for management students. “humility” is ranked nr. 9 among cems mim students and nr. 10 among management students. that is why the hypothesis h1.2 is not supported. the comparison of importance of the values “achievement”, “concern for others” and “responsibility” partially supports the hypothesis h1.1. it has already been mentioned that “concern for others” is the 2nd most important for cems mim students and the less important for management students. “responsibility” has been ranked as nr. 4 among cems mim students and nr. 8 among management students. the last compared value, “achievement”, appears at very similar positions in both groups cems mim students marked it as nr. 6 and management students as nr. 5. therefore, it can be assumed that, the expected higher degree of performance orientation of cems mim students does not automatically mean the importance of the achievement value at a higher position in the value system. 5. conclusion and discussions from the literature review, it is evident that the members of generation y are accenting personal development, flexibility and personal life. the results of this research confirm the fact that, the different groups of young professionals do have different set of values and value orders connected with work as well as with nonworking environment. that is why companies should have different approach towards the individual applicants/employees in order to be able to satisfy their important needs, values and expectations. if the expectations and values are met, then the employees’ performance is higher and it brings (not only) wealth to the organizations and its stakeholders. the biggest differences between the groups are found in perception of financial prosperity, which is the crucial part of work life and compensation in the companies. other differences are shown in perception of concern for environment, concern for others, loyalty to family/ group, and scientific understanding. on the other hand, there are similarities in perception of achievement, humility, privacy and spirituality. the strategic leaders should thus consider aligning the changes to the organizational cultures and structures. by doing so, the job descriptions and content would be more appropriate to meet the values of young professionals as generation y members. as the values of each individual differ, the changes should be flexible in order to meet the different value systems. while recruiting the young professionals, the companies should explore the core values of candidates to be able to match their demands. as shown, such values differ not only between generations, but also within one. there might be some similarities among different reference groups (in our case cems mim students and management students), however, it is needed to be able to react more flexibly on the needs of employees. it is thus a crucial task of the strategic leadership to not only be able to identify such need, but also to be able to communicate the need of changes through the whole organizations. should the companies not adjust to the changes, they would have problems in attracting the best workers (human capital) from the group of young professionals. only those who are able to meet the expectations and values of the candidates with the highest potential would be able to maintain the best human capital and by that gaining the competitive advantage. where strategic leadership fails in providing the guidance, vision, flexibility and prediction, the companies are condemned to struggle for living. one of the limitations of this study can be the values of cronbach’s alpha. as some theories state that 0.5 value is sufficient, for high reliability it is recommended to have the value higher than 0.75. in this case, the results of 4 values would not meet these requirements. as the inventory was distributed only among students from one university, findings might not be transferable to other organizations that work with young professionals. thus, the results may be influenced by the culture at the university. further research conducted at different university/tertiary educational institutions should verify these results. for further research, it is also recommended to continue with these two groups of students and/or alumni. at this moment, it is confirmed that there are differences in the importance of life values. however, it is not only important for strategic leaders and recruiters of companies to know why there is the difference. these findings will also help to implement the (recruiting) strategies more properly. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.149 | http://emaj.pitt.edu martina fischerová, kateřina půbalová emerging markets journal | p a g e |37 references brown, d. (1996). brown’s values-based, holistic model of career and life-role choices and satisfaction. in career choice and development (3rd ed.). san francisco: josseybass. brown, d. (2002). the role of work values and cultural values in occupational choice, satisfaction, and success: a theoretical statement. in career choice and development (4th ed.). san francisco: jossey-bass. brown, d. and crace, r. k. (1996). values in life role choices and outcomes: a conceptual model. the career development quarterly, 44(3), 211-223. brown, d. and crace, k. r. (1996/2002). life values inventory: facilitator’s guide [pdf]. cems. (2018). key facts & figures, cems.org, cems the global alliance in management education, www.cems.org/aboutcems/overview/key-facts-figures. chládová, m., lorenc, m. (2011). development and effective leading of student team work. international journal of case method research & application. 23(3), 216–227. festing, m. and schäfer, l. (2014). generational challenges to talent management: a framework for talent retention based on the psychologicalcontract perspective. journal of world business, 49(2), 262-271. flodrová, t., & šilerová, l. (2011). generace y – jiná cílová skupina. strategie, 19 (10), 58-59. hauw, s. d., & vos, a. d. (2010). millennials’ career perspective and psychological contract expectations: does the recession lead to lowered expectations? journal of business and psychology, 25(2), 293-302. hershatter, a., & epstein, m. (2010). millennials and the world of work: an organization and management perspective. journal of business & psychology. 25 (2), 211–223. howe, n., & strauss, b. (1993). 13th gen: abort, retry, ignore, fail? new york: vintage books. kirovová, i. (2011). od tradiční kariéry k současným kariérním koncepcím. československá psychologie. 55 (4), 316-331. kolář, o. (2015). analýza kariérního vývoje absolventů vysoké školy ekonomické v praze (master's thesis, university of economics, prague, 2015). prague: university of economics. mayrhofer, w., nordhaug, o., & obeso, c. (2009). portrait of a new generation of leaders: project summary report cems l’oréal fellowship (rep.). paris, france: cems head office. patton, w., & mcmahon, m. (2006). career development and systems theory: connecting theory and practice. rotterdam: sense. managing tomorrow’s people: millennials at work – perspectives from a new generation. [pdf]. (2008). pricewaterhousecoopers international limited. millennials at work – reshaping the workplace. [pdf]. (2011). pricewaterhousecoopers international limited. schullery, n. (2013). workplace engagement and generational differences in values. business communication quarterly. 76 (2), 252–265. shoemaker, p., krupp, p. j. h., howland, s. (2013). strategic leadership: the essential skills. harvard business review. retrieved online: https://hbr.org/2013/01/strategic-leadershipthe-esssential-skills twenge, j. m., et al. (2010a). generational differences in work values: leisure and extrinsic values increasing, social and intrinsic values decreasing. journal of management. 36 (5), 1117-1142. https://hbr.org/2013/01/strategic-leadership-the-esssential-skills https://hbr.org/2013/01/strategic-leadership-the-esssential-skills volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.149 | http://emaj.pitt.edu different approaches in recruiting young professionals page |38| emerging markets journal twenge, j. m. (2010b). a review of the empirical evidence on generational differences in work attitudes. journal of business & psychology. 25 (2), 201-210. ware, l. b. (2014). stop the gen y revolving door. t+d. 68 (5), 58-63. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu evaluation of performance of tourism industry companies listed in istanbul stock exchange (bist) by topsis methodology erdal yılmaz samsun ondokuz mayıs university | eyilmaz@omu.edu.tr tunay aslan independent researcher | tunay_aslan@hotmail.com abstract to evaluate the operations of the companies in the past years and to make forecasts about the future, it is important to evaluate and analyze their financial performance. in this study, the financial performances of tourism enterprises operating in istanbul stock exchange for 2013-2016 are compared with topsis method. as a result of the research, it is determined that the best performances are observed in 2014, 2015 and 2016 for malt and in 2013 for metur. keywords: tourism, borsa istanbul, istanbul stock exchange, bist, topsis new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu | mailto:eyilmaz@omu.edu.tr mailto:tunay_aslan@hotmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu evaluation of performance of tourism industry companies listed in istanbul stock exchange (bist) by topsis methodology page |8| emerging markets journal evaluation of performance of tourism industry companies listed in istanbul stock exchange (bist) by topsis methodology erdal yılmaz tunay aslan 1. introduction tourism industry, which is an important sector of the economy, is increasing its importance day by day. tourism sector produces economic units that aim to meet the needs by producing tourism services and to obtain the final profit. in order for tourism businesses to survive, continue their activities and reach their goals, it is very important to use this information that is obtained when evaluating, measuring and making future plans for financial performance. the evaluation of financial performance includes investors and lenders. evaluation of financial performance also provides important information to decision makers such as managers in making past evaluations and planning for the future. in this study, the financial performances of the tourism enterprises operating in the tourism sector, which has an important place in the turkish economy and traded in the istanbul stock exchange (bist) are evaluated. the topsis method, which is one of the multiple criteria decision making techniques is used in evaluating the financial performance. the topsis method is an important method that helps to take decisions by choosing between multiple alternatives with converting a number of criteria to a single score on performance evaluation. in the analysis, various financial ratios were calculated on the basis of the financial statements of seven tourism companies traded in the bist between 2013-2016 and the financial performances of the companies were compared by evaluating these ratios by topsis method. 2. literature review the evaluation of the financial performance of companies is a subject that has been studied in the literature. programs such as electre and topsis are used to evaluate and compare financial performances. there are other studies evaluating the financial performance of tourism companies as well. a summary of the literature on which company performance is assessed by topsis method is presented in the table below. no publication title author(s) year journal name purpose and method of study study findings 1 türk hisse senedi emeklilik yatırım fonlarının çok kriterli performans değerlendirmesi: topsıs metodu alptekin ve şıklar 2009 dumlupınar üniversitesi sosyal bilimler dergisi to assess the performance of turkish stock pension mutual funds, which is an important investment instrument in terms of individual investors, topsis method as a multi-criteria decision making method was used for january 2007 december 2008 period. fund performance evaluation generally uses traditional performance measurement techniques such as sharpe ratio, m2 performance measure, sortino ratio, treynor index, t2 performance measure, jensen index and valuation ratio. the topsis method takes into account the comparison of multiple criteria and gives more meaningful results in the performance evaluation of stock pension mutual funds. therefore; by using the topsis method, a single performance criterion has been achieved in which traditional performance measures are evaluated together. table 1: the evaluation of business performance by using topsis method and ratio analysis volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu erdal yılmaz, tunay aslan emerging markets journal | p a g e |9 2 topsis yöntemine göre performans değerleme yükçü ve atağan 2010 muhasebe ve finansman dergisi topsis method was used to compare the performance of different businesses. in performance appraisal, the use of financial indicators prevents the making of subjective decisions. however, comparing financial results with each other can be problematic for the decision maker. because, the usefulness of the methods can differ according to the expectations of the enterprises without performance evaluation. at this point, like the other multiple decision making methods, the topsis method allows the decision maker to make a more objective assessment because it can combine different evaluation options into a common pavilion. 3 topsis yöntemi kullanılarak finansal ve finansal olmayan oranlara göre performans değerlendirilmesi, şehirlerarası otobüs sektöründe bir uygulama soba ve eren 2011 sosyal ekonomik araştırmalar dergisi anadolu transportation incorporated companies, which has entered transportation sector recently in turkey is evaluated for 4 years in terms of financial and nonfinancial data using topsis method. a total of 14 criteria have been determined under the three main headings of production, marketing and operation in the four-year financial structured study of the anadolu ulaşım anonim şirketi, which has entered the transportation sector in turkey in a recent period. with these 14 criteria, success rankings were made over 4 years. in this context, the most successful year is 2007 (100%). successful percentages of the other years are 2009 (84%), 2010 (79%) and 2008 (21%) respectively. 4 i̇mkb’ye kayıtlı taş ve toprak alanında faaliyet gösteren i̇şletmemelerin performanslarının topsis yöntemi i̇le değerlendirilmesi soba vd 2011 i̇stanbul ticaret üniversitesi dergisi to measure the performances of firms operating in the stone and land area, topsis method was used for financial data between 2006 and 2010. according to topsis method, the results of the financial statements of the enterprises are consistent with each other. the method presented in this study has provided a useful approach in determining the performance evaluations by comparing the operating companies in the same field for the identical criteria over the years. 5 i̇mkb’ye kote bilişim sektörü şirketlerinin finansal performanslarının topsis yöntemi ile değerlendirilmesi türkmen ve çağıl 2012 maliye finans yazıları to analyze the financial performances of these firms using the topsis method which is one of the most criteria decision making techniques, financial tables of twelve firms registered in the istanbul stock exchange and operating in the information sector were used. when topsis results are analyzed, it is seen that pkart company is the best performing company in 20072010 period. karel and arena companies are consistently performing well. escom has improved its financial performance in recent years despite its poor performance in first years. it has been determined that link has performed poorly in 2007 with the lowest performance in 2007 and has performed well again in the following years, failing to maintain this performance. logo company had a good performance in 2007, and it was observed that in the following years performance rankings were at the bottom of the list. 6 finansal performansın topsis çok kriterli karar verme yöntemi i̇le belirlenmesi: ana metal sanayi i̇şletmeleri üzerine bir uygulama uygurtürk ve korkmaz 2012 eskişehir osmangazi üniversitesi i̇bff dergisi to analyze the financial performances of enterprises, topsis method was used for financial tables belonging to the period of 2006-2010 of 13 basic metal industry enterprises traded on istanbul stock exchange (ise). it has been found that the performance scores of the companies operating in the basic metal industry generally vary during the analysis period. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu evaluation of performance of tourism industry companies listed in istanbul stock exchange (bist) by topsis methodology page |10| emerging markets journal 7 evaluation of performance of automotive i̇ndustry companies traded at stock exchange(i̇mkb) by topsis methodology şenel vd 2012 interdisciplinary journal of contemporary research i̇n business evaluating the financial data of 17 companies operating in the automotive field between 2009 and 2011 with the topsis method as a result of the study, it was observed that the financial indicators of companies fedaral mogul and i̇zmit piston pin manufacturing were more successful than companies like sabancı tire, steel rope, demirtaş cast,karsan in all 3 periods. 8 hava taşımacılığı sektöründe topsis yöntemi ile finansal performans değerlendirilmesi ömürberk ve kınay 2013 süleyman demirel üniversitesi i̇ktisadi ve i̇dari bilimler to evaluate the financial performances of an airline company (abc) operating in the istanbul stock exchange (bist) and an airway company (xyz) operating in the frankfurt stock exchange, the topsis method was used. both airline companies are superior to each other in terms of different performance indicators. however, in order to make a holistic evaluation, topsis method, which is one of the most popular decision making techniques, has been used. the topsis method is preferred because all criteria that are essential for evaluation can be subject to joint valuation. for this reason, the performances of airline companies were evaluated using the weight of performance indicators in the study. as a result of the performance evaluation made by topsis method, it is concluded that the companies traded in istanbul stock exchange are more successful. 9 i̇malat alt sektörlerinin finansal performanslarının topsis ve electre yöntemleri i̇le değerlendirilmesi ömürberk ve mercan 2014 çankırı karatekin üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi to evaluate financial performances using various financial ratios of the manufacturing sector, topsis and electre methods were used. in the solutions; s9 "coke and refined petroleum products manufacturing sector" is in the first place for both methods. the proportions in which coke and refined petroleum products have the first place in the manufacturing sector are important. 10 finansal krizlerin bi̇st metal eşya endeksinde faaliyet gösteren firmaların mali performanslarına etkisinin topsis yöntemi i̇le ölçülmesi topaloğlu 2014 yönetim ve ekonomi araştırmaları dergisi the 18 companies operating in the bursa istanbul metal goods and machinery index and the data for the 2000-2012 period of these companies were obtained by the topsis method in 2001 and 2008 to examine within the context of crises. as a result of the analysis, federal mogul i̇zmit piston ve pim üretim tesisleri a.ş. is the company with the most stable financial performance among the companies in the sector. the financial performance scores of other companies for the 2000-2012 period and the resulting fluctuations in their rankings have been determined. moreover, it can be said that the fragility caused by the 2008 crisis is at a lower level than the 2001 crisis. 11 topsis yönteminin finansal performans göstergesi olarak kullanılabilirliği saldanlı ve sırma 2014 marmara üniversitesi öneri dergisi this study was run to evaluate whether the topsis method can help in the presentation of a large number of financial data of the decision makers in the decision-making process. as a result of the study, it has been concluded that the topsis method scores are not capable of helping investment decisions for publicly traded companies. however, if the method is developed, it will be very helpful to the investor at the decision stage and will enter the literature as an important financial evaluation criterion. 12 bi̇st’de i̇şlem gören turizm i̇şl. topsis yöntemi ile finansal performanslarının değerlendirilmesi özçelik ve kandemir 2015 balıkesir üniversitesi sosyal bilimler enstitüsü dergisi this research was conducted to analyze the financial performances of tourism companies with topsis method by taking advantage of financial ratios. through the topsis method, multiple ratios were evaluated together, and the performance evaluation measure was reduced to a single coefficient, and general rankings were made between the enterprises. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu erdal yılmaz, tunay aslan emerging markets journal | p a g e |11 13 topsis performance evaluation measures and relation between financial ratios and stock returns özen vd 2015 journal of economics, finance and accounting this study was run to determine the financial performance of companies with topsis method and to measure the relationship between these performance and financial ratios as well as returns of stocks. there was no relationship between topsis performance scores and stock returns. when we look at the relationship between financial ratios and stock returns, there is generally no correlation between variables in three out of four firms. only statistically significant positive relationships were found between profitability ratios of an operator and market returns. the study results reveal that stock prices are mainly determined by external factors, especially in small businesses. 14 financial performance of pension companies operating in turkey with topsis analysis method i̇şseveroğlu ve sezer 2015 international journal of academic research in accounting, finance and management sciences this research was conducted to analyze the financial performance of the pension companies for the years 2008-2012 using the topsis method. as a result of the study, the performance results did not show much change during the analysis period. 15 ahp temelli topsis ve electre yöntemiyle muhasebe paket programı seçimi tunca vd 2015 niğde üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi this study was run to evaluate the most appropriate accounting package program choice using topsis and electre methods considering many qualitative and quantitative criteria. for the weights of the criteria that were effective in the selection process of the accounting package program in the study, the consistency rate of the evaluations made with the ahp technique was examined and it was found that the results were reliable. criteria with the highest importance were the ability to report and ease of use of menus, respectively. 16 performance evaluation of electricity generation companies traded on bist according to the financial parameters through the application of topsis method i̇lkuçar ve çifçi 2016 international journal of social sciences and education research this research was done to analyze the financial ratios of the electricity companies traded in the bist for 2015 by using the topsis method. the results of the financial analysis using the topsis method showed that ayen was the most successful electricity company and akener was the most unsuccessful company. 17 finansal oranların topsis sıralaması ile yıllık getiriler arasındaki i̇lişki: tekstil i̇malatı sektörü üzerine bir uygulama temizel ve bayçelebi 2016 anadolu üniversitesi sosyal bilimler dergisi the purpose of this study was to evaluate and compare the financial performances of companies operating in textile sector using topsis method. between the years 2011-2014, there was no significant relationship between the topsis rankings of firms. 18 yönetim kararlarında geçerli maliyet analizlerinde alternatif bir yöntem: bulanık topsis yöntemi mihriban coşkun arslan 2017 gazi i̇ktisat ve i̇şletme dergisi in the implementation section, the decision of the operator to renew the technology and increase capacity; the selection problem of the existing machine and the two cnc machines to be purchased were analyzed using the fuzzy topsis method with valid cost analysis. as a result, a common solution to the selection of the same machine was found in both methods. in this case, the fuzzy topsis method can be used as an alternative to valid cost analysis in making management decisions. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu evaluation of performance of tourism industry companies listed in istanbul stock exchange (bist) by topsis methodology page |12| emerging markets journal 3. purpose and content the purpose of this study is to evaluate and compare the financial performances of companies operating in tourism sector and traded in bist using the topsis method. due to the fact that tourism enterprises are affected by global economic, social and political issues, we do not engage in companies that do not operate in the tourism sector. the names of the tourism companies traded in the bist and their codes are shown in table 2. the dataset of the study constitutes the financial statements of the tourism companies traded in the bist for 4 years between 2013-2016. the information used to calculate the financial ratios was derived from the annual financial statements published on official websites of the bist and public disclosure platform (kap) (bist, 2017; kap, 2017). the 9 generally accepted financial ratios selected from the liquidity, financial structure, activity and profitability ratios and obtained from the financial tables were taken from public disclosure platform (kap) (kap.gov.tr). they are shown in table 3. although studies have been carried out analyzing financial performances of tourism enterprises previously traded in the bist, the absence of a research study covering the 2013-2016 period increases the importance of our paper. table 2: businesses operating in the tourism sector (bist) bist operation business name avtur avrasya petrol ve turi̇stli̇k tesi̇sler yatirimlar a.ş maalt marmari̇s altinyunus turi̇sti̇k tesi̇sler a.ş. marti marti otel i̇şletmeleri̇ a.ş metur metemtur otelci̇li̇k ve turi̇zm i̇şletmeleri̇ anoni̇m şi̇rketi̇ nttur net turi̇zm ti̇caret ve sanayi̇ a.ş tektu tek-art i̇nşaat ti̇caret turi̇zm sanayi̇ ve yatirimlar anoni̇m şi̇rketi̇ utpya utopya turi̇zm i̇nşaat i̇şletmeci̇li̇k ti̇caret anoni̇m şi̇rketi̇ 4. financial ratios (performance indicators) it is aimed to reach a judgment about the economic and financial structure as well as the profitability of the businesses by establishing mathematical relations between the ratio analysis method and the account groups in financial statements. it is possible to calculate multiple ratios from financial statements. however, the aim should be interpretable information. for this reason, the items which have a meaningful relationship are selected and compared with each other. the financial status of the entities is interpreted by comparing the results of previous years or making comparisons with the general standards, as it is common in literature (çabuk and lazol, 2011). financial ratios used in performance analysis are classified as liquidity ratios, financial ratios, activity ratios and profitability ratios. in this study, liquidity ratios taken into consideration were current ratio and cash ratio. activity ratios taken into account were stock (inventory) turnover ratio, ownership turnover ratio, sales and cost ratio. profitability ratios chosen were assets profitability, profitability of equity, profitability and net profit margin. liquidity ratios: they measure the short-term debt solvency of orgnanization; in other words, evaluate the liquidity risk and determine whether the net operating capital is sufficient (akgüç,1995:346). financial ratios: the ratios used in measuring the short and long term debt repayment power of the resources that constitute the passive part of the enterprise balance sheets are included in this group. financial ratios 19 topsis yöntemi ile finansal performans değerlendirmesi: xutek üzerinde bir uygulama orçun ve eren 2017 muhasebe ve finansman dergisi this study analyzed financial performances of technology companies traded in istanbul stock exchange (bist) using topsis method. the most successful companies in terms of performance between 2010 and 2015 were asels, link, armda, link, indes and dgate. financial performance of the technology companies traded in istanbul stock exchange is analyzed by topsis method. 20 bi̇st’te ana metal sanayi endeksinde faaliyet gösteren i̇şletmelerin finansal performans ölçümü:20112015 dönemi şit vd 2017 süleyman demirel üniversitesi vizyoner dergisi, this paper evaluated the financial performances of the companies in bist main metal index (xmana) by topsis method. as a result of the analysis carried out, it is seen that the firms operating in the sector have different financial performances and the performances of the firms vary between the 20112015 period. http://finans.mynet.com/borsa/hisseler/avtur-avrasya-petrol-ve-tur/ http://finans.mynet.com/borsa/hisseler/maalt-marmaris-altinyunus/ http://finans.mynet.com/borsa/hisseler/marti-marti-otel/ http://finans.mynet.com/borsa/hisseler/metur-metemtur-otelcilik/ http://finans.mynet.com/borsa/hisseler/nttur-net-turizm/ http://finans.mynet.com/borsa/hisseler/tektu-tek-art-turizm/ http://finans.mynet.com/borsa/hisseler/utpya-utopya-turizm/ volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu erdal yılmaz, tunay aslan emerging markets journal | p a g e |13 measure the extent of usage of foreign sources in the financing of an enterprise. financial ratios with another expression; examine the location of the debt of the business in financial structure and its consequences within this structure (ataman and hacırüstemoğlu,1999:131). activity ratios: they are used to determine how much investment is made relative to the income generated from assets and how efficiently they are used. it is desired that these ratios are high (ömürberk and mercan, 2013). profitability ratios: these ratios show whether the company has earned enough profits and from which elements this profit is generated. it is known that the universally accepted income statement includes various income and expenditure items following a specific order from top to the bottom. the profit of each stage has a different meaning in terms of financial status and performance of the organization (saraç,2012:21). the financial ratios and calculation methods used in the analysis of the study are shown in table 3. according to the information in table 3; determination of the liquidity status of the business is made by determining the current ratio, cash ratio, the stock transfer ratio (inventory turnover ratio) and the ownership turnover ratip in determining the effective use of the assets of the entity and finally the net profit margin, the profitability ratio of the equity, profitability and net sales ratio. table 3: ratios considered for the research ratios formulas o1: current ratio current assets/ short term liabilities o2:cash ratio cash and cash equivalents / short term liabilities o3:stock (inventory) turnover rate cost of goods sold / average inventory o4:return on equity net sales / average equity o5:equity profitability net profit / shareholders' equity o6:net profit margin net profit / net sales o7:active profitability net profit / total assets o8:operational profitability operating profit / net sales 5. data and methodology the aim of this study is to analyze the performance of the companies in the tourism sector, which are traded on bist for 2013-2016, taking into account their financial data. for this reason, the topsis analysis is used to determine the best and worst of the business performances. the topsis method can be applied directly on data without a qualitative conversion. with this method, it is possible to sort out the ideal solution distances between the maximum and minimum values that can be taken by certain criteria. in topsis analysis, microsoft office excel program was used. the data are obtained from the financial statements on the bist website. seven companies listed on bist with full financial statements between 2013-2016 were included in the study. there are many criteria-based decision making techniques used in businesses. the topsis method is the most common of all-purpose decision making techniques. the topsis method gives meaningful results when evaluating the operating performance. this method is the most suitable solution for operation based on ideal and negative ideal solutions. positive ideal solution is an improved method based on the assumption that, the nearest negative ideal solution will be formed from the most far point. opsis (technique for order preference by similarity to ideal solution) was developed by hwang & yoon (1981) as an alternative to the method of electre and is the most widely used multi-criteria decision making technique (kabakçı,2014). this method consists of 6 steps. the following table summarizes these steps. table 4: topsis analysis application steps step 1: creating the decision matrix step 2: the normalized decision matrix creation step 3: creation of weighted decision matrix step 4: creating ideal (a +) and negative ideal (a) solutions step 5: calculation of separation measures step 6: calculation of ideal approximation of solution step 1: creating the decision matrix (a): the decision matrix contains the decision points to be ranked in the rows and the evaluation factors to be used in decision making in the columns. the decision matrix is shown as follows: in the matrix aij, m is the number of decision points and n is the number of evaluation factors (dumanoğlu and ergün,2010:105). volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu evaluation of performance of tourism industry companies listed in istanbul stock exchange (bist) by topsis methodology page |14| emerging markets journal table 5: annual standard decision matrix for the 2013-2016 period year 2013 shar e o1 o2 o3 o4 o5 o6 o7 o8 o9 avt ur 15, 93 0,01 47,22 0,03 0,00 0,00 -0,12 0,59 -0,31 maa lt 12, 89 12,61 44,79 0,13 0,02 0,02 0,16 0,58 -0,11 mar ti 0,68 0,02 3,27 0,56 -0,13 -0,04 -0,21 0,76 -0,15 met ur 2,99 0,06 0,04 0,34 4,58 -0,22 -10,53 0,90 -2,94 ntt ur 0,36 0,14 15,94 0,05 0,24 0,15 4,47 0,77 1,12 tekt u 2,09 0,02 159,9 0,09 0,01 0,01 0,15 0,58 0,07 utp ya 0,50 0,02 14,03 0,37 -0,20 -0,10 -0,49 0,79 -0,02 table 6: annual standard decision matrix for the 20132016 period year 2014 share o1 o2 o3 o4 o5 o6 o7 o8 o9 avtur 10,69 0,02 187, 23 0,04 0,09 0,09 2,60 1,86 -0,85 maalt 17,55 17,38 163, 42 0,10 0,05 0,05 0,54 0,42 0,30 marti 0,56 0,02 4,61 0,89 -0,57 -0,10 -0,48 0,71 -0,04 metur 2,52 0,03 0,00 0,00 0,83 -0,24 0,00 0,00 0,00 nttur 3,22 2,69 17,25 0,04 0,16 0,15 4,27 0,81 -0,11 tektu 1,42 0,05 99,04 0,09 0,01 0,01 0,15 0,49 0,05 utpya 0,37 0,01 30,73 0,44 -0,01 -0,01 -0,02 0,78 0,11 table 7: annual standard decision matrix for the 20132016 period year 2015 share o1 o2 o3 o4 o5 o6 o7 o8 o9 avtur 0,80 0,01 80,02 0,03 0,03 0,02 0,81 0,83 0,15 maalt 10,18 10,10 181, 37 0,12 0,06 0,05 0,48 0,33 0,32 marti 0,35 0,01 8,54 0,40 -0,10 -0,05 -0,42 0,79 -0,04 metur 10,23 0,99 0,44 37, 98 1,75 0,30 0,37 0,27 0,67 nttur 5,18 3,96 22,14 0,04 0,06 0,05 1,56 0,80 -0,17 tektu 4,36 2,55 142, 29 0,12 0,01 0,01 0,11 0,54 0,06 utpya 0,66 0,03 15,93 0,35 -0,20 -0,09 -0,63 0,85 -0,02 table 8: annual standard decision matrix for the 20132016 period year 2016 share o1 o2 o3 o4 o5 o6 o7 o8 o9 avtur 0,30 0,01 89,54 0,03 0,11 0,09 4,28 0,98 -1,81 maalt 3,49 3,43 219, 92 0,04 0,02 0,02 0,39 0,96 -1,00 marti 0,26 0,00 12,13 0,21 -0,33 -0,11 -1,10 0,86 -0,27 metur 6,86 0,93 1,28 3,49 0,46 0,40 0,17 0,73 0,22 nttur 1,22 0,50 27,29 0,05 0,00 0,00 0,03 0,84 -0,24 tektu 1,88 0,12 44,97 0,02 -0,07 -0,04 -4,32 1,03 -4,32 utpya 0,49 0,01 8,56 0,23 -0,34 -0,13 -1,27 1,00 -0,26 in our example, 7 businesses from decision points and 9 financial ratios from evaluation factors are used. in the first phase of the study, the standard decision matrix was created for the topsis method. decision matrix for the years 2013-2016 belonging to the enterprises subject to the study are shown in table 5, table 6, table 7 and table 8. step 2: the normalized decision matrix (r) creation the values of rij are calculated using the values in the standard decision matrix with the formula below: in our example; the normalized decision matrices for the years 2013-2016 are calculated and the normalized decision matrix for the year 2013 is shown in table 9 below. table 9: normalized decision matrix of year 2013 sha re o1 o2 o3 o4 o5 o6 o7 o8 o9 avt ur 0,765 0,001 0,271 0,040 -0,001 -0,010 0,308 -0,011 -0,097 ma alt 0,619 1,000 0,257 0,165 0,004 0,014 0,304 0,068 -0,034 ma rti 0,033 0,001 0,019 0,729 -0,028 -0,019 0,398 -0,134 -0,048 volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu erdal yılmaz, tunay aslan emerging markets journal | p a g e |15 me tur 0,143 0,005 0,000 0,438 0,997 -0,919 0,474 -0,776 -0,928 ntt ur 0,017 0,011 0,092 0,070 0,053 0,390 0,404 0,514 0,354 tek tu 0,100 0,001 0,919 0,123 0,003 0,013 0,307 0,044 0,023 utp ya 0,024 0,002 0,081 0,477 -0,043 -0,042 0,415 -0,331 -0,007 tot al 1,701 1,021 1,639 2,042 0,986 -0,573 2,610 -0,627 -0,736 step 3: creation of weighted decision matrix (v) in this step, the weight values (wi) related to the evaluation factors are determined, then the elements in each column of the r matrix are multiplied by the corresponding (wi) values to form the v matrix (aladağ et. al. 2016). the formula for the calculation of the matrix v is shown below: the weights for the evaluation criteria are determined as w1 and w2. the weights to be created are for the normalized decision matrix. the values of columns of the r matrix are multiplied by the corresponding evaluation factor weight values and the columns of the v matrix are calculated. in our example, weighted normalized decision matrices for 2013-2016 are calculated and the weighted decision matrix for 2013 is shown in table 7 below: table 10: year 2013 weighted normalized decision matrix shar e o1 o2 o3 o4 o5 o6 o7 o8 o9 avt ur 0,161 0,000 0,055 0,010 0,000 0,001 0,100 0,001 0,009 maa lt 0,131 0,127 0,052 0,042 0,001 -0,001 0,099 -0,005 0,003 mar ti 0,007 0,000 0,004 0,185 -0,003 0,001 0,129 0,010 0,004 met ur 0,030 0,001 0,000 0,111 0,122 0,065 0,153 0,060 0,085 ntt ur 0,004 0,001 0,019 0,018 0,006 -0,028 0,131 -0,040 -0,032 tek tu 0,021 0,000 0,187 0,031 0,000 -0,001 0,099 -0,003 -0,002 utp ya 0,005 0,000 0,016 0,121 -0,005 0,003 0,134 0,026 0,001 step 4: creating ideal (a +) and negative ideal (a) solutions according to the topsis method, each evaluation factor assumes monotone increasing or decreasing tendency. in order to form the ideal solution set, the largest values of the column values are selected by another expression of the weighted evaluation criterion in the v matrix. the ideal solution set is as follows: . in the formula; j1 is the maximization of utility, and j2 is the loss minimization. the composition of the best achievable criterion values is the ideal solution. the negative ideal solution consists of the worst solution value that can be achieved. the application is shown in our sample with the ideal and negative ideal solution table for 2013. table 11: ideal (a+) and negative ideal (a) solution table for year 2013 share o1 o2 o3 o4 o5 o6 o7 o8 o9 ideal soluti on 0,161 0,127 0,187 0,185 0,122 0,065 0,099 0,060 0,085 negat ive ideal soluti on 0,004 0,000 0,000 0,010 -0,005 -0,028 0,153 -0,040 -0,032 step 5: calculation of separation measures following the determination of the ideal points, the maximum and minimum point distance values are found with the help of formulas in this step. in this stage, the distance between the positive ideal solution (s +) and the negative ideal solution (s-) are calculated for each point. calculation method is shown in the following form: in our example, positive and negative ideal solutions are also shown. table 12: 2013 yearly positive ideal solution distance point share o1 o2 o3 o4 o5 o8 o6 o7 o9 avtur 0,000 0,016 0,017 0,030 0,015 0,004 0,004 0,000 0,006 maalt 0,001 0,000 0,018 0,020 0,015 0,004 0,004 0,000 0,007 marti 0,024 0,016 0,034 0,000 0,016 0,002 0,004 0,001 0,006 metur 0,017 0,016 0,035 0,005 0,000 0,000 0,000 0,003 0,000 nttur 0,025 0,016 0,028 0,028 0,013 0,010 0,009 0,001 0,014 tektu 0,020 0,016 0,000 0,024 0,015 0,004 0,004 0,000 0,008 utpya 0,024 0,016 0,029 0,004 0,016 0,001 0,004 0,001 0,007 volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu evaluation of performance of tourism industry companies listed in istanbul stock exchange (bist) by topsis methodology page |16| emerging markets journal table 13: 2013 yearly negative ideal solution distance point share o1 o2 o3 o4 o5 o6 o7 o8 o9 avtur 0,158 0,000 0,055 0,000 0,005 0,028 -0,054 0,041 0,041 maalt 0,127 0,126 0,052 0,032 0,006 0,027 -0,055 0,035 0,035 marti 0,003 0,000 0,004 0,175 0,002 0,029 -0,025 0,050 0,037 metur 0,027 0,001 0,000 0,101 0,127 0,093 0,000 0,100 0,117 nttur 0,000 0,001 0,019 0,008 0,012 0,000 -0,023 0,000 0,000 tektu 0,018 0,000 0,187 0,021 0,006 0,027 -0,054 0,037 0,030 utpya 0,001 0,000 0,016 0,111 0,000 0,031 -0,019 0,066 0,033 step 6: calculation of ideal approximation of solution ideal and negative ideal separation measures are used to calculate (c*i) the computation of the ideal solution relative of each decision point. the criterion used here is the share of the negative ideal measure in the total measure. calculation of the ideal approximation to relative solubility is shown below with the help of following formula: ideal solution relative affinity values in our example are shown with the help of the table below: table 14: ideal solution relative affinity values – years 2014 and 2016 share share year 2014 c value ranking c value ranking avtur 0,633 4 avtur 0,712 2 maalt 0,702 2 maat 0,747 1 marti 0,620 5 marti 0,495 4 metur 0,731 1 metur 0 7 nttur 0,253 7 nttur 0,609 3 tektu 0,634 3 tektu 0,425 6 utpya 0,603 6 utpya 0,459 5 share share 2016 c value ranking c value ranking avtur 0,665 5 avtur 0,558 4 maalt 0,828 1 maalt 0,750 1 marti 0,433 6 marti 0,414 7 metur 0,812 2 metur 0,677 2 nttur 0,702 4 nttur 0,489 5 tektu 0,707 3 tektu 0,648 3 utpya 0,405 7 utpya 0,444 6 6. results the tourism companies traded on bist were examined in this study. the financial performance for the years 2013-2016 was evaluated by the topsis method using the financial statement information. as a result of the evaluation, metur in 2013 and malt in 2014, 2015 and 2016 showed the best performances. malt also showed the second best performance in 2013. metur has the best performance in 2013, and also it was in the last place because it did not have any sales activity in 2014. metur showed the second best performance in other years. the poor performers belong to nttur in 2013, metur in 2014, utpa in 2015 and marti in 2016. when evaluating the financial performances of the enterprises; it is important to compare the performances of the previous year with those of similar qualities in the same sector. in this way, more accurate results can be achieved by evaluating the past and anticipating the future. by the help of topsis multicriteria decision method, the performances of companies operating in the same sector are assessed and the performances are compared. in the following studies, it is possible to obtain more healthy results by comparing the performances of large scale tourism companies which are not traded in bist, together with their financial statements. references akgüç,ö,.(1995),mali tablolar analizi, i̇stanbul. aladağ, z., alkan, a., ve çelik, c. (2016). otomotiv sektöründe faaliyet gösteren bir firmada tedarikçi seçimi: ahp-bulanık ahp ve topsıs uygulaması. beykent üniversitesi fen ve mühendislik bilimleri dergisi, 9(1). alptekin,n,.şıklar,e,.(2009), türk hisse senedi emeklilik yatırım fonlarının çok kriterli performans değerlendirmesi: topsıs metodu, dumlupınar üniversitesi sosyal bilimler dergisi. arslan,.m,. (2017), yönetim kararlarında geçerli maliyet analizlerine alternatif bir yöntem: bulanık topsis yöntemi, gazi i̇ktisat ve i̇şletme dergisi. ataman,ü,.hacırüstemoğlu,r,.(1999), yöneticiler için muhasebe ve finans bilgileri,i̇stanbul. borsa i̇stanbul (2017), http://www.borsaistanbul.com. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu erdal yılmaz, tunay aslan emerging markets journal | p a g e |17 çabuk,a,.lazol,i̇,.(2011),mali tablolar analizi,bursa. dumanoğlu, s. ve ergül, n. (2010), i̇mkb’de i̇şlem gören teknoloji şirketlerinin mali performans ölçümü, muhasebe ve finansman dergisi, 48. hwang, c.l. and yoon, k. (1981), multiple attribute decision making: methods and applications. springer-verlag, new york. i̇lkuçar,m,.çifçi,a,.(2016), performance evaluation of electricity generation companies traded on bist according to the financial parameters through the application of topsis method, international journal of social sciences and education research. i̇şseveroğlu,g,. sezer,o,.(2015), financial performance of pension companies operating in turkey with topsis analysis method, international journal of academic research in accounting, finance and management sciences. kabakçı,c,.(2014), tarıma dayalı sanayi i̇şletmelerinde topsis yöntemi ile finansal performan analizi, dokuz eylül üniversitesi sosyal bilimler enstitüsü yüksek lisans tezi. kap (2017), http://www.kap.gov.tr. orçun,ç,.eren,b,.(2017), topsis yöntemi ile finansal performans değerlendirmesi: xutek üzerinde bir uygulama, muhasebe ve finansman dergisi. ömürberk,n,.mercan,y,.(2014), i̇malat alt sektörlerinin finansal performanslarının topsis ve electre yöntemleri i̇le değerlendirilmesi, çankırı karatekin üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi. ömürberk,v,.kınay,b,.(2013), hava taşımacılığı sektöründe topsis yöntemi ile finansal performans değerlendirilmesi, süleyman demirel üniversitesi i̇ktisadi ve i̇dari bilimler dergisi. özçelik,h,.kandemir,b,.(2015), bi̇st’de i̇şlem gören turizm i̇şletmelerinin topsis yöntemi i̇le finansal performanslarının değerlendirilmesi, balıkesir üniversitesi sosyal bilimler enstitüsü dergisi. özen,e,.yeşildağ,e,.soba,m,.(2015), topsis performance evaluation measures and relation between financial ratios and stock returns, journal of economics, finance and accounting. saldanlı,a,.sırma,i̇,.(2014), topsis yönteminin finansal performans göstergesi olarak kullanılabilirliği, marmara üniversitesi öneri dergisi. saraç,m,.finansal yönetim,sakarya. soba,m,.akcanlı,f,.erem,i,.eren,k,.(2011), i̇mkb’ye kayıtlı taş ve toprak alanında faaliyet gösteren i̇şletmemelerin performanslarının topsis yöntemi i̇le değerlendirilmesi, i̇stanbul ticaret üniversitesi dergisi. soba,m,.eren,k,.(2011), topsis yöntemi kullanılarak finansal ve finansal olmayan oranlara göre performans değerlendirilmesi, şehirlerarası otobüs sektöründe bir uygulama, sosyal ekonomik araştırmalar dergisi. şenel,b,.şenel,m,.sarıyar,m,.(2012), evaluation of performance of automotive i̇ndustry companies traded at stock exchange (i̇mkb) by topsis methodology, i̇nterdisciplinary journal of contemporary research i̇n business. şit,a,.ekşi,i̇,.hacıevliyagil,n,.(2017), bi̇st’te ana metal sanayi endeksinde faaliyet gösteren i̇şletmelerin finansal performans ölçümü:2011-2015 dönemi, süleyman demirel üniversitesi vizyoner dergisi. temizel,f,.bayçelebi,b,.(2016), finansal oranların topsis sıralaması ile yıllık getiriler arasındaki i̇lişki: tekstil i̇malatı sektörü üzerine bir uygulama, anadolu üniversitesi sosyal bilimler dergisi. volume 7 no 2 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.136 | http://emaj.pitt.edu evaluation of performance of tourism industry companies listed in istanbul stock exchange (bist) by topsis methodology page |18| emerging markets journal topaloğlu,e,.(2014), finansal kirizlerin bi̇st metal eşya endeksinde faaliyet gösteren firmaların mali performanslarına etkisinin topsis yöntemi i̇le ölçülmesi, yönetim ve ekonomi araştırmaları dergisi tunca,m,.aksoy,e,.bülbül,h,.ömürberk,n,.(2 015) ahp temelli topsis ve electre yöntemiyle muhasebe paket programı seçimi, niğde üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi. türkmen,s,.çağıl,g,.(2012), i̇mkb’ye kote bilişim sektörü şirketlerinin finansal performanslarının topsis yöntemi ile değerlendirilmesi, maliye finans yazıları. uygurtürk,h,.korkmaz,t,.(2012), finansal performansın topsis çok kriterli karar verme yöntemi i̇le belirlenmesi: ana metal sanayi i̇şletmeleri üzerine bir uygulama, eskişehir osmangazi üniversitesi i̇bff dergisi. yükçü,s,.atağan, g,.(2010) topsis yöntemine göre performans değerleme, muhasebe ve finansman dergisi. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu gold-stock market relationship: emerging markets versus developed markets jalal seifoddini islamshahr branch, islamic azad university | jalal.seifoddini@iiau.ac.ir fraydoon rahnamay roodposhti science and research branch, islamic azad university | f-rahnamayroudposhti@srbiau.ac.ir elahe kamali central tehran branch, islamic azad university | ela.kamali.mng@iauctb.ac.ir abstract we perform a comparative study on the gold-stock market relationship in u.s. stock market as a developed market and in iran stock market as an emerging market. by considering appropriate variables for emerging markets and by providing a more proper methodology, we improve earlier studies. according to our findings, the relationship between stock market returns and gold price returns does not follow any specific regimes and that this relationship changes in short and long term returns. it is necessary to mention that in the present research, we did not consider this relationship in major structural changes in the economies and instead considered usual economic circumstances that investors are regularly faced with in their investment decisions. keywords: gold, stock market, safe haven, hedge, regime switching new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.126 | http://emaj.pitt.edu | mailto:jalal.seifoddini@iiau.ac.ir mailto:f-rahnamayroudposhti@srbiau.ac.ir http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.126 | http://emaj.pitt.edu gold-stock market relationship: emerging markets versus developed markets page |17| emerging markets journal gold-stock market relationship: emerging markets versus developed markets jalal seifoddini fraydoon rahnamay roodposhti elahe kamali 1. introduction investors always look for different assets, to lower the risk of their portfolios as low as possible, and gold is conceived to have great potentials for this purpose. in the present research, we will investigate whether gold is an asset with the characteristic of a safe haven or hedge. in this regard, we will improve past studies by further investigating the difference in the role of gold in developed markets and emerging markets, because we guess that developed markets have a greater effect on gold compared to emerging markets. according to pierdzioch et al. (2016), investigating the data of other markets can be interesting, because recent studies have obtained interesting results about the gold market efficiency in various countries. therefore, we will consider iran's stock market, which is recognized as an important emerging market in recent years and frequently mentioned as one of the next eleven emerging economies (pradhan et al. (2016), heirati & o’cass (2016), and rancic & jakovljevic (2016)). nevertheless, past studies in this field, which we addressed in the literature review, have not covered iran's market and studying iran’s market is one of our contributions. in addition, given that the official global gold price is denominated in u.s. dollars, currency exchange rate changes in the financial markets of different countries other than u.s. can influence the relationship between gold and stock market in these countries. therefore, comparing the relationship between gold and stock market in u.s. whose currency is dollar and has a very developed financial market with another country whose currency is not u.s dollar and is also recognized as a small emerging market can reveal the differences in the role of gold in different economies. we investigate this matter in the present paper as one of our contributions. another contribution of this paper is the modelling of the relationship between gold and stock market using a regime switching approach and determining the regimes based on the data characteristics, the details for which are presented in the methodology section of the paper. 2. literature review primary studies about safe havens focus on the behavior of investors at the times of crises in a market, for example, upper (2000) focused on market turmoil in 1998. kaul & sapp (2006), and mccauley & mcguire (2009) also studied in this field. in this type of studies, only capie et al. (2005), clearly investigated the role of gold as a hedge against u.s. dollar. baur & lucey (2010), presented a specific definition of safe haven and hedge concepts, and investigated this subject in the markets of the u.s., u.k., and germany and discovered that gold is normally a hedge for the stock market; and at times of a market collapse, it acts as a safe haven. however, they discovered that the safe haven property of gold is short lived. next, baur & mcdermott (2010) presented a more detailed definition of safe haven and hedge assets and also expanded the investigation scope (u.s., u.k., switzerland, russia, japan, italy, india, germany, france, china, canada, brazil, and australia). according to baur & mcdermott (2010), “a strong (weak) hedge is defined as an asset that is negatively correlated (uncorrelated) with another asset or portfolio on average, and a strong (weak) safe haven is defined as an asset that is negatively correlated (uncorrelated) with another asset or portfolio in certain periods only, e.g. in times of falling stock markets”. baur & mcdermott (2010) discovered that the role of gold as a safe haven is short lived and especially observed in daily fluctuations of developed markets but in lower frequencies like weekly or monthly, no such relationship exists. iqbal (2017), added pakistan's market to the population of markets in which this subject has been investigated. hood and malik (2013) focused on extreme situations in the stock market and found that in periods of extremely low or high volatility, gold does not have a negative correlation with the u.s. stock market. the above mentioned studies, use assumptions and methodologies similar to baur and lucey (2010) and their main characteristic is that researchers directly set a price decrease level defined as a market collapse and they use this predetermined criteria for all the markets under consideration. however, we think that it is not appropriate to use the a predefined criteria with no regard to different markets charachteristics. we will address this subject in the methodology section of the paper. other researchers such as beckmann et al. (2015), investigated the role of gold as a hedge or safe haven based on the same definitions, but through the smooth transition methodology. however, they concluded that the transition between the two extreme regimes appears to be very fast in some cases. besides, they used data with monthly frequencies while the studies of baur & lucey (2010) and baur and mcdermott (2010) show that the volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.126 | http://emaj.pitt.edu jalal seifoddini, fraydoon rahnamay roodposhti, elahe kamali emerging markets journal | p a g e |18 gold role as a safe haven for stock market is only observed in daily data. baur and mcdermott (2010) believe that the safe haven effect does not exist in emerging markets. this can be interpreted in this way that investors in emerging markets like iran, are not among the main players of the global gold market and their behavior does not influence the global price of gold. iran's demand only comprise 3% of the global gold investment demand through coins and bullions (world gold council 2016). thus, the assumption that iranian investors behavior would influence the global gold price does not seem reasonable. it is better to focus on the domestic price of gold in every country. in this regard, beckmann et al. (2015) converted the global gold price from u.s. dollar to the national currency of each country under consideration. however, this is not enough, because changes in the domestic gold price can be due to exchange rate fluctuations. beckmann et al. (2015) admited this problem, but ignored it. iqbal (2017) in his model for investigating the relationship between gold and stock market also converted the global gold price into india and pakistan currencies without considering the effects of exchange rate changes. but in the present research, in order to resolve this issue, we will consider the global gold price and exchange rate as other factors influencing the relationship between the domestic gold price and stock market in iran. because according to samadi et al. (2015) , iran's currency exchange rate against u.s. dollar and global gold prices fluctuations have a significant effect on iran's domestic gold coins prices. their relationships are especially stronger in the long term than in the short term. accordingly, in this paper, these two factors are considered in investigating the relationship between iran's stock market and domestic gold coins prices. kaffash hosseini and rostami (2013) investigated this subject based on baur and lucey's (2010) and baur and mcdermott's (2010) model though they did not consider other factors influencing the relationship between gold and stock market. 3. research methdology baur and lucey (2010), baur and mcdermott (2010), hood and malik (2013), lucey and li (2015) and iqbal (2017) manually classified stock market returns into categories based on a rule of thumb (e.g. 5%, 2.5% and 1% quantiles) and distinguished the relationship between stock market returns and gold price returns when the stock market return was at each of these categories. however, using the same rule of thumb for all markets cannot be appropriate and may lead to incorrect results, because every market has different microstructure. therefore in the present research, we use a model that makes it possible to identify the existence of different regimes based on the data characteristics that are derived from different markets. these kind of models are known as regime switching models which estimate the relations between variables in different regimes. in these models, the relations between the variables is nonlinear and the advantage of these models is in their flexibility which provides the possibility to consider different means and variances in different regimes. two main categories of regime switching models include the markov regime switching and threshold regime switching models. the markov regime switching model is useful for cases where the factor causing the regime switching is not visible. but in threshold regression (tr) models, it is assumed that the variable determining the regime changes is visible (gonzalo and pitarakis 2013). in this research, since the value of the variable determining the regime is important for us, we will use the tr model to see whether a regime switching has occurred in the gold-stock market relationship or not. one of the advantages of the tr model is that without using the rule of thumb, it is possible to determine the number of existing regimes in a way that the f-statistics of the regression is maximized. therefore, the model used for iran's market will be as follows. later, by making some changes in the model, we will also present the u.s. market model. moreover, after analyzing the data series, it is possible to adjust the model and change it from a static model to a dynamic model and we will do this in the next section after we describe our data. now as a primary model, if we consider iran stock market return imrt as the threshold variable with j=0, 1, …m regimes, we will have the following model: (1) where gct: domestic gold coins returns in iran got: global gold returns usdt: u.s. dollar to iran’s rial exchange rate αi: coefficients of regime-independent variables βj: coefficients of regime-dependent variables so, if imrt is the regime determinant variable, its threshold values will be as (γ1< γ2<…< γm) and we will be in j regime if: γj ≤ imrt < γj+1. here, γj‌ are different stock market returns and therefore based on the number of determined thresholds, we will have a range of regimes from a very negative market regime to a very positive one. therefore, based on equation (1) we can investigate the relationship of gold coin returns with iran stock market returns, global gold returns and exchange rates in different regimes of the stock market. if like baur and lucey (2010) and baur and mcdermott (2010), we manually determine these regimes, for example if we consider two regimes of a negative market (less than zero return) and a positive market (j=1,2 and γ1=0), then our model will be as follows: volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.126 | http://emaj.pitt.edu gold-stock market relationship: emerging markets versus developed markets page |19| emerging markets journal if -∞ < imrt < γ1 if γ1 ≤ imrt < ∞ (2) now, by defining a regime determination function lj(imrt, γj)=lj(γj≤imrt<γj+1), whose value equals 1 when the regime determining variable is within the range of the chosen threshold and equals 0 when its value is outside that threshold, we can combine the above two equations and we will have: (3) since we manually determined the number of regimes (j=1,2) and threshold values (γ1=0), we only have to estimate the values of αi and βj in equation (3). however, in order to avoid manually applying the regimes, we must consider the number of the regimes and their subsequent γ values as unknown, therefore we will have the following model: (4) where, we have to estimate the values of γj, αi and βj. a common method to do so is to use nonlinear least squares. therefore, if we define the following sum-ofsquared residuals (ssr) function: =1 , 2 (5) by minimizing with respect to the sample data in the time period of (t=1,…..t), we can obtain the different regimes. now, to determine the regimes based on our data, it is possible to use three methods: in the first method called the global estimation of thresholds, ssrs are compared for all possible sets of thresholds to find a possible set that minimizes the ssr of equation (4). in the second method, called sequential estimation of thresholds, first, a value will be obtained as a primary threshold, which minimizes the ssr, next, by moving from this value, other possible thresholds will be discovered that decrease the ssr. the third method is actually a combination and comparison of the two global and sequential methods. in the present research, we will use all three estimation methods based on the approach provided by bai & perron (2003). the primary model for the u.s. market, given that the prices in u.s market are denominated in u.s. dollar and the u.s. is considered a developed market, is now specified as: (6) where umrt: u.s. stock market returns got: global gold returns αi: coefficients of regime-independent variables βj: coefficients of regime-dependent variables 4. data and findings we collected daily data on iran’s domestic gold spot prices, iran stock market index, u.s. dollar/iran’s rial exchange rates (usd/irr), global gold spot prices and u.s stock market index for this study. data on iran are obtained from rahavard noin database and data on global gold price and the u.s stock market index are obtained from quandl database. we used tedpix as an index of iran stock market, bahar azadi gold coins prices as a measure of the domestic gold prices in iran, and s&p500 index as an index of u.s. stock market. our sample covers the period from dec 2013 to dec 2016. we chose this period to make sure that, during this period, no significant structural changes have occurred in the general economic system of iran and the u.s. (things like the sep 2013 significant usd/irr exchange rate increase in iran). therefore, we can focus on the usual macroeconomic conditions in these countries and avoid structural breaks. table 1 presents the descriptive characteristics of the sample: table 1: descriptive characteristics of the sample the results from the test for stationary of the variables presented in table 2 show that the variables are stationary at the first difference level. therefore, in investigating the relationship between the variables, we will use their first difference. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.126 | http://emaj.pitt.edu jalal seifoddini, fraydoon rahnamay roodposhti, elahe kamali emerging markets journal | p a g e |20 table 2: the augmented dickey-fuller test results augmented dickey-fuller test statistic null hypothesis: variable has a unit root level 1st difference mackinnon (1996) one-sided p-values. prob. prob. tedpix 0.4128 0.0000 iran gold coins prices 0.7282 0.0000 usd/irr 0.7216 0.0000 global gold ounce prices 0.2860 0.0000 s&p500 0.2935 0.0000 now we will investigate the relationship between the stock market return and gold market return using equations (4) and (6). in daily analysis, variables are specified with the prefix of lnd, and in weekly analysis, the prefix of lnm and in monthly analysis the lnm prefix are used. we start with analyzing the relationship between gold market and stock market daily returns, but first, we investigate the existence of a serial correlation of error terms using the breusch-godfrey serial correlation lm test, whose results are presented in table 3: table 3: serial correlation test on daily returns breusch-godfrey serial correlation lm test: iran u.s. prob. f-statistic 0.0000 0.1467 prob. chi-square(2) 0.0000 0.1458 test equation (dependent variable: resid): variable prob. prob. resid(-1) 0.0000 0.1807 resid(-2) 0.0000 0.1346 test statistics on iran’s daily data show that the error terms are serially correlated. autocorrelation in the residuals is often caused by a dynamic structure in variables that has not been modelled and so has not been captured in the fitted values. it is possible to extend the model to a dynamic model by adding lagged variables (brooks 2008). in order to justify the model to consider the effect of the autocorrelation, we will add lagged independent and dependent variables. therefore, the justified model of the relationship between iran stock market and gold market daily returns is as follows: (7) we also consider the existence of heterogeneous error distributions for different regimes in our model. table 4, presents the results of implementing the model: table 4: investigating the existence of different regimes in the relationship between the daily returns of the u.s. and iran's stock markets and gold threshold type: bai-perron tests of l+1 vs. l sequentially determined thresholds according to the results presented in table 4, the relationship between gold market and stock market daily returns in iran is not regime-specific and these two do not have a meaningful relationship. in the u.s. market, there is an inverse meaningful relationship between stock market and global gold daily returns, which does not follow different regimes. therefore, in the short term, gold is a weak hedge for iran stock market and a strong hedge for u.s. stock market. we used the sequential method to determine the threshold values in table 4. the use of the other two methods did not cause any changes in the results; therefore, to summarize the matter, we do not present their results. also, if like baur and lucey (2010) and baur and mcdermott (2010) we manually apply our own regimes, the f-statistic of the model decreases which shows that in practice, no such regime existed. table 5 shows the results of manually applying the two regimes of negative market (returns below zero) and positive market (above zero returns) to the model, for which, the f-statistics can be compared with this very statistic in table 4. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.126 | http://emaj.pitt.edu gold-stock market relationship: emerging markets versus developed markets page |21| emerging markets journal table 5: manually applying the regimes to the relationship of the daily return of the u.s. and iran's stock markets with gold method: threshold regression threshold type: fixed number of user-specified thresholds threshold value used: 0 according to table 5, the researchers can manually apply the two positive and negative regimes and show that in the short term, in iran, gold is a strong safe haven, and in the us, it is a weak safe haven for the stock market. however, as mentioned before, determination of the two regimes led to a decrease in the f-statistic of the model and in fact, we applied regimes to the model that did not practically exist. it is also possible that if instead of considering the two positive and negative regimes, we consider more regimes (like baur & mcdermott (2010) baur & lucey (2010)) we may obtain different results. we investigated the relationship between stock return and gold coin return of the subsequent day, which led to a significant drop in the goodness of fit of the model. this is because the working hours of iran stock market are from 8:30 a.m. to 12:30 p.m., whereas the official trading hours of iran gold market start from 11:30 a.m., and if the stock market drops, investors will have the opportunity to turn to the gold market in the same day as a safe haven. the global gold market is open 24 hours and u.s. investors can access this market at any time using various gold investment tools and markets (learn2succeed.com inc 2014). now we investigate the weekly relationship between the variables. according to the results presented in table 6, which indicate autocorrelation, we justified the equations (4) and (6) similar to what we did in equation (7) for weekly returns and investigated the existence of different regimes in the relations between the variables. table 6: serial correlation test of weekly returns breusch-godfrey serial correlation lm test: iran u.s. prob. f-statistic 0.0000 0.0000 prob. chi-square(2) 0.0000 0.0000 test equation (dependent variable: resid): variable prob. prob. resid(-1) 0.0000 0.0000 resid(-2) 0.0678 0.1770 the results presented in table 7 show that weekly relations do not follow different regimes, and in iran, there is no meaningful relationship between the gold and stock market weekly returns, whereas in the us, there is a meaningful inverse relationship between the weekly returns of gold and stock market. therefore, gold continues to hold its role as a strong hedge in the u.s and a weak hedge in iran. table 7: investigating the existence of different regimes in the relationship between the weekly return of the stock markets of the u.s. and iran and gold method: threshold regression threshold type: bai-perron tests of l+1 vs. l sequentially determined thresholds as table 8 shows, in iran, even if we manually determine the regimes, the relations between the weekly return of the stock market and gold coin are not meaningful and only the goodness of fit of the model decreases. in the u.s. market, if we manually determine the regimes, gold will be considered a weak safe haven but still the goodness of fit of the model decreases. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.126 | http://emaj.pitt.edu jalal seifoddini, fraydoon rahnamay roodposhti, elahe kamali emerging markets journal | p a g e |22 table 8: manually applying the regimes to the relationship of the weekly return of the u.s. and iran stock markets with gold method: threshold regression threshold type: fixed number of user-specified thresholds threshold value used: 0 the results from investigating the monthly relations are given in table 9, table 10 and table 11, which show that gold performed as a weak hedge in both iran and the u.s. markets. table 9: serial correlation test of monthly returns breusch-godfrey serial correlation lm test: iran u.s. prob. f-statistic 0.0000 0.0000 prob. chi-square(2) 0.0000 0.0000 test equation (dependent variable: resid): variable prob. prob. resid(-1) 0.0000 0.0000 resid(-2) 0.0000 0.0000 table 10: investigating the existence of different regimes in the relationship between the monthly returns of the u.s. and iran stock markets and gold threshold type: bai-perron tests of l+1 vs. l sequentially determined thresholds table 11: manually applying the regimes to the relationship of the monthly returns of the u.s. and iran stock markets with gold method: threshold regression threshold type: fixed number of user-specified thresholds threshold value used: 0 as table 11 shows, manually applying the regimes did not cause any changes in the research results in the monthly returns. 5. conclusion in the present paper, we presented a new approach to improve previous studies performed to determine the specific relationships between stock markets and gold markets. we used threshold regression to determine the volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.126 | http://emaj.pitt.edu gold-stock market relationship: emerging markets versus developed markets page |23| emerging markets journal potential different regimes in the gold and stock markets relationships based on data characteristics and improved the rule of thumb approach introduced by baur and lucey (2010). we also improved other studies like beckmann et al. (2015), by considering higher frequency data and taking into account the role of currency exchange rates and finally providing the possibility to make quick transition in regimes by implementing a different regime switching model. the main conclusion of the present research is that we showed that studies like baur and mcdermott (2010) and baur and lucey (2010) who found that gold acts as a safe haven for stock market, may have suffered from manually applying the regimes. because our findings showed that, if we investigate the existence of different regimes based on the data characteristics, the relationship between the stock market and gold market does not follow any specific regimes, both in the short and the long terms. another point is that, according to our findings, in the short term, the relationship between the stock market and gold in the developed market of u.s. differs from that of the relatively small emerging market of iran. however, in the long term using monthly returns, in both iran and the u.s. markets, there was no meaningful relationship between gold and stock market. in other words, in both markets, in the long term, gold performed as a weak hedge. this can be because in the long term, the price of gold is heavily influenced by the demand for gold as jewelry, which encompasses a major part of the global gold demand (world gold council 2016). therefore, based on the research results, we recommend that investors should distinguish the relationship between gold and stock market in different markets, especially in developed and emerging markets. they should also consider the importance of other factors influencing the price of gold in each market. in addition, turning to gold when the market turns negative may not be an effective strategy, because according to our findings, the relationship between gold and stock market does not follow different regimes, rather, it acts as a hedge, and to use its risk reduction advantage, it is better to always allocate a part of the portfolio to it. finally, since the existence of regimes is specified based on the data characteristics, the type of the relationship may change in different periods or in different markets. in the present research, we considered a period in which no major structural economic changes occurred in the u.s and iran. references bai, jushan, and pierre perron. 2003. "computation and analysis of multiple structural change models." journal of applied econometrics 18 (1): 1-22. baur, dirk g., and thomas k. mcdermott. 2010. "is gold a safe haven? international evidence." journal of banking & finance 34 (8): 18861898. baur, drik g, and brian m lucey. 2010. "is gold a hedge or a safe haven? an analysis of stocks, bonds and gold." the financial review 45: 217-229. beckmann, joscha, theo berger, and robert czudaj. 2015. "does gold act as a hedge or a safe haven for stocks? a smooth transition approach." economic modelling 48: 16-24. brooks, chris. 2008. introductory econometrics for finance. 2nd. cambridge university press. capie, f, t.c. mills, and g wood. 2005. "gold as a hedge against the dollar." journal of international financial markets 15 (4): 343– 352. gonzalo, jesús, and jeanyves pitarakis. 2013. "estimation and inference in threshold type regime switching models." in handbook of research methods and applications in empirical macroeconomics, edited by nigar hashimzade and michael a. thornton, 189205. edward elgar publishing. heirati, nima, and aron o’cass. 2016. "supporting new product commercialization through managerial social ties and market knowledge development in an emerging economy." asia pacific journal of management 33 (2): 411–433. hood, matthew, and farooq malik. 2013. "is gold the best hedge and a safe haven under changing stock market volatility?" review of financial economics 22 (2): 47-52. iqbal, javed. 2017. "does gold hedge stock market, inflation and exchange rate risks? an econometric investigation." international review of economics & finance 48: 1-17. kafash hoseini, eftekhar sadat, and ali rostami. 2013. "the effect of fluctuations of the tehran stock exchange index (tedpix) on return of investment in gold." journal of investment knowledge (in persian) 2 (8): 235-254. kaul, aditya, and stephen sapp. 2006. "y2k fears and safe haven trading of the us dollar." journal of international money and finance 25 (5): 760779. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.126 | http://emaj.pitt.edu jalal seifoddini, fraydoon rahnamay roodposhti, elahe kamali emerging markets journal | p a g e |24 learn2succeed.com inc. 2014. gold investing for beginners: an opportunity for huge gains or a bubble about to burst? productive publications. lucey, brian m., and sile li. 2015. "what precious metals act as safe havens, and when? some us evidence." applied economics letters 22 (1): 35-45. mccauley, robert n., and patrick mcguire. 2009. "dollar appreciation in 2008: safe haven, carry trades, dollar shortage and overhedging." bis quarterly review december. pierdzioch, christian, marian risse, and sebastian rohloff. 2016. "fluctuations of the real exchange rate, real interest rates, and the dynamics of the price of gold in a small open economy." empirical economics 51 (4): 1481– 1499. pradhan, rudra p., mak b. arvin, neville r. norman, and sara e. bennett. 2016. "financial depth, internet penetration rates and economic growth: country-panel evidence." applied economics 48 (4): 331-343. rancic, nemanja, and mihajlo michael jakovljevic. 2016. "long term health spending alongside population aging in n-11 emerging nations." eastern european business and economics journal 2 (1): 2-26. samadi, saeed, nasrin ebrahimmi, and fariba aghili. 2015. "the effect of exchange rate fluctuations on the stock market index and the price of gold coins." financial monetary economics (in persian) 22 (9): 57-73. upper, christian. 2000. how safe was the'safe haven'? financial market liquidity during the 1998 turbulences. working paper no. 1/00, deutsche bundesbank. world gold council. 2016. gold demand trends third quarter 2016. world gold council. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu the relationship between corporate performance and ownership structure: evidence from turkey hicabi ersoy asst. prof. dr., istanbul commerce university, department of banking and finance – turkey, hersoy@ticaret.edu.tr ayben koy research asst., istanbul commerce university, department of banking and finance – turkey, akoy@ticaret.edu.tr abstract this study investigates the effects of ownership structure on the performance of the listed companies in borsa istanbul stock exchange 30 firms (bist 30). the main hypothesis of our study is that there is a significant relationship between companies' performances and their ownership structures. the statistical population includes 19 non-financial companies in the period of years between 2008 and 2013. the results show that, the concentration of the large shares of companies one or a few shareholders has a negative effect on related firm’s performance. keywords: ownership structure, corporate performance, borsa istanbul stock exchange 30 (bist 30), panel data analysis. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.75 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.75 | http://emaj.pitt.edu hicabi ersoy, ayben koy emerging markets journal | p a g e |9 the relationship between corporate performance and ownership structure: evidence from turkey hicabi ersoy ayben koy i. introduction in finance literature, it is known that there are argues that there is a relationship between corporate performance and ownership structure of the firms, however institutional and economic influences differ from both nationwide and internationally. the major objective of this study is to provide an empirical evidence to respond to the argument that, ownership structures differ according to companies’ financial performances. there are generally two basic types of ownership structure in turkish economic environment, private and publicly ownership. when looking private sector, there is a tendency to foreign weighted ownership structure from domestic one in the last decade. in this study, we have taken into account the concentration of the shares in one hand or a group. in other words, the performance differences between sub samples such as private and public or domestic and foreign owner/s, and etc. weighted firms are not tested separately, because it is subject to another research in the literature. the structure of the paper is as follows: after the introduction, section 2 is about to explain theoretical foundation and reviews the ownership structures and their significance in the corporate governance. section 3 presents the research method, including hypotheses, research variables, model buildings, population and sample selection, data collection method, and statistical test. the findings of the study and hypotheses and discussion of the article is reported in section 4. finally, 5th section has concluding remarks of the study. ii. literature review according to craswell at al. (1997), the impact of the ownership structure on corporate performance occurs in at least three ways. first, there are studies which test for ex post performance effects. demsetz and lehn (1985) do not find evidence of a linear relationship between three measures of ownership concentration and measures of profitability.1morck et al. (1988) also point to demsetz and lehn’s failure to distinguish between the holdings of board members and those of other large stockholders. second, there are studies that relate ownership structure to actions or events which are believed to affect future corporate performance, typically evidenced by share price changes associated with the event in question. however, given the differing context in which these studies occur, it is difficult to generalize about the probable influence of ownership structure on corporate performance. third, there are the studies which examine the ex-ante impact of ownership structure as captured in firms’ market value. in contrast to demsetz and lehn’s focus on the ex post performance measures, morck et al. (1988) examine the relationship between insiders’ stock ownership and firm performance (as measured by tobin’s q) for 371 large us firms. to capture possible non-linearities, morck et al. use a piecewise regression and find that for every 1 percent increase in ownership in the range of 0 to 5 percent, q raises significantly, for a similar increase in ownership between 5 to 25 percent, q declines significantly and beyond 25 percent, q begins to rise again although at a slower rate. they argue that the positive relationship, at relatively low levels of insider 1 these measures of concentration are the percentage of common stock held by the largest twenty stockholders and a similar measure restricted to the five largest stockholders, and a herfindahl measure of ownership concentration. additional control variables include dummy indicators for utilities and financial firms, along with capital, advertising and research and development expenditure and firm size. profitability is measured by accounting profit after tax expressed as a percentage of book equity value. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.75 | http://emaj.pitt. the relationship between corporate performance and ownership structure: evidence from turkey page |10| emerging markets journal holdings, reflects a convergence of managerial and stockholder interests. in empirical studies on the relationship between the ownership and control structure and corporate performance, researchers encounter different econometric problems that, if not addressed, can result in erroneous inference on the relationship between the variables. considering the multiple regression technique by researchers working on the subject, three sources of endogeneity must be highlighted that could derail the studies’ results: the omission of variables, the feedback effect, and the reverse causality (“simultaneous determination”) börsch-supan&köke, (2002); barros et al. (2010). as explained by barros et al. (2010), the “assumption of exogeneity of regressors” in the regression model excludes the possibility of correlation between the explanatory variables and the random error term. if this assumption is invalid, the regressors are endogenous and should mitigate endogeneity; otherwise, the parameters will be biased. according to börsch-supan&köke, (2002), the omission of variables that are relevant to the estimated model occurs for two reasons: the non-availability of data on potentially important variables for corporate governance studies, and lack of knowledge about the type of that explains the relationship between the variables. silveira (2010) noted that omissions of variables can result in a spurious correlation between variables of interest, also known as the fallacy of the common cause. the use of control variables and the procedures of random and fixed effects, as in the studies by claessens et al. (2002) and fahlenbrach and stulz (2009), are a way to combat the problem. claessen et al. (2002) analyzed the impact of the participation of the largest shareholder in the ownership and control on corporate market value. by employing regression with random effects on a sample of 1.301 companies from eight different countries in east asia, the authors found evidence that ownership concentration and control concentration influenced tobin’s q positively and negatively, respectively. thus, the conclusions from the study suggested that the incentive and entrenchment effects can be captured through proxies linked to cash flow and voting rights in organizations. lehman and weigand (2000) found ownership concentration to affect profitability significantly negatively in panel regressions for 361 german corporations over the time period 1991 to 1996. although they showed this effect depends intricately on stock market exposure, the location of control rights, and the time horizon. mishra et al. (2001) examined a sample of 120 norwegian, founding family controlled and nonfounding family controlled firms. they found a positive association between founding family control and firm value for alternative definitions of founding family control. faccio and land (2002) analyzed the ultimate ownership and control of 5,232 corporations in 13 western european countries. typically firms are widely held (36.93%) or family controlled (44.29%). they found that financial and large firms are more likely widely held, while non-financial and small firms are more likely family controlled. kapopoulos and lazaretou (2007) investigated whether there is strong evidence to support the notion that variations across firms in observed ownership structures result in systematic variations in observed firm performance. the paper tested this hypothesis by assessing the impact of the structure of ownership on corporate performance, measured by profitability, using data for 175 greek listed firms. according to their study ownership structure is positively related to higher profitability of analyzed firms. cornett et al. (2008) investigated the relation between institutional investors' involvement and operational performances of the large sized firms. institutional ownership of shares, institutional investor representation on the board of directors, and the presence of independent outside directors on the board all reduce the use of discretionary accruals. they found that there was a significant relationship between operating cash volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.75 | http://emaj.pitt.edu hicabi ersoy, ayben koy emerging markets journal | p a g e |11 flow returns of the companies and the percentage of the institutional stock ownerships. fahrenbrach and stulz (2009) investigated the possible determinants of insider ownership and its impact on the market value of 4.900 companies in the united states for the period from 1988 to 2003. the authors applied probit models and linear regression, both with fixed effects. the results indicated that good stock performance generally decreases managerial ownership, and an increase in shares held by managers tends to increase tobin’s q. however a large reduction in managerial ownership did not result in a decline in firm market value. gurbuz et al (2010) investigated the impact of corporate governance on financial performance in turkey, taking the issue of institutional ownership into account. the paper employs panel data analysis on a sample of 164 firm-year observations for real sector firms on the istanbul stock exchange (ise) covering the 4 year time span between 20052008. the results of the analyses demonstrate the positive influence of corporate governance and institutional ownership on financial performance. additionally, the impact of institutional investors is found to be more strongly pronounced on firms listed on the corporate governance index. azofra and santamaría (2011) investigated the relationship between ownership structure and the corporate performance of 80 spanish banks between 1996 and 2004. the results of the study’s regression models, estimated by the gmm (generalized method of movements)2, indicated that the greater the separation between the largest shareholder’s cash flow and voting rights, the smaller the company’s return on assets, and there is no difference between ownership and control, the 2 gmm, has performedbygugler et al. (2008) andazofraandsantamaría (2011), is a sorurse of endogeneoty in corporatefinancestudies (wintoki, linck, &netter, 2012) is a way of mitigatingfeedbackeffectorfeedbackloop of theresponsevariabletotheregressors. thiseffectemergeswhenthepastvalues of thedependentvariablesinfluencethecontemporaryand/orfu turevalues of theindependentvariables (barros, castro júnior, silveira, &bergman, 2010). relationship between the controlling shareholder’s shareholding and the bank’s profitability is not monotonic. drakos and bekiris (2010) studied the impact of ownership structure on the market value of 146 companies listed on the athens stock exchange from 2000 to 2004. regression estimated by two stage least squares (2sls) and three stage least square (3sls) were used. the authors found that inside directors’ shareholdings (member of the executive board) and the accumulation of shares by investors who owned more than1% of the shares and who did not participate in senior management positively influenced tobin’s q. garcia-meca and sanchez-ballesta (2011) applied piecewise ols (ordinary least squares) regressions and 2sls regressions with random effects in a non-balanced panel composed of 76 spanish companies for the period from 1999 to 2002. the results generally pointed to the existence of a quadratic relationship between large shareholders’ shareholding (who owned more than 5% of the shares) and tobin’s q. an increase in ownership concentration increased the corporate market value up to 60% accumulation of the shares, and the market value decreased after that point. luo et al (2013) used data from chinese family listed companies from 2004 to 2007. the study showed inverse u-shaped relationships between contest for control and corporate market value, as measured by tobin’s q, and between the number of large shareholders and corporate market value. findings indicated that at low to medium levels of contest for control or number of large shareholders, formal institutions can strengthen. jusoh (2014) investigated the effect of audit quality on company performance. panel data of 730 malaysian public listed companies were examined. the results showed that managerial ownership had negative and significant relationship with roa and tobin’s q. in contrast, institutional ownership showed positive and significant relationship with roa and tobin’s q. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.75 | http://emaj.pitt. the relationship between corporate performance and ownership structure: evidence from turkey page |12| emerging markets journal iii. methodology and data the objective of this research is to identify financial effects of the various ownership structures on the performances of the bist 30 companies, which are the biggest open to public companies according to firm size by their volume in turkish stock market. therefore, in this study we investigate the role of the different ownership concentration structures on the performances of the companies. research hypotheses: the main hypothesis is “there is a significant relationship between ownership structure and the performances of the bist 30 companies”. so “there is a significant relationship between the size of the largest share of the firm equity and the firm performance” research variables: we examine the effects of ownership structure on firm value among listed turkish non-financial bist 30 companies. data used for this analysis come from two sources. first, the ownership structures were taken from annual reports of related firms. the other sources of data are based on the financial ratios of firms announced to public. the dependent variable of this study is "the value of the firm" which is represented by the performances of the companies. the performance was measured by tobin’s q = (market value / book value). in order to assess the relationship between corporate performance and ownership structure, as a measure of performance, craswell at al. (1997) indicated that us researchers have utilized tobin’s q (=market value / book value). the multivariate regression method consists of different forms and their difference is related to selecting the predicting variables. for determining the regression equation in this article, the following formula was extracted: y = α + β1χ1 + β2χ2 +…+ βnχn y: company's performance α: constant χ1 , χ2 ,…, χn : independent variables β1 , β2 ,…, βn: coefficient of the achieved regressions for each variables. the statistical data could be managed via three ways: cross sectional, time series and panel data approach. with the panel data method researchers can do cross sectional observations within different time periods. in this study, the panel method (brooks, 2008) was exerted. by employing panel data, a group of data which cover a great number of cross sectional variables (n) that is obtained during a time period (t) is collected. the number of observations (n×t) could be estimated by different models. efficient estimations could be determined by exerting the panel data model. if the immeasurable variables are controlled by exerting ordinary least squares (ols) or generalized least squares (gls), then the variables have efficient estimations. one way for controlling is expending the fixed effects model. in the fixed effects model, the unobserved effects will enter into the fixed statement of the regression model. with different tests such as hausman or the breusch-pagan lagrange multiplier (lm) test, one could select suitable estimates. after selecting a suitable model, the continuity of the time series and the reliability of the regression should be followed. the population of this study includes nonfinancial turkish bist 30 firms from 2008 to 2013 (6 years) period. turkish bist 30 market is the one of the world’s best performing stock exchanges and has been categorized as an emerging market. reliability of the continuity of the explanatory variables as well as control variables were studied. it is observed that studied variables’ mean and variances during the time period and the covariance of the variables were stable. as a result of exerting these variables in this model, we did not have a spurious regression. we use both time series and cross sectional elements. panel data (or longitudinal data) keeps the same individuals (firms) entities. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.75 | http://emaj.pitt.edu hicabi ersoy, ayben koy emerging markets journal | p a g e |13 yit = α + βχit +uit yit= dependent variable. α = intercept term. β = kx1 vector of parameters to be estimated on the explanatory variables. χit = 1xk vector of observations on the explanatory variables. t = 1, …,t (term) i= 1, …, n (firm) the applicability of this technique is limited. it can be employed only when the number of time series observations, t, per cross sectional unit, i, is at least as large as the total number of such unit, n. the simplest types of fixed effects models allow the intercept in the regression model to differ cross-sectionally but not over time. yit = α + βχit + μi + υit uit= μi + υit we can think of μi as encapsulating all of the variables that affect yi tcrosssectionally but do not vary over time-for example, the sector that a firm operates in, a person’s gender, or the country where a bank had its headquarters, and etc. this model could be estimated using dummy variables, which would be termed the least squares dummy variable (lsdv) approach (brooks, 2008). the fixed effects approach is a sensible one, given the data analyzed here, since there is an unusually large number of years compared with the number of firms (19), resulting in a total of (114 =19 firm x 6 years) firm years observation. the data employed in the study are obtained from firms’ annual reports and bist 30 index statistics. the analysis is conducted for the whole sample period of 2006-2013. the model equation can be defined as: perfit = α0 + α1ownstrit + β1ebitsls + β2ebitcpt β4liqr + β5dbtr + β6eqttotassts + β7ebittotassts + β7ebiteqt + γ1growth + μi + υit where perfit: corporate performance = tobin’s q = market value / book value, α : intercept term, β : k x 1 vector of observations on the explanatory variables, t = 1, …, t; i= 1,…, n. in order to control the effects of extraneous variables on the performance of the companies, seven control variables were also selected as follows: 1. ebitsls : ebit/sales ratio (ebittosales) 2. ebitcpt : ebit/capital (ebittocapital) 3. liqr: liquidity ratio, 4. dbtr : total debts/total assets, 5. eqttotassts : equity/total assets, 6. ebittotassts : ebit/total assets. 7. ebittoeq: ebit/equity: 8. owner: the largest share of the firm equity μi =firm specific fixed effect, υit= idiosyncratic disturbance term. as mentioned above, this research’s independent variable and ownership structure were considered as follows: the size of the largest share of the firm equity. the owner of the largest share may be publicly (or governmental) shareholdings, foreign investors, family shareholdings or domestic private shareholdings. in this research, the followings were studied by the regression equation: auto-correlation, the amounts of determining coefficient, and the significance of the model and its coefficient. for determining whether a regression model error statements were self-correlated or not, the durbinwatson test was employed. in durbin-watson test the model hypotheses are: ho : ρ = 0 h1 : ρ ≠ 0 in this model, when ρ is positive, self correlation is positive and when ρ is negative, self correlation is negative and if ρ=0, there’s no self correlation. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.75 | http://emaj.pitt. the relationship between corporate performance and ownership structure: evidence from turkey page |14| emerging markets journal determining coefficient is a criteria which explain the strength of the relationship between the dependent and independent variables. the amount of this coefficient, in fact, determines what percentages of changes of the dependent variables are explained by the independent variables. the significance of the regression equation was determined by f-statistic and related hypothesis were as follows (pindycky&rubinfield, 2001): ho :β1 = β2 = … = βk = 0 h1 :ǝβi ≠ 0 : i = 1,2, …, k if ho is rejected (with 95 percent probability), the regression equation is significant. after implementing the regression significance test, the regressions of each of the coefficients should have been tested. the test hypotheses are presented below: ho : β1 = 0 means the population coefficient is zero, h1 : β1 ≠ 0 means the population coefficient is not zero. for testing these hypotheses, t test was employed. in this test (with 95 percent probability) if we couldn’t reject ho, it means that the considered coefficient isn’t significant and its rejection means the opposite. iv. empirical results the descriptive statistics of the variables and the results of the normality test are given in table 1. the normality for five variables showed significant at 1 percent (p<0.01), two variables showed significant at 5 percent (p<0.05), and liqr showed significant at 10 percent (p<0.01). different models are developed from the variables except eqttotassts. the f-statistic for one model is statistically significant at 5 % level. table 2 reports that ownership coefficient on tobin’s q is negative and significant at 5 percent level (p<0.05). 1 percent increase in the size of the largest share of the firm equity will decrease 0.044871 in tobin’s q. table 1: descriptive statistics and normality test tobi nsq own er ebit tsls ebit eq liqr eqtto tassts ebit cpt ebittot assts dbtr mean 2.387 632 53.56 193 0.098 596 0.213 333 1.4887 72 0.4130 70 0.142 895 0.07894 7 0.859 825 media n 1.485 000 52.37 000 0.070 000 0.190 000 1.4000 00 0.4000 00 0.120 000 0.07000 0 0.580 000 maxim um 19.88 000 97.92 000 0.500 000 0.670 000 3.0800 00 0.8000 00 0.640 000 0.25000 0 34.45 000 minim um 0.390 000 26.00 000 0.090 000 0.100 000 0.5800 00 0.0800 00 0.090 000 0.08000 0 0.200 000 std. dev. 3.329 065 14.33 453 0.096 376 0.153 679 0.5695 72 0.1607 84 0.124 109 0.06275 9 3.177 465 skewn ess 3.709 338 0.499 932 1.666 322 0.635 785 0.4922 03 0.0659 77 1.606 568 0.60200 8 10.49 949 kurtos is 16.96 225 4.136 021 6.749 212 3.308 428 2.5018 85 2.5120 10 6.639 115 3.26386 5 111.5 000 jarque -bera 1187. 411 10.87 880 119.5 248 8.132 079 5.7815 76 1.2138 46 111.9 452 7.21657 7 5801 2.69 proba bility 0.000 000* 0.004 342* 0.000 000* 0.017 145** 0.0555 32*** 0.5450 25 0.000 000* 0.02709 8** 0.000 000* sum 272.1 900 6106. 060 11.24 000 24.32 000 169.72 00 47.090 00 16.29 000 9.00000 0 98.02 000 sum sq. dev. 1252. 342 2321 9.11 1.049 575 2.668 733 36.658 63 2.9212 25 1.740 545 0.44507 4 1140. 880 obser vation s 114 114 114 114 114 114 114 114 114 notes: * significant at 1 percent (p<0.01) ** significant at 5 percent (p<0.05) *** significant at 10 percent (p<0.10) volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.75 | http://emaj.pitt.edu hicabi ersoy, ayben koy emerging markets journal | p a g e |15 the study result shows that, when the large shares of the companies are held by one individual or a few persons or a group, the firm performances are affected negatively. the result appropriates the agency theory. the existence of large shareholders and concentrated ownership influence the level of agency cost and companies performance (jensen and meckling 1976). except from the variables owner, ebitsls and ebitcpt, the others tested ebit/capital, liqr, dbtr, eqttotassts, ebittotassts, ebit/total assets, ebittoeq are not found significantly in this study. so table 2 below shows the results of the significance level of the explanatory variables owner, ebitsls and ebitcpt. then we rewrite the model as: tobinsq = -0.04487145591*owner 5.787288895*ebittosales + 17.21702618*ebittocapital + 2.901417306 + [cx=f, per=f] table 2.results of panel least squares dependent variable: tobinsq method: panel least squares date: 02/04/15 time: 13:36 sample: 2008 2014 cross-sections included: 17 total panel (unbalanced) observations: 114 variable coefficient std. error t-statistic prob. owner -0.044871 0.019282 2.327154 0.0223** ebittosales -5.787289 2.147322 2.695120 0.0084* ebittocapital 17.21703 1.919293 8.970503 0.0000* c 2.901417 1.130206 2.567158 0.0119** effects specification cross-section fixed (dummy variables) period fixed (dummy variables) r-squared 0.848528 mean dependent var 2.387632 adjusted r-squared 0.805496 s.d. dependent var 3.329065 s.e. of regression 1.468203 akaike info criterion 3.803234 sum squared resid 189.6945 schwarz criterion 4.427279 log likelihood -190.7843 f-statistic 19.71865 durbin-watson stat 1.962473 prob(f-statistic) 0.000000 notes: * significant at 1 percent (p<0.01), ** significant at 5 percent (p<0.05) v. conclusion this study demonstrated that large shareholders and concentrated ownership of the firms would actually lead to different financial performances. the statistical population in this study includes 19 nonfinancial companies in the period of years between 2008 and 2013 in bist 30 stock exchange, which are the biggest open to public companies according to firm size by their volume in turkish stock market. according to test results, there is a significant relationship between turkish bist 30 non-financial companies’ ownerships structure and their performances. references azofra, v., santa maria, m., (2011)ownership, control, and pyramids in spanish commercial banks. journal of banking and finance, 35(6), 1464-1476. börsch-supan, a. &köke, j. (2002) an applied econometricians’ view of empirical corporat governance studies. german economic review, 3 (3), 295-323. brooks, chris, 2008, introductory econometrics for finance, cambridge university press, second edition cornett, m.m., a.j. marcus and h. tehranian. 2008. corporate governance and payfor-performance: the impact of earnings management. j. financial econ.. 87: 357-373. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.75 | http://emaj.pitt. the relationship between corporate performance and ownership structure: evidence from turkey page |16| emerging markets journal cornett, m.m., a.j. marcus, a. saunders and h. tehranian, 2007.the impact of institutional ownership on corporate operating performance. j. banking finance, 31: 1771-1794. claessens, s., djankov s., fan, j.p.h. & lang, l.h.p. (2002). diesntangling the incentive and entrenchment effects of large shareholdings. the journal of finance, 57 (6), 2741-2771) craswell, taylor and saywell, 1997, ownership structer and corporate performance: australian evidence, pasific-basin finace journal 5, 301321. demsetz, h. & lehn. k., (1985), the structure of corporate ownership: causes and consequences. journal of political economy. 93, 1155-1177. dracor, a. &bekiris, f. v. (2010). corporate performance, managerial ownership and endogeneity: a smultaneous equation analysis for the athens stock exchance. research in international business and finance, 24 (1), 24-38. faccio, m. &lan, l.h.p., 2002. the ultimate ownership of western european corporations.journal of financial economics. 65: 365-395. fahlenbrach, r., &stulz, r.m. (2009), managerial ownership dynamics and firm value. journal of financial economics, 92 (3), 342-361. garcia-meca, e. & sanchez-ballesta, j.p. (2011).firm value and ownership structure in spanşsh capital market. corporate governance, 11 (1), 41-53. gugler, k., mueller, d.c. and yurtoğlu, b.b. (2008). insider ownership, ownership concentration and investment performance: an international comparison. journal of corporate finance. 14 (5), 688-705. gürbüz, a. osman, aslı aybars. özlemkutlu. 2010. corporate governance and financial performance with a perspective on institutional ownership: empirical evidence from turkey. journal of applied management accounting research. vol. 8 no. 2 jensen, m. c. &meckling, w. 1976. theory of the firm: managerial behavior, agency costs, and ownership structure. journal of financial economic. 3. 305-350. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.75 | http://emaj.pitt.edu hicabi ersoy, ayben koy emerging markets journal | p a g e |17 jin-hui luo, di-fang wan, di cai and heng liu. multiple large shareholder structure and governance: the role of shareholder numbers, contest for control, and formal institutions in chinese family firms. management and organization review 9:2. july 2013.265–294. jusoh, mohd abdullah. 2014. equity ownership, audit quality and firm performance in malaysia using generalized least square estimations technique. journal of emerging issues in economics. finance and banking (jeiefb) an online international monthly journal. 2014 vol: 3 issue 1 kapopoulos, p. and s. lazaretou, 2007. corporate ownership structure and firm performance: evidence from greek firms. corporate governance: an int. rev..vol. 15.no. 2. pp. 144-158. lehman, e. &weigand, j. 2000. does the governed corporation perform better? governance structures and corporate performance in germany’.european finance review.4(2).157-195. mishra, c.s., t. randqy and j.i. jenssen, 2001.the effect of founding family influence on firm value and corporate governance. j. int. finan. manage. accounting, vol. 12.no. 3. pp. 235259. morck. r., schleiffer, a. &vishny, r.w., (1988) management ownership and market valuation: an ampirical analysis. journal of financial economics. 20, 293-315. web sources: http://www.arcelikas.com/sayfa/152/yillik_faa liyet_raporlari http://www.bim.com.tr/categories/654/faaliyet _raporlari.aspx http://www.doganholding.com.tr/yatirimciiliskileri/default.aspx http://www.enka.com/trtr/enka.aspx?mainid=68&contentid= 154 http://www.erdemir.com.tr/yatirimcilar/detay.a spx?sectionid=wsvn2msqrhuysos zhuec6a%3d%3d&contentid=h0e oxotbgwz5mhkyrjc%2b0w%3d %3d http://www.fordotosan.com.tr/faaliyetraporlari. htm http://www.arcelikas.com/sayfa/152/yillik_faaliyet_raporlari http://www.arcelikas.com/sayfa/152/yillik_faaliyet_raporlari http://www.bim.com.tr/categories/654/faaliyet_raporlari.aspx http://www.bim.com.tr/categories/654/faaliyet_raporlari.aspx http://www.doganholding.com.tr/yatirimci-iliskileri/default.aspx http://www.doganholding.com.tr/yatirimci-iliskileri/default.aspx http://www.enka.com/tr-tr/enka.aspx?mainid=68&contentid=154 http://www.enka.com/tr-tr/enka.aspx?mainid=68&contentid=154 http://www.enka.com/tr-tr/enka.aspx?mainid=68&contentid=154 http://www.erdemir.com.tr/yatirimcilar/detay.aspx?sectionid=wsvn2msqrhuysoszhuec6a%3d%3d&contentid=h0eoxotbgwz5mhkyrjc%2b0w%3d%3d http://www.erdemir.com.tr/yatirimcilar/detay.aspx?sectionid=wsvn2msqrhuysoszhuec6a%3d%3d&contentid=h0eoxotbgwz5mhkyrjc%2b0w%3d%3d http://www.erdemir.com.tr/yatirimcilar/detay.aspx?sectionid=wsvn2msqrhuysoszhuec6a%3d%3d&contentid=h0eoxotbgwz5mhkyrjc%2b0w%3d%3d http://www.erdemir.com.tr/yatirimcilar/detay.aspx?sectionid=wsvn2msqrhuysoszhuec6a%3d%3d&contentid=h0eoxotbgwz5mhkyrjc%2b0w%3d%3d http://www.erdemir.com.tr/yatirimcilar/detay.aspx?sectionid=wsvn2msqrhuysoszhuec6a%3d%3d&contentid=h0eoxotbgwz5mhkyrjc%2b0w%3d%3d http://www.fordotosan.com.tr/faaliyetraporlari.htm http://www.fordotosan.com.tr/faaliyetraporlari.htm volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.75 | http://emaj.pitt. the relationship between corporate performance and ownership structure: evidence from turkey page |18| emerging markets journal http://kardemir.com/yonetim.aspx?sec=yat& ani=yes&lng=tr-tr&w=3 http://www.koc.com.tr/tr-tr/yatirimciiliskileri/finansal-raporlar-veistatistikler/faaliyet-raporlari https://www.migroskurumsal.com/icerik.aspx? icerikid=162 http://www.petkim.com.tr/sayfa/1/176/yatir imci-iliskileri-operasyonelve-finansal-verilerfaaliyet-raporlari.aspx https://www.sabanci.com/tr/yatirimciiliskileri/faaliyet-raporlari/k-29 http://www.sisecam.com.tr/tr/yatirimciiliskileri/yillik-faaliyet-raporlari/ http://www.tekfen.com.tr/faaliyetraporu.asp http://www.tofas.com.tr/tr/yatirimci/pages/faal iyetraporlari.aspx http://www.tupras.com.tr/detailpage.tr.php?lpa geid=12 http://investor.turkishairlines.com/tr/maliveriler/faaliyet-raporlari/1/tumyillar/tum-donemler http://www.ttinvestorrelations.com/tr/malioperasyonel-veriler/faaliyetraporlari.aspx http://www.ulkerbiskuvi.com.tr/trtr/yatirimci-iliskileri/yillik-faaliyetraporlari http://kardemir.com/yonetim.aspx?sec=yat&ani=yes&lng=tr-tr&w=3 http://kardemir.com/yonetim.aspx?sec=yat&ani=yes&lng=tr-tr&w=3 http://www.koc.com.tr/tr-tr/yatirimci-iliskileri/finansal-raporlar-ve-istatistikler/faaliyet-raporlari http://www.koc.com.tr/tr-tr/yatirimci-iliskileri/finansal-raporlar-ve-istatistikler/faaliyet-raporlari http://www.koc.com.tr/tr-tr/yatirimci-iliskileri/finansal-raporlar-ve-istatistikler/faaliyet-raporlari https://www.migroskurumsal.com/icerik.aspx?icerikid=162 https://www.migroskurumsal.com/icerik.aspx?icerikid=162 http://www.petkim.com.tr/sayfa/1/176/yatirimci-iliskileri-operasyonel-ve-finansal-veriler-faaliyet-raporlari.aspx http://www.petkim.com.tr/sayfa/1/176/yatirimci-iliskileri-operasyonel-ve-finansal-veriler-faaliyet-raporlari.aspx http://www.petkim.com.tr/sayfa/1/176/yatirimci-iliskileri-operasyonel-ve-finansal-veriler-faaliyet-raporlari.aspx http://www.petkim.com.tr/sayfa/1/176/yatirimci-iliskileri-operasyonel-ve-finansal-veriler-faaliyet-raporlari.aspx https://www.sabanci.com/tr/yatirimci-iliskileri/faaliyet-raporlari/k-29 https://www.sabanci.com/tr/yatirimci-iliskileri/faaliyet-raporlari/k-29 http://www.sisecam.com.tr/tr/yatirimci-iliskileri/yillik-faaliyet-raporlari/ http://www.sisecam.com.tr/tr/yatirimci-iliskileri/yillik-faaliyet-raporlari/ http://www.tofas.com.tr/tr/yatirimci/pages/faaliyetraporlari.aspx http://www.tofas.com.tr/tr/yatirimci/pages/faaliyetraporlari.aspx http://www.tupras.com.tr/detailpage.tr.php?lpageid=12 http://www.tupras.com.tr/detailpage.tr.php?lpageid=12 http://investor.turkishairlines.com/tr/mali-veriler/faaliyet-raporlari/1/tum-yillar/tum-donemler http://investor.turkishairlines.com/tr/mali-veriler/faaliyet-raporlari/1/tum-yillar/tum-donemler http://investor.turkishairlines.com/tr/mali-veriler/faaliyet-raporlari/1/tum-yillar/tum-donemler http://www.ttinvestorrelations.com/tr/mali-operasyonel-veriler/faaliyet-raporlari.aspx http://www.ttinvestorrelations.com/tr/mali-operasyonel-veriler/faaliyet-raporlari.aspx http://www.ttinvestorrelations.com/tr/mali-operasyonel-veriler/faaliyet-raporlari.aspx volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu consumption characteristics mapping of the base of the pyramid (bop) population in brazil renata giovinazzo spers universidade de são paulo faculdade de economia, administração e contabilidade departamento de administração, brazil | e-mail: renatag@usp.br / renatag@fia.com.br james terence coulter wright universidade de são paulo faculdade de economia, administração e contabilidade departamento de administração, brazil | e-mail: jtwright@usp.br abstract the objective of this study is to outline a diagnosis of the base of the pyramid population (bop) in brazil, regarding their size and consumption characteristics. this is a relevant and current issue, considering that bop needs to be understood as a large potential market with its own logic, also representing a large productive potential, which, if well developed, will bring very positive impacts to these communities. to achieve this, a theoretical survey was run. after that, research was made based on secondary data about brazilian bop population participation and a mapping of their consumption profile, identifying main categories of goods consumed. this research generated meaningful results for society, companies and the academy, hopefully consolidating a relevant line of research and management education. keywords: base of the pyramid population, brazilian market, low income markets, market needs, products and services new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.74 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.74 | http://emaj.pitt.edu renata giovinazzo spers, james terence coulter wright emerging markets journal | p a g e |19 consumption characteristics mapping of the base of the pyramid (bop) population in brazil renata giovinazzo spers james terence coulter wright 1. introduction: context, research problem and objectives the literature on the base of the pyramid (bop), developed in brazil and abroad mostly from the late 1990s has highlighted the benefits of the establishment of mutual value and opportunities for businesses and communities, according to studies conducted by prahalad and hammond, 2002; prahalad and hart, 2002; giovinazzo, 2003; prahalad, 2004 and spers, 2007. there has been a growth in the profitable businesses, which are able to successfully meet the bop market needs and at the same time, get a reduction in poverty and a higher inclusion of this portion of the population into the economy and society, according to studies carried out by london et al (2007) and london, anupindi and sheth (2009). from the companies viewpoint, an effort is observed aiming at the new products and services and new processes development, as well as adjustments to the business strategies towards the suitability to the base of the pyramid markets, according to studies conducted abroad by prahalad (2004) prahalad (2005), hart (2005), hart and london (2005), hammond et al (2004), hammond et al (2007) and london (2004). also in brazil, studies and researches can be identified that show the companies strategies to meet the base of the pyramid market needs, such as those by giovinazzo (2003), spers and wright (2006) and spers (2007), which demonstrate that companies focusing on bop have obtained better results, in terms of growth, profits and operational results, than those companies focusing on social classes a and b. however, in this context it also becomes relevant to know the base of the pyramid needs, as consumers and also as producers. given the above, a question arises: what are the consumption characteristics of the bop population in brazil? it is understood that this is a relevant and current issue, bearing in mind that bop needs to be understood as a large potential market with its own logic, besides also representing a large productive potential, which, if well developed, will bring very positive impacts to these communities. this research is expected to generate meaningful results for society, companies and the academy, with the potential to be developed over the medium and long term, with a view to consolidating a relevant line of research and management education. taking into consideration the research questions submitted, the main objective of the study is to map out a diagnosis of the bop population in brazil, with regard to the consumption dimension. the specific objectives of the study are: 1. to identify the current participation of the bop population in brazil; 2. to map out the consumption profile of the bop population in brazil, identifying the main categories of products and services consumed; 3. to analyze if the characteristics of bop consumption in brazil are consistent with the national and international literature on the theme. 2. characterization and behavior shopping of the bop in brazil the social stratification may be defined according to different parameters. in his work, prado (2008) carried out an effort to seek in the brazilian academic literature the classification of popular market and realized that there is no consensus regarding this classification, it can be related to brazil criterion; to the amount of minimum wages and to the very understanding of each author about the formation of the low-income market in brazil, according to data in table 1 below. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.74 | http://emaj.pitt.edu consumption characteristics mapping of the base of the pyramid (bop) population in brazil page |20| emerging markets journal table 1 – low income in brazilian academic papers authors classification schneider (1978) monthly household income up to 5 minimum wages arruda (1981); zamith (1993); alves (2006); reis (2006) monthly household income less than or equal to 3 minimum wages giovinazzo (2003); issa jr. (2004); barki (2005); spers and wright (2006) socioeconomic class c (monthly household income between 4 and 10 minimum wages) and socioeconomic classes d and e (monthly household income less than 4 minimum wages) marques (2004); lima, gosling and matos (2008) socioeconomic classes c and d mattoso and rocha (2005); mattoso (2005); castilhos (2007) housing location parente, barki and kato (2005) household income less than r$ 1.200,00. this amount represented at the time the study was conducted, 4 minimum wages moura et al. (2006); ponchio, aranha and todd (2006); ponchio and aranha (2007) monthly household income below 4 minimum wages assad and arruda (2006) socioeconomic classes d and e, with monthly household income less than 4 minimum wages barros (2006a); barros and rocha (2007) group of domestic workers residents in the baixada fluminense neighborhoods, state of rio de janeiro barros (2006b) definition through the logic of "lacking" because they do not have the required goods to be fully included in the consumer society, ended up being disqualified as consumers chen (2006); moreira (2006); veloso e hildebrand )(2006); veloso, hildebrand and daré (2008) socioeconomic classes c, d and e sobral et al. (2006); parente, barki and kato (2007) monthly household income below 10 minimum wages silva and parente (2007) monthly household income between 2 and 5 minimum wages monteiro, silva and ladeira (2008) monthly household income below r$1.000,00 source: prado (2008) a common and trustworthy definition is the one that uses the classification by average household monthly income, based on data from the national household sample survey (pnad-ibge, 2010). based on this study, the popular class (or the base of the pyramid, as defined in this study) is made up of families earning average income up to 10 minimum monthly wages. for ibge (2010), the class a is made up of the families that receive above twenty minimum monthly wages, the class b consists of the families that receive between ten and twenty minimum monthly wages and the popular classes c, d and e, consists of the families that receive below ten minimum monthly wages, being divided into the following categories: a) between five and ten minimum monthly wages the representatives of the class c, b) between two and five minimum monthly wages the representatives of the class d and c) the families that receive less than two minimum monthly wages the representatives of the class e. this study will adopt the classification criteria proposed by the ibge (2010), being the criterion of average household monthly income a metric available and reliable, which qualifies it as an option to be used for this study. spers and wright (2011) highlights that the base of the pyramid population consists of the classes c, d and e, a group of potential customers who, if included as part of the consumer market, can generate lots of wealth and, consequently, social inclusion and social welfare state. a. the shopping behavior of the base of the pyramid (bop) population the change in the brazilian socioeconomic structure was due to a better income distribution and the increase in average household income. in accordance with analysis carried out by wright and cardoso (spers cited in wright, 2006) it was observed an increase in the number of families with average monthly income between 2 and 5 minimum wages in the period 1992-2004. the higher income led to the change of members from the class d and e to the class c over the years. the classes c, d and e, together, accounted for 88% of the total population in 2011 (cps / fgv, 2012). in this scenario, where most of the population belongs to the base of the pyramid, attention should be given to the consumption of popular and essential goods to meet the demands of low-income market. cobra (2009) states that the popular class purchases, primarily for survival, while the upper class purchases also to boast the luxury. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.74 | http://emaj.pitt.edu renata giovinazzo spers, james terence coulter wright emerging markets journal | p a g e |21 vaz (2006) points out that the consumers with low purchasing power are seen, generally, as people who do not have money to spend and therefore appreciate lower prices, second-tier brands and are dependent on credit plans systems. however, considering this market size, the lower classes represent a significant purchasing power that is waiting to be explored. the base of the pyramid represents a large share of brazilian society that, despite having a restricted budget, is increasingly exposed to the advertising, publicity and influences that awaken the consumption desire and has available income to choose what to purchase, being the price, although important, only one of the attributes to be analyzed in the purchasing process. complementing this analysis, wright et al (2000) apud (as cited) in spers and wright (2011) emphasize that, although relevant, price is not the only determinant factor in the purchasing process of popular class: the stores and products must be attractive, be stylish and these income range customers must be treated with respect and, in addition, these popular consumers’ desires and needs must be satisfied, which is not always reflected by what is cheaper and required for survival. according to prahalad (2005), the consumption capacity creation is based on three basic principles: purchasing power, access and availability of goods/services. the author also states that the bop population is highly brand aware. and it is also extremely conscious about value, considering the necessity and the impossibility of repurchasing. according to a study disclosed by bcg (2002), carried out with consumers of popular class (restricted to people in the age group of 18-64 years old and heads of household) in brazil, the base of the pyramid consumer is subdivided into three groups according to their consumption profile: the consumerist, the planner and the reserved. the "consumerist" consumer profile is described as an adventurous, outgoing, vain and dreamlike person. this base of the pyramid group grew accustomed to living with debt and do not worry too much about it. it is a consumer who buys for pleasure, the products related to personal image being the focus of its consumption. this portion represents 40% of the studied public, featuring a large consumer market in the sector of fashion and beauty, for example, beyond the staple products. the "planner" consumer profile, according to bcg, 2002, is more cautious. this consumer spends his income sparingly and is skeptical regarding to advertising. because he cares about the future, he invests in his education and in their children. he hates debts and, in few months, manages to save a buck. this profile, although at first glance, has few consumption off their essential needs, knows very well the products he purchases as well as his consumption desires. thus, this is a challenging consumer profile who gives great importance to the low price, but also resorts to a higher amount when he realizes that the quality of the product or service is relevant to this expenditure. this consumer represents 36% of the studied base of the pyramid total consumers. finally, the research shows that the minority of study population (24%) consists of retracted consumers: people who focus on price and buy only if it is necessary: their needs and their families’ needs, the paper states. this profile resembles the ideal of cobra (2009) and of common sense when it comes to the consumer of the base of the pyramid. the conclusion of the paper is that, despite being difficult to speak of a standard for the popular class, a feature common to all profiles comes to the fore: consumers pertaining to the popular class neither invest nor save, they consume. according to the data popular (2006), young people prevails in the popular classes, 30% of the class c is comprised by people under 20 and in classes d and e, the percentage is 41%. this ratio significantly impacts the consumption profile, and stands out opportunities in some product segments, among them the education of these young people. according to research by bcg (2002), the price has a weight of 31% to 38% on the purchase decision, according to the product category. but despite the price being relevant, this group has increasingly trying to project its quest for social status in products that class a/b consumes as well as looking for quality in the purchased goods and services. the low-income consumers have the need for social inclusion, as opposed to the upper classes consumers, who want to be unique. poorer consumers feel excluded from society; living in the fringes of society they feel inferior. the consumption, in turn, offers a sense of belonging in the group, is a way to feel as a part of society. to consume is good for self-esteem of such consumers (oliveira, 2006). based on these concepts, secondary data will be analyzed, considering the following framework: 1. the current participation of the bop population in brazil will be analyzed, considering that bop population is made up of families earning average income up to 10 minimum monthly wages. 2. the consumption profile of the bop population in brazil will be mapped out, identifying the main categories of products and services consumed, in the light of the literature review. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.74 | http://emaj.pitt.edu consumption characteristics mapping of the base of the pyramid (bop) population in brazil page |22| emerging markets journal 3. methodological approach green and carmone (1988) and malhorta (1996) point out that once the research problem has been clearly formulated, it is needed to develop the research planning, organizing the conditions for data collection and analysis. considering this study, main objective is to draw up a diagnosis of bop's population in brazil, with regard to the consumption size. with respect to the research characterization, according to aaker, kumar and day (2001), this research can be characterized as exploratory, in accordance with its purpose, research issue, the accuracy of the hypotheses developed and method of data collection. this type of research is used when an understanding is sought on the general nature of a problem, on possible alternative hypotheses and on the relevant variables that need to be regarded. for this sort of research, the methods are quite flexible. they are not structured and qualitative, so that the researcher begins his study without preconceptions about what will be found (aaker, kumar and day, 2001). the lack of a strict structure allows that different ideas and clues on the situation be investigated. as for sources, this study used secondary surveys of specialized publications, which provided the data on the participation of bop in brazil and their main consumption characteristics that allowed the data analysis and interpretation as well as the development of initial findings under the theoretical references light. initially, to carry out a diagnosis on the bop current situation, a survey of secondary data was conducted in available and reliable databases which allowed the analysis on the current participation and the trends about the bop relevance on the brazilian income structure. then data surveys were done on secondary sources about the bop population consumption in brazil, in order to identify a consumption pattern and an analysis in the light of the theoretical reference. quantitative and qualitative data were used in research, collected based on the documents analysis, evaluation of historical and current data, records, reports, governmental documents and opinions, which are suitable for the a research of exploratory nature, as described by scharamamm (1971), yin (1994), miles and huberman (1994), schindler and cooper (2003). 4. presentation and results analysis according to data published by cps / fgv (2012), in 2011, the classes a and b accounted to 12% of the brazilian population, the class c accounted to 55%, and the classes d and e accounted to 33%. for 2014, it is projected that the higher strata will increase their relative share in the pyramid, encompassing 15% of the population, the middle stratum will also present growth, totaling 60%, and the lower classes will constitute 25%. the ibge data (2011) shown in table 2, which serve as reference for this study, show the evolution of salary ranges over 10 years. table 2 – families per monthly household income classes in minimum wage (mw) -% source: ibge, national sample survey of households 2001/2011 these data reveal that the brazilian bop, i.e. the population with average monthly household income below 10 mw represents the vast majority of the population. this portion of the population accounted for 81.7% of the total population in 2001 and 85.6% of the total in 2011. graph 1 shows the evolution of the number of bop families in the last 10 years. graph 1 evolution of bop from 2001 to 2011 source: prepared by the authors based on data from ibge (2011) salary ranges up to 1 mw more than 1 up to 2 mw more than 2 up to 3 mw more than 3 up to 5 mw more than 5 up to 10 mw more than 10 up to 20 mw more than 20 mw without income without declaration volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.74 | http://emaj.pitt.edu renata giovinazzo spers, james terence coulter wright emerging markets journal | p a g e |23 in the context of the base of the pyramid it stands out the class c, which has always been a representative social economic class in the brazilian social pyramid, consisting of a portion of people whose average income, according to the brazilian association of research companies (criterion brazil) is around r$ 1.700,00 (average monthly household income). in 2005 it accounted for 35% of the population, while classes d/e were the majority, totaling 51% (figure 1). figure 1 – economic social classes evolution source: cetelem ipsos2012 between 2005 and 2011, approximately 40 million people turned to be part of the class c, according to cetelem (2012) research and as shown in figure 1. thus, the c class now comprises 54% of the population in 2011, compared to 24% of the classes d/e. entry of another 30 million brazilians is estimated in the class c until 2014. thus, analyzing the social classes’ evolution throughout the years, it may be noted that the class c has achieved a greater room in the brazilian population in an accelerated form. in addition to this significant increase in the number of people belonging to the base of the pyramid, their income has also seen significant growth, being around 8% over the previous year (class c), as shown in graph 2. still analyzing this graph, it can be noticed that the increase in total average household income in the country was mainly driven by the class c income growth. graph 2 – average household income for each consumption segment source: cetelem ipsos2012 a. consumption profile of the bop in brazil according to wright and spers (2011), compared with the other classes, the base of the pyramid consumers feature a consumption pattern focused on their basic needs satisfaction, the housing and food capturing most of this population income, followed by energy and transport. the data in table 3 below support this statement, showing the size of the popular market of housing, food, transportation, clothing and health care, which represent the main expenditures of the base of the pyramid people. these data are also aligned with the concepts presented by cobra (2009) on the relevance of key products and services in the consumption of lowincome consumers. table 3 – overview of the percentage of expense and size of markets of the key sectors in the brazilian family spending at the base of the pyramid principal applications of the budget market size in the main sectors (in billions) range 1 – up to 2 minimum wages housing – 37,2% food – 32,7% transportation – 8,2% clothes – 5,3% medical care – 4,1% r$ 46,2 r$ 40,7 r$ 10,1 r$ 6,6 r$ 5,1 range 2 – more than 2 up to 3 minimum wages housing – 36,8% food – 29,8% transportation 8,6% clothes – 5,7% medical care – 4,7% r$ 39 r$ 31,5 r$ 9,1 r$ 6,0 r$ 4,9 range 3 – more than 3 up to 5 minimum wages housing – 35,9% food – 25,4% transportation – 10,9% clothes – 5,8% medical care – 5,0% r$ 60,9 r$ 43,2 r$ 18,5 r$ 9,8 r$ 8,4 range 4 – more than 5 up to 10 minimum wages housing – 32,7% food – 21% transportation – 13,4% clothes – 5,7% medical care – 5,2% r$ 81,1 r$ 52 r$ 33,2 r$ 14 r$ 13 source: prepared by the authors based on data from ibge (household budget survey 2008-2009) other significant expenditures for the bop population are health care (6%), especially spending on medicines (4% of income), and taxes and labor contributions, representing 4% of the expenditure. it is noteworthy that the bop population spends some money on tobacco (1%), with hygiene and personal care (perfumes and personal products), and also with personal expenses, such as hairdressers (1%). volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.74 | http://emaj.pitt.edu consumption characteristics mapping of the base of the pyramid (bop) population in brazil page |24| emerging markets journal relatively few resources are spent by bop population on education (2%), recreation and culture (1%). these expenditures are proportionally higher for high-income population, accounting for 3% and 2% of income, respectively. the presented data confirm the results of the survey conducted by bcg (2002), on the profile of low-income consumers. according to this study, it is hard to define a unique standard or consumption profile for the popular class, but a common feature to all profiles is that the popular class consumer does not save, or invests, he consumes. the data in table 4 show that the population of the base of the pyramid, on average, spends 90% of their income on consumption expenditures, reaching 94% for families with incomes up to 2 minimum wages. the classes a and b population, in contrast, spend 66% of income on consumption spending, reaching 40% in families earning more than 25 minimum wages. these data show that much of the income of the base of the pyramid is intended for consumption, especially of staple goods such as food, housing, transportation and health care. however, part of the income is also intended for goods and services that meet their personal needs of well-being, leisure and recreation, as shown in the study of bcg (2002). table 4 – household expenditure subdivided into income classes (% of income) average monthly household spending (distribution) subdivided into total income classes and monthly household equity variation, according to the expenses types brazil variable = cash and non-monetary average monthly household expenses n (reais r$) minimum wage = r$ 415,00 year = 2008 types of expens es base of the pyramid (class c / d / e) high income (class a / b) up to 83 0 re ais up to 2 m w mor e tha n 830 up to 1,2 45 rea is – mor e tha n 2 up to 3 mw mor e tha n 1.2 45 up to 249 0 r$mor e tha n 3 up to 6 mw mor e tha n 2.4 90 up to 4.1 50mor e tha n 6 up to 10 mw b o p mor e tha n 4.1 50 up to 6.2 25 mor e tha n10 up to 14 mw mor e tha n 6.2 25 up to 10. 375 mor e tha n 15 up to 25 mw mor e than 10.3 75 mor e than 25 mw hig h inc om e total expens es 74 4,9 8 1.12 4,99 1.81 0,69 3.13 3,00 4.77 8,06 7.19 6,08 14.0 98,4 0 consu mption expens es 94 % 92 % 89 % 84 % 9 0 % 79 % 78 % 40% 66 % food 28 % 25 % 21 % 17 % 2 3 % 14 % 12 % 6% 10 % housin g 37 % 37 % 33 % 30 % 3 4 % 28 % 25 % 13% 22 % clothes 5% 5% 5% 5% 5 % 4% 4% 2% 3% transp ortatio n 10 % 11 % 14 % 17 % 1 3 % 17 % 20 % 10% 16 % hygien e and person al care 3% 3% 3% 2% 3 % 2% 2% 1% 1% medical care 5% 6% 6% 6% 6 % 6% 6% 3% 5% educati on 1% 1% 2% 2% 2 % 3% 4% 2% 3% recrea tion and culture 1% 1% 2% 2% 1 % 2% 2% 1% 2% smokin g 1% 1% 0% 0% 1 % 0% 0% 0% 0% person al service s 1% 1% 1% 1% 1 % 1% 1% 1% 1% miscell aneous 2% 2% 2% 2% 2 % 3% 3% 1% 2% inciden tal expens es 3% 4% 9% 9% 6 % 11 % 14 % 7% 11 % taxes 1% 1% 3% 3% 2 % 4% 6% 3% 5% labor contrib utions 1% 2% 3% 3% 2 % 3% 4% 2% 3% bankin g service s 0% 0% 0% 0% 0 % 0% 1% 0% 0% pensio ns, allowa nces and donatio ns 1% 1% 1% 1% 1 % 1% 1% 1% 1% private social securit y 0% 0% 0% 0% 0 % 0% 0% 0% 0% other expens es 0% 0% 1% 1% 0 % 1% 2% 1% 1% assets increas e 2% 2% 3% 5% 3 % 8% 6% 3% 5% propert y (acquis ition) 1% 1% 1% 3% 1 % 6% 4% 2% 4% propert y (renov ation) 1% 1% 2% 2% 2 % 2% 2% 1% 2% other invest ments 0% 0% 0% 0% 0 % 0% 0% 0% 0% decrea se of liabiliti es 1% 1% 2% 2% 2 % 2% 2% 1% 2% loan and payme nt booklet 1% 1% 1% 1% 1 % 2% 2% 1% 1% propert y install ment 0% 1% 1% 1% 0 % 1% 1% 0% 1% part of the expenses made by the base of the pyramid consumers should also offer them a sense of belonging to some social group, as presented in the theoretical volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.74 | http://emaj.pitt.edu renata giovinazzo spers, james terence coulter wright emerging markets journal | p a g e |25 reference. according to oliveira (2006), for the bop population, consumption is a way to feel part of society. consuming is good for such consumer‘s self-esteem. spending on appliances, clothing and shoes, vehicle acquisition, personal care products, recreation and culture should represent this inclusion role, in addition to meeting the essential basic needs. 5. conclusion (final thoughts) the main objective of this study is to outline a diagnosis of the bop's population in brazil, with regard to the consumption size. to achieve this goal, a theoretical survey was made in the international literature, and especially in brazilian literature, identifying the base of the pyramid main characteristics. after the theoretical survey, a research was made based on secondary data about the brazilian bop population participation and a mapping of the consumption profile, identifying the main categories of the goods consumed. the definition adopted in this study for the bop population (or also known as low-income or popular) is the one that uses the classification by average monthly household income, based on the data from the national household sample survey (pnad-ibge, 2010). based on this study, the popular class is composed of families with income up to 10 minimum monthly wages. the data show that there was a population increase of the brazilian bop in the last 10 years, from 82% of the population in 2002 to 86% in 2012. it is noteworthy that this increase was mainly due to enlargement of the class c, having in view a narrowing of the classes d/e mostly. such analyses show the class c strengthening and it has now a stronger appearance and more importance in consumption context. in addition to this significant increase in the number of people belonging to bop, their income has also seen significant growth, around 8% in 2011 compared to 2010, for the class c, according to data analyzed. the data show that the increase in total average household income in the country was mainly driven by the class c income growth. these analyses confirm the statements made in the theory about the base of the pyramid relevance and its consumption potential according to statement of foreign authors prahalad and hammond, 2002; prahalad and hart, 2002; prahalad, 2004 and the brazilian authors giovinazzo, 2003; spers, 2007. by analyzing the data on consumption, it may be concluded that in general, the average expenditures of the bop population are concentrated in essential expenditures, especially housing, food, transportation and clothing, which constitute 70% of the bop population expenditures and only 48% of the expenditures of highincome population. these expenditures include rents, home maintenance, electricity, gas, water and sewage, clothing and shoes, urban transportation and vehicle acquisition. in addition to expenditures essential goods, the bop population also spends money on health care, smoking, hygiene and personal care (perfumes and personal products) and personal expenses, such as hairdressing, recreation and culture. it is remarkable that few resources are spent on education by the bop population. the base of the pyramid population, on average, spends 90% of their income on consumption expenditures, reaching 94% for families with incomes up to 2 minimum wages. these results are aligned with the theory that the bop population hardly saves or invests, it consumes, spending much of their income on consumer goods, whether they are essential or not. it is worth noting that this behavior is closely related to the income restriction, but also to the concept of belonging to a social group, and to the base of the pyramid population. consumption is a way of social inclusion, makes the consumer feel as an integral part of society. consuming is good for such consumer selfesteem. these findings are relevant to decision makers within organizations, considering the relevance of the bop population as a consumer market. it is also valuable to know the main categories of products that are part of the consumption basket of the bop population bp, and its preferences. these conclusions should also be taken into account by public policy managers, especially on the issue of education for the bop, when considering the small amount of money this population assigns to its own education. it is also important to understand that consumption represents the economic and social inclusion of this population. the study carries some theoretical and methodological limitations. main limitation is the fact that, the study was based only on secondary data. in order to make the research richer and more complete, it would be interesting to consult the bop population through primary research with quantitative approach (surveys) or qualitative, such as focus groups. it would also be ideal to consult a panel of experts in different areas, so that, with their experience, they can complement the diagnosis obtained in this study, based on secondary data. it would be interesting to analyze the market (brazil) and bop from different perspectives, considering different sectors, volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.74 | http://emaj.pitt.edu consumption characteristics mapping of the base of the pyramid (bop) population in brazil page |26| emerging markets journal such as the tourism demand perspective, and other important sectors. the research carried out here allowed a consolidated analysis on the participation of the bop population in brazil, as well as the income evolution of this population. the analyses lead to the confirmation of bop as a consumer segment of the population. the analyzed data also reveal the consumption profile of the bop, reinforcing a general perception that the essential goods are relevant for this population, but also allowing for a deeper analysis on the perception of this population segment with regard to price, quality and consumption of goods that bring a higher personal satisfaction and sense of belonging to a social group and social inclusion. the results are important for the strategic planning of companies from different sectors, such as housing, food, transportation, clothing, health care, education and recreation, including tourism. references aaker, d. a., et al. (2011) pesquisa de marketing. são paulo: editora atlas. aaker, d.a., kumar, v. and day, g.s. (2001), marketing research (7th edition), john wiley and son inc, new york. bcg (2002). mercados pouco explorados: descobrindo a classe c. boston consulting group: são paulo. cetelem. (2012) pesquisa anual: o observador brasil 2012. são paulo. available at: http://www.cetelem.com.br/portal/sobr e_cetelem/observador.shtml. cobra, marcos. (2009) administração de marketing no brasil. são paulo: elsevier. 3ª edição. cooper, d. r. schindler, p. s. (2003) métodos de pesquisa em administração. porto alegre: bookman. cps/fgv. (2012) de volta ao país do futuro: projeções, crise européia e a nova classe média. fundação getúlio vargas centro de políticas sociais: rio de janeiro. disponível em <http://www.fgv.br/cps/ncm2014/>. acesso em: 30/04/2012. data popular. (2006) o mercado da base da pirâmide no brasil. disponível em: <http://www.datapopular.com.br/>. acesso em: 19/05/2012. giovinazzo, r. a. (2003) um estudo sobre o desempenho e a estratégia das empresas que atuam no mercado de bens populares no brasil. dissertação (mestrado em administração de empresas). são paulo: faculdade de economia, administração e contabilidade da universidade de são paulo. green, p. e. carmone, f. j. (1988) multidimensional scaling and related techniques in marketing analysis. boston: allyn. http://www.cetelem.com.br/portal/sobre_cetelem/observador.shtml http://www.cetelem.com.br/portal/sobre_cetelem/observador.shtml volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.74 | http://emaj.pitt.edu renata giovinazzo spers, james terence coulter wright emerging markets journal | p a g e |27 hammond, a.l. kramer, w.j. katz, r.s. tran and c. walker, j.t. (2007) the next four billion: market size and business strategy at the base of the pyramid. world resources institute and international finance corporation. washington, dc. hammond, a.l. prahalad, c.k. (2004) selling to the poor, for pol. hart, s.l. london, t. (2005) developing native capability: what multinational corporations can learn from the base of the pyramid. stanford social innovation review. hart, s.l. (2005) capitalism at the crossroads: the unlimited business opportunities in serving the world's most difficult problems. nj: wharton school publishing. ibge. censo 2010. available at: <http://www.censo2010.ibge.gov.br/pri meiros_dados_divulgados/index.php?u f=00/>. london, t. hart, s.l. (2004) reinventing strategies for emerging markets: beyond the transnational model, journal of international business studies. london, t. anupindi, r. sheth, s. (2009) creating mutual value: lessons learned from serving base of the pyramid producers. journal of business research. london, t. janiga, k. valente, m. (2007) the base of the pyramid perspective and the social enterprise methodology: understanding the facilitating role for development agencies. mi: william davidson institute. malhorta, n. (1996) marketing research: an applied orientation. upper sadlle river: prentice hall. miles, b. m. huberman, a. m. (1994) qualitative data analysis: an expanded sourcebook. california: sage. oliveira, mariana. (2006). a base da pirâmide torna-se o topo das vendas. mundo do marketing. available at: http://mundodomarketing.com.br/.. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.74 | http://emaj.pitt.edu consumption characteristics mapping of the base of the pyramid (bop) population in brazil page |28| emerging markets journal prado, karen perrotta lopes de almeida. (2008) a preferência da marca no processo de decisão de compra: um estudo exploratório no segmento de baixa renda. são paulo. tese de doutorado – departamento de administração da faculdade de economia, administração e contabilidade da universidade de são paulo. prahalad, c.k. (2005) aid is not the answer. wall street journal. prahalad, c.k. (2004) the fortune at the bottom of the pyramid: eradicating poverty through profits, wharton school publishing, upper saddle river, nj. prahalad, c.k. and hammond, a. (2002) serving the world's poor, profitably, harvard business review. prahalad, c.k. hart, s.l. (2002) the fortune at the bottom of the pyramid. strategic business. scharamamm, v. (1971) notes: case studies of instructorial media projects. working paper for academy educational development,. washington. spers, r. g. (2007) proposição de um modelo de internacionalização para atuação de empresas brasileiras nos mercados populares internacionais. tese (doutorado em administração de empresas). são paulo: faculdade de economia, administração e contabilidade da universidade de são paulo. spers, r. g. wright, j. t. c. (2006) mercado de bens populares no brasil: desempenho e estratégia das empresas, rpa brasil, v. 3, p. 5-18, maringá. vaz, danielle. (2006) estratégias de marketing para o consumidor na base da pirâmide. são paulo. disponível em: http://www.ead.fea.usp.br/tcc/trabalhos . acessado em 19/05/2012. wright, james terence coulter; spers, renata giovinazzo. (2011) mercado popular no brasil: abordagens para geração de negócios e casos de sucesso. são paulo: blucher, 2011. yin, r. k. (1994) case study research: design and methods. california sage. http://www.teses.usp.br/index.php?option=com_jumi&fileid=30&itemid=162&id=12&lang=pt-br http://www.teses.usp.br/index.php?option=com_jumi&fileid=30&itemid=162&id=12&lang=pt-br http://www.teses.usp.br/index.php?option=com_jumi&fileid=30&itemid=162&id=12&lang=pt-br the effect of selected human resource management practices on employees’ job satisfaction in ethiopian public banks amare werku ijigu debre berhan university, management department, college of business and economics, debre berhan, ethiopia, | email: amarew.john@gmail.com abstract most of the research has been conducted in the job satisfaction of employees’ on employees job related outcomes but there is little well comprehensive research done that shows the influence of hrm practices on the satisfaction of employees towards a job. this study is co-relational type of research design which is aimed to describe or ascertain if there are significant associations between selected hrm practices and employees’ job satisfaction. in addition to correlation and regression, descriptive statistics, frequencies and percentages were utilized to analyze the data. interpretation is made on the mean, frequency, and percentage of the data and summarized by bar graphs and pie charts. the study result has implied that recruitment and selection is found to have moderate but positive correlation with employees’ job satisfaction and the remaining, training and development, performance appraisal and compensation package found to have strong positive correlation with employees’ job satisfaction. moreover, the regression result shows that recruitment and selection, training and development, performance appraisal and compensation package have a significant positive impact on job satisfaction. each hrm practices in the banks should be a source for employees’ satisfaction and then employees will be loyal and willing to stay in those organizations (banks) because, employees’ satisfaction on the job will reduce absenteeism and turn over intentions in public banks. keywords: human resource management practices, job satisfaction, public banks new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu | mailto:amarew.john@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu amare werku ijigu emerging markets journal | p a g e |1 the effect of selected human resource management practices on employees’ job satisfaction in ethiopian public banks amare werku ijigu 1. introduction human resource management is critical to the success of the organizations because human capital has certain qualities that make it valuable. in terms of business strategy, an organization can succeed if it has a sustainable competitive advantage which means better than competitors at something and can hold that advantage over a sustained period of time (noe et al..., 2007). job satisfaction is a factor that would induce the employee to work in the long term position. regardless of job satisfaction the organization or firm would confront with the cost of recruitment caused by turnover. (hamdia mudor & phadett tooksoon, 2011). most researches are focused on human resource outcomes of employees such as employee satisfaction, employee commitment, and employee retention due to the changing business environment and organizations are moving towards seeing human resource as a valuable asset in which the knowledge, skills and abilities of human resource is a source of competitive advantages. according to armstrong m.(2010) commitment, motivation and job satisfaction, either together or separately, will be higher when people positively experience the application of hr policies concerned with creating an able workforce, motivating valued behaviours and providing opportunities to participate. in ethiopia, there are large numbers of employees working on public organizations and most of them are unsure about their satisfaction towards the hrm practices and with the job. also it is difficult to get published researches that addressed the effect of human resource management practices on employees’ job satisfaction in public organizations. in public or state owned banks, the numbers of employees are not quite stable and some employees look on other competent organizations, specifically private companies with in an expectation of better hrm practices, nice work environment and high satisfaction from the job. every individual employee wants satisfaction at job but organization is wasting its resources by focusing on wrong hr practices for employee job satisfaction (muhammad javed, 2012). again due to lack of efficient hrm practices reduce employee’s satisfaction towards their organization and ultimately that affects their commitment to the organization (md. tofael hossain majumder, 2012). 1.1. research questions in order to achieve the desired purpose and address the problem stated the following research questions were developed. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu the effect of selected human resource management practices on employees’ job satisfaction in ethiopian public banks page |2| emerging markets journal which selected human resource management practices affect employees’ job satisfaction? how selected human resource management practices impact on employees’ job satisfaction? in what ways do selected human resource management practices affect employees’ job satisfaction? 1.2. objectives of the study the main objective of the study is to investigate the effect of selected human resource management practices on employees’ job satisfaction. the specific objectives of the study are: to measure the degree of association between selected human resource management practices on employees’ job satisfaction. to determine which of selected human resource management practices influence on employees’ job satisfaction. to assess the effect of selected human resource management practices on employees’ job satisfaction. to provide necessary recommendation to the respected public banks based on the results of the study. 2. literature review hr practices and job satisfaction are studied widely in different parts of the world. as it is cited by mir mohammed nurul absar et al.., (2010) it is assumed that hr practices are closely associated with job satisfaction ting (1997). because many scholars and practitioners believe that sound hr practices result in better level of job satisfaction which ultimately improves organizational performance (appelbaum, bailey, berg and kalleberg, 2000) which is cited on mir mohammed nurul absar et al.., (2010). in human resource management practices (hrmp), individuals most likely have a higher level of communication with co-workers, employees and outsiders of the organization; a greater involvement of in decision making process. it can be said that individuals give high value to these new opportunities, as result their overall job satisfaction might increase when an employee participates in decision-making, he or she can trust his or her supervisors; perceive his or her jobs as challenging and intrinsically rewarding . trust and intrinsic rewards are in turn positively related to high organizational commitment and positive attitudes toward the job. also, as one of the human resource management practices, job rotation might increase employee’s job satisfaction by giving him/her a sense of belonging, reducing boredom, and mastering his/her skills needed for promotions (sarbapriya ray and ishita aditya ray, 2011). volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu amare werku ijigu emerging markets journal | p a g e |3 2.1. outcomes of previous empirical studies researchers findings mir mohammed nurul absar et al..., (2010) -it was found that hr practices have significant association with job satisfaction (js). -in addition, human resource planning (hrp), and training and development (tnd) were found to have positive impact on job satisfaction (js). -it was also found that tnd has the greatest impact on js. md. tofael hossain majumder (2012) -the study reveals that all hrm dimensions exercised in the private banking sector of bangladesh does not satisfied to the employees equally. -most of the employees are dissatisfied with compensation package followed by reward and motivation, career growth, training and development, management style, and job design and responsibilities. sarbapriya ray and ishita aditya ray (2011) -it was found that factors like performance appraisal, participation in decision making, training and development, empowerment, compensation influencing human resource management( hr) practices have significant association with job satisfaction (js). -in addition, performance appraisals, participation in decision making are found to have high positive impact on job satisfaction (js). -it has also been found that other elements like training and development, empowerment, compensation have substantial impact on employees’ job satisfaction. -but, job rotation, self-directed work teams, recruitment and selection have very negligible impact on job satisfaction as their respective t statistics are insignificant. adeel mumtaz et al..., (2011) -result of study described that teacher satisfaction is not predicted by these set of hr practices so there are some other factor which effect satisfaction. nihat kaya et al.., (2010) -the study show that in addition to the positive impact of hrm activities, organizational climate in particular makes a significant contribution to job satisfaction. hamdia mudor and phadett tooksoon (2011) -the results indicate hrm practice a positively and significantly correlated with job satisfaction. -hrm practice and job satisfaction are negatively and significantly correlated with turnover. hrm practice &job satisfaction are strong predictors of turnover. muhammad javed et al.., (2012) -recognition and training and development are a key source of employee job satisfaction in public sector organizations of pakistan but rewards do not have any significant impact upon employee job satisfaction. nausheen syed and lin xiao yan (2012) -empowerment, job rotation, employee participation, merit-based promotions & performance-based pay and grievance handling procedures, were positively correlated with employee’s job satisfaction. all the practices except grievance handling procedures account for unique variances in job satisfaction of the surveyed firm’s employees. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu the effect of selected human resource management practices on employees’ job satisfaction in ethiopian public banks page |4| emerging markets journal alina ileana petrescu and rob simmons (2008) -after controlling for personal, job and firm characteristics, it is found that several hrm practices raise workers’ overall job satisfaction and their satisfaction with pay. however, these effects are only significant for non-union members. -satisfaction with pay is higher where performance-related pay and senioritybased reward systems are in place. -a pay structure that is perceived to be unequal is associated with a substantial reduction in both non-union members’ overall job satisfaction and their satisfaction with pay. -although hrm practices can raise workers’ job satisfaction, if workplace pay inequality widens as a consequence then non-union members may experience reduced job satisfaction. rathnaweera (2010) -the findings of the research revealed that human resource management practices are significant predictors of employee satisfaction, commitment and retention. 2.2. conceptual framework the reviewed literature leads to formulate a research model. so, the conceptual framework of the study is: 3. research model and hypotheses after looking at the literatures, this research posits the following hypotheses and statistical research model: h1: recruitment and selection is significantly and positively related to employee job satisfaction. h2: training and development is significantly and positively related to employee job satisfaction. h3: performance appraisal is significantly and positively related to employee job satisfaction. h4: compensation package is significantly and positively related to employee job satisfaction. 4. research methodology 4.1. research approach the research design that is used for this study is a quantitative research design. the reason for choosing quantitative research design is due to the fact that it involves studies that make use of statistical analyses to obtain their findings. in addition, this study is a correlational type of research design which is aimed to employees’ job satisfaction volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu amare werku ijigu emerging markets journal | p a g e |5 describe or ascertain if there are significant associations between selected hrm practices and employees’ job satisfaction. 4.2. study variables the independent and dependent variables of the study are: independent variables –recruitment and selection, training and development, performance appraisal and compensation package dependent variable – employees’ job satisfaction 4.3. sampling technique as the data obtained from respective public banks, during the year 2012/13 g.c. the overall number of employees working in state owned banks is 16287. but, by considering geographical restrictions, access to data, expected rate of return from the study and degree of literacy, the study is confined to employees and managers at head office who are at clerical position of the respective banks. convenience sampling technique is used to select sample from the target population. the main reason was banks were unable to provide name list of employees within an assumption to keep the confidentiality of the organization. the following formula is used to select the appropriate sample size based on 95% confidence level and 5% margin of error or level of precision. where, p = sample proportion, q = 1 – p; z = the value of the standard variate at a given confidence level and to be worked out from table showing area under normal curve; n = size of sample. source: c.r. kothari (2004) given: at 95% confidence level the value of z= 1.96 p = the population proportion (assumed to be .50 since this would provide the maximum sample size). n = 2464 which is population size e = 0.05 which is acceptable sample error = 332.461203 333 so, based on the above formula a sample of 333 is selected from the target population and participated in the study which was a sample of both employees and managers. the sample size obtained is allocated to three banks proportional to their population size. 4.4. method of data collection the study used both primary and secondary sources of data. primary data is obtained through questionnaire that is collected from employees and managers at the head offices of the respective public banks. questionnaire is prepared for employees and managers. a five point likert scale questionnaire is used to measure the volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu the effect of selected human resource management practices on employees’ job satisfaction in ethiopian public banks page |6| emerging markets journal variables of the study. some of the questionnaire item was adapted from past researches; (rathnaweera, 2010) and (nihat kaya et al..., 2010) which are better to describe the variables under study. secondary data was gathered from published and unpublished theoretical literatures and empirical studies, books, journal articles, internet and other publications. 4.5. method of data analysis quantitative data analysis tools are used to analyse the collected data. descriptive statistics are used to describe and interpret the results of the study. correlation analysis more specifically pearson correlation coefficient is used to measure the degree of association between selected hrm practices and employees’ job satisfaction. from inferential statistics, regression analysis is used to test the hypothesis of the study. 4.6. reliability and validity the reliability statistics result of both employees and managers questionnaires respectively are excellent and good based on different literature. regarding to validity, validation of questionnaire item is carried out through initial consultation of experts to judge the research instrument. 5. discussion of findings 5.1. descriptive statistics the mean scores for recruitment and selection was greater than the rest four variables indicating that respondents are satisfied with the recruitment and selection practice. but the mean scores for the rest four variables are closer to three (3) indicating respondents are neutral or moderate in their satisfaction with the respective variables. the standard deviations for the five variables ranged from 0.71230 to 1.02899 indicating that the data were reasonably homogenous. 5.2. correlation analysis despite the correlation coefficient of recruitment and selection is weaker compared with other variables, training and development, performance appraisal and compensation package all are found to be strongly and positively correlated with dependent variable job satisfaction. the value (r= 0.365) suggests that the strength of recruitment and selection is moderate but positively correlated with job satisfaction, (r= 0.677) shows that training and development is strongly and positively correlated with job satisfaction, (r= 0.713) shows that performance appraisal is strongly and positively correlated with job satisfaction and (r= 0.802) shows that compensation package is strongly and positively related with job satisfaction. 5.3. regression analysis results of linear regression analysis indicated that 13% variance in employee job satisfaction is explained by recruitment and selection, which is evident by the value of r=0.365 f=39.247 at p<0.01 illustrates the model’s goodness of fit, the regression result also confirms that volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu amare werku ijigu emerging markets journal | p a g e |7 recruitment and selection is a significant predictor of job satisfaction (beta= 0.365, t= 6.265, p<0.01). thus, the null hypothesis is rejected and the alternative hypothesis that ‘recruitment and selection is significantly and positively related to employee job satisfaction’ is failed to reject. results of linear regression analysis indicated that 45.6% variance in employee job satisfaction is explained by training and development, which is evident by the value of r=0.677 f=215.942 at p<0.01 illustrates the model’s goodness of fit, the regression result also confirms that training and development is a significant predictor of job satisfaction (beta= 0.677, t= 14.695, p<0.01). thus, the null hypothesis is rejected and the alternative hypothesis that ‘training and development is significantly and positively related to employee job satisfaction’ is failed to reject. results of linear regression analysis indicated that 50.6% variance in employee job satisfaction is explained by performance appraisal, which is evident by the value of r=0.713 f=263.064 at p<0.01 illustrates the model’s goodness of fit, the regression result also confirms that performance appraisal is a significant predictor of job satisfaction (beta= 0.713, t= 16.219, p<0.01). thus, the null hypothesis is rejected and the alternative hypothesis that ‘performance appraisal is significantly and positively related to employee job satisfaction’ is failed to reject. results of linear regression analysis indicated that 64.2% variance in employee job satisfaction is explained by compensation package, which is evident by the value of r=0.802 f=460.094 at p<0.01 illustrates the model’s goodness of fit, the regression result also confirms that compensation package is a significant predictor of job satisfaction (beta= 0.802, t= 21.450, p<0.01). thus, the null hypothesis is rejected and the alternative hypothesis that ‘compensation package is significantly and positively related to employee job satisfaction’ is failed to reject. 6. conclusion and recommendation 6.1. conclusion the results of this study revealed that bundles of hrm practices mainly recruitment and selection, training and development, performance appraisal and compensation package are positively related to employee job satisfaction. this result is consistent with mir mohammed nurul absar et al..., (2010) and rathnaweera (2010). this means that effective hrm practices lead to employee satisfaction. 6.2. recommendation the overall goal and objectives of the banks would be achieved if and only if employees are satisfied with the job. this will be achieved through by each hrm practices in the banks should be a source for employees satisfaction and then employees will be loyal and willing to stay in that organizations (banks) because, job satisfaction of employees will reduce absenteeism and turn over intentions in public banks. moreover, the need and expectations of employees’ also play a vital role in increasing employees’ satisfaction through by implementing two way volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu the effect of selected human resource management practices on employees’ job satisfaction in ethiopian public banks page |8| emerging markets journal communications and then by continually evaluating the human resource management practices of the banks as well. 7. recommendation public banks should revise and make an adjustment on certain rules and procedures that hinders the employees not to perform with their maximum effort since it has an effect on employees’ level of satisfaction. it is recommended that the management of respective public banks should be able to increase the level of commitment in banks by increasing satisfaction with the specified hrm practices. each public bank has to create a link between the recruitment and selection practices and employees job satisfaction by preparing job descriptions and specifications; deciding terms and conditions of employment; reviewing and evaluating alternative sources of applicants, inside and outside the banks and should take other necessary measurements as well. 8. suggestions for future research the study sample is mainly focused on head office employees of respective public banks. so, future researchers can take sample of city and outlying or regional branch employees and managers. furthermore, the study is basically intended to examine the effect of some of hrm practices such as recruitment and selection, training and development, performance appraisal and compensation package on employees’ job satisfaction. potential researchers can study by considering further hrm practices whether or not they have an impact on employees’ job satisfaction. finally, the study is emphasized on banking industry specifically on public banks. others researcher can study on private banks and confirm whether or not hrm practices have an effect on employees’ job satisfaction. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu amare werku ijigu emerging markets journal | p a g e |9 references abel g/tsadik. (2012). the effect of reward system on job satisfaction: the case of commercial bank of ethiopia addis ababa area. unpublished master’s thesis, addis ababa university. adeel mumtaz, imran khan, hassan danial aslam and bashir ahmad. (2011). impact of hr practices on job satisfaction of university teacher: evidence from universities in pakistan. industrial engineering letters, 1, 1017. alina ileana petrescu and rob simmons. (2008). human resource management practices and workers' job satisfaction. international journal of manpower, 29, 651 – 667. anol bhattacherjee. (2012). social science research: principles, methods and practices. 2nd ed. usa: creative commons attribution 3.0 armstrong, m. (2006). a handbook of human resource management. 10th ed. great britain and usa: kogan page limited. armstrong, m. (2009). armstrong’s handbook of human resource management practice. 11th ed. london: great britain and usa: kogan page limited. armstrong, m. (2010). armstrong’s essential human resource management practice: a guide to people management. great britain and usa: kogan page limited. armstrong, m., duncan brown. (2006). strategic reward: making it happen. great britain and usa: kogan page limited. asta savaneviciene & zivile stankeviciute. (2011). human resource management practices linkage with organizational commitment and job satisfaction. economics and management, 16, 921928 c.r. kothari. (2004). research methodology: methods and techniques. second revised edition. new delhi: new age international (p) ltd. cynthia, d., fisher, lyle, f. schoenfeldt and james, b. shaw. (2006). human resource management. 6th ed. usa: houghton mifflin company. gary dessler. (2004). a framework for hrm. 3th ed, new jersey: pearson education, inc. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu the effect of selected human resource management practices on employees’ job satisfaction in ethiopian public banks page |10| emerging markets journal gary dessler. (2005). human resource management. 10th ed, usa: pearson prentice hall. geoffrey marczyk, david dematteo and david festinger. (2005). essentials of research design and methodology. new jersey: john wiley & sons, inc. hamdia mudor & phadett tooksoon. (2011). conceptual framework on the relationship between human resource management practices, job satisfaction, and turnover. journal of economics and behavioral studies, 2, 41-49 helen collins. (1993). human resource management: personnel policies and procedures. great britain: hodder and stoughton educational hirut g/kidan. (2011). the effect of compensation strategies on employees job satisfaction the case of ethiopian federal democratic republic hiv/aids prevention and control office (fhapco) and dink kistet letena (dkt) ethiopia. unpublished master’s thesis, addis ababa university. john m. ivancevich. (2008). human resource management. 10th ed, india: tata mcgraw – hill companies, inc. john storey. (2007). human resource management: a critical context, 3rd ed. thomson. louis cohen, lawrence manion and keith morrison. (2007). research methods in education. 6th ed. taylor & francis elibrary md. tofael hossain majumder. (2012). human resource management practices and employees’ satisfaction towards private banking sector in bangladesh. international review of management and marketing, 2, 52-58 mengiste kassa. (2012). human resource development practices in commercial bank of ethiopia. unpublished master’s thesis, addis ababa university. mir mohammed nurul absar, mohammad tahlil azim, nimalathasan balasundaram, sadia akhter. (2010). impact of human resources practices on job satisfaction: evidence from manufacturing firms in bangladesh. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu amare werku ijigu emerging markets journal | p a g e |11 economic sciences series, lxii, 3142. muhammad javed, muhammad rafiq, maqsood ahmed and mustajab khan. (2012). impact of hr practices on employee job satisfaction in public sector organizations of pakistan. interdisciplinary journal of contemporary research in business, 4, 348-363. muhammad javed, muhammad rafiq, maqsood ahmed and mustajab khan. (2012). impact of hr practices on employee job satisfaction in public sector organizations of pakistan. interdisciplinary journal of contemporary research in business, 4, 348-363. nausheen syed and lin xiao yan. (2012). impact of high performance human resource management practices on employee job satisfaction: empirical analysis. interdisciplinary journal of research in business, 4, 318-342. nihat kaya, erdogan koc and demet topcu. (2010). an exploratory analysis of the influence of human resource management activities and organizational climate on job satisfaction in turkish banks. the international journal of human resource management, 21, 2031–2051. phyllis tharenou, ross donuhue and brian cooper. (2007). management research methods. new york: cambridge university press. r. wayne., mondy, robert, m. noe and shane, r. premeaux. (1999). human resource management. 7th ed. new jersey: prentice hall, inc. raigama rathnaweerage neelamani thanuja rathnaweera (2010). do hrm practices impact employee satisfaction, commitment or retention? empirical studies of sri lankan public sector banks. unpublished master’s thesis, university of agder. raymond, a. noe., john, r. hollenbeck., barry, gerhart and patrick m. wright (2007). fundamentals of human resource management. newyork: mcgraw – hill companies, inc. robbins, s.p. (1998). organizational behavior: concepts, controversies and applications, 8th ed. newyork: prentice-hall, inc. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu the effect of selected human resource management practices on employees’ job satisfaction in ethiopian public banks page |12| emerging markets journal robert l. mathis and john h. jackson. (1994). human resource management. 7th ed. west publishing corporation. samy tayie (prof. phd). (2005). research methods and writing research proposals. center for advancement of post graduate studies and research in engineering science, faculty of engineering – cairo university (capscu) sarbapriya ray & ishita aditya ray. (2011). human resource management practices and its effect on employees’ job satisfaction: a study on selected small and medium sized iron &steel firms in india. public policy and administration research, 1, 22-33. stephen p. robbins. (2005). essentials of organizational behavior. 8th ed, new jersey: pearson education, inc. tofael hossain majumder, md. (2012). human resource management practices and employees’ satisfaction towards private banking sector in bangladesh. international review of management and marketing, 2, 52-58. torrington, d., hall, l. and taylor, s. (2008). human resource management. 7th ed. england: pearson education limited. wendell l. french. (1990). human resource management. 2nd ed, usa: houghton mifflin company. websites http://wiki.answers.com/q/define_publ ic_sector_bank accessed date 16th february 2012 http://en.wikipedia.org/wiki/job_satisfa ction accessed on many times http://wiki.answers.com/q/define_public_sector_bank http://wiki.answers.com/q/define_public_sector_bank http://en.wikipedia.org/wiki/job_satisfaction http://en.wikipedia.org/wiki/job_satisfaction volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu amare werku ijigu emerging markets journal | p a g e |13 appendix table 4.7.1. reliability test result of study variables reliability statistics result of employees questionnaire cronbach's alpha n of items .955 41 table 5.1.1. mean and standard deviation of the five study variables statist ics recruit ment and selecti on training and develop ment perform ance apprais al compen sation package job satisfa ction mean 3.9326 3.3781 3.1740 3.0832 3.3160 std. devia tion 0.7123 0 0.89106 1.02899 0.98726 0.8477 8 table 5.2.1. correlation result of recruitment and selection and employees’ job satisfaction correlations recruitment and selection job satisfaction recruitment and selection pearson correlation 1 .365** sig. (1-tailed) .000 n 257 257 job satisfaction pearson correlation .365** 1 sig. (1-tailed) .000 n 257 257 correlations recruitment and selection job satisfaction recruitment and selection pearson correlation 1 .365** sig. (1-tailed) .000 n 257 257 job satisfaction pearson correlation .365** 1 sig. (1-tailed) .000 n 257 257 **. correlation is significant at the 0.01 level (1tailed). table 5.2.2. correlation result of training and development employees’ job satisfaction correlations training and development job satisfaction training and development pearson correlation 1 .677** sig. (1-tailed) .000 n 257 257 job satisfaction pearson correlation .677** 1 sig. (1-tailed) .000 n 257 257 reliability statistics result of managers questionnaire cronbach's alpha n of items .821 13 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu the effect of selected human resource management practices on employees’ job satisfaction in ethiopian public banks page |14| emerging markets journal table 5.2.3. correlation result of performance appraisal and employees’ job satisfaction correlations performance appraisal job satisfaction performance appraisal pearson correlation 1 .713** sig. (1-tailed) .000 n 257 257 job satisfaction pearson correlation .713** 1 sig. (1-tailed) .000 n 257 257 **. correlation is significant at the 0.01 level (1tailed). table 5.2.4. correlation result of compensation package and employees’ job satisfaction correlations compensation package job satisfaction compensation package pearson correlation 1 .802** sig. (1-tailed) .000 n 257 257 job satisfaction pearson correlation .802** 1 sig. (1-tailed) .000 n 257 257 **. correlation is significant at the 0.01 level (1tailed). table 5.3.1. regression result of recruitment and selection and employees’ job satisfaction model summary model r r square adjusted r square std. error of the estimate 1 .365a .133 .130 .79077 a. predictors: (constant), recruitment and selection anovab model sum of squares df mean square f sig. 1 regression 24.542 1 24.542 39.247 .000a residual 159.455 255 .625 total 183.997 256 a. predictors: (constant), recruitment and selection b. dependent variable: job satisfaction coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1.607 .277 5.794 .000 recruitment and selection .435 .069 .365 6.265 .000 volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu amare werku ijigu emerging markets journal | p a g e |15 anovab model sum of squares df mean square f sig. 1 regression 24.542 1 24.542 39.247 .000a residual 159.455 255 .625 total 183.997 256 a. dependent variable: job satisfaction table 5.3.2. regression result of training and development and employees’ job satisfaction model summary model r r square adjusted r square std. error of the estimate 1 .677a .459 .456 .62506 anovab model sum of squares df mean square f sig. 1 regression 84.369 1 84.369 215.942 .000a residual 99.629 255 .391 total 183.997 256 a. predictors: (constant), training and development b. dependent variable: job satisfaction coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1.140 .153 7.441 .000 training and development .644 .044 .677 14.695 .000 a. dependent variable: job satisfaction table 5.3.3. regression result of performance appraisal and employees’ job satisfaction model summary model r r square adjusted r square std. error of the estimate 1 .713a .508 .506 .59596 a. predictors: (constant), performance appraisal anovab model sum of squares df mean square f sig. 1 regression 93.431 1 93.431 263.064 .000a residual 90.567 255 .355 total 183.997 256 a. predictors: (constant), performance appraisal volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.64 | http://emaj.pitt.edu the effect of selected human resource management practices on employees’ job satisfaction in ethiopian public banks page |16| emerging markets journal anovab model sum of squares df mean square f sig. 1 regression 93.431 1 93.431 263.064 .000a residual 90.567 255 .355 total 183.997 256 b. dependent variable: job satisfaction coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1.453 .121 12.029 .000 performance appraisal .587 .036 .713 16.219 .000 a. dependent variable: job satisfaction table 5.3.4. regression result of compensation package and employees’ job satisfaction model summary model r r square adjusted r square std. error of the estimate 1 .802a .643 .642 .50725 anovab model sum of squares df mean square f sig. 1 regression 118.384 1 118.384 460.094 .000a residual 65.613 255 .257 total 183.997 256 a. predictors: (constant), compensation package b. dependent variable: job satisfaction coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1.192 .104 11.471 .000 compensation package .689 .032 .802 21.450 .000 a. dependent variable: job satisfaction volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.87 | http://emaj.pitt.edu image and reputation of yalova city: a study on yalova university students cevdet kızıl assistant professor, istanbul medeniyet university, department of management, turkey | cevdetkizil@yahoo.com alican atalan undergraduate student, yalova university, business administration department in english | alicanatalan@hotmail.com volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.87 | http://emaj.pitt.edu | abstract recently, the image of a country and city has become a core competitive asset for the government and local authorities and this core competitive asset plays a critical role for domestic and foreign tourists, businessmen, residents of the city, neighbouring cities, investors, entrepreneurs and also the university students. based on the competitive asset of city image and reputation, the perception needs an effort from a marketing perspective in order to improve the strategies for enhancing quality of life. the aim of this research is to evaluate the city image of yalova from the eye of yalova university students. for this purpose, image perception of students on the advantages of city, abstract image elements and residents of the city have been investiageted. the data of research have been collected through the questionnaire methodology. this study is run on 200 students as the research sample. in light of the results of the survey, the overall image perception of students about yalova city and its residents are determined to be at medium level. location of yalova has a very positive perception, while intercity transportation, nature and weather conditions have a positive perception. the city is considered as peaceful, safe and clean, but expensive. residents of yalova are evaluated as peaceful. it is also found that, infrastructures and superstructures enhancing the yalova city image should be improved. keywords: image, reputation, marketing, yalova, university new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.87 | http://emaj.pitt.edu cevdet kızıl, alican atalan emerging markets journal | p a g e |71 image and reputation of yalova city: a study on yalova university students cevdet kızıl alican atalan 1. introduction in a globalizing world, the rivalry is not only among products, but it is also among cities. this rivalry plays a critical role to get a competitive advantage and not to get behind other cities. the mentioned rivalry obliges the cities to possess a strong image for remaining in this competition. strong city image and reputation are also musts for surviving from the intense competition field where cities struggle to take a position for domestic and foreign tourists, businessmen, residents of a city, investors, entrepreneurs and also university students. thus, marketing professionals should also concentrate on the city image to improve marketing operations towards their target group. there are many critical standards to choose a city and one of these standards is expressed as city image (bakan, 2008:293). the image is defined as a virtual presentation of an object, an event, a condition, a person, a group, a city or a country (demirel, 2014:230-241). according to kotler, the city image is an integration of belief, ideas and impression in people’s mind toward a specific location (kotler et al, 1993). city image is also defined as a set of belief structured and composed by people (apaydın, 2011); (kotler, hamlin, rein and haider, 2001). a city image consists of the whole features of unseen and visible objects towards a city. there are many different elements influencing the image and perception of a city. these elements are characteristics of inhabits of the city, city’s location or diplomatic appearance, the intensity of population, ratio of crime, socioeconomic status and employment status, city’s position in the world, its history, films and tv series that were filmed in a city, recreation opportunities and touristic-cultural destinations as well as appearance of a city (avraham, 2004). the city image produces an intangible output with a tangible input. also, the city image is generated and formed by the experience toward a city, word of mouth among friends and social network, articles from the newspapers, tv shows, documentaries, published resources, information about a city and communication tools such as marketing. together with these elements, the city image is structured in minds negatively or positively (gecikli, 2012); (demirel, 2014). as kotler expressed, a city’s image may be a positive and desirable, negative and poor, complex (consists of both positive and negative image) or conflicting. a city image can be categorized in two different aspects such as “ rich image “ and “ poor image”. rich image is that, people who live far away from a certain city have a lot of information about that city and this information source arrives from different sources or personal experiences. poor image is that, there is less information about a certain city and personal experiences are limited from different sources (avraham, 2004). the perception and focus points about a city also often differentiates among individuals. for instance, one individual may view a city as an investable area for the future, while another individual can concentrate on the tax rates and educated work-force around the area. the image and reputation create a competitive asset for the city. at that point, how to manage this image and perception needs a marketing process and strategy. to implement these processes and strategies, the government or city municipality needs to have a strong marketing perfective. that is why the city marketing subject is an eye-catching one in the recent years. city marketing is defined as a phenomenon to satisfy the demand of a certain target group and to contribute the city image for enhancing related perception. each city has to have a strong image in minds, that should be supported with successful strategies. the city marketing at this point includes the relationship between identity, image and brand (akdoğan & karkın, 2010). throughout the history, the marketing of cities has become more important, since this issue is critical to attract foreign direct investment (fdi). the cities are currently accepted and considered as a product for the business life since they provide infrastructure, workforce, land, facilities and social life for the inhabitants. (bennet & koudelova, 2001). determining the outstanding features of a city is extremely significant in the city marketing. by the help of situational analysis, after determining the outstanding features of a city, the mentioned city should be differentiated from the competitors. differentiation can be applied in any field such as the nature of city, leisure facilities, history, location, characteristics of inhabitants, universities or traditional food culture (apaydın, 2011). volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.87 | http://emaj.pitt.edu image and reputation of yalova city: a study on yalova university students page |72| emerging markets journal the strategic image management is a critical step for the city image. there are also two steps of measuring the city image. at the first step, target groups are identified and at the second step, features of a city and common interests of target groups are determined (apaydın, 2011). elements affecting the city image and features for measuring city image are shown below on table 1. table 1. elements affecting the city image and features for measuring city image elements futures the natural sources climate  landscape  nature infrastructure airports, roads and ports  public and private transportation  health and wellness facilities  communication services  commercial infrastructure  physical conditions of buildings tourism infrastructure hotels and restaurants  bars and clubs  facilities of transportation  tourism destinations  information services  trips and tours organizations entertainment locations parks  recreation and sport activities history, cultre and art  museums  monuments  festival  concerts  crafts  religion  folklore  food  culture political and economic factors  political stability  political tendency  economy  security  prices nature  beauty of cities  cleanliness  population  air/noise pollution  traffic jam social environment  hospitality of city inhabitants  poverty  discrimination  quality of life  language barriers  atmosphere of city  luxurious places  fashion  famous locations  family locations  exotic locations  mystic locations  locations to relax  stress locations resource: apaydın, f. (2011). şehir pazarlaması. nobel yayınları there are seven different target groups for city marketing when city marketers consider composing their strategies. these target groups are as follows: (apaydın, 2011); (kotler, hamlin, rein and haider, 2001). 1. public: most of the city managements give importance and priority to gain the attention of new residents who are going to provide tax revenues. thus, how the mentioned group of individuals perceive the city plays a critical role. 2. visitors: visitors increase the trade volume by utilizing the facilities of accommodation and doing shopping in the city. in order to take advantage of opportunities for enhancing trade volume, it is a necessary activity and operation for city managements to present services and products for visitors. 3. managers: it is significant how executives of firms perceive the city. because, company owners and managers make investments in cities, which foster the development of these locations seriously. 4. domestic investors: domestic investors and real estate investors also lend a great deal of funds to volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.87 | http://emaj.pitt.edu cevdet kızıl, alican atalan emerging markets journal | p a g e |73 certain cities. their contribution for a strong city image can also never be underestimated. 5. entrepreneurs: small and medium sized enterprises (smes) have a strong impact on the development and value of a city. in this respect, operations of these organizations in cities and their success rates create an investable area for other entrepreneurs. that way, more entrepreneurs are attracted to cities in increasing rates. 6. foreign investors: foreign investors build a communication bridge with other cities in the world, they enhance the value of the cities and serve as an important factor to attract foreign direct investment (fdi). 7. specialists: creating a remarkable city also brings in experts and specialities from all over the world, who have a strong impact on the improvement of city. as observed, these seven diverse target groups perceive the cities differently and all of them have separate demands. thus, city markets should be able to plan and execute various marketing strategies for each target group. planning and executing a wide spectrum of marketing strategies can be realized by the government and municipalities employing personnel coming from different backgrounds and who have unorthodox job experiences. 2. data and methodology the purpose of this research is to evaluate the image perception of yalova city from the eye of yalova university students. study consists 200 students who study in 4 faculties and 1 vocational school of yalova university. the mentioned 4 faculties where this research is run are faculty of economics and administrative sciences, faculty of law, faculty of engineering and faculty of religious studies (faculty of islamic sciences). students subject to this study were chosen randomly and it was made sure that these students were not originally from yalova, since that would create bias and subjectivity. there are many different methods to measure city image of residents and related target groups. these techniques can be listed as questionnaire, focus group meeting and in depth interview (avraham, 2004). data are collected using the questionnaire method for this study. in terms of survey questions, two former studies are taken as reference, which are ”city brand and the measurement of brand image: a survey in afyonkarahisar” (özdemir and karaca, 2009) and “ burdur city image: a case study on mehmet akif ersoy university students” (demirel, 2014 ). the survey includes four different sections for respondents. at first section, six different questions related to demographic factors are directed to respondents (yalova university students) in order to identify their faculty/vocational school, type of education, gender, class (year), original region (hometown) and accommodation. at the second part of survey, eighteen different questions are directed to respondents for evaluating the opportunities (advantages) of yalova city. then, at the third part of survey, seven questions are directed to measure the intangible image (abstract elements) and characteristics of yalova city. at the last part of survey (fourth section), fifteen questions are directed in order to learn the perception of students towards yalova city residents. each part of the survey are designed to evaluate the diverse feautures of yalova city, except the first section which is related with demographic factors. survey uses a 5-point likert scale, ranging from strongly disagree to strongly agree. spss (statistical program for social science) 20 for windows was used in order to process and analyze the research data. finally, the arithmetic means were calculated and considered for this research, to identify the image perception of yalova city and its inhabitants (residents). the numerical intervals of arithmetic means used for interpretation are listed below: • if 1.0≤ x <1.8, the image perception of participant is very low • if 1.8≤ x <2.6, the image perception of participant is low • if 2.6≤ x <3.4, the image perception of participant is medium/undecided • if 3.4≤ x <4.2 , the image perception of participant is high • if 4.2≤ x <5.0, the image perception of participant is very high. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.87 | http://emaj.pitt.edu image and reputation of yalova city: a study on yalova university students page |74| emerging markets journal 3. results demographic characteristics and data of participants are provided below on table 2. table 2. demographic characteristics and data of participants variables groups/subsections n % faculty faculty of law 4 2.0 faculty of religious studies (islamic studies) 1 0.5 faculty of engineering 45 22.5 faculty of economics and administrative sciences 99 49.5 vocational school 51 25.5 total 200 100 type of education daytime education 185 92.5 evening education 15 7.5 total 200 100 gender male 111 55.5 female 89 44.5 total 200 100 class (year) 1st year 53 26.5 2nd year 95 47.5 3rd year 17 8.5 4th year 35 17.5 total 200 100 region (hometown) mediterranean region 18 9.0 marmara region 121 60.5 aegean region 13 6.5 central anatolia region 13 6.5 black sea region 17 8.5 eastern anatolia region 13 6.5 southeastern anatolia region 5 2.5 total 200 100 accom modation house for rent 81 40.5 dormitory 25 12.5 hostel 45 22.5 other 49 24.5 total 200 100 table 2 related to demographic characteristics and data of participants show that, a great majority of students who did take the survey are from faculty of economics and administrative sciences (49.5%). that is followed by vocational school students (25.5%), faculty of engineering students (22.5%), faculty of law students (2%) and faculty of religious studies (islamic studies) students (0.5%). also, most of the students who took the survey are daytime education students (92.5 %). however, only 7.5% of university students are evening education students. moreover, 55.5% of respondents (university students) are males while 45.5% are females. besides, 47.5% of respondents are 2nd year students. this followed by 1st year students (26.5%), 4th year students (17.5%) and 3rd year students (8.5%). furthermore, a high ratio of university students are from marmara region (60.5%). then comes the university students from mediterranean region (9%), black sea region (8.5%), volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.87 | http://emaj.pitt.edu cevdet kızıl, alican atalan emerging markets journal | p a g e |75 aegean region (6.5%), central anatolia region (6.5%), eastern anatolia region (6.5%) and southeastern anatolia region (2.5%). finally, most university students taking the survey live in houses for rent (40.5%). the remaining students live in other type of residences (24.5%), hostels (22.5%) and dormitories (12.5%). the study also measured and evaluated the image perceptions on opportunies (advantages) of yalova city as mentioned earlier. indeed, each survey question at this section was designed to measure the advantages and disadvantages of yalova city. results concerning the image perceptions on opportunities (advantages) of yalova city are indicated on table 3. table 3. image perceptions on opportunities (advantages) of yalova city characteristic mean* standard deviation perception level location is good 4.57 5.78 very high nature is good 3.69 1.00 high intercity transportation is good 3.62 1.16 high weather conditions are good 3.54 1.05 high urban transportation is good 3.30 1.22 medium health facilities are good 3.13 1.08 medium food and beverages are good 3.12 1.03 medium cultural events are plenty 2.78 1.06 medium history is rich 2.71 1.12 medium education opportunities are good 2.69 1.13 medium accommodation facilities are good 2.64 1.18 medium sport events are plenty 2.64 1.07 medium art events are plenty 2.63 1.09 medium industry is developed 2.61 1.07 medium planned urbanization exists 2.55 0.98 low services of municipality are successful 2.54 1.15 low shopping facilities are plenty 2.28 1.16 low recreation facilities are plenty 2.25 1.10 low total 53.24 24.43 general average (mean) 2.95 1.35 medium perception level: 1.0 ≤ x <1.8 ( very low); 1.8≤ x <2.6 ( low) 2.6≤ x <3.4 ( medium) 3.4≤ x <4.2 (high); 4.2 ≤ x <5.0 ( very high) according to the survey results about image perceptions on opportunities (advantages) of yalova city, location is considered very ideal for respondents. this is generally because yalova is very close to big cities such as istanbul, kocaeli (i̇zmit) and bursa. the nature, intercity transportation and weather conditions are considered ideal by respondents based on the mean scores. however, some characteristics of yalova city such as urban transportation, health facilities, food and beverages, cultural events, history, education opportunities, accommodation facilities, sport events, art events and industry are considered normal (at medium level) by respondents. this means that, improvements in yalova city can be made on these issues. moreover, according to survey respondents, characteristics of yalova city like planned urbanization, services of municipality, shopping facilities and recreation facilities are poor. in other words, survey respondents rate the mentioned characteristics low as a result of the questionnaire. thus, improvements should definitely be made at these fields. also, in general, image perceptions on opportunities (advantages) of yalova city have a medium rating with a mean of 2.95 and a standard deviation of 1. 35. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.87 | http://emaj.pitt.edu image and reputation of yalova city: a study on yalova university students page |76| emerging markets journal third section of this study assessed the abstract elements of yalova city. for this purpose, some characteristics about yalova city was listed and respondents were asked to evaluate the listed features. table 4 shows the results related to respondents’ answers regarding abstract elements of yalova city. table 4. image perceptions on abstract elements of yalova city characteristic mean* standard deviation perception level peaceful 3.95 1.04 high clean 3.38 1.13 high safe 3.35 1.11 high outward 3.30 1.11 medium modern 3.21 1.06 medium developed 2.78 1.10 medium inexpensive 2.08 1.08 low total 22.05 7.63 total average 3.15 1.09 medium the perception level: 1.0 ≤ x <1.8 ( very low); 1.8≤ x <2.6 ( low) 2.6≤ x <3.4 ( medium) 3.4≤ x <4.2 (high); 4.2 ≤ x <5.0 ( very high) 2.6≤ x <3.4 ( medium) 3.4≤ x <4.2 (high); 4.2 ≤ x <5.0 ( very high) based on the results listed on table 4, the strongest abstract elements of yalova city is its peacefulness, cleanness and safeness. but, the city has an average rating in terms of its outward, modern and developed characteristics. in other words, university students as respondents are undecided whether yalova is an outward, modern and developed city or not. however, questionnaire respondents generally believe that yalova is an expensive city for university students, since the mean is 2.08 for this factor. at last, the abstract elements of yalova city are rated medium by respondents with an average score (mean) of 3.15 and a standard deviation of 1.09. fourth section of this research included the measurement of image perception of residents of yalova. thus, some questions were directed for particular characteristics of yalova city’s residents. table 5 below shows the image perception of university students as respondents concerning the characteristics of yalova city residents. table 5. image perceptions of residents of yalova city characteristic mean* standard deviation perception level peaceful 3.61 1.12 high warm blooded 3.20 1.09 medium friendly 3.13 1.11 medium tolerant 3.19 1.12 medium educated 3.15 1.03 medium boring 3.14 1.12 medium kind 3.14 1.02 medium helpful 3.03 1.13 medium honest 2.97 0.95 medium traditional 2.85 1.07 medium innovative 2.85 1.02 medium hard-working 2.83 1.03 medium entrepreneur 2.80 0.96 medium generous 2.79 1.03 medium religious 2.67 1.03 medium total 45.35 15.83 total average 3.02 1.05 medium the perception level : 1.0 ≤ x <1.8 ( very low); 1.8≤ x <2.6 ( low) 2.6≤ x <3.4 ( medium) 3.4≤ x <4.2 (high); 4.2 ≤ x <5.0 ( very high) volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.87 | http://emaj.pitt.edu cevdet kızıl, alican atalan emerging markets journal | p a g e |77 parallel to the indicators on table 5, it should be noted that respondents perceive residents of yalova as very peaceful. that is advantageous related tp the image perception of yalova city residents. on the other hand, all other characteristics of yalova city residents are rated medium. university students as respondents did not rate warm blooded, friendly, tolerant, educated, boring, kind, helpful, honest, traditional, innovative, hard-working, entrepreneur, generous and religious characteristics as high nor low. overall, image perception of residents of yalova city is medium with an average (mean) of 3.02 and a standard deviation of 1.05. 4. conclusion the images of countries and cities have become a core competitive asset for both the governments and city municipalities. this core competitive asset has a critical impact on composing strategies to improve image perceptions. a strong city image is perceived as a supportive element in order to enhance the overall perspective of city towards public, students, domestic and foreign tourists, business people, managers, entrepreneurs, investors, specialists and residents. in this content, how an image is going to be perceived needs an effort from a marketing perspective and applying correct strategies. according to philip kotler, the concept of city image is structured and accomplished by overall thoughts, feelings and biases toward a specific city. also, the city image is said to be formed as a result of certain group of beliefs. this study aimed measuring the image perception of yalova city from the viewpoint of yalova university students. for this purpose, a survey had been conducted as a part of this resarch in order to expose the perception level of yalova and its residents. according to the results of research, location of yalova is evaluated as the most important element and most valuable factor of city. in other words, respondents think that the location of yalova city is a critical advantage and opportunity. moreover, it is determined that nature, weather conditions and intercity transportation are other important assets of yalova city and they are perceived positive in terms of city image. on the opposite side, urban transportation, health facilities, food and beverages, cultural events, history, education opportunities, accommodation facilities, sport events, art events and industry in yalova are considered normal (at medium level). improvements may be considered for mentioned points. plus, planned urbanization, services of municipality, shopping facilities and recreation facilities are rated poor. so, steps to triggger developments at these areas should be taken. overall, image perception on opportunities (advantages) of yalova city is medium (normal). in terms of image perception on abstract elements, yalova is rated as a peaceful, clean and safe city. that is a very desirable result for yalova city, considering the image perception. but, respondents are not certain whether yalova ia an outward, modern and developed city. more importantly, based on the thoughts of yalova university students as respondents, yalova is an expensive city. finally, in the context of image perceptions of residents of yalova city, local people are considered to be peaceful. that is a desired and advantageous result for the image perception of yalova city. but warm blooded, friendly, tolerant, educated, boring, kind, helpful, honest, traditional, innovative, hard-working, entrepreneur, generous and religious characteristics of yalova residents are rated medium (undecided) by university students as respondents. in conclusion, it is observed that image perception of yalova city is strong and desireable for specific factors. definitely, there are still other factors related to the image perception of yalova city waiting for improvement. it is recommended that the government, municipality and yalova university to work together for improving the image perception of yalova city further. this will help to attract more students, business people, domestic investment, foreign direct investment (fdi) and tourists to yalova city. references akdoğan, ş. ve karkın, g. (2010). “şehir pazarlaması kapsamında bir i̇maj çalışması; sivas örneği”. i.disiplinerarası turizm araştırma kongresi, 549. anholt, s. (2010). “definitions of place branding-working towards a resolution”. place branding and public diplomacy. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.87 | http://emaj.pitt.edu image and reputation of yalova city: a study on yalova university students page |78| emerging markets journal apaydın, f. (2011). “şehir pazarlaması”. nobel yayınları. avraham, e. (2004). “medi strategies for improving an unfavorable city image”. 471479. bennet, r. and koudelova, r. (2001). “image selection and the marketing of downtown areas in london and new york”. the international journal of public sector management, 205-220. demirel, m. (2014). “burdur city image: a case study on mehmet akif ersoy university”. mehmet akif ersoy sosyal bilimler enstitüsü dergisi, 230241. gecikli, f. (2012). “şehir i̇majı: amasya şehri üzerine bir uygulama”. ankara: fenomen yayınları. kavaratzis, m., and ashworth, g. (2008). “place marketing: how did we get here and where are we going ?”. journal of place management and development, 150-165. kotler, p., and gertner, d. (2002). “country as brand, product and beyond: a place marketing and brand management perspective”. brand management, 249261. kotler, p., hamlin, m. a., rein, i., and haider, d. h. (2001). “marketing asian places: attracting investment, industry and tourism to cities, states and nations”. singapore: john wiley & sons pte. ltd. özdemir, ş., and karaca, y. (2009). “kent markası ve marka i̇majının ölçümü: afyonkarahisar kenti i̇majı üzerine bir araştırma”. afyon kocatepe üniversitesi i̇.i̇.b.f dergisi, 113-134. sağdıç, m. (2014). “üniversite öğrencilerinin i̇stanbul'a ilişkin algılarının şehir imajı açısından analizi”. turkish studies, 1267-1283. zenker, s., knubben, e., and beckmann, s. c. (2010). “your city, my city, their city, our city”. 6th international conference thought leader in brand management. the relationship between gold prices and exchange value of us dollar in india girish karunakaran nair program leader, international hospitality management, stenden university, doha – qatar | email: gknair75@gmail.com nidhi choudhary assistant professor, sbi school of commerce & banking, banasthali unviersity, fms-wisdom, rajasthan, india | email: nidhic10@gmail.com harsh purohit dean, fms-wisdom, sbi school of commerce & banking, banasthali unviersity, rajasthan, india | email: deanwisdom@banasthali.in abstract the inverse relationship between the value of u.s. dollar and that of gold is one of the most talked about relationships in currency markets. the present study is an attempt to understand the impact of recession of 2008 on relationship between exchange rate of us dollar in inr and gold prices in india. the study uses johansen cointegration test to check the long term association between exchange rate of us dollar in inr and gold prices in india and it further uses the granger causality test to check the lead lag relationship between the variables. a separate pre, during and post recession analysis of the variables is done to understand the impact of recession on this relationship. the study highlights how this relationship has changed since the global turmoil. key words: gold price; value of dollar; johansen co-integration; ganger causality. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu | mailto:gknair75@gmail.com mailto:nidhic10@gmail.com mailto:deanwisdom@banasthali.in http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu girish karunakaran nair, nidhi choudhary, harsh purohit emerging markets journal | p a g e |17 the relationship between gold prices and exchange value of us dollar in india girish karunakaran nair nidhi choudhary harsh purohit i. introduction indians consider the yellow metal as an object of luxury believed to be worthy for only gods and rulers. the metal is a symbol of wealth, supremacy, beauty, and cream of the crop and holds immense religious magnitude in indian culture. indians are known for their love for gold. the jewelry demand for the metal is highest in india. the country consumed 864 tones of metal in 2012 in the form of jewellery, bar and coins only (pwc, 2013) such high consumption statistics clearly show that the prices of gold is an important issue for the indians. the reverse relationship between the value of u.s. dollar and that of gold is one of the most discussed about relationships in currency markets. dollar is an internationally accepted currency and most of the international transactions take place in dollar equivalent. the major reason behind the relationship of gold and usd inr exchange rate is that gold is used as a hedge against the adverse exchange value of dollar. as the dollar’s exchange value decreases, it takes more dollars to buy gold, which increases the value of gold. the value of dollar can be at a potential risk of fluctuation through various factors like shifts in monetary policy, international trade, etc., but the value of yellow metal is largely determined by supply and demand, without interference from shifts in monetary and corporate policies. the relationship of gold and dollar is traced back to international history, discussed in next section. ii. history of gold and dollar relationship after the first world war, nations attempted to revive the gold standard for international exchange rates, but the system soon collapsed with the arrival of the great depression of the 1930s. some economists were of the view that the strict obedience to the gold standard had prevented monetary authorities all over the world from increasing the money supply to match the growing demand for money which could have been enough to revive economic activity. soon after the end of the second world war, representatives of most of the world's leading nations met at bretton woods, new hampshire, in 1944 to create a new international monetary system. united states had emerged as politically strong nation on the winner side after the war. it was the world leader in terms of manufacture capacity and accounted for over half of the world's capacity. the nation also held most of the world's gold at that time. therefore, the leaders decided to tie world currencies to the dollar, which, in turn, they agreed should be convertible into gold at a fixed exchange rate of $35 per ounce. this was known as the bretton woods system. the system required the central banks of countries other than that of united states to maintain a fixed exchange rate between their currencies and the dollar. the us dollar could be internationally exchanged for gold. the central banks had to accomplish this task by intervening in foreign exchange markets. if the exchange value of a country's currency was too high relative to the dollar, its central bank would sell its currency in exchange for dollars, which will make the value of its currency to sink down. conversely, if the value of a country's money was too low, the country would buy its own currency, thereby driving up the exchange value. the bretton woods system successfully lasted until 1971 but the problem arrived when the high rate of inflation and growing trade deficit of usa were undermining the value of the dollar. during the same period, germany and japan had favorable balance of payments because they had high volumes of exports. the united states asked the two nations to appreciate their currencies. but the two nations were reluctant to do so as appreciation of their currency would hurt their exports as it will increase the prices of their goods making them internationally incompetent. with the passage of time, the situation in usa went from bad to worse and worst. finally the bretton wood’s system was terminated by the then us president nixon. now, the usa adopted the ‘floating’ exchange rate system for usd against other currencies and abandoned the fixed exchange rate system. the exchange value of dollar promptly fell. this alarmed the world leaders who maintained high reserves of dollar thinking it to be exchangeable for gold. many countries sought to resuscitate the old bretton woods system and proposed the smithsonian agreement in 1971 which was similar to bretton woods system, but the effort failed. by 1973, various nations, including usa adopted the floating exchange rate system for their currencies. hence, now the dollar was no more equivalents to gold at a fixed rate but this psychology still persists. this intrinsic co-relation between gold prices and the us dollar still volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu the relationship between gold prices and exchange value of us dollar in india page |18| emerging markets journal exists. when the value of us dollar devaluates in international market bankers as well as investors and traders from all over the world hedge against this adversity through investments in gold. this measure helps them protect the value of their money. the increase in investment demand of yellow metal consequently increases the value of gold. though the legal connection between gold and usd ended with the bretton woods, the current study is an attempt to know if technically any such relationship is still existing in indian context and what has been the impact of global recession on this relationship. iii. literature review the yellow metal has emerged as an important alternative asset only after the equity markets. all over the world the investment demand for gold has surged to new levels when the equity markets were not spared by the global crisis. the performance of the metal has been the area of interest for various academicians and media especially when the gold prices have outperform in recent times. a lot of existing recent literature is available about the relationship between exchange rate of us dollar with respect to the various currencies and gold prices in those nations. in one of the studies by (apak, akman, çankaya, & sönmezer, 2012)the influence of exchange value of various currencies on the prices of gold was analyzed. this study involved currencies of countries that are the leading gold exporters and importers to explain the price fluctuation in gold prices. india, china, turkey, russia, usa, indonesia, euro zone countries, switzerland and uk are among the top gold demanding countries whereas, china, australia, usa, south africa, russia, canada and indonesia are among the significant producers in world gold production according to various reports of world gold council. further, a subset of alternative assets including bond returns, return on oil prices, silver prices, and credit default swaps of some emerging countries are used. the study employed the garch (1,1) model and provided the evidence that return of silver, usd and change in the equity volatility index influences gold returns positively whereas, swiss franc and canadian dollar returns influence gold returns negatively regardless of the 2008 recession crisis. in another study, (omağ, 2012) in analyzed the relationship of yellow metal with few financial variables like inflation, exchange rate of home currency to us dollar and return on few government securities in turkey. the most influential factor impacting the gold prices in turkey is exchange value of home currency to usd. however, the other factors have small but statistically significant impact. he commented that gold is an important precious metal in the economy and the recent recession has increased its investment demand. therefore, the flow of funds in the financial system has been impacted by effects of gold trading as the metal has emerged as an important alternative investment tool after the recent recession. in another study, (kiohos & sariannidis, 2010) tried to comment on the influence of energy and financial markets on the gold market in short run. they used crude oil prices an indicator of energy market and equity, currency and exchange rate of u.s. dollar to yen as the indicator of financial markets. in their study, the two used a gjrgarch model to study these relationships for daily data for 10 year period (january 1, 1999 to august 31, 2009). the study concluded that the exchange rate of u.s. dollar/yen has the most significant impact on the gold prices. (sjaastad, 2008) used the technique of forecasting error data to study the relationship between price of gold and exchange rate of major currencies. the study was both empirical and theoretical in nature. it concluded that after the cessation of the bretton woods system, the evolution of floating exchange rates for various currencies has been a strong reason behind instability in gold prices. the most influential currency in this respect has been us dollar. the appreciation or depreciation of us dollar has been a very important factor in determining the gold prices. (tully & lucey, 2007) investigated the relationship between gold prices and exchange rate of us dollar. they used six different models of garch family in their study. their analysis concludes that an apgarch model is best fit model for the datasets used in the analysis which included data for various economic variables over the 1983–2003 period and both spot and average futures prices of gold. the study provided a especial reference to the equity market crash of 1987 and 2001. the study confirms that the though few macro economic variables have a statistically significant impact on gold prices, the exchange rate of domestic currency to us dollar is the main and important factor which has a strong impact on gold prices. in another study, (capie, mills, & wood, 2004) used weekly data for last thirty years for spot prices of gold, exchange rate of great britain pound and japanese yen to us dollar to understand up to what extent gold has acted as a hedge against exchange rate adversities. the study used garch model for the analysis. they concluded that the volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu girish karunakaran nair, nidhi choudhary, harsh purohit emerging markets journal | p a g e |19 relationship between gold and exchange rates of the currencies to usd is inelastic and negative. but the nature and the strength of this relationship has shifted over time. the hedging property of yellow metal is highly dependent on political events and political uncertainty. (capie, mills, & wood, 2005) in their study on gold as a hedge against the us dollar did a detailed analysis about if gold is a perfect hedge against us dollar. they collected abundant data for spot prices of gold and the exchange values of currencies from the london markets. they ensured that exchange rate and gold price data were of same day. they checked the relationship of gold with various currencies not only for the entire period but also for various sub periods. the study concluded that gold is a good hedge against adverse exchange value of us dollar to home currency. the study provided for various statistical evidences for their claims. in another study (sinton, 2014), examined the long term association and causality between gold prices, stock indices and u.s dollar exchange rate in jakarta. the study used the johansen co-integration analysis for the study and it concluded that there exists no long term association between the variables under study. in another study in indian context, (bhunia, 2013) investigated the long term association between crude oil prices, gold prices, us dollar exchange rate and stock price indices in india. the study also used johansen cointegration and granger causality test and indicated that there exists a long term association between the variables under study. the study further stated that there is a bi directional relationship among the variable under study. however, the study has not segregated the duration of the global financial crisis and included the data since january 1991 to october 2012 at a streach. on similar lines, (arezki, dumitrescu, freytag, & quintyn, 2012) used the johansen cointegration and granger causality test to find the flow of causality of movement in gold prices and foreign exchange rate in case of prior and post capital account liberalization in south africa. the findings of the study indicated that the direction of causality was from exchange value of rand to gold prices in pre libralization phase. however, the flow of causality has revered in post libralization phase. iv. objective of the study keeping in mind the review of existing literature, the objective of the current study will be to understand the long term association and the lead lag relationship between the gold prices and exchange rate of us dollar in indian economy in three phases: pre global financial crisis, during global financial crisis and post the financial crisis. if the study is able to statistically prove the long term relationship between the variables under study during any of the three phases, then the study will extend its scope to find the lead lag relationship between the two variables under study. v. data collected the data uses spot prices of gold which are collected from the official website of multi commodity exchange limited (mcx) which is a leading commodity exchange for metal trade in india. the second variable used is the inrus dollar exchange rate. the exchange rate data is collected from the official website of international monetary fund (imf). the period of study is divided in three phases: pre financial crisis period 1 january, 2005 30 november, 2007 during financial crisis period 1 december, 2007 – 30 june, 2009 post financial crisis period 1 july, 2009 – 31 december, 2013 the period of the study has been defined after the study of course of event for global financial crisis. (the economist, 2013) (shah, 2013) (elliot, 2011) vi. methodology the study will use the concept of co integration to check the long term association between the variables under study. the theory of co-integration analysis states that there may be co-integration relationship between the variables involved if they are integrated of the same order. more generally and are said to be co-integrated of order ci (d, p) if and are both integrated of order d; but there exist a α such that is integrated of order d p. in other words, the non stationary time series are co integrated if there is a linear combination of that is stationary. the proposed study uses the johansen co integration test (johansen, 1988) based on vector auto regression (var) to study the long term association between the two variables. the johansen co-integration test is based on a var approach to co-integration where it is possible to include the endogenous and exogenous variables. the test relies on the relationship between rank of a matrix and its eigen values or characteristic roots. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu the relationship between gold prices and exchange value of us dollar in india page |20| emerging markets journal let, where, g x 1 vectors is a g x g matrix of parameters i = is a g x g identity matrix the rank of π equals the number of co-integrating vectors. if π consists of all zeros, the rank of the matrix equals zero, all of the xs are unit root processes, implying the variables are not co-integrated (johansen, 1988). the precondition of co-integration test is that time series need to be integrated of same order. this means that the series need to be stationary at the same lag value. so, to find the stationary of series and we first carried out the unit root test on time series of logarithmic price of exchange rates. a stationary time series will have constant statistical properties. in other words, the statistical properties such as mean, variance, autocorrelation, etc. of a time are all constant over time for a stationary series. such a series is relatively easy to predict and analyze. to achieve staionarity, if a stochastic process needs to be differenced i times, the process is said to be integrated of order i, and is abbreviated as (i). the statistical properties will be useful for future study only if series is stationary. for example, for a non stationary increasing or decreasing series, the sample mean or any statistical measure will be either underestimated or overestimated. this will mean the models proposed on the statistical measure will be inefficient. hence, it is required to make the data stationary before we proceed with the test. the most commonly used methods of unit root test is augmented dickey fuller test. the adf test relies on a parametric transformation of the model that eliminates the serial correlation in the error term. this test is conducted by “augmenting” the preceding three equations by adding the lagged values of the dependent variable . the augmented dickey fuller test (adf test) was proposed by (dickey & fuller, 1979). the test indicated that under the null hypothesis of unit root (non stationary of data), the calculated statistics ( ) does not follow the student’s t distribution. the statistics is calculated from the following equation: and, where, is the estimate of , and is the coefficient standard error. we further use tstatistics to know if our results are significant or not at various levels. the model uses various lag levels till the error component is uncorrelated. the lead lag relationship between the spot and future market will be treated with the help of granger causality test (granger, 1969). it is to be noted that although regression analysis deals with the dependence of one variable on the other but it does not provide any evidence that if there is any causal relationship between the variables under study. in other words, we fail to know if any variable is causing the other variable or both of the variables under study are causing each other. hence, the granger causality test is a step ahead after the regression analysis where one can judge the cause and effect relationship between two variables under study. the test would use the following pair of regression equations: where, s = spot index f= futures index the significance of results is tested with the help of ftest. f-test is any statistical test in which the test statistic has an f-distribution under the null hypothesis. it is most often used when comparing statistical models that have been fitted to a data set, in order to identify the model that best fits the population from which the data were sampled. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu girish karunakaran nair, nidhi choudhary, harsh purohit emerging markets journal | p a g e |21 vii. findings the analysis begins with the graphical representation of the data in the pre, during and post recessionary phase as depicted in figure 1, 2 and 3. the graphs indicate that the relationship between two variables under study has been dynamic and inconsistent in nature. fig. 1 the exchange rate of us dollar to inr and gold prices jan, 2005 nov, 2007 fig. 2 the exchange rate of us dollar to inr and gold prices dec, 2007 – june, 2009 fig. 2 the exchange rate of us dollar to inr and gold prices july, 2009 – dec, 2013 proceeding with the study, the series were made stationary using the augmented dickey–fuller test. the augmented dickey–fuller test (adf) is a test for a unit root in a time series sample. it is an augmented version of the dickey– fuller test for a larger and more complicated set of time series models. the null hypothesis under the test was that the series under consideration has a unit root and is not stationary. the adf test was first conducted on the data set at level and the following results were derived: table 1: the results of adf test on gold prices (at level) at level jan, 05 nov, 07 at level dec, 07 june,09 at level july, 09 dec, 13 tstati stic prob .* tstati stic prob .* tstati stic prob.* augmented dickey-fuller test statistic 0.24 8395 0.97 54 1.07 085 0.72 83 1.53 83 0.5139 test critical values: 3.43 858 3.44 69 3.43 59 3.43 59 2.86 506 2.86 87 2.86 39 2.86 39 2.56 87 2.57 06 2.56 80 2.56 80 34 36 38 40 42 44 46 48 0 2000 4000 6000 8000 10000 12000 ja n 2 9 2 0 0 5 ju n 2 1 2 0 0 5 a u g 1 9 2 0 0 5 o ct 2 1 2 0 0 5 d ec 2 1 2 0 0 5 m ar 1 2 0 0 6 m ay 2 2 0 0 6 ju l 1 2 0 0 6 a u g 3 0 2 0 0 6 o ct 2 7 2 0 0 6 d ec 2 3 2 0 0 6 f eb 2 1 2 0 0 7 a p r 2 1 2 0 0 7 ju n 1 9 2 0 0 7 a u g 1 7 2 0 0 7 o ct 1 6 2 0 0 7 gold price 0 10 20 30 40 50 60 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 d ec 1 2 0 0 7 ja n 5 2 0 0 8 f eb 5 2 0 0 8 m ar 5 2 0 0 8 a p r 7 2 0 0 8 m ay 1 6 2 0 0 8 ju n 2 3 2 0 0 8 ju l 2 8 2 0 0 8 s ep 4 2 0 0 8 o ct 1 4 2 0 0 8 n o v 2 4 2 0 0 8 ja n 1 2 0 0 9 f eb 9 2 0 0 9 m ar 2 0 2 0 0 9 m ay 6 2 0 0 9 ju n 1 0 2 0 0 9 gold price 0 10 20 30 40 50 60 70 80 0 5000 10000 15000 20000 25000 30000 35000 ju l 1 2 0 0 9 o ct 1 5 2 0 0 9 ja n 2 8 2 0 1 0 m ay 1 7 2 0 1 0 a u g 2 5 2 0 1 0 d ec 7 2 0 1 0 m ar 2 1 2 0 1 1 ju l 5 2 0 1 1 o ct 1 9 2 0 1 1 f eb 2 2 0 1 2 m ay 2 2 2 0 1 2 a u g 3 0 2 0 1 2 d ec 1 7 2 0 1 2 m ar 3 0 2 0 1 3 ju n 2 5 2 0 1 3 s ep 1 8 2 0 1 3 gold price volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu the relationship between gold prices and exchange value of us dollar in india page |22| emerging markets journal table 2: the results of adf test on gold prices (at first difference) at first difference jan, 05 nov, 07 at first difference dec, 07 june,09 at first difference july, 09 dec, 13 tstati stic prob .* tstati stic prob .* tstati stic prob.* augmented dickey-fuller test statistic 28.5 17 0 19.1 094 0 33.6 66 0 test critical values: 3.43 861 3.44 69 3.43 59 2.86 507 2.86 87 2.86 39 2.56 871 2.57 06 2.56 80 table 1: the results of adf test on usd exchange rate (at level) at level jan, 05 nov, 07 at level dec, 07 june,09 at level july, 09 dec, 13 tstati stic prob .* tstati stic prob .* tstati stic prob.* augmented dickey-fuller test statistic 0.24 8395 0.97 54 1.07 085 0.72 83 0.14 11 0.943 test criti cal valu es: 3.4385 8 3.44 69 3.43 59 2.8650 6 2.86 87 2.86 39 -2.5687 2.57 06 2.56 80 table 2: the results of adf test on usd exchange rate (at first difference) at first difference jan, 05 nov, 07 at first difference dec, 07 june,09 at first difference july, 09 dec, 13 tstati stic prob .* tstati stic prob .* tstati stic prob.* augmented dickey-fuller test statistic 29.2 206 0 19.3 025 0 30.0 78 0 test criti cal valu es: 3.4385 9 3.44 69 3.43 59 2.8650 7 2.86 87 2.86 39 -2.5687 2.57 06 2.56 80 since the calculated tstatistics is less than the critical value at various test critical levels for both the series, we have to accept the null hypothesis that the future and the spot prices have a unit root and the series are not stationary. correspondingly, the adf test was conducted at the first level difference and the results derived indicated that since the absolute tstatistics is more than the critical value, we reject the null hypothesis meaning that the data is stationary at first difference. therefore, since the data is integrated of the same order and we can apply the johansen cointegration test. volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu girish karunakaran nair, nidhi choudhary, harsh purohit emerging markets journal | p a g e |23 table 3: the results of johansen co-integration test between gold usd exchange rate pre recession unrestricted co-integration rank test (trace) hypothesized trace 0.05 no. of ce(s) eigen value statistic critical value prob.** none 0.004582 32.9323 15.49471 0 at most 1 0.000521 0.400548 3.841466 0.5268 unrestricted co-integration rank test (maximum eigen value) hypothesized maxeigen 0.05 no. of ce(s) eigen value statistic critical value prob.** none 0.004582 3.531749 14.2646 0.0012 at most 1 0.000521 0.400548 3.841466 0.5268 during recession unrestricted co-integration rank test (trace) hypothesized trace 0.05 no. of ce(s) eigen value statistic critical value prob.** none 0.017699 8.37506 15.49471 0.0017 at most 1 0.003889 1.500057 3.841466 0.2207 unrestricted co-integration rank test (maximum eigen value) hypothesized maxeigen 0.05 no. of ce(s) eigen value statistic critical value prob.** none 0.017699 6.875003 14.2646 0.0201 at most 1 0.003889 1.500057 3.841466 0.2207 post recession unrestricted co-integration rank test (trace) hypothesized trace 0.05 no. of ce(s) eigen value statistic critical value prob.** none 0.005756 7.56101 15.49471 0.0178 at most 1 0.001008 1.124482 3.841466 0.289 unrestricted co-integration rank test (maximum eigen value) hypothesized maxeigen 0.05 no. of ce(s) eigen value statistic critical value prob.** none 0.005756 6.436527 14.2646 0.0035 at most 1 0.001008 1.124482 3.841466 0.289 in all the three cases, the johansen cointegration test is conducted with two hypotheses. the first one says that there is no co –integration between the variables under study. the next hypothesis stays that there is co-integration in at most one case. the hypothesis is accepted since the corresponding p value is more than 5%. the eigen values in this case also give the same result. therefore, it can be concluded that the two variables under study have long run relationship. since the two variables have long run relationship, the granger causality test was conducted to check the lead lag relation between them. since the data series becomes stationary at first difference, the test uses the first difference of the original series. the test is conducted at lag which showed the minimum akaike information criterion (aic). the minimum value of aic helps us to know that optimum lag is selected while conducting the granger causality test. the selection of inappropriate lag can lead to skewed result which in turn can define in appropriate lead lag relationship among variables under study. the test showed the following results: table 4: the result of pair wise granger causality tests between gold usd exchange rate fstatistic prob . decisio n pre recession null hypothesis: usd1 does not granger cause gold1 0.4602 0.005 rejecte d gold1 does not granger cause usd1 1.01568 0.008 3 rejecte d during recession null hypothesis: usd1 does not granger cause gold1 1.20899 0.306 5 accept ed gold1 does not granger cause usd1 1.63732 0.164 2 accept ed post recession null hypothesis: usd1 does not granger cause gold1 5.74535 0.000 1 rejecte d gold1 does not granger cause usd1 2.05963 0.084 accept ed the results and decision of granger causality test are given in table 4. the null hypotheses are rejected in case the p values are less than 0.05. on the other hand, in case the p values are more than 0.05, the null hypothesis is accepted. as a result, the test indicates that there exists bidirectional volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu the relationship between gold prices and exchange value of us dollar in india page |24| emerging markets journal causality between exchange rate of usd and gold prices in india before the recession. however, this bidirectional relationship is disturbed and there exists no lead lag causality between the variables during the period of global recession. however, post recession; the causality flows from exchange value of usd to gold prices in india. viii. conclusion the study concludes that the relationship between gold prices and usd exchange rate has been impacted by recession in india. the two variables under study shared bidirectional causality (bhunia, 2013) before recession which was lost during the global financial turmoil in 2007 – 2008. the indian economy faced the problem of usd appreciation post recession due to stressful global macroeconomic scenario (mccauley & mcguire, 2009) (quéré, béreau, & mignon, 2009). as a result, the gold prices also sky rocketed. this direction of causality in the prices is well evident from the result of granger causality test summarized in table 4. the study hence concludes that exchange value of us dollar is an important factor in fluctuations in gold prices in india like in case of south africa as concluded by (arezki, dumitrescu, freytag, & quintyn, 2012). even though this relationship has changed with the occurrence of global recession, the exchange value of usd should be taken into consideration while taking any investment decision in the metal (tully & lucey, 2007) bibliography apak, s., akman, v., çankaya, s., & sönmezer, s. (2012). the case for gold revisited: a safe heaven or a hedge ? emerging markets journal , 2, 1-8. arezki, r., dumitrescu, e., freytag, a., & quintyn, m. (2012). commodity prices and exchange rate volatility: lessons from south africa’s capital account liberalization. imf working paper , wp/12/168, 1-19. bhunia, a. (2013). cointegration and causal relationship among crude price, domestic gold price and financial variablesan evidence of bse and nse. journal of contemporary issues in business research , 2 (1), 1-10. capie, f., mills, t. c., & wood, g. (2005). gold as a hedge against the dollar. international financial markets, institutions and money , 15, 343–352. capie, f., mills, t. c., & wood, g. (2004). gold as a hedge against the us dollar. world gold council , research study no 30. dickey, d. a., & fuller, w. a. (1979). distribution of the estimators for autoregressive time series with a unit root. journal of the american statistical association , 74, 427-431. elliot, l. (2011, august 11). global financial crisis: five key stages 2007-2011. retrieved october 31, 2013, from http://www.theguardian.com: http://www.theguardian.com/business/2 011/aug/07/global-financial-crisis-keystages volume 5 no 1 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.66 | http://emaj.pitt.edu girish karunakaran nair, nidhi choudhary, harsh purohit emerging markets journal | p a g e |25 granger, c. (1969). investigating causal relations by econometric models and cross-spectral methods. econometrica , 37, 424-438. johansen, s. (1988). statistical analysis of cointegration vectors. journal of economic dynamics and control , 12, 231-254. kiohos, a., & sariannidis, n. (2010). determinants of the asymmetric gold market. investment management and financial innovations , 7 (4), 26-33. mccauley, r. n., & mcguire, p. (2009). dollar appreciation in 2008: safe haven, carry trades, dollar shortage and overhedging. bis quarterly review , 85-93. pwc. (2013). the direct economic impact of gold. world gold council. quéré, a. b., béreau, s., & mignon, v. (2009). the dollar in the turmoil. journal of the japanese and international economies , 23 (4), 427-436. shah, a. (2013, march 24). global financial crisis. retrieved october 20, 2013, from http://www.globalissues.org: http://www.globalissues.org/article/768 /global-financial-crisis sinton, j. (2014). an empirical investigation of the causal relationship between gold price, exchange rate changes and jakarta composite index. proceedings of world business and social science research conference, (pp. 1-10). paris. sjaastad, l. a. (2008). the price of gold and the exchange rates: once again. resources policy , 33 (2), 118–124. the economist. (2013, september 7). the origins of the financial crisis: crash course. retrieved october 1, 2013, from http://www.economist.com: http://www.economist.com/news/schoo lsbrief/21584534-effects-financialcrisis-are-still-being-felt-five-yearsarticle tully, e., & lucey, b. m. (2007). a power garch examination of the gold market. international business and finance , 21, 316325. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the impact of currency shocks on sanandaj municipality revenues in iran shaho heidari gandoman islamic azad university sanandaj branch, islamic republic of iran | shahoheidari@yahoo.com shahla nouri islamic azad university sanandaj branch, islamic republic of iran | haidarishaho99@gmail.com abstract exchange rate fluctuations have been affecting economic demand in recent years. the purpose of this study is to review the effects of exchange shocks on sanandaj municipality revenues. the statistical population is sanandaj municipality during 2006-2018 and spss, eviews softwares were used for data analysis. the results show that since the correlation test is not significant at the level of 0.95, there is no significant relationship between two variables of municipality income and exchange fluctuations. thus, the main hypothesis is rejected. in other words, exchange shocks have no impact on sanandaj municipality revenues. also based on the correlation test, since the correlation test is not significant at the level of 0.95, the relationship between the two variables of municipality income and negative exchange fluctuations is not significant and the sub-hypothesis (1) is rejected, and finally based on correlation test, since the correlation test is not significant at the level of 0.95, the relationship between two variables of municipality and positive exchange fluctuations is not significant. thus, the sub-hypothesis (2) is rejected as well. it could be concluded that, sanandaj municipality revenues do not follow the currency rate fluctuations. keywords: exchange, currency shock, positive currency shocks, negative currency shocks, municipality revenues, sanandaj municipality new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.191 | http://emaj.pitt.edu | mailto:shahoheidari@yahoo.com mailto:haidarishaho99@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.191 | http://emaj.pitt.edu the impact of currency shocks on sanandaj municipality revenues in iran page |2| emerging markets journal the impact of currency shocks on sanandaj municipality revenues in iran shaho heidari gandoman shahla nouri i. introductıon in developing countries, such as iran, with a dysfunctional economic system, weak tax systems, and no mechanisms for citizens’ partnership in providing cities expenses, municipalities' revenue supply system is mainly driven towards unstable sources of income. this issue became even more critical in iran after executing selfsufficiency policy of municipalities in 1980s (mazini, 2006). two significant challenges of sanandaj municipality revenues supply system are inadequate sources of income and instability. unstable sources of income are those incomes of municipality which are dependent on new operations and activities of the urban economy and in the absence of new employment, reduced volume of economic trade and currency fluctuations, the volume of these resources would be reduced. apart from sustainable resources, there are some resources that exist and to require them, no particular action from the owners of those resources is needed. in other words, sustainable income sources are dependent on the production process and unstable resources are dependent on consumption flow (yavari et al., 2011). therefore, to review the impact of exchange rate fluctuations on municipality revenues, it is inevitable to judge the optimal amount of these fluctuations. since the exchange rate fluctuations affect the economy both on currency and demand sides, the exchange rate could be considered as one of the most important variables affecting the economy and income of organizations, including the municipality. on the other hand, exchange rate variable reflects the economic situation of one country compared to other countries. crisis experiences resulted from positive and negative shocks of exchange rate fluctuations indicate the importance of unit forecasts of such shocks in designing appropriate exchange rate policies. one of the topics in economy argues that, stable exchange rates provide a stable framework for adjusting countries' financial markets, labor sources and assets through preserving the value of national exchange and accelerating economic growth. in other words, different studies show that there is a negative relationship among exchange rate fluctuations, economic growth and the income of one country's organizations. this is especially true for countries where their economies are in transition and capital account freedom exists. definitely, there are also various empirical cases where the rise and fall of the real exchange rate had a positive and negative impact on revenues. therefore, theoretical studies have focused on both positive and negative shocks in recent research. these fluctuations are also considered in this article (mazini, 2006). achieving the optimal structure for providing municipality revenue sources, reviewing the municipality revenues structures could serve as a guide and an appropriate model for amending and reforming an optimal revenue structure. the extent of the municipality's scope of action as a public institution and providing various services such as improvement of the urban environment, construction of urban infrastructures, street lighting, construction of streets, floodgates, public health supply, basically could not be directly supplied by the private sector due to their specific features and characteristics. on this basis, the way municipalities’ revenues are funded to provide these services optimally seems necessary. since the currency rate fluctuations affect the economy demand itself, the exchange rate could be one of the most important variables affecting municipalities economy and income (ziyari, et al., 2012). on the one hand, the currency rate variable represents the economic situation of a country compared to other countries and that is why many studies have been conducted on exchange rate and its changes which haven’t had similar results that have not been followed. also, there is controversy about the impact of this variable on other economic variables. most of recent studies have shown that, the currency rate variable has asymmetric impacts on variables such as price, production, and ultimately income. this means that the effect of increasing this variable is different from reducing it. the liquidity criterion variable is another essential factor affecting the economy. the changes of this variable will have profound effects on economy. it is expected that, currency and monetary policies shocks have adverse effects on industry sub-sectors (kens, 2017). for this reason, in this study first we will try to determine whether exchange shocks have had any impacts on sanandaj municipality revenues or not. second, we study if positive and negative shocks have had the same impacts on municipality's revenue. thus, it is essential to identify the effect of currency rate fluctuations on macro variables in the iranian economy and to provide strategic exchange recommendations aligned with the proper management of municipalities, currency rates and resources. ii. literature review the results of the study conducted by ali falahati et al. (2016) titled “interaction effect between government tax revenues and metropolitan municipality of ahvaz revenue” shows that increasing tax revenue leads to a decrease in ahwaz municipality revenue. mehregan (2015) conducted a research on “currency shocks and financial markets" and showed the importance and analysis of exchange fluctuations on financial markets, using var panel self-regression model and daily data gathered from january 1, 2009 to july 31, 2013. the results show: 1: the exchange rate volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.191 | http://emaj.pitt.edu shaho heidari gandoman, shahla nouri emerging markets journal | p a g e 3 guides the stock market and the stock index response to shock exchange is positive, 2: in sanctions situation, the currency is considered as a real asset for investment and 3: in sanctions situation, the long-term exchange shock has a negative effect on the stock index due to the dependence of domestic production on raw materials and machineries imported. alexis cruz-rodriguez (2013) conducted a research titled “the relationship between fiscal sustainability and currency crises in some selected countries”. the results show that, the financial sustainability index does not have the power required to predict the currency crises in different countries. it was stated that, fiscal policies play an important role in creating currency crises. grier and smallwood (2013) study the effect of currency rate uncertainty on trade-offs. the findings show that, the impact of unpredictable shocks of currency rate shocks on production level is positive and the impact of predictable shocks of currency rates on the production level is negative. iii. methodology currency is a common monetary unit in proportion to another common monetary unit. that is, the amount required of one currency that can buy some other currency is the exchange rate. so, this rate could be a conversion factor. in general, the exchange rate is the relative price of foreign currency to the domestic currency which has always been the interest of the economic and financial community as one of the significant economic factors. in fact, this rate reflects economic conditions of the country and a factor to compare the national economy with that of other nations. the rate of exchanging the currency of a country with the currencies of other countries is called currency rate (kazerouni et al., 2007). currency shock: currency shock is a significant change in the exchange rate (anwar et al., 2015). positive and negative currency shock effect: a sharp decline in domestic currency value (exchange rate increase) is called negative currency shock effect and the sudden improvement in domestic currency value (currency exchange rate decrease) is called positive shock effect. through studying the combination of supply and demand, the impact of exchange rate fluctuations on the economy could be identified (hassanzadeh and khosroshahi, 2011). here are the hypothesis of research:  main hypothesis: the currency shocks affect sanandaj municipality revenues.  sub-hypothesis (1): the negative currency shocks affect sanandaj municipality revenues.  sub-hypothesis (2): the positive currency shocks affect sanandaj municipality revenues. given the assumption that prices of market goods are equal around the world, the exchange rate could be mathematically defined based on the distinction between market and non-market goods as follows: in this definition, pt and p* t indicate domestic and international prices for tradable goods respectively, and the price of non-tradable goods are shown by pn. based on this definition, a decrease in rr equals to an increase of real value of national currency. considering the domestic studies of research, it is observed that different researchers use different methods to investigate the impact of currency or monetary shocks on economic variables, including ardl, gardh, and others. in this research, markov switching method was used to study the effect of currency fluctuations shocks on sanandaj municipality revenues. a dual-mode ar (1) model can be illustrated as follows: municipality revenue: one of the significant issues for municipalities worldwide is creating sufficient sources of revenue and providing the cost of public services. domestic revenue sources include direct municipality receipts from tolls for land and properties as well as the income resulted from tolls for non-properties (karimi, samaneh, 2011). foreign revenue sources include incomes received outside the municipality organizations such as water, power, telephone and similar urban needs, factories, and government grants. article 29 of the financial regulations of municipalities, divides municipalities' revenues into the following categories: income earned from public tolls (regular income) income earned from private tolls cost of services and revenues of municipality non-profit institutions revenues from municipalities’ properties funds government grants and public organizations municipality revenues classification is as follows: municipality quota out of ministry payments tolls together with the tax received inland tolls on buildings and lands tolls on communications and transportation tolls on licenses, sales and entertainment income from sales and services income from municipality installations, fines and offenses income from municipality properties grants, gifts, loans, cash balance and assets of prior periods (samati and bakhshayesh, 2011). volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.191 | http://emaj.pitt.edu the impact of currency shocks on sanandaj municipality revenues in iran page |4| emerging markets journal var model is used to evaluate and measure the variable income of the municipality: yt=a1yt-1+…+apyt-p+bxt+et where yt is a vector with k components of internal variables, xt is a vector with d components of external variables. a1, ..., ap and b are the coefficients matrix that must be estimated. finally, et is a transformation vector that may correlate simultaneously, but it has nothing to do with their lagged variables on the right. since only delayed amount of endogenous variables appears on the right side of the equations, synchronization is not problematic, and the usual ols method of the smallest square provides compatibility estimations. in standard var model, in general, the disturbances are demonstrated simultaneously with correlations. this causes the system to respond the variable changes. all variables associated with that variable have been responded. however, the correlation will be resolved by chelsea's undeniable ring at the same time (farzanegan and marquardt, 2009). figure 1. conceptual model statistical population in this study, sanandaj municipality is the statistical population, which was analyzed between 2006 and 2018 (13 years). descriptive analysis: descriptive analysis of statistics and data gathered on united states (u.s.) dollars as well as municipality income are shown below. figure 2. the u.s. dollar price situation since 1978 resource: https://ieb.today/wp-content/uploads/2016/07/ exchange-rate.png as shown in the chart above, first there was a rise in the price of u.s. dollars. then, the u.s. dollar had the highest price leap in 2012. figure 3. status of sanandaj municipality revenue between 1978 and 2018 as it could be observed from the chart above, sanandaj municipality revenue has been on the rise for years, and from 2015 onwards, there is a higher leap than previous years. note: sudden exchange leaped to about two thousand four hundred in 2014. while this sudden change of the rate of u.s. dollars has no sudden impact on the chart and the series has been decreasing since 2016, its significance should be considered in the subsequent discussion of statistical analysis and tests. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.191 | http://emaj.pitt.edu shaho heidari gandoman, shahla nouri emerging markets journal | p a g e 5 figure 4. reviewing municipality revenue charts in terms of months (1) figure 5. reviewing municipality revenue charts in terms of months (2) the three graphs above are actually sanandaj municipality income in terms of months for different years. they show that, in march of each year the municipality's revenue was higher than other months. this is natural at the end of the year, as it is assumed that at the beginning of each year, there will probably be about 10% increase in registration and administrative costs in administrative system. so most clients tend to carry out their affairs at the end of the year. table 1: status of sanandaj currency and municipality revenue between 2006 and 2018 as two variables units are different, we follow the central argument and the dispersion of the two variables by changes in coefficient method. income changes coefficient of variation: 136%)100( 36357518870 88657840287 )100(1  x s cv currency changes coefficient: 118%)100( 2464 2913 )100(2  x s cv since the changes coefficient is lower in currency variable, the changes in currency variable is lower and it is higher in income variable. definitely, as discussed earlier, income growth is increasing and that is considered good. but currency changes are not considered as good although it has been a little ascending, and probably the best state is currency stability and municipality revenue increase. figure 6. correlation chart volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.191 | http://emaj.pitt.edu the impact of currency shocks on sanandaj municipality revenues in iran page |6| emerging markets journal according to the graph above, which shows the currency and revenue of sanandaj municipality, it is observed that there is no relationship between two variables and the data do not follow any model. a: the points above are municipality revenue in march of each year. they are not considered as out-of-date data. b: significance of the tailed descriptive results is concluded in the following discussion of statistical analysis and tests. table 2: municipality income and u.s. dollars confidence intervention considering the exchange data of 2018 for a short interval, we can observe that it had reached 18500. but the figure was not stable and it was declining rapidly. besides, the currency is between 2003 and 2924. also, the municipality income is generally at the range of 49882160866 77268216541. anova testing for municipality income and u.s. dollars: table 3: anova testing for municipality income and u.s. dollars based on the above table in exchange section, since sig=0.000<0.005, the test is significant at the confidence level of 0.95. this means, hypothesis h0 is rejected and exchange average varies from year to year. secondly, based on the table above in municipality revenue section, since sig=0.984>0.05, the test is not significant at the confidence level of 0.95. this means, hypothesis h0 is not rejected and revenue averages are the same in different years. result: these two tests accurately determine that, currency changes have no impact on municipality revenues. modeling the relation between the municipality revenue and the exchange: although earlier reports suggest that there is no relationship between the currency and income, to be sure, we fit different models to the data by regression approach. in this situation, the results are as follows: figure 7: models or equations fitting diagrams it is clear from the above diagram that, none of the above models such as linear and logarithmic equation is a suitable fitting for these data. in fact, data do not have a specific model and equation. autoregressive conditional heterogeneity variance: in order to study the garch model in this research, we need to investigate the variables' standing and use the adf generalized dickey-fuller test for the static variables. the results are as follows using the eviews software at the confidence level of 0.95.        k k h h   ...: ...: 211 210 that is, at least two averages are equal volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.191 | http://emaj.pitt.edu shaho heidari gandoman, shahla nouri emerging markets journal | p a g e 7 table 4: checking the mann variables the dickey-fuller test results at the confidence level of 0.95 indicate a static mean of variable mana that is obtained with a one-time mana difference. then, using the garch-lm statistics on the presence and absence of effects of the arch model, we follow the following results: table 5: results of garch-lm test f-statistic 32.34 probability 0.0751 obsrsquared 25.98 probability 0.0542 as shown in the table above, there is no garch effect at the confidence level of 0.95. the reason is that, probability value is greater than 0.05. so, there is no continuation of the process or method for modeling. table 6: logarithmic model fitting test table based on the above table, since sig=0.271>0.05, the test is not significant at the confidence level of 0.95. this means, hypothesis h0 is not rejected and the data do not follow the logarithmic model. correlation between municipality's income and foreign exchange we use pearson's correlation test to examine the relationship between municipality’s income and foreign exchange as follows: pearson correlations test:       0: 0: 1 0 xy xy rh rh table 7: pearson correlations test for the relationship between municipality’s income and foreign exchange between 2006 and 2018 resource: author’s computation based on the above table, since sig=0.378>0.05, the test is not significant at the confidence level of 0.95. this means, hypothesis h0 is not rejected and there is no correlation coefficient between the variables of municipality revenue and u.s. dollars. even though the test was significant, the coefficient of determination of the two variables indicates the degree of correlation between the two variables, r2 xy= (0.071)2=0.005=0. iv. conclusion and recommendations reviewing the hypotheses through pearson correlation test: main hypothesis: based on the correlation test, since correlation test is not significant at the level of 0.95, there is no relationship between two variables of municipality revenue and foreign exchange. this means that, the main hypothesis is rejected. in other words, identifying the effects of currency shocks on sanandaj municipality revenues is not significant and cannot be defined. sub-hypothesis (1): based on the correlation test, since correlation test is not significant at the level of 0.95, the relationship between two variables of municipality revenue and negative exchange is not significant. in other words, subhypothesis (1) is rejected. mentally and in terms of descriptive statistics, it seems that there is a relationship between the two variables. however, what is important is the test result, which indicates that there is no relationship between municipality revenue and negative exchange. sub-hypothesis (2): volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.191 | http://emaj.pitt.edu the impact of currency shocks on sanandaj municipality revenues in iran page |8| emerging markets journal based on the correlation test, since correlation test is not significant at the level of 0.95, the relationship between two variables of municipality revenue and positive exchange is not significant. in other words, subhypothesis (2) is rejected. due to the rising u.s. dollars price, construction growth presents fluctuations as shown above. however, there has been a downturn in housing construction and the price between 2013 and onwards. housing prices have been rising and in the years of 2012 and at the end of 2018, the most significant increase in housing prices was observed due to the leap in u.s. dollars. municipality revenue has been rising in terms of years, and from 2015 onwards, it is climbing more than previous years. so, rates of the u.s. dollars and housing prices have been ascending over the years. however, the municipality revenue increased in march, which seems to be natural. according to variance analysis test for the equality of the average in exchange and municipality revenue, we concluded that currency changes could be considered the same over different years. indicating that currency rate changes had no impact on municipality revenue and through regression methods as well as different tests, we concluded that exchange data and revenue do not follow any model. according to pearson correlation test, two variables were identified and at the confidence level of 0.95, there is no relationship between municipality revenue and u.s. dollars. statistical methods such as time series and regression methods are not needed to expand the subject. therefore, through descriptive and statistical analysis, we found that there is no relationship between municipality revenue and u.s. dollars, as well as between municipality revenue and positive-negative currency fluctuations. the branches of municipality revenues could be identified by using 40-year data, which was not possible regarding the above-mentioned limitations of research. so, if an organization or a research institution can find more information about the municipality, more detailed results can be presented. it is also recommended that the iranian statistical center or the municipalities themselves provide this type of data as databanks, which are essential in academic research. also, some specific rules or legislation can be in order, encouraging departments to arm university students with financial information. finally, obtaining information related to municipality revenues was one of the limitations of this study. gatherimg the information related to municipality revenues for 40 years was also a limitation of the research, because there were two levels of office and automation. office accounts was not accessible by the researchers. also, receiving the information related to municipality revenues daily was another limitation. plus, not having the permit to obtain information related to municipality revenues in various areas such as changing occupancy, purchasing, and selling was also a limitation. furthermore, since there was some incomplete months for the year 2019, discussion was oriented on months and years. references cruz-rodríguez, a. (2013). the relationship between fiscal sustainability and currency crises in some selected countries, review of economic perspectives, vol. 13, issue: 4. falahati, a., mohsen khozestani, m. b., alipourfard, s. (2016). interaction effect between government tax revenues and metropolitan municipality of ahvaz revenue study. farzanegan, m.r., markwardt, g. (2009). the effects of oil price shocks on the iranian economy, energy economics, vol. 31, 134-151. grier, k. b. and smallwood, a. d. (2013). exchange rate shocks and trade: a multivariate garch-m approach ,journal of international money and finance, elsevier, vol. 37(c), pages 282-305. hassanzadeh, a., khosroshahi, p. (2011). studying of efficient financing pattern for municipal metropolitan (case study of tehran). fourth municipality finance conference: problems and solutions. karimi, s. (2011). sustainability analysis of financial resources and income of tehran municipality (comparative study with a number of cities in the world), master's thesis, allameh tabataba'i university, faculty of management and accounting. kazerouni, a., rostami, n. (2007). asymmetric effects of exchange rate fluctuations on real production and price in iran, economic bulletin 196-177: (25). kenneth j. s., emerson, d. j. (2017). an analysis of the relation between resilience and reduced audit qualitywithin the role stress paradigm. salisbury university, department of accounting & legal studies, 1101 camden avenue, salisbury, md, united states. manafi a., vahid, k. t., farhad, d. j., pasban, f. (2015). factors influencing real exchange rate changes and its impact on the competitiveness index of the iranian economy, financial knowledge journal of securities analysis, fall 2015, vol. 9, issue 32, pp. 24-1. mazini, a. h. (2006). the impact of monetary shocks on nominal and real variables in economics, journal of urban management studies, no. 20, summer 2008, pp. 37-23. qomi, n.m.m.a.a. (2015). currency shocks and financial markets: an application of the panel vector auto regression model, research and economic policies of the twenty-third fall 2015, issue 75. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.191 | http://emaj.pitt.edu shaho heidari gandoman, shahla nouri emerging markets journal | p a g e 9 yavari, k-r., majid, m. and majid, a. (2011). investigation of the impact of foreign exchange policies on the development of non-oil exports of iran with emphasis on currency agreement and currency monetary policy, quarterly economic research quarterly. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu book review of “the real warren buffett managing capital, leading people” cevdet kızıl assistant professor, istanbul medeniyet university | cevdetkizil@yahoo.com abstract this paper reviews and discusses the book titled “the real warren buffett – managing capital, leading people” by james o’loughlin. the mentioned book details the managerial skills, financial expertise and leadership approach of warren buffett. practical lessons of warren buffett are also included in “the real warren buffett – managing capital, leading people” and how he became the second richest man in united states are mentioned. keywords: warren buffett, managing capital, leading people, james o’louglin, book review, finance new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.117 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.117 | http://emaj.pitt.edu book review of “the real warren buffett managing capital, leading people” page |43| emerging markets journal book review of “the real warren buffett managing capital, leading people” cevdet kızıl reviewed publication details: o’louglin, j. o. (2004). ”the real warren buffett: managing capital, leading people”, nicholas brealey. review the book titled “the real warren buffett – managing capital, leading people” by james o’o’louglin starts with a famous quote from warren buffet, the second richest man in the u.s. he says “we’re only responsible for two functions… first, it’s our job to keep able people who are already rich motivated to keep working at things… they don’t need to do for financial reasons. it’s that simple. secondly, we have to allocate capital” (o’louglin, 2004). as you can easily see, warren buffett emphasizes the importance of motivation here and implies that money may not let us to solve all the problems in every situation. then, it’s stated in the book that buffett has not achieved his successes by simply being a stock picker. he is a very good chief executive officer (ceo) who knows how to lead people and manage the capital, that’s the key of his victory. after that, the book says warren buffett learned from his mistakes as years passed, he discovered the errors in his decision making and he understood how to change behavior of the people, although it was very challenging. according to warren buffett, establishing loyalty among employees who work for him is also very important. next, it’s underlined in the book that leadership is not forcing, dragging, kicking and pushing; it’s to know how to efficiently lead people. by the way, attracting the right employees to the organization is also crucial according to warren buffett. additionally, he informs managers that mistakes are not tombstones, but they are stepping stones to better decision making. in the following section, the book also discusses the leadership of jack welch, who retired in 2001 after 17 iconoclastically successful years at general electric (ge), one of united state’s most admired firms (slater, 1998). according to the book, the success of jack welch comes from his eye-catching ability to get the teams he formed under him to pull together and perform. from jack welch’s viewpoint, passion and desire are also critical for organizational achievement. moreover, instead of being reactive to change, welch anticipated it and then engaged on a personal crusade to adapt the company to his vision. however, there are also some differences between the philosophies of jack welch and warren buffett. for example, jack welch likes reinventing the organization at every turn and strives to deliver a consistent and above-average return which is a risky strategy for buffett that he rejects. also, buffett is extraordinary careful in selecting with whom to associate, seeking out those managers who “relish the thrill of outstanding performance”. furthermore, concerning motivation, buffett chooses the hands-off route and sets managers free. according to him, this refers to setting minimum rules of behavior, which tap into a form of motivation that comes from within. the mentioned leadership rule is founded on his confidence in that immutable tanet of human behavior which informs him that trust will be reciprocated with compliance and effort. the following quote by warren buffet clearly explains this philosophy: “i found in running businesses that the best results come from letting high-grade people work unencumbered” (loomis, 2012). it’s also a form of leadership which realizes that, if it’s not within the nature of a manager to reciprocate trust, no amount of management of the person will engender the expected behavior. on the other hand, jack welch’s leadership style is different compared to that of warren buffett. the reason is that, welch has the command-and-control style (o’louglin, 2004). the book mentions the leadership style of jack welsh with the following words: “by alternately hugging and kicking… setting stretch goals and relentlessly following up on people to make sure things get done”, which speaks of a distrust of that part of human nature which is selfish and will attend to its own interests if left unattended. because of this reason, the author criticizes the leadership style of jack welch, but he also adds that neither solution is free from error. according to the author, the positive inattention of warren buffet’s leadership style to people management is sometimes costly, although it’s a favorable and appreciated one. similarly, jack welch’s leadership style of control and command is also costly and has caused some serious losses to welch until this time (o’louglin, 2004). at last, the author finalizes this section by expressing that buffett’s leadership style is the more robust. plus, according to warren buffett, all ceos should make their employees believe in themselves and they don’t need independent directors, oversight committees or auditors absolutely free of conflicts of interest. in other words, from warren buffett’s point of view, conflict is a natural thing. following that, the book also mentions berkshire hathaway, where warren buffett had worked as a chairman and chief executive officer (ceo) and had increased the market value of this firm at a compound volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.117 | http://emaj.pitt.edu cevdet kızıl emerging markets journal | p a g e |44 growth rate of over 25% per year (buhayar, 2016). in this firm, buffett had learned that managers had to be motivated so well that they should be committed to the organization like the owners. the author of the book provides his comments then and says that managing is the integration of several components. lao tzu, chinese taoist philosopher is also mentioned in the book with his following quote: “intelligent control appears as uncontrol or freedom. and for that reason it is genuinely intelligent control. unintelligent control appears as external domination. and for that reason it is really unintelligent control.” (o’louglin, 2004). the author of the book provides this quote to the readers, because lao tzu’s words are strictly related to leadership and control. according to the book, the relationship between strategic plan and leadership is very important too. for example, the author talks about stephen schneider of cps company who indicates that strategic plans and leadership are tightly linked. mr. schneider explains strategy as “process of positioning an organization for future advantage,” which necessities a deep understanding of the internal and external elements which affect a company. “leadership”, stephen schneider states, “is the weapon that provides strategic impact,” demanding “the articulation of an argument so compelling that other people see its merits and are prepared to act on it.” (o’louglin, 2004). controls and leadership relationship is also analyzed in the book. for example, some famous words of dr. robert cialdini is provided concerning this issue: “one problem with controls… is that when people perceive of themselves performing the desirable monitored behavior, they tend to attribute the behavior not to their own natural preference for it, but to coercive presence of the controls. as a consequence, they come to view themselves as less interested in the desirable conduct for its own sake… and they are more likely to engage in the undesirable action whenever controls cannot detect the conduct.” (o’louglin, 2004). later, the book focuses on the fact that leadership should not involve forcing and fearing the employees. at this point, jonathan freedman’s experiment is mentioned. it’s said that, jonathan freedman had run an experiment in which he first instructed a group of boys, on pain of punishment, not to play with a toy robot out of a selection of toys made available for them. as a result, the boys didn’t play with the toy robot while he was present. on the other hand, six weeks later, back in the same room but this time when freedman was absent, the majority of the boys played with the robot. as you can clearly see from this example, externally imposed rules did not work as well as forcing and fearing (marshall, 2002). in fact, the book says that, good leaders always know how to communicate well and explain the details. for instance, freedman had done a second experiment and this time he had worked on another group who were warned against playing with the robot. however, this time freedman had included a reason: “it is wrong to play with the robot”. again, the majority obeyed the rule. however, the difference here is that, with this group, six weeks later a great majority of boys were still following the rule. but what is the reason? definitely, it’s because the rule now came from the inside – the boys had decided that they would not play with the robot because this time that was their own decision. in other words, they had taken inner responsibility for their actions and it was not required for freedman or anyone else to be present to monitor their behavior with outside pressures. experiment designers could trust the boys since they had explained why they did not want the boys to play with the robot. besides, the book links the importance of communication and explanation features of good managers to a quote of charlie munger, vice president of berkshire hathaway: “just as you think better if you array knowledge on a bunch of models that are basically answers to the question why, why, why, if you always tell people why, they will understand it better, they will consider it more important and they will be more likely to comply” (o’louglin, 2004). rewarding as a motivational tool is also very important for warren buffett. for example, he implements a compensation scheme which rewards correct behavior appropriately. according to warren buffett, employees should get paid based on the performance of the part of the firm that they can affect. the book even provides a quote of buffett related to this issue: “arrangements that pay off in capricious ways, unrelated to a manager’s personal accomplishments, may well be welcomed by certain managers… but such arrangements are wasteful to the company and cause the manager to lose focus” (o’louglin, 2004). actually, warren buffet has deeper opinions on incentive compensation systems. as an example, i believe that the following sentences will help you to understand his philosophy on this subject: “we employ an incentive compensation system which rewards key managers for meeting targets in their own bailiwicks. if see’s does well, that does not produce incentive compensation at the news – nor vice versa… in setting compensation, we like to hold out the promise of large carrots, but make sure their delivery is tied directly to results in the area that a manager controls… we believe further, that such factors as seniority and age must not affect incentive compensation… a 20-year-old who can hit .300 is as valuable to us as 40-year-old performing as well.” (connors, 2010). volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.117 | http://emaj.pitt.edu book review of “the real warren buffett managing capital, leading people” page |45| emerging markets journal after that, the book expresses the fact that leaders should highly value intellectual capital which should never be underestimated. a quote of jack welch related to this issue is even presented: “my gut told me that compared to the industrial operations i did know, this business (ge capital) seemed an easy way to make money. you didn’t have to invest heavily in r&d, build factories, and bend metal day after day. you didn’t have to build scale to be competitive. the business was all about intellectual capital.” (choo and bontis, 2002). according to the book, like jack welch, warren buffett also highly values intellectual capital as a leader and his competitive advantage comes from appreciating this factor which sets him apart. moreover, the book underlines the fact that warren buffett as a manager does not favor lay-offs. in relation with this, a comment of him is provided: “we don’t engage in layoffs when we experience a cyclical slowdown at one of our generally profitable insurance operations. this no-layoff policy is in our self-interest. employees who fear that large layoffs will accompany sizeable reductions in premium volume will understandably produce scads of business through thick and think (mostly thin)” (o’louglin, 2004). after that, the book argues that all leaders should have confidence for achievement, but overconfidence can be dangerous. for instance, some words of charlie munger take place in the book related to this issue: “smart, hard-working people aren’t exempt from professional disasters from overconfidence. often they just go around in the more difficult voyages they choose, relying on their self-appraisals which they have superior talents and methods.” (o’louglin, 2004; lowe, 2000). thus, charlie munger thinks that the majority of individuals consider themselves to be above-average performers, although this is not the case in aggregate. the lesson which we should learn from this point is that we must always trust ourselves, but being too optimistic can also be harmful. warren buffett also has some opinions and suggestions on change. as an example, according to him, managers should react to change instead of anticipating it. in other words, he says that managers should affect the change. then, mr.buffet makes clear that gathering feedback, eliminating stereotypes and identifying the truths are extremely significant. for this purpose, he has a “circle of competence” in place. for example, he establishes what he knows by determining truths, the dynamics which sit behind them, and their links to each other. then, he makes sure that he knows by a process of inversion whereby he tries to disprove his previous conclusions. this way, he tries to eliminate stereotypes. plus, he checks that he knows by looking for feedback from the results of his decisions (flores, 2016). following that, communication and asking for the opinions of others are also critically important according to warren buffett. for example, he says: “as you are acquiring knowledge about industries in general and companies specifically, there isn’t anything like first doing some reading about them and then getting out and talking to competitors and customers and suppliers and past employees and current employees and whatever it may be. virtually everything we have done has been by reading public reports and then maybe asking questions and ascertaining trade positions and product strengths or something of that sort.” (o’louglin, 2004). another fundamental characteristic of a leader should be to learn from his mistakes. again, i will provide a quote from the book to better explain this issue. these are the words from a speech of warren buffett directed to his shareholders: “i want to be able to explain my mistakes… if we are going to lose your money, we want to be able to get up there next year and explain how we did it.” (o’louglin, 2004). besides, a good manager should also implement empathy according to the book. for instance, warren buffett also emphasized this important point and said that: “managers frequently have trouble putting themselves in the shoes of their shareholder-owners”. (labitan, 2011). among all other things, warren buffet says that managers should always consider the long-run and must care for all stakeholders, including the investors. regarding this subject, the book provides a quote of warren buffett: “if companies focus their thinking and communications on short-term results or short-term stock market consequences they will, in large part, attract shareholders who focus on the same factors. and if they are cynical in their treatment of investors, eventually that cynicism is highly likely to be returned by the investment community”. (o’louglin, 2004). finally, in warren buffett’s opinion, when an organization gains a success, it should be celebrated with the whole stuff including all employees. he states that victories must always be remembered, no matter how big or small they are. on the opposite side, according to warren buffett, failures of organizations and their competitors are much more important and several lessons can be learned from these failures. for example, he says: “i have often felt there might be more to be gained by studying business failures than business successes… my partner, charles munger, says all he wants to know is where he’s going to die – so he won’t ever go there.” (o’louglin, 2004). volume 6 no 2 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.117 | http://emaj.pitt.edu cevdet kızıl emerging markets journal | p a g e |46 references buhayar, n. (2016). “berkshire profit jumps 25% on new manufacturers, insurance”, bloomberg, https://www.bloomberg.com/news/artic les/2016-08-05/berkshire-profitadvances-25-to-5-billion-on-insurancerebound choo, c. w., bontis, n. (2002). “the strategic management of intellectual capital and organizational knowledge”, oxford university press, p.481. connors, r. j. (2010). “warren buffett on business: principles from the saga of omha”, john wiley & sons. flores, b. (2016). “buffett and munger on the circle of competence”, yahoo finance, http://finance.yahoo.com/news/buffettmunger-circle-competence221834144.html labitan, b. (2011). “coach w software: a. i. conversation with the buffett letters”, frips, p.79. loomis, c. j. (2012). “how to live with a billion”, fortune magazine, http://fortune.com/2012/11/21/how-tolive-with-a-billion/ lowe, j. (2000). “damn right! : behind the scenes with berkshire hathaway billionaire charlie munger”, john wiley & sons, p.202. marshall, m. j. (2002). “why spanking doesn’t work”, bonneville books. p.76. o’louglin, j. o. (2004). ”the real warren buffett: managing capital, leading people”. slater, r. (1998). “jack welch & the ge way: management insights and leadership secrets of the legendary ceo”, mcgraw-hill publishing. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu the relationship between accounting practices and effects of financial crisis in turkey: a case study on an oil company i̇smail erkan çelik beykent university | ismailerkancelik@gmail.com abstract many reasons lie at the base of all financial crises from the past to the present. if we take into consideration the 2008 subprime mortgage crisis, the only reason cannot be mortgage loans. but the mortgage issue continued to advance and created several other problems. definitely, the source of mortgage loans problem also had many roots. one of the reasons was the lack of correct use of accounting principles and auditing. this is a strong proof and indicator that, there are many accounting based reasons behind the occurrence of the financial crises. many examples can be given showing moving away from the basic principles of accounting rules and the general accounting concepts. moreover, institutions being not fully independent, running creative accounting practices, having problems with fair valuation and transparency issues, presenting unreal financial reports, and sharing misleading audit reports are all related to financial crises. furthermore, specific businesses and people abuse accounting rules, standards and related legislation for the sake of their own interests. accounting and finance history has shown us that, even audit institutions, credit institutions and rating agencies are getting unfair advantages and generating unethical cash by making intentional accounting and finance errors, which is actually categorized as fraud. the aim of this study is to analyze financial crises and to determine if accounting practices have any relationship with financial crises. the research investigated an oil company’s financial and operational indicators before and after the 2008 financial crises with related tables and figures. also, an interview was run with the company’s accounting officer. based on the statements of firm’s accounting officer, correct accounting practices defended firm from several negative effects of the 2008 financial crisis. keywords: accounting, finance, financial crisis, accounting principles, auditing deficiency new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu | mailto:ismailerkancelik@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu i̇smail erkan çelik emerging markets journal | p a g e |47 the relationship between accounting practices and effects of financial crisis in turkey: a case study on an oil company i̇smail erkan çelik 1. introduction the term crisis comes from the word krisis in greek and latin. the word crisis is used as a synonym for concepts such as recession and depression within social sciences. within the economics literature on the other hand, it corresponds to those terms such as depression, recession, impasse or difficult period and generally refers to the totality of comprehensive problems that impact upon the current situation and the future of enterprises, occur all of a sudden, where the affected parties are usually late in taking precautions and that change the economic operation partially or completely. as seen above, the term crisis has several definitions. however, most generally it is defined as the tense situation that cannot be anticipated and foreseen beforehand, where prevention and harmonization mechanisms remain inadequate and that threatens existing values, objectives and assumptions. concepts such as stress, concern and panic are the feelings experienced during a crisis. “crises refer to the fluctuations that occur outside the limits of acceptable change within prices or quantities in a commodity, service, factoring and foreign exchange markets” (kibritçioğlu, 2000). crises have become even more prevalent as the capital system became more widespread with the effect of the first industrial revolution. this crisis also named as the production crisis in 1825, had a significant adverse impact on great britain. respectively, the crisis in 1836 had included usa in the chain of countries affected whereas the following crisis that occurred in 1847 included almost all of the european countries. as a result of this crisis, production activities were adversely affected within the production industry, consumption levels were reduced and unemployment levels increased rapidly. pursuant to this crisis, another crisis occurred in 1873 affecting austria and germany and continued until 1879. the end of the capitalist era and the start of the imperialist era are also marked with the crisis between 1900-1903. 1929 crisis which has a considerably differentiated scope and impact in comparison to the crises that occurred in the past, is also described as the "great depression". the underlying reason for this crisis was the collapse of the stock exchange and its destructive effects. in order to explain the crisis that occurred during that period, it would be appropriate to elaborate on it by using examples. while the unemployment levels were at 3.2 in 1929, it had escalated to 24.9 in 1932. gross domestic product (gdp) decreased from 103 billion dollars to 56 billion dollars. this crisis impacted upon the entire globe. at the end of world war ii, the crisis that occurred between 1970 and 1980 was the first global crisis witnessed and this ten-year period is characterized as the "lost ten years". during this period, 15 million people were left unemployed and 10 million people had to manage by undertaking short-term, temporary works. during the 1990s and 2000s, numerous crises were witnessed across the globe. the most important of these crises include the following: crises affecting the exchange rate mechanism (erm) in the european monetary system between 1992-1993 tequila crisis that occurred in latin america between 1994-1995 pursuant to the crisis in mexico -currency and banking crisis that took place in 19941995 in turkey financial crisis that started in thailand, indonesia, south korea and malaysia in 1997-1998 and the impacts of which extended to several countries outside the region including other asian countries first and other oecd countries afterwards crises that occurred in russia and brazil in 1998 in parallel to the asian crisis currency and banking crises that occurred in november 2000 and february 2001 in turkey financial crisis that started in 2001 in argentina and caused a deep economic and social collapse with its effects still on-going after the 1980s, crises have occurred consecutively due to the effects of globalization and it has come to such a point that first, second and third crisis models were developed to explain the crises experienced over the last thirty years and scholars had to develop a new model to elucidate this crisis which occurred pursuant to the crisis in 2008. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu the relationship between accounting practices and effects of financial crisis in turkey: a case study on an oil company page |48| emerging markets journal economic crises are classified in two categories as real economy crises and financial industry crises. these two crises also affect different industries. we can list real economy crises as inflation crises, recession crises and unemployment crises. financial crises on the other hand can be categorized as banking, monetary, foreign debt and systemic financial crises. these crises are generally successive. for this reason, they cannot be distinguished from each other with very clear distinctions. financial crises are referred to as the panicking experienced from a financial perspective and the consequences of these panics or the boom of financial prices. financial crises lead to the failure of the financial markets to perform their functions in an effective manner. naturally, severe shrinkages occur in the volume of economic activities. along with the numerous common characteristics of financial crises, they also have distinguishing features. the common point of all financial crises is evident in their cost creating features. the classification of the concept of financial crisis can be described as the following: -currency crisis -banking crisis -foreign debt crisis -systemic financial crisis on the other hand, banking crises are analyzed within the framework of the increase in nonperforming loans, deterioration in bank balances, decrease in the loan demands from the real economy and the shrinkage in commercial loan periods as well as sudden and sharp fluctuations in the securities markets. as the loan periods for the debts owed by commercial banks cannot be extended or as these banks fail to meet the sudden withdrawal requests in demand deposits, liquidity problem occurs and this is followed by their announcement of bankruptcy. the reasons that lead to a banking crisis are diverse. the irresponsible attitudes of the banks, the weakness of the banking system and the fragility of financial markets are among the primary reasons. it is also believed that the currency crises have an impact on banking crises. since the 1950s until the 1960s, banking crises have not been widespread. however, after the 1970s and until the present day, they have started to occur simultaneously with currency crises. for example, currency crises have been witnessed between 1970 and 1985 and during the same period, banking crises have also become more abundant. however, banking crises continue for a longer period and they are more severe compared to currency crises. currency crisis refers to the rapid loss of value in a country's currency. the significant aspect of currency policy is the foreign exchange rate applied by that country. if a country implements the fixed exchange rate system, then a rapid escalation in the devaluation rates of the designated country will be regarded as a crisis, whereas if the flexible exchange rate system is valid, then significant levels of deviation from the market value in the exchange rate will be considered as a crisis. for example frankel, rose and andrew (1996) indicate that a currency crisis occurs when the nominal depreciation rate of the national currency equals 25% and if this depreciation rate shows at least 10% increase compared to the previous period. currency crisis is also described as a foreign exchange crisis. a currency crisis also occurs when there is a sudden movement in foreign exchange rates and a sharp alteration in market movements. a currency crisis takes place especially in fixed foreign exchange systems when the market players suddenly shift their demands from the local currency to the foreign currency assets and the foreign exchange reserves of the central bank are depleted. the most important characteristic of the currency crises is reflected in the destructive impact of the expansion mechanism. for example, it was particularly evident in the most recent asia crisis. the crisis initially started in a single country but afterwards it had significant effects on an important part of southeast asia due to the similar economic structures in the region and the high levels of commercial links. the development and expansion stage in the foreign capital flows towards these countries was followed by very severe and sudden reverse movements. foreign debt crises on the other hand refer to the incapability of a country to pay its foreign debts incurred by the public and/or private sector. it occurs when a country invigorates its domestic product with the foreign debts it receives, loses its capability to pay these foreign debts on a regular basis and announces that it will not be able to pay the principal amount and interests incurred for this debt. foreign debt crises especially occur when the governments encounter problems in debt rollover and finding new foreign loans and as a result, the foreign debt amounts in question are restructured with new payment plans or the obligations are postponed" (turgut, 2007). when the borrowing country cannot pay its debts, the lenders refrain from lending new loans and debt crises occur when they try to recover the debts that they have already given. if the public sector cannot pay the designated debt, then a significant downfall takes place in the private capital inflows and in fact, it can lead to a currency crisis. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu i̇smail erkan çelik emerging markets journal | p a g e |49 systematic financial crises on the other hand encompass currency and banking crises and are defined as significant potential disruptions experienced in the capability of the financial system to perform its fundamental obligations in an efficient manner. moreover, systemic financial crises are described as a shock that causes an interruption in the essential functions of the financial system such as asset valuation, loan allocation and payments. finance markets perform the following functions in an economic system. they steer funds to the decision-making units with productive investment projects effectively and accurately. hence, they share the risks encountered by the investment projects of decisionmaking units and facilitate the flow of funds. moreover, the financial system curtails the transaction and research costs incurred in financial markets and perform the function of ensuring efficient funds allocation. along with this, it furnishes the increase of productivity in real economy and economic growth. naturally, the financial system carries out its functions through financial markets and institutions. for example, the banks experiencing difficulty in repayment or interruptions in repayment, sudden collapses in the securities and the systematic occurrence of these lead to systematic crises. these crises afterwards encompass currency and banking crises. systematic crises that develop due to the designated reasons create an adverse effect on the real economy (output and employment). when there is a systematic disruption, output (production) losses occur in that country, economic losses grow, national income decreases and the country diverges away from economic efficiency. there are also several accounting-based reasons in the occurrence of a financial crisis. when we investigate the accounting-based reasons of a financial crisis, we observe that the accounting based reasons of the crisis stem from abuse and exploitation in accounting. put differently, it originates from the characterization also referred to as "mine fields in accounting". we can briefly list the accounting based reasons as the following: 1. accounting diverging from the primary principles, rules and concepts, 2. inability to achieve full independence in accounting standards and those institutions regulating these standards, 3. creative accounting practices (creative accounting), 4. financial reports with transparency problems, which do not reflect reality, 5. problems with fair value valuation, 6. failures in supervision and misleading auditing reports, 7. diverging away from the concepts of prudence and conservatism, the transactions related to the execution of an enterprise and applications are materialized with the fundamental principles, rules and concepts of the accounting. in case of non-compliance with these principles, rules and concepts, they lead to the occurrence and expansion of global financial crises. it is believed that the failure to comply with accounting principles underpinned the global crisis that took place in 2008. former chairman of türmob masum türker indicated that crises are grounded in non-compliance with accounting and therefore the solution has to be sought in accounting as well (türker, 2009). wrongful accounting practices carried out by those enterprises which announced their bankruptcy are listed below: -one of the fundamental concepts of accounting is social responsibility. however, disregarding the interests of the society in accounting practices and processes, and diverging away from the concept of social responsibility, moving away from the concept of personality when the enterprise's treasury and/or the treasury of the enterprise's owner and/or partners are not separated, alienation from the monetary (money measurement) concept of accounting using differences in foreign exchange rates and arbitrage methods for their own advantage, estrangement from the concept of full explanation (full disclosure) with non-transparent practices, diverging away from the concept of objectivity by being an instrument of the enterprise management's demand to manipulate financial reports, moving forward from the concept of cost base by revealing the assets with the values which do not reflect reality through the employment of market value method, practicing fraud by registering unrealized revenues, accounting practices of bankrupt companies also contradict ethical rules and standards along with the legislative provisions. apart from all these, it is understood that they stem from considerably conscious actions which contradict the interests of the society and general ethics norms. it is observed that several enterprises trick investors, creditors, state and the society through fraudulent financial reporting and lead to crises. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu the relationship between accounting practices and effects of financial crisis in turkey: a case study on an oil company page |50| emerging markets journal small enterprises also generally show their assets and profit less than the actual values; whereas large enterprises present their assets and profits more than the actual values. the objective of small enterprises is to avoid paying taxes or reducing the amount of tax they are required to pay. large enterprises on the other hand, aim to find more funds (loans and capital). large enterprises demonstrate the financial status of the company differently to the public. what is interesting is that, actually all of these firms seem to comply with the accounting standards and legislations. but enterprises perform these contradictory acts through creative accounting practices. auditing institutions, credit and finance corporations as well as credit rating institutions are also involved in these tricks used by the enterprises. for example, the relationship between the fluctuations in the us market and accounting in 2008 caused the interrogation of the accounting institutions and standards pursuant to the global crisis. these kinds of effects or pressures applied to financial institutions such as iasb (international accounting standards board) or fasb (financial accounting standards board). these organizations had also become significant parts of debate. creative accounting, on the other hand, is defined as performing measurements and making presentations using the existing flexibilities in accounting provided that they stay within the legal limits and hence accommodating the priorities of those who prepare these data instead of the requirements of those parties using the accounting information. this practice is generally carried out by enterprises in order to change or conceal unwanted results of financial circumstances and activities. it is also argued that creative accounting practices provide some advantages to firms, such as low financial cost and higher stock (share) values in the market. that is why specific companies are in favor of creative accounting, although it is not a correct action. if we consider it in the short-term, it is true that creative accounting has positive impacts. however, in the longterm, creative accounting causes disadvantageous and difficult situations which are hard to recover. the "misrepresentation" activities of the enterprises willing to use the gaps and flexibility in creative accounting practices lead to the occurrence of the global crises. the enterprises willing to acquire advantages in the shortterm have encountered various problems in the longterm. general motors, america has taken advantage of the options and flexibilities offered by creative accounting practices which completely comply with accounting practices. prior to going bankrupt in 2009, it had used creative account practices and it had announced its loss for 2006 and 2007 as 1 billion usd, which was actually 3 billion in reality. in the same manner, it had announced its loss for 2008 as 16.8 billion usd even though it was actually 30.6 billion. the company had gone bankrupt in the long-term while it aimed to acquire advantages in the short-term. general motors (gm) was re-structured after the 2009 bankrupt and a new gm was formed. although general motors owned 60% of the automobile market share in the us in 1960, this rate was reduced to 25% by 2008. thus, it can be seen how several companies used creative accounting as an instrument of fraudulent financial reporting while financial crisis circumstances were maturing and had inflicted damage in return. auditing on the other hand refers to the investigation of whether financial reports are prepared, shared and reported in accordance with accounting principles, standards and regulations. however, auditing weaknesses occur when the transparency principle is neglected in accounting practices. transparency and auditing weaknesses have inflicted significant damages on the road to a crisis (aysan, 2009). complete success could not be attained in accounting measurement methods. this omission had led to those circumstances where financial assets could not be priced accurately. the fair value approach, on the other hand, originated from the demands of the financial statement users (investors, executives, employees, state, lenders, customers, suppliers and wide masses of public) to reflect the data provided within the financial statements in an accurate manner. the fair value approach has taken the market price as a basis. fair value is defined as the sales value between the bidders (a buyer and a seller) in a mutual negotiation environment. put differently, fair value accounting functions without any problems if the assets are considered with their real prices, however in those situations when the prices regarding the assets cannot be determined accurately in the market, then it leads to facing certain challenges. in a crisis environment, assets and debts were evaluated freely by the companies as designated reliable prices were not present in the market, however this situation led to the further deterioration of the financial crisis. (can, 2010). for example; prior to the global crisis in 2008, fair value approach was employed for subprime valuation. securities predicated on subprime mortgage volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu i̇smail erkan çelik emerging markets journal | p a g e |51 loans were being priced by performing negotiations under ordinary conditions. however, during this crisis period, this pricing method lost its transparent characteristic and started to be corrupted. the use of market prices as a fair value also challenged the performance of valuation in this period where pricing has become harder, liquidity and trust were lost. it is generally acknowledged that the fair value accounting system plays a role in the deepening of this global crisis at the minimum. it is so far discussed how diverging away from and abandonment of certain fundamental accounting concepts affected the crisis. another accounting concept on the other hand is prudence and conservatism. the most recent crisis that occurred also revealed that there was a divergence from the concepts of prudence and conservatism as in the case of other accounting concepts. the concept of prudence and conservatism refers to the ban on the reporting of unrealized revenues and profits and registering these as expenditure while reserving the equivalent amounts for the existing or potential losses. as they object to reflecting the assets and profits more than their actual value, it is characterized as conservative. this accounting concept ensures the permanence of an enterprise. conservatism concept in accounting also refers to accountant being careful, cautious and allocating necessary reserve funds for unexpected situations. as an example, allocating provisions for doubtful receivables is a requirement parallel to the conservatism concept in accounting. thus, divergence from this concept puts the enterprise in a difficult situation. the significance of this concept is particularly recognized during the shrinkage and growth periods (cyclical fluctuations) in the economy. for example, the practices implemented in the us markets during the most recent crisis were related to divergence from the concepts of prudence and conservatism. the companies which move away from these concepts go as far as bankruptcy. well known firms which did not comply with the conservatism concept during the crisis period in the us can be listed as worldcom, enron, global crossing, adelphia and kmart. 2. literature review when we evaluate the reasons for global financial crises from an accounting perspective, we had discussed that these reasons were comprised of exploitation, abuse and frauds in accounting. the research conducted by güler manisalı darman (2004) addresses how certain companies trick every segment (creditors, employees, contractors and the entire society) associated with the investors and themselves by applying tricks and fraudulent practices in accounting. the situation when accounting practices lead to a crisis is referred to as "mine fields in accounting". what are meant by mine fields in accounting is those circumstances that violate accounting rules and principles such as intentional fictive income, boosting losses and profits, concealing debts and falsifying tables. the research carried out by ahmet vecdi can (2010) on the other hand connotes that, the former chairman of türmob masum türker (2009) indicated that the foundation of a crisis has to be sought in noncompliance with accounting principles and the solution could only be found in the accounting itself while making an assessment on the global crisis. we can reinforce the situations where divergence from the main principles and concepts of accounting lead to a crisis with specific examples from real life: worldcom showing 3.8 billion expenses as capital, enron selling its assets to private purpose companies off the balance sheet, boosting the balance sheets of the companies in china by the state prior to privatization and the occurrence of the parmalat scandal (where the debts were concealed, offbalance financing were used and company owners had deposited 500 million dollars in their own private companies). there are several reasons which give rise to financial crises. ahmet gökgöz (2012) had described the extent to which these reasons were accounting based as the following: one of the most important reasons underlying the impact of financial crises on several individuals and states and reaching a global scale is seen as the fraudulent practices of those enterprises conducting business in different parts of the globe, where they used misleading financial reports to trick the users of financial statements worldwide. here the important point is, all of the lies put forth with the financial statements actually comply with accounting legislations, rules and standards. therefore, the financial statements in question are actually able to pass auditing and it is confirmed that they reflect the truth. in this context, these crises are actually referred to as accounting crises. even though it is highlighted that a crisis is accounting based, it would be appropriate to assert that it is actually the enterprise executives and accounting professionals failing to comply with these rules who cause these crises to occur. within the research conducted by ahmet gökgöz (2012), the author designates that the accounting tricks in those companies such as enron, worldcom, adelphia, xerox, tyco and parmalat at the beginning of the 2000s as well as the fraudulent practices of several executives of various enterprises prior to the global crisis volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu the relationship between accounting practices and effects of financial crisis in turkey: a case study on an oil company page |52| emerging markets journal in 2008 led to numerous companies to go bankrupt and several beneficiaries to suffer from losses. according to the studies of neslihan topbaş (2009), the primary objective of the fair value accounting system is to manifest the losses that might arise in case the risks undertaken to ensure income are materialized in the best possible manner and introduce the relevant institution to the market players in accordance with these information. the extreme optimism of lenders, borrowers and investors with regard to the housing market and the affiliated markets and the failure of economic policies, banking regulations, company administrations and similar other regulatory mechanisms to manage this optimism as required had become the main factors in the formation of the crises. the misleading and unreliable characteristic of financial reports along with the problems encountered during the auditing of these reports predominantly led to these crises. in a research conducted by p.j. barrett (2010), it was denoted that along with the misleading financial reports and data manufactured with the use of accounting systems, the misrepresenting auditing reports which confirmed their accuracy and reliability played a significant role in the formation of the crises and therefore, these crises led to an increase in the prevalence of the gap for auditing expectations worldwide and escalated the debates with regard to the auditing profession. pursuant to the crises experienced, auditing institutions started to be questioned. in regards to an article published by the ministry of eu affairs (ab bakanlığı) (2011), this issue is tackled. during the pre-crisis period, the failure to subject the financial system sufficiently to auditing and the delay in adopting preventive measures resulted in the further escalation of the crisis. also, after recovering from the initial shock caused by the crisis, the qualifications and competence of the regulatory and supervisory structures in the industry started to be interrogated. the artificial inflation of financial statements instead of reflecting the facts is considered as a significant transparency problem. these kinds of practices which are not compatible with the concepts of full explanation (full disclosure) and transparency among the primary concepts of accounting are regarded as the most important reasons that generated the crisis. in a report published by the united nations conference on trade and development (unctad) in march 1999: "the failures of the financial institutions and companies in the far east result from the companies which are under the burden of excessive debts, tendency of the private sector to obtain high levels of foreign debt and the omissions in transparency and accountability. the omissions in financial explanations also have a significant share in this. the shortcomings with regard to the rules applied to the statements indirectly contributed to internal auditing problems and the flawed and inappropriate risk management practices of the banks and companies" (unctad, 1999). this problem and statement is also supported with another research. spence (2008) and daştan (2009) underline that the source of the crisis that occurred in the us in 2008 can also be attributed to the problem of transparency. according to this research, "whereas the risk had to be expanded as a result of the inflated and exploding balloon of assets, it was actually extreme transparency problems related to complex bonds and derivatives and the inadequate auditing structure employed to ensure stability, which occurred over time which increased the systematic risk carried by excessive debt." finally, while discussing the accounting based reasons of a crisis, akerlof and romer (1993) who have been awarded with a nobel prize point out that, inadequate accounting systems, weak legal regulations and low levels of fines lead to bankruptcy for profit. another scholar with a nobel prize, stiglitz (2008) stated that "the problems are underpinned by the bad decisions and auditing mistakes of the banks". his statement supported the previous arguments by considering the crises that occurred at different periods as having the same basis. 3. research and methodology the research contains the fundamental data of a mid-size company during the pre-crisis period between 2006 and 2008 and the post-crisis period between 2008 and 2010. for this research, interviews were conducted with the company's accounting officer and certain basic data were obtained. these data include the number of products, number of employees, product distribution and the financial turnover (revenue) of the enterprise prior to and pursuant to the crisis. first of all, it is wise and correct to discuss the management information, mission, vision administration structure and activities of the company that the research is conducted on. the real name of the firm subject to this research is confidential, thus will be indicated as xyz company in the following sections of this article. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu i̇smail erkan çelik emerging markets journal | p a g e |53 the company with trade name xyz was established as a limited liability company in 1991. the company's founding capital was 10.000 tl. the firm had increased its capital to 1.000.000 tl with a capital increase in 2008. in 2010, a capital increase was not observed in the company's owner’s equity. the enterprise has a single headquarters, which is located in istanbul. the company's vision is to develop the product quality and types constantly in order to respond to the customers’ requirements, to work in collaboration with the business partners in order to procure their own products in the most effective and efficient manner, to create a working environment that would maximize the creativity and productivity levels of all of the employees and to ensure the sustainability of environment, to keep the promises given to the customers, business partners and employees, and to comply with business ethics rules at all times. the enterprise has an official organizational diagram as shown below. however, the mentioned organizational diagram is not fully functional. general manager sales and marketing unit accountancy unit foreign trade unit production unit sales and marketing officer accounting officer foreign trade officer production officer sales and marketing representative accounting personnel foreign trade personnel production personnel figure 1. organizational diagram of xyz enterprise xyz is a company that is completely specialized on the petroleum equipment industry. conducting business activities both as a producer and as a distributor company on petroleum equipment which is its main field of activity, xyz has a wide range of products including the infrastructure installations of stations, all of the pumping parts, lpg pump equipment, alternative (cng, hydrogen) pump equipment, cryogenic valves and chemical cleaning products. during the years when it was first founded, xyz manufactured products predominantly for the local market and provided services for the petroleum and lpg industries with regard to pump parts such as hinges, breakaway, flow controls and guns. since 2000, xyz started to conduct business on the infrastructure installations on stations with the important representations it has acquired. owing to the successful applications it has carried out within this field, xyz has become one of the leading companies in the industry and implemented its vision which entailed becoming an "energy company" within the natural gas industry where it was first engaged in 2002. moreover, the company had its production and system quality confirmed after it was certified with an iso 9001 certificate in 2007. in the following sections of this paper, product portfolio of xyz over the years, personnel profile of acc enterprise on a yearly basis, yearly sales turnover of acc, post-crisis product portfolio of xyz, 2006-2008 pre-crisis and 2008-2010 post-crisis product distribution (%) for xyz and post-crisis employee portfolio of xyz are discussed as a part of research methodology. the mentioned data are collected by conducting an interview with xyz firm’s accounting officer. table 1: product portfolio of xyz over the years number (type) of products 2006 2007 2008 1396 1533 1729 as the company expanded its customer portfolio, it has also adopted the policy of expanding its product portfolio. especially in 2007, the company has taken the necessary steps to expand its product portfolio further initiating new product research studies. for this reason, if we were to consider the product portfolio of the company based on the years, while it was 1396 in 2006, we observe that it increased to 1729 in 2008. accounting officer of xyz indicated that, the firm does not have a policy to use excess short-term and long-term bank credits. instead, relying on owner’s equity is a better strategy and priority for xyz. accounting officer of the company stressed that, accounting practice of relying on owner’s equity rather than short-term and long-term bank credits helped the firm to overcome the negative effects of 2008 financial crises. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu the relationship between accounting practices and effects of financial crisis in turkey: a case study on an oil company page |54| emerging markets journal table 2: personnel profile of xyz enterprise on a yearly basis number of employees 2006 2007 2008 33 39 46 while the number of employees was 33 in 2006, it increased consistently until the year 2008. the increase in the number of employees is concerned with the company starting to manufacture a group of products, ensuring proximity to the market and its ability to fulfill customers' demands in due time. during the period prior to the crisis between 2006 and 2008, the company adopted a growth policy which entailed increasing the number of employees in order to expand its product portfolio and its market share as a result. according to the accounting officer interviewed, employee termination is only a solution in the short-run, but it leads to several disadvantages in the long-run. because, employee turnover ratio hurts the reputation of organizations, decreases organizational commitment and increases expenses, in line with the statements of accounting officer. in xyz, employee salaries are paid electronically with eft and no employee receives his/her wage as cash. so, it is a top principle for xyz to pay accurate taxes to the government. also, seniority indemnities are calculated correctly and provisions for employee termination benefits are computed accordingly. thus, xyz firm completely abides to the conservatism concept. accounting officer of xyz underlined the fact that, following and implementing general concepts of accounting helped the firm to protect from undesirable effects of financial crises. table 3: yearly sales turnover of xyz (tl) company annual sales turnover 2006 2007 2008 11,189,09 12,888,747 15,276,165 while the company's yearly sales turnover was 11,189,09 tl in 2006, it gradually increased every year and reached to 15,276,165 tl in 2008. in this context, the strategy which involved product diversification and reaching new markets adopted by the company as its growth policy between the years 2006 and 2008 had a positive impact on sales and sales sum. accounting officer of xyz explained that, ever increasing annual sales turnover of firm (tl) strengthens the financial situation of firm and also empowers the owner’s equity structure. thus, financial risk of xyz is never high and that also helps the company to take advantage of external financing cheaper with better conditions. transparent financial statements of xyz reflect all the accounting indicators accurately. so, according to the opinion of xyz’s accounting officer, correct accounting practices always avoid the negative consequences of difficult situations during financial crises. it is also observed that, the pre-crisis period of 2006-2008 is the period when the company started to grow and secured a place for itself in the market while making an established name for itself. afterwards, the crisis which shook and affected the entire world occurred in 2008. however, when we examine the post-crisis data that we are in possession of, we observe that the company turned this crisis into an opportunity with the successful accounting and financial policies it adopted and had the least amount of loss and actually achieved growth during this period. indicators prove that, the company was only slightly affected from the crisis during the 2009-2010 post-crisis period, but it reached to a certain desired point after a period of maturing. table 4: post-crisis product portfolio of xyz number (type) of products 2008 2009 2010 1729 1468 1672 as it can be understood from the table, the company did not adopt a management approach which is governed by panic in the crisis environment of 2008. even though there was a decrease in the number of products in 2009, it further increased its product range in volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu i̇smail erkan çelik emerging markets journal | p a g e |55 2010 which was growing on a yearly basis since 2006. the company's accounting officer explains the decline witnessed in 2009 as the following: "naturally, we were affected by the crisis period like every other enterprise. however, we experienced this at the minimum level. naturally, the accounting policies and strategies followed by the company had a significant role at this point. for example, product distribution was changed. we started to concentrate more on production pro rata. this was a positive thing for us due to the foreign exchange rates that increased during the crisis period. we were mostly focused on carrying out production ourselves." table 5: 2006 2008 pre-crisis and 2008-2010 postcrisis product distribution (%) for xyz product 2006 2007 2008 2009 2010 self production 13 19 24 31 36 importation 87 81 76 69 64 according to table 5, xyz only produced 13% in 2006 and imported 87% in 2006. this situation improved in 2007 with 19% self production and 81% importation. even during the crisis of 2008, self production increased to 24%, while importation decreased to 76%. in the following year (2009), self production of xyz was 31% and importation was 69%. finally, the most favorable situation was observed in 2010 with 36% self production and 64% importation. table 5 above is an ideal indicator, which shows that xyz firm was not affected by the financial crisis. the firm is actually experiencing a continuous positive trend, because it is now less dependent on importation compared to former years. from an accounting perspective, more self production and less imports help to prevent foreign exchange losses. if borrowing is existent in the case of imports, foreign exchange losses issue becomes more evident. accounting officer of xyz mentioned that, coordination among the accounting department and other departments in a firm such as the production department and marketing department is also crucial to give the correct decision concerning self production or importation. thus, accounting practices are really like a medicine to defend from the unhealthy consequences of financial crises. table 6: post-crisis employee portfolio of xyz number of employees 2008 2009 2010 46 43 49 during crisis periods, austerity measures generally start from the personnel. however, even though the industry that the company is engaged in went through shrinkage during the crisis period, it is seen that xyz did not believe there had to be shrinkage in their own activities. in this context, a significant amount of reduction did not occur in the number of employees. the number of employees was 46 in 2008. after a slight decline in 2009, number of employees started to escalate again in 2010. as part of the exemplary practical research conducted, the company that we carried out the case study on successfully implemented the crisis management method using the right strategies before and after the crisis. the company also altered its product portfolio in order to protect itself from the increases in the costs during the crisis period. at this point, role of accounting in effective crisis management is also observed easily. so, correct accounting practices definitely lower the adverse effects of financial crises. xyz started to perform the manufacture of the products that were advantageous. during the crisis period, even though some of the industrial enterprises were adversely affected, owing to the right steps that xyz developed with regard to sales and collection, it survived through this period with the least amount of loss, thanks to smart accounting practices during financial crises. during the post-crisis period between 2008 and 2010, the company continued to move forward without volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu the relationship between accounting practices and effects of financial crisis in turkey: a case study on an oil company page |56| emerging markets journal making significant changes. the company has acquired efficient and effective progress due to the diversification of the products, efficient cost management and the application of right strategies within the field of production. accounting officer of xyz said that, auditing and internal control applications are also critical accounting components besides standard accounting practices in order to minimize the negative effects of financial crises. especially, the role and function of auditing as well as internal controls can never be neglected in terms of efficient cost management. 4. conclusion and evaluation if we consider the financial crises, we can come across several reasons underlying them. we can provide several examples such as the disruption of macroeconomic equilibriums, the fragility of financial systems, inconsistency between domestic policies and the foreign exchange regime along with accounting principles. the misuse of accounting principles caused the financial crises to lead to even more adverse results. as the companies conceal facts diverging from the concepts of objectivity, consistency, full explanation (full disclosure), conservatism, materiality and substance over form, financial crisis have a deeper impact. also, use of unrealistic financial statements and auditors not complying with accounting ethics for the fulfillment of certain purposes carry crises one step forward. the best explanation that would identify the crisis experienced as an accounting crisis came from akerlof and romer (1993) who were awarded with a nobel prize. they mentioned that, "inadequate accounting systems, weak legal regulations and low levels of fines lead to bankruptcy for profit." naturally, we cannot argue that the crisis is accounting based solely looking at this explanation. however, even it was initially caused by the disruption of macroeconomic equilibriums and the foreign exchange rates and domestic policies, it was further developed with the misuse of accounting principles. if one of the reasons underlying a financial crisis is accounting, then the solution should be sought in accounting as well. in order to prevent all of the accounting practices that would lead to a crisis, accounting rules, regulations, methods and standards can be discussed and certain adjustments can be applied. prior to and pursuant to the financial crisis, company policies are extremely significant for their sustainability. whereas some companies go through this period with the least amount of damage, some companies come to the point of bankruptcy. prior to the global crisis that occurred in 2008, several companies suffered from losses and they even went bankrupt due to the accounting tricks they applied during this period. enron, worldcom, adelphia, xerox, tyco and parmalat and several companies can be given as an example in this regard. the xyz enterprise that we examined in this article ensured progress in a consistent manner during the pre-crisis period of 2006-2008. during these years, the company grew and secured a place for itself in the market. during the crisis period of 2008, it turned the crisis into an opportunity, thanks to the certain accounting policies it followed. even though there was a decline during the first year following the crisis, afterwards the xyz company was able to start recovering. owing to the accounting procedures implemented by it, xyz accomplished to recover from the financial crisis with the least amount of damage during the post-crisis period of 2008-2010. with this study conducted, it is observed that a company can go through a financial crisis period with the least amount of damage by employing the crisis management method and following correct accounting practices prior to and pursuant to the crisis. thus, actually organizations determine their own destinies. some companies panic during crisis periods and adopt flawed accounting policies in line with their own interests, which made them go through difficult processes and bring themselves to the point of bankruptcy. on the other side of the coin, golden firms exist such as the xyz company which implement correct accounting practices and guarantee their financial futures. references ab bakanlığı (2011); avrupa birliği bakanlığı’nın teşkilat ve görevleri hakkında kanun hükmünde kararname; http://www.mevzuat.gov.tr/mevzuatme tin/4.5.634.pdf, sayı:2. akerlof, g. and p.m. romer (1993); looting: the economic underworld of bankruptcy for profit, brookings http://www.mevzuat.gov.tr/mevzuatmetin/4.5.634.pdf http://www.mevzuat.gov.tr/mevzuatmetin/4.5.634.pdf volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu i̇smail erkan çelik emerging markets journal | p a g e |57 papers on economic activity, no.2, 173. aysal, mustafa (2009); küresel ekonomik krizler ve muhasebe standartları, tmud, www.tmud.org.tr/userfiles/file/aysa nsunum.ppt (01.12.2009). barrett, p (2010); performance auditing what value?, public money and management, vol. 30, no: 5, pp. 271 278. can, ahmet vecdi (2010); krizin muhasebesi ve muhasebenin krizi; http://archive.ismmmo.org.tr/docs/mali cozum/97malicozum/2%20ahmet%20v ecdi%20can.pdf, sayı : 97 2010. darman, güler manisalı (2004); uluslararası finansal raporlama standartlarının kurumsal yönetim üzerindeki etkileri; http://www.cgscenter.org/doc/ufrsni nkurumsalyonetimuzerinde etkileri.pdf, 5 kasım 2004. daştan, abdulkadir. (2009); ekonomik kriz dönemlerinde muhasebe bilgi sisteminin i̇şletmelerdeki rolü ve kriz yönetimine katkısı”, muhasebe ve denetime bakış, yıl: 9, sayı: 28 (nisan sayısı), ss. 57-72. delice, güven (2003); fi̇nansal kri̇zler: teori̇k ve tari̇hsel bi̇r perspekti̇f; http://iibf.erciyes.edu.tr/dergi/sayi20/de lice.pdf, erciyes üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi, sayı: 20, ocak-haziran 2003. -s. 5781. durukan, m.banu (2009); finansal kriz ve muhasebe: kim i̇çin muhasebe?; mali ufuklar 45 (temmuz-aralık 2009) : 11-28 frankel jeffrey, a.,rose, andrew k (1996); currency crashes in emerging markets: an empirical treatment; http://web.calstatela.edu/faculty/rcastil/ econ462/frankel.pdf, journal of international economics 41 (1996) 351-366. gökgöz, ahmet (2012); küresel finansal krizin muhasebe temelli nedenleri bağlamında kurumsal yönetim ve muhasebe meslek etiğinin önemi; atatürk üniversitesi i̇ktisadi ve i̇dari bilimler dergisi, cilt: 26, sayı: 3-4, 2012. kibritçioğlu, bengi (2000); finansal krizler, belirleyicileri, öngörülebilirliği ve yayılma etkisi, ankara: hazine müsteşarlığı, yayınlanmamış uzmanlık tezi. köse, h. ömer (2012); küresel krizle mücadelede denetimin önemi ve yüksek denetim kurumlarının rolü; https://earsiv.anadolu.edu.tr/xmlui/bitst ream/handle/11421/145/2012-0307%5b1%5d.pdf?sequence=1 hyperlink , anadolu üniversitesi sosyal bilimler dergisi, cilt/vol.: 12 sayı: 3 (93-108). pusti, müge (2013); krizlerin anatomisi ve türkiye’de 2001-2008 finansalekonomik krizleri üzerine bir i̇nceleme; t.c. atılım üniversitesi sosyal bilimler enstitüsü i̇şletme yönetimi anabilim dalı, ankara, 2013. saçan, erdem (2014); türkiye’de bankacılar açısından gerçeğe uygun değer muhasebesinin yaşanan finansal krizlerdeki rolü; http://archive.ismmmo.org.tr/docs/mali cozum/126malicozum/006_erdem_sa c%c4%9fan.pdf, yıldız teknik üniversitesi, sosyal bilimler enstitüsü, muhasebe finansman doktora programı. sönmez, sinan (2013); ekonomik ve finansal krizler dünyasında kısa bir gezinti; http://ebulten.library.atilim.edu.tr/sayi/ 2013-10?sayfa=3, cumhuriyet gazetesi bilim teknoloji eki, sayı:31, ekim 2013. spence, m. (2008); zor zamanlardan etkin küresel yönetim, küresel kriz ve sonrası, turkishtime, om yayıncılık, i̇stanbul, ss.25-27. stiglitz, j. (2008), “çıkış yolu”, küresel kriz ve sonrası, turkishtime, om yayıncılık, i̇stanbul, ss.5-12. topbaş, neslihan (2009); finansal kriz ortamında bankaların muhasebe sistemlerinde gerçeğe uygun değerleme yönteminin etkileri; http://www.tmud.org.tr/userfiles/file/aysansunum.ppt http://www.tmud.org.tr/userfiles/file/aysansunum.ppt http://archive.ismmmo.org.tr/docs/malicozum/97malicozum/2%20ahmet%20vecdi%20can.pdf http://archive.ismmmo.org.tr/docs/malicozum/97malicozum/2%20ahmet%20vecdi%20can.pdf http://archive.ismmmo.org.tr/docs/malicozum/97malicozum/2%20ahmet%20vecdi%20can.pdf http://www.cgscenter.org/doc/ufrsninkurumsalyonetimuzerindeetkileri.pdf http://www.cgscenter.org/doc/ufrsninkurumsalyonetimuzerindeetkileri.pdf http://www.cgscenter.org/doc/ufrsninkurumsalyonetimuzerindeetkileri.pdf http://iibf.erciyes.edu.tr/dergi/sayi20/delice.pdf http://iibf.erciyes.edu.tr/dergi/sayi20/delice.pdf http://web.calstatela.edu/faculty/rcastil/econ462/frankel.pdf http://web.calstatela.edu/faculty/rcastil/econ462/frankel.pdf https://earsiv.anadolu.edu.tr/xmlui/bitstream/handle/11421/145/2012-03-07%5b1%5d.pdf?sequence=1&isallowed=y https://earsiv.anadolu.edu.tr/xmlui/bitstream/handle/11421/145/2012-03-07%5b1%5d.pdf?sequence=1&isallowed=y https://earsiv.anadolu.edu.tr/xmlui/bitstream/handle/11421/145/2012-03-07%5b1%5d.pdf?sequence=1&isallowed=y https://earsiv.anadolu.edu.tr/xmlui/bitstream/handle/11421/145/2012-03-07%5b1%5d.pdf?sequence=1&isallowed=y http://archive.ismmmo.org.tr/docs/malicozum/126malicozum/006_erdem_sac%c4%9fan.pdf http://archive.ismmmo.org.tr/docs/malicozum/126malicozum/006_erdem_sac%c4%9fan.pdf http://archive.ismmmo.org.tr/docs/malicozum/126malicozum/006_erdem_sac%c4%9fan.pdf http://ebulten.library.atilim.edu.tr/sayi/2013-10?sayfa=3 http://ebulten.library.atilim.edu.tr/sayi/2013-10?sayfa=3 volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.96 | http://emaj.pitt.edu the relationship between accounting practices and effects of financial crisis in turkey: a case study on an oil company page |58| emerging markets journal https://www.tbb.org.tr/dosyalar/arastir ma_ve_raporlar/neslihan.pdf, bankacılar dergisi, sayı 68, 2009. turgut, ahmet (2007); türleri, nedenleri ve göstergeleriyle finansal krizler; http://www.tuhis.org.tr/dergi/cilt20_say i4-5/cilt20_sayi4-5_bolum4.pdf, tühis i̇ş hukuku ve i̇ktisat dergisi, cilt: 20, sayı: 4 5, kasým 2006 / şubat 2007. türker, masum (2009); 24.01.2009 tarihli muhasebe ve finansman derneği olağan kurulu, konuşma notları. unctad (1999); world investment report. yücel, fatih ve kalyoncu,yücel (2010); finansal krizlerin öncü göstergeleri ve ülke ekonomilerini etkileme kanalları:türkiye örneği; http://dergiler.sgb.gov.tr/calismalar/mal iye_dergisi/yayinlar/md/159/fatihy%c 3%9ccel.pdfmaliye dergisi, sayı 159,temmuz-aralık 2010. https://www.tbb.org.tr/dosyalar/arastirma_ve_raporlar/neslihan.pdf https://www.tbb.org.tr/dosyalar/arastirma_ve_raporlar/neslihan.pdf http://www.tuhis.org.tr/dergi/cilt20_sayi4-5/cilt20_sayi4-5_bolum4.pdf http://www.tuhis.org.tr/dergi/cilt20_sayi4-5/cilt20_sayi4-5_bolum4.pdf http://dergiler.sgb.gov.tr/calismalar/maliye_dergisi/yayinlar/md/159/fatihy%c3%9ccel.pdf http://dergiler.sgb.gov.tr/calismalar/maliye_dergisi/yayinlar/md/159/fatihy%c3%9ccel.pdf http://dergiler.sgb.gov.tr/calismalar/maliye_dergisi/yayinlar/md/159/fatihy%c3%9ccel.pdf volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu joint-stock corporation under turkish commercial law and the doctrine of increasing shareholder commitments berna tepe doctor, attorney at law registered by the istanbul bar association | e-mail: berntep@ymail.com volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu | abstract the principle that the shareholder of a joint-stock company is under the single obligation of paying in his contribution to the equity-capital is in force within the framework of the 2011turkish commercial code. it appears as if the reinforced principle of “single obligation “critically challenges the relevance of the formerly settled norm of subjecting increase in shareholders’ commitments to unanimous consent of all shareholders. that being said, since the turkish commercial code also contains deviations to the single obligation principle in addition to the fact that the notion of increase is shareholders’ commitments was not made entirely obsolete from the turkish commercial code, the doctrine for subjecting increases in shareholders’ commitments to the general assembly’s unanimous vote is to an extent still relevant within the context of the 2011 turkish commercial code. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu berna tepe emerging markets journal | p a g e |79 joint-stock corporation under turkish commercial law and the doctrine of increasing shareholder commitments berna tepe introduction1 under turkish law, commercial companies are comprised of a variety of commercially oriented entities: corporate partnerships, collective partnership and partnership in commendam, in addition to corporate capital companies, joint-stock corporation, limited liability corporation, partnership in commendam by shares in addition to the distinct cooperative partnership. the scope of the present article is related to joint-stock corporations for which the liability of each partner is, in principle, restricted with the amount of his concrete contribution for the constitution of capital and vis-à-vis the relevant company. each company regulated under the commercial code has legal capacity as an entity. for a corporation to enjoy its legal capacity distinct from the person(s) who provided for the constitution of the corporation, the corporate “will” needs to form ideally as a result of the deliberations within and by resolutions of the person(s) who have, as a rule, provided the equity-capital of the corporation, i.e., the general assembly of shareholders. corporate logic is based on investment for future gain and dependency among its various organs rather than immediate actualization of shareholders’ own interests. for the actualization of company’s economic objects such as to serve the interests of the shareholders in the long run, codependency exists between the company and the shareholder(s). rule of majority reigns for the corporation to run rather than the independent will and intention of each shareholder which is relevant and “presumed” rather for creation of contracts. according to the civil code, article 2, everyone should abide by norms of integrity when enjoying rights and discharging obligations while the legal order is not to protect abuse of a right. as such, a legal entity’s enjoyment of its legal capacity by its machinations must end, the farthest, where another person starts. it is the shareholder who has expressed his will in order to establish a legal entity to perform commercial activity within the framework of an 1 all legislative clarifying statements referred to in the present article are accessible via www.basbakanlik.gov.tr. opted type of corporation. on the other hand, such will has been expressed for predictable if not specific terms of activity which must be maintained with a degree of legal security. based on the foregoing, a condition which has prior importance is therefore whether the obligation favors the interests of the corporation for which the shareholder had legitimately expressed his will at the first place by participating to the corporation, as a reflection of the affectio societatis element of the memorandum of association. under turkish law, three elements which distinguish the formation of a company from the formation of a regular contract, from an assembly of goods or an assembly of persons by law, constitute of (i) the contract, (ii) the persons, and (iii) the capital. among them, “the contract’s being a component of the company emphasizes that the company is a product of a consensual agreement”2. by rule, a type of consideration must be articulated for the formation of a contract, yet consideration is simply an object of exchange between the parties and therefore differs from the notion of capital. however, there is the characteristic of affectio societatis which further distinguishes a company from other contractual formations and also influences how the capital must be perceived: affectio societatis, “in its broader sense, expresses the intention of each shareholder to actively participate to the accomplishment of a company’s purpose”3. the corporation is not a representative of the shareholder who is a person separate from the corporation as well as from other shareholders. it is further noteworthy that, as an organ of a corporate company, the general assembly is composed of shareholders, each having a mindset on how the purpose and the objectives of the company within the framework of the company’s purpose can be achieved while each considering also his own legitimate interests, accordingly asserting an individual will. such distinction between the corporate interests and individual interests becomes very apparent, for instance, within the context of repurchase of own shares by a company; at a final analysis, “when a company repurchases its shares, it transfers company assets (the purchase price) to the members from whom the shares are purchased”4. therefore, is the shareholder really expected to act purely to the benefit of the shareholding separate from the shareholder’s other legitimate interests? taking the shareholder out of the equation for decisions which can however be imposed on any shareholder is neither fair nor realistic since such would keep the company too 2 domaniç, hayri “anonim şirketler hukuku ve uygulaması” , temel yayınları, 1988, p.19. 3 domaniç, ibid., p.27. 4 cahn, a. and donald, d. “comparative company law”, cambridge university press, 2010, p. 241. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu joint-stock corporation under turkish commercial law and the doctrine of increasing shareholder commitments page |80| emerging markets journal independent from the shareholder’s will and circle of interests. obligations which are sufficiently specific to which the shareholder has individually committed do not cause a concern since they are in conformity with the contractual logic. if “the shareholder is constrained to transfer a value above the amount he has committed to pay, or perform an act which has not been expected at the outset”5, if “a decision of the company obliges the shareholder to make an expense or discharge an obligation which was not present in the original agreements”6, then there is a clear case of increase in shareholder obligations. such occurrences generally arise due to reasons favoring the corporation or third parties. although constraining the shareholder to obligations in an unagreed manner, not all cases may be that clear as explained. some vices thrive in the absence of any detection. therefore, framing certain obligations as shareholder commitments initially serves concerns of legal security. secondly, the shareholder’s will should be in line with the obligations which such shareholding is conducive to, that is in a predictable and measurable manner to the extent any contractual obligation must be while the principle of equality among shareholders under the same circumstances must also be satisfied. in some countries, the doctrine of increasing shareholder commitments by unanimous vote, i.e. the requirement to seek unanimous vote of the general assembly, thereby consent of each shareholder whose commitments increase by various transactions of the company. in this article, it is analyzed to which extent this doctrine is relevant to joint-stock corporations under 2011 turkish commercial code. i. commitments of shareholders the classification adopted by the 2011 turkish commercial code for personal commitments prioritize commitments of financial nature. 1. primary commitments a primary commitment of the shareholder consists of obligations and commitments which are to enable the formation of a company’s capital: it is asserted in a provision common to all types of corporate companies of the 2011 turkish commercial code that “each shareholder is liable vis-à-vis the company for the 5 houpin and bosvieux, “traité général théorique et pratique des sociétés civiles et commerciales” vol. ii, n° 1262, cited in rizzo, fabrice “le principe d'intangibilité des engagements des associés” revue trimestrielle de droit commercial, 2000, p. 27 ff. 6 hamel, lagarde and jauffret “traité de droit commercial” vol. i, 1980, n° 697, cited in rizzo, fabrice “le principe d'intangibilité des engagements des associés” revuetrimestrielle de droit commercial, 2000, p. 27 ff. amount of capital it has undertaken in the memorandum of association duly draft and signed”7. the commitments that a shareholder can make in the form of obligations to the company for constitution of capital depend on the type of company. registration of a commercial corporation by the commercial registry as well as acquiring title over its shares require the deposit of liquid or non-liquid assets. according to the 2011 turkish commercial code, article 581 and article 342, liquidity and transferability determine the types of assets which can be deposited as capital: commercial prestige, labor or other types of services cannot be deposited as capital to a limited liability corporation or a corporate capital company in a consecutive manner; such do not even qualify as an asset for the formation of capital. as far as corporate capital companies are concerned, for both the limited liability corporation and the jointstock corporation, the major commitment of a shareholder vis-à-vis the company is the obligation to extend capital. 2. auxiliary commitments generally speaking, there are commitments other than the obligation for the constitution of capital of a corporation. especially when managing the capital of the company, the “will” of a corporation that is formed in an organizational manner is also inclined to ask for commitment, impose conditions or simply become part of situations which favorably or adversely acts upon shareholders’ interests. financial commitments other than paying in capital can however be considered as commitments independent from the constitution of the capital. on the other hand, legal security requires that if a financial commitment is primarily of a contractual nature, it should abide by norms concerning contracts. 8 7 2011 turkish commercial code, article 128, para. 1 8 legislative clarifying statement of the 2011 turkish commercial code, article 480, alinea (1), available at www.basbakanlik.gov.tr reads as: madde 480 birinci fıkra: 6762 sayılı kanunun m. 405 (1)'in bazı değişikliklerle yerini alan ve tek borç ilkesine açıkça yer veren bu hüküm, anonim şirketlerde, tasarı ile ona dayalı esas sözleşme düzenini egemen kılmayı, borçlar hukuku sözleş meleriyle oluşturulabilecek yan düzenin esas sözleşme düzenini ortadan kaldırmasına sınırsız bir şekilde izin vermemeyi amaçlamaktadır. "paysahipleri sözleşmesi" veya "ortaklar sözleşmesi" diye türkçeye çevrilen, ancak dünyada "shareholders agreement" terimi ile adlandırılan, bazen de "joint-venture sözleşmesi" başlığını taşıyan, son yılların dünya çapında en "populer" atipik sözleşmesi olan bu sözleşme, yabancı öğretide kullanılan terim ile esas sözleşme düzeni yanında, çoğu kez ona ve kanuna hükmeden veya ikisini de birden bertaraf eden bir "yan düzen" yaratmıştır. ulusal hukukun uygun görmediği ve bu sebeple emredici hükümlerle koruma altına aldığı hemen hemen her menfaat veya hak (çoğu kez) yan düzenle ya zedelenmekte ya da sınırlandırılmaktadır. bu yan düzen güçlüye, hukukunu getirmek, hakimiyet kurmak, istediği an istediği fiyatla karşı volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu berna tepe emerging markets journal | p a g e |81 a difference between the limited liability corporation and the joint-stock corporation in terms of the explicit wording is that supplementary financial commitments are enabled by the 2011 turkish commercial code, article 573, para.2 relevant to the limited liability corporation.9 the component of person is much less prevalent as far as a joint-stock corporation is concerned such that a commitment is attached to the shareholding rather than to a certain person even when he has a single unit of shareholding at the company. therefore, the principle of single obligation of the shareholder was introduced by the 2011 turkish commercial code. the said principle is explicitly articulated in its article 480, para.1 such that each shareholder is under the single commitment to contribute by capital for his shareholding. by barring the imposition of any obligation on him other than for his shareholding and, if applicable, any premium above the nominal value of the relevant shares, does the legislature mean to set the financial boundary of the shareholder of the typical jointstock company? the provision where the single obligation principle is asserted explicitly concerns the memorandum of association. that being said, according to the legislative clarifying statement of the specific provision, the underlying primary aim is upholding the memorandum of association as the constitution of the joint-stock corporation. the legislature sounds anxious not to legally acknowledge agreements in the 2011 turkish commercial code since such agreements frequently thrive along the memorandums of association. on the other hand, even such aim as stated in the legislative clarifying statement is explicitly limited to not permit that contractual obligations and rights by means of agreements of which the formation is subject to the code of obligations override the clauses of the memorandum of association regulated by law. it is noteworthy that the 2011 turkish commercial code introduced a restrictive norm which is significant tarafın paylarını almak veya paylarını satmak hakkını sağlamaktadır. veto hakları da bu düzenin önemli silahıdır. kara avrupası hukukları olabildiği o--randa bu yan düzeni sınırlamaya çaba harcamaktadır. tek borç ilkesi, hükümde "esas sözleşmeyle pay sahibine, pay bedelini veya payın itibarî değerini aşan primi ifa dışında borç yükletilemez" şeklinde ifade olunmuştur. bu hüküm, yan düzenin esas sözleşmeyle düzenlenmesine engel olduğu kadar emredici niteliği sebebiyle yan düzenin bazı hükümlerini sorgulanabilir konuma getirmektedir. hüküm başka kanunlara engel olucu bir aracı içermemekte, bu görevi sınırlı bir şekilde 340 ıncı maddenin son cümlesi üstlenmiş bulunmaktadır. i̇lke yönünden 6762 sayılı kanunun 405 inci maddesinin birinci fıkrasının ifadesinde değişiklik yapılmıştır. mevcut metin "fazla bir şey ödemeye esas mukavele ile dahi mecbur tutulamaz" diy erek ödeme sözcüğünü vurgulamıştı. bu da, türk öğretisinde, hükmün sermaye ve prim borcu dışındaki diğer para borçlarını kapsamadığı görüşünün ileri sürülmesine sebep olmuştu. onun için 480 inci maddede "borç yükletilemez" ifadesi bilinerek kullanılmıştır. hükümdeki borç sözcüğü geniş anlam taşımaktadır. 9 cf. can, m. e. “limited şirket ortağının borçları ve yükümlülükleri”, gazi university, gazi üniversitesi hukuk fakültesi dergisi, 2011/4, p. 3. and relevant, also to the single obligation principle: according to its article 340, the memorandum of association of a joint-stock cannot deviate from the provisions specified in relation to this type of company unless such a deviation is explicitly permitted by the commercial code. moreover, provisions of another (statutory) act permissive of complementary clauses within a memorandum of association would be applicable within the framework of and limited to such an act. the rule of the 2011 turkish commercial code sets forth a rule of interpretation and is meant to debar loopholes in the statutory regulation of joint-stock corporations10 and control the previously assumed liberty to get commitments from shareholders by various means, e.g. a shareholders’ agreement parallel to a memorandum of association. moreover, the legislator asserts in the legislative clarifying statement that the notion of “obligation” of the single obligation principle is to be conceived in its broad sense11. given the restrictive norm of interpretation, the provisions of the code related to the joint-stock corporations are to be shed a brighter light on in order to detect any explicit wording which enables deviation from the single obligation principle. indeed, within the context of conditions of amending the memorandum of association, the 2011 turkish commercial code, article 421, para.2, alinea (a) provides that a decision which imposes a liability to balance a negative account [or auxiliary liabilities/ (commitments)] requires unanimous vote of all shareholders at the general assembly. according to the scholarly opinion, the provision enables deviation from the single obligation principle only for the stated aim of balancing a negative account12. nevertheless if that deviation calls for a change, it is possible by amending the memorandum of association by unanimous consent of all shareholders. further, underlying the 2011 turkish commercial code, it is stated in various provisions’ legislative clarifying statements, viz. those of article 391, article 421, para.2, article 476, para. 2, that balancing a joint-stock corporation’s negative account constitutes an exception as a supplemental financial liability to be assumed by the shareholders while requiring unanimous consent of the shareholders. to an extent, 2011 turkish commercial code has dispensed with the notion of increase of shareholder commitments by adopting the principle of single 10 cf. r. karasu, “6102 sayılı türk ticaret kanunu’na geçen anonim şirketlerde emredici hükümler i̇lkesi”, 6102 sayılı yeni türk ticaret kanunu’nu beklerken” university of marmara, faculty of law, hukuk araştırmaları dergisi, 2012, special issue of the proceedings held between 10-12 may 2012, vol. 18, no.2, p. 311 ff. 11 legislative clarifying statement of the 2011 turkish commercial code, article 480, alinea (1) . 12 poroy, r, tekinalp, t, and çamoğlu, e. “ortaklıklar ve kooperatif hukuku”, vedat kitapçılık, 2014, p. 607. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu joint-stock corporation under turkish commercial law and the doctrine of increasing shareholder commitments page |82| emerging markets journal obligation for the shareholder as far as joint-stock corporations are concerned. if attention is be paid to swiss law, a clause providing an auxiliary commitment need to be individually analyzed to see whether the clause imposes an obvious financial burden to the shareholder. 13 however, not all clauses are explicit as concerns the possible financial burden for a shareholder. the criteria of “obvious financial burden” has been used however in order to not permit occurrences where the financial loss for a shareholder was highly obvious and measurable rather than cases where the financial loss is not predictably measurable at the first place. for instance, getting a commitment from the shareholder as to subject his transfer of shares to a much lesser value than the market value is in fact a disguised restriction or even a prohibition on transferring shares. i.b. other commitments of non-monetary type as a very general norm, commitments focused on performance can be made as to constitute capital of a company, as such enabling a shareholder to discharge its obligation to acquire shares by way of performing some acts. indeed, performance commitments can be of commercial value for those who benefit even if they do not constitute assets as such. as a matter of fact, such is enabled by 2011 turkish commercial code, article 127 which states to be a provision applicable to all types of corporations unless provided otherwise by law14. therefore, as a general rule, commitments for personal performance can be exchanged for title to corporate partnership. the related obligation is the performance of some act by the shareholder. such acts are generally active labor or active management which are supposed to benefit the corporation. as a matter of fact, it has been an item of which the evaluation has been generally difficult or impossible to be represented and entered into corporate accounts in monetary terms. nevertheless, the turkish court of cassation pronounced in 1968 that a corporation is entitled to claim from the shareholder to perform his obligation.15 unless the act cannot be performed due to reasons where the shareholder cannot be held liable for nonperformance16, then at worst, damages can be claimed from the shareholder. therefore, even if the performance of such act has not been represented in monetary terms in the company accounts, the performance of an act still has a value as participation to the capital. if a personal performance commitment has been made by a shareholder, his shareholding is the 13 tekinalp et alias, ibid, p. 607. 14 for exceptions, see the subtitle below in the text of the present article. 15 decision of the court of cassation (commercial) dated 26 november 1968, numbered 1968/6301. 16 see, nomer, haluk “borçlar hukuku – genel hükümler”, beta basım a.ş., 2013, pp. 265 – 270. direct product of his commitment to perform unless there is a substantial reason not to reframe a commitment of personal performance as participation to the capital. however, not all corporation types enable a shareholder to participate to the capital with personal performance. indeed, 2011 turkish commercial code, article 581, article 342 and article 307 consecutively excludes acts of service and personal labor from the capital of a limited liability corporation, the capital of a joint-stock corporation and the capital extended by a partner whose liability is limited in a corporate partnership in commendam. a further difference is introduced between the limited liability corporation and the joint-stock corporation: according to its explicit wording, auxiliary commitments are enabled by the 2011 turkish commercial code, article 573, para. 2 for the limited liability corporation while the joint-stock corporation is to be run primarily in accordance with the “principle” of single obligation assumed by the shareholder. when the provision is construed as a principle, it calls for interpretation whether the principle is relevant only to financial commitments vis-à-vis the joint-stock corporation, or the “single obligation” principle is also meant to debar any other commitments especially if they are not monetary: the legislator asserts that “the notion of obligation of the single obligation principle is to be conceived in its broad sense”17 . shareholder commitments are framed by the 2011 code of commerce as commitments for capital requirement, primary commitments and secondary commitments. the (i) commitment for capital requirement is well structured because the single obligation principle is primarily applicable to the constitution of capital; (ii) other primary commitments can arise only to balance a negative company account, therefore for the maintenance of capital; (iii) secondary commitments are not explicitly enumerated by law. the 2011 turkish commercial code, article 421, para.2, alinea (a) is relevant in the present context since it enables imposition of an auxiliary liability to balance a negative account of the joint-stock corporation, that is by the unanimous vote of all shareholders at the general assembly. since in various provisions’ legislative clarifying statements, viz. those of article 391, article 421, para.2, article 476, para. 2, it is clarified that balancing a joint-stock corporation’s negative account and other commitments related to non-monetary performance constitutes an exceptional financial liability to be assumed by the shareholders. 17 legislative clarifying statement of the 2011 turkish commercial code, article 480, alinea (1). volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu berna tepe emerging markets journal | p a g e |83 if the courts are to construe clauses as to whether they survive the single obligation principle, due regard is be paid to the implied financial burden on the shareholder if the clause is complied with. “options” are put under focus from this regard: an option is a unilateral declaration of intention which gives the right to make an agreement or entitles the holder of the option to prolong an agreement18. call and put options create legally qualified new occurrences initiated by unilateral declarations of intention extended by the holders of such options. the contract will be formed not before a declaration stemming from a call or put option, but once it has been received by the other party. making an agreement by unilateral declaration of intention means that it does not matter whether other party accepts this declaration or not. the contract is formed upon the receipt of due notification. gained more weight upon the introduction of the 2011 turkish commercial code, the scholarly opinion to the effect that while a call option is not viable due to the weakness of any related negotiations, the right of first offer survives the single obligation principle.19 the same scholarly works suggest that under swiss law, such clauses are tested by the implied financial burden if the commitment was abided by. 20 from this perspective, there is no reason why should not be compatible with the single obligation principle, innocent options like the tagalong right of a minority shareholder who is vested with the right to join the deal and sell their stake at the same terms availed by the majority shareholder who is the initial seller. we believe it is an artificial attempt to reframe obligations arising out of options as shareholder commitments. since the legislature justifies introduction of certain provisions in the 2011 turkish commercial code by the existence of critical risks which arise out of contractual agreements among the shareholders or between the shareholder(s) and the corporation, then such suggests the requirement to acknowledge that the legislature has taken on a regulatory attitude even for joint-stock corporations which are not publicly listed. the courts’ judgment cannot be independent from such an attitude. it is pertinent to simply emphasize that law cannot protect abuse of any right. the shareholder’s will should be in line with the implications of commitments for the shareholder and it should be taken into account in 18 buz, vedat “medeni hukukta yenilik doğuran haklar”, yetkin yayınları, 2005, p. 160 ff. 19 poroy, r, tekinalp, t, and çamoğlu, e. “ortaklıklar ve kooperatif hukuku”, vedat kitapçılık, 2014, p. 607. cf. bahtiyar, mehmet “anonim ortaklıkta payların üçüncü kişilere satılması durumunda diğer ortaklara önalım hakkı tanıyan anasözleşme hükümleri ve etkileri”, banka ve ticaret hukuku araştırma enstitüsü, bati̇der, vol. xxi, no. 2, 2001, pp. 94 – 95. 20 poroy, r, tekinalp, t, and çamoğlu, e. “ortaklıklar ve kooperatif hukuku”, vedat kitapçılık, 2014, p. 607. the case of a contract, the law of parties meant to be formed is based on the shareholding. such contractual obligations which aim to construct the law of the parties although they directly relate to a regulated area of law like the transferability of shares can only form and be maintained in a healthy manner if the liabilities can be assessed in a predictably measurable manner. further, it should be possible to assert that there the contractual obligation is based on free will which have formed in a sufficiently concrete manner at the first place. moreover, it is stated in the 2011 turkish commercial code, article 480, para. (4) that in case transfer of shares is subjected to the approval of the joint-stock corporation, then in addition to the obligation to extend capital, commitments can be obtained from shareholders which require them to perform various acts in a periodical (/repetitive) manner provided that the subjectmatter is not monetary. as concerns the subject-matter of such a commitment, the subject-matter being non-monetary calls for interpretation. under both legal terminology as well as financial terminology, when the subject-matter is “nonmonetary”, such excludes cash and not other rights, values or assets. secondly, it is noteworthy that under turkish law, (contractual) obligations are being classified in the doctrine also from the perspective of the frequency of performance involved in order to discharge an obligation: obligations of instant performance, periodical performance and continuous performance constitute the types of obligations from this aspect21. other than those specified in the 2011 turkish commercial code, by enabling certain obligations of periodical performance in its article 480, para. (4), the stated provision excludes other obligations of instant performance or continuous performance even if their subject-matters are nonmonetary. obligations based on continuous performance are based on various degrees of trust between its parties. therefore in principle, the legislature maintains the previous understanding that a joint-stock corporation is not based on or meant to be conducive to an understanding where trust characterizes the relationship among the shareholders, or that between the corporation and the shareholder(s). 22 the nature and scope of such commitments of periodical performance which are enabled by article 480, para. (4) can be written on the back of the share certificates or receipts as applicable. 21 see, eren, firket “borçlar hukuku – genel hükümler”, beta a.ş., 2008, pp. 99 – 100. 22 see, hamamcıoğlu, esra “anonim şirketlerde anasözleşme değişikliği”, phd thesis in private law defended at the marmara university, 2011, p. 28, accessible via www.yok.gov.tr. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu joint-stock corporation under turkish commercial law and the doctrine of increasing shareholder commitments page |84| emerging markets journal finally, such legislative stance does not rule out regulation of critical risk by law or contract when it is the minority shareholder’s legitimate interest which is at stake. indeed, the 2011 turkish commercial code enables by its article 531 the minority shareholder(s) to request termination of the company due to rightful/legitimate reasons which can be conducive to such termination, transfer of shares or other suitable and acceptable solution by the decision of the court. although of ex post effect, such statutory regulation of minority shareholder’s risk is especially meaningful at situations where transfer of shares is subjected to the approval of the corporation. proscribing the shareholders from competing with the company is a shareholder commitment which can be analyzed in this vein. rules as concerns noncompetition of shareholders with the company are contained in the 2011 turkish commercial code, but vary depending on the type of company. prohibition to compete may (further) be regulated within the memorandum of association of the relevant company. if no norm is specified in relation to a type of company, and if compatible, the 2011 code of obligations, article 626 applies such that the shareholders cannot perform acts favorable to others while impeding the company’s achievement of its objective or otherwise to the detriment of the company. it cannot be said that competitive activities or exercise of separate activities in the same sector as the company at which one is a shareholder are necessarily to the company’s detriment. it calls for clarification albeit basic that the specified prohibition to compete is an extension of the duty of loyalty or is simply out of integrity. according to a legislative clarifying statement in relation to the 2011 turkish commercial code which is noteworthy also in the present context, although the notion of shareholder loyalty neighbors the prohibition to compete, it is distinct from it.23 from the perspective of a corporation’s interests, organizational sophistication of the company as a distinct entity, the shareholder’s access to information, increased involvement in the company’s business and right of vote are considered to justify a prohibition to compete. that being said, when it is a joint-stock corporation which is concerned, the general principle of “single obligation” of shareholders is deemed relevant also in terms of nonfinancial commitments; authors who conceive the term “obligation” in its broad sense and not just financial such as to validate the principle’s restrictive effect on all types of commitments, emphasize that nonfinancial commitments could rather be sustained, if applicable, as 23 legislative clarifying statement for the 2011 turkish commercial code, article 613 re duty of loyalty (and proscription to compete) of shareholders of limited liability corporations. contractual obligations24. if it can be deduced from the “single obligation” principle that a shareholder of a jointstock corporation cannot be prohibited from competing with the company, than we assume that the prohibition to compete is a type of shareholder commitment which cannot be sustained even if contractually. indeed, such commitments are among those occurrences which have provoked the regulatory attitude of the legislature and need to be weighed by courts also against principles and other rights which such commitments conflict with, in addition to taking into account the resulting financial burden for the shareholder. however such commitments cannot find a favorable justification at the 2011 turkish commercial code as far as joint-stock corporations are concerned. at situations where an obligation which consists of a periodical performance is enabled, obtaining a new performance commitment is conducive to following the procedure for amending the memorandum of association. ii. commitments for execution of preexisting commitments given the single obligation principle as well as article 421, para.2, alinea (a) and article 480, para. 4 of the 2011 turkish commercial code about other commitments, specifying each commitment is an ideal for the soundness of not only the original general commitment, but also that of an act in order to implement a clause or decision binding on the shareholder. the doctrine subjecting increase in shareholders’ commitments to unanimous vote also emphasizes seeking shareholder consent for such acts of implementation would hamper the efficient functioning of a company.25 such concern challenges any view that the obligations to which the shareholder has committed must been predictably measurable. iii. amending the memorandum of association within the context of conditions of amending the memorandum of association, the 2011 turkish commercial code, article 421, para.2, alinea (a) provides that a decision which imposes a liability or auxiliary liabilities/commitments to balance a negative account requires unanimous vote of all shareholders at 24 poroy, r, tekinalp, t, and çamoğlu, e. “ortaklıklar ve kooperatif hukuku”, vedat kitapçılık, 2014, p.529. 25 monsèrié-bon, marie-hélène, “encore l'augmentation des engagements des associés”, revue trimestrielle de droit commercial, dalloz, 2004, p. 551. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu berna tepe emerging markets journal | p a g e |85 the general assembly. given the single obligation principle, the provision requires that in order to impose a liability to a shareholder as to balance a negative company, such should be with the decision of the general assembly which could decide favorably only with unanimous vote. when the provision is interpreted in a teleological manner, the purpose is to subject such impositions of liability to the favorable vote of all shareholders during the general assembly of the jointstock corporation. iv. mergers: issues of increase in shareholder commitments when a merger is considered to require amendment of the relevant corporations’ memorandum of association, such would be subject to the statutory and regulatory provisions regulating amendment of a corporation’s memorandum of association. however, the 2011 turkish commercial code regulates merger operations in a separate manner and distinct from the provisions related to amending memorandum of association. vi.a. compatibility between types of corporations the legislative clarifying statement of the 2011 turkish commercial code, article 137 is expressive rather about the limitation on liabilities vis-à-vis the creditors as an underlying reason behind the compatibility required between various types of companies that is by especially taking into account the form of the acquiring or the final emerging company. a merger can realize by way of acquisition or by way of establishing a new incorporation. the 2011 turkish commercial code, article 137 ff specifies compatible types of companies which can merge. the table below shows the companies compatible for merger, which can be analyzed in three main categories such as corporate capital companies, corporate partnerships and cooperative partnership. this classification is significant and an accepted one in the literature. table 1: companies compatible for merger in essence, while introducing a distinction between corporate capital companies and corporate partnerships in its article 124, para. 2, the 2011 turkish commercial code does not allow for corporate partnerships to be the acquiring party when merging with a type of corporation other than that of such intended acquirer. that being said, the classification serves to determine whether the element of “persons” or rather the element of “capital” characterizes the delimitation of the shareholders’ obligations and rights related to the corporation.26 at corporate partnerships, there is always a partner liable vis-à-vis the creditors of the company in an unlimited manner while shareholders of a corporate capital company do not accommodate such.27 the 2011 turkish 26 see köse, ibid, p. 882 27 for collective corporations, see 2011 turkish commercial code, article 211 according to which partners are liable vis-à-vis the creditors of the corporation in an unlimited manner. for corporate partnerships in commendam, the 2011 turkish commercial code, article 304 and article 319 are relevant in this context; individuals may become partners to the latter with unlimited liability vis-à-vis the creditors of the corporation in addition to any other person whose corporate partnership should be conducive to liability vis-à-vis the companies compatible for merger corporate capital companies with corporate capital companies cooperative partnership corporate partnerships (except if it is the acquirer) corporate partnerships with corporate partnerships corporate capital companies (except if it is being acquired) cooperative partnership (except if it is being acquired) cooperative partnership with a cooperative partnership corporate capital company corporate partnership (except if it is the acquirer) volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu joint-stock corporation under turkish commercial law and the doctrine of increasing shareholder commitments page |86| emerging markets journal commercial code permits rather the corporate capital company to be the acquirer if a merger also involves a corporate partnership. such principle is introduced thanks to another principle in its article 158, the code prevents release of those shareholders from liability from an obligation of the acquired partnership vis-à-vis the partnership’s creditor for a period of three years starting from the date by which the decision for merger was publicly announced. in essence, the point of focus for compatibility in mergers is the shareholder rather than the creditor. it can be deduced that the limitation on shareholder commitments from the perspective of the shareholder has been influential on the legislature’s perspective for enabled mergers. iv. b. rule of majority for mergers the 2011 turkish commercial code permits for a merger operation to be conducive to supplementary financial obligations, other personal performance commitments, personal duties or other obligations for the shareholders by the will of the merging corporations or due to the variation in the type of company merged into; according to the commercial code, article 147, alinea 1(g) and (h), such duties should be made explicit in the merger report the draft of which is requisite. even such merger report can be dispensed with under certain conditions sought by law. the merger needs to be approved by the general assembly of the merging corporations unless the acquirer already holds a qualified majority of the other corporation’s shares. for approval of the merger, the general assembly quora sought for equity-capital companies vary. for a limited liability corporation, the quorum sought is three-fourths of the shareholders which should be representative of three-fourths of the equitycapital. apart from the limited liability corporation, as concerns the other two types of corporate capital company, viz. the joint-stock corporation or corporate partnership in commendam by shares, a quorum of threefourths is sought for the general assembly to approve the merger which should be representative of the majority of the actual or issued equity-capital as applicable. the 2011 turkish commercial code specifies that, the merger agreement “may” provide for a remunerated optout of the relevant company being subjected to merger. moreover, it is explicitly permitted that the merger agreement provides only for remunerated opt-out28. that creditors upto the amount he has participated to the equitycapital. 28 “opt-out” is specified in 2011 turkish commercial code, article 141. being said, a provision for remunerated opt-out should be voted separately as to seek a quorum of ninety percent of the votes existing at a corporate capital company, or the unanimous vote of the shareholders vested with voting rights at a corporate partnership as applicable29. iv.c. simplified procedure for mergers a point in legislation where the notion of increasing shareholder commitments has been held in consideration is when introducing a simplified procedure applicable to mergers. only if recourse can be made to the simplified procedure for mergers, then it is not necessary to submit the merger agreement and other documentation to the general assembly. 2011 turkish commercial code, article 155, a merger can be effected by simplified procedure if the acquiring corporation owns all of the tobe-acquired company’s shares vested with voting rights. even if the acquirer owns not all, but at least ninety-five percent of the shares vested with voting rights, recourse to the simplified procedure is possible provided that the merger would not be conducive to any supplementary monetary liability, personal performance obligation or personal responsibility against the shareholder(s) holding the remainder. therefore, the individual consent of such shareholders is sought to deviate from the full procedure for mergers according to which the merger agreement was to be vote by the general assembly. iv.d. requisite general assembly quorum for a decision on merger as a rule, decisions of mergers need to be taken at the general assemblies of the involved companies after works involved in order to realize the merger. as concerns joint-stock companies whose shares are not listed on the stock-exchange markets, the decision quorum sought for the general assembly is three-fourths of those present at the assembly provided that such quorum represents the majority of the equity-capital or of the issued capital as applicable. therefore, unless more than a quarter of those present at the general assembly opposes the merger, shareholder(s) representing the majority of the capital can issue a decision favorable to the merger. the merger of a joint-stock corporation into a limited liability corporation is conducive to a regime which is not covered by the single obligation principle applicable to joint-stock corporations. indeed, pursuant to the 2011 turkish commercial code, article 151, para.4., when a joint-stock corporation is to be acquired by a limited liability company and if the merger is conducive to or increases auxiliary commitments or personal performance commitments, then the merger should be 29 2011 turkish commercial code, article 151, para.5, volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu berna tepe emerging markets journal | p a g e |87 approved by unanimous vote of the relevant general assembly. such requirement is parallel to the doctrine of increase of shareholders commitments. v. recourse to the judiciary for violation a general assembly decision can contravene the principles or other norms concerning shareholder commitments by failing to satisfy procedural requirements, the quorum sought or due to its content. v.a. challenging a general assembly decision a.1. action to have a general assembly decision rescinded 2011 turkish commercial code provides that a general assembly decision in violation of statutory norms, or the memorandum of association, and especially a decision not observing norms of integrity can be rescinded by a request to the commercial court. 2011 turkish commercial code, article 446 is worded as to entitle shareholders, the board of directors and members of the board of directors in an individual manner. (1) such a shareholder who can ask for rescission should be in a position to either (i) prove that their interest in such a result as requested is not only legitimate, but also they have opposed to the decision in the general assembly, or (ii) justify that he’s entitled to initiate an action by asserting that failures to comply with certain procedural rules are (at least) among those factors which enabled such a decision to be taken. the provision’s wording reads such that a shareholder cannot avail of this course of action if he simply did not or could not oppose the decision except if a procedural failure was influential in enabling the decision to being taken; (2) also the board of of directors is entitled to initiate an action for rescission in its capacity as an organ of the corporation; (3) even a member of the board of directors can lodge for the rescission of such a general assembly decision if he would be vulnerable to a risk of being held liable for executing the relevant decision. different from requests for rendering a general assembly decision null and void, action for rescission should be initiated within a term of three months starting from the date by which the decision was issued. a.2. action to render a general assembly decision null and void a novelty of the 2011 turkish commercial code is the provision that a general assembly decision can be declared null and void, that is acknowledging the invalidity of a decision, in addition to situations where a general assembly is rescinded. taking into account rather the “content” of the decision, a general assembly decision can be declared to be null and void according to article 447 if the decision restricts a shareholder’s right which stems from the law or contravenes the main structural features of joint-stock corporations. v.b. comparison of the two types of actions against a general assembly decision despite the substantive and procedural differences between rescission of a general assembly decision and declaring it null and void, the 2011 turkish commercial code regulates common points of these actions. the 2011 turkish commercial code specifically provides certain interim measures upon pleadings that is while hearing a case for rescission of a general assembly decision, or to declare it null and void: (i) the board of directors is required to duly announce the pleadings and the date of hearing, as such especially have that information announced on the internet site of the relevant company; (ii) after hearing the board of directors on the matter, the court may – in the interim rule for suspense of the relevant decision; (iii) the court may order the plaintiff to deposit a caution for an eventual loss of the relevant company to arise due to the proceedings. if the court orders deposit of a caution upon the defendant’s request, the court is to decide on the type and amount of the caution. different from grounds for rescission however, grounds for declaring a general assembly decision null and void stems from concerns of public order. within the context of the present subject analyzed, it is noteworthy that according to the doctrine subjecting increase of shareholders commitments to unanimous vote, “in order to sue for having such a general assembly decision null and void, it is not necessary to have voted against it”30; such approach is valid if the single obligation principle is considered not to override, but to be taken in conjunction with the doctrine in a manner as to form a main structural feature of the joint-stock company constituting a norm of public order. finally, whether for rescission or declaring a general assembly decision null and void, a favorable court ruling would be effective with regard to all shareholders and not just those persons who have initiated the action. 30 saintourens, bernard “l'annulation, à la demande d'un associé, d'une décision d'assemblée emportant augmentation des engagements des associés votée à l'unanimité”, revue des sociétés 2004 p. 97. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu joint-stock corporation under turkish commercial law and the doctrine of increasing shareholder commitments page |88| emerging markets journal v.c. challenging the validity of a resolution of the board of directors another possibility is that a resolution of the board of directors contravenes the principles or other norms concerning shareholder commitments by failing to observe especially the separation of functions or due to the content of the resolution. c.1. action for rescission of a resolution at a private joint-stock corporation, if the board of directors has been authorized to increase the equitycapital of the company up to the registered amount of equity-capital, the 2011 turkish commercial code, article 460, para.1 enables the board to decide for increasing the equity-capital in accordance with the code and within the limits of its power set forth by the company’s memorandum of association. as such, for the board of directors to issue shares for a value above the nominal value or restrict the existing shareholders’ rights to acquire new shares, it is required that the board’s authority is provided by the memorandum of association. in case of failure to observe the said rules, 2011 turkish commercial code, article 460, para. 5 permit recourse to the court aiming at rescission of such a board resolution. by explicit reference of the code, its provisions from article 448 to 451 relevant to the rescission of a general assembly decision applicable to joint-stock corporations are applicable also in respect of the rescission of such a resolution of the board of directors. c.2. action to render a resolution null and void the 2011 turkish commercial code, article 391 enables the competent court to “declare” a resolution of the board of directors null and void “particularly” for lack of conformity with mandatory provisions and for lack of conformity with main principles in respect of the functioning of a joint-stock corporation. such main principles include acting in accordance with the main structure of a joint-stock corporation as well as separation of functions among the company’s bodies. conclusion the relevance of the doctrine of increasing shareholder commitments by unanimous consent of shareholders was critically weakened in the 2011 turkish commercial code owing to the reinforcement of the single obligation for the shareholder as a principle as far as joint-stock corporations are concerned. the legislature rather emphasizes other principles as genuineness of capital, principle of single shareholder obligation and maintenance of capital which moreover figure as structural features of the joint-stock corporation. nevertheless, due to the deviations from the single obligation principle, the doctrine concerning increase in shareholder commitments is not entirely overridden. for instance, the notion of increase of shareholder commitments is preserved with respect to mergers absorbing a joint-stock corporation. further, the distinction introduced by the referred doctrine in france as concerns the difference between reduction of rights and increase in shareholder commitments can be considered pertinent within the 2011 turkish commercial code: if a shareholder right or interest is reduced or not sustained, per se, such does not translate to an obligation for the shareholder, therefore not by itself challenging the single obligation principle. we exposed certain normative as well as theoretical grounds for the referred doctrine to be upheld in conjunction with the principle of single obligation. finally, such analysis is meant to support resolution of conflicts in a healthy manner rather than trying to construe the 2011 turkish commercial code in a manner totally detached from the past case-law arising from the referred doctrine when relevant. references bahtiyar, mehmet “anonim ortaklıkta payların üçüncü kişilere satılması durumunda diğer ortaklara önalım hakkı tanıyan anasözleşme hükümleri ve etkileri”, banka ve ticaret hukuku araştırma enstitüsü, bati̇der, vol. xxi, no. 2, 2001, pp. 83-127. cahn, a. and donald, d. “comparative company law”, cambridge university press, 2010. domaniç, hayri “anonim şirketler hukuku ve uygulaması” , temel yayınları, 1988. eren, fikret “borçlar hukuku – genel hükümler”, beta basım a.ş., 2008. volume 5 no 2 (2015) | issn 2158-8708 (online) | doi 10.5195/emaj.2015.85 | http://emaj.pitt.edu berna tepe emerging markets journal | p a g e |89 european parliament, “rights and obligations of shareholders: national regimes and proposed instruments at eu level for improving legal efficiency” may 2012, accessible via http://www.europarl.europa.eu hamamcıoğlu, esra “anonim şirketlerde anasözleşme değişikliği”, phd thesis defended at marmara university, 2011, accessible via www.yok.gov.tr hamel, lagarde and jauffret, “traité de droit commercial”, dalloz, 1980. karasu, rauf “6102 sayılı türk ticaret kanunu’na göre anonim şirketlerde emredici hükümler i̇lkesi”, 6102 sayılı yeni türk ticaret kanunu’nu beklerken” university of marmara, faculty of law, hukuk araştırmaları dergisi, 2012, special issue of the proceedings held between 10-12 may 2012, vol. 18, no.2, pp. 311332. köse, levent “türk anonim ortaklıklar hukukunda sözü edilen tek borç i̇lkesi ile doktrin ve tasarının i̇lkeye bakışı”, i̇stanbul barosu dergisi, 2010/2, pp. 882 – 885. monsèrié-bon, marie-hélène, “encore l'augmentation des engagements des associés”, revue trimestrielle de droit commercial, dalloz, 2004 p. 551. nomer, haluk “borçlar hukuku – genel hükümler”, beta basım a.ş., 2013. petit and reinhard “augmentation des engagements des actionnaires”, revue trimestrielle de droit commercial, 1996, p. 487. poroy, r, tekinalp, t, and çamoğlu, e. “ortaklıklar ve kooperatif hukuku”, vedat kitapçılık, 2014. rizzo, fabrice “le principe d'intangibilité des engagements des associés”, revue trimestrielle de droit commercial, dalloz, 2000, p. 27. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu corporate entrepreneurship and manufacturing firms’ performance benneth uchenna eze hallmark university, nigeria | beneze7@gmail.com abstract the study evaluates the effect of corporate entrepreneurship (measured by innovation, proactiveness, risk-taking, strategic renewal and corporate venturing) on the non-financial performance of manufacturing firms in nigeria (measured by market share and employees satisfaction). the study employed survey research design, through the administration of structured questionnaire to management staff of eight manufacturing firms in nigeria. the findings revealed that innovation, risk taking, proactiveness, strategic renewal and corporate venturing are all significantly related with manufacturing firms’ non financial performance. it can therefore be concluded that corporate entrepreneurship (ce) elements (risk-taking, innovation, corporate venturing, proactiveness and strategic renewal) enhance manufacturing firms’ non-financial performance (market share and employees’ satisfaction). it is recommended that manufacturing firms should employ ce elements towards the enhancement of their non-financial performance. keywords: corporate entrepreneurship, manufacturing firms, non-financial performance, innovation, proactiveness, risk-taking, strategic renewal, corporate venturing new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.146 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:beneze7@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.146 | http://emaj.pitt.edu corporate entrepreneurship and manufacturing firms’ performance page |12| emerging markets journal corporate entrepreneurship and manufacturing firms’ performance benneth uchenna eze 1. introduction the importance of the manufacturing sector of nigeria economy cannot be overemphasized. the manufacturing sector adds value to the overall economic growth, creates more jobs than any other sector (world economic forum, 2013). however, the manufacturing sector in nigeria is plagued by some challenges, among which are: increasing cost of production, emanating from increased cost of energy and increasing cost of imported raw material, reliance on inadequate and poor public infrastructure, as well as the depreciation of the local currency (naira) (akinmulegun & oluwole, 2014). firms have employed various conceptual elements to enhance their performance. one of such conceptual elements is corporate entrepreneurship (ce), which refers to the entrepreneurial activities of corporate organizations and its components. these include: risktaking, innovation, proactiveness, corporate venturing and strategic renewal. studies have shown that ce positively and significantly affects firm’s performance (daryani and karimi, 2017; jancenelle et al., 2017; prange and pinho, 2017; abosede, fayose and eze, 2018). although, most of the studies employed financial performance measures; the effect of ce on the nonfinancial performance of the manufacturing firms in nigeria appears not to have been fully explored. the few studies on the subject matter in nigeria focused on how ce has impacted manufacturing firms’ financial performance. ibrahim and lloyd (2011) opine that high performance on non-financial performance measures tend to enhance the future financial performance of firms. in this way, non-financial performance measures can lead to an enhancement in financial performance measures. for instance, an increase in market share (which is a non-financial measure of performance) tends to increase revenue and profitability (which is a financial performance indicator). similarly, an increase in employees’ satisfaction level (which is a non-financial performance measure) tends to prompt employees to put in more effort, which can lead to more sales revenue for such firms. in addressing this research gap, this study examines the effect of ce (measured by risk-taking, proactiveness, innovation, strategic renewal and corporate venturing) on the non-financial performance (measured employee’s satisfaction and market share) of manufacturing firms in nigeria. the objective of the study is to examine the effects of innovation, risk-taking, proactiveness, strategic renewal and corporate venturing on the market share and employee’s satisfaction level of manufacturing firms in nigeria. the study was divided into five sections: section one introduces the subject matter. it presents the problem statement (based on the relevant literature and with references to the literature), the research gap and the objectives of the study. section two presents a review of literature. section three presents the research methodology employed for this study. section four presents the research findings and discussion of the findings. section five provides the conclusion and recommendations of the study. finally, section six presents suggestions for future studies. 2. literature review the manufacturing sector has become increasingly important as the driver of economic growth in developed, emerging and developing economies (oburota and ifere, 2017). considering the enormous role that the manufacturing sector is expected to play in the industrialization of the nigerian economy, the sector seems not to be contributing much to the economic growth of nigeria. according to central bank of nigeria (cbn) (2012), the contribution of the manufacturing sector in nigeria to the nations’ gdp is relatively low. the low contribution of the manufacturing sector to the nation’s gdp is as a result of numerous challenges confronting the sector. these challenges include: lack of infrastructural facilities like good road network, functional transportation system (especially rail transportation), high cost of imported raw materials (due to the devaluation of naira and high import duties), high cost of power (due to the nation’s epileptic power supply that has led manufacturers to seek alternative source of power at high cost). the concept of ce has evolved over time. early research on ce focused on the development of entrepreneurship within existing firms and venture teams (hill and hlavacek, 1972; peterson and berger, 1972; hanan, 1976). in the 1980’s, researchers conceptualized ce as relating to entrepreneurial activities, aimed at developing value creating innovative actions, which entail the commitment of resources and approval of an organization (schollhammer, 1982; burgelman, 1984; pinchott, 1985; kuratko and montagno,1989). contemporary studies have seen the linkage of ce to firms’ international performance (abosede, fayose and eze, 2018), as well as firms financial performance (daryani and karimi, 2017; jancenelle et al., 2017). wolcot and lippitz (2007) posit that ce refers to a process, through which teams within existing business entity develop and manage a new business that is separate from the parent firm, but leverages the parent’s assets, market position, capabilities or other resources. thornberry (2003) opines that ce is also responsible for stimulating innovation within the firm through the evaluation of potentially new opportunities, resource acquisition, execution, exploitation and commercialization of the new products or services. for this study, ce is viewed as the entrepreneurial activities of business entities, which involve the innovative, proactive, risk-taking, strategic renewal and corporate venturing activities of business entities. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.146 | http://emaj.pitt.edu benneth uchenna eze emerging markets journal | p a g e |13 miller and friesen (1982) measured ce by employing the following constructs: proactiveness, innovation and risk taking. zahra (1995) highlights three components of ce, innovation, strategic renewal, and corporate venturing. in this case, innovation entails firms’ commitment to the introduction of new products, process and market. venturing implies the creation of new business and strategic renewal refers to the combinations of resources towards wealth creation (zahra, 1995). risk taking involves taking bold steps, by entering into the uncertain business environment and borrowing heavily. zahra and garvis (2000) opine that risk taking is a firm’s disposition to embark on innovative projects irrespective of how uncertain such business activities are. proactiveness reveals a firm’s quest for business opportunities and an emphasis on being among the early movers to employ innovativeness in its industry (rauch et al., 2009). proactiveness is a futuristic and opportunity-seeking perspective typified by product introduction ahead of the competitors and acting in expectation of future demand. wiklund (1999) posits that proactiveness gives firms the ability to introduce new products or services to the market ahead of its competitors, which is also a source of competitive advantage. some scholars have examined how firms can enhance their performance by employing corporate entrepreneurship elements. adele (2015) posits that ce tends to enhance manufacturing firms’ financial performance in nigeria. oyedokun (2015) posits that ce enhances the dynamic capabilities of pharmaceutical firms in nigeria. prange and pinho (2017) found that innovation enhances the performance of small and medium sized enterprises (smes). in a similar study, daryani and karimi (2017) equally found that ce significantly influences the performance of smes in iran. jancelle et al. (2017) found that ce elements, risk-taking and innovativeness positively and significantly affect firms’ performance. abosede, fayose and eze (2018) found that ce enhances the international performance of banks in nigeria. the theory underpinning this study is the benneth theory of corporate entrepreneurship. the theory assumes that there are only five elements of corporate entrepreneurship, which are risk taking, innovation, proactiveness, corporate venturing and strategic renewal. the theory postulates that corporate entrepreneurial activities of firms tend to enhance their performance as well as their international expansion. this theory emerges from models specified by abosede, oladimeji and eze (2017); oladimeji, abosede and eze (2017); abosede, fayose and eze (2018). the models were used to test the effects of innovation on the internationalization of banks; corporate entrepreneurship on the performance of service firms; corporate entrepreneurship on the international performance of banks. these studies found that corporate entrepreneurship elements have a combined effect on firms’ performance, internationalization and international performance. the theory was employed by oladimeji, eze and adebayo (in press); eze (in press) to examine the effects of strategic renewal and corporate venturing on the internationalization of nigerian banks as well as risk taking and proactiveness on the internationalization of nigerian banks. 3. data and methodology survey research design was employed for the study, through the administration of structured questionnaire to management staff of eight manufacturing firms in nigeria. these firms cut across the following sub-sectors of the manufacturing sector: fast moving consumers goods sub-sector, beverages sub-sector, chemical and allied products sub-sector and pharmaceutical manufacturers. two manufacturing firms were purposively selected from each of the four sub-sectors. the eight manufacturing firms used for this study are: dangote sugar plc, honeywell flour mills plc, berger paint plc, president paint plc, emzor pharmaceutical, may & baker plc, 7 up bottling company plc and nigeria bottling company plc. according to national bureau of statistics (2014), the manufacturing sectors employs 2, 368, 514 people, which constitute the population for this study. considering yamane (1968), based on sample size determination formula at 95 % confidence interval and 5 degree of error, a sample size of 400 was derived. wellstructured questionnaire on a nine-point likert scale ranging from 1 (minimum) to 9 (maximum) was administered to the targeted respondents. 400 copies of questionnaire were administered. however, 298 copies of the questionnaire were returned and found useable, which represents 74.5 % return rate. the instrument (questionnaire) was validated, using content validity. the validity of the instrument was tested using content validity index (cvi) by making use of four independent evaluators (four academics). each of the independent evaluators rated the questions on a two point rating scale of ‘relevant’ (r) and ‘not relevant’ (nr). the content validity index was obtained by employing the cvi formula: cvi = n/n where; n= total number of items in the instrument n= numbers of items rated as relevant. the cvi gave a value of 0.7890, which indicated that the instrument is valid. the cronbach alpha was employed to test the reliability of the instrument through a pilot study. the instruments were administered twice within an interval of two weeks and the results of the first and second pilot studies were correlated and a cronbach alpha of 0.7703, 0.8911, 0.9021, 0.8934, 0.8822, 0.7912 and 0.8524 were obtained for innovation, risk taking, proactiveness, strategic renewal, corporate venturing, employee’s satisfaction and market share respectively. nunnally (1978) posits that the acceptable reliability level is an alpha coefficient greater than 0.7. therefore, the instrument is reliable. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.146 | http://emaj.pitt.edu corporate entrepreneurship and manufacturing firms’ performance page |14| emerging markets journal statement of hypothesis: ho1: innovation has no significant effect on the nonfinancial performance of manufacturing firms in nigeria. ho2: proactiveness does not have a significant effect on the non-financial performance of manufacturing firms in nigeria. ho3: risk taking has no significant effect on the non-financial performance of manufacturing firms in nigeria. ho4: strategic renewal does not significantly affect the non-financial performance of manufacturing firms in nigeria. ho5: corporate venturing does not have a significant effect on the non-financial performance of manufacturing firms in nigeria. ho6: combined corporate entrepreneurship elements do not have significant effect on the non-financial performance of manufacturing firms in nigeria. model specification: the theory underpinning the model specification for this study is benneth theory of corporate entrepreneurship. the theory is relevant to this study, because it captures all the variables employed for this study (proactiveness, strategic renewal, innovation, risk taking, corporate venturing and firm’s performance). the model specification is stated below: ) nonfin where; nonfin represents non-financial performance β 0 is the constant term β1, β2, β3, β4, β5 are the coefficients of the estimator. β1, β2, β3, β4, β5 > 0 inv= innovation pr= proactiveness rt= risk taking sr= strategic renewal cv= corporate venturing is the error term the apriori expectation: it is expected that innovation, proactiveness, risk taking, strategic renewal and corporate venturing will all have a positive effect on the non-financial performance of manufacturing firms; hence the parameters of innovation, proactiveness, risk taking, strategic renewal and corporate venturing should all have a positive sign. structural equation models (sem) was used to test whether there is a measurable relationship between corporate entrepreneurship and manufacturing firms’ performance, with the aid of linear structural equations (lisrel) software. 4. empirical findings and discussion table 1: independent and dependent variables independent variables dependent variables employees satisfaction market share innovation 196* * f:16.34 9 p= 000 r2: 0.4957 .124* f: 51,205 p= 000 r2: 0.023 risk taking 198** f:6.944 p= 000 r2: 0.4231 .374* * f:51.20 5 p= 000 r2: 0.3974 proactivenes s .723** f:52.45 p= 000 r2: 0.388 .374* * f:44.56 2 p= 000 r2: 0.3974 strategic renewal .666** f: 18.421 p= 000 r2: 0.3012 .411* * f: 33.541 p= 000 r2: 0.2541 corporate venturing .567** f:25. 864 p= 000 r2: 0.419 387* f: 42.554 p= 000 r2: 0.6812 all of the paths were freely estimated, and error variances were constrained to one, which is the program default. the proposed structural equation model achieved a good fit (χ2 = 459.93, df = 296, p < 0.00; gfi = 0.93, ifi = 0.96, cfi = 0.98, rmsea = 0.091). the findings revealed that innovation, risk taking, proactiveness, strategic renewal and corporate venturing are all significantly related with manufacturing firms’ employees’ satisfaction and the enhancement of their market share. from the p-values associated with the coefficients, there is empirical evidence for rejecting the statistical hypotheses of nullity of the coefficients associated with the relationships between corporate entrepreneurship elements and manufacturing firms’ nonfinancial performance. innovation (p<0.05), risk-taking (p<0.05), proactiveness (p<0.05), strategic renewal (p<0.05) and corporate venturing (p<0.05). therefore, we can confirm the existence of these relationships and should reject the null hypothesis (h0) and accept the alternative hypothesis (ha). the path coefficients are reported in figure 1. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.146 | http://emaj.pitt.edu benneth uchenna eze emerging markets journal | p a g e |15 figure 1. path coefficients the estimated values of the coefficients of the structural equations provide relevant information about the ways in which corporate entrepreneurship elements affect manufacturing firms’ performance. the result reveals that risk taking is the main element of corporate entrepreneurship driving manufacturing firms’ performance. the path analysis also shows that the corporate entrepreneurship elements play a more significant role in determining the market share of manufacturing firms than its employees’ satisfaction. 5. conclusion and recommendations the study evaluates the effect of corporate entrepreneurship (measured by innovation, proactiveness, risk-taking, strategic renewal and corporate venturing) on the non-financial performance of manufacturing firms in nigeria (measured by market share and employees satisfaction), using survey research design. the findings revealed that innovation, risk taking, proactiveness, strategic renewal and corporate venturing are all significantly related with manufacturing firms’ nonfinancial performance (employees’ satisfaction and market share). the path-analysis revealed that risk taking has the highest effect on the non-financial performance of manufacturing firms in nigeria, while innovation, corporate venturing, proactiveness and strategic renewal have the second, third, fourth and fifth highest effects respectively. furthermore, the path analysis also revealed that corporate entrepreneurship elements play a more significant role in determining the market share of manufacturing firms than its employees’ satisfaction. it can therefore be concluded that ce elements (risk-taking, innovation, corporate venturing, proactiveness and strategic renewal) enhance manufacturing firms’ non-financial performance (market share and employees’ satisfaction). this is consistent with the study by adele (2015), who studied the effect of ce on manufacturing firms’ performance in nigeria and found that ce significantly affects manufacturing firms’ performance. but adele (2015) focused majorly on financial performance measures. it is also consistent with the study by abosede, fayose and eze (2018) that studied the effect of ce on the international performance of banks in nigeria and found that ce significantly affects banks international performance. it is recommended that manufacturing firms should employ ce elements towards the enhancement of their non-financial performance. manufacturing firms should display a risk-tolerant posture towards performance enhancement. the managerial act of focusing on only ventures with expected return that are certain negatively affects firms’ performance, in contrast to taking bold steps by entering the uncertain business environment (eze, 2018; lumpkin and dess, 1996). manufacturing firms should also strive to enhance their innovativeness, through the development of creative process and product as well as the creation of new market or the expansion of existing market. strategic change, through the overall reengineering of the firm and taking advantage of business opportunities by venturing corporately are effective at this point. 6. suggestions for further studies this study only employed non-financial performance measures. however, further studies can be conducted using a combination of financial and nonfinancial performance measures like profitability, revenue, customers’ satisfaction, efficiency, effectiveness and productivity. further studies can also be conducted using interview, as this tends to yield more information from the respondents. references abosede, a.j., fayose, j., and eze, b.u. (2018). corporate entrepreneurship and international performance of banks in nigeria. journal of economics and management, 32(2), 5-17. abosede, a.j., oladimeji, m.s., and eze, b.u. (2017, november). innovation and internationalization of banks in nigeria. paper presented at the lagos state university international conference of business administration, lagos, nigeria. adele, h. a. (2015). corporate entrepreneurship as prerequisite for corporate financial performance of public liability companies: a study of selected manufacturing firms in nigeria. international journal of economic development research and investment, 6(3), 118. akinmulegun, s.o. and oluwole, f.o. (2014). an assessment of the nigerian manufacturing sector in the era of globalization. american journal of social and management sciences, 5(1), 27-32. burgelman, r. a. (1984). designs for corporate entrepreneurship in established firms. california management review, 26(3), 154– 166. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.146 | http://emaj.pitt.edu corporate entrepreneurship and manufacturing firms’ performance page |16| emerging markets journal central bank of nigeria (2012). statistical bulletin. retrieved from www.cbn.gov.ng. daryani, m.a., and karimi, a. (2017). effect of corporate entrepreneurship on firm performance in iranian asmes: the mediating role of knowledge creation and learning orientation. journal of agricultural science and technology, 19(2), 261-277. eze, b.u. (in press). risk-taking, proactiveness and internationalization of nigerian deposit money banks. izvestiya journal of varna university of economic. gunday, g., ulusoy, g., kilic, k., and alpkan, l. (2011). effects of innovation types on firms’ performance. middle east journal of scientific research, 10(101), 662-667. hanan,m. (1976). venturing corporations-think small to stay strong. harvard business review, 54(3), 139–148. hill, r. m., and hlavacek, j. d. (1972). the venture team: a new concept in marketing organizations. journal of marketing, 36(1), 44–50. jancenelle, v.e., storrud-barnes, s., and javalgi, r.g. (2017). corporate entrepreneurship and market performance: a content analysis of earnings conference calls. management research review, 40 (3), 352-367. jennings, d. f., and young, d. m. (1990). an empirical comparison between objective and subjective measures of the product innovation domain of corporate entrepreneurship. entrepreneurship theory and practice, 15(1), 53–66. kuratko, d. f., and montagno, r. v. (1989). the intrapreneurial spirit. training and development journal, 43(10), 83–87. kuratko, d. f., montagno, r. v., & hornsby, j. s. (1990). developing an entrepreneurial assessment instrument for an effective corporate entrepreneurial environment. strategic management journal, 11, 49–58. laleye, m. (2003). public enterprises. in l. adamolekun (ed.), public administration in africa, (pp. 2848), abuja, spectrum books. miller, d., and friesen, p. (1982). innovation in conservative and entrepreneurial firms: two models of strategic momentum. strategic management journal. oburota, c.s., and ifere, e.o. (2017). manufacturing subsector and economic growth in nigeria. british journal of economics, management and trade, 17(3), 1-9. oke, a. (2015). the impact of innovation performance. international journal of innovation in smes, 5(1), 13-25. oladimeji, m.s., abosede, a.j., and eze, b.u. (2017, november). corporate entrepreneurship and service firms’ performance in nigeria. paper presented at the lagos state university international conference of business administration, lagos, nigeria. oladimeji, m.s., eze, b.u., and adebayo, a.a. (in press). strategic renewal, corporate venturing and internationalization of banks in nigeria. lapai journal of management sciences. oyedokun, a.j. (2015). corporate entrepreneurship and dynamic capabilities in selected pharmaceutical firms in nigeria, international journal of management, 6(9), 121-135. peterson, r., and berger, d. (1972). entrepreneurship in organizations. administrative science quarterly, 16, 97–106. pinchott, g. (1985). intrapreneurship. new york: harper & row. prange, c., and pinho, j.c. (2017). how personal and organizational drivers impact on sme internationalizational performance: the mediating role of organization innovation. international business review. rauch, a., wiklund, j., lumpkin, g., and frese, m. (2009). entrepreneurial orientation and business performance: an assessment of past research and suggestions for the future. entrepreneurship theory and practice, 33(3), 761–787. sathe, v. (1989). fostering entrepreneurship in large diversified firm. organizational dynamics, 18(1), 20–32. schollhammer, h. (1982). internal corporate entrepreneurship. in c. kent, d. sexton, & k. vesper (eds.), encyclopedia of entrepreneurship. englewood cliffs: prenticehall. thornberry, n.e. (2003). corporate entrepreneurship: teaching managers to be entrepreneurs. journal of management development, 22(4), 329-344. wiklund, j. (1999). the sustainability of entrepreneurial orientation-performance relationship. entrepreneurship theory and practice, 24(1), 37-48. wolcot, r.c., & lippitz, m.j. (2007). the four models of corporate entrepreneurship. mit sloan management review, 49(1), 221-229. http://www.emeraldinsight.com/author/jancenelle%2c+vivien+e http://www.emeraldinsight.com/author/storrud-barnes%2c+susan http://www.emeraldinsight.com/author/javalgi%2c+rajshekhar+raj+g volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.146 | http://emaj.pitt.edu benneth uchenna eze emerging markets journal | p a g e |17 world economic forum (2013). manufacturing sector adds value to economic growth and creates job. india: press trust. yamane, t. (1967). statistics: an introductory analysis, 2nd edition, new york: harper and row. zahra, s. a. (1991). predictors and financial outcomes of corporate entrepreneurship: an exploratory study. journal of business venturing, 6(3), 259–286. zahra, s.a. (1995). corporate entrepreneurship and financial performance: the case of management leveraged buyouts. journal of business venturing, 10(3), 225-247. zahra, s. a. and garvis, d. m. (2000). international corporate entrepreneurship and firm performance: the moderating effect of international environment hostility, journal of business venturing, 15(2), 469-492. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu okun’s law and long term co-integration analysis for oecd countries (1987-2012) bilal kargı aksaray university | bilalkargi@gmail.com abstract even though, there are so many so long discussions on the relation between population increase and economic growth, today, general opinion tends to believe that there is a direct relation between population increase and economic growth. this opinion is supported by some empirical studies. despite an economical growth caused by directly with population growth, it is known that there is a reverse relation between unemployment and growth known as okun’s law. this relation, suggesting that every 1 point decrease in unemployment induces a 3 point increase in growth, is tested for many countries. in this study, this hypothesis of okun is examined and it is found to be true for selected 23 countries, even with the difference in coefficients. at the same time, long term relation between growth and unemployment is tested with the use of time series analysis and long term relation is found for 14 countries. additionally, tests done for all 34 oecd countries showed that reversed relation between unemployment and growth is valid and they are co-integrated in long run. in this study, countries are categorized according to growth rate as “low”, “normal” and “high” and a consistent unemployment rate for countries with high growth rate could not be seen. in the case of countries with lowest growth rate, generalization that they have quite high unemployment rate can be made. jel classification: o40, o57, j64. keywords: economic growth, oecd countries, unemployment. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.97 | http://emaj.pitt.edu | mailto:bilalkargi@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.97 | http://emaj.pitt.edu bilal kargı emerging markets journal | p a g e |39 okun’s law and long term co-integration analysis for oecd countries (1987-2012) bilal kargı 1. introduction a. okun (1962), to explain relation between unemployment and growth, stated that an increase in employment should induce an increase in the level of gdp and unemployment will cause gdp to decrease. this reverse relation between gdp and unemployment is defined as okun’s law (mankiw, 2009: 260-263; plosser and schwert, 1979; lang and de peretti, 2009; teck, 2012). there are some special cases for okun’s law. increase of working hours of current employees may create increase in gdp, if it does not cause increase in unemployment (knotek 2007; levine, 2013). while average unemployment rate of the period 1970 to 2012 for oecd countries (oecd.statextract) was 5.586%, it is found to be 8.430% when calculated for the period 2000 to 2012. gdp is increased 2.747% for the period 1970 to 2012, but for the period 2000 to 2012, it increased 1.871%. both data are given in the graph 1. gdp graph starting from 1970 also shows 1974, 1981 and 2008 crisis. most influential crisis is the 2008 crisis in the way of its affecting unemployment mostly. especially at the end of 80’s, unemployment rates started to increase while gdp continued its characteristic movements. reason of this can be shown as; developments in the use of technology and directing to non-oecd countries with cheap facilities and labor force. graph 1: gdp growth rate (red) and unemployment (blue) it is seen that; unemployment rates show a continuous trend to increase. difference between the two variables is 5.586-2.747 (2.839%) in the period 1970 to 2012; 7.242-2.303 (4.939%) in the period 1989 to 2012 and 8.430-1.871 6.559% in the period 2000 to 2012. total gdp for oecd was 3.1 trillion us dollars in 1970; it has reached 46.1 trillion us dollars at 2012. this shows that gdp increased 14.87 times. technically, okun’s law suggests that, 3% increase in gdp causes a 1% decrease in unemployment (caraiani, 2010; elshamy, 2013). relation between unemployment and growth states the positive effects of power of trade associations and labor costs, when unemployment rates are low and growth rates are high. besides, efficient trade union bargains in labor market may create negative effects on growth rate (adjemian, langor and rojas 2010). in this study, unemployment and growth data of 23 oecd countries are used. firstly, okun difference equation (ode) is used to calculate needed gdp increase to have constant unemployment rate. then, with the use of time series analysis, long term relation of the two variables is studied. 2. literature review first of all, for the different periods and methods, data sets may give different results. for example, while it is observed by bankole and fatai (2013) that hypothesis is invalid for nigeria; amossoma and nwosa (2013) found that it is valid. some studies had gathered results contrasting okun’s law. for instance, ting and ling for malaysia and habees and rumman (2012) for arabian countries and jordan showed that, there is no absolute relation between unemployment and growth. lal and others (2010), for some developing asian countries, showed that okun’s law is not applicable. tillmann (2010) stated that the relation started to get weak from 90’s. there exist studies showing partial validity for okun’s law. some findings are as follows: the relation is unstable for usa and canada (beaton, 2010); partially valid for germany (oberst and oelgemöller, 2013); valid with low rate for central and east europe (cee) countries (hutengs and stadtmann, 2013); strongly valid for young population and weak validity for old population in euro zone (hutengs and stadtmann, 2012). also, there are different coefficients for different countries and these coefficients vary in time, while the relation is valid in the opposite way for euro zone countries (zanin and marra, 2012). using the italy example, busetta and corco (2012) found results suggesting that there might be regional differences. in another study on regional differences, kangasharju and others (2012) found similar results and pointed the decrease tendency of coefficients. in their study on volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.97 | http://emaj.pitt.edu okun’s law and long term co-integration analysis for oecd countries (1987-2012) page |40| emerging markets journal relation of unemployment in crisis periods and growth, for usa and eu, cazes, verick and hussami (2011), and gordon (2010a; 2010b; 2011) found that after global crisis, coefficients for usa, canada and spain showed sudden increases. in addition to this, these increases are quite sudden compared to crisis before 2000 and coefficients are lower for economies with high labor protection, like germany. however, many studies provide empirical evidences strongly showing the relation okun predicts between unemployment and growth. for example; ball, leigh and loungani (2013) for usa and moazzami and dadgostar (2009) for 13 oecd countries (for oecd other study: lee, 2000; hopkin and blyth 2012) found that in order to decrease unemployment 1%, increase in gdp should be between 2.6% 4.7%. biggest coefficients in long term are calculated for canada, finland, norway and usa and these countries experienced the effect of economic growth on employment the fastest. in their study for 15 oecd countries, sögner and stiassny (2000) found that; there is constant okun relation for austria, belgium, canada, italy and usa. there are deviations in okun’s law for sweden, germany, denmark, finland, france, great britain, japan, netherlands, norway and switzerland. herwartz and niebuhr (2011) showed okun relation for eu countries, whereas supporting the cause of the differences among the countries with the structural characteristics. besides, huang and lin (2008) for usa and villaverde and maza (2008) for spain found empirical evidence for strong relations. similar results are found in other country studies (bakas and papapetrou, 2012; ibragimov, karimov and permyakova, 2013; giha, leat and renwick, 2012; mosikari, 2013; tingii and lingii, 2011). finally, boulton (2010), for 10 western europe countries, showed that 4% increase in growth causes 1% decrease in unemployment. concerning romania, andrei, vasile and adrian (2009) found that, 0.5% decrease in growth causes 1% increase in unemployment. in an analysis on developed countries, kitov (2011); and kitov and kitov, (2012) calculated that the lowest coefficient as 0.4 belonging to australia and highest as 0.84 belonging to usa. in their study, huang and yeh (2013) found that gdp and unemployment variables are co-integrated in long term. also, they found that these two variables are reversely and strongly related in both long and short term. in a survey study (for wall street economists, mitchell and pearce, 2009) on g7 countries with professional economists, pierdzioch, rülke and stadtmann (2011) showed that reverse relation between growth and unemployment predicted by economists is parallel to okun’s law. 3. data and methodology the data belonging the period between 1987 and 2012 was taken from the oecd database. an analysis was done for 23 oecd countries’ data and total oecd data. first thing in the analysis was to calculate “okun coefficient” of countries with the regression relation okun predicted. growth rates were categorized as “low” (between 0%-2%), “normal” (between 2%-4%) and “high” (4%+). in the second step of analysis, the data time series and co-integration relation were tested. for this reason, firstly for each country; i) the growth and unemployment data were tested with unit root tests (dickey and fuller. 1979) ii) the two stepped englegranger (1987) test was applied. same process was done on sum of growth and unemployment data of 34 oecd countries. first condition, to decide whether series are co-integrated in long term or not, were to have stationary series at same level. 4. empirical results table 1 shows the results of equation 1 for each country. regression constants are given in b0. b1gdp gives negatively expected coefficient of gdp variable in regressions, known as okun coefficient. “average unemployment” (avg. une) and “average growth” (avg. grw) rates, calculated from the data set of the period 1987 to 2012, are also given on table 1. according to this, the highest average unemployment rate is 15.46%, which belongs to spain and the lowest average unemployment rate is 3.25%, which belongs to luxembourg. the highest average growth rate is for south korea with 5.91%, and the lowest is for italy with 1.3%. according to table 1, average unemployment rate for oecd countries is 6.87%. mean of average growth rates for the countries with higher average unemployment than this mean (uk, turkey, spain, portugal, italy, ireland, germany, france, finland, chile, canada, belgium, and australia) is 3.5%. so, the ratio between average unemployment and average growth is almost two (0.687/0.350=1.96). so it can be said that, this reverse relation of unemployment and gdp is oneto-one for the countries with highest unemployment rate. mean of average unemployment rates for the countries with lower average unemployment than oecd mean (us, sweden, norway, new zealand, netherlands, mexico, luxembourg, south korea, japan and denmark) is 4.80. average of average growth rate for these volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.97 | http://emaj.pitt.edu bilal kargı emerging markets journal | p a g e |41 countries is 2.76. even though, this ratio is lower than oecd average, it is pretty close. ratio between unemployment and gdp is lower (0.480/0.276=1.74) for economies with low unemployment rate. then, findings suggest that average of growth rate is lower (2.76<3.50) for countries with lower unemployment rate than oecd average. shortly, growth rate occurring when the unemployment is high is higher than growth rate occurring when the unemployment is low. high unemployment creates high growth; low unemployment creates low growth. this is the relation okun claims. table 1: okun’ regressions: u u-1 = bo + b1(y)+e (difference model) country bo b1(gdp) avg. une avg. grw bo / b1 australia 1,139776 0,391112 6.919 3.301 2,91419 belgium 0,495702 0,295806 8.096 1.986 1,67576 canada 0,841631 0,375152 8.173 2.484 2,24343 chile 1,379607 0,275437 8.23 5.698 5,00879 denmark 0,605353 0,360756 5.988 1.358 1,67801 finland 0,879881 0,355040 9.13 2.138 2,47825 france 0,583921 0,307495 9.423 1.805 1,89896 germany 0,284049 0,151278 7.857 1.833 1,87766 ireland 1,595931 0,342655 10.2 4.871 4,65754 italy 0,281676 0,216006 9.153 1.18 1,30401 japan 0,220478 0,103351 3.803 1.651 2,13329 korea 1,118544 0,192760 3.369 5.911 5,80278 luxembou rg 0,328280 0,054827 3.257 4.085 5,98756 mexico 0,644013 0,208315 3.78 2.84 3,09153 netherland s 0,487941 0,231328 4.769 2.268 2,10930 new zealand 1,050341 0,374662 6.407 2.4 2,80343 norway 0,237443 0,129464 4.134 2.337 1,83404 portugal 1,034295 0,341197 6.969 2.179 3,03137 spain 2,512723 0,921603 15.469 2.559 2,72647 sweden 0,954893 0,340653 6.488 2.169 2,80312 turkey 0,638043 0,157970 8.526 4.224 4,03901 united kingdom 0,564312 0,290173 7.061 2.363 1,94474 united states 1,255776 0,449484 6.026 2.656 2,79381 oecd total 0,716469 0,274117 6.873 2.438 2,61373 calculated bo / b1 coefficients are the “okun coefficients” and they indicate the needed economic growth rate to prevent unemployment rate. countries with highest unemployment, chile (8.23), ireland (10.2) and turkey (4.03), need growth rates higher than 4% to prevent unemployment rate to increase more than current rate. countries with high calculated okun coefficient, south korea (5.80) and luxembourg (5.98) need growth rate more than 5%. lowest okun coefficient is calculated for these countries: italy (1.30), belgium (1.67), denmark (1.67), norway (1.83), germany (1.87), france (1.89) and uk (1.94). these countries have two basic common points: i) average unemployment is higher than oecd average (except denmark and norway) and ii) average growth rate is lower than oecd average. the second part of our analysis is time series analysis and to do this, firstly, dickey-fuller unit root test is applied to unemployment and growth data of each country. findings are given in table 2 . “adf” column of table 2 shows adf statistics of variables for “level” values. values in parenthesis show the critical value for 5% meaning value of applied test. for adf<critical value, it is concluded that series is not stationary, meaning it includes unit root. in this case, adf test is redone by taking the first difference of series. adf test statistics and critical values are calculated taking first difference and given in adf (-1). unemployment variable for all 23 countries includes unit root in its meaning level. for italy and portugal, unemployment variable becomes stationary [i(2)] by taking second difference. unemployment variable for other 21 countries becomes stationary [i(1)] by taking first difference. for denmark, finland, germany, italy, japan, mexico, sweden and turkey, growth variable is stationary in its level value [i(0)]. growth variable for other 15 countries is stationary [i(1)] when the first difference is taken. in this case, since for italy and portugal unemployment variable is i (2) and for denmark, finland, germany, italy, japan, mexico, sweden and turkey growth rate is i (0), they will not be subjected to co-integration analysis. unemployment and growth relation for other 14 countries is suitable for cointegration analysis. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.97 | http://emaj.pitt.edu okun’s law and long term co-integration analysis for oecd countries (1987-2012) page |42| emerging markets journal table 2: adf unit root tests for une and grw une grw country adf adf(-1) adf adf(-1) notes australia -0,908449 (-1,955020) -3,248560 (-1,955681) -1,538109 (-1,955020) -5,681636 (-1,955681) belgium 0,142256 (-1,958088) -4,130355 (-1,958088) -2,321835 (-2,660720)* -5,797556 (-1,956406) grw is meani ngful at i(0) for 1% canada -0,611939 (-1,955020) -3,474439 (-1,955681) -2,005565 (-2,660720)* -5,675185 (-1,955681) grw is meani ngful at i(0) for 1% chile -1,134512 (-1,955020) -4,425504 (-1,955681) -1,447020 (-1,955020) -6,924916 (-1,955681) denmark 0,169550 (-1,955020) -3,404381 (-1,955681) -2,720146 (-1,955020) grw is station ary at i(0) finland -0,846320 (-1,955681) -2,142956 (-1,955681) -2,700622 (-1,955020) grw is station ary at i(0) france 0,088157 (-1,955020) -3,494173 (-1,955681) -2,061675 (-2,660720)* -5,277750 (-1,956406) germany -0,223752 (-1,956406) -3,216671 (-1,956406) -2,778381 (-1,955020) grw is station ary at i(0) ireland -0,815741 (-1,955681) -2,349557 (-1,955681) -1,313100 (-1,955202) -4,846012 (-1,955681) italy 0,237083 (-1,955681) -1,575031 (-1,955681 -2,850082 (-1,955020) une i(2) station ary; grw is station ary at i(0) japan 0,166641 (-1,955681) -3,119968 (-1,955681) -2,970024 (-1,955020) grw is station ary at i(0) korea -0,600884 (-1,955020) -4,379657 (-1,955681) -1,830450 (-1,958088) -6,599361 (-1,956406) luxembo urg 0,828045 (-1,955020) -3,377125 (-1,955681) -1,890258 (-1,955020) -6,537240 (-1,955681) mexico -0,195295 (-1,955020) -4,191578 (-1,955681) -3,064823 (-1,955020) grw is station ary at i(0) netherla nds -0,392488 (-1,957204) -3,827521 (-1,957204) -1,699881 (-1,955020) -4,472764 (-1,959071) new zealand -0,627356 (-1,956406) -2,918821 (-1,955681) -1,709697 (-1,955020) -7,825929 (-1,955681) norway -0,854987 (-1,956406) -3,576689 (-1,956406) -1,176697 (-1,955020) -5,551168 (1,955681) portugal 1,619556 -1,284031 -2,036313 -4,317693 une (-1,956681) (-1,955681) (-2,660720)* (-1,956406) is station ary at i(0); grw is meani ngful at i(0) for 1% spain 0,174815 (-1,955681) -1,955758 (-1,955681) -1,767823 (-1,955020) -4,735233 (-1,955681) sweden -0,291357 (-1,955681) -3,413449 (-1,956408) -2,828183 (-1,955020) grw is station ary at i(0) turkey -0,301171 (-1,955020) -4,336725 (-1,955681) -3,716088 (-1,955020) grw is station ary at i(0) united kingdom -0,270641 (-1,955681) -3,224373 (-1,955681) -2,119882 (-1,955020) -5,024712 (-1,956406) united states 0,275519 (-1,956406) -3,844323 (-1,956406) -1,541823 (-1,955020) -6,018883 (-1,955681) oecd total 0,616892 (-1,956406) -4,191554 (-1,956406) -1,859498 (-1,955020) -6,710746 (-1,955681) results of applied test for 14 countries having stationary variables at the same level, which is prerequisite for engle-granger co-integration test, and all of oecd are given on table 3. engle-granger co-integration test examines the long term integration relation between variables. for this purpose, firstly, regression models between unemployment (independent) and growth (dependent) for each country are designed. calculated coefficients, standard error and t-statistics for regression models are given on table 3. being stationary in their level of u model, error term is prerequisite for two variables to be co-integrated in long term. adf unit-root test is applied to create error term series and calculated adf test statistics are given in “u adf” and critical value for 5% meaning level of these values. they are presented in “5% level” column. when these two columns are examined, it is seen that error terms are stationary [i(0)] at their level value. in this case, it can be concluded that unemployment and growth variables are co-integrated in long term for each country. table 3: engle-granger cointegration test country coefficient std. error t-stat. adf for u 5% level inte grat ed australia 0,125173 0,1186 23 1,055213 3,2318 32 1,955 681 i(0) volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.97 | http://emaj.pitt.edu bilal kargı emerging markets journal | p a g e |43 belgium -0,006537 0,0779 58 0,083850 3,8133 56 1,958 088 i(0) canada -0,140804 0,0737 00 1,910512 4,0585 20 1,956 406 i(0) chile -0,157108 0,0621 89 2,526298 4,2176 02 1,955 681 i(0) france -0,068150 0,0794 65 0,857608 3,3065 43 1,955 671 i(0) ireland -0,195960 0,1009 40 1,941340 2,3351 31 1,955 681 i(0) korea -0,097530 0,0397 06 2,456297 4,9980 89 1,956 406 i(0) luxembo urg -0,037914 0,0255 35 1,484799 3,5224 90 1,955 681 i(0) netherlan ds 0,006223 0,0752 30 0,082718 3,7949 21 1,957 204 i(0) new zealand -0,025766 0,0947 66 0,271893 2,9139 87 1,955 681 i(0) norway 0,009446 0,0658 29 0,143499 3,6410 56 1,956 406 i(0) spain -0,625511 0,2378 83 2,629487 1,9865 34 1,955 681 i(0) united kingdom -0,046496 0,0776 38 0,598886 3,0048 77 1,955 681 i(0) united states -0,150388 0,1025 29 1,466780 4,2560 37 1,956 406 i(0) oecd total -0,092221 0,0540 69 1,705604 4,6535 30 1,956 406 i(0) taking first difference, because series are not stationary while examining the long term co-integration relation, they create short term information losses. removing these losses, error correction models are degisned to show existence of short term relation and the results are presented on table 4. by using, for each country, unemployment (dependent), growth (independent) variables and 1 lagged error term series in error correction models, var models are obtained and obtained coefficients, error term coefficients (u (-1) coefficients), t statistics and probability values for 5% meaning level are provided on table 4. tablo 4: error correction models country coefficien t u (-1) coefficien t t-stat. 5% prob. notes australia -0,071853 -0,568314 0,226474 0,0204 56% of losses is removed after 1 period belgium -0,571773 -0,571773 2,637700 0,0154 57% of losses is removed after 1 period canada -2,296605 -0,718622 3,137732 0,0050 71% of losses is removed after 1 period chile -0,177540 0,164910 0,682898 0,5021 losses con not be removed france -0,246964 -0,680557 2,465309 0,0224 68% of losses is removed after 1 period ireland -0,280638 -0,662728 0,174254 0,0010 66% of losses is removed after 1 period korea -0,131000 0,315185 1,236727 0,2298 losses con not be removed luxembou rg -0,032472 0,315044 1,552124 0,1356 losses con not be removed netherland s -0,090831 -0,698149 3,642073 0,0015 69% of losses is removed after 1 period new zealand -0,093035 -0,526498 2,955737 0,0075 52% of losses is removed after 1 period norway -0,066788 -0,553571 2,629159 0,0157 55% of losses is removed after 1 period spain -0,861976 -0,750691 4,553393 0,0002 75% of losses is removed after 1 period united kingdom -0,224679 -0,823409 4,693064 0,0001 82% of losses is removed after 1 period united states -0,277950 -0,564665 2,567682 0,0179 56% of losses is removed after 1 period oecd total -0,186823 -0,600909 2,514537 0,0201 60% of losses is removed after 1 period according to table 4, error correction model does not work for chile, south korea and luxembourg. model works for other 12 countries and by removing data losses caused by long term, short term relation is showed. according to this, for these countries, a ratio is given in “notes” column, and data loss for any term can be removed in the following period. 5. results okun law indicates reverse relation between unemployment and growth. this means that, increase in unemployment causes decrease in gdp. results of calculation related to oecd countries showed that okun law is valid for 23 countries. growth performance of countries, especially with high employment rate, is quite low. countries, especially with high okun coefficient, need that economic growth to keep unemployment at current rate. long term co-integration is valid for 14 of 23 oecd countries and variables are long term related. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.97 | http://emaj.pitt.edu okun’s law and long term co-integration analysis for oecd countries (1987-2012) page |44| emerging markets journal similar results of huang and yeh (2013) for long term relation are found. finally, the findings of tillmann (2010) which state that reverse relation between unemployment and growth in the long term get weak is supported. for 34 oecd countries, average unemployment is calculated as 6.87 and average growth is computed as 2.43. these results show that, long term relation of unemployment and growth data are suggesting validity for okun’s law. references adjemian, s., langor, f. & rojas, c. q. (2010). how do labor market institutions affect the link between growth and unemployment: the case of the european countries. the eeuropean journal of comparative economics, 7(2), 347-371. amassoma, d. & nwosa, p. i. (2013). the impact of unemployment rate on productivity growth in nigeria: a error correction modeling approach. international journal of economics and management sciences, 2(8), 01-13. andrei, d. b., vasile, d. & adrian, e. (2009). the correlation between unemployment and real gdp growth. a study case on romania. annals of faculty of economics, 2(1), 317-322. bakas, d. & papapetrou, e. (2012).unemployment in greece: evidence from greek regions. bank of greece, working paper, no.146. ball, l., leigh, d. & loungani, p. (2013). okun’s law: fit at 50?. nber working paper, no.18668. bankole, a. s. & fatai, b. o. (2013). empirical test of okun’s law in nigeria. international journal of economic practices and theories, 3(3), 227-231. beaton, k. (2010). time variation in okun’s law: a canada and u.s. comparison. bank of canada working paper, no.7. boulton, t. (2010). test of okun’s law fort the 10 eastern europen countries. london metropolitan business school, economics subject group. busetta, g. & corso, d. (2012) labor productivity and okun’s law: an emprical application on italian regional panel data. rivista italiana degli economesti, 2, 279-298. caraiani, p. (2010). bayesian linear estimation of okun coefficient for romania: sensitivity to priors distributions. the romanian economic journal, 38, 5365. cazes, s., verick, s. & hussami, f. a. (2011). diverging trends in unemployment in the united states and europe: evidence from okun’s law and the global financial crisis. international labor office, employment working paper, no.106. dickey, d. a., & fuller, w. a. (1979). distribution of the estimators of autoregressive time series with a unit root. journal of the american statistical association, 74, 427-431. elshamy, h. (2013). the relationship between unemployment and output in egypt. procedia social and behavioral sciences, 81, 22-26. engle, r. f., & granger, c. w. j. (1987). “cointegration and error correction: representation, estimation, and testing. econometrica, 55(2), 251-276. giha, c. r., leat, p. m. & renwick, a. w. (2012). the relationship between output and employment in scotland: a regional analysis. scotland’s rural college, working papers, no.131465. gordon, r. j. (2010a). revisiting and rethinking the business cycle: okun’s law and productivity innovations. american economic review, 100, 1115. gordon, r. j. (2010b). the demise of okun’s law and of procyclical fluctuations in conventional and unconventional measures of productivity. for presentation at nber summer institute, prbb research meeting, cambridge. gordon, r. j. (2011). the evolution of okun’s law and of cyclical productivity volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.97 | http://emaj.pitt.edu bilal kargı emerging markets journal | p a g e |45 fluctuations in the united states and in the eu-15. for presentation at ees/iab workshop, nuremberg. habees, m. a. & rumman, m. a. (2012). the relationship between unemployment and economic growth in jordan and some arab countries. world applied sciences journal. 18(5), 673-680. herwartz, h. & niebuhr, a. (2011). growth, unemployment and labor market institutions: evidence from a crosssection of eu regions, applied economics, 43(30), 4663-4676. hopkin, j. & blyth, m. (2012). what can okun teach polanyi? efficiency, regulation and equality in the oecd. review of international political economy, 19(1), 1-33. huang, h. c. & lin, s. c. (2008). smoothtime-varying okun’s coefficients. economic modelling, 25, 363-375. huang, h. c. & yeh, c. c. (2013). okun’s law in panels of countries and state. applied economics, 45(2), 191-199. hutengs, o. & stadtmann, g. (2012). age effects in the okun’s law within the eurozone. german institute for economic research, discussion papers, no.1243. hutengs, o. & stadtmann, g. (2013). don’t trust anybody over 30: youth unemployment and okun’s law in cee countries. european university viadrina frankfurt, department of business administration and economics, discussion paper, no.333. ibragimov, m., karimov, j. & permyakova, e. (2013). unemployment and output dynamics in cis countries: okun’s law revisited. eerc, working paper series, no.13/04. kangasharju, a., tavera, c. & nijkamp, p. (2012). regional growth and unemployment: the validity of okun’s law for the finnish regions, spatial economic analysis, 7(3), 381-395. kitov, i. o. (2011). okun’s law revisited. is there structural unemployment in developed countries?. mpra paper, no.32135. kitov, i. & kitov, o., (2012). modeling unemployment and employment in advanced economies: okun’s law with a structural break. theoretical and practical research in economic fields, 5(3), 26-41. knotek, e. s. (2007). “how useful is okun’s law?. federal reserve bank of kansas, journal economic review, 4, 73-103. lal, i., muhammad, s. d., jalil, m. a. & hussain, a. (2010). test of okun’s law in some asian countries cointegration approach. european journal of scientific research, 40(1), 73-80. lang, d. & de peretti, c. (2009). a strong hysteretic model for okun’s law: theory and preliminary investigation. international review of applied economics, 23(4), 445-462. lee, j. (2000). the robustness of okun’s law: evidence from oecd countries. journal of macroeconomics, 22(2), 331-356. levine, l., (2013). economic growth and the unemployment rate. crs report for congress. mankiw, (2010). macroeconomics. seventh edition, worth publishers, new york. mitchell, k. & pearce, d. k. (2009). do wall street economicsts believe in okun’s law and the taylor rule? journal of economics and finance, 34(2), 196217. moazzami, b. & dadgostar, b. (2009). okun’s law revisited: evidence from oecd countries. international business and economics research journal. 8(8), 2124. mosikari, t. j. (2013). the effect of unemployment rate on gross domestic product: case of south africa. mediterranean journal of social sciences, 4(6), 429-434. oberst, c. a. & oelgemöller, j. (2013). economic growth and regional labor market development in german regions: okun’s law in a spatial context. fnc working paper, no:5. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.97 | http://emaj.pitt.edu okun’s law and long term co-integration analysis for oecd countries (1987-2012) page |46| emerging markets journal okun, a. m. (1962). potential gnp: its measurement and significance. proceedings of the business and economics statistics section of the american statistical association. 98104. pierdzioch, c., rülke, j. c. & stadtmann, g. (2011). do professional economists’ forecasts reflect okun’s law? some evidence fort the g7 countries, applied economics, 43(11), 1365-1373. plosser, c. i. & schwert, g. w. (1979). “potential gnp: its measurement and significance: a dissenting opinion”, journal of monetary economics, 10, 179-186. sögner, l. & stiassny, a. (2000). a crosscountry study on okun’s law. vienna university of economics and business administration, working paper series, no:13. teck, h. h. (2012). an economic analysis of optimum population size achieved through boosting total fertility and net immigration. national university of singapore, institute of policy studies. tillmann, p. (2010). do fomc members believe in okun’s law?. economics bulletin, 30(3), 2398-2404. tingi, n. y. & lingii, l. s. (2011). okun’s law in malaysia: an autoregressive distributed lag (ardl) approach with hodrick-prescott (hp) fitler. journal of global business and economics, 2(1), 95-103. villaverde, j. & maza, a. (2008). the robustness of okun’s law in spain: 1980-2001 regional evidence. journal of policy modeling, 31, 289-297. zanin, l. & marra, g. (2012). rolling regression versus time-varying coefficient modelling: an empirical investigation of the okun’s law in some euro area countries. bulletin of economic research, 64(1), 91-108. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu spirituality: the power of entrepreneurship jozef raco universitas katolik de la salle manado, indonesia | jraco@unikadelasalle.ac.id johanis ohoitimur sekolah tinggi filsafat seminari pineleng, indonesia | ohoitimur@yahoo.com kosmas sobon universitas katolik de la salle manado, indonesia | ksobon@unikadelasalle.ac.id abstract spirituality is considered to be an essential nature of human being that strengthens their purpose and mental power to do something for the betterment of many people. spirituality is considered as a part of theology or other divine disciplines. spirituality is becoming an important topic in management and economics, particularly in entrepreneurship. it is an animating force and vital principle that motivates entrepreneurs to run a business which is not merely for making profit but, enabling them to better serve people. a real spiritual entrepreneur is not just looking for their own benefit, but for the betterment of others. any business which is beneficial and helpful to others will grow better and enjoy economic benefits. spirituality is in line with the core principle of entrepreneurs, which is doing business to meet customers’ need. one characteristic of spirituality is seeking to transcend the ego or their own self-centered interests. that is why spirituality is very important for entrepreneurs. it can be considered as a capital that has a number of core elements such as being driven by deep values, having a clear sense of purpose, and involving applied ethics in service. keywords: spirituality, entrepreneurship, management, business, economics new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.161 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:jraco@unikadelasalle.ac.id mailto:ohoitimur@yahoo.com mailto:ksobon@unikadelasalle.ac.id http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.161 | http://emaj.pitt.edu spirituality: the power of entrepreneurship page |28| emerging markets journal spirituality: the power of entrepreneurship jozef raco johanis ohoitimur kosmas sobon i. introduction entrepreneurship is an essential part of economics and entrepreneurs are commonly considered to be the ones who are promoting economic gain by introducing innovations, new concepts and novel ideas to produce better and competitive products or services. an entrepreneur also is counted as a person who adds and creates wealth for selected individuals or society as a whole. economics concerns about economic growth both for customers, communities or even the state. it examines and discusses resources allocation, pricing policy, income generation, savings, investments, government spending and policies regarding development and finance. an entrepreneur is an economic agent, since he or she is always on the front line in implementing and executing those policies. he or she is the one who has proper knowledge and skills required by business industries. besides those capabilities and potentials, an entrepreneur is very much aware about the role of culture, the importance of values and the value of ethics in running a venture (raco & tanod, 2014a). while there are many business practitioners who regard accumulation of wealth, income generation and increase of financial gain as the target of any economic activity, there is a growing number of people who think that those objectives are slightly changing. through many experiences relating to economic crisis, companies’ bankruptcy, industries’ collapse, some people realize that financial and economic gain are not the primary motivator for people to initiate and start a new business (katz, 1992, amit et al., 2001). people nowadays are doing business not merely for wealth creation or accumulation of money and capital. there are many reasons that influence an entrepreneur to start a new venture. amongst those reasons, some scholars found out that spirituality is one important factor which triggers an entrepreneur to launch a firm. in fact, many recent studies revealed that spirituality is playing a very important role for entrepreneurs to commence their business. interests in doing research about spirituality and its impact on entrepreneurship and business management are increasing. the numbers of articles and academic papers as well as research studies on spirituality and business ventures which are available on goggle-search are rising. academicians are attracted to discover more and understand deeper on the role of spirituality in entrepreneurs’ decision making process. there are frequent seminars, conferences and academic discussions conducted by professional and academicians on the topic of spirituality. howard (2002) wrote that there is an explosion of interest in spirituality as a new dimension in the study of management. he added that, it may be the most significant academic trend since the 1950s. wagner and conley (1999) suggested that there has been an organizational fourth wave, referring to an aftermath of alvin toffler’s technological third wave, and they called it ‘the spiritual based firm’. spirituality is not only important for business, but also it brings about positive impact to industries, employees and societies (jacson & konz, 2006). spirituality strengthens entrepreneurs’ commitment to develop their business, thereby improving their productivity, and enabling flexibility and creativity both in business planning and its implementation (agbim et al., 2013). they added that spirituality creates a sense of community amongst employees. furthermore, the employees mentioned that because of spirituality they have more positive views about their job. a job is no longer considered to be a burdensome task but a vocation and a calling. through their job, they can find a meaningful life. they elaborated that a job is a joyful experience and not a troublesome load anymore. it is a self-actualization project where they can find and perform their wholeness of life. in addition mitroff and denton (1999) noticed that spirituality reduces feeling of fear amongst employees of an organization. they stated that being spiritual-motivated-workers will make them have better health and lower level of stress. that is why gaining understanding through a study of spirituality is a must since it will be beneficial for managerial and organizational success. furthermore, ashmos and dunchon (2000) disclosed that spirituality supports the employees to have meaningful work experiences. spirituality increases happiness and freedom for employees and also makes them more loyal to the organization. they mentioned that people who feel they are working with spiritual values are usually happier and more productive compared to those who are not. employees having spirituality will stay longer and be more helpful to an organization. this study concluded that ultimately spirituality can be used to improve organizational performance. in addition, karakas (2010) added that spirituality enhances employee well-being and quality of life by increasing their morale, commitment and productivity. it helps employees to reduce stress, burnout and workaholism. he further explained that spirituality provides employees with a sense of purpose and meaning at work. specifically he said that spirituality provides employees and managers a deeper sense of meaning and purpose of work. moreover, he stated that spirituality provides employees a sense of interconnectedness and community. it essentially increases their sense of attachment, loyalty and belonging to the organization. other researchers mention that spirituality can foster the intention of the entrepreneurs for start-up ventures (judge & douglas, 2013). it will allow them to fulfill their business obligations and helps their ventures to succeed (pio, 2010). equally important, it assists them to enhance volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.161 | http://emaj.pitt.edu jozef raco, johanis ohoitimur, kosmas sobo emerging markets journal | p a g e 2 9 their ability to cope with stressful business situations (herriott et al., 2009). it is also believed that, entrepreneurs view venture founding and managing as a part of their spiritual journey (kauanui et al, 2010). by the influence of spirituality, the entrepreneurs will create a pro-social business (pavlovich & corner, 2013). it is this business approach which puts people and community interests before profit (porter & driver, 2012). thus, it is concluded that spirituality will provide profitability to firms and customers as a whole (biberman & whitty, 1997). however, given the growing interest about spirituality, still many academicians doubt and raise harsh questions about the validity and accuracy of research on this topic. according to moberg (2010), this challenge is because spirituality is assumed to be solely a christian concept and involves christian values and interpretations which discourage people of other religions or denominations to discuss it. he added that spirituality is too ephemeral, mystical, theological and considered highly speculative and difficult to apply for calculation. he stated that, spirituality is hard to define and has many connotations attached to it. in addition, its construct is too broad and transcendent for a researchable subject. he claimed that, spirituality is too sacred for study by the mundane, cold, and worldly methods of science. similarly, other people stated that it was so inscrutable. one researcher supported what logical positivists claimed that spirituality was nothing more than a verbalized reification or product of the human imagination. nowadays spirituality can be subjected to scientific research. in fact today in this framework, spirituality is one issue that all of us are concerned about. with the increasing secularization in western countries, the focus in society is moving away from religiousness toward spirituality. considering the importance of spirituality in entrepreneurship, it is imperative to determine how spirituality is being defined and understood by academicians of management disciplines. in the process of inquiry, the previous understanding of spirituality which was closely related to religion probably will change. ii. meaning and definition of spirituality the meaning of spirituality is developing and expanding. previously, spirituality was commonly discussed and used in theology. nowadays it is not merely connected to religion, but also other subjects. it is not only used in christianity, but also in other beliefs. that is why spirituality has various meanings. it can mean many things in popular usage, and is often understood differently by different people (fisher, 2011). spirituality is dynamic which means that it must be felt before it can be conceptualized (priestley, 1985). for some religions, the ‘spirit’ and then ‘spirituality’ connotes to the breath of god or god himself. ‘spirituality’ comes from the latin word ‘spiritus’ and ‘spirare’ which means ‘breathing, soul, wind’. the latin word of ‘spiritus’ is a translation of hebrew word of ‘ruach’ and ‘nefesh’ which have the same meaning as ‘breathing’, ‘soul’ or ‘wind’ evoking a principle of vivification and animation. that is why the word spirituality is often being understood as an animating or vital principle in people. agbim et al. (2013) stated that, spirituality is an animating force or vital principle which gives life. essentially, spirituality is transcending the material and mechanical aspects of life (fisher, 2011). it is a life affirming force in one’s self and all human beings (anderson, 2000). the word ‘spirituality’ is commonly used in religion referring to the holy spirit. in christianity, especially in the teaching of the trinity, the holy spirit is also god (bouckaert & zsolnai, 1997). for this reason, the discussion about spirituality in early ages was always in connection with god. spirituality in this context is expressed in praying, going to church, liturgical activities, ritual ceremonies and doing charitable work. it is a collective acknowledgement toward god. although spirituality is very much attached to the practice of religion, still every religion has its own meaning and perception about spirituality. sometimes they portray spirituality in a very narrow conception and this myopia can be dispiriting for a person, inhibiting their own individual spirituality. bouckaert and zsolnai (2011) added that, religious belief systems can have negative effects on the health of an individual’s beliefs and expectations. there are many cases which show that religious spiritualities only bring negative impact to human beings. instead of promoting human dignities, it is only destroying humanities. some groups of people consider their religion is the true one. they think they have divine authority to convert people to follow them. they assume that they have the right to annihilate and harm others. some brutal activities such as terrorism, warfare, vandalism and violence are inspired by a certain religious spirituality. many people have become victims or died in vain because of a certain spirituality belief. however, we cannot set aside the fact that some other religions foster compassion, trust, nonviolence and peace. there are many good people being inspired by a true religion and who surrender themselves for the betterment of others. giacalone and jurkiewicz (2003a) described spirituality as an intrinsic drive and motivation for people to learn and to find meaning in their work. it is something from within a human being that urges him or her to actualize his or her dreams or ideas. spirituality is also being used as a term intertwined with ethics. some academicians link spirituality to ethics. they bring ethics and spirituality together under the umbrella of subjective values and moral principles. however, there is a difference between spirituality and ethics. ethics is more interested in normative regulation of social life by norms and codes, while spirituality is more driven by inner inspiration and intrinsic commitment. furthermore, the application of ethics in business is depending on the economic performance of a company. if the company is having a good economic performance, ethics will be considered as sustainable. but when the company encounters business problems or the company performance is going down, sometimes they will behave unethical toward employees. there is a well-known company which was previously applying ethical principles in business, promoting a humanistic approach toward its employees, but once the company was confronted with a deep financial crisis, they reacted as if ethics never existed volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.161 | http://emaj.pitt.edu spirituality: the power of entrepreneurship page |30| emerging markets journal (bouckaert & zsolnai, 2007). in this case, ethics was surrendered to profit maximization. bouckaert and zsolnai (2007) also mentioned that having more welfare does not necessarily create more human happiness. the basic question arises that if religion and ethics could not provide an inspiring meaning to spirituality, then what kind of spirituality are we looking for? academicians now are relying on spirituality with its modern special meaning. finding a new meaning of spirituality is encouraging. sandra nandram (bouckaert & zsolnai, 2011) wrote that with the increase in complexity, rapid change, the decreasing role of religion in human’s lives and uncertainty in business industries, the emergence of spiritual seeking is growing. some researchers introduce another meaning of spirituality based on day to day living. they claimed that, it is something that we experience. it is more about life or vigor and not a series of mystical or isolated experiences (bezy, 2011). it is a discovery of personal genuineness. it is finding meaning, purpose and directions in one’s life (porter, 1995; spohn, 1997). in comparison to other definitions, it could be different from a sectarian religious belief or ethics. bouckaert and zsolnai (2007) of the european spirituality in economics and society (spes) forum define spirituality as people’s multi-form search for a transcendent meaning of life. it connects them to each other and to god of the ‘ultimate reality’. looking for meaning of life does not last for a short period of time, but could be an effort over a long period of time if not during an entire lifetime (bouckaert & zsolnai, 2011). searching for meaning is really a matter of experience. it is about uplifting our inner aspirations, reaching a higher level of consciousness, and discovering our self. spirituality is an inner path enabling a person to discover the essence of his or her being. it has been considered as the deepest values and meaning by which people lived (raco & tanod, 2014b). this profound meaning never turns into an object of ego-centricism. this view was also supported by frankl (1997), who added that man’s primary concern is not to gain pleasure and avoid pain, but rather to see a meaning in life. this search for meaning is the core of the individual’s being and is the driving force behind the intellect and emotion. many other authors also perceive this search for meaning as being a major component of spirituality. in this sense, meaning in life is also recognized as a personally perceived phenomenon. frankl (1997) also claimed that, the meaning of life must be specified and it can only be realized by the individual. it is the essential nature of human being, their strength of purpose, perception, mental powers, and frame of mind (fisher, 2011). muldoon and king (1995) wrote that in general, the term ‘spirituality’ appears to denote approaches to discovering, experiencing, and living out the implications of an authentic human life. valenzuela (1998) refers spirituality to the way in which we use our freedom to structure our lives, our relationships and commitments in order to serve our deepest values and convictions. in a broad sense, everyone has a spirituality, which is their way of life. this way of understanding spirituality makes it clear that spirituality cannot simply be equated with prayer, nor can it be separated from the day to day issues of life in this world. in this shared universal sense, everybody can talk about spirituality either having religion or not. pruzan (2008) refers to spirituality as a search for meaning, which transcends material well-being. he added that spirituality focuses on basic, deep-rooted human values and a relationship with a universal source, power or divinity. if we connect this spirituality to our job, we could mention that the work or job is a personal vocation, a passion for quality, and a social commitment toward the betterment of others. in this way, the meaning of work appears to lead to the common good (bouckaert & zsolnai, 2011). in this paper, the researchers apply spirituality as a search for meaning. it is the profane meaning of spirituality or spiritual humanism, which is a way to discover a spiritual meaning within profane and public activities such as business, art, family life, politics, and conflict regulation. it also corresponds to motivation, which is a desire to find the ultimate purpose in life and to live accordingly. it addresses man’s inner sense, human aspirations or inner knowledge. in this context, spirituality is understood as a driving force or an inner power that pushes the entrepreneurs to materialize his or her dream and a vision which pulls and absorbs his or her energy and potentials to grasp it. most definitions of spirituality share a number of elements such as a re-connection to the inner self; a search for universal values that lift the individual above his egocentric striving; a deep empathy with all living beings and finally the desire to keep in touch with the source of life. in other words, spirituality is a search for inner identity, connectedness and transcendence. spirituality is a rich, intercultural and multi-layered concept, which cannot be captured in one standard definition. however, many researchers agree that, spirituality is experienced-based and its function is as a driving force for someone to materialize his or her dreams or ideas. iii. spirituality and healthy business as mentioned above, spirituality provides significant contribution to business institutions and employees as well. through spirituality business is expanding and improving, while employees’ turnover is decreasing since they enjoy and discover special meaning in performing their jobs. workers should look for the meaning of work, since they spend more time in their work place than in their house. work is not only to earn money, but more importantly to build a life. in this case, the emphasis of spirituality is more on the self rather than the collective. the authority of individuals over religious tradition on spirituality is increasing. it means that people from all walks of life, whether religious or atheist, group or individual, can live the way of spirituality. for this reason, the meaning of transcendence is changing. it is not only meaning something beyond self, or a divine realm, outside earthly concerns but more about an experience of personal growth and development which enables a person to go beyond the limitations of the self and personal circumstances. transcendence as virtue is concerned with individuals reaching their highest potential, which is achieved through testing limitations. one might think that spirituality has nothing to do with management. it is quite the contrary, since management has an undeniable existential-spiritual dimension. any managerial decision will bring huge impact to humanity volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.161 | http://emaj.pitt.edu jozef raco, johanis ohoitimur, kosmas sobo emerging markets journal | p a g e 3 1 and the environment. management and business need spirituality. in the light of spirituality, the purpose of business is not merely producing goods and services merely for profit or increasing the market shares, rather it should serve the self realizations of persons involved including the managers, the employees and the customers. spirituality can have a real impact on management through enhancing the personal quality of managers. spirituality also deepens the moral values of managers and leads them to make business decisions which benefit all people. despite the rich diversity of spiritual experiences, spirituality involves promoting love, compassion, deep reverence for life and empathy. through, spirituality we develop a new system of values which is not based on conventional norms, precepts, commandments and fear of punishment, but based on our knowledge and understanding of the universal order. we realize that we are an integral part of creation and that by hurting others, we would be hurting ourselves. mitroff and denton (1999) emphasized that spirituality has a big role in management since to recoup or recovery is crucial in business and management. mahakul (2014) added that, the management and business development study should no longer put aside the issue of spirituality in its topics of discussion, but instead start taking its issues seriously since it can contribute to better understanding about managerial and leadership issues of an organization or business and ultimately will affect human life and the environment. the discussion of the role of spirituality in business sectors is growing. a number of articles and research studies, in business management particularly in entrepreneurship, are being conducted about spirituality in profit and non-profit organizations. some academicians realized that many business practices are quite destructive and environmentally unfriendly. in this case, spirituality can help business leaders to arrive at solutions which serve the community, the planet and life itself since it promotes the common good, human dignity and moves away from egocentrism. that is why spirituality is becoming a core value of business. business practices and managerial activities should apply spirituality for its sustainability and for the world as well as being environmentally healthy and ethically sound. spirituality is also important for maintaining the customers’ loyalty. loyalty is only possible if the organization or business industry offers better quality services and meets the customers’ needs. it means that, the role of management in business industry is how to better serve other people. serving people better is the core concern of spirituality. any kind of management decision-making considerably affects the life and fate of human communities, natural ecosystems and future generations. a spiritual management will take into account and avoid any damage caused by any management policy. it is also functioning as a source of competitive advantages for present-day best business practices (nandram & borden, 2009). iv. essentials of spirituality there are some essential elements of spirituality, which include reconnection to the inner self; a search for universal values which lifts the individual above egocentric strivings; deep empathy with all living beings; and a desire to keep in touch with the source of life (whatever name we give it). in other words, spirituality is a search for inner identity, connectedness and transcendence. spirituality avoids the formal and ceremonial connotation of religion; it is nondenominational, non-hierarchical and non-ecclesiastical. spirituality implies an inner search for meaning or fulfillment that may be undertaken by anyone regardless of religion. while this spirituality perspective predominately speaks about some power that originates from inside, it also involves a feeling of being connected with one’s work and with others and the entire universe. spirituality will bring about intuition and creativity, honesty and trust, personal fulfillment as well as deeper commitment and improved organizational performance. spirituality is also looking for benefit of all, not only personal or individual. spirituality brings about good for all people concerned. it moves away from the egocentric stage. ultimately, he or she has only personal interest for the betterment of others. that is why a spiritual person always has good relations with others, environment and the supreme being. zohar and marshall (2000) implied that, spirituality is transcendence. it enables someone to see something special in the ordinary, to overcome boundaries or limits of knowledge and experience and facilitate people to see things in a wider context. a spiritual entrepreneur has the capacity to see possibilities while others cannot. the final end of this spirituality is the common good. all spiritual activities should promote human dignity and love for humanity. pruzan (2008) mentioned that the core element of spirituality is the removal of the ego from central stage replacing it with other elements such as compassion, connectedness to others, while transcending self-interests for the welfare of others, through openness and discernment. v. spirituality as the power entrepreneurship is derived from the french word ‘entreprende’, meaning ‘to undertake’. in the business context, it means to start a business. webster’s dictionary defines entrepreneur as one who organizes, manages, and assumes the risks of a business or enterprise. he or she is the one, who combines resources based on new ideas so as to add value to a new or existing product or add innovation in services rendered. as schumpeter (croitoru, 2012) explained, the entrepreneur is an innovator who provides new products, new production methods, new markets, and new forms of organization. for a long time, people understood entrepreneurship in the economic context. cantillon and say (foss et al., 2004) consider an entrepreneur as a key player in economic development. it is associated with the creation of added value and wealth. entrepreneurs are the ones who know how to make profit through allocation of resources. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.161 | http://emaj.pitt.edu spirituality: the power of entrepreneurship page |32| emerging markets journal however, entrepreneurship is much broader than merely an economic meaning. every entrepreneur is unique. because of this uniqueness, there is no single definition about being an entrepreneur. entrepreneurship is complex, contextual and constructive. there are some factors though that contribute to the development of entrepreneurship. according to the self-determination theory, entrepreneurship emerged because of the eagerness of a person or group of people to actualize their autonomy. they want to work or do something autonomously without any pressure from other parties (sheldon et al., 2001). self-determined motivation results from performance of a behavior or action out of personal choice, satisfaction and/or pleasure (agbim et al., 2013). ajzen’s theory of planned behavior stated that entrepreneurship was created through both an internal state of the person (internal locus) and external or contextual variables (external locus), which influences intention and ultimately actions (bird, 1988). according to krueger and carsrud (1994), the theory of planned behavior is very applicable to entrepreneurship. another theory related to entrepreneurship is the theory of ‘pull and push’ elements (dowson & henley, 2012). pull factors motivate the entrepreneurs to initiate the ventures. while, the factors which force people to start business enterprises are termed as push or compelling factors. it is very difficult to draw a dividing line between entrepreneurs’ ambitions and compulsions. however according to shapero and sokol (1982), individuals are much more apt to form a company based on negative information rather than positive. but amir (1994) found out that, pull entrepreneurs were more successful than push entrepreneurs in both personal income and sales per employee. he added that it is caused by the fact that, pull entrepreneurs are lured by attractiveness of a personal business idea. the interchange between pull and push factors is unavoidable. what is considered as a pull factor influence, could be a push factor for another. unemployment is one example of that crossover. push and pull factors have an impact, for example, on an individual’s motivation. while either pull or push factors are influencing an entrepreneur to start their business, at the end it is about a mind set or a way of thinking and acting. it is about imagining new ways to solve problems and create value. this is because, values are important for an entrepreneur in order to understand entrepreneurship and the meaning as well as the purpose of entrepreneurs’ activities. meaning, purpose and values are also the main elements of spirituality. the study of entrepreneurship is only possible by understanding the values and meaning owned by the entrepreneur. all their activities are usually based on their values, sense of purpose and the meaning they hold. nandram and borden (2009) added that, spirituality in entrepreneurship is about strong will and the capacity to see, believe and imagine a future which others don’t see or believe in. in this way, spirituality functions as a driving force for entrepreneurs. entrepreneurs are really spiritual people. it is about the drive to overcome one’s limitations and engage in following a vision through venturing no matter how intangible or ephemeral it may initially seem. meaning of life here is asking self-probing questions about what is my purpose here as an entrepreneur? what contribution do i make and what is it that i have to offer that is of significance? what do i want to leave behind here? meaning of life should be distinguished from the related constructs which are meaningful as an entrepreneur. meaning in life entails a significance of being – a feeling, experience or perception that one’s existence is significant. it relates to a sense of being committed to and fulfilling a higher purpose in life. this purpose fullness provides one with a reason for living; it makes life more than just a survival quest, but rather experiencing one’s life as having been made by being able to make a difference in the world. this calling originates from the self. it is the expression of personal essence, the inner core, the voice within that must surface, and it can be seen as a deeper self, calling out for actualization and integration. it is the driving force which urges the entrepreneurs to successfully perform in business. vi. spirituality as capital based on the above explanation, the researchers are convinced that spirituality should be considered as capital by entrepreneurs. spiritual capital is understood as the power, influence and disposition created by a person’s or an organization’s spiritual belief, knowledge and practice (liu, 2015). in this sense, the spiritual capital is formulated as the individual and collective capacities generated through affirming and nurturing the intrinsic spiritual values of every human being. the manifestation of spiritual capital is best expressed through a life devoted to service (zohar, 2010). zohar mentioned that it is by seeking the meaning in our lives and acting in accordance with our deepest values that we can commit ourselves to lives of service based on the capacity that we are best suited to whatever we choose to do personally or professionally. middlebrooks and noghiu (2010) affirmed that, the practice of spiritual capital is manifested through service, since it is a practical expression of the underlying capacities associated with spiritual capital. a strongly developed individual service disposition becomes an essential element in the development of spiritual capital at the organizational level. it is something every single entrepreneur has to possess. it is a demand required by the post capitalist economy. that is a transition from the capitalist economy which placed emphasis on profit maximization to a post capitalist economy which is more about values. this very much influences the choices of modern entrepreneurs. presently, people are talking about values-driven economy. post capitalist economies are driven by a complex balance of spiritual and material values and respect for the human condition of future generations. it supports responsible consumption of ethical, healthy products. within the value driven economy, profit and growth are no longer ultimate aims, but elements in a wider set of values. one of those values is spirituality which includes trust, respect, moral values and wisdom. spirituality concerns the common good, not just the private good since it is open to everyone. it is free, not regulated by markets and may not be enforced by law. it is different from the human capital which focuses on knowledge, experience and skills, education and training but with very low emphasis on quality of volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.161 | http://emaj.pitt.edu jozef raco, johanis ohoitimur, kosmas sobo emerging markets journal | p a g e 3 3 relationship and milieu. it is also different from social capital with its emphasis on networks, norms and social trust which facilitate coordination and cooperation for mutual benefits. competitive difference between companies is no longer purely one of a difference in expertise and technology, but now it is more about values. vii. conclusion there is growing interest on exploring spirituality and its impact toward business, management and entrepreneurial practices. spirituality brings about positive impacts to entrepreneurship activities and business industries. spirituality which has become a general topic of religious discussion is now expanded to be a concern of other subjects including management and entrepreneurship. the meaning of spirituality is getting more complex and there is no single definition suitable to describe spirituality. the meaning of spirituality is linked to searching for the meaning of life, and looking for purpose in life. through spirituality, every single activity is considered as a vocation, a calling and meaningful. a spiritual person will ask what is the purpose of me being here and what can i get from here or from my position. spirituality encourages entrepreneurs to create opportunities where others cannot see. through spirituality, they can perform better in business and sometimes go beyond their limitations and the result exceeds their expectations. the final end of spirituality is the common good and getting away from the egocentric behavior. while common and ordinary entrepreneurs are striving for making a profit, a spiritual entrepreneur looks for the benefit of others. common business practices mostly end up in the destruction of humanity and environment, while spiritual business practices always create good working conditions and preserve the environment. spirituality in business is not an illusion, but a new phenomenon (rose, 2001; seaward, 2001). it should be applied in entrepreneurship and business as a whole. it is becoming the core of business and entrepreneurial action since by trying to fulfill the needs and wants of customers they will guarantee the sustainability of their business. spirituality is now a very important capital for entrepreneurs. a good and successful entrepreneur is the one who possesses and strategically applies spirituality in providing quality services for others. references agbim, k.c., oriarewo, g.o., ijie, n. (2013). the relative importance of spirituality in entrepreneurship development among graduates of nigerian tertiary institutions. international journal of business and management invention, 2(4), 25-35. amir, r. (1994). ‘push’ and ‘pull’ entrepreneurship. frontiers of entrepreneurship research. wellsley, m.a, bobson college. amit, r., maccrimmon, k.r., zietsma, c., and oesch, j.m. (2001). does money matter? wealth attainment as the motive for initiating growthoriented technology ventures. journal of business venturing, 16(2), 119–143. anderson, p. (2000). this place hurts my spirit. journal for quality and participation, 1(1), 16-17. ashmos d., duchon, d. (2000). spirituality at work: a conceptualization and measure. journal of management inquiry, 9(2), 134-145. bettignies h. c., thompson, m. (2009). leadership, spirituality and common good. garant. bettignies h. c., lépineux, f. (2009). business, globalization and common good. peter lang publishers. bezy, k. (2011). an operational definition of spiritual leadership. (online), available at: https://vtechworks.lib.vt.edu/bitstream/handle/ 10919/26865/bezy_kg_d_2011.pdf, accessed 7 january 2017. biberman, j., whitty, m. (1997). a postmodern spirituality for work. journal of organizational change management, 10(2), 130-138. bird, b. (1988). implementing entreprenerial ideas: the case for intention. the academy of management review, 13(3), 34-47. bouckaert l., zsolnai, l. (eds). (2011). the palgrave handbook of spirituality and business. palgrave macmillan. bouckaert l., zsolnai, l. (2007). spirituality as a public good. garant. croitoru a. (2012). the theory of economic development: an inquiry into profits, capital, credit, interest and the business cycle, journal of comparative research in anthropology and sociology, 3(2), 137-148. dowson c & henley a. (2012). "push" versus "pull" entrepreneurship: an ambigu distinction? international journal of entrepreneurial behaviour & research, 18(6), 697-719. fisher, j. (2011). four domains model: connecting spirituality, health and well being. religions, 2, 17-28. https://vtechworks.lib.vt.edu/bitstream/handle/10919/26865/bezy_kg_d_2011.pdf https://vtechworks.lib.vt.edu/bitstream/handle/10919/26865/bezy_kg_d_2011.pdf volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.161 | http://emaj.pitt.edu spirituality: the power of entrepreneurship page |34| emerging markets journal foss n. j., peter g. klein p, g. (2004). entrepreneurship and the economic theory of the firm: any gains from trade. available online: http://www3.druid.dk/wp/20040012.pdf, accessed 2 october 2016. frankl v. (1997). men’s search for meaning. beacon press. giacalone, r a., jurkiewicz, c. l. (2003a). r. a. giacalone, & c. l. jurkiewicz (eds.), handbook of workplace spirituality and organizational performance (3-28). new york: m. e. sharp. herriott, e.n., schmidt-wilk, j., heaton, d.p. (2009). spiritual dimensions of entrepreneurship in transcendental meditation and tm-sidhi program practitioners. journal of management, spirituality and religion, 6(3), 195-208. howard, s. (2002). a spiritual perspective on learning in the workplace. journal of managerial psychology, 17(3), 230-242. islam, s. (2012). pull and push factors towards small entrepreneurship development in bangladesh, journal of research in international business management, vol. 2(3) pp.065-072. available online:http://www.interesjournals.org/jribm copyright ©2012. international research journals, accessed 3 october 2016. jackson, j. j. konz, g.n.p. (2000). spirituality and entrepreneurs. journal of management, spirituality & religion, 3(3), 242-257. judge, w.q., douglas, t.j. (2013). entrepreneurship as a leap of faith. journal of management, spirituality and religion, 10(1), 37-65. karakas, f. (2010). spirituality and performance in organizations: a literature review. journal of business ethics, 94(1), 89-106. katz, j.a., (1992). a psychological cognitive model of employment status choice. entrepreneurship theory and practice, 17(1), 29–37. kauanui s.k. et al. (2010) entrepreneurship and spirituality: a comparative analysis of entrepreneurs' motivation. journal of small business and entrepreneurship. 621 635,649-650. kauanui, s.k., thomas, k.d., sherman, c.l., waters, g.r., giles, m. (2010). exploration of entrepreneurship and play. journal of organizational change management, 23(1). 51-70. klerk j.j. (2005). spirituality, meaning in life and work wellness. the international journal of organization analysis, 13(1), 64-88. krueger, n.f., carsrud, a.l., (1993). entrepreneurial intention: applying the theory of planned behavior. entrepreneurship for regional development, 5, 315-330. liu, a. (2015). measuring spiritual capital as a latent variable.(online), http://www.researchmethods.org/measuringsp capital.pdf. accessed 5 january 2017. mahakul p. (2014). workplace spirituality and cultural awakening of western bonai on impact of sarsara. american international journal of research in humanities, arts and social sciences, 284-289. middlebrooks, a., noghiu, a. (2010). leadership and spiritual capital: exploring the link between individual service disposition and organizational value. international journal of leadership studies, 6(1), 67-85. mitroff, i.i., denton, e. a. (1999). a study of spirituality in the workplace. sloan management review, l(40), 83-92. moberg, d. (2010). measuring the immeasurable? perspective on science and christian faith, 62(2). (online). available on: http://www.asa3.org/asa/pscf/2010/pscf610moberg.pdf, accessed 10 january 2017. muldoon, m.,king, n. (1995). spirituality, health care and bioethics. journal of religious health, 34, 329-349. nandram, s., borden, m.e. (2009). spirituality and business. springer. pavlovich, k., corner, p. (2013). conscious enterprise emergence: shared value creation through expanded conscious awareness. journal of business ethics, 121(3), 1-11. pio, e. (2010). islamic sisters: spirituality and ethnic entrepreneurship in sweden. equality, diveristy and inclusion. international journal, 29(1), 113-130. http://www3.druid.dk/wp/20040012.pdf http://www.researchmethods.org/measuringspcapital.pdf http://www.researchmethods.org/measuringspcapital.pdf http://www.asa3.org/asa/pscf/2010/pscf6-10moberg.pdf http://www.asa3.org/asa/pscf/2010/pscf6-10moberg.pdf volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.161 | http://emaj.pitt.edu jozef raco, johanis ohoitimur, kosmas sobo emerging markets journal | p a g e 3 5 porter, m., driver, m. (2012). an interview with michael porter: social entrepreneurship and transformation of capitalism. academy of management learning and education, 11(3), 421-431. porter, g. (1995). exploring the meaning of spirituality and its implication for counselors, counseling and values, 40(1), 69-79. priestley, j. g. (1985). towards finding the hidden curriculum: a consideration of the spiritual dimension of experience in curriculum planning. brit j. relig edu, 7, 112-119. pruzan p. (2008). spiritual leadership in business. journal of human values, 14(2),101-114. raco, j.r., tanod, r.h.m. (2014a). the phenomenological method in entrepreneurship, int. j. entrepreneurship and small business, 22(3), 276-285. raco, j.r., tanod, r.h.m. (2014b) ‘understanding spirituality as experienced by catholic entrepreneurs’, world review of entrepreneurship, management and sustainable development, 10(1), 40–51. rose, s. (2001). is the term “spirituality’ a word that everyone uses, but nobody knows what anyone means by it?. journal of contemporary religion, 16, 193-207. seaward, b.l. (2001). health of the human spirit: spiritual dimensions for personal health. allyn and bacon: boston, usa. shapero, a., sokol, i. (1982). the social dimensions of entrepreneurship. in c.a. kent, d.i. sexton and k.h. vesper (eds). encyclopedia of entrepreneurship. englewood cliff, nj: prentice-hall. sheldon, k.m., elliot, a.j., kim, y., kasser, t. (2001). what is satisfying about events: testing 10 candidates’ psychological needs. journal of personality and social psychology, 80,325339. spohn, w. (1997). spirituality and ethics: exploring the connections. theological studies, 58, 109-123. thompson, m.j., eynikel, j. (eds). (2011). leading with wisdom. garant. thompson, m. (2011). business, spirituality and common good. russel media. valenzuela m. (2009). you are ministers of grace: a primer on la sallian spirituality for christian educators, de la salle catholic university manila. wagner-marsh, f. & conley, j. (1999). the fourth wave: the spiritual-base firm. journal of organizational change management, 12(4), 292-301. zohar, d., marshall, i. (2000). sq: connecting with our spiritual intelligence. new york. bloomsbury pub. zohar, d. (2010). exploring spiritual capital: an interview with danah zohar. spirituality in higher education, 5(5), 1-8. zsolnai, l. (2011). ethical principles and economic transformation. springer. zsolnai, l. (2011). spirituality and ethics in management. springer. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the brand relationship of cult-like following: developing scales of measurement in apple and catholic devotees yi-chia wu tarleton state university, usa | yichiawu@tarleton.edu michael s. minor university of texas, rio grande valley, usa | michael.minor@utrgv.edu abstract the purpose of this research aims to fill in the gap in the religion-brand relationship, and explores what constitutes a cultlike allegiance to a brand, by examining subjects’ relationship to the apple brand, comparing survey response by subjects who were “devotees” versus “indifferents” to catholicism and to apple. this paper uses ninian smart’s (1989) “seven dimensions of religion” as a theoretical framework to develop scales of measurement among apple and catholic devotees. the contribution of this research is the development of catholic and apple scales. the catholic scale extracted three factors and the apple scale generated four factors in cfa. keywords: seven dimensions of religion, devotees, indifferents, apple, catholicism new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.185 | http://emaj.pitt.edu | mailto:yichiawu@tarleton.edu mailto:michael.minor@utrgv.edu http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.185 | http://emaj.pitt.edu yi-chia wu, michael s. minor emerging markets journal | p a g e |27 the brand relationship of cult-like following: developing scales of measurement in apple and catholic devotees yi-chia wu michael s. minor i. introduction religion, a multidimensional influence on human behavior and decision-making, has been underresearched in the marketing discipline, possibly due to the sensitivity of religious topics and difficulties in measuring the impact of so potentially broad a field as “religion.” the exploration between individuals and brands through these lenses begins to offer glimpses into the relationship between brands and their devotees. the global advertising firm young and rubicam claimed that “brands are the new religion” and that “people turn to them for meaning” (rossano 2010). some argue that religion exists in the cultural context and varies within the shape of cultural influence at a specific point in time. if the ideology expressed by materialism can shape one’s judgments, social acceptance, moral issues, and the motivation for pursuing happiness, then that specific ideology can possibly function and impact one’s beliefs and further replace the importance and value of one’s religion. more extremely, one may take that ideology as one’s religion, rather than having an “actual religion” per se. for instance, religion is often used in daily dialogue. in alexandre o. philippe’s documentary of the people vs. george lucas (philippe, philippe and kurtz 2011), devoted fans describe george lucas as “god” because of his ability to create the incredible movie series, star wars. the same phenomenon applies to trekkies participating in star trek annual conventions as crucial events in their lives (nygard 1997). a cult-like phenomenon emerged among the apple macintosh brand community (belk and tumbat 2005; kahney 2004) and was related to certain apple products. lam (2001) explores “cultists, fanatics, and zealots” occurring through the lens of macintosh devotees to follow an “implicit” religion. both the apple macintosh and the newton brand communities are cultlike denominations of apple products (muñiz and schau 2005). at this point, it is important to explore some key definitions. according to the bloomsbury guide to human thought (cult 1993), cult has two identified meanings in english religious and theological literature: first, an “intense worship of or devotion to a particular saint or deity, who is credited with miracle-working powers” or second, a neo-religious activity, “heterodox sect outside the mainstream churches, often with secret doctrine and worship.” ii. theoretical rationale the theoretical rationale of this current study lies in understanding how devotees view their beloved brand to analogize those views as a form of a religious belief. the idea of forming a cult-like following of brands and communities was initiated into marketing strategy during the 1980s (koay and hernandez eriksson 2006). at the beginning of the 20th century, comparisons and strategic analyses with the name of “cult brands” appeared in the literature (berry 1992). as constantin and stoenescu (2014) explain, there is one main characteristic that cult brands have in common: “brands for which consumers developed such strong feelings need to be inspirational, remarkable, and relatable” (124). the meaning of “relatable” in this context suggests a level where an individual can express feelings of freedom and their allegiance to products or brands. contributing to a cult-like brand community not only satisfies one’s basic needs for belonging (atkin 2004), but also allows one to express oneself to a platform as an “outlet for personal fulfilment” (acosta and asagayam 2010). cult brands create a strong relationship “with a group cognitively initiated by individuals” (acosta and asagayam 2010, 166). such cult-like communities and their followers rely on tightly-bonded connections and share a sense of “satisfaction, accomplishment, belonging, and enlightenment” (ragas and bueno 2002, xxii–xxiii). constantin and stoenescu (2014) generalize their observations from the literature, giving examples of several cult brands such as apple, oprah winfrey, volkswagen beetle, harley-davidson, star trek, and others. kozinets (2001) analyzes star trek fandom, whose devotion goes beyond entertainment. for its followers, star trek’s imaginative future worlds provide a venue of escape as well as a platform for cognitive sharing (sirsi, ward and reingen 1996) through an actualization of their imagination. one enthusiastic star trek fan that kozinets interviewed in 1995 made the following statement: “star trek is a philosophy that almost approaches a religion. that’s what it is. it’s replacing religion, for a lot of people” (76). to explain the formation of a cult-like following, constantin and stoenescu (2014) generated eight characteristics that cult brands share, which were identified in the books the power of cult branding, written by ragas and bueno (2002), and the culting of brands: when customers become true believers written by atkin (2004) and compiled. to wit: 1) the brand enables individual differences in the way that “brand is different, but same enough.” (c.f. constantin and stoenescu 2014); 2) cult brand leaders are risk takers and determined fighters (koay and hernandez eriksson 2006); 3) cult brands sell lifestyles (ragas and bueno 2002) for customers to fulfil their dreams (constantin and stoenescu 2014); 4) cult brands not only satisfy a customer’s needs but, more importantly, they must listen and integrate their customers’ input (ragas and bueno 2002) in order to create evangelists among leading fandoms (constantin and stoenescu 2014); 5) and thus, supportive communities are formed to create a sense of belonging and remain authentic to create meanings of oneself (atkin 2004); 6) cult brands are open and volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.185 | http://emaj.pitt.edu the brand relationship of cult-like following: developing scales of measurement in apple and catholic devotees page |28| emerging markets journal inclusive (ragas and bueno 2002); 7) cult brands embrace personal freedom and rebellion (ragas and bueno 2002); and 8) cult brands demonize the other to create justified credibility (atkin 2004). the commonly shared characteristics of cult brands do not mean they all have these eight qualities, but several of these qualities may be observed in describing the success of cult brands. fisk (1989) pointed out that “commodities become icons of worship and rituals of exchanging money for goods become a secular equivalent of holy communion (sic)” (306). starting from an individual’s viewpoint specifically, atkin (2004) explores the reasons individuals are attracted to various groups to “find their own,” or, in other words, the need to belong. his interviewees from different cult brand communities explain the reason for becoming a cult member by saying they needed to find a community that would allow them to “become themselves.” (16) sometimes, these devotees are traditional religious devotees, such as those who belong to the mormon church. atkin (2004) often uses “devotees” while discussing cult brands, but whether these individuals’ devotion reaches the religious level is not discussed or measured in his qualitative interviews with various cult communities such as mary kay, harley-davidson, apple, and others. in 2005, apple paved its path to large-scale popularity as a mainstream phenomenon different from the non-mainstream experience of the newton community. users of the newer apple products—i.e., the iphone, ipad, and ipod—are so ubiquitous that a more recent trend has emerged: apple users defining themselves in contrast to personal computer, or pc, users. yet, by shifting from a marginalized group to a mainstream group, the mentality of current apple users already deviates from that of the newton community. devotion in both groups continued even as apple transformed its image from being “cool” and “innovative” to commanding a powerful market dominance (belk and tumbat 2005). incredibly, the zeal of apple fans drove apple to astonishing growth: 22,000 weekly visitors in an apple store, one billion visitors in total, and $10 billion in sales by may 19, 2011 (gallo 2012). hirschman (1983) points to three possible reasons that religion and religion-like consumption is under-researched in the marketing field: 1) topics related to religion and consumption are still limited in consumer research (mokhlis 2009); 2) the exploration of the relationship between consumption and religion is important because they are interactive and reciprocal, which makes interactions difficult to disentangle; and 3) religion not only influences how much we consume but also why we consume (hirschman 1983). the analogy has been made that consumption is a new religion. apple is a suitable entity to study because its consumption is oftentimes a process of self-searching for meaning and validating one’s existence through creation and possession (belk 1988). research question this study combines one of the oldest human activities, religion, to explore and explain the process of how the growth of apple can possibly be analogized as religion. this study used catholicism as the religious group to examine. catholicism is the largest single religious denomination in the u.s. (delener 1994; u.s. census bureau 2012), but research regarding catholicism is limited, and more focus should be paid to the study of this group (delener 1994). according to the american religious identification survey conducted by the u.s. census bureau in 2008, 25% of the surveyed adult population in the u.s. are catholic (u.s. census bureau 2012). catholicism emphasizes family ties, which is one of the traits of the apple community, as well as a basic mechanism to form a religion. therefore, it is reasonable to compare apple within the context of catholicism for the purpose of this study. it was crucial to identify the factors that cause an individual to react in a cult-like way to a specific brand and to determine what furthers the extreme worship mentality. with the curious nature of apple’s emerging cult-like phenomenon, this research attempts to answer the following question: how, if at all, is religious devotion expressed by apple fans? more specifically, how, and to what degree, is apple a cult-like religion for some individuals? one of the purposes of religion is to reduce anxiety and increase a sense of calmness. when a possession has a function similar to religion, the level of anxiety decreases while using and having the possession in this case an apple product. this reflects belk’s (1988) having, doing and being as well as the original goal of jobs when he created apple products. that is, through the possession of apple products and creating work by doing, one has left evidence of being, and it is meaningful to him or her that the creation itself is part of their being. even though one may not be a professional photographer, musician, or video editor, it takes little effort to create professionally displayed work with a few finger clicks with an iphone, ipod, or mac. seven dimensions of religion and operationalizations previous scales developed in the literature measure religious belief as it influences the decisionmaking process in consumption (delener 1990, 1994; hirschman 1983; mokhlis 2009; shukor and jamal 2013; wilkes, burnett and howell 1986). in these studies, three dimensions of religion, “belief, ritual, and experience,” are typically measured (tan 2006; tan and vogel 2008). since existing scales did not fit precisely the purpose of this study, modifications were made to existing measures (donahue 1985; tan and vogel 2008; worthington et al. 2003) based on the seven dimensions of religion (smart 1989). in addition, there is no existing apple religiosity scale meeting the purpose of this research. these new scales were used to assess the degree of apple and catholic devotion. during this research, a catholic scale was developed based on previous literature, and then an apple scale was developed to align with the items in the catholic scale. religion impacts consumer behavior in terms of values, decision-making, and judgments (macinnis and folkes 2010). when religion is used as a variable to differentiate an individual’s behavior instead of a correlated component with religious goods, religion can volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.185 | http://emaj.pitt.edu yi-chia wu, michael s. minor emerging markets journal | p a g e |29 be considered a predictor of consumer behavior (macinnis and folkes 2010). there are two important components of religion relevant to this study: 1) religious affiliation and 2) religiosity. religious affiliation generally refers to the major religions of christianity, judaism, islam, buddhism, and hinduism. religiosity indicates the degree of belief. smart (1989) proposes seven dimensions of religion in his book, the world’s religions. each dimension is explained and examples provided; the definitions are provided below. these detailed explanations and examples of the seven dimensions of religion (smart 1978, 1989, 12-20; smart 1996) are: 1) practical/ritual: this dimension is particularly important with faith in the form of a sacrament. patterns of behavior are ways to develop spiritual awareness. scales were derived from worthington et al. (2003) and thurstone and chave (1929). 2) experiential/emotional: this dimension contains religious experiences and feelings of being exposed to sacred awe. scales were derived from thurstone and chave (1929) and allport and ross (1967). 3) narrative/ mythic: the “storytelling” of a religion. the examples include written and oral forms of informal teaching. scales were derived from worthington et al. (2003), thurstone and chave (1929), ganzevoort (1998), and faulkner and de jong (1966). 4) doctrinal/ philosophical: this dimension refers to the aspect of religion expressed in relatively abstract and philosophical terms. scales were derived from worthington et al. (2003), thurstone and chave (1929), and allport and ross (1967) 5) ethical/legal: this dimension includes the laws, morals and formal guidelines derived from the system. scales were derived from thurstone and chave (1929) and allport and ross (1967). 6) social/institutional: the influence and understanding of faith can be observed among a group of people, which is the sociological component of religion. the social identity may be recognized within a small group of people, or it may be in line with the society on a large scale. scales were derived from worthington et al. (2003) and thurstone and chave (1929). 7) material: this dimension contains buildings, architecture, arts, images, icons, and instruments of ritual. scales were derived from bader, forese, johnson, mencken, and stark (2005). these seven dimensions serve as fundamental concepts for social scientists, neuroscientists, and anthropologists to explore and explain human behaviors. specifically, social scientists can explore the phenomena of all seven dimensions in descriptive and quantitative measurements in the virtual and physical world. iii. method a questionnaire was used to test the apple and catholic devotees. the purpose of the scale development was to allow participants to convey the meanings of religion and the meanings of apple individually. the empirical testing related to the seven dimensions of religion enabled further understanding of how apple and catholic devotees set priorities among the seven dimensions in their beloved brand and religion. pilot study the new scales, in the catholic and apple context, were developed by the researcher. the initial catholic and apple scales were with 51 and 47 items in the pilot study. participants were asked to answer each question on a scale of 1 to 10 (1 being “strongly disagree” and 10 being “strongly agree”). the pilot study was an online survey distributed through qualtrics with convenience sampling. the data collection timeframe for the pilot study was from april 1 to 14, 2014. participants were asked for their instructor’s name and their student id number in order to earn extra credit for taking the survey. participants were required to be a catholic and had to have used an apple product to fit the criteria of this research. in order to avoid biased answers from the online survey, participants were asked to choose their religious belief if he or she was not a catholic. even though a catholic can be referred to as a christian, a christian is not necessary a catholic. therefore, the first question asked was, “are you a catholic?” if the participant chose the answer, “no,” the second question asked was, “what is your religious belief?” the answer options for religious belief included: christianity, islam, buddhism, judaism, and others. the available option of “others” takes into consideration the fact that some are atheists or have a religious belief that is not affiliated with any religious organization listed. options for an online survey should be inclusive and mutually exclusive. therefore, the option of “others” allowed participants to choose if they considered their religious belief not affiliated with the options provided in the online survey. the third question of the survey appeared next: “i have used apple products before.” participants who chose “no” would not be included in the study and the survey would end after three questions. there were 161 questionnaires gathered for the pilot study. among all responses, five (3.1%) of them had never used apple products; four (2.4%) were incomplete (more than 50% of the questions were missing); 89 (55.2%) were catholic; and 63 (39.1%) were noncatholic. among the 63 non-catholics, 47 respondents identified themselves as non-catholic christians; two were buddhist; and 14 were “others.” eighty-nine questionnaires from university students who were both catholic and apple users were selected for the pilot study. exploratory factor analysis pilot study exploratory factor analysis (efa) and reliability tests were conducted in the pilot study in order for the newly developed items to be parsimonious. the lengthy initial questionnaire, with a total of 98 items before the pilot study, could potentially cause fatigue of survey participants and therefore needed to be reduced. the data were analyzed through efa using spss 21. before conducting efa, kaiser-meyer-olkin (kmo) tests of sampling adequacy and bartlett tests of volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.185 | http://emaj.pitt.edu the brand relationship of cult-like following: developing scales of measurement in apple and catholic devotees page |30| emerging markets journal sphericity were conducted in order to provide statistical evidence that the data were appropriate for proceeding to factor analysis. before proceeding to efa, the correlations among items were examined. the threshold of correlation coefficients between each item is above 0.3 (hair, black, babin and anderson 2013; tabachnick and fidell 2012). next, a measure of sampling adequacy (msa) was performed. the msa values were recommended to be at least 0.5 or above (hair, black, babin, anderson and tatham 2006). this study used principal components in the efa analysis. smart (1998) indicated the correlation between each dimension. the basis of religion as a multidimensional concept (allport 1954; glock 1954; king 1967; king and hunt 1975) was used as a theoretical framework. the researcher used promax, an oblique rotation, to demonstrate the nature of correlations (fabrigar, wegener, maccallum and strahan 1999) between each dimension. items were excluded due to the combination of multiple testing in the following: crossloadings (hair, black, babin and anderson 2010), low loading if below 0.4 (bearden, hardesty and rose 2010), partial correlations if above 0.7 (hair et al. 2010), interitem correlations if below 0.2 (bearden et al. 2010), and corrected item-to-total correlations if below 0.35 (bearden et al. 2010). most importantly, the item was removed if it did not load in any one of the generated factors. the catholic scale generated five factors in the efa with corresponding items. each factor was then examined with cronbach’s alpha, which ranged from 0.858 to 0.95. a total of 19 items were removed in the catholic scale in the pilot study. therefore, 32 items remaining in the catholic scale. the apple scale generated six factors in the efa with corresponding items. each factor was conducted using cronbach’s alpha, which ranged from 0.685 to 0.910. apple’s legal factor is slightly lower, but very close to the threshold of 0.7 (hair et al. 2010). a total of 16 items were removed in the apple scale in the pilot study. therefore, there are 31 items in the apple scale. data collection after the pilot study, the remaining 63 items of the scale were distributed through an online survey via qualtrics. the researcher collected the data through a qualtrics data collection panel. to increase the representativeness of the data, the survey was distributed in the northeast, west, midwest, and south regions of the u.s. survey participants had to be catholic and had to use apple products to qualify for the survey. the qualtrics team sent the survey link to the subjects’ emails and asked their willingness to participate. question 21, which asked: “to ensure you are reading the questions carefully, please select number two for this statement,” was added and used as an attention check question in the middle of the survey to ensure participants were reading each question (oppenheimer, meyvis and davidenko 2009). responses were excluded if this question was answered incorrectly. after the filtering and demographic questions, participants started with the catholic scale questions, then the apple scale questions. the pool of participants in this study focuses on both apple and catholic devotees. general users, but not devotees, of apple products were recruited but are not targets for this study; the same criterion applies to practitioners of the catholic faith. iv. results a total of 708 surveys were collected. participants were located in the northeast (23.4%), west (20.9%), midwest (21.9%), and south (33.7%). table 1 demonstrates the demographics of the total samples. this survey was distributed to the four main areas in the u.s. from may 16, 2014 to august 14, 2014. table 1: sample demographics gender frequency percent male 264 37.3% female 444 62.7% average age 35.6 region midwest 155 21.9% northeast 166 23.4% south 239 33.8% west 148 20.9% household income less than $25,000 95 13.4% $25,000-$34,999 93 13.2% $35,000-$49,999 105 14.9% $50,000-$74,999 201 28.4% $75,000-$99,999 117 16.5% more than $100,000 96 13.6% education level graduated high school or equivalent 109 15.4% some college, no degree 183 25.8% associate degree 103 14.5% bachelor's degree 228 32.2% post-graduate degree 85 12.0% there was a total of 65 questions in the main study. bagozzi and yi (2012) suggest that the ratio of the number of questions to survey participants should be 1:10. this study reached the requirement of this ratio. in order to achieve generalizability, this research included not only student samples, which has the drawback of homogeneity, but also other catholic and apple users residing in the four main areas of the united states. exploratory factor analysis exploratory factor analysis (efa) was conducted to extract factors of the online survey based on the items extracted from the pretest. a promax rotation with principal components was performed due to the correlation between dimensions in nature (fabrigar et al. 1999; hair et al. 2013). kaiser-meyer-olkin (kmo) tests of sampling adequacy and bartlett tests of sphericity (bartlett 1954) were conducted in order to provide statistical evidence that the data were acceptable to proceed toward factor analysis. the kmo measure value is 0.971, which meets the threshold of 0.6 (pallant 2010) and is above 0.9, which indicates a great suitability for analysis (kaiser 1974). a significant test result of bartlett volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.185 | http://emaj.pitt.edu yi-chia wu, michael s. minor emerging markets journal | p a g e |31 tests of sphericity rejects the null hypothesis that there is no correlation among variables. the catholic scale produced a significant bartlett test of sphericity (p = 0.000). in the catholic scale, total of five items were excluded after conducting an efa. item cr14 (i pray every day without the need to go to mass) was excluded because this item did not load in any one of the generated factors. ce3 (religion is relevant to my deepest feelings) and ci4 (i have influence in the decisions of my local religious group) were removed due to cross-loading. cr7 (i pray the rosary every day) and cr13 (i pray to saints) were removed because neither item loaded at all. cronbach’s alpha for the three new extracted factors was above 0.7 (hair et al. 2013). all the factor loadings were above the threshold of 0.5 except ce2 (i enjoy working in the activities of my religious affiliation), which had a factor loading of 0.47. in the apple scale, total of six items were excluded after running an efa. item ar3 (i do not like apple, inc., so i do not care to buy any apple products) and ar7 (i really worship apple, inc.) were removed due to a low inter-item correlation, which was less than the threshold of 0.2 (bearden et al. 2001). ad3 (the simplicity of apple products is the source of apple’s growth) and al2 (i don't think apple, inc., is truthful to its customers) were excluded due to cross-loadings after several tests using the promax rotation. al1 (apple does not cheat its customers.) and an4 (i am totally captivated by the stories about apple.) were removed because neither item loaded at all. confirmatory factor analysis after running efa, the catholic scale generated three factors, whereas the apple scale generated four factors. the three factors in the catholic scale involved 17, 5, and 5 items, while the four factors in the apple scale involved 12, 7, 3, and 3 items separately. table 2 demonstrates the factor loadings using amos 22.0 for each item with all seven factors from the catholic and apple scales, along with cronbach’s alpha, construct reliability, and average variance extract (ave) to test for convergent validity. table 2: factor loadings of catholic and apple scales, ave, cv, and cronbach's alpha volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.185 | http://emaj.pitt.edu the brand relationship of cult-like following: developing scales of measurement in apple and catholic devotees page |32| emerging markets journal jaccard and wan (1996) suggest using fit indexes to measure the model fit, such as chi-square to the degrees of freedom (cmin), rmsea (root mean square error approximation), cfi (comparative fit index), and nfi (normed fit index) for multiple examinations for the model fit. these values are presented in table 3. cmin is below the suggested threshold of 5 (wheaton, muthen, alwin and summers 1977) that is considered adequate. rmsea is below 0.08, which is considered adequate (hair et al. 2006). cfi and nfi are less than ideal, as they are supposed to be above 0.9 as recommended (hair et al. 2010). however, considering the catholic scale, and especially the apple scale, was developed by this study, lower cfi and nfi are expected. table 3: test results of model fit goodness-of-fit statistics model fit chi-square/df (cmin) 4.787 rmsea 0.073 cfi 0.873 nfi 0.845 convergent validity convergent validity indicates the extent to which indicators of constructs share a high degree of variance (bagozzi, yi and phillips 1991). there are three ways to measure convergent validity (hair et al. 2010): factor loading, average variance extract (ave), and construct reliability (cr). the threshold for a standardized factor loading should be 0.5 or, ideally, above 0.7 (hair et al. 2010). ave is an indicator of convergence and is calculated as a mean variance from the items loading on a specific construct (hair et al. 2010). all standardized factor loading was above 0.5 and the majority of them were above 0.7. an ave above 0.5 suggests an adequate convergence. all seven factors fit within this criteria. cronbach’s alpha evaluates the reliability; this is also an indicator of convergent validity. all the cronbach’s alphas were above 0.7, which suggests good reliability. construct reliability, on the other hand, measures internal consistency. all the construct reliability measurements range from 0.795 to 0.971, suggesting that the items consistently represent the specific latent construct (hair et al. 2010). discriminant validity. the suggested method for testing for discriminant validity is when the ave is greater than any of the two factors’ squared correlation estimates (hair et al. 2010). discriminant validity is achieved if this relationship is valid. this explains more than the correlations between any of the two constructs. table 4 shows results that indicate the seven constructs have discriminant validity. table 4: discriminant validity values below the diagonal are squared correlations between constructs. diagonal elements in bold are ave. v. discussions with a theoretical framework, this research provided the foundation to examine an individual’s perception of what religion is and whether apple can be considered similar to a religion. factors did not extract as expected in the seven dimensions in both catholic and apple scales. after convergent and discriminant validity, there were three constructs generated from the catholic scale and four constructs generated from the apple scale. these results were not in line with the seven dimensions of religion that were used for the theoretical framework as expected. in the catholic scale, catholic religiosity, the first construct, consisted of items from doctrinal, emotional, legal, narrative and ritual dimensions. catholic rituals at institution, the second construct was composed of items from institutional and ritual dimensions. catholic material, the third construct included items from the material dimension. the possible explanation for these results is that catholic devotees and indifferents view their devotion to catholicism in a combination of more than one dimension, rather than a clear separation of each dimension. for example, smart (1989) indicates that the ritual and emotion dimensions are related. in addition, ritual occurrence to catholic devotees may be related to the institutional dimension, such as going to church on a regular basis. the apple scale was developed based on the catholic scale because there is no existing “apple scale.” it is reasonable to expect that the apple scale would generate similar constructs in the statement, “apple is a religion,” if apple devotees evaluated apple and catholicism in a similar way. however, the scale development with reliability and validity testing presented different outcomes. for instance, apple religiosity, the first apple construct, included items from the emotional, institutional and ritual dimensions. apple doctrine on material, the second construct, consisted of items from the doctrinal, emotional and material dimensions. apple narrative, the third *p = 0.000 volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.185 | http://emaj.pitt.edu yi-chia wu, michael s. minor emerging markets journal | p a g e |33 construct, was composed of items merely from the narrative dimension. apple legal, the fourth construct, included items from the legal dimension only. interestingly, when all the items (32 = catholic scale; 31 = apple scale) were run in efa, all of the apple items were negatively correlated with the catholic items. this correlation remains the same in cfa in that all three catholic constructs were negatively correlated with the four apple constructs. this may indicate that catholic devotees perceive devotion to apple negatively and vice versa. that is, catholic indifferents are more likely to have a positive attitude towards apple. antik (2004) explains reasons for the formation of popular cult brand communities. people have the need to belong. when religion or other social means cannot satisfy this need, they look for alternatives. perhaps apple is parallel to the way religion reaches its believers and apple devotees find this alternative to be close enough to fulfil the need to belong, but this study indicates that it does not necessarily have the impact on their minds in the same way a religion does. vi. conclusion the significance of this research lies in four perspectives, all related to theoretical contributions. in the first perspective, religion is a multidimensional concept that is measured from the perspective of theology (allport 1954; glock 1954; king 1967; king and hunt 1975). in psychology, the research of religion is considered a multilevel, interdisciplinary paradigm (paloutzian and park 2013). this research incorporated the institutional aspects proposed by the smart’s seven dimensions of religion to examine the reasons for apple to develop into such a cult-like phenomenon in comparison to the catholic context. the results showed that devotees and indifferents practice their religion in different ways when dealing with apple. even though there were not seven factors generated in the catholic and apple scales separately as expected, the outcomes remain meaningful with self-reporting that helped to identify how individuals classify their devotion to catholicism and apple. the largest factor in the catholic scale had 17 items. these 17 items are in line with the construct religious commitment inventory, rci-10, in measuring religiosity (worthington et al. 2003). cfa analysis in the catholic scale did not have clearly identified factors falling into the seven dimensions. this may be due to the fact that some participants considered ritual and experiential as one dimension, whereas others considered ritual and material as a separate dimensions, which were defined by intrinsic-extrinsic religiosity (allport and ross 1967). even though the factors did not load as expected, the divided definition of each dimension includes the major shared components of what constitutes a religion. in the theological literature, there are thirteen common domains to measure religiosity: religious beliefs, spirituality, meaning and values, private practices, attachment, motivating forces, and more (paloutzian and park 2013, 65-67), used for their reliability and validity in some studies. one can distinguish differences in the wording of items in the theological literature when compared to the marketing literature. smart (1978, 1989, 1996, 1998) observed the world’s religions, then sought to identify the seven dimensions over twenty years. those seven dimensions serve as the basis for the theoretical foundation of this study from a rational, observant point of view. however, devotees may consider all religious and spiritual experiences while practicing rituals and producing emotional attachments to their institutions (churches) and the rosary in their daily rituals. furthermore, from the operational perspective, the construct of “religiosity” allows more statistical testing in terms of reliability and validity (de vries-schot, pieper and van uden 2012) for a specific religion. a unidimensional definition of religion narrows the complexity and limits the ability to capture dynamic phenomena (paloutzian and park 2013). apple devotees strongly revealed their feelings toward apple while taking the survey. emotional and institutional dimensions were extracted in the apple religiosity construct as important factors from the survey results. the apple doctrine on material construct includes items from the doctrinal, emotional, material, and ritual dimensions. the legal and narrative dimensions in the apple scale are clearly generated. for centuries, “catholics have displayed their faith materially” (mccallion and bennett-carpenter 2008, 427). in their research, mccallion and bennettcarpenter indicate that catholics consider visual displays of faith as a form of evangelization. they tend to present their faith publically by visual, non-verbal, or material means. the material means include the collection of statues, jewelry, and elaborate altars displayed in churches or for domestic collection. the material means are ways for catholic devotees to express their faith and connect with feeling of transcendence. catholics are used to the material means in various formats as a symbol to express their faith. similarly, consumers use material goods to identify themselves as an expression of existence. therefore, based on this research, the ideal target market for computer manufacturers and marketers would be catholics who are less religious. religion helps one to find identity, discover the meaning of life, and find purpose in one’s existence. religion also functions to bring believers comfort, reduce anxiety, and to contribute to a stable mental state. brands may, similar to religion, reduce anxiety because of a certain value perceived by users. whether brands or companies can achieve these same effects needs to be further studied. references acosta, p. m., and , r. a. j. asagayam. 2010. brand cult: extending the notion of brand communities. marketing management journal 20: 165–176. allport, g. w. 1954. the nature of prejudice. cambridge, ma: perseus books. allport, g. w., and , j. m. ross. 1967. personal religious orientation and prejudice. journal of personality and social psychology 5 (4): 432– 443. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.185 | http://emaj.pitt.edu the brand relationship of cult-like following: developing scales of measurement in apple and catholic devotees page |34| emerging markets journal atkin, d. 2004. the culting of brands: when customers become true believers. new york, ny: portfolio. bader, c. d., p. forese, b. johnson, f. c. mencken, and r. stark. 2005. baylor religion survey, wave i. waco, tx: baylor institute for studies of religion. retrieved from http://www.thearda.com/archive/files/descrip tions/brs2005.asp bagozzi, r. p., and y yi. 2012. specification, evaluation, and interpretation of structural equation models. journal of the academy of marketing science 40 (1): 8–34. bagozzi, r. p., y. yi, and l. w. phillips. 1991. assessing construct validity in organizational research. administrative science quarterly 36 (3): 421–458. bartlett, m. s. 1954. a note on the mulitplying factors for various chi square approximations. journal of the royal statistical society 16 (b): 296–298. bearden, w. o., d. m. hardesty, and r. l. rose. 2001. consumer self-confidence: refinements in conceptualization and measurement. journal of consumer research 28 (1): 121–134. belk, r. w. 1988. possessions and the extended self. journal of consumer research 15 (2): 139– 168. belk, r. w., and g. tumbat. 2005. the cult of macintosh. consumption, markets and culture 8 (3): 205–217. berry, j. 1992. the power of cult brands. adweek's marketing week 33 (8): 18–21. constantin, v.-d. n., and , r.-d. g. stoenescu. 2014. the impact of origin on creating a cult brand: the case of apple. sea–practical application of science 1 (3): 123–134. cult. 1993. in bloomsbury guide to human thought. retrieved from https://zeus.tarleton.edu/login?url=https://searc h.credoreference.com/content/entry/bght/cult/0 ?institutionid=5155 de vries-schot, m. r., j. z. t. pieper, and m. h. f. van uden. 2012. mature religiosity scale: validity of a new questionnaire. european journal of mental health 7 (1): 57–71. delener, n. 1990. the effects of religious factors on perceived risk in durable goods purchase decisions. journal of consumer marketing 7 (3): 27–38. delener, n. 1994. religious contrasts in consumer decision behaviour patterns: their dimensions and marketing implications. european journal of marketing 28 (5): 36–53. donahue, m. j. 1985. intrinsic and extrinsic religiousness: the empirical research. journal for the scientific study of religion 24 (4): 418–423. fabrigar, l. r., d. t. wegener, r. c. maccallum, and e. j. strahan. 1999. evaluating the use of exploratory factor analysis in psychological research. psychological methods 4 (3): 272– 299. faulkner, j. f., and g. f. de jong. 1966. religiosity in 5d: an empirical analysis. social forces 45 (2): 246–254. fisk, j. 1989. shopping for pleasure: malls, power, and resistance. in j. b. schor and d. b. holt (eds.), the consumer society reader. new york, ny: the new press. gallo, c. 2012. the apple experience: secrets to building insanely great customer loyalty. new york, ny: mcgraw-hill education. ganzevoort, r. r. 1998. religious coping reconsidered. part one: an integrated approach. journal of psychology and theology 26 (3): 260–275. glock, c. y. 1954. toward a typology of religious orientation. new york: bureau of applied social research, columbia university. hair, j. f., , w. c. black, b. j. babin, and r. e. anderson. 2010. multivariate data analysis. upper saddle river, nj: prentice-hall. --- 2013. multivariate data analysis. edinburgh gate, essex: pearson education, limited. hair, j. f., w. c. black, b. j. babin, r. e. anderson, and r. l. tatham. 2006. multivariate data analysis. upper saddle river, nj: pearson prentice hall. hirschman, e. c. 1983. religious affiliation and consumption processes: an initial paradigm. research in marketing 6: 131–170. jaccard, j., and c. k. wan. 1996. lisrel approaches to interaction effects in multiple regression. thousand oaks, ca: sage publications. kahney, l. 2004. the cult of mac. san francisco, ca: no starch press. kaiser, h. f. 1974. an index of factorial simplicity. psychometrika 39 (1): 31–36. https://zeus.tarleton.edu/login?url=https://search.credoreference.com/content/entry/bght/cult/0?institutionid=5155 https://zeus.tarleton.edu/login?url=https://search.credoreference.com/content/entry/bght/cult/0?institutionid=5155 https://zeus.tarleton.edu/login?url=https://search.credoreference.com/content/entry/bght/cult/0?institutionid=5155 volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.185 | http://emaj.pitt.edu yi-chia wu, michael s. minor emerging markets journal | p a g e |35 king, m. b. 1967. measuring the religious variable: nine proposed dimensions. journal for the scientific study of religion 6: 173–190. king, m. b., and r. a. hunt. 1975. measuring the religious variable: national replication. journal for the scientific study of religion 14 (1): 13. koay, l., and i. hernández eriksson. 2006. a pragmatic approach to sustaining cult brand – case of apple. retrieved from database name master thesis international marketing, mälardalen international master academy, school of business, tutor: charlotta edlund. kozinets, r. v. 2001. utopian enterprise: articulating the meanings of star trek’s culture of consumption. journal of consumer research 28 (1): 67–88. lam, p.-y. 2001. may the force of the operating system be with you: macintosh devotion as implicit religion. sociology of religion 62 (2): 243– 262. macinnis, d. j., and v. s. folkes. 2010. the disciplinary status of consumer behavior: a sociology of science perspective on key controversies. journal of consumer research 36 (6): 899– 914. mccallion, m. j., and b. bennett-carpenter. 2008. displays of faith: material/visual versus cognitive/verbal. review of religious research 49 (4): 427–437. mokhlis, s. 2009. relevancy and measurement of religiosity in consumer behavior research. international business research 2 (3): 75–84. muñiz jr., a. m., and h. jensen schau. 2005. religiosity in the abandoned apple newton brand community. journal of consumer research 31 (4): 737–747. nygard, r. 1997. trekkies [motion picture]. united states: neo motion pictures. oppenheimer, d. m., t. meyvis, and n. davidenko. 2009. instructional manipulation checks: detecting satisficing to increase statistical power. journal of experimental social psychology 45: 867–872. pallant, j. 2010. spss survival manual: a step by step guide to data analysis using spss. australia: allen and unwin. paloutzian, r. f., and c. l. park. 2013. handbook of the psychology of religion and spirituality, second edition. new york, ny: guilford publications. philippe, a. o., v. philippe, and g. kurtz. 2011. the people vs. george lucas. santa monica, ca: lionsgate. ragas, m. w., and b. j. bueno. 2002. the power of cult branding: how 9 magnetic brands turned customers into loyal followers (and yours can, too!). roseville, ca: prima. rossano, m. j. 2010. “sacred brands: consumerism as modern religion.” (accessed april 23, 2013), [available at http://www.huffingtonpost.com/matt-jrossano/sacred-brandsconsumerism_b_789303.html]. shukor, a. s., and a. jamal. 2013. developing scales for measuring religiosity in the context of consumer research. research in contemporary islamic finance and wealth management 13: 69-74. sirsi, a. k., j. c. ward, and p. h. reingen. 1996. microcultural analysis of variation in sharing of causal reasoning about behavior. journal of consumer research 22 (march): 345–372. smart, n. 1978. the phenomenon of religion. london: mowbrays. smart, n. 1989. the world’s religions: old traditions and modern transformations. new york, ny: cambridge up. smart, n. 1996. dimensions of the sacred: an anatomy of the world’s beliefs. berkeley, ca: university of california press. smart, n. 1998. the world’s religions. new york, ny: cambridge university press. tabachnick, b. g., and l. s. fidell. 2012. using multivariate statistics. boston, ma: pearson education. tan, j. h. w. 2006. religion and social preferences: an experimental study. economics letters 90 (1): 60–67. tan, j. h. w., and c. vogel. 2008. religion and trust: an experimental study. journal of economic psychology 29 (6): 832–848. thurstone, l. l., and e. l. chave. 1929. the measurement of attitudes: a psychophysical method and some experiments with a scale for measuring attitude toward the church. chicago, il: university of chicago press. u.s. census bureau. 2012. statistical abstract of the united states: 2012 (131st edition). retrieved from https://www2.census.gov/library/publications/2 011/compendia/statab/131ed/tables/pop.pdf https://www2.census.gov/library/publications/2011/compendia/statab/131ed/tables/pop.pdf https://www2.census.gov/library/publications/2011/compendia/statab/131ed/tables/pop.pdf volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.185 | http://emaj.pitt.edu the brand relationship of cult-like following: developing scales of measurement in apple and catholic devotees page |36| emerging markets journal wheaton, b., b. muthen, d. f. alwin, and g. f. summers. 1977. assessing reliability and stability in panel models. sociological methodology 8 (1): 84–136. wilkes, r. e., j. j. burnett, and r. d. howell. 1986. on the meaning and measurement of religiosity in consumer research. journal of the academy of marketing science 14 (1): 47. worthington jr., e. l., n. g. wade, t. l. hight, j. s. ripley, m. e. mccullough, j. w. berry, and l. o’connor. 2003. the religious commitment inventory—10: development, refinement, and validation of a brief scale for research and counseling. journal of counseling psychology 50 (1): 84–96. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu a research on the determination of consumer perceptions related to guerrilla marketing methods: sample of izmir province ebru onurlubaş trakya university | ebruonurlubas@trakya.edu.tr abstract in developing technology and differentiating markets, businesses have resorted the way of increasing their competitiveness by taking advantage of new marketing methods in order to stand out in the market. within this context, companies have started to use different marketing strategies in order to be more effective in the market and to maintain their presence and awareness in different ways. guerrilla marketing is an important marketing technique that small and medium-sized businesses are using with minimum marketing investments in extraordinary ways at unexpected times to attract attention of the target audience in today's increasingly competitive environment. this study focuses on guerrilla marketing which is an important marketing technique that small and medium-sized enterprises (smes) have applied, using unusual methods, in unexpected times, with minimum marketing investments to attract the attention of target audience in today's increasingly competitive environment. in order to determine the consumer perception about guerrilla marketing methods, a survey was applied to 384 people living in i̇zmir. factor analysis was applied to the obtained survey data in spss 22 statistics program. three results were obtained. 'extraordinary' has been identified as the most important factor. the second important factor is 'interesting and surprising', and the final factor is 'communication'. kolmogorov smirnov test was conducted to determine which tests should be performed on the sub-dimensions of the scale of consumer perception on guerrilla marketing methods (scpgmm). it was determined that the distribution was not normal and kruskal wallis and mann whitney u tests were applied to the sub-dimensions of scpgmm. according to the test results, it has been determined that the "extraordinary" (f1) sub-dimension of the scpgmm sub-dimensions varies according to gender, age, education and marital status; the "interesting and surprising" (f2) sub-dimension varies according to the education and the "communication" (f3) sub-dimension varies according to gender and marital status. keywords: consumer, consumer perception, guerrilla, i̇zmir new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.124 | http://emaj.pitt.edu | mailto:ebruonurlubas@trakya.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.124 | http://emaj.pitt.edu a research on the determination of consumer perceptions related to guerrilla marketing methods: sample of izmir province page |31| emerging markets journal a research on the determination of consumer perceptions related to guerrilla marketing methods: sample of izmir province ebru onurlubaş 1. introduction the rapid impact of technology on human life has encouraged businesses to use new means of communication more effectively in order to influence the target audience. nowadays, businesses have resorted to increase their competitiveness by taking advantage of new marketing methods in order to be able to stand out in the developing technology and differentiating market. within this context, companies have started to use different marketing strategies in order to be more effective in the market and to maintain their presence and awareness in different ways. guerilla marketing is just one of these strategies. guerrilla marketing is an important marketing technique that small and mediumsized businesses are using with minimum marketing investments in extraordinary ways at unexpected times to attract attention of the target audience in today's increasingly competitive environment (yıldız, 2016: 826). the basis of this marketing technique is to make a lasting impression on consumers with factors such as creativity and imagination with messages that are not seen before and cannot be imitated. the essential feature of guerrilla marketing is that the message is transmitted to the consumer at an unexpected time in an unexpected way. the nice issue is that a big budget is not necessary for this striking method (altunışık et al. 2006: 180). thus, enterprises try to create a privileged identity on the market by making their goods and services different from their competitors. the goal of guerrilla marketing, which is regarded as an important technique for businesses to adapt to ever-changing and increasingly competitive conditions, is to create a marketing management that is close to the market, dynamic, responsive to consumer needs, and empowered. within this context, the purpose of the study is to examine the consumer perceptions of guerrilla marketing techniques that businesses use in the marketing of their products or services. in order to achieve this aim, survey method was used as a data collection method in the research and the perceptions of consumers about guerrilla marketing techniques were analyzed. 2. guerrilla marketing guerrilla marketing is fundamentally guided by the guerrilla warfare and the steps taken. like a guerrilla warrior guerrilla marketing uses different, surprising strategies while trying to attract attention (çeltek and bozdoğan, 2012: 4789). the guerrilla warfare, which appeared in the resistance of the spaniards to the french napoleon between 1807 and 1814 and was described as the weapon of the weak, was used to repel the enemy without being seen as a "soldier" tactically to the enemy (özgül, 2008: 168). at this point, one of the marketing tactics, "guerrilla tactics", was first used in the mid1960s in the field of "marketing and advertising" in america. the vietnamese war that had taken place in these years and the successful use of the guerrilla tactics by the people there affected the marketing industry. this victory, which seems small for the countries, actually made a great contribution to the marketing world. companies started to increase their revenues with different marketing policies (i̇şler, 2016: 24). the concept of guerrilla marketing emerged when levinson, the founder and idea leader, gave marketing lessons at the university of california at berkeley and a group of his students who wanted to set up their own businesses asked him to recommend a book which taught "the ways to build a business without paying money" (kaşlı et al., 2009; arslan, 2009). as a result of his researches, levinson, who could not find any resources for his students, answered that question by writing an article entitled "527 ways to market without much money". thus, the foundations of guerrilla marketing had been laid and come until today (arslan, 2009). the guerrilla marketing term was first used in 1984 in the book "guerilla marketing" written by jay conrad levinson. in our day when classical marketing methods have lost its update and consumer behaviours have changed, guerrilla marketing, which is considered as an ideal marketing method for entrepreneurs with a small budget and big dreams, is based on the principle of demoralizing other players in the market and taking a place in the market, especially in small and mediumsized enterprises with small, periodic but surprising attacks (arslan 2009: 13; çeltek and bozdoğan 2012: 4789; tek, 1997: 109; kotler, 2003a: 163; özgül, 2008: 160). in order to be permanent in the market place, which was taken from demoralized competitor, efforts to increase sales, intensive advertising attacks in local areas and other legal actions are carried out (boyd and orville, 1990: 728). within this context, while guerilla marketing is aiming at the highest interest in its own goods, services, and proposals, it aims the least of resources and volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.124 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |32 costs for this endeavour. guerrilla marketing tries to attract attention to a different side as if it were a guerrilla warrior. in doing so, the policies they apply are "different, surprising, original and entertaining". everything comes with a small budget and can be used in every sector (dağdaş, 2013:15). guerrilla marketing is a strategy aimed at going for the jugular where it is weak, without leaving a direct understanding of war against big businesses (i̇slamoğlu, 2013: 35). according to kotler; the guerrilla marketing battle is to attack different areas of the enemy slowly, at intervals. the goal is to demoralize and disturb the enemy and to provide a marketing area where it can be kept all the time in the end (kotler, 2003b). according to another definition, guerrilla marketing is the marketing activities aimed at obtaining market shares by utilizing the mistakes of competing firms instead of increasing the sales by enlarging the market (pazarlamacı blog, 2017). guerrilla marketing is based on a marketing philosophy in which creative methods that competitors cannot imitate are used and the customer can be influenced by interesting tactics. businesses using this strategy can obtain the desired position in the mind of the customers compared to their competitors. they are beginning to make systematic plans to change customer habits and show why they need to buy their own brands as if they were entering the market for the first time (pirtini et al., 2007). guerrilla marketing is often associated with insidious marketing or sneaky tactics that are used without revealing them to people. therefore, it is often expressed in many sources with ambush marketing. but according to levinson, "you do not have to lie when you're guerrilla marketing, you do not have to be dishonest. guerilla marketing does not mean to do anything that annoys other communities or people. guerrilla marketing is to pursue traditional goals using unconventional tools" (reşber, 2013: 10). although there are various approaches to the definition of guerrilla marketing, the source of the differences in all these definitions is that guerrilla marketing looks very different at first glance. all these different definitions characterize the founding features of guerrilla marketing. these are; it is extraordinary, surprising, original / creative, provocative / arrogant, economic / cost effective, flexible, unusual / typical, funny, brilliant and contagious (nufer, 2011: 32; schulte, 2007: 3 resver, 2013: 12-13). guerrilla marketing was initially used only for small firms to compete against big companies better. later, it became a low cost marketing strategy, so not only smes but also strong companies started to use guerrilla marketing as a marketing strategy (kaşlı et al., 2009). the guerrilla marketing approach, which started to attract the attention of consumers with its striking examples in a short time, showed that marketing is not just advertising made with media tools and thanks to creative ideas marketing which can be done anywhere and anytime. this approach, which moves with the principle of facing potential customers unexpectedly almost everywhere such as avenues, streets, public transportation vehicles, pavements and stops, is thought to be remarkable and catchy (çeltek and bozdoğan, 2012). 2.1. the features that guerrilla marketing must have some basic features are needed to make marketing activities and achieve success in guerrilla marketing. these are; having a marketing plan understanding the importance of following knowing the responsibility of undertaking a plan acting according to the guerrilla marketing calendar, promoting the company by participating in events such as trade fairs, seminars, conferences, etc., sending direct postcards, preparing a website for free information, subscribing to forums and organizing e-mail campaigns (pazarlama makaleleri,2017). for a marketing strategy to be guerrilla marketing there must be basic features such as a simple and viable marketing plan, a good timing, a well-defined target market, a faithful and energetic entrepreneur, a wellchosen and purposefully targeted marketing weapon, imagination and patience (arslan, 2009: 14). it is also necessary for a business to adopt an attitude that is willing, curious, self-confident, realistic, objective, imaginative and ready to compete in order to conduct guerrilla marketing. in an environment where everyone is struggling to gain a privileged position in the mind of the customer, the ones who find and implement the most intelligent and creative solutions become successful (chief, 2008: 31). 2.2. the process needed to be followed in guerrilla marketing levinson and rubin (1996) have described the process that businesses need to follow in order to implement guerrilla marketing in five main stages. we can list the guerrilla marketing process and the activities to be carried out at each stage of the process as follows; creating a broad database: businesses must first create a database that is as detailed and accurate as possible about their internal and external environment. this database should contain detailed information about employees, customers, market situation and competitors, and should be guiding in shaping marketing efforts. conducting swot (strengths, weaknesses, opportunities threats) analysis: the business should volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.124 | http://emaj.pitt.edu a research on the determination of consumer perceptions related to guerrilla marketing methods: sample of izmir province page |33| emerging markets journal conduct a swot analysis of itself and the market in which it operates by taking the potential threats and opportunities into account. during this analysis, the advantages of the business different from its competitors should be determined, and while the marketing strategies are being developed, the competitive advantages of the business should be considered as much as possible. guerrillas, who are practitioners of guerrilla marketing in the direction of this data, are attempting to gather the information necessary to achieve a strategic alignment between opportunities outside the enterprise and the superiority of the business. the selection of the appropriate marketing weapon according to the results of the swot analysis: the business should choose a marketing weapon that suits its superiority once it determines the superior feature that it has. while choosing this appropriate weapon, it should focus on the differences of its products or services from the competitors' and the goals that will make the business more profitable by using the strongest side of that business. preparing a marketing calendar: a market-oriented guerrilla marketing calendar should be created and kept as faithful as possible. while preparing this calendar, it is necessary to use all the marketing weapons in a coordinated manner and to be prepared at all times against the counterattack that may arise from the opponent. passing on counter attacks: this phase is about the answers to the reactions of the opponents when guerrilla marketing calendar is applied. the results of the attacks made at this stage should constantly be monitored so that the reactions that are to be challenged against the opponents are passed without delay. 3. examples of guerrilla marketing in the world mcdonald's made an interesting surprise in the hot weather with the ice coupon project in brazil. mcdonald's amazed visitors with an ice cold surprise with its project held in rio de janeiro. the campaign "24 gifts in 24 cities in 24 hours", which was carried out basing on the brand's slogan "i'm lovin' it", and guerrilla marketing project in this context attracted attention with its creative concept. for the project, a vending machine that produces ice molds was placed on a busy street near the sea. in a short time, those who notice the vending machine met with the duties given to them for a delicious reward when they pushed the buttons of the machine, and learned that those who perform their duties like taking a selfie, and dancing were rewarded. the award is an ice coupon. the lucky winners had to go to the nearest mcdonald's restaurant to use the coupons. another guerrilla marketing example is that nescafe had invited people waiting in traffic lights to socialize with his guerrilla marketing project in berlin. nescafe invited the users who became more dependent on the internet and their phones day by day, made an interesting project in the streets of berlin. the brand, which placed two coffee machines in the traffic lights, made a special surprise to the people waiting at traffic lights with the "press together" button. thanks to the machines that rewarded individuals with coffee when they were pressed simultaneously, nescafe had reached a lot of people who had been shaking hands, greeting each other, smiling and establishing a short dialogue in the middle of the road. the brand had gained appreciation by creating "instant communication" between people with this work named "instant connections" (dijital ajanslar, 2017). when other guerrilla examples are examined, the example of guerrilla marketing which was applied by fast food brand mcdonald's by using a pedestrian crossing as an alternative medium is almost the definition of guerrilla marketing. the creative minds, bored by using conventional media, had found precisely a guerrilla idea and had integrated a product of their brand to a pedestrian crossing. the cost of this tremendous example to the firm had been very little. another guerrilla marketing asked the question “do you have the courage to get on this elevator?” in this guerrilla marketing case, which had been conducted by a parascending school operating in europe, the on-wall advertising which was applied to an elevator of a high-rise building caused fearful moments for the people getting on that elevator. this idea of on-wall advertising to an elevator was a great guerrilla example for a brand name to express itself. it had become a very successful application because it excited people and also led them to parachute jumping. the lifeless mannequin in the thief appearance is another kind of guerrilla contact which is carried out by a leading insurance company in turkey. it can be taught as a lesson in schools. the firm conveys the idea of insuring individuals’ home and workplace against thieves with the message ''before the thieves come to you, come to ….. insurance”. this creative guerrilla marketing idea which puts a lifeless mannequin in the appearance of a thief on the balcony of a building located in istanbul beşiktaş attracted considerable attention and created a tremendous impression (avansas blog, 2017). 3.1. guerilla marketing examples and images in the visuals, it is seen how brands work with guerilla marketing to influence consumers. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.124 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |34 figure 1. nivea; if you have a smooth skin, sit on the side of nivea source:http://www.aktifgirisimci.com/para-kazanmasanati/gerilla-pazarlama-ornekleri figure 2. mcdonald’s pedestrian crossing source:http://blog.avansas.com/pazarlamacilarin-keskebiz-yapsaydik-dedigi-5-mukemmel-gerilla-pazarlamaornegi figure 3. lifeless mannequin in the appearance of a thief on the balcony of a building located in istanbul beşiktas for an insurance company source:http://blog.avansas.com/pazarlamacilarin-keskebiz-yapsaydik-dedigi-5-mukemmel-gerilla-pazarlamaornegi figure 4. the on-wall advertising applied to an elevator of a high-rise building conducted by a parascending school operating in europe source:http://blog.avansas.com/pazarlamacilarin-keskebiz-yapsaydik-dedigi-5-mukemmel-gerilla-pazarlamaornegi figure 5. lipton tea source:http://www.aktifgirisimci.com/para-kazanmasanati/gerilla-pazarlama-ornekleri figure 6. brazil coffee company source:https://blogof.francescomugnai.com/2009/11/the -80-best-guerrilla-marketing-ideas-ive-ever-seen/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.124 | http://emaj.pitt.edu a research on the determination of consumer perceptions related to guerrilla marketing methods: sample of izmir province page |35| emerging markets journal figure 7. kitkat chocolate source:https://blogof.francescomugnai.com/2009/11/the -80-best-guerrilla-marketing-ideas-ive-ever-seen/ 4. methodology 4.1. sampling and measurement tools the data gathered from 384 persons in i̇zmir province in 2016 is the target population of the study. the population of izmir province in 2016 is 4.223.545 (tuik, 2016). the sample size has been determined with the help of the equation below ( bas, 2008): qptnd qptn n **)1(* *** 22 2   n; number of the individuals that are to take part in the sample, n; 4.223.545, p; probability of occurrence (0,50), q; probability of non-occurrence (0,50), t; standard normal distribution value (1,96), d; sampling error (0,05) after the calculation, the sample volume was determined as 384 within the 95% confidence interval and 0.05 margin of error. the survey, which was distributed to 384 people in 2016, was randomly given to consumers. 4.2. data collection and analysis the data obtained from the questionnaires distributed to consumers in i̇zmir in 2016 were analyzed using spss 21 statistical package program. the data collection form consists of two parts. in the first part, there are questions about the demographic characteristics of the participants and in the second part, there are 19 statements regarding the consumer perception about the guerrilla marketing methods of the enterprises. the questionnaire used in the research consists of the questionnaires prepared from the previous studies (memişoğlu, 2014; yıldız, 2016) and the literature given in the bibliography. also, the questionnaire was developed by adapting 19 measurement questions, because they are relevant to the scope of the research. the questionnaire participants responded according to the likert scale. an exploratory factor analysis was applied to the scale of consumer perception on guerrilla marketing methods (scpgmm). after the exploratory factor analysis, three dimensions were presented. the most important factor was determined as “extraordinary”. then, the kolmogorovsmirnov test was applied to the sub-dimensions of scpgmm and it was determined that the distribution was not normal. the variations of the sub-dimensions of scpgmm according to the demographic characteristics of consumers were revealed by mann whitney u and kruskal wallis tests which are non-parametric tests. 5. research findings table 1: demographics of the consumers frequency (f), percent(%) gender (f) (%) age (f) (%) male 193 50,3 25-34 82 21,4 female 191 49,7 35-44 95 24,7 total 384 100,0 45-54 91 23,7 profession (f) (%) 55-65 69 18,0 housewives 37 9,6 66 and over 47 12,2 worker 85 22,1 total 384 100,0 civil servants 115 29,9 monthly incomes (f) (%) self-employed 59 15,4 1000 and below 34 8,9 private sector employee 88 22,9 1001-1500 38 9,9 total 384 100,0 1501-2500 52 13,5 marital status (f) (%) 2501-3500 89 23,2 married 200 52,1 3501-4500 92 24,0 single 166 43,2 4501 and over 79 20,6 divorced 18 4,7 total 384 100,0 total 384 100,0 educational status (f) (%) elementary school 7 1,8 high school degree 42 10,9 vocational school degree 122 31,8 bachelor’s degree 167 43,5 master’s degree 46 12,0 total 384 100,0 49,7% of the participants were women, and 50,3% were men. when the distributions according to age groups were examined, it was seen that 21,4% of the volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.124 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |36 participants were in the age group of 25 34, 24,7% were 35-44, 23,7% were 45-54, 18,0% were 55-65 and 12,2% of them were 66 and over. 52,1% of the consumers were married, 43,2% were single, and 4,7% were divorced. when the monthly average income of families was examined, it was seen that 8,9% of them had an income of 1000 tl and below and 9,9% was between 1001-1500tl, 13,5% was between 1501-2500tl, 23,2% was between 2501-3500tl and 24% was between 35014500tl, 20,6% had an income of 4501 tl and above. when the persons participating in the survey were examined according to occupation; it had been determined that 9,6% were housewives, 22,1% were workers, 29,9% were civil servants, 15,4% were selfemployed and 22,9% were private sector employees. according to the evaluation results of education data, 1,8% of the participants were elementary school graduates, 10,9% had high school degree, 31,8% had vocational school degree, 43,5% had bachelor’s degree, 12,0% had master’s degree. table 2: kmo and barlett results of the scale of consumer perception on guerrilla marketing methods (scpgmm) kasiser meyer olkin (kmo) 0,872 bartlett sphericity testi χ² (chi-square) 2,51903 df (degrees of freedom) 105 p (probability) 0,000* if the value found in the kmo test is below 0,50, it is unacceptable, 0,50 is weak, 0,60 is moderate, 0,70 is good, 0,80 is very good, 0,90 is excellent (sharma 1996). the kmo value of the study is very good at 0.87. as a result of the bartlett sphericity test, χ²:2,51903, sd:105 p<0,05 . for this reason, the data set is suitable for factor analysis. table 3: variance description of the scale of consumer perception on guerrilla marketing methods (scpgmm) in the results of varimax rotation, the items are collected under a total of 3 factors. these factors account for 58.761% of the total variance. the first factor accounts for 33,420% of the total variance, the second factor for 13,599% and the third factor for 11,742%. table 4: exploratory factor and reliability analyses results of the scale of consumer perception on guerrilla marketing methods (scpgmm) factor code statements factor load values cronbach’s alpha factor 1 s1s1 it offers innovations based on imagination. ,783 ,922 s1s10 it differs from conventional marketing methods. ,815 s1s8 it is more fun than the other marketing methods. ,823 s1s6 it uses creative techniques and methods. ,885 s1s3 it introduces new products and services with their different characteristics compared to its peers. ,787 s1s13 it uses different advertising techniques. ,745 s1s14 it changes consumer's conventional purchasing tendencies. ,773 s1s15 unusual promotional techniques brand the products and services offered. ,662 factor 2 s1s4 with unconventional tools, it is imbedded in the consumer’s subconscious ,547 .640 s1s7 it's exciting ,649 s1s9 it contains interesting messages ,676 s1s2 it may occur unexpectedly. ,710 factor 3 s1s11 its relationship with the consumer in marketing is good. ,679 ,650 s1s12 its marketing communication is strong. ,814 s1s5 it establishes an emotional connection with the consumer. ,638 volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.124 | http://emaj.pitt.edu a research on the determination of consumer perceptions related to guerrilla marketing methods: sample of izmir province page |37| emerging markets journal in the guerrilla marketing evaluation, 19 variables, which were highly related to each other, were reduced by factor analysis and are distributed to 3 factors. it was seen that the 19th, 12th, 10th, 5th and 8th factors were below 0.400 and all others’ factorial loads were above 0.400. in the direction of this result, 19th, 12th, 10th, 5th, 8th items were removed from the scale and factor analysis was applied again. factors that were effective as a result of coverage of item 15 were collected in 3 groups. 'extraordinary' had been identified as the most important factor. the second important factor was 'interesting and surprising', and the final one was 'communication' factor. for the first factor, the factor loadings ranged from 0.885 to 0.622; for the second factor, they ranged from 0.710 to 0.547 and for the third factor, they ranged from 0.814 to 0.638. sipahi, yurtkoru and çinko stated that the cronbach alpha reliability coefficient should be above 0.70. however, it is also stated that when the number of questions in the scale is few, the lower limit can be accepted as 0.60 or more, or it can be withdrawn up to 0.50 in some studies (öztürk and babacan, 2012; sipahi et al., 2008; altunışık et al., 2010). the cronbach alpha value was found 0.92 for factor 1, 0.64 for factor 2, 0.65 for factor 3. table 5: kolmogorov-smirnov test results regarding the sub-dimensions of the scale of consumer perception on guerrilla marketing methods (scpgmm) one-sample kolmogorov-smirnov test f1 f2 f3 n 384 384 384 normal parameters mean 25,1849 14,3177 11,1641 std. deviation 6,93609 2,82808 2,30147 most extreme differences absolute ,158 ,127 ,134 positive ,109 ,082 ,088 negative -,158 -,127 -,134 kolmogorov-smirnov z 3,088 2,492 2,625 asymp. sig. (2-tailed) ,000 ,000 ,000 h0= the sub-dimensions of the scpgmm have normal distribution. h1= the sub-dimensions of the scpgmm do not have normal distribution. as shown in table 5, the hypothesis h0 is rejected because p <0,05. in other words, the subdimensions of the scpgmm do not have normal distribution. mann-whitney u and kruskal wallis nonparametric tests were applied to the three sub-dimensions of the scpgmm according to gender, age, marital status, education, occupation and income. table 6: variations test results of the subdimensions of the scpgmm according to consumer demographics (variables) variables subdimension test type p gender f1 mann whitney u 0,006* f2 mann whitney u 0,205 f3 mann whitney u 0,012* age f1 kruskal wallis 0,000* f2 kruskal wallis 0, 412 f3 kruskal wallis 0,375 marital status f1 kruskal wallis 0,004* f2 kruskal wallis 0,170 f3 kruskal wallis 0,002* educational status f1 kruskal wallis 0,003* f2 kruskal wallis 0,008* f3 kruskal wallis 0,380 profession f1 kruskal wallis 0,060 f2 kruskal wallis 0,307 f3 kruskal wallis 0,154 monthly income of the family f1 kruskal wallis 0,054 f2 kruskal wallis 0,067 f3 kruskal wallis 0,072 * p <0,05; represents the differences among the subdimensions of scpgmm scale in table 6, according to the mann whitney u test, it has been determined that extraordinary (f1) and communication (f3) sub-dimension varies according to gender. in the extraordinary sub-dimension, the average of women (208,01) is found to be higher than that of men (177,16). when the averages of communication subdimension are examined, it is found that the average of women (206,73) is higher than that of men (178,41). volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.124 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |38 among the sub-dimensions of scpgmm, ‘extraordinary’ sub-dimension varies according to the age. the average of the age group between 55-65 years (235,62) has been found to be higher than the other age groups. when the marital status is examined, it is determined that the averages of ‘extraordinary’ and ‘communication’ sub-dimensions vary. it is seen that ‘extraordinary’ sub-dimension of the married (210,60) is higher than that of the single (173,87) and divorced (163,17), and the averages of the ‘communication’ subdimension are also higher for the married (200,20) and lower for the single (173,81) and the divorced (157,42). it appears that the educational status varies according to the sub-dimensions ‘extraordinary’ and ‘interesting and surprising’. it has been found that the averages of ‘extraordinary’ sub-dimension (209,69) and the 'interesting and surprising' sub-dimension (203,03) of the persons with a master’s degree are higher than the others. 6. conclusion the fact that the communication and information technologies evolving with globalization is rapidly influencing human life has caused changes in consumption patterns and lifestyles. enterprises that want to keep up with these consumption patterns have had to look for different holding efforts to be able to take place in the market. especially, due to the fact that small businesses have limited budgets for their marketing activities, they have been looking for marketing strategies that will create competitive advantages without forcing their budgets. one of these strategies is guerrilla marketing. guerrilla marketing is a marketing method that enables low-budget brands to place their products in consumer consciousness by creating sensations that emerge in unexpected places and times with creative, extraordinary, exciting and surprising tactics. guerrilla marketing was initially applied to small businesses due to its low cost, but later on, it became used as a marketing strategy in large enterprises because of its low cost and attractiveness. in guerrilla marketing, businesses should act as a guerrilla warrior. in other words, when trying to attract attention to another place as a guerrilla warrior, they should use strategies that can be used in unexpected places at an exciting, interesting, different, surprising and creative time. creative ideas used in guerrilla marketing techniques will appeal to consumers and they will share their experiences and photographs or videos on the social media. thus, the brand will also reach people such as a virus via internet and the popularity will increase. in the study conducted with 384 people in izmir province, due to the exploratory factor analysis performed on the scale of consumer perception on guerrilla marketing methods; 3 sub-dimensions have been identified: factor 1 is “extraordinary”, factor 2 is “interesting and surprising”, factor 3 is “communication”. factor 1 extraordinary: consumers see guerrilla marketing techniques that are more creative as an unconventional marketing method whixh uses imaginative, fun, creative techniques by standing out amongst other traditional marketing methods, television and radio channels, billboards, newspapers, and magazines. factor 2 interesting and surprising: the guerrilla marketing method draws the attention of consumers to a great extent by using unconventional tools, and various brands are imbedded in consumers’ subconscious, thus it is changing the consumption habits at a low cost. brands unexpectedly and suddenly come out with different methods and the consumer is surprised and excited. for example; mc donald's use of his own brand as a pedestrian crossing had been used in europe as an intriguing and remarkable guerrilla marketing method. factor 3 communication: consumers think that the relationship and communication with the customer in guerrilla marketing techniques is better, and that it even creates an emotional bond. when the test results of the scpgmm subdimensions according to the demographic characteristics of the consumers are examined, it has been found that extraordinary (f1) sub-dimension varies according to gender, age, education and marital status; interesting and surprising (f2) sub-dimension varies according to education; and communication (f3) sub-dimension varies according to gender and marital status. women find guerrilla marketing method more extraordinary than men and think that communication is better in this marketing technique. as the average age increases, consumers think that the guerrilla marketing method is more extraordinary. married people find guerrilla marketing method more extraordinary than single and divorced people. as the educational status increases, consumers think that the guerrilla marketing method is extraordinary and interesting and surprising. the results obtained from this study may lead the way for those who are considering to do academic work in this area. this study also reveals the consumers’ perception about the guerrilla marketing method and guides the businesses that are considering using lowbudget guerrilla marketing techniques instead of using traditional marketing method and casts light on establishing their policies. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.124 | http://emaj.pitt.edu a research on the determination of consumer perceptions related to guerrilla marketing methods: sample of izmir province page |39| emerging markets journal references aktif girişimci (2013). para kazanma sanatı: gerilla pazarlama örnekleri, http://www.aktifgirisimci.com/para-kazanmasanati/gerilla-pazarlama-ornekleri altunışık, r. özdemir, ş. torlak, ö. (2006). pazarlamaya giriş, sakarya kitabevi, -iii. basım, sakarya. altunışık r, çoşkun r, bayraktaroğlu s, yıldırım e. (2010). sosyal bilimlerde araştırma yöntemleri. sakarya: sakarya yayıncılık; 2010. arslan, s. (2009). turizm sektöründe alternatif bir pazarlama stratejisi olarak gerilla pazarlamasının kullanılması: konaklama i̇şletmeleri üzerinde bir araştırma. yayınlanmamış yüksek lisans tezi, ankara: gazi üniversitesi eğitim bilimleri enstitüsü turizm i̇şletmeciliği eğitimi anabilim dalı. avansas blog (2014). pazarlamacıların keşke biz yapsaydık dediği 5 mükemmel gerilla pazarlama örneği, http://blog.avansas.com/pazarlamacilarinkeske-biz-yapsaydik-dedigi-5-mukemmelgerilla-pazarlama-ornegi. baş, t. (2008). gerilla kobiler için stratejiler, optimist yayın dağıtım, i̇stanbul haziran 2008. boyd, h. w., orvılle, c. w. (1990). marketing management. boston: irwin. çeltek, e., bozdoğan, m. (2012). alternatif pazarlama i̇letişimi aracı olarak gerilla pazarlama: uygulanmış gerilla pazarlama reklam örneklerinin i̇ncelenmesi ve turizm sektörü i̇çin model önerileri, journal of yasar university 2012 28(7) s.4788-4812. dağdaş, g. (2013). i̇şletmelerde retro pazarlama uygulamalarının müşteri bağlılığına etkileri üzerine bir araştırma. yayınlanmamış yüksek lisans tezi, konya: selçuk üniversitesi sbe. dijital ajanslar (2017). mcdonald’s: serinleten proje ice coupon, http://www.dijitalajanslar.com/mcdonaldsserinleten-proje-ice-coupon/. i̇slamoğlu, h. a. (2013). pazarlama yönetimi, i̇stanbul. i̇şler, ü. (2016). gerilla pazarlama ve uygulamaları. yayımlanmamış yüksek lisans tezi. okan üniversitesi sosyal bilimler enstitüsü, i̇stanbul kaşlı, m., i̇lban, m. o., şahin, b. (2009). modern pazarlama stratejileri: ab ve türk turizmi, elektronik sosyal bilimler dergisi, 8 (27). kotler, p. (2003a). a framework for marketing management. (2nd edition). new jersey: prentice hall. kotler, p. (2003b). kotler ve pazarlama, sistem yayıncılık, 3. baskı, i̇stanbul. levınson, j. c., rubin, c. (1996). guerrilla marketingon line weapons. new york: houghton mifflin company. memişoğlu, a. (2014). gerilla pazarlama faaliyetlerine i̇lişkin tüketici görüş ve değerlendirmelerinin belirlenmesi: örnek bir uygulama, atılım üniversitesi, sosyal bilimler enstitüsü, yüksek lisans tezi. mugna, f. (2009). the 80 best guerrila marketing ideas i have ever seen, https://blogof.francescomugnai.com/2009/11/th e-80-best-guerrilla-marketing-ideas-ive-everseen nufer, g. ve bender, m. (2008). guerilla marketing, reutlinger diskussionsbeiträge zu marketing & management, reutlingen üniversitesi, almanya. özgül, n.(2008). bütünleşik pazarlama i̇letişiminde gerilla pazarlama stratejilerinin kullanılması. yayımlanmamış yüksek lisans tezi. ege üniversitesi sosyal bilimler enstitüsü, i̇zmir. öztürk, h., babacan, e. (2012). bir ölçek geliştirme çalışması: hastanede çalışan sağlık personeli i̇çin i̇ş güvenliği ölçeği, hemşirelikte eğitim ve araştırma dergisi 2012; 9 (1): 36-42. pazarlama makaleleri (2017). http://www.pazarlama makaleleri.com volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.124 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |40 pazarlamacı blog (2017), http://pazarlamaci.blogspot. com.tr pirtini, s., şahin, ş., temelli p. (2007). stratejik yaratıcılık açısından gerilla pazarlama ve müşteri deneyimi yaratan stratejiler, pi̇ pazarlama ve i̇letişim kültürü dergisi, güz, (2007/3), s.4-13 reşber, z. (2013). gerilla pazarlamanın temel unsurlarından gerilla reklamcılık ve göstergebilim reklam i̇lişkisi: türkiye’deki gerilla reklamcılık uygulamalarının göstergebilimsel açıdan i̇ncelenmesi. yayımlanmamış yüksek lisans tezi. selçuk üniversitesi sosyal bilimler enstitüsü, konya. schulte, t. (2007). “was ist guerilla marketing? große wirkung mit kleinem budget?”, http://www.guerilla-marketing-portal.de/ (erişim tarihi: 29.01.2017). sharma s, (1996). applied multivariate techniques, john wiley sonc inc, new york, 116. sipahi b, yurtkoru es, cinko m. (2008). sosyal bilimlerde spss ile veri analizi. i̇stanbul: beta basım yayım dağıtım a.ş. tek, ö. b. (1997). pazarlama i̇lkeleri. (7. basım). i̇zmir: cem ofset. http://www.pazarlamamakaleleri. com/category/gerilla-pazarlama/ erişim tarihi: 29/01/20017 yıldız, salih (2016). effects of guerrilla marketing on brand awareness and consumers’ purchase intention, 2. uluslararası osmaneli sosyal bilimler kongresi, 12-14 ekim 2016, ss.825834, bilecik. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu emancipating identity: the differential effect of organizational identification on commitment and performance i̇pek koçoğlu gebze technical university, turkey | ikocoglu@gtu.edu.tr serhat erat gebze technical university, turkey | erat@gtu.edu.tr salih zeki i̇mamoğlu gebze technical university, turkey | imamogly@gtu.edu.tr abstract research on organizational identity (oi) and organizational identification (oid) has long considered the two concepts as inseparable. there is also a rising concern among scholars that oid and organizational commitment (oc) might be misrepresented and used interchangeably. these together raise the question: can oi, oid, and oc substitute each other, or should firms make an effort to establish all three differentially in order to capitalize on their unique effects on performance outcomes? in this study, we aim to address these unanswered inquiries with regards to how oi, oid, and oc are interrelated yet distinct constructs that in turn play unique roles in increased performance outcomes. we argue that, oi, oid and oc are distinct constructs that have differential effects on performance outcomes. by first looking at the effect of oi and oid on oc, we aimed to understand the differential relationship of oi and oid with oc. also, we aimed to examine the concurrent effects of all three constructs namely oi, oid, and oc on individual performance. drawing on the social identity and social categorization theories, we develop and empirically test a conceptual model where we examine the effects of oi and oid on oc and the effect of oc on individual performance. through examining the data collected by 345 employees in the education sector, we show that oi and oid have positive significant effects on oc. further, the results of our hierarchical multiple regression analyses reveal that oi, oid, and oc have positive and significant effects on individual performance. keywords: organizational identity, organizational identification, organizational commitment, individual performance, social identity theory new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.181 | http://emaj.pitt.edu | mailto:ikocoglu@gtu.edu.tr mailto:erat@gtu.edu.tr mailto:imamogly@gtu.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.181 | http://emaj.pitt.edu emancipating identity: the differential effect of organizational identification on commitment and performance page |8| emerging markets journal emancipating identity: the differential effect of organizational identification on commitment and performance i̇pek koçoğlu serhat erat salih zeki i̇mamoğlu 1. introduction organizational identity (oi) and organizational identification (oid) draw increasing attention of both scholars and practitioners. in an attempt to better understand organizational life, researchers often refer to these concepts. in today’s global world where conventional organizational forms are dismantled, firms rely on an ever more geographically dispersed workforce, diversifying expertise, social and cultural fragmentation and intensifying virtual connections (albert, ashforth, & dutton, 2000). as external structures that holds the firm intact dissolve, to have an internalized cognitive structure that endows a self-referential meaning of “who we are” is an essential force that drives the organization forward toward its goals. along these lines, the field of oi and oid research witnessed rigorous attempts of scholarly effort ever since the seminal work of (albert & whetten, 1985). research on oi and oid has long considered the two concepts as inseparable. over more than two decades, the close association between oi and oid has led to multiple misconceptions regarding their definitions and their unique effects on organizational outcomes (he & brown, 2013). the distinguishing characteristics that draw the boundaries of the oi and oid concepts are overlooked leading to an entanglement across the two concepts. the loss of identity experienced by oi and oid has been referred to as “an identity crisis” by (whetten, 2006) to indicate the uncertainties regarding the misuse, ill positioning and underspecification of both concepts. it follows that studies use oi and oid interchangeably limiting the potential to investigate their distinctive effects on organizational phenomena such as commitment (kreiner & ashforth, 2004). although there is an agreement that research on oi and oid ought to spend considerable effort in redefining, reconceptualizing, and operationalizing these concepts to better reflect their uniqueness, very few studies have distinguished oi and oid and empirically tested their differential effects on organizational and individual level outcomes. this raises the question can oi and oid substitute each other or should companies invest in establishing both? further, it is increasingly recognized that the extent to which individuals identify themselves with the organization implies their attachment, and involvement in that organization (meyer & allen, 1991; mowday, steers, & porter, 1979). while the former refers to oid, and the latter is represented through organizational commitment (oc), and the most significance overlap is that the focus of both is the organization (cole & bruch, 2006). this raised a concern among scholars of oid and oc that the two might be misrepresented and used interchangeably. researchers implicitly suggest that although very similar oid and oc are two distinct constructs. only a few studies examine this implicit claim and empirically test whether oid and oc are distinct constructs (see gautam, van dick, & wagner, 2004). indeed, their distinctiveness become particularly important in relation to their impact on performance outcomes. while there is a plethora of studies focusing on the effect of oid on performance and the effect of oc on performance separately, very few attempts were made to include both constructs in relation to performance, specifically individual performance. accordingly, past research has only offered limited understanding on how they concurrently influence individual performance. in rare cases where oid and oc were included in the same study the focus has been on the psychometric qualities, overlooking the theoretical understanding as well as empirical examination of their implications on performance (cole & bruch, 2006). in this study, we aim to address these unanswered inquiries with regards to how oi, oid, and oc are interrelated yet distinct constructs that in turn play unique roles in increased performance outcomes. we argue that oi, oid and oc are distinct constructs that have differential effects on performance outcomes. by first looking at the effect of oi and oid on oc, we aimed to understand the differential relationship of oi and oid with oc. moreover, we aimed to examine the concurrent effects of all three constructs namely oi, oid, and oc on individual performance. drawing on the social identity and social categorization theories we develop and empirically test a conceptual model where we examine the effects of oi and oid on oc and the effect of oc on individual performance. through examining the data collected by 345 employees in the education sector, we show that oi and oid have positive significant effects on oc. further, the results of our hierarchical multiple regression analyses reveal that oi, oid, and oc have positive and significant effects on individual performance. we further show their unique effects through the increase in the variance explained (r2) in individual performance. our study has two main contributions to the research on oi, oid, and oc. first, it expands the scholarship by including all the three highly associated constructs whose unique effects have long been overlooked. second, it showed that employees best volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.181 | http://emaj.pitt.edu i̇pek koçoğlu, serhat erat, salih zeki i̇mamoğlu emerging markets journal | p a g e 9 perform when their firm has an oi, when they are engaged in oid, and they are committed to their firm. these findings allowed us to conclude that, firms appear to benefit from developing a salient organizational identity, motivating their employees for organizational identification, and further nourishing oc among their employees. the simultaneous development of oi, oid, and oc will have a premium payoff for the firms. 2. theoretical background 2.1. organizational identity organizational identity (oi) is a critical concept that is influential in a variety of management fields including, strategic management, organizational behavior, and marketing (balmer & greyser, 2006; brickson, 2005; brown, dacin, pratt, & whetten, 2006; corley, 2004; cornelissen, haslam, & balmer, 2007; he, li, & harris, 2012; jo hatch & schultz, 1997). it has first been introduced through the seminal study by (albert & whetten, 1985) to explain the organizational characteristics that are perceived to be central, distinctive, and enduring by the members of a particular organization (albert & whetten, 1985). it infers the meaning attached to the organization, and more explicitly it refers to the assertion of organizational members about “who they are” and “who they want to become” (he & brown, 2013). although many different definitions of oi have been proposed over more than three decades scholars came to agreement that organizational identity is the self-referential meaning that results from an individual member’s attempt to define their organization in conjunction with their perception of the self. it is suggested to be a combination of cognitive and affective motivation that drives the linking one’s self-definition with the perception of one’s self as the member of an organization. it follows that oi is constructed by amalgamating the perceived congruence of organizational members’ self-concept with that of their organization, ensuing in a collective understanding about the construal of the organization’s culture, history, structure, and characteristics (haslam, postmes, & ellemers, 2003; martin, johnson, & french, 2011). as in the contemporary organizational life with the organizational boundaries, and structures started to be redefined a cognitive-affective mechanism that enable the sense of oneness and belongingness started to be more salient for the effective functioning of organizations. considerable effort has been spent to redefine the concept in the context of changing organizational dynamics (e.g. digitalization, debureaucratization, virtual organizations). this effort included both internal and external processes of oi construction, because it has been increasingly evident that oi is a mutual process of defining what the organization means through a relational and comparative interaction with outside stakeholders such as investors, customers, competitors, and suppliers (brickson, 2005; corley et al., 2006; scott & lane, 2000). there emerged more definitions from the perspective that regards oi as involving both organizational members’ attempt to define their organization in relation their own self-concept and their organization’s position with regards to the external parties. they describe oi as the set of shared beliefs between top managers and stakeholders about the central, enduring, and distinctive features of an organization (scott & lane, 2000). it is thus agreed that oi is a collective-level construct that differentiates the organization from the others in the eyes of its members, managers, and stakeholders. hence, it is apparent that oi is not a strictly static concept in terms of its definition, nor there is a consensus regarding its meaning. while it is accepted that oi is a dynamically evolving concept with the changes in the modern organizational life (gioia, schultz, & corley, 2000), several scholars raise concerns regarding the embarrassing richness of misconceptualizations of oi that blur the boundaries with several neighboring concepts such as organizational identification (oid). indeed, extensive debate focuses on how to distinguish oi from its kindred concept oid. this resulted in a variety of perspectives to explain oi that seem to be not likely to coalesce any time soon. these parallel streams of research namely functionalist, social constructionist, psychodynamic, and postmodernist (he & brown, 2013) define the boundary conditions of the oi concept and thus help scholars to differentiate it from oid. further according to (albert et al., 2000) the lack of agreement in defining oi constitutes a barrier in the advancement of theories of oi, thus calling for more rigorous attention to distinguish it from similar constructs as well as empirically test its effects for outcomes relevant for organizations. in order to elaborate more on the distinction between oi and oid we now refer to the latter and explain it in detail. 2.2. organizational identification organizational identification (oid) is a central concept that informs organization studies to understand a wide range of organizational outcomes. oid derives from social identity theory (sit) (ashforth & mael, 1989; tajfel, turner, austin, & worchel, 1979; turner, 1982). according to sit, individuals tend to categorize themselves and others into several social categories. based on the perceived oneness with or belongingness to a social group the extent to which one identifies him/herself with a particular social group, that is the social identification determined. social identification concerns the self-definition according to the perceived overlap between the self and social category that he/she considers to be part of (kreiner & ashforth, 2004). it is a social phenomenon that is also applied to the workplace. as a potentially salient social category in human life, organizations appeal the attempts of its members to develop identification (dutton, dukerich, & harquail, 1994; elsbach, 1999; van knippenberg & van schie, 2000). this is according to (ashforth & mael, 1989) a particular form of social identification where the organization provides the individual with a sense of identity and the individual perceives that they belong to the organization. it follows that oid implies that organizational members see their values, beliefs, motivations, and interests intertwined with their organization and those that constitute the collective identity of that particular organization (haslam et al., 2003). it indicates the psychological integration of the volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.181 | http://emaj.pitt.edu emancipating identity: the differential effect of organizational identification on commitment and performance page |10| emerging markets journal self and the organization that motivates members to contribute to the collective interest of the organization as it is well representing the self-interest (van knippenberg & sleebos, 2006). hence, it is not surprising that oid would provide the basis for attitudes, and behavior. the intensity with which an organizational member identifies one’s self with the organization, the more he or she will behave in favor of the organization (carmeli, gilat, & waldman, 2007; haslam et al., 2003; van knippenberg & van schie, 2000). oid has important implications for individual performance. in particular, there is substantial evidence in the literature that oid is positively related with satisfaction, creativity, task and job performance, and negatively associated with turnover intention, absenteeism, and burnout (riketta, 2005, 2005; schaubroeck, peng, & hannah, 2013; van knippenberg, 2000; walumbwa et al., 2011). just like oid, oc has also been found to be related with attitudes, and behaviors and in turn positively influence performance outcomes (kreiner & ashforth, 2004). even though research provides ample theoretical and empirical evidence regarding the positive implication of oid, the focus has been on examining its single and direct relationship with several performance outcomes, few studies recognized the conceptual and empirical difference of oid with its close associates such as oi and oc (cole & bruch, 2006; gautam et al., 2004; van knippenberg & sleebos, 2006). considering the overlap between the theoretical basis of oid and commitment as well as conceptual resemblance between them, scholars highlight the importance of distinguishing the two and understanding their inter-relationship. in an attempt to explore how identification and commitment are different from each other, studies focused on the distinct psychometric qualities or empirically tested their relative effects on a few work-related behaviors such as satisfaction, turnover, attachment, organizational support or affective commitment (riketta, 2005; van knippenberg & sleebos, 2006), but no study to our knowledge included both oid, oi in relation to oc and examined their inter-relationships with an individuallevel outcome such as job performance. 2.3. organizational commitment in contemporary organizational life the exchange between the employees and the organization is not limited to pure economic basis, there is rather a social exchange that manifests in the form of organizational commitment (oc). commitment is a binding force that yields a pattern of reciprocal obligations between the individual and the focus of commitment and in turn a psychological attachment (meyer & herscovitch, 2001). when the focus of this bond is the organization, it is referred to as oc to indicate psychological attachment of the individual to the organization. it reflects the extent to which an organizational member internalizes and adopts the characteristics of the organization (o’reilly & chatman, 1986). it is noteworthy that the conceptualization of commitment commonly includes identification, yet it needs to be acknowledged that identification and commitment are distinct concepts and distinct organizational phenomena. oc is defined as “the relative strength of an individual’s identification with and involvement with” their organization (meyer & allen, 1991; mowday et al., 1979). while oid is centered around the individual’s perception of belongingness to the organization, oc is focused to the emotional attachment to the goals, and values of the organization that drives positive behavior towards the organization (wombacher & felfe, 2017). it is suggested that the self-definition through the membership to a particular organization is necessary, but not sufficient for oc. oc also includes developing an internal motivation to engage in favorable behavior on behalf of the organization (meyer, becker, & van dick, 2006). further over the years, commitment has been conceptualized and operationalized in different ways leading to a lack of agreement in the field. for instance, some researchers operationalized commitment as a unidimensional construct and some asserted that it is a multidimensional construct consisting of affective, normative and continuance (allen & meyer, 1990; meyer, stanley, herscovitch, & topolnytsky, 2002; o’reilly & chatman, 1986). past research mostly resembled oid to one of the three aspects of oc that is affective commitment yet failed to examine the link between oid and the construct of oc in unity with continuance and normative under one construct. although multiple perspectives have made attempts to conceptualize oc in a variety of ways, a common theme appears to be its relevance with oid. therefore, in this study we include commitment as one-dimensional construct and tested its relationship with oi and oid considering also continuance and normative commitment. 3. hypotheses development recently, considerable debates appear regarding the conceptual overlaps among oc, oi, and oid. researchers assert that understanding the relations among these constructs is an important step forward to understand their distinction. in particular, examining the differential effects of oi, and oid on oc is a necessity in order to be informed on how organizations can capitalize on the conducive environment to create belongingness (i.e. oid) vs. creating a salient collective meaning (i.e. oi). in the workplace, individuals increasingly define themselves through their membership to the organization that they are part of. stated in other words, oid is increasingly what constitutes the self-construal of an individual. the individual shares this identity with other who are part of the same organization and therefore perceives his/her motivations, goals, and interests to be interchangeable with theirs (haslam et al., 2003). it follows that, oid is a socially structured phenomena that is collectively shaped by the common perspective of the organization which facilitates the construction of social bonds and a mechanism that holds the individual members together in the face of conflicting goals. those volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.181 | http://emaj.pitt.edu i̇pek koçoğlu, serhat erat, salih zeki i̇mamoğlu emerging markets journal | p a g e 1 1 individuals who identify themselves with their organization will more easily sacrifice their individual self-interest, because the gain that they will have from achieving the organizational goals will serve for the benefit of the organization (carmeli et al., 2007; riketta, 2005; van knippenberg & sleebos, 2006). researchers use commitment to explain the attachment between individuals in organizations (mathieu & zajac, 1990). there is an extensive literature on the implications of commitment on outcomes seeking to show how organizational members who are committed to their organization strengthen the emotional bonds in their relationships, thus increasing organizational and individual performance outcomes (meyer, paunonen, gellatly, goffin, & jackson, 1989; rhoades, eisenberger, & armeli, 2001; wright & bonett, 2002). members with a high level of commitment invest themselves more to their job, because commitment manifests as an intrinsic drive where the goals and values of the organization become intertwined with those of the individual member (mathieu & zajac, 1990; meyer et al., 2002). commitment leads to an augmented persistence in a course of actions keeping the organizational members focused even in times where disagreements with the management, or colleagues emerge, because it is a higher-order bond that develops with the organizational values, and goals, not only the individuals involved(meyer & herscovitch, 2001). in this study, we argue that individuals in an organization whose value systems match that of their organization stated in other words who are committed to their organization will be better able to satisfy their needs for relatedness. social identity theory suggests that, individuals who feel strongly committed to their social group (e.g. organization) define themselves in terms of their group because of a self-enhancement motive (tajfel, 1982). self-enhancement is a drive to feel good about one’s self, and the social group that one is the member of that enables an ingroup favoring that creates cohesiveness and increased collaboration (wombacher & felfe, 2017). therefore, we suggest that commitment also enhances the sense of psychological safety and belongingness, improving their potential to work together more synergistically hence increasing their job performance. 3.1. research model and hypotheses figure 1 presents the proposed conceptual model and the hypothesized relationships. figure 1. conceptual model h1: organizational identity has a positive and significant relationship with organizational commitment. h2: organizational identification has a positive and significant relationship with organizational commitment. h3: organizational identity has a positive and significant relationship with individual job performance. h4: organizational identification has a positive and significant relationship with individual job performance. h5: organizational commitment has a positive and significant relationship with individual job performance. 4. research method 4.1 sample and data collection the data used to test the hypotheses are drawn from the education sector. a total of 410 surveys have been sent to educators employed in high schools in turkey. of the 410 contacted, 352 agreed to answer the survey. yet, of the 352 returns, 7 were deleted due to incomplete and inconsistent information, leaving 345 usable returns for the analysis. correspondingly, usable data were received for a response rate of 84.1%. convenience sampling was employed for the selection of schools. the screening criterion was established on the basis that these schools should be part of the national education ministry and reside in istanbul. the presumption that “individual views on issues will constitute a function of their organizational roles” directed the survey of the study to be done with individuals who occupy strategic positions in their organizations who would be more knowledgeable about the strategic relationships between the interorganizational structure (paulraj et al.,2008). thus, the use of key informants as sources of data is a standard practice in strategic management research (paulraj et al., 2008). 4.2 measures the methodology consistently entails the adoption of a survey research method. a survey that consisted of 22 items was conducted to validate the proposed relationships ascribed in the hypotheses and to develop a reliable discussion coextending with the volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.181 | http://emaj.pitt.edu emancipating identity: the differential effect of organizational identification on commitment and performance page |12| emerging markets journal findings attained. to test the hypotheses, well verified measures of multi-item scales adopted from previous studies were used. all the measurement constructs were estimated through respondents’ perceptual evaluation on a seven-point likert scale, which was anchored by the end points of “strongly disagree” (1) to “strongly agree” (7). by using the parallel translation method, the items were first translated into turkish by one person and then translated into english by another person. the two translators then jointly reconciled all differences. subsequently, the suitability of the turkish version of the questionnaire was pre-tested by the people working in the industry. after refining the questionnaire based on interviews with the pre-test subjects, the questionnaires were then distributed and collected. organizational identity is measured through the 6-item scale developed by mael and ashforth, (1992). organizational identification is also assessed through the 6-item scale developed by mael and ashforth, (1992). in order to measure oc, the 4-item scale developed by (babin & boles, 1998) was adopted. finally, (kirkman & rosen, 1999) 6-item job performance scale has been used and the employees were asked to evaluate their own performance. 4.3 analyses and results the analyses are conducted through using spss statistical data analysis software. firstly, the sociodemographic characteristics of the 345 respondents’ have been observed and the frequency analysis have been shown. our sample consisted of 61% males and 39% females. majority of the participants were between the ages of 33-46 (46%) and 26-32 (40%). the rest are ages 21-25 (2%). further, the majority of our respondents were married (77%) and the rest being single (23%). caucasian (45%) and asian (47%) had the highest ethic majority, where the rest were african american (1%) and hispanic (7%). regarding the position of respondents, we observed that 91% were educators, 6% were vice-principals of the schools, and 2% were employed as principals. we examined the reliability and validity of the utilized measures through several measures (fornell & larcker, 1981). we first checked the kaiser-meyer-olkin (kmo) sampling adequacy and conducted the bartlett’s test of sphericity in order to assess the appropriateness of the exploratory factor analysis for our data set. the kmo statistic of .949 was above .6, indicating the suitability of data for factor analysis. also, bartlett’s sphericity test resulted in a highly significant chi-squared statistic indicated adequate correlation among the items (p < 0.001). we then performed an exploratory factor analysis (efa) using a principal component having a varimax rotation. the 22 items loaded in 4 factors had satisfactory loadings that ranged between 0.846 to 0.554. the solution of the exploratory factor analysis yielded a total of 76.07% of the variance explained. table 1: results of the exploratory factor analysis organizational identity (oi) factor loading i define myself as a member of the school i work for. .569 being a member of my school defines my identity very well. .746 i like to work for my school. .678 i always prioritize and think for my school’s interests. .672 i always feel proud to be a member of this school. .625 i prefer to be active all the time in order to be able to contribute to my school. .718 organizational identification (oid) when someone criticizes (name of school), it feels like a personal insult. .737 i am very interested in what others think about (name of school). .807 when i talk about this school, i usually say ‘we’ rather than ‘they’. .763 this school’s successes are my successes. .796 when someone praises this school, it feels like a personal compliment. .794 if a story in the media criticized the school, i would feel embarrassed. .740 organizational commitment being a member of this organization has a personal meaning for me. .554 i feel a strong commitment towards this organization. .682 i feel like a part of the family in this organization. .817 i feel emotionally attached to this organization. .617 job performance i complete my tasks on time. .815 i satisfactorily accomplish or exceed my goals. .846 i quickly resolve any problem when it emerges. .844 i develop products that are or exceed the quality requirements. .805 i accomplish my tasks in time. .824 i quickly respond when there is a problem and i take fast actions. .819 total variance explained 76.07 table 2 presents the correlations among all four variables, their means, standard deviations and reliability estimates. the relatively low to moderate correlations provided further evidence of discriminant validity. the highest correlation is among organizational identity and job performance (r= 0.760, p<0.01), which is indicative of a strong relationship. also, all the reliability estimates (cronbach alpha values) are well beyond the threshold levels suggested by nunnally (1978). accordingly, it was concluded that measures were unidimensional and had adequate reliability as well as validity. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.181 | http://emaj.pitt.edu i̇pek koçoğlu, serhat erat, salih zeki i̇mamoğlu emerging markets journal | p a g e 1 3 table 2: correlations, means, and standard deviations mean s.d. cronbach alpha 1 2 3 organizational identity 2.73 6.87 .95 organizational identification 2.88 6.18 .93 .737** organizational commitment 3.27 3.54 .68 .405** .444** job performance 3.11 6.85 .97 .760** .660** .408** ** p < 0.01 4.4 hypotheses testing to test the hypotheses, we employed hierarchical multiple regression and the results are presented in table 3 and table 4. in model 1, we test two relationships: the relationship between oi and oc and the relationship between oid and oc. it is shown that, the model is significant (f = 45.515, p < 0.001). the findings show that, there is a positive and significant relationship between oi and oc (β = 0.172, p < 0.01) supporting hypothesis 1. there is also a positive and significant relationship between oid and oc (β = 0.317, p < 0.01), supporting hypothesis 1. further, oi and oid explain 0.206 of the variances in oc. table 3: the results of the regression analysis for the relationship between oi, oid and oc model 1 dependent variable: organizational commitment independent variables β t sig. organizational identity (h1) 0.172** 2.414 0.008 organizational identification (h2) 0.317** 4.456 0.000 model f 45.515 r² 0.206 p 0.000 **p < 0,01 the model 2 shows the results of three relationships: the relationship between oi and job performance, the relationship between oid and job performance, and the relationship between oc and job performance. it is shown that, the model is significant (f = 174.300, p = 0.000). the findings show that, there is a positive and significant relationship between oi and job performance (β = 0.584, p < 0.01) supporting hypothesis 3. there is also a positive and significant relationship between oid and job performance (β = 0.192, p < 0.01) supporting hypothesis 4. further, there is a positive and significant relationship between oc and job performance (β = 0.086, p < 0.05), supporting hypothesis 5. the results also reveal that oi, oid, and oc together explain 0.602 of the variances in job performance. table 4: the results of the regression analysis for the relationship between oi, oid, oc and job performance model 2 dependent variable: job performance independent variables β t sig. organizational identity (h3) .584** 11.497 .000 organizational identification (h4) .192** 3.699 .000 organizational commitment (h5) .086* 2.242 .013 model f 174.300 r² 0.602 p 0.000 **p < 0,01, * p < 0,05 5. discussion and conclusion the main purpose of this study has been to explore the differential and concurrent relationship among oi, oid, oc, and individual performance. we aimed to better understand the distinction among the three constructs, which are theoretically based on the common grounds of social identity theory and that are almost used interchangeably in the literature. in order to do this, we developed a conceptual model where we included all the three variables and empirically tested their inter-relationships as well as their unique effects on individual job performance. the strength of their relationship with the corresponding dependent variable showed us their relative impact in the model. our results showed that, oid has a stronger impact on oc relative to oi. this is in line with the existing research suggesting that organizational identification determines the extent to which an individual defines one’s self in relation with the organization such that his/her identity becomes integrated with that of the organization will be more likely to maintain membership in, and feel emotionally attached to the organization. this is not to say that oi does not have any role in establishing oc. however, this finding shows an important distinction to the managers with regards to developing a salient oi versus engaging employees in oid practices. further, our results show that oi, oid, and oc are unique aspects of organizational life, each having a distinct impact on individual job performance. it follows that when oi, oid, and commitment are included, oi has the highest impact on job performance, while oc has the least impact. this suggest that managers should prioritize building a strong oi in order to leverage the performance outcomes of their members. like any empirical research effort, this study contains some methodological strengths and limitations. first, there was not any separation with regards to the size of the schools where the educators were employed while evaluating data; results may differ for different school sizes. second, although beyond the scope of this particular study indirect effects were not assessed, leaving this a fruitful area of investigation for future studies. future studies can empirically test the mediating role of oc in the oi, oid, and job performance volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.181 | http://emaj.pitt.edu emancipating identity: the differential effect of organizational identification on commitment and performance page |14| emerging markets journal relationship. also, the tenure times of the educators employed in the schools may have an impact on the interrelationships among oi, oid, commitment, and performance, thus making it a suitable control variable. future studies can include tenure of the educators as the control variable in the analysis. despite these limitations, this study provides important implications for the research on oi, oid and oc from both theoretical and practical perspectives. references albert, s., ashforth, b. e., & dutton, j. e. (2000). organizational identity and identification: charting new waters and building new bridges. academy of management review, 25(1), 13– 17. albert, s., & whetten, d. a. (1985). organizational identity. research in organizational behavior. allen, n. j., & meyer, j. p. (1990). the measurement and antecedents of affective, continuance and normative commitment to the organization. journal of occupational and organizational psychology, 63(1), 1–18. ashforth, b. e., & mael, f. (1989). social identity theory and the organization. academy of management review, 14(1), 20–39. babin, b. j., & boles, j. s. (1998). employee behavior in a service environment: a model and test of potential differences between men and women. journal of marketing, 62(2), 77–91. balmer, j. m., & greyser, s. a. (2006). corporate marketing: integrating corporate identity, corporate branding, corporate communications, corporate image and corporate reputation. european journal of marketing, 40(7/8), 730– 741. brickson, s. l. (2005). organizational identity orientation: forging a link between organizational identity and organizations’ relations with stakeholders. administrative science quarterly, 50(4), 576–609. brown, t. j., dacin, p. a., pratt, m. g., & whetten, d. a. (2006). identity, intended image, construed image, and reputation: an interdisciplinary framework and suggested terminology. journal of the academy of marketing science, 34(2), 99–106. carmeli, a., gilat, g., & waldman, d. a. (2007). the role of perceived organizational performance in organizational identification, adjustment and job performance. journal of management studies, 44(6), 972–992. cole, m. s., & bruch, h. (2006). organizational identity strength, identification, and commitment and their relationships to turnover intention: does organizational hierarchy matter? journal of organizational behavior: the international journal of industrial, occupational and organizational psychology and behavior, 27(5), 585–605. corley, k. g. (2004). defined by our strategy or our culture? hierarchical differences in perceptions of organizational identity and change. human relations, 57(9), 1145–1177. corley, k. g., harquail, c. v., pratt, m. g., glynn, m. a., fiol, c. m., & hatch, m. j. (2006). guiding organizational identity through aged adolescence. journal of management inquiry, 15(2), 85–99. cornelissen, j. p., haslam, s. a., & balmer, j. m. (2007). social identity, organizational identity and corporate identity: towards an integrated understanding of processes, patternings and products. british journal of management, 18, s1–s16. dutton, j. e., dukerich, j. m., & harquail, c. v. (1994). organizational images and member identification. administrative science quarterly, 239–263. elsbach, k. d. (1999). an expanded model of organizational identification. gautam, t., van dick, r., & wagner, u. (2004). organizational identification and organizational commitment: distinct aspects of two related concepts. asian journal of social psychology, 7(3), 301–315. gioia, d. a., schultz, m., & corley, k. g. (2000). organizational identity, image, and adaptive instability. academy of management review, 25(1), 63–81. haslam, s. a., postmes, t., & ellemers, n. (2003). more than a metaphor: organizational identity makes organizational life possible. british journal of management, 14(4), 357–369. he, h., & brown, a. d. (2013). organizational identity and organizational identification: a review of the literature and suggestions for future research. group & organization management, 38(1), 3–35. he, h., li, y., & harris, l. (2012). social identity perspective on brand loyalty. journal of business research, 65(5), 648–657. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.181 | http://emaj.pitt.edu i̇pek koçoğlu, serhat erat, salih zeki i̇mamoğlu emerging markets journal | p a g e 1 5 jo hatch, m., & schultz, m. (1997). relations between organizational culture, identity and image. european journal of marketing, 31(5/6), 356– 365. kirkman, b. l., & rosen, b. (1999). beyond selfmanagement: antecedents and consequences of team empowerment. academy of management journal, 42(1), 58–74. https://doi.org/10.2307/256874 kreiner, g. e., & ashforth, b. e. (2004). evidence toward an expanded model of organizational identification. journal of organizational behavior: the international journal of industrial, occupational and organizational psychology and behavior, 25(1), 1–27. mael, f., & ashforth, b. e. (1992). alumni and their alma mater: a partial test of the reformulated model of organizational identification. journal of organizational behavior, 13(2), 103–123. martin, k. d., johnson, j. l., & french, j. j. (2011). institutional pressures and marketing ethics initiatives: the focal role of organizational identity. journal of the academy of marketing science, 39(4), 574–591. mathieu, j. e., & zajac, d. m. (1990). a review and meta-analysis of the antecedents, correlates, and consequences of organizational commitment. psychological bulletin, 108(2), 171. meyer, j. p., & allen, n. j. (1991). a three-component conceptualization of organizational commitment. human resource management review, 1(1), 61–89. meyer, j. p., becker, t. e., & van dick, r. (2006). social identities and commitments at work: toward an integrative model. journal of organizational behavior, 27(5), 665–683. meyer, j. p., & herscovitch, l. (2001). commitment in the workplace: toward a general model. human resource management review, 11(3), 299–326. meyer, j. p., paunonen, s. v., gellatly, i. r., goffin, r. d., & jackson, d. n. (1989). organizational commitment and job performance: it’s the nature of the commitment that counts. journal of applied psychology, 74(1), 152. meyer, j. p., stanley, d. j., herscovitch, l., & topolnytsky, l. (2002). affective, continuance, and normative commitment to the organization: a meta-analysis of antecedents, correlates, and consequences. journal of vocational behavior, 61(1), 20–52. https://doi.org/10.1006/jvbe.2001.1842 mowday, r. t., steers, r. m., & porter, l. w. (1979). the measurement of organizational commitment. journal of vocational behavior, 14(2), 224–247. o’reilly, c. a., & chatman, j. (1986). organizational commitment and psychological attachment: the effects of compliance, identification, and internalization on prosocial behavior. journal of applied psychology, 71(3), 492. rhoades, l., eisenberger, r., & armeli, s. (2001). affective commitment to the organization: the contribution of perceived organizational support. journal of applied psychology, 86(5), 825. riketta, m. (2005). organizational identification: a meta-analysis. journal of vocational behavior, 66(2), 358–384. schaubroeck, j. m., peng, a. c., & hannah, s. t. (2013). developing trust with peers and leaders: impacts on organizational identification and performance during entry. academy of management journal, 56(4), 1148–1168. scott, s. g., & lane, v. r. (2000). a stakeholder approach to organizational identity. academy of management review, 25(1), 43–62. tajfel, h. (1982). social psychology of intergroup relations. annual review of psychology, 33(1), 1–39. tajfel, h., turner, j. c., austin, w. g., & worchel, s. (1979). an integrative theory of intergroup conflict. organizational identity: a reader, 56–65. turner, j. c. (1982). towards a cognitive redefinition of the social group. social identity and intergroup relations, 15–40. van knippenberg, d. (2000). work motivation and performance: a social identity perspective. applied psychology, 49(3), 357–371. van knippenberg, d., & sleebos, e. (2006). organizational identification versus organizational commitment: self-definition, social exchange, and job attitudes. journal of organizational behavior: the international journal of industrial, occupational and organizational psychology and behavior, 27(5), 571–584. van knippenberg, d., & van schie, e. c. (2000). foci and correlates of organizational identification. journal of occupational and organizational psychology, 73(2), 137–147. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.181 | http://emaj.pitt.edu emancipating identity: the differential effect of organizational identification on commitment and performance page |16| emerging markets journal walumbwa, f. o., mayer, d. m., wang, p., wang, h., workman, k., & christensen, a. l. (2011). linking ethical leadership to employee performance: the roles of leader–member exchange, self-efficacy, and organizational identification. organizational behavior and human decision processes, 115(2), 204–213. whetten, d. a. (2006). albert and whetten revisited: strengthening the concept of organizational identity. journal of management inquiry, 15(3), 219–234. wombacher, j. c., & felfe, j. (2017). dual commitment in the organization: effects of the interplay of team and organizational commitment on employee citizenship behavior, efficacy beliefs, and turnover intentions. journal of vocational behavior, 102(supplement c), 1–14. https://doi.org/10.1016/j.jvb.2017.05.004 wright, t. a., & bonett, d. g. (2002). the moderating effects of employee tenure on the relation between organizational commitment and job performance: a meta-analysis. journal of applied psychology, 87(6), 1183. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu sustainability in the hospitality industry: a social factor dimension girish k nair stenden university of applied sciences qatar, qatar | gknair75@gmail.com nidhi choudhary banasthali university, india | nidhic10@gmail.com abstract this research focuses on the influence of social factors on the sustainability of hospitality industry in the context of qatar. the significance of this research lies in its ability to empirically study the impact of social factors on the sustainability of hospitality industry in qatar. the hypotheses building has been through the process of finding evidence through the theoretical models available in the literature for the linkages between the various social factors and sustainability. while there are several social factors which influence sustainability of any business in general, the ones which are most relevant to the hospitality industry are: education, life expectancy, income, tv index, newspaper index, and pc index. structural equation modeling using partial least square method was used as the research methodology. this method was specifically chosen for its ability to undertake factor analysis and regression analysis simultaneously and address the issue of multicollinearity. the sample size of 213 managers was chosen from various hotels. the results based on the hypothesis testing would lead to the implications and also suggestions for the benefit of the hotel managers, so that sustainability of hospitality industry could be ensured. keywords: sustainability, hospitality industry, social factors, structural equation modeling new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:gknair75@gmail.com mailto:nidhic10@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu sustainability in the hospitality industry: a social factor dimension page |34| emerging markets journal sustainability in the hospitality industry: a social factor dimension girish k nair nidhi choudhary 1. introduction tourism is considered to be the fastest growing service sector in the world and has a bearing on the economic growth of the country (osman & sentosa, 2013). the tourism and hospitality industry has outperformed the manufacturing, retail, financial services and communications globally. the contribution of tourism and hospitality industry to the gross domestic product (gdp) in most of the countries is quite significant. more than 10% of all new jobs created in the past few years have been from the tourism industry (abu alroub, alsaleem, & daoud, 2012). world travel and tourism council (wttc) (2013) claims that, 9% of the total gdp contribution in most countries is through tourism and hospitality industry. so, tourism and hospitality industry is right now a booming business across the world. in qatar, one of the focal areas of the government is tourism and hospitality, and the government has taken very keen interest in developing it on a large scale. the qatar national tourism sector strategy 2030 is the government initiative. the strategy has been developed with sustainability on the focus. sustainable tourism according to united nation world tourism organization (unwto) is "tourism that takes full account of its current and future economic, social and environmental impacts, addressing the needs of visitors, the industry, the environment and host communities" (unwto, 2005). the general observation is that in the arab region qatar is ranked 2nd as a tourism destination and on the global ranking it is in 41st place (blanke & chiesa, 2013). it has world rankings which are comparable to any other tourist destination and it is the boost for the hospitality industry. qatar benefits from a safe and secure environment (21st rank), good ict and tourism infrastructures (32nd and 37th rank, respectively), and excellent air transport infrastructure (23rd rank) (blanke & chiesa, 2013). the ease of hiring foreign labor (4th rank), increasing enrollment rates, and the quality of its education drive the ability of the country to find highquality human resources (7th rank) inside and outside the country (blanke & chiesa, 2013). qatar also has a high degree of customer orientation (5th rank) (blanke & chiesa, 2013). however, the sustainability of these positions and the ability to improve it further will have social, cultural, economic and environmental issues associated with it. ensuring the sustainability during the promotion of hospitality as well as tourism is important for the overall development of qatar. this is because the growth of the hospitality industry may be detrimental to the maintenance of the ecosystem and biodiversity in the form of loss of wildlife and rare species, habitat loss, environmental degradation which can disturb the social wellbeing of the community (rabbany et al., 2013). according to rabbany et al. (2013), there could also be the disrupting of the coasts in the form of shoreline erosion, pollution, and fish spawning grounds; water overuse may lead to another set of problems; urbanization may lead to pollution, traffic congestion and disturb the social life of the residents; fossil fuel consumption may also increase due to the maintenance of the hotels and the supporting conveyance required; and finally, additional consumption of energy and water may tax the residents in their wellbeing in different ways. while there are many different dimensions to sustainability of hospitality industry especially in the context of the arab nations such as qatar, it is surprising to note that not many of the studies are focused on specific dimensions of sustainability, particularly in the form of empirical studies. there is a need to have a detailed study about how the managers in hospitality industry in qatar respond to the expansion of hospitality industry, which is important in the context of sustainability. if sustainability of hospitality has to be ensured as per the initiatives taken by the qatar government, the focus should be directed towards the social dimension of sustainability in the hospitality industry. this research is an attempt to provide the empirical evidence for the influence of exogenous variables of social sustainability which include: education, life expectancy, income, television (tv) index, newspaper index, and personal computer (pc) index on sustainable growth of hospitality industry in qatar. the problem has emerged based on the qatar government initiative in bringing sustainability to hospitality industry of qatar. the aim of the research is to establish the empirical evidence for the influence of specific societal variables on the sustainability of the hospitality industry. to accomplish this aim, the following objectives are framed: 1. examine the external factors that have influence on social sustainability of hospitality industry. 2. investigate the indicators or the latent variables: education, life expectancy, income, television (tv) index, newspaper index, and personal computer (pc) index. 3. develop a model which links the above constructs in the context of international business and empirically test the model. 4. draw implications to the managers of hospitality industry and also to the government officials to strengthen the critical factors which have influence on social sustainability of hospitality industry. 2. literature review ‘sustainability’ is a generic term which refers to the survival on a long term basis and it is often linked to the volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu girish k nair, nidhi choudhary emerging markets journal | p a g e |35 word ‘sustainable development’ which according to world commission on environment and development, (1987) is development which meets the needs of the present without compromising the ability of future generations to meet their own needs. sustainability has three distinct dimensions: social, economic, and environmental (choy et al., 2015) and this research is focused specifically on the social sustainability in the context of hospitality industry. according to western australia council of social services (wacoss), "social sustainability occurs when the formal and informal processes; systems; structures; and relationships actively support the capacity of current and future generations to create healthy and liveable communities. socially sustainable communities are equitable, diverse, connected and democratic and provide a good quality of life ("wacoss, 2003). according to woodcraft (2011), "social sustainability is a process for creating sustainable, successful places that promote wellbeing, by understanding what people need from the places they live and work. social sustainability combines design of the physical realm with design of the social world – infrastructure to support social and cultural life, social amenities, and systems for citizen engagement and space for people and places to evolve.” the focal area of this research is ‘social sustainability’ and it comprises several aspects such as: social equity, liveability, health equity, community development, social capital, human rights, labour rights, place making, social responsibility, social justice, cultural competence, community resilience, and human adaptation as referred to the hospitality industry (james et al., 2015). the definition and the tasks to be accomplished are given in table 1. table 1: the various aspects of social sustainability, definitions and tasks social sustainability aspect definition tasks social equity this refers to the equal employment opportunities to the employees and equity in the sharing of the duties and responsibilities based on the employment cadre. ensures law and order, provides secure feeling for the residents, ensures welfare, and makes available the social services livability it refers to the providing of an ambiance to the public which is congenial for healthy living with all the modern luxuries livability ensures health equity which is to make sure that the health benefits provided by the government and the private and facilities and the societal members living in harmony. organizations are equally available to all the classes of the society. community development this refers to the progressive growth of the community. this calls for the demonstration of the social corporate responsibility of the hospitality industry in some form social capital this refers to the social values that the community builds over a period of time and passes it to the future generations. there should be clear indicators of the social support to the citizens of the country. human rights this refers to the upliftment of the human pride and dignity so that the citizens can live with pride and dignity. there should be an ambiance created in the society where every individual feels safe and secure. labor rights the employers of the organization should feel that all their basic rights are protected. the employment contracts should be in accordance to the norms set by the government place making every individual should be provided an environment where he is free to choose the lifestyle irrespective of his/her social class. all the sections of the society should feel they have the freedom to choose. social responsibility the business organizations should demonstrate responsibility for the development of the society. it is demonstrated through the establishment of the places for the functions of the society including the social get together, entertainment, festivals, carnivals, religious programs, parks, stadiums etc., social justice cultural it refers to the building of a society where everyone can develop a feeling that he/she can work towards the fulfillment of vision in life. equity should be possible in terms of the distribution of wealth, opportunities, and privileges within the society. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu sustainability in the hospitality industry: a social factor dimension page |36| emerging markets journal cultural competence the culture of a society should be showcased so as to gain visibility internationally. there should be provision for cultural programs, paintings in the walls, interior design in the buildings, providing of the various services in traditional forms, display of books etc. community resilience it refers to the measure of the sustained ability of a community to utilize available resources to respond to, withstand, and recover from adverse situations. the community should strategically plan for adverse situations and have a clear plan to manage crisis under unforeseen conditions. human adaptation it refers to the cultural transformations in case it helps for the progressive growth of the society. the entire community should be sensitized to the need for accepting change with time if it is considered to be useful in terms of making the world a better place to live for all. of all the above referred aspects of social sustainability, human adaptation is a very vital aspect. there are theories which link the human adaptations based on the cultural transformations (henrich, 2011). the interaction between the society and human being has been the focus in modern approach and the ecological aspects are also highlighted. the claim is that, all human activities have to be considered under the social sustainability (james et al, 2015). despite the fact that social sustainability has a very vast spread in terms of its dimensionality, in the context of this research, it is important to identify the variables that constitute social sustainability in the context of hospitality industry in qatar and that is discussed in following paragraphs. as the name itself indicates, these influences are due to the social issues in the country of business. assaker, esposito, and o’connor (2011) found that, if the quality of life lead by the tourists and the local residents in a country are different, then this would cause a lot of discrepancies in adjusting with each other and may adversely affect the hospitality and tourism. if the quality of life in the country visited by the tourists is superior, the tourists may be attracted to the place and try to visit the place more and more (krippendorf, 1987). on the contrary, if the quality of life in the country being visited is inferior, the tourists may not like the place and the place of visit may look less attractive, and this may cause dissatisfaction in tourists (mathieson & wall, 1982). while the tourists may not like the place of visit, on the other hand, the residents of the place may also develop inferiority when they come across the tourist who again builds the gap between the tourists and the residents, and this becomes detrimental to the social sustainability aspect of tourism. the main theory applicable here is the social exchange theory (set), which suggests that the greater the discrepancy between the quality of life of two populations, the more willing the locals will be to bear some inconvenience and enter into exchanges with tourists for money (turner, 1986). ritchie, brent, geoffrey, crouch and simon (2000) have studied the influence of socio-cultural factors to capture local residents’ quality of life and found that it does influence the tourism in many different ways. the measurement of social and cultural influences on hospitality has been a priority in the sustainability research (gooroochurn & sugiyarto, 2004) and researchers have suggested using the united nations development programme’s human development index (hdi) alongside indices for education, newspapers, personal computers, and televisions as alternative measures of life quality. the main dimension of hdi, which is a measure of human development of a country as these indices is directly proportional to the number of people who subscribe to the newspapers, own personal computers and televisions. the hdi consists of three indicators: life expectancy, education, and income, which indicate how developed the country is. social dimension as an antecedent is also opposed by a group of researchers who reject the proposition that the social dimension is critical for the sustainability of hospitality instead of aspects such as service quality, customer satisfaction and loyalty, competitive advantage, and organizational performance (kusluvan, kusluvan, ilhan, & buyruk, 2010). researchers also bring various other theories in addition to the aforementioned set, which include: resource based theory (kozlenkova & palmatier, 2014), dynamic capability theory (eisenhardt & martin, 2000), competency-based theory (ott, baca, cisnernos, & bates, 2014), knowledge based theory (nickerson & zenger, 2004), organizational social capital theory (woolcock & narayan, 2010), and intellectual capital theory (karanja, 2014). all these theories have many different perspectives about the growth, sustainability, financial performance, non-financial performance, organizational performance, competitive advantage, innovation, etc. despite the fact these theories are applicable to any product or service oriented organization, when it comes to hospitality, there is a significant amount of personal touch associated with the service and the customer-guest interaction, or the tourist and local resident behavior and the set is more widely accepted and it governs this research. it is important to note that, as far as the sustainable tourism is concerned, it is not just about sustainability in the turnover in terms of financial benefits it can bring to the country, but the terms sustainability here moves beyond the financial aspects and has many different dimensions as mentioned before. income from hospitality has influence on the income of local residents and in turn the income of the volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu girish k nair, nidhi choudhary emerging markets journal | p a g e |37 local residents has influence on the tourism sustainability (paci & marrocu, 2013). this is because hospitality industry promotes travel and tourism, has a direct contribution to the gdp, employment, and also indirect impact on capital investment, government collective spending, and supply chain effects. a lot of income is generated by hospitality through hotels, travel agents, airlines and other passenger transport services, as well as the activities of restaurant and leisure industries that deal directly with tourists, which directly adds to the gdp of the country. hospitality industry growth is vital, because it provides a lot of employment opportunities and there is an opportunity for the national citizens to have a priority on recruitment, selection, training and a steady employment. tv index, newspaper index, and pc index have been linked to sustainability of tourism by many researchers. the study of tourism induced by popular culture has often been broken down by media format, so there is film-induced tourism, tv tourism, literature tourism and so on (beeton, yamamura, & seaton, 2013). the study on the causation between these variables and hospitality sustainability is relatively young, but growing rapidly (seaton & yamamura, 2015). the first major example of a film significantly affecting tourist behavior is believed to have been in 1935 though the film called ‘the mutiny on the bounty’, which sparked an influx of tourists to tahiti (roesch, 2009). 3. research methodology 3.1 the hypotheses development following hypotheses are developed based on the hypothetical research model (figure 1): h1a: there is a significant influence of education on social sustainability of hospitality industry in qatar. h1o: there is no significant influence of education on social sustainability of hospitality industry in qatar. h2a: there is a significant influence of life expectancy on social sustainability of hospitality industry in qatar. h2o: there is no significant influence of life expectancy on social sustainability of hospitality industry in qatar. h3a: there is a significant influence of income on social sustainability of hospitality industry in qatar. h3o: there is no significant influence of income on social sustainability of hospitality industry in qatar. h4a: there is a significant influence of tv index on social sustainability of hospitality industry in qatar. h4o: there is no significant influence of tv index on social sustainability of hospitality industry in qatar. h5a: there is a significant influence of newspaper index on social sustainability of hospitality industry in qatar. h5o: there is no significant influence of newspaper index on social sustainability of hospitality industry in qatar. h6a: there is a significant influence of pc index on social sustainability of hospitality industry in qatar. h6o: there is no significant influence of pc index on social sustainability of hospitality industry in qatar. figure 1. hypothetical research model 3.2 development of the questionnaire the development of the metric in the form of a questionnaire entailed a four-stage approach including meta-analysis of literature, interviews with major stakeholders of hospitality industry, questionnaire development and pilot testing of the questionnaire. the reason for this selection was to study the influences of external factors across the cross section of the industry. the exogenous latent constructs for the survey were the social factors influencing sustainability of hospitality industry. the six exogenous latent constructs in this study included: education, life expectancy, income, tv index, newspaper index, and pc index. table 2 summarizes the constructs, description, sample items, number of items and origin of the items. table 2: survey constructs, sample items and sources sustainability in this research, which is a dependable variable, has been measured in terms of volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu sustainability in the hospitality industry: a social factor dimension page |38| emerging markets journal progressive growth of the industry, the importance of hospitality industry, initiative of the government in tourism and hospitality development, the place of the hospitality industry among the other service industries, information about the local tradition and heritage, provision for authentic traditional food and beverage, access for the locals to facilities, support for local initiatives for heritage conservation as perceived by the managers (manning, 1999; roberts et al., 2008). 3.3 sample description the sample is a finite population of managers in the hospitality industry in qatar. there are 108 hotels in doha, qatar where this questionnaire survey is conducted. the respondents to this survey are the managers of the selected hotels who are general managers, directors, assistant directors and managers of rooms, f&b, catering & events, guest relations managers, finance, marketing, managers of rooms, f&b, catering & events, executive chefs, sue chefs, senior front house managers, reservation managers, in room dining managers, marketing managers, guest service managers, recreation managers, restaurant managers, executive chef, shisha managers, laundry managers, spa managers, chef de party, pastry chef, cold kitchen chef, hot kitchen chef, outlet managers, guest services managers, duty managers, health and wellness managers. the population size is 3,280 managers and the standard formula for probability based sampling assuming 2% defects and 2% permissible error yields a sample size of 178. questionnaires in electronic form were communicated to 300 respondents and 213 usable responses were obtained, which have been used for analysis. 3.4 pilot study a pilot study was undertaken to validate and test the reliability of the questionnaire with a sample size of 35. the questionnaire with a total 28 indicators of the latent variables was reduced to a total of 21 items through factor analysis, which were subsequently used for collecting data through a total sample size of 213 managers of different hotels. 3.5 method of data collection the concept of meta-analysis was used to screen the social dimensions that influence the sustainability of hospitality industry. the approach of this study was both qualitative and quantitative in nature and it basically being an exploratory and ‘ex post facto’ kind of research (creswell & clark, 2011), the concepts and models evolved as the research made progress both in terms of literature review and field work on hospitality industry in qatar. informal interviews with the managers of hospitality industry and the secondary sources such as journals and conference proceedings were used to collect the qualitative data. questionnaire with 5-point likert scale was used for collecting quantitative data from the managers of various hotels in qatar. structural equation modeling (sem) was used for exploratory factor analysis and hypothesis testing was undertaken using path modeling approach. 4. results and discussion 4.1. demographic details of respondents demographic distribution gives the general idea about the respondents who have participated in this research. this becomes important as an idea about participants, who give strength to the inferences which are drawn through the data. it can be observed that, majority of the respondents are males in this research (64%), the dominating age group was 35-45 years (32%) followed by the age group of 25-35 years (28%) (table 3). it can be observed that, majority of the respondents are undergraduates (44%) followed by post-graduates (36%). the highest per month salary range was in qar 10,000 to 20,000 (36%) followed by qar 20,000 to 30,000 (28%). majority of the respondents were having a work experience of six to ten years (40%) followed by two to five years (34%) in that order. so, by and large, it is evident that the respondents are qualified and have the required experience in organization to respond to aspects related to the topic of research interest. the researchers have included experts and experienced professionals in the hospitality industry to be a part of this study. after analysing the demographics of the sample, it was realized that, majority of the respondents were not citizens of qatar. they are immigrant workers. hence, the majority of the workforce which holds the managerial positions in few of the best hotels in qatar are expats. this is attributed to the fact that about 90% of the population in qatar is expatriates (the report, 2015) qatar is a popular destination for the expats who plan to start their career overseas (hsbc, 2014) . however, the role of expats labour in achieving sustainable development is another debatable topic. though the expats help to bridge the gap between demand and supply of labour, it is primarily argued that the widespread utilization of expatriate labour is recognized as one of the major features that alleviate the positive economic impacts of tourism (mowforth & munt, 2009) (wall & mathieson, 2006). further, excess participation by expats also leads to lack of native governance and contribution in tourism development (rao, 2002). therefore, the government of qatar should not ignore this fact and draft the labor policies in such a way that the interest of expats as well as the native labour is intact. this is important for the sustainable development of tourism in the country. table 3: demographic distribution of the respondents (n=213) attributes frequency percentage gender male 136 64.0 female 77 36.0 age less than 25 years 26 12.0 26 – 35 years 60 28.0 36 – 45 years 68 32.0 volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu girish k nair, nidhi choudhary emerging markets journal | p a g e |39 46 – 55 years 43 20.0 greater than 55 years 16 8.0 educational qualification diploma 34 16.0 undergraduate 94 44.0 post graduate 77 36.0 other 8 4.0 income per month (qar) less than 5,000 17 8.0 5,000 to 10,000 26 12.0 >10,000 to 20,000 77 36.0 >20,000 to 30,000 60 28.0 above 30,000 33 16.0 professional experience less than two years 34 16.0 2 – 5 years 72 34.0 6 – 10 years 85 40.0 more than 10 years 22 10.0 4.2. normality of the data normality assumption was not violated with an acceptable range of skewness and kurtosis statistics (threshold values 1.00 and -3 to +3 respectively). therefore, the data could be subjected to further level of statistical analysis. 4.3. measurement model to verify the reliability of the latent variables in the model, internal consistency reliability measure, item reliability measure, and composite reliability measure were calculated. table 4 shows the cronbach’s alpha coefficient and the composite reliability result for the model. the alpha coefficient has the acceptable value ranging from 0.6 to 0.9, indicating a moderately high level of internal consistency. to test for discriminant validity, the square root of average variance extracted (ave) for each construct was compared with the correlation between the construct and the other constructs (table 5), and was found to be higher (shown in bold), and hence, the discriminant validity is proved. the data could be subjected to the further analysis as very high measures were indicated in all the methods of reliability and validity. finally, the low value of redundancy (0.0067) is an indication that there is no redundancy in the indicators of measurement. the result of item reliability (ir) measured as standardized confirmatory factor loading (fl) ranged from 0.7 to 0.9 (table 6). the composite reliability is in the range of 0.8 to 0.9, indicating moderate to high reliability score. the communality values ranging from 0.5 to 0.8 are also indicating that the reliability is adequate. the convergent validity assessment based on factor loading and composite reliability indicate moderate to high acceptable range of factor loading for all items and good composite reliabilities in general. table 4: the reliability measures table 5: the correlation matrix table 6: factor loadings (after reduction) 4.4. structural model the hypothesized model was designed to test 6 hypotheses built based on the research literature on the influence of social aspects on sustainability of the hospitality industry. the model with path coefficients and the explanatory power (r2) for each dependent construct is displayed in figure 2. while path coefficients show the strength of relationship between the two latent variables, the t-values (figure 3 and table 7) are indicative of the significance of relationships which enable hypotheses testing. the r2 values of 0.713 (cutoff 0.1) for the endogenous variable indicate a very high explanatory power of the model. in other words, the exogenous variables influence up to 71% on the endogenous variables of the study. the path coefficients are in the range of 0.2 to 0.3, except for an outlier (0.011) for the variables associated through hypotheses testing and indicate a moderate to high influence. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu sustainability in the hospitality industry: a social factor dimension page |40| emerging markets journal table 7: the t-values of the hypothetical model *significance level of 10%; **significance level of 5%; rest have a significance level of 1%. the sem indicated that the following hypotheses were supported: h3a: there is a significant influence of income on social sustainability of hospitality industry. h4a: there is a significant influence of tv index on social sustainability of hospitality industry. h5a: there is a significant influence of newspaper index on social sustainability of hospitality industry. h6a: there is a significant influence of pc index on social sustainability of hospitality industry. the sem indicated that the following hypotheses were not supported: h1a: there is a significant influence of education on social sustainability of hospitality industry. h2a: there is a significant influence of life expectancy on social sustainability of hospitality industry. figure 2. path coefficients and factor loading figure 3. t-values of the hypothetical model 5. findings and implications to the strategic managers of hotels hospitality industry is a service sector which is highly knowledge intensive and putting in the words of the philosopher telfer (lashley, 2015), the service providers should be first of all hospitable, have a desire to please others, be naturally warm and friendly, have the ability to meet the needs of individuals, be ready to help in trouble, have a desire to make friends and enjoy communication, and entertain guests. the following discussions open up the issues related to social sustainability: 1. this research has revealed that income of the domestic population does have a significant influence on the sustainability of hospitality industry. this result is consistent with the results obtained by a group of researchers who have worked on hospitality and tourism (vasheghanifarahani, esfandiar & tajzadeh-namin, 2014; paci et al, 2013; yaping, 2013; zortuk, 2009; leea & chang, 2008; beresford, 2004; mccain, 2003; hach, 2001). the research shows in fact a reciprocal relationship between the income of domestic population and hospitality industry sustainability, according to which, if the local population is having a higher level of income, then there is ample scope for the hospitality industry to grow and as the hospitality industry grows, it will increase the income of local population. the implication is that, the government of qatar should focus on the overall business growth of the country in general and also strategize the hospitality industry to meet the requirement of the international community on a higher scale. the distribution of the income also appears to be a challenge to be faced. these measures are already taken by the government, but the promotion of local hospitality industry at the international level should be scaled up for ensuring sustainability. 2. this research has revealed the fact that, tv index has a significant influence on the sustainability of hospitality industry, which is also consistent with earlier research studies (seaton et al, 2015; beeton et al, 2013; roesch et al, 2009; chan, 2007). volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu girish k nair, nidhi choudhary emerging markets journal | p a g e |41 3. newspaper index also has a significant influence on the sustainability of hospitality industry. the revelations would be higher if the number of local residents read the newspapers more. thus, the hospitability industry will be sustainable. this outcome is consistent with the contemporary and earlier research (loi & sentosa, 2015; castro, armario & ruiz 2007; and grosspietsch, 2006). it is a well-known fact that, newspaper provides information about the measures government initiates for developing the economic health of country. it is important that the local residents must be aware of these measures. so, the responsibilities on their part will be fulfilled. a good understanding of the privileges and responsibilities as the citizens of country would help in building a culture, which is congenial to the growth of hospitality industry. the local residents may be more cooperative towards the international community and this would attract more number of tourists, which will make the hospitality industry grow. newspaper also provides the necessary business opportunities to the local citizens and supply information on opportunities to collaborate with foreign companies of international repute, and all these will further add to the growth of the hospitality industry. the government can make the newspapers available in abundance and have a wide range of newspapers available to the locals which cover local news, business opportunities, political initiatives, future of hospitality industry in qatar etc., which will pave the way to the success of hospitality industry. 4. pc index also has a significant influence on the sustainability of hospitality industry. this outcome is in agreement with many other researchers (esty & simmons, 2011; solomon, barnossy, askegaard & hogg, 2010; sloan, legrand & chen, 2009; ball, horner & nield, 2007). the higher the computer usage by the local residents, better will be the opportunity for sustaining hospitality industry. while pc usage has many facets including computing, word processing, accounting, planning etc., the most widely used application is internet surfing. the world of internet provides the users with a whole gamut of information about the business opportunities as well as tools and techniques available to build a stronger career for the local citizens of the country. at the same time, pc usage builds a computer savvy culture, which has the ability to access latest information in any field. these applications of pc will produce a generation which is receptive to newer ideas and they will develop linkages with the external world in social, cultural, and economic front. all these aspects have a direct bearing on the growth and success of hospitality industry. the implication to the government is to introduce computers in early stages of the student career, so that a computer literate crowd could be generated which knows how to exploit technology for the growth of the country. making computers available at a reasonable price to local public through reduced sales taxes may also be considered to maximize the pc usage. in contrast, by the correct application of ict well, the rewards could be enormous. these are identified as helping to enhance creativity and innovation to solve problems, build communities, give more people access to goods and services and use precious resources much more efficiently. 5. income of citizens of the country also has a significant influence on the social sustainability of hospitality industry as indicated by the hypothesis testing. there is research evidence that, higher the income of the people in a country, higher will be their awareness about the importance of promoting hospitality and tourism to strengthen the gdp of the country (marrocu & paci, 2011; paci & marrocu, 2013 and yaping, 2013). 6. it was surprising to note that, education background of the society had no significant influence on the sustainability of hospitality industry. this finding is in direct contrast to a group of researchers such as ouane & singh (2009); nabi, rogers & street (2009); adra (2008); robinson-pant, (2004). these research studies have been undertaken in a different setting and in the context of qatar, the research has revealed that sustainability of hospitality is independent of the educational background of the local residents. further investigation may be necessary and generalizing this outcome completely may not be advisable. 7. another counter intuitive outcome of this research was that, life expectancy of the local residents had no bearing on the sustainability of the hospitality industry. this research finding is not in agreement with some theoretical observations such as bimonte, brida, pulina & punzo, (2012); croes (2012); andereck & nyaupane (2011). the point is justifiable as hospitality industry has to be supported by the local citizens of the country, but there is no rule which would claim that longer the residents of the country live, the better will be the sustainability of hospitality industry. 6. conclusion this research is the first of its kind in the context of qatar and has come out in a timely manner, as the hospitality industry of the country is undergoing major scaling operation in the light of fifa 2022 world cup to be hosted in qatar. the research focused on the impact of specific social factors such as education, life expectancy, income, tv index, newspaper index, and pc index on sustainability of hospitality industry in qatar. the study has effectively made use of structural equation modelling to determine the significance of influence of the social variables on sustainability of hospitality industry. it can be very clearly concluded from this empirical research that, income of the local residents of the country, tv index, newspaper index, and pc index have direct impact on the sustainability of hospitality industry. drawing upon this revelation of the study, a discussion was undertaken on sustainability of hospitality industry. the discussion can be utilized by the stakeholders to promote sustainability of hospitality industry in qatar. the study cannot be completely generalized, mainly because of the sample size chosen, which comprises the managers of the hospitality industry, and not all the socio-economic classes of the society. however, it volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu sustainability in the hospitality industry: a social factor dimension page |42| emerging markets journal highlights the perceptions of managers in terms of the linkage of social aspects on sustainability. the study is an empirical investigation only on the social aspects, which impact the sustainability and thus, it is not a holistic approach to the problem. this provides ample scope for extending the work further. also, other dimensions of sustainability such as culture, economics, environment etc. may be added to the model. references abu alroub, a., alsaleem, a., & daoud, a. (2012). service quality and its impact on customer satisfaction tourist restaurants (a field study on the tourist restaurants /amman). interdisciplinary journal of contemporary research in business, 4 (1), 364-379. adra, n. (2008). learning through heritage, literacy through poetry. adult education and development, 70,125-138. andereck, k.l., & nyaupane, g.p. (2011). exploring the nature of tourism and quality of life perceptions among residents. journal of travel research, 50, 248-260. assaker, g., esposito, v., & o’connor, p. (2011). modelling a causality network for tourism development: an empirical analysis. journal of modelling in management, 6 (3), 258-278. ball, s., horner, s., nield, k. (2007). contemporary hospitality & tourism. management issues in china and india (1st ed). oxford: butterworth heinemann. beeton, s., yamamura, t. & seaton, p. 2013. the mediatisation of culture: japanese contents tourism and pop culture. in:j. lester and c. scarles, eds. mediating the tourist experience: from brochures to virtual encounters. farnham: ashgate, 139-154. beresford, m. b. (2004). the macroeconomics of poverty reduction in cambodia. asia-pacific regional programme on the macroeconomics of poverty reduction. phnom penh: united nations development programme. bimonte, s., brida, j.g., pulina, & m., punzo, l.f. (2012). tourism and growth. stories of two continents. routledge studies in the modern world economy, london. binder, m., & georgiadis, g. (2011). determinants of human development: capturing the role of institutions. cesifo working paper, 3397. blanke, j., & chiesa, t. (2013). the travel & tourism competitiveness report 2013, world economic forum, retrieved on 7th september, 2015 from: http://www3.weforum.org/docs/wef_tt_comp etitiveness_report_2013.pdf. castro, b. c., armario, e. m., & ruiz, d. m. (2007). the influence of market heterogeneity on the relationship between a destination’s image and tourist’s future behaviour. tourism management, 28, 175-187. http://dx.doi.org/10.1016/j.tourman.2 005.11.013. chan, b. (2007). film-induced tourism in asia: a case study of korean television drama and female viewers’ to visit korea. tourism, culture & communication, 7 (3), 207-224. choy, v., chong, h. & verma, r. (2015). environmental sustainability in the hospitality industry: best practices, guest participation, and customer satisfaction, cornell hospitality reports, 15(3), 6-16. creswell, j.w., & clark, v.l.p. (2011). designing and conducting mixed methods research, ny: sage publications, inc. croes, r., (2012). assessing tourism development from sen's capability approach. journal of travel research, 51, 542-554. daluwatte, m., & wijetilleke, s. (2000) reading the living environment: case study from sri lanka, mumbai: aspbae. echtner, c. m., & ritchie, j. r. b. (2003). the meaning and measurement of destination image. journal of tourism studies, 14(1), 37–48. eisenhardt, k.m., & martin, j.a. (2000). dynamic capabilities – what are they? strategic management journal, 21, 1105-1121. esty, d.c., winston, a.s. (2009). green to gold: how smart companies use environmental strategies to innovate, create value, and build competitive advantage. hoboken, new jersey: usa: john wiley and sons. figini p., castellani, m., & vici, l. (2009). estimating tourism effects on residents: a choice modeling approach to the case of rimini. advances in tourism economics. new developments, berlin, springer-verlag, 145-164. figini, p., & vici, l. (2010). tourism and growth in a cross-section of countries. tourism economics, 16, 789-805. gefen, d., straub, d. w. and boudreau, m. c. (2000). ‘structural equation modelling and regression: guidelines for research practice’. communications of the ais, (4): 1-77. http://www3.weforum.org/docs/wef_tt_competitiveness_report_2013.pdf http://www3.weforum.org/docs/wef_tt_competitiveness_report_2013.pdf http://dx.doi.org/10.1016/j.tourman.2005.11.013 http://dx.doi.org/10.1016/j.tourman.2005.11.013 volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu girish k nair, nidhi choudhary emerging markets journal | p a g e |43 gooroochurn, n., & sugiyarto, g. (2004). measuring competitiveness in the tourism and travel industry. paper presented at international conference on tourism modelling and competitiveness, cyprus. govers, r., go, f. m., & kumar, k. (2007). virtual destination image: a new measurement approach. annals of tourism research, 34(4), 977–997. grosspietsch, m. (2006). perceived and projected images of rwanda: visitor and international tour operator perspectives. tourism management, 27(2), 225-234. habisch, a., jonker, j., wegner, m., schmidpeter, r. (eds.). (2005). corporate social responsibility across europe: discovering national perspectives of corporate citizenship. berlin, germany: springer. hach, s. (2001). cambodia’s annual economic review. phnom penh: cambodia development resources institute. henrich, j. (2011). a cultural species: how culture drove human evolution a multi-disciplinary framework for understanding culture, cognition and behaviour, psychological science agenda, november issue. hsbc. (2014). expat explorer: report 2014. hsbc. james, p., magee, l., andy, s., steger, m. b. (2015). urban sustainability in theory and practice: circles of sustainability. london: routledge. karanja, n. (2014). intellectual capital theory of entrepreneurship. european journal of business management, 2(1), 161-180. kozlenkova, i. s., & palmatier, r.w. (2014). resourcebased theory in marketing, journal of the academy of marketing science, 42(1), 1-21. krippendorf, j. (1987). the holiday markers: understanding the impact of leisure and travel. london, william heinemann. kusluvan, s., kusluvan, z., ilhan, i., & buyruk, l. (2010). the human dimension: a review of human resources management issues in the tourism and hospitality industry. cornell hospitality quarterly, 51(2), 171-214. lansing, p. & de vries, p. (2007). sustainable tourism: ethical alternative or marketing ploy? journal of business ethics, 72, 77-85. lashley, c. (2015). hospitality and hospitableness, research in hospitality management, 2015, 5(1), 1-7. leea, c. c., & chang c. p. (2008). tourism development and economic growth: a closer look at panels. tourism management, 29, 180192. loi, d.h., & sentosa, i. (2015). the image of vietnam as a tourism destination for malaysian tourists. international journal of business and management, 10(1), 258-265. manning, t. (1999). indicators of tourism sustainability, tourism management, vol. 20, pp. 179-181. marrocu, e., & paci, r. (2011). they arrive with new information. tourism flows and production efficiency in the european regions. tourism management, 32, 750-758. mathieson, a., & wall, g. (1982), tourism: economic, physical, and social impacts. longman: harlow, uk. mccain, a. r. (2003). measuring inequality in income distribution. accessed on 5th september 2015 from: http://williamking.www.drexel.edu/top/prin/txt/factors/ dist4.html mowforth, m., & munt , i. (2009). tourism and sustainability: development, globalisation and new tourism in the third world. routledge. nabi, r., rogers, a., & street, b.v. (2009). hidden literacies: ethnographic studies of literacy and numeracy practices in pakistan. uppingham: uppingham press. nickerson, j. a., & zenger, t.r. (2004). a knowledgebased theory of the firm-the problem-solving perspective. organization science, 5(2), 1-16. osman, z., & sentosa, i. (2013). mediating effect of customer satisfaction on service quality and customer loyalty relationship in malaysian rural tourism. international journal of economics and management studies, 2(1), 25-37. ott., m., baca, e., cisnernos, j., & bates, e. (2014). a competency-based approach to the master’s degree preparation of higher education professionals, journal of case studies in accreditation and assessment, 4, 1-19. ouane, a., & singh.m. (2009) report of the workshop no. 21. esd and lifelong learning 31 march – 2 april 2009, unesco world conference on education for sustainable development, bonn, germany. paci, r., & marrocu, e. (2013). tourism and regional growth in europe. papers in regional science. doi:10.1111/pirs.12085. rabbany, m.g., afrin, s., rahman, a., islam, f. hoque, f. (2013). american journal of environment, energy and power research, 1(7), 117-130. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.154 | http://emaj.pitt.edu sustainability in the hospitality industry: a social factor dimension page |44| emerging markets journal rao, m. (2002). challenges and issues for tourism in the south pacific island states: the case of fiji islands. tourism economics, 8, 401-429. ritchie, j.r., brent., geoffrey i., crouch., & hudson, s. (2000). assessing the role of consumers in the measurement of destination competitiveness and sustainability. tourism analysis, 5(24) 69-76. roberts, s. and tribe, j. (2008). sustainability indicators for small tourism enterprises – an exploratory perspective, journal of sustainable tourism, 16(5), 575-594. robinson-pant, a. (2004) ‘"the illiterate woman": changing approaches to researching women's literacy', in robinson-pant, a. (ed), women, literacy and development: alternative perspectives, routledge, london, isbn 0-41532239-1, 15-35. roesch, s., (2009). the experiences of film location tourists. bristol: channel view publications. rogers, a. (2006). lifelong learning and the absence of gender. international journal of educational development, 26, 189-208. seaton, p., & yamamura, t. (2015). japanese popular culture and contents tourism – introduction, japan forum, 27:1, 1-11, doi: 10.1080/09555803.2014.962564. sloan, p., legrand, w.; & chen, j. (2009). sustainability in the hospitality industry (1st ed). oxford, uk: elsevier inc. solomon, m. r., barnossy, g., askegaard, s., & hogg, m. k. (2010). consumer behaviour: a european perspective (4th ed.). essex, england: pearson education limited. the report. (2015). country profile overview. turner, j.h. (1986). the structure of sociological theory, dorsey press, chicago, il. unesco, (2014) efa global monitoring report 2013/4, teaching and learning: achieving quality for all (summary report), paris: unesco. making tourism more sustainable a guide for policy makers, unep and unwto, 2005, p.11-12 vasheghani-farahani , f., esfandiar, k., & tajzadehnamin, a. (2014). enlightening tourism. a pathmaking journal, 4(2), 147-167. wacoss, (2003). submissions to the board of taxation on the draft charities bill, australia. wall , g., & mathieson, a. (2006). tourism: change, impacts and opportunities. pearson prentice hall. west g., & gamage, a. (2001). macro effects of tourism in victoria: a nonlinear input-output approach, journal of travel research, 40 (1), 101-109. woodcraft, s. (2011). design for social sustainability, london: social life. woolcock, m., & narayan, d. (2010). social capital: implications for development theory, research, and policy, oxford journal, 15(2), 225-240. world travel & tourism council, (2013). retrieved on september 1, 2015 from: http://www.wttc.org. yaping, z. (2013). the influence of tourism to regional economic difference: a literature review, journal of beijing second foreign languages institute, 9(1), 23-34. zortuk, m. (2009). economic impact of tourism on turkey’s economy: evidence from cointegration tests. international research journal of finance and economics, 25, 231-239. http://www.wttc.org/ volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the perception of teachers about financial markets and instruments information ferhat sayım yalova university, turkey | f_sayim@hotmail.com nurdan serdar yalova university, turkey | nurdanserdar4@gmail.com abstract in recent years, online shopping, online financial transactions and social media have become a subject of interest to everyone. current economic news and economic developments are being interpreted by all. in addition, individuals constitute the class of consumers as the most important element of microeconomics. also regardless of profession, individuals carry out entrepreneurial activities and constitute economic units such as firms and so on. the public's so much interconnectedness with the economy is normal, and this interest has been the subject of more research in academic circles in recent years. many researches have been done on measuring the financial literacy of various public sectors. various scales have been prepared. the financial literacy of teachers, who are the main component of education system, is very important both in terms of the large professional community they represent and in terms of the student population they train. in this aspect, teachers' familiarity with financial systems and concepts, how they make sense of them in their daily lives have been seen as a subject worth investigating. the scales of financial literacy studies are examined in the literature. also, the scale of the measurement of the level of financial knowledge felt towards the business environment other than financial literacy has been examined. a new scale has been prepared that includes the main elements of these two basic scales. a survey has been conducted in various subtitles that do not exceed one page. the questionnaire was applied to teachers in schools. it is given high importance that they fill the questionnaire with the researcher. data which transmitted in excel are tried to be interpreted through the spss program. the survey contains sub-headings and will serve as the basis for more than one study. teachers' knowledge of the financial system is as low as expected. when applying the questionnaire, teachers talk about realizing that they don't really know some of the concepts they use in everyday life. however, it is observed that the information levels are increasing about some focus issues. data related teachers' financial literacy, such as the functioning of the financial system, recognizing financial institutions, recognizing financial instruments, recognizing and making financial transactions are gathered. summary tables have been created. in this study, teachers' familiarity with financial concepts is explained. keywords: financial market, financial literacy, teachers new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.186 | http://emaj.pitt.edu | mailto:f_sayim@hotmail.com mailto:nurdanserdar4@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.186 | http://emaj.pitt.edu the perception of teachers about financial markets and instruments information page |2| emerging markets journal the perception of teachers about financial markets and instruments information* ferhat sayım nurdan serdar i. introduction in recent years, online shopping, online financial transactions and social media are becoming more common. thus, these subjects have become a subject of interest to everyone. current economic news and economic developments are being interpreted by all. in addition, individuals constitute the class of consumers as the most important element of microeconomics. besides that, the dominance of teachers, who take the task of training people, about existing knowledge, capabilities and the opinions they convey to the students have a great importance. measuring teachers’ level of knowledge of financial concepts which is related with everyone even in different levels is accepted as valuable for themselves and for the potential achievements of students with whom they are in continuous communication. the perception of information that teachers feel about financial concepts is the subject of research. the studies in the literature are more focused on financial literacy and many are applied to students. another study topic consists of financial behavior and attitudes. ii. literature similar research have been examined in the literature. in the examination, the level of financial literacy, determination of financial behavior, attitudes and the importance of financial education studies were found. while financial literacy studies on students are at the forefront of research estimating a particular segment, there are also studies on the financial skills and education of women. no study that measures teachers' relationships with financial concepts or the financial sector was found in the research. a close and common research topic as a subject is the research about financial literacy. these research and their results have been examined, but it has been observed that the population is usually the segments of students, public sector etc. their interest in financial information, financial attitudes and financial behavior have been investigated (coşkun, 2016, 2247-2258) (bayram, 2014, pp. 105-135) (alkaya & yağlı, 2015). * this study was previously presented in the international conference of business students (icobs-2019) as a paper in a different language. the financial literacy and access association and visa conducted the turkish financial literacy survey to determine the level of financial literacy of the general public and to understand attitudes and behaviors towards financial products and services. the research was carried out face-to-face with 2,000 people in 26 provinces in turkey between january and february 2019. participants were asked 10 questions about the level of financial literacy, including both math transaction information and inflation and risk perception, and those who answered at least 7 of these 10 questions correctly were identified as financial literacy. according to the research results, the financial information score increased from 70 percent in 2017 to 75 percent in 2019, meaning that the correct response to a minimum of 7. according to the results, the level of financial literacy has increased.(financial literacy and access association) another research, "finansal okuryazarlık: harran üniversitesi suruç meslek yüksekokulu öğrencilerine yönelik bir araştırma ", is a study of students studying at harran university suruc vocational school in 2017-2018. literacy levels, basic and current financial indicators and simple interest calculations have been tried to be examined (aba şenbayram, 2019, p. 3). "finansal eğitimin finansal okur-yazarlık üzerindeki etkisi: muğla i̇linde kadınlara yönelik bir araştırma" tried to demonstrate the impact of education on financial literacy in investments by comparing women's financial literacy levels with financial education (bayrakdaroğlu & bilge, 2018, p. 114). the article titled "üniversite öğrencilerinin finansal okuryazarlık düzeylerinin bazı demografik değişkenler açısından i̇ncelenmesi” is one of the studies in the literature. it is seen as a goal to educate young people who are capable of making financial decisions in a healthy way, are conscious of credit card use and can manage their budget. in this context, it is stated that education in financial subjects in turkey should be added to the curriculum in the years of compulsory education and in higher education institutions as compulsory courses in faculties other than the faculty of administrative sciences and economics. (yücel & çiftçi, 2018, p. 159) iii. methodolgy the importance of research-method even though they are in different levels doing individual entrepreneurial activities, creating economic units such as firm etc. are in financial system. teachers are not only individuals, but teachers are also a key element of the education system. their financial situation affects a large number of other individuals, considering the students they educate and benefit society. for these reasons, measuring the perception of information about the financial market and instruments of teachers is a subject worth for investigating. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.186 | http://emaj.pitt.edu ferhat sayım, nurdan serdar emerging markets journal | p a g e 3 in this study, the level of knowledge that teachers define for themselves about the financial system and concepts is investigated with questionnaires that do not exceed one page. this level of knowledge is not a measurement of information that can be measured parametrically. how the surveyed audience defines their level of knowledge about the financial concept is investigated. they are given three options. 0=i don't know anything about that. 1=i have general knowledge of this subject 2= i have more detailed knowledge such as risk, cost and returns. the data obtained were evaluated in the statistics program and were tested with reliability test for non-parametric data. in the analysis, the outputs which are processed in excel and obtained by tabulating the data in the spss program were used. universe and sampling (scope) sectoral distribution it can be said that the sample has a balanced distribution for the public and private sectors. this independent variable is divided into two sub-groups. table 1. public and private sector distribution frequency percent valid percent cumulative percent valid public 24 48,0 48,0 48,0 private 26 52,0 52,0 100,0 total 50 100,0 100,0 age distribution the distribution based on age was divided into four sub-groups. while participants under 30 and 31-40 years are in majority, the proportions of groups aged 4150 and over 50 are close to each other. table 2. distribution by age frequency percent valid percent cumulative percent valid under 30 16 32,0 32,0 32,0 31-40 17 34,0 34,0 66,0 41-50 9 18,0 18,0 84,0 over 50 8 16,0 16,0 100,0 total 50 100,0 100,0 gender distribution when the distribution of the participants by gender is examined, women are in majority with a difference that does not pose a problem in terms of feasibility analysis. table 3. distribution by gender frequency percent valid percent cumulative percent valid men 21 42,0 42,0 42,0 woman 29 58,0 58,0 100,0 total 50 100,0 100,0 reliability test cronbach alpha is 0.910 for the questionnaire, which seeks to measure the perception of information that teachers feel about financial instruments and concepts. this coefficient is sufficient for the study to be analyzed. table 4 . reliability test cronbach's alpha n of items ,910 17 scale mean if item delet ed scale varia nce if item delet ed correct ed itemtotal correla tion cronba ch's alpha if item deleted financial system and market operation 7,82 29,66 ,647 ,903 investment budgeting 7,88 29,33 ,746 ,899 financial risks 7,96 30,49 ,607 ,904 common/compound/no minal/real interest 8,08 31,01 ,621 ,904 participation (interestfree)bank differences 7,84 30,50 ,592 ,904 offshore banking 8,26 33,75 ,147 ,914 bond-bond types/repo 7,84 28,91 ,723 ,900 interest/exchange/matur ity/risk and management 7,74 29,01 ,722 ,900 futures (forward)markets 7,90 29,89 ,611 ,904 consumer credit, housing credit 7,16 30,02 ,562 ,906 central bank transactions 7,76 30,72 ,523 ,907 company's public offering 7,80 29,88 ,657 ,902 stock exchanges 7,72 30,00 ,655 ,902 forex markets 8,16 31,40 ,543 ,906 leasing 8,16 31,93 ,495 ,907 credit note 7,42 30,90 ,516 ,907 derivative products 8,26 32,89 ,396 ,910 volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.186 | http://emaj.pitt.edu the perception of teachers about financial markets and instruments information page |4| emerging markets journal iv. analysis and findings the level of knowledge felt about financial concepts and instruments table 5. average knowledge level that teachers feel aver age 50 peop le deviation from the general average nominal deviation from general average percentage the functioning of the financial system and the market 0,54 0,048 9% investment budgeting 0,48 -0,012 -3% financial risks 0,4 -0,092 -23% common/comp ound/nominal/r eal interest 0,28 -0,212 -76% participation (interest-free) bank differences 0,52 0,028 5% offshore banking 0,1 -0,392 -392% bond-bond types/repo 0,52 0,028 5% interest/exchang e/maturity/risk and management 0,62 0,128 21% futures (forward) markets 0,46 -0,032 -7% consumer credit, housing credit 1,2 0,708 59% central bank transactions 0,6 0,108 18% company's public offering 0,56 0,068 12% exchanges 0,64 0,148 23% forex markets 0,2 -0,292 -146% leasing 0,2 -0,292 -146% credit note 0,94 0,448 48% derivatives products 0,1 -0,392 -392% overall average 0,49 2 0 0% when expressing the perception of information that teachers feel about financial concepts and instruments; they have been asked to give values that mean 0=i don't know about this 1=i have general knowledge of this subject 2= i have more detailed information such as risk, cost and returns. as it can be seen from the table, perception of information that teachers feel about financial concepts is low. the lowest knowledge level averages felt are respectively "coastal banking (off shore) and derivatives" with 0.1, "forex markets and leasing" with 0.2 and "name/compound/nominal/real interest types" with 0.28. the concepts and tools that participants felt were most knowledgeable are "consumer credit, housing credit" with a value of 1.2 and "credit note" with 0.94. the higher awareness of these concepts can be explained by the use of more by individuals in daily life. according to the results of the analysis, these concepts and instruments are followed by the "stock exchanges”, “interest/exchange/maturity risk and management", "the company's public offering and financial system" and "the functioning of the market". looking at the general assessment of the information felt for financial concepts and instruments, there is an average of 0.49 corresponding to almost the middle of two comments which are “i have no knowledge of this issue” and “i have knowledge on the general level”. table 6. average knowledge level felt by teachers by sectoral distinction publi c secto r teac hers aver age 24 peop le private sector teachers average 26 people public private differen ce nomina l public private differen ce percenta ge the functioning of the financial system and the market 0,54 0,54 0,00 1% investment budgeting 0,46 0,50 -0,04 -8% financial risks 0,46 0,35 0,11 32% common/co mpound/nom inal/real interest 0,29 0,27 0,02 8% participation (interestfree) bank differences 0,71 0,35 0,36 105% offshore banking 0,04 0,15 -0,11 -73% bond-bond types/repo 0,58 0,46 0,12 26% interest/exch ange/maturity /risk and management 0,54 0,69 -0,15 -22% futures (forward) markets 0,46 0,46 0,00 -1% consumer credit, housing credit 1,38 1,04 0,34 32% volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.186 | http://emaj.pitt.edu ferhat sayım, nurdan serdar emerging markets journal | p a g e 5 central bank transactions 0,67 0,54 0,13 24% company's public offering 0,63 0,50 0,13 25% exchanges 0,75 0,54 0,21 39% forex markets 0,25 0,15 0,10 63% leasing 0,21 0,19 0,02 8% credit note 1,04 0,85 0,20 23% derivatives products 0,08 0,12 -0,03 -28% overall average 0,53 0,45 0,08 %14,94 in this section, the perception of information felt is examined in the distinction between public and private sectors. it has been observed that there is no significant difference in the concepts and instruments of "financial system and market functioning", "forward markets", "common/compound/nominal/real interest types" and "investment budgeting", respectively. in contrast, the most obvious difference was realized in the question of "participation (interest-free) bank differences". the average level of knowledge declared by teachers working in the private sector is 0.35, while the average knowledge level declared in the public sector is 0.71% which corresponds 105% more. it was followed by concepts and instruments 63% "forex markets", 39% "stock exchanges" and "financial risks" and "consumer/housing loans" with a difference 32 %, in terms of the proportional difference between the coefficients of the two sectors. the private sector thought it was more knowledgeable about off shore banking by 73%, followed by derivatives with a margin of 28% and interest/exchange rate/maturity/risk management with 22%. when we look at the general average, the average level of knowledge declared by teachers working in the public sector is 0.53, while it is 0.45 for the teachers who are working in private sector. table 7. average knowledge level that teachers feel by age factor avera ge under 30 aver age 3140 aver age 4150 avera ge over 50 the functioning of the financial system and the market 0,38 0,53 0,33 1,13 investment budgeting 0,31 0,41 0,33 1,13 financial risks 0,31 0,41 0,33 0,63 common/compound/ nominal/real interest 0,25 0,18 0,33 0,50 participation (interestfree) bank differences 0,50 0,41 0,56 0,75 offshore banking 0,06 0,12 0,11 0,13 bond-bond types/repo 0,38 0,29 0,33 1,50 interest/exchange/ma turity/risk and management 0,44 0,47 0,44 1,50 futures (forward) markets 0,25 0,29 0,33 1,38 consumer credit, housing credit 1,13 1,12 1,00 1,75 central bank transactions 0,63 0,59 0,44 0,75 company's public offering 0,50 0,53 0,44 0,88 exchanges 0,56 0,65 0,56 0,88 forex markets 0,06 0,18 0,33 0,38 leasing 0,19 0,00 0,33 0,50 credit note 1,00 0,94 0,56 1,25 derivatives products 0,13 0,00 0,22 0,13 overall average 0,42 0,42 0,41 0,89 in the examination according to age factor, according to general average the age group over 50 is the leader with 0,89. the average of teachers over the age of 50 is more than double the average that occurs when this group is excluded. the main financial concepts and instruments that increase the average of teachers over the age of 50 are "financial system and market functioning", "investment budgeting", "bond-bond types/repo", "interest/exchange/maturity risk and management", "company's public offering", "stock exchanges", "participation (interest-free) bank differences". this result with direct proportion to life can be attributed to the participants' experience, level of knowledge and their use and being more familiar with these concepts and tools. the level of knowledge felt by groups under 30 and 31-40 were similar and this was 0.42, closely followed by the 41-50 age group with a level 0.41. table 8. average knowledge level that teachers feel according to gender avera ge man aver age wom an man / woma n differe nce nomin al man / woman difference percentage the functioning of the financial system and the market 0,76 0,38 0,38 101% investment budgeting 0,71 0,31 0,40 130% financial risks 0,52 0,31 0,21 69% common/comp ound/nominal/r eal interest 0,48 0,14 0,34 245% participation (interest-free) bank differences 0,57 0,48 0,09 18% volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.186 | http://emaj.pitt.edu the perception of teachers about financial markets and instruments information page |6| emerging markets journal offshore banking 0,19 0,03 0,16 452% bond-bond types/repo 0,57 0,48 0,09 18% interest/exchang e/maturity/risk and management 0,86 0,45 0,41 91% futures (forward) markets 0,62 0,34 0,27 80% consumer credit, housing credit 1,24 1,17 0,07 6% central bank transactions 0,67 0,55 0,11 21% company's public offering 0,71 0,45 0,27 59% exchanges 0,76 0,55 0,21 38% forex markets 0,43 0,03 0,39 1143% leasing 0,29 0,14 0,15 107% credit note 1,00 0,90 0,10 12% derivatives products 0,14 0,07 0,07 107% overall average 0,62 0,40 0,22 55% according to general assessment, the difference between men and women is in favor of men. when the average of men is taken, the perception of information about these tools and concepts is 0.62. for women, the value of 0.40 was calculated. although the average results are considered low for both groups, the average of men is 55% which is higher than the average of women. the fact that men are more interested in financial instruments and concepts and tend to follow financial markets more in their daily lives supports the results of this analysis. concerning teachers, it was observed that men feel more knowledgeable about every concept and tool than women. when the average difference of the two genders on each concept is expressed as a percentage; they were calculated as 1143% "forex markets", 452% "off shore banking", 245% "name/compound/nominal/real interest types", 130% "financial risks" which are noteworthy. the closest level of knowledge felt by men and women was "consumer/home loan" where the difference was 6%, "credit rating" where the difference was 12% and "bond-bond types/repo and participation (interest-free) bank differences" where the difference was 18%. v. conclusion and discussion when the surveys about perception of knowledge of teachers about financial instruments and concepts were evaluated, generally low level results were found. particularly in derivative products, off shore banking, forex markets and leasing issues, the results achieved were 0.1, 0.2 and they were very low. the reasons for this can be considered to be subjects that they are not used in daily life, rarely encountered or never countered, uninterested, or it can be thought that they are subjects that have not been involved in the education life of teachers. consumer / housing credits with 1.2 and credit notes with 0.94 were the subjects with the most felt highest level of information. this is because they have concepts and tools that they use in their daily lives or that they have witnessed a lot. when examination done under the headings of public and private sectors, teachers working in the public sector with a value of 0.53 feel more knowledgeable, while in the private sector this figure is calculated as 0.45. although the public sector feels more knowledgeable, both values are low. no matter which sector the participants work in, the information levels that the participants feel take place in the middle of these options: “i have general knowledge of this subject” and “i don't know anything about that”. in terms of the level of knowledge felt, the closest result to the expression "2risk, i have more detailed information such as costs and returns" was observed in the field of consumer/home credit with 1.38 in the public sector and 1.04 in the private sector. this is followed by the concept of a credit note. when the results of the research are evaluated in terms of age groups, the level of knowledge about financial instruments and concepts of the group over 50 is at the top with 0.89. this result can be based on the participants' level of knowledge and financial experience, which is directly proportional to their age. 0.42 in the age group below 30 and 31-40, in the 41-50 age group, a mean of 0.41 similarly is reached. although values of 1 or more are found in areas such as consumer/home loan and credit rating, the level of knowledge felt especially in groups under 50 years of age is very low. when the level of knowledge about financial instruments and concepts is evaluated by gender, men feel more knowledgeable with 0.62. in women, this value was measured as 0.40. the reasons for this difference include that men are more interested in finance and more likely to follow the financial agenda, and to be more involved in economic activities compared to the general public. the issues where the difference is most and least are explained in the related section. in general, teachers’ level of knowledge feeling about financial concepts and instruments is low. this is not a criterion for evaluating the professional success or competence of teachers. however, it can be considered that strengthening teachers on issues such as financial literacy will have a multiplier effect on society. this situation is related to both the fact that teachers are a big occupational group and that their impact areas such as the number of students they train are very wide. more comprehensive and increased number of samples can be carried out within the framework of the results of this research and different publications can be carried out. the teachers' professional group should be addressed separately in terms of targets such as increasing the level of knowledge about financial concepts and instruments in society, increasing financial literacy levels, creating conscious consumer masses that can better interpret economic plane and events. references aba şenbayram, e. (2019). finansal okuryazarlık: harran üniversitesi suruç meslek yüksekokulu öğrencilerine yönelik bir araştırma. econharran harran üniversitesi i̇i̇bf dergisi , 3. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.186 | http://emaj.pitt.edu ferhat sayım, nurdan serdar emerging markets journal | p a g e 7 alkaya, a., & yağlı, i̇. (2015). finansal okuryazarlık finansal bilgi, davranış ve tutum: nevşehir hacı bektaş veli üniversitesi i̇i̇bf öğrencileri üzerine bir uygulama. uluslararası sosyal araştırmalar dergisi , 8 (40), 585-599. bayrakdaroğlu, a., & bilge, s. (2018). finansal eğitimin finansal okur-yazarlık üzerindeki etkisi: muğla i̇linde kadınlara yönelik bir araştırma. sosyal ve beşeri bilimler araştırmaları dergisi , 114. bayram, s. s. (2014). finansal okuryazarlık ve para yönetimi davranışları: anadolu üniversitesi öğrencileri üzerine uygulama. business & management studies: an international journal , 2 (2), 105-135. coşkun, s. (2016). üniversite öğrencilerinin finansal davranış ve tutumlarının belirlenmesi: finansal okuryazarlık algıları üzerine bir araştırma. i̇nsan ve toplum bilimleri araştırmaları dergisi , 5 (7), 2247-2258. finansal okuryazarlık ve erişim derneği. (tarih yok). para durumu. 5 14, 2019 tarihinde para durumu: https://www.paradurumu.com/yonetilsinbutceler/turkiyede-finansal-bilgiye-sahip-olanbireylerin-orani-artti-haberi-4459 taken from this adress yücel, s., & çiftçi, n. (2018). üniversite öğrencilerinin finansal okuryazarlık düzeylerinin bazı demografik değişkenler açısından i̇ncelenmesi. i̇nönü üniversitesi uluslararası sosyal bilimler dergisi , 159. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu innovation and internationalization of nigeria deposit money banks moruff sanjo oladimeji olabisi onabanjo university, nigeria | sanjolanre4life@yahoo.com adebiyi julius abosede olabisi onabanjo university, nigeria | abosede.adebiyi@gmail.com benneth uchenna eze hallmark university, nigeria | beneze7@gmail.com abstract the study investigated the effect of service and process innovation on internationalization of nigeria deposit money banks, using a survey research design. a structured questionnaire was administered to a purposively selected sample of seven hundred and sixty five (765) staff of five international banks; from the population of one thousand six hundred and fifteen (1615) staff of strategy and international operation departments of the ten central bank of nigeria (cbn) licensed international banks. ordinary least squares was employed to estimate the regression model and this was done with the aid of stata 12. the findings revealed that service and process innovation significantly affect bank’s internationalization. it is therefore recommended that banks seeking internationalization should adopt services and processes innovativeness strategy. keywords: internationalization, innovation, international entry strategies, institutional theory, joint venture new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:sanjolanre4life@yahoo.com mailto:abosede.adebiyi@gmail.com mailto:beneze7@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu moruff sanjo oladimeji, adebiyi julius abosede, benneth uchenna eze emerging markets journal | p a g e |1 innovation and internationalization of nigeria deposit money banks moruff sanjo oladimeji adebiyi julius abosede benneth uchenna eze 1. introduction the banking industry has played a central role in the economic development of nigeria in recent decades. the global competitive pressure and the opportunities in foreign markets have led some nigerian owned banks to set up foreign subsidiaries. foreign market entry by nigerian banks can be traced to the establishment of representative offices and branches in united states and united kingdom by some nigerian banks in the 1980s, which was geared towards the facilitation of trade for their customers. in 2004, the central bank of nigeria (cbn) increased the capital base of banks to 25 billion naira, which enhances bank’s capacity, due to higher fund at their disposal, and some banks developed international expansion strategies. the aftermath of the 2009 financial crisis in the banking sector, led to the initiation of series of reforms to restore public confidence and stability in the system. as part of the reform, the cbn categorizes banks in nigeria into three, namely; commercial banks, merchant banks and specialized banks (which includes; micro finance banks, primary mortgage institutions and non interest banks). commercial banks were further categorized into international banks, national banks and regional banks, with a minimum share capital of nigeria naira (ngn) 50 billion, ngn 25 billion and ngn 10 billion respectively. international entrepreneurship literature has extensively researched the factors influencing the internationalization of firms as well as the entry mode choice (amoros, etchebarne, zapata & felzenstein, 2016; dimitratos, buck, fletcher & li, 2016, amungo, 2016 and junaidu, 2012). scholars equally studied internationalization from the perspective of social entrepreneurship, corporate governance, relational capability building and culture (calabro, campopiano, basco & pukall, 2016; ghauri, tasavori & zaefarian, 2014; chavan & agarwal, 2016, and ovadje, 2016). as the literature progressed, it began to be recognized that firms can internationalize through the adoption of corporate and strategic entrepreneurship (which has innovation as one of its key components) (slimane, slim & mansouri, 2015; bell, crick & young, 2004; rezvan, ghamri and ghahramani, 2013, and veilleux & roy, 2015), and studies on innovation and internationalization (boermans & roelfsema, 2015; o’cass & weerawardena 2009; sdiri & ayadi, 2014; nosi, pucci and zanni, 2017; prange and pinho, 2017) should also be noted at this point. studies showing the effect of innovation on the internationalization of banks in sub-saharan africa are sparse, and most of the related studies are from developed and emerging economies. considering the socio-cultural, political as well as economic differences between the developed economies, emerging economies and the developing economies, this study seeks to address this research gap, by examining the effect of innovation on the internationalization of banks in nigeria, with the following specific objectives: to evaluate the effect of service innovation on the internationalization of nigerian banks, to determine the volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu innovation and internationalization of nigeria deposit money banks page |2| emerging markets journal effect of process innovation on the internationalization of nigerian banks and to investigate the combined effect of innovation elements on the internationalization of nigerian banks. the study was divided into five sections. section one introduces the subject matter. it presents the problem statement (based on the relevant literature and with references to the literature), the research gap and the objectives of the study. section two presents a review of literature. section three presents the research methodology employed for the study. section four presents the research findings and discussion of the findings. section five provides the conclusion of the study, which includes contributions of the study, the similarities and difference of the findings with existing literature findings. the implications of the findings for researchers, practitioners as well as the limitations of this study and suggestions for further studies are also indicated. 2. literature review internationalization of firms can be traced to the ability of people to travel across national borders. scholars made attempt in defining internationalization, using many different perspectives and variables. internationalization generally implies any business activities across national borders (wach, 2014). penrose (1959) opines that internationalization is an organization’s opportunities in the international market as well as an organization’s core competences. welch and luostarinen (1988) posit that, internationalization is an increment in the international operation of an organization. johanson & vahlne, 1977; calof & bearmish, 1995; loane & bell, 2006; awolusi, 2013; chavan & agarwal, 2016: xu, carter, taute & dishman, 2016; ovadje, 2016 agreed that, internationalization is the process of international business engagement by organizations. this study viewed internationalization from the perspective of nigerian banks that has foreign subsidiaries. as of 2017’s second quarter, nigeria had ten international banks, with subsidiaries in some africa countries as well as united kingdom, united states, china and united arab emirate (cbn, 2017). innovation refers to the engagement and support of novel and unique ideas by an organization, which can lead to the creation of new services (product), market or technique as well as venturing into foreign markets (lumpkin & dess, 1996). innovative firms have capabilities to monitor the fluctuations in the market and respond promptly, thereby, taking advantage of budding business opportunities (wiklund& shepherd, 2003). according to huse, neubaum and gabriellson (2005), the level of product creation is high in organizations operating in unstable business environment. environmental changes stimulate firms to innovate by introducing new technologies, new products, services and processes to take advantage of opportunities arising from the dynamic environment. environmental changes can propel the organization to explore enhanced means of remaining competitive in its industry, which enhances process innovativeness. a very good example is the recent deployment of mobile banking that allows bank customers to transfer fund, check balance, buy airtimes and pay bills with their phones, through the dialing of special codes, without internet connection. unlike in the past when all virtual services were internet based, the introduction of this innovative technique and product by guaranteed trust bank plc. to the nigeria volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu moruff sanjo oladimeji, adebiyi julius abosede, benneth uchenna eze emerging markets journal | p a g e |3 market, through the 737 code has enhanced the ease of banking. other banks have equally developed various codes for such services and these services have been embraced by the younger generation and even the older generation in nigeria. particular banks have equally introduced some innovative processes. for instance, united bank of africa (uba) introduced a process whereby customers, depositing 50000 naira and below do not have to queue. all they have to do is to pick a nylon provided by the bank and put the fund inside and thereafter auto-stamp there tellers, and drop the fund inside a reflective box, thereby reducing the waiting time. innovative organizations are usually ahead of their competitors, which enhance their result as well as their competitive advantage. boermans and roelfsema (2015) posit that, internationalization has a positive effect on innovation. therefore, the involvement of an organization in international activities will enhance their innovativeness. sdiri and ayadi (2014) opined that internationalization enhances organizations’ innovativeness and financial result. nosi, pucci and zanni (2017) posited that, internationalization as well as innovation are complementary, in achieving organizations’ improved performance, and not alternatives. prange and pinho (2017) opine that, innovation mediates small and medium sized enterprises’ (smes) international performance. innovation resonances a company’s inclination to get involved in, and sustain, new ideas, uniqueness, experimentation and creative processes that may result in new products, services, or technological processes or venturing into foreign markets (lumpkin & dess, 1996). innovative organizations have the ability to monitor the market changes and act promptly, thereby taking advantage of emerging opportunities (wiklund, 1999). huse et al. (2005) opine that, organizations operating in turbulent business environments usually introduce new products rapidly and frequently. such business environment plays an important role in influencing corporate entrepreneurship in an organization. venter et al. (2008), posit that, an innovative organization is seen as being entrepreneurial. according to huse et al.(2005), innovation has become a source of international competitive advantage. ngoma et al. (2017) opines that, innovation is positively and significantly related to internationalization. rapid technological changes in an industry, customer demands, new processes, technology and international diversification can propel an organization to be innovative (huse et al., 2005). innovation propels an organization to act entrepreneurially. firms use innovation to attain organizational goals such as maximizing profits, gaining market share, creating niche markets and adding value for stakeholders as well as entering foreign markets (lumpkin & dess, 1996). the international entry mode adopted by an internationalizing organization is a vital strategic choice that can determine the organizations’ position in the selected foreign market (holmlund & kock, 1998). amungo (2016) identified two major foreign market entry modes adopted by nigerian banks, namely; joint ventures and wholly-owned subsidiaries. a joint venture refers to a business entity, established by two or more autonomous organizations, that agrees to come together and share the risk and profit of the new business entity. the ownership structure of a joint venture can be 50/50 volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu innovation and internationalization of nigeria deposit money banks page |4| emerging markets journal shareholding or any other combinations, depending on the agreement stated in the memorandum of understanding, which also captures the commitments and roles of each of the combining organizations. the main benefit of joint venture according to hill (2007) is that, an organization gains from the host country partners’ knowledge and experience. furthermore, it is difficult to set up foreign subsidiaries in some countries, thereby, making joint venture desirable. though, joint venture can lead to conflict of interest and struggle over the control of the venture. a very good example of joint venture in nigeria is stanbic ibtc bank. a wholly-owned subsidiary refers to the foreign business entity; controlled, owned and managed by an organization. wholly-owned subsidiaries can be attained either through the acquisition of a local firm in the host country. this is also referred as brownfield or through the establishment of a new organization in the host country, it is referred as greenfield. this entry mode gives an organization control over the new business entity. an example of wholly owned subsidiaries is standard chartered bank limited in nigeria, owned by standard chartered bank of south africa and gt bank in ghana, owned by gt bank, nigeria. the study adapts schumpeterian theory of innovation and institutional theory of internationalization. schumpeterian theory of innovation postulates that, innovativeness gives its creator competitive advantage over competitors. this is because, the creation of innovative products, processes or markets makes some previous innovations obsolete and it will equally be rendered obsolete by future innovations (schumpeter, 1934). schumpeter (1934) posits that economic behavior is to some extent automatic in nature, and more probable to be consistent, while entrepreneurship involves doing new things in a new way. innovation is the development of novelty (new products, processes and markets). the entrepreneur is propelled by the craving for power and independence, the will to succeed, and the fulfillment of getting things done. the entrepreneur obliterates the static equilibrium from within the system by creating new products, processes as well as entering new markets, which could be international markets. the institutional theory postulates that economic, political and socio-cultural institutional environment of the host country may differ from that of the home country and this is an important determinant in firms’ internationalization (brouthers & hennart, 2007). cui and jiang (2010) posit that organizations prefer to enter a foreign market through wholly-owned subsidiary, when there are few legal restrictions, and while joint venture entry mode strategy is usually adopted when the market is highly restricted. hennart and larimo (1998) found that the cultural distance, which shows the differences between the host and home countries environment, plays a significant role in explaining organizations’ foreign entry mode decisions. the theory is highly relevant to bank internationalization, since the banking sector is a highly regulated sector. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu moruff sanjo oladimeji, adebiyi julius abosede, benneth uchenna eze emerging markets journal | p a g e |5 figure 1. conceptual framework source: compiled by authors (2018) the conceptual framework shows the relationship between service and process innovation and bank’s internationalization. it suggests that, service and process innovation leads to bank’s internationalization. scholars have studied internationalization from various perspectives, yielding diverse entry strategy and driving internationalization. o’cass and weerawardena (2009) examined the effect of international entrepreneurship and innovation on the international market performance of small and medium enterprises (smes), using survey research method. the findings revealed differences between international smes and non-international smes in terms of innovativeness and international entrepreneurship as well as firm size. they recommended that, organization striving towards internationalization should employ organizational innovation. the reason is that, innovative organizations have greater capacity to take advantage of international market opportunities as well as posing better performance in the foreign markets. boerman and roelfsema (2015) studied small firms’ internationalization, innovation and growth in germany. using survey research design, their findings revealed that internationalization is positively related to innovation. internationalization enhances organizational performance through innovation. however, the direct impact of innovation on organizations’ is insignificant. awolusi (2012) investigated the relationship between critical influencing factor and perceived international business performance, using survey research method. findings suggested that, success in entering the international market had a positive effect on the international business performance of the organizations. amungo (2016) studied the internationalization of nigerian banks, using primary and secondary data. the findings revealed that foreign market entry by nigerian banks was propelled by the successful reform in the banking sector. the banks desire to take advantage of tangible and intangible assets in the profitable banking sector in sub-saharan african as well as a shift in the strategic goal of the banks. nosi, pucci & zanni (2017) conducted a study aimed at determining the possibility of attaining internationalization and innovation concurrently instead of choosing one of the two strategies in working towards a better corporate performance. the study found that innovations as well as internationalization are complementary in enhancing organizational performance. prange and pinho (2017) investigated the impact of internal drivers (personal and organizational) on the international performance of smes, mediated by organizational innovation, using data collected from 120 exporting smes in portugal. the findings revealed that, the indirect mediating effect of innovation is particularly volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu innovation and internationalization of nigeria deposit money banks page |6| emerging markets journal relevant with regards to the organizational driverperformance link. 3. data and methodology the study employed survey research design, because it is deemed appropriate for this study. the population of the study was the one thousand six hundred and fifteen (1615) members of staff of strategy and international operation departments of the 10 central bank of nigeria (cbn) licensed international banks ( (i). access bank plc, (ii) diamond bank plc, (iii) fidelity bank plc, (iv) first city monument bank plc, (v) first bank nigeria ltd, (vi) guaranteed trust bank plc, (vii) skye bank plc, (viii) union bank of nigeria plc, (ix) united bank of africa plc and (x) zenith bank plc). purposive sampling was used to select a sample of seven hundred and sixty five (765) staff of five banks from the ten cbn licensed international banks (union bank, uba, first bank, gtb and fcmb). the study employed a close ended questionnaire to obtain data for analysis. the questionnaire is adequate, because it is capable of obtaining the relevant data for the study without any form of bias and it has also been used in similar studies by boermans & roelfsema, 2015; slimane, slim & mansouri, 2015; cahen, lahiri & borini, 2016; dimitratos, buck, fletcher & li, 2016; ovadje, 2016. the authors developed the questionnaire for this study. primary data were obtained through the administration of structured questionnaires to a purposively selected sample of seven hundred and sixty five (765) staff of the five sampled banks. however, only 660 copies of questionnaires were returned and properly completed. this indicated 86.3% response rate, which is thought to be sufficient for this study. the construct and content validity of the instrument was ascertained by ensuring that the instrument assesses information for the study’s objectives. it is also ensured that, the same is closely tied to the conceptual framework for this study. the questionnaire was examined by other researchers and bankers with international banking and strategy experience, in order to ensure that the instrument measures what it is designed to measure. the cronbach’s alpha was employed to test the internal consistency of the instrument, which yielded an alpha of 0.82, 0.88, 0.91 for service innovation, process innovation and internationalization respectively, indicating that the instrument is highly reliable. the data analysis was guided by the objectives and hypotheses of the study as well as the instrument employed for data collection. ordinary least square was employed to estimate the regression model, with the aid of stata version 12. research hypotheses ho1: service innovation does not significantly affect the internationalization of nigerian banks ho2: process innovation does not have a significant effect on the internationalization of nigerian banks ho3 : service and process innovation do not have a combined effect on the internationalization of nigerian banks volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu moruff sanjo oladimeji, adebiyi julius abosede, benneth uchenna eze emerging markets journal | p a g e |7 4. empirical findings and discussion hypothesis 1 table 1: regression results for hypothesis 1 coefficient t p value constant 1.747027 17.94 0.000 service innovation 0.5319796 17.37 0.000 r square= 0.3144 f= 301.79(0.000) source: authors’ computation from stata 12 it is evident from the table above that, service innovation has a positive and significant effect on internationalization of deposit money banks in nigeria. this result is in tandem with the study of o’cass and weerawardena, (2009), that service innovation positively and significantly affects bank’s internationalization. the r2 (coefficient of determination) suggests that, 31 % variation in bank’s internationalization is accounted for service innovation. the f-test result of 301.79 (0.0000) suggest that, the model is reliable and predictable for policymaking. hypothesis 2 table 2: regression results for hypothesis 2 coefficient t p value constant 2.192424 33.72 0.000 process innovation 0.4015152 19.53 0.000 r square= 0.3669 f= 381.35(0.000) source: author’s computation from stata 12 it is evident from the table above that, process innovation has a positive and significant effect on internationalization of deposit money banks in nigeria. this result is in tandem with the study of o’cass and weerawardena, (2009), that process innovation positively and significantly affects bank’s internationalization. the r2 (coefficient of determination) suggests that, 36 % variation in bank’s internationalization is accounted for process innovation. the f-test result of 381.35 (0.0000) suggests that the model is of good fit. hypothesis 3 table 3: regression result for hypothesis 3 coefficient t p value constant 1.194966 13.77 0.000 process innovation 0.3210164 17.33 0.000 service innovation 0.3994676 15.07 0.000 r square = 0.5295 adj r square= 0.5280 f= 369.63 (0.000) source: author’s computation from stata 12 the table above indicated that process and service innovation have a combined positive and significant effect on the internationalization of deposit money banks in nigeria (f= 369.63 *0.000) and that process and service innovation account for 52.9% variation in the internationalization of nigerian banks (r2 = 0.5295). the f-value indicates that all the parameter estimates are significant. 5. conclusion and recommendations this study examined the effect of service and process innovation on banks’ internationalization in nigeria. the research used a purposive sample of staff of foreign operations and strategy departments of five out of the ten cbn licensed international banks in nigeria. the findings suggest that, service and process innovation affects banks internationalization. also, both process and service innovations are significant. they jointly account for 52% variation in the internationalization of nigerian volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu innovation and internationalization of nigeria deposit money banks page |8| emerging markets journal banks (r2 =0.5295). this is consistent with the study of boerman and roelfsema (2015), who had studied small firms’ internationalization, innovation and growth in germany. they had found that internationalization is positively related to innovation. this study contributes to the sparse literature on the effect of innovation on the internationalization of banks in nigeria, by revealing how process and service innovation can lead to internationalization of banks. the significant effect of process and service innovation on the internationalization might be the result of innovative processes and services that has been initiated by nigerian banks. these have aided the ease of banking. for instance, ten years ago it would take about two days to obtain a bank draft. but today, you can get a bank draft in less than five minutes. the introduction of the unstructured supplementary service data (ussd) code has enhanced the ease of banking. today, funds can be transferred, airplane tickets can be purchased and bills can be paid through mobile devices without internet connection. internet banking has equally gained some appreciable acceptance, which has equally contributed to the ease of banking. the success of innovative processes and services in nigeria has propelled banks to seek to maximize the gains from such services and process, through the establishment of foreign subsidiaries (especially within the west africa region). therefore, banks seeking to establish foreign subsidiaries need to pay attention to their service and process innovativeness. managers should strive towards the development of innovative services and processes. for instance, guarantee trust bank (gtb) introduced a service known as “quick service”, which allows customers to withdraw with their automated teller machine cards (atm cards), using the bank’s dedicated pos (point of service) inside the banking hall without queuing, thereby saving time. united bank for africa (uba) equally introduced an innovative process whereby customers depositing less than ngn 50,000 can do that without interfacing with the bank staff. all the customer has to do is to pick a white nylon and a teller, fill the teller autostamp the teller, then put the cash and the teller inside the white nylon and drop it in the box and that is all. the fund will be posted at a later time by the bank’s staff. banks’ executives can develop such innovative services and processes that will attract national appeal. since the west africa economic block is actively involved in intra-region trade, such services and processes can be replicated abroad, thereby leading to internationalization. finally, the study faces potential limitations that may guide the directions for further research. there are various kinds of innovation, but the study only examined process and service innovations. other kinds of innovations can be incorporated in future studies. also, different industries like the insurance and telecommunications sectors, among others, can be studied. definitely, future studies can equally employ the use of other data collection methods, like interview, so as to obtain key participants’ information. references amoros, j.,etchebarne, m., zapata, i. & felzenstein, c. (2016). international entrepreneurial firms in chile: an exploratory profile. journal of business research, 69(6), 2052-2060. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu moruff sanjo oladimeji, adebiyi julius abosede, benneth uchenna eze emerging markets journal | p a g e |9 amungo, e. (2016). examining the factors influencing the international expansion of nigerian banks. in adeleye, i., white, l., & boso, n. (eds). africa to africa internationalization: key issues and outcomes. switzerland: palgrave macmillan. awolusi, o.d. (2013). factors influencing the internationalization of nigerian manufacturing firms: an empirical analysis. international journal of business and management review, 1(3), 14-34. bell, j., crick, d., & young, s. (2004). small firm internationalization and business strategy. international small business journal, 22(1), 23-56. brouthers, k.d., & hennart, j. (2007). boundaries of the firm: insights from international entry mode research, journal of management, 33(3), 395425. boermans, m., & roelfsema, h. (2015). small firms internationalization, innovation and growth. international economics and policy journal, 2(1), 132-140. cahen, f., lahiri, s., & borini, f. (2016). managerial perceptions of barriers to internationalization: an examination of brazil’s new technology-based firms. journal of business research, 69(6), 1973-1979. calabro, a.,campopiano, g., basco, r., & pukall, t. (2016). governance structure and internationalization of family controlled firms: the mediating role of international entrepreneurial orientation. european management journal, 2(3), 374-389. chavan, m., & agarwal, r. (2016). the efficacy of linkages for relational capability building and internationalization: indian and australian mining firms. international journal of business and economics, 15(1), 51-78. cui, l. & jiang, f. (2012). state ownership effect on firms fdi ownership decisions under institutional pressure: a study of chinese outward investing firms. journal of international business studies, 43(3), 264-284. diego, q., enrique, c., & laura, r. (2011) political risk, cultural distance, and outward foreign direct investment: empirical evidence from large chinese firms. asia pacific journal of management 29, 1089-1104. dimitratos, p., buck, t., fletcher, m., & li, n. (2016). the motivation of international entrepreneurship: the case of chinese transnational entrepreneurs. international business review, 25(5), 1103-1113. ghauri, p., tasavori, m., & zaefarian, r. (2014). internationalization of service firms through corporate social entrepreneurship and networking. international marketing review, 31(6), 576-600. grönroos, c. (1999). internationalization strategies for services. journal of services marketing, 13(4/5), 290-297. hennart, j.f., & larimo, j. (1998). the impact of culture on the strategy of multinational enterprises: does national origin affect ownership decisions. journal of international business studies, 29(3), 515–538. hill, c.w.l., 2007. international business competing in the global marketplace. irwin: mcgraw hill. holmlund, m., & kock, s. (1998). relationships and the internationalization of finnish small and medium-sized companies, international small business journal, 16(1), 46-63. huse, m. neubaum, d. o., & gabrielsson, j. (2005). corporate innovation and competitive environment. international entrepreneurship and management journal, 1(3), 313-333. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu innovation and internationalization of nigeria deposit money banks page |10| emerging markets journal johanson, j., & vahlne, j.e. (1977). the internationalization process of the firm– a model of knowledge development and increasing foreign market commitments. journal of international business studies 8(1), 23–32. junaidu, a.s. (2012). export performance of smes in the nigeria leather industry and the mediating effect of perception of export difficulty. international journal of academic research in business and social sciences, 2(10), 1-12. loane, s., bell, j.d., and mcnaughton, r. (2006). a cross-national study on the impact of management teams on the rapid internationalization of small firms. journal of world business 42(1), 146–65. lumpkin, g. t., & dess, g. g. (1996). clarifying the entrepreneurial orientation construct and linking it to performance. academy of management review, 2(1), 135-172. ngoma, m., sudi, e. & nangoli, k.c. (2017). internationalization of smes: does entrepreneurial orientation matter? world journal of entrepreneurship, management and sustainable development, 13(2), 1-9. nosi, c., pucci, t., & zanni, l. (2017). no need to choose between innovation and internationalization: when pursuing two strategies at a time leads to firm superior performance. piccola impresa / small business. o'cass, a., & weerawardena, j. (2009). examining the role of international entrepreneurship, innovation and international market performance in sme internationalization. european journal of marketing, 43(11/12), 1325-1348. ovadje, f. (2016). the internationalization of african firms: effects of cultural differences on the management of subsidiaries. african journal of management, 2(2), 117-137. penrose e.t. (1959). the theory of the growth of the firm. oxford: basil blackwell. prange, c., & pinho, j.c. (2017). how personal and organizational drivers impact on sme internationalizational performance: the mediating role of organization innovation. international business review. rezvani, m. ghamari, y. & ghahramani, s. (2013). identifying themes of entrepreneurial strategy of new venture in international market entry. journal of economics, business and management, 1(2), 217-219. root, f.r. (1994). entry strategies for international markets. d.c. heath, lexington, ma. schumpeter, j. (1934). the theory of economic development. cambridge, ma: harvard university press . sdiri, h., & ayadi, m. (2014). internationalization and innovation profitability: the case of tunisian service firms. problems and perspectives in management, 12(1), 40-50. slimane, a. slim, a., & manouri, f. (2015). corporate entrepreneurship and learning capability of internationalized smes. international journal of economics and strategic management of business process, 4(1), 302-313. thomas.f.l. (2013). applying the transaction cost theory, resourcebased view and institutional theory in entry mode:the case of a danish retailer entering russia. available from: http://pure.au.dk/portal-asbstudent/files/55744852/300115.pdf [accessed on 26 july, 2016]. veilleux, s. & roy, m. (2015). strategic use of corporate and scientific boards in the internationalization of biotech firms. international journal of technoentrepreneurship, 3(1), 67-93. venter, a., rwigema, h. & urban, b. (2008). entrepreneurship: theory in practice, 2nd edition, cape town:oxford university press southern africa (pty) ltd. wach, k. (2014). internationalisation and globalisation as a wider context of europeanisation from micro and macroeconomic perspective. horyzonty polityki, 5(10), 11-30. welch, l., & luostarinen, r., (1988). internationalizationevolution of a concept. journal of general management,14(2), 34-55. whitelock, j., & jobber, d. (2004). an evaluation of external factors in the decision of uk industrial firms to enter a new non-domestic market: an exploratory study. european journal of marketing, 38(11/12), 1437-1455. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.144 | http://emaj.pitt.edu moruff sanjo oladimeji, adebiyi julius abosede, benneth uchenna eze emerging markets journal | p a g e |11 wiklund j., & shepherd, d. (2003). knowledge-based resources, entrepreneurial orientation, and the performance of small and medium-sized businesses. strategic management journal, 24(2), 1307-1314. woodcock, c.p., beamish, p., & makino, s. (1994). ownership-based entry mode strategies and international performance. journal of international business studies, 25(2), 253-274. xu, h., carter, l., taute,h. & dishman, p. (2016). managers perceived risk, experiential knowledge, marketing capability and international performance: a study of chinese international enterprises. journal of marketing development and competitiveness, 10(1), 53-65. yiu, d. & makino, s. (2002). the choice between joint venture and wholly owned subsidiary: an institutional perspective. organization science, 13(6), 667-679. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu organizational culture and intrapreneurship growth in nigeria: evidence from selected manufacturing firms benneth uchenna eze hallmark university, nigeria | beneze7@gmail.com adekunle abdul olabisi onabanjo university, nigeria | abduladekule3@gmail.com emmanuel kanayo nwaba olabisi onabanjo university, nigeria | nwabakanayo@gmail.com azeez adebayo olabisi onabanjo university, nigeria | bayoazeez@gmail.com this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. abstract the study examines the effect of organizational culture (measured by organizational norms and organizational shared values) on intrapreneurship growth in manufacturing sector of the nigerian economy. survey research design was used through the administration of structured questionnaire to members of staff of nestle nigeria plc and pz cussons nigeria plc. the population of the study consist 2325 and 3500 staff of nestle nigeria plc and pz cussons nigeria plc respectively. using the raosoft sample size determination technique, a sample size of 359 was obtained. the findings revealed that, organizational culture positively and significantly affect intrapreneurship growth in manufacturing firms in nigeria. the study further revealed that, organizational norms and organizational shared values significantly affect intrapreneurship growth in the manufacturing sector in nigeria, with coefficient and probability values of (β1=0.982, p<0.05) and (β2=0.901, p<0.05) respectively. the adjusted coefficient of determination (adj. r squared) revealed that , organizational culture elements account for 69.8% variation in intrapreneurship growth. thus, the study concluded that organizational culture plays a significant role in promoting intrapreneurship growth. it is recommended that, manufacturing firms should enhance their organizational norms as well as their organizational shared values towards the growth of intrapreneurship within their firms. keywords: intrapreneurship, organizational culture, organizational norms, organizational shared values new articles in this journal are licensed under a creative commons attribution 3.0 united states license. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.147 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:beneze7@gmail.com mailto:abduladekule3@gmail.com mailto:nwabakanayo@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.147 | http://emaj.pitt.edu benneth uchenna eze, adekunle abdul, emmanuel kanayo nwaba, azeez adebayo emerging markets journal | p a g e |39 organizational culture and intrapreneurship growth in nigeria: evidence from selected manufacturing firms benneth uchenna eze adekunle abdul emmanuel kanayo nwaba azeez adebayo 1. introduction intrapreneurship has engendered a lot of research interest in the developed, emerging and developing economies. intrapreneurship refers to entrepreneurs within an organization, who are considered as tools for achieving strategic organizational goals. according to gursoy (2016), the growth of intrapreneurship activities in an organization tends to enhance organizational performance. mcdowells (2017) opines that, intrapreneurship is both a cultural and behavioural pattern which can aid organizations to have competitive advantage in an ever changing business and economic environment. according to bau and wagner (2015), intrapreneurial behaviour of an organization is the process by which employees are empowered to implement, promote and discover new business opportunities and create economic values inside established firms. organization culture is a system of shared conjecture, values and beliefs which governs how people behave in organizations (alvesson, 2013; odor, 2018). scholars, such as blanka (2018), odor (2018), mcdowells (2017), otsu (2016), moriano, molero, topa and levy (2014), witzell (2014) and webb (2013) studied the concepts of organizational culture and intrapreneurship growth in isolation. in their findings, they revealed that organizational culture is important to an organizational performance and that intrapreneurship is of great importance to how innovative an organization would be. however, most of these studies were carried out in the developed and emerging economies and most of the studies examined the concepts (intrapreneurship and organizational culture) separately. in addressing that research gap, this study connects the two concepts that are traditionally investigated separately. furthermore, considering the social, economic, political and cultural differences between nigeria and the developed economies as well as the rarity of similar studies in nigeria, this study seeks to examine the effect of organizational culture (measured by organizational norms and organizational shared values) on intrapreneurship growth in nigeria. 2. literature review intrapreneurship is principally concerned with the traits of intrapreneurial individuals and the means of utilizing these individuals in the pursuit of corporate innovation. dauber et al. (2012) opine that, individual champions are commonly involved in corporate innovation. these individuals are employees of organization leading the organizational innovative efforts. blanka (2018) asserts that, new opportunity recognition stems from individuals rather than organizational processes. the individual dimension separates intrapreneurship from the concept of corporate entrepreneurship. the term intrapreneur was conceptualized based on the work of pinchot (1985). it refers to entrepreneurial employees. that is the entrepreneurial activities within organization. pinchot (1985) introduced the concept of intrapreneur as a combination of two concepts: intracorporate and entrepreneur. pinchot also stated that, intrapreneurs turn ideas into realities inside an organisation. baruah and ward (2015) identified three main differences between intrapreneurs and entrepreneurs: intrapreneurs are able to use the existing resources of the companies, they operate within organizations and they work within firms that already have their own policies and structures. corporate entrepreneurship refers to the entrepreneurial activities of corporate organizations. the concept of intrapreneurship is closely linked to corporate volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.147 | http://emaj.pitt.edu organizational culture and intrapreneurship growth in nigeria: evidence from selected manufacturing firms page |40| emerging markets journal entrepreneurship, but they are not the same (moriano et al., 2014). rigtering and weitzel (2013) assert that, one major differentiating feature between corporate entrepreneurship and intrapreneurship is that, corporate entrepreneurship can be seen as an innovative process initiated from the top-down within an organization, whereas intrapreneurship can be seen as a bottom-up approach related to the intrapreneurial behaviour of employees. kuz (2010) introduces a prototype of an intrapreneur, providing a set of characteristics for individual intrapreneurs, including advanced emotional intelligence, extensive network building capabilities, as well as ability to work in multiple organizational domains from product development to strategy building, business development as well as market research. according to this view, intrapreneurs possess a natural tendency of creating more intrapreneurship, provided that they are granted power in the organization. in case of leader intrapreneurs, they intuitively direct themselves to hire other intrapreneurial individuals or help create more intrapreneurs from the existing organizational members through inclusion in their work and their network approach (blanka, 2018). kuz (2010) has suggested an enabler model of intrapreneurship, consisting of a set of behaviours that can be utilized for the growth of intrapreneurship within an organization. the model starts with the presupposition that certain individuals exist with intrapreneurial characteristics, which should be utilized as change agents for driving the development and growth of intrapreneurship. these set of behaviours consists of seven constructs; value proposition creation, idea champion roles, enabling innovation networks, exploiting technology intersections, culture change agency, enabling workforce creativity, and intrapreneur resource growth (kuz, 2010). intrapreneurship has also been examined as a team level phenomenon. teams represent a central unit for creating new ventures, as they bring together a pool of talent with versatile skills and knowledge, thus creating an interface for new initiatives to emerge. teamwork is frequently utilized as a tool in improving organization-wide cooperation, facilitating idea sharing and thus creating a favourable environment for intrapreneurship to thrive (eesley and longenecker, 2006; blanka, 2018). 2.1. organization culture organization culture is a system of shared assumptions, values and beliefs which governs how people behave in an organization. these shared values have a strong influence on the people in the organization and dictate how they act, dress and perform their duties (odor, 2018). given the relative importance of organizational culture in innovative organizations, it is hardly surprising that intentional and planned culture change efforts represent a widespread phenomenon in corporate environments. new management tools and trends emerge on a regular basis to guide organizational growth, and they are relentlessly applied by managers to render their organizations more innovative, effective and competitive. organizational culture is widely recognized as an important component in all organizational change processes and innovativeness (alvesson and sveningsson, 2008; odor, 2018). yildiz (2014) posits that organizational culture is strategically important to intrapreneurship, as it affects organization process which enhances firm survival and performance. paunovic and dima (2014) examined the effect of organizational culture on corporate entrepreneurship with a view of establishing the effect of organizational culture on intrapreneurship. they suggested that keeping and increasing competitive advantages in a relatively longer period of time has become very difficult and challenging for businesses and that for organizations to survive in a very turbulent business environment, large organizations are under the pressure of constant changes while struggling to overcome what has been done in the near past. the business strategies that are based on passive adaptation to changes increasingly give way to the innovation-based proactive strategies, which means the implementation of different forms of intrapreneurship. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.147 | http://emaj.pitt.edu benneth uchenna eze, adekunle abdul, emmanuel kanayo nwaba, azeez adebayo emerging markets journal | p a g e |41 mcdowells (2017) viewed intrapreneurship as a cultural form of innovation and sustainable competitive advantage and posit that, intrapreneurial activity within the organization varies within the contexts of employee perception and motivation. 2.2. theoretical review several theories have attributed entrepreneurial characteristics, such as entrepreneurial passion to personality, considering them as fixed individual traits (cardon, 2009). characteristics such as ability to take risk, desire for autonomy and achievement, goal orientation and intrinsic motivation and control are often viewed as individual characteristics favorable for the growth of intrapreneurial behaviour (dauber et al, 2012; hashimoto and nassif, 2014). this study concentrates on the theory of planned behaviour and organizational perspective theory. theory of planned behaviour is rooted in rational models, where decisions are based on the probabilities of different outcomes. the theory postulates that, behaviour is a product of three elements: beliefs about the attributes of an object, the degree of intensity of these beliefs, the evaluation of the attributes (good or bad) as well as the confidence of an individual (antoncic, 2003). this theory provides a framework through which context-bound individual behaviour can be analyzed through a set of psychological human cognitions (antoncic, 2003). organization perspective theory reverberates with the non-rational, affective elements of individuals, and provides a sense of collective membership and belonging that is a general human characteristic (antoncic, 2003). organizational theory is based on its three perspectives, which are the modern, symbolicinterpretive and the post-modern. the perspectives each have different approaches when it comes to the management of an organization. modernists are objectivists who focus on reality of knowledge, which is built based upon the conceptualization and the theorization. an example would be that, a company earns profits based on the ceo's ability to make right decisions while investing the money of an organization. the results of the actions can be measured in profit and loss, and can be directly measured. 3. methodology the study employs survey research design. this design enables the researcher to get relevant information needed for the study. since the study covered a large number of respondents, the survey design is the most suitable. related studies (brigic and umihanic, 2015; findik and altindag, 2017) also utilized survey research design. the population of the study consist 2325 and 3500 staff of nestle nigeria plc and pz cussons nigeria plc respectively. using the raosoft sample estimator software which is based on normal distribution at error margin of 5 and 95% significant level, the aggregate sample for this study is 359 staff. the study employed a structured questionnaire as the instrument of data collection. a 9 point likert scale, ranging from 1 (minimum) to 9 (maximum) was used to obtain data from the target respondents. content validity index (cvi) is employed to test the validity of the research instrument, through the independent assessment of 3 academic staff of lagos state university. the assessors rated the instrument on two scale (relevant and not relevant) using the cvi formula n/n where; n is number of questionnaire items ticked as relevant n is the total number of the questionnaire items a cvi value of 0.86 was obtained, which indicates that the research instrument is valid. a pilot study was conducted to ascertain the reliability of the research instrument. the instrument was administered to 30 members of staff of cadbury nigeria plc twice within an interval of two weeks. the outcome of the first pilot study was correlated with that of the second and a cronbach alpha of 0.811 was obtained, which indicated that the instrument (questionnaire) is reliable. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.147 | http://emaj.pitt.edu organizational culture and intrapreneurship growth in nigeria: evidence from selected manufacturing firms page |42| emerging markets journal model specification intrgro= β0+β1(orgnorms)i +β2(orshva)i +µi…………….. (1) where; intrgo is intrapreneurship growth orgnorms is organizational norms orshva is organization shared value β0 is the constant term β1, β2, are the coefficient estimators where is error term statement of hypotheses in line with the objectives of this study, the following research hypotheses were tested: ho1: organizational norms do significantly affect intrapreneurial growth in manufacturing firms in nigeria. ho2: organizational shared values do significantly affect intrapreneurial growth in manufacturing firms in nigeria. ho3: organizational culture elements do significantly affect intrapreneurial growth in manufacturing firms in nigeria. apriori expectation all the measures of organizational culture are expected to exhibit positive relationship with intrapreneurship growth; hence there will be a positive relationship between organizational culture elements and intrapreneurship growth in the above model. .i.e. β1, β2, > 0 categorical regression was employed to test the model, with the aid of stata version 14. 4. findings and discussion the results on table 1 below revealed that, both organizational norms and organizational shared values have a positive and significant effect on intrepreneurship growth. the f-statistics (49.12*0.000) indicates that, organizational culture elements have a positive and significant effect on intrapreneurship growth. the adjusted r square revealed that, organizational culture elements account for 69.8% variation in intrapreneurship growth. thus, the hypotheses of ho1, ho2 and ho3 are accepted. table 1: summary of categorical regression result (dependent variable – intrapreneurship growth) variable(s) coefficient fc p-value organizational norms 0.982* 4.601 0.000 organizational shared value 0.901* 4.052 0.000 r square = 0.716 nb: *significant at 5% level adjusted r square = 0.698 f stat =49.12(0.000) 5. conclusion and recommendations the study examined the effect of organizational culture (measured by organizational norms and organizational shared values) on intrapreneurship growth in two selected manufacturing firms, using survey research design. the findings revealed that, organizational culture positively and significantly affect intrapreneurship growth in manufacturing firms in nigeria. also, the study further revealed that organizational norms and organizational shared values significantly affect intrapreneurship growth in the manufacturing sector in nigeria, with coefficient and probability values of 0.982(0.000) and 0.901(0.000) respectively. this further indicates that, organizational norm has the highest effect on intrapreneurship growth. the adjusted coefficient of determination (adj. r squared) revealed that, organizational culture elements account for 69.8% variation in intrapreneurship growth. the study indicated that, organizational norms and organizational shared values are the critical elements of organizational culture driving intrapreneurship growth. thus, the study concluded that, organizational culture plays a significant role in promoting intrapreneurship growth. it is recommended that, manufacturing firms should enhance their organizational norms as well as volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.147 | http://emaj.pitt.edu benneth uchenna eze, adekunle abdul, emmanuel kanayo nwaba, azeez adebayo emerging markets journal | p a g e |43 their organizational shared values towards the growth of intrapreneurship within their firms. references alvesson, m. (2013). understanding organizational culture. london, uk: sage. alvesson, m. and sveningsson, s. (2008). changing organizational culture. new york: routledge. antoncic, b. (2003). risk taking in intrapreneurship: translating the individual level risk aversion into the organizational risk taking. journal of enterprising culture, 11(1), 1–23. anu, l. (2007). fostering intrapreneurial :the new competitive edge, conference on global competition & competiveness of indian corporate. baruah, b. and ward, a. (2015). metamorphosis of intrapreneurship as an effective organizational strategy. international entrepreneurship management journal, 11, 811–822. https://doi.org/10.1007/s11365-014-0318-3 bau, f. and wagner, k. (2015). measuring corporate entrepreneurship culture. international journal of entrepreneurship and small business 25(2), 231-244. blanka, c. (2018). an individual-level perspective on intrapreneurship: a review and ways forward. review of managerial science, 12(1), 1-43. brigić, m. and umihanić, b. (2016). intrapreneurship impact on growth of production companies in bosnia and herzegovina. econviews journals, 3(1), 393-408. cardon, m. (2009). the nature and experience of entrepreneurial passion. academy of management review 34(3), 511–532. cowles, b. (2015). question mark culture: how culture affects entrepreneurship at amazon. an unpublished doctoral thesis. department of management, entrepreneurship, and leadership, texas christian university. dauber, d., fink, g., and yolles, m. (2012). a configuration model of organizational culture. sage open, 2(1), 1-16. eesley, d. t. and longenecker, c. o. (2006). gateways to intrapreneurship. industrial management 48(1), 18–23. fındık, g. and altındağ, e. (2017). the effect of entrepreneurship and culture on the employee commitment in turkey. american journal of economics and business administration. 9 (1), 13-26. gapp, r., and fisher, r. (2007). developing an intrapreneur-led three-phase model of innovation. international journal of entrepreneurial behavior & research, 13(6), 330-348. gursoy, a. (2016). effect of innovative culture on intrapreneurship. international journal of business and social science. 7(1). hashimoto, m. and nassif, v. (2014). entrepreneurs self-perception of planning skills: evidences from brazilian entrepreneurs. revistaiberoamericana de estratégia – riae, 3(4), 1-15. janczak, s. and boiteux, s. (2007). understanding intrapreneurship: a process model for the logic of action used by intrapreneurs. journal of business and entrepreneurship 19(1). kuz, d. s. (2010). exploration of intrapreneurship and innovation in advanced technology organizations in the western united states. unpublished doctoral dissertation, university of phoenix. mcdowells, c.t. (2017). a comprehensive study of intrapreneurship as a cultural form of innovation and sustainable competitive advantage. an unpublished masters dissertation, bisk college of business, florida institute of technology. moriano ja, molero f, topa g. and lévy-mangin, j.p. (2014). the infuence of transformational leadership and organizational identifcation on intrapreneurship. international entrepreneurship management journal, 10, 103–119. https://doi. org/10.1007/s11365-0110196-x odor, h.o. (2018). organizational culture and dynamics. global journal of management and business research, 18(1). otsu, a. (2016). an exploratory story of intrapreneurship development: the role of organizational factors. international journal for research in business, management and accounting, 3(2). paunovic, s. and dima, c. (2014). organizational culture and corporate entrepreneurship. annals of the university of petroşani, economics, 14(1), 269-276. pinchot, g. (1985). intrapreneuring: why you don’t have to leave the corporation to become an entrepreneur. harper & row, new york. rigtering, j.p.c. and weitzel, u. (2013). work context and employee behaviour as antecedents for intrapreneurship. international entrepreneurship management journal, 9, 337– 360. https://doi.org/10.1007/s11365-013-02583. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.147 | http://emaj.pitt.edu organizational culture and intrapreneurship growth in nigeria: evidence from selected manufacturing firms page |44| emerging markets journal webb, t. (2013). building an intrapreneurial culture: a sine-quanon for organizations’ today. global journal of management and business studies, 3(8), 849-854. witzell, u. (2014). metamorphosis of intrapreneurship as an effective organizational strategy. new york: springer science+business media. doi 10.1007/s11365-014-0318-3. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu the impact of housing loans on economic growth in turkey: times series analysis for 2010-2015 period gülay selvi hanişoğlu beykent university | gulay.selvi61@gmail.com özlem arzu azer beykent university | mularoz@gmail.com abstract turkish economy has a growing trend after the 2000-2001 economic crises, although ups and downs were experienced in some periods. some of the important components of turkish economy are the construction industry and the related housing industry. the construction industry in turkey has a multiplier effect in the economy since it uses domestic inputs and creates jobs for the labor. also, the construction sector actors operate overseas and enable inflow of foreign currency to turkey, thus fostering economic growth. in the recent years, foreign funds and overseas firms have an increasing interest in turkish construction industry. the turkish housing industry as one of the leading components of construction industry has also experienced eye-catching developments in the recent years. definitely, the turkish housing industry is now much more competitive compared to former years. the global economic crisis of 2008 originated from the housing industry and had devastating effects all over the world. however, the 2008 global economic crisis had relatively lighter effects in turkey. parallel to the improvements in construction and housing industries, several financial alternatives exist today. banks have diversified their credit products considering the needs of consumers. moreover, the mortgage law going in effect and the mortgage practices becoming popular have contributed to the progress of housing industry. this study analyzed the effect of housing loans and their diversification on economic growth. the research concentrated on the 2010-2015 period, where the impact of 2008 global crisis has diminished. this study was presented at econ anadolu 2017 conference (5th international conference in economics) dated 11-13 may 2017. keywords: economic growth, housing industry, housing loan, turkey, time series analysis new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.127 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.127 | http://emaj.pitt.edu the impact of housing loans on economic growth in turkey: times series analysis for 2010-2015 period page |25| emerging markets journal the impact of housing loans on economic growth in turkey: times series analysis for 2010-2015 period gülay selvi hanişoğlu özlem arzu azer i. introduction wherever you are in the world, housing is one of the basic needs of human being. in addition to being a basic need for human being, it also functions as an important investment tool for people. dwelling place or housing is one of the biggest assets which people invest in their lifetimes. for instance, in the united states, real estate accounts for roughly a third of the total assets held by the nonfinancial private sector. (min zhu, 2014) housing sector is also essential and crucial for the whole economy. housing construction sector is considered a prime source of employment generation and offers job opportunities to skilled, semi-skilled and unskilled workers. housing construction sector together with other type of building constructions play a crucial role in generating income. housing sector has strong links with other economic sectors and also affect other sectors with the multiplier effect such as financial sector, construction sector, furniture sector, paint industry and retail industry. as being a part of financial markets, mortgage markets and mortgage loans are important tools of monetary policy. if housing sector works properly in the economy, the overall economy will be well-functioning and healthy. and vice versa also true, as economies develop, the housing markets will be growing and deepening. the mortgage markets are an important instrument of monetary policy. as targeting healthier economies, governments make and review regulations regarding mortgage markets. in our paper, the relation between economic growth and housing loans will be analyzed in turkey for the 2010-2015 period. firstly, the history and improvements in turkish economy will be summarized and improvements for housing loan market will be followed. this paper mainly consists two sections. in the first section, general outlook of turkish economy and economic growth data are analyzed. in the second section, housing loans and regulations on the housing sector are examined in detail. ii. literature review there are many studies analyzing the role of housing sector on economic growth and investigating the relationship between housing sector and economic growth. in literature, there are different approaches; some of them analyze the effect of economic growth on different sectors or financial products such as different type of loans or securities markets. other types of studies analyze the topic from the industrial side and investigate the effect of different sectors on the economic growth of countries. ünalmış (2002) inquires the direction of causality between the financial development and economic growth for turkey for the period of 19702001. the results show that, financial development significantly causes economic growth in the short-run, and in the long-run, there is a bidirectional relationship between financial development and economic growth. another study done by alhowaish (2015) shows that there is a relationship between the construction sector and economic growth in saudi arabia. this study empirically investigates the relationship between construction flow and economic growth for saudi arabia during the 1970–2011 period. the world bank (1984) states that, the importance of the construction industry stems from its strong linkages with other sectors of the economy. analysis of macroeconomic aspects of financial development and economic growth published by tsuru (2000) summarizes some theoretical considerations of the topic and also reviews the empirical literature. the role of financial development in economic growth is described at the macro level, both theoretically and empirically. the study of king and levine (1993) is emphasized by tsuru as an comprehensive empirical research. jappelli and pagano (1994), focusing on household credit markets, found that their development (represented, for example, by the ratio of consumer credit to gdp) was negatively correlated with savings and growth rates and that some types of financial development could affect growth rates negatively, as predicted by theoretical models (tsuru,2000). although in a pure neoclassical framework the financial system is irrelevant to economic growth in practice, an efficient financial system can simultaneously lower the cost of external borrowing, raise the returns to savers, and ensure that savings are allocated in priority to projects that promise the highest returns, all of which have the potential of affecting economic growth rates. the empirical literature reviewed above shows that, there seems to be a causal link between the level of financial development and the rate of accumulation of capital, or of multifactor productivity. even though an efficient financial system can (and apparently does) reduce the volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.127 | http://emaj.pitt.edu gülay selvi hanişoğlu, özlem arzu azer emerging markets journal | p a g e |26 level of household savings, by easing access to consumer credit, the welfare implications remain positive, unless there is a significant gap between private and social time discount rates (tsuru,2000). iii. economic growth economic growth in turkey shows a steady performance since 2000’s. after 2012, there are some concerns about sustainability of this growth performance. there are wars across the southern border, and severe domestic tensions in the eastern regions. trade restrictions with russia, inflow of millions of refugees and decreasing trend tourism income caused negative effects on growth figures. growth figures in turkey remains centered on the domestic demand and is funded by capital inflows which increase the foreign debt figures of country. in this section, firstly the economic growth figures of turkey have been analyzed through years. in our paper, gross domestic product (gdp) is used as the main indicator of economic growth. the following tables summarize the gross domestic product figures for the years under investigation. percentage changes in gdp figures are also shown. the following tables also show gdp (gross domestic product) figures with the expenditure approach for 1998-2015. table 1: gdp (gross domestic product) for 19982015 (tl, bio) source: tui̇k table 2: gdp changes for 1998-2015 (%) source: tui̇k figure 1. gross domestic product change (%) for 19992015 period it can be seen from the above figure that, 20002001 and 2007-2008 economic crises made a negative effect on the economic growth of turkey and there were sharp declines at these periods. table 3: the growth rate at selected sectors in turkish economy source: tuik database, http://www.tuik.gov.tr/ustmenu.do?metod=temelist iv. the share of construction sector in gdp in turkey, economic growth and construction sector figures always move together. it means if the economic growth figures are improving, construction sector is improving. if the economic growth figures are contracting, the construction sector figures are also contracting. but generally volume of contracting in the construction sector is higher than the economic years 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 index 71,07 68,66 73,22 68,85 73,28 77,39 84,85 92,50 99,07 104,06 104,94 100,00 108,49 120,54 126,32 137,04 144,12 152,86 volume billion tl 710 686 732 688 732 773 848 924 990 1.040 1.049 999 1.084 1.204 1.262 1.369 1.440 1.527 years 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 change compared to previous year -3,39 6,64 -5,96 6,43 5,61 9,64 9,01 7,11 5,03 0,85 -4,70 8,49 11,11 4,79 8,49 5,17 6,06 -3,39 6,64 -5,96 6,43 5,61 9,64 9,01 7,11 5,03 0,85 -4,70 8,49 11,11 4,79 8,49 5,17 6,06 -8,00 -6,00 -4,00 -2,00 0,00 2,00 4,00 6,00 8,00 10,00 12,00 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 gross domestic product change % gross domestic product change % agriculture, forestry and fishing manifacturing construction real estate activities gdp (purchas er's price) 1998 1999 -4,56 -5,54 -3,7 4,68 -3,39 2000 6,41 7,06 6,39 5,21 6,64 2001 -8,89 -8,89 -20,35 1,36 -5,96 2002 8,68 4,01 17,73 3,72 6,43 2003 -1,53 9,8 13,8 1,39 5,61 2004 3,95 13,24 21,32 2,45 9,64 2005 7,93 9,63 14,98 2,3 9,01 2006 1,55 9,83 25,56 1,22 7,11 2007 -6,22 6,75 10,57 0,82 5,03 2008 4,53 0,5 -4,65 0,35 0,85 2009 4,13 -8,89 -15,87 -0,16 -4,7 2010 7,67 9,6 17,14 4,47 8,49 2011 3,44 20,02 24,74 4,96 11,11 2012 2,2 2,26 8,28 4,29 4,79 2013 2,32 9,31 14,03 2,92 8,49 2014 0,59 6,1 5 2,53 5,17 2015 9,12 5,86 4,9 2,39 6,06 growth rate in selected sectors (gross domestic product in chain linked volume, index and percentage change (2009=100), by kind of econ.activity) volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.127 | http://emaj.pitt.edu the impact of housing loans on economic growth in turkey: times series analysis for 2010-2015 period page |27| emerging markets journal contraction figures and in the improvement periods, the figures of improving in the construction sector are higher than the total economic growth figures. this connection indicates two results. firstly, economic booming or contracting periods match fully, which shows a close relationship with economic growth and construction sector. secondly, for crises periods, construction sector would be the leading sector for other sectors that can easily stimulate economic growth. figure 2. comparison between gross domestic product change and construction sector production and turnover change (%) for 20062015 period source: tuik database turkish authorities are aware of this relationship and have made different types of supports to construction sector as well as the financial sector for increasing supply and demand of construction sector. the construction industry usually accounts for between 3 percent to 8 percent of a developing country's gross domestic product (gdp); the more dynamic national economies as well as wealthier countries are largely bunched at the upper end of this range (the construction industry:issues and strategies in developing countries, 1984). construction sector contributes to gdp growth, employment and construction materials industry. housing construction has backward and forward linkages for the economy and affects durable consumer goods or the furniture sector. the growing interest of many countries in developing their construction industry has coincided with increasing concern of banks for this sector (the construction industry:issues and strategies in developing countries, 1984). construction sector has a leading role for stimulating economic activity and improving job opportunities in turkey. construction sector also plays an important role in the economic growth of turkey. furthermore, it has a crucial effect in the gnp growth. figure 3. share of construction sector in gdp source: tui̇k database, http://www.tuik.gov.tr/ustmenu.do?metod=temelist figure 4. change ratio of construction sector source: tui̇k database http://www.tuik.gov.tr/ustmenu.do?metod=temelist as seen in the figure above, the share of construction sector has increased through years. the share of construction sector had increased from 5,32 % in 2000 to 8,15 % in 2015. due to 2008 economic crisis, a deep decrease of 17,39 % had occurred in 2009. the highest growth rate of 41,46 % had occurred in 2011 parallel to the economic growth. figure 5. share of real estate activities in gdp source: tui̇k database, http://www.tuik.gov.tr/ustmenu.do?metod=temelist volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.127 | http://emaj.pitt.edu gülay selvi hanişoğlu, özlem arzu azer emerging markets journal | p a g e |28 average share of real estate activities in gdp had occurred as 8,7 while the growth rate had occurred as 10,30 % in 2015. it is also important to mention the effect of sector over employment. its share in employment had been 7,2 % in 2015. the employment in construction sector was realized as 1.914.000 in 2015. it is seen very clearly that, the construction and real estate sectors play a very important role in turkish economy. in the last 10 years, new infrastructure projects have increased in turkey. urban transformation is one of the reasons of the sector improvement. the construction sector is also important in the improvement of related sectors. increase in the construction sector provides improvement in cement, ceramic, lighting and insulation. turkey has also become a very important country in international construction. turkish contractor sector improved and the undertaking contracts reached to 342 bio.usd in 115 countries since 1972 (republic of turkey ministry of economy). figure 6. change rate in construction sector and real estate activities source: tui̇k database, http://www.tuik.gov.tr/ustmenu.do?metod=temelist construction sector and the real estate sector are very sensitive to economic growth and expectations. after 2001 and 2008 crises, construction sector showed a sharp improvement. it is seen very clearly that, construction sector moves parallel to economic growth. in 2009, growth of sector reversed due to 2008 global crisis. in a similar way, the highest growth realized in 2011 is pretty parallel to economic growth. v. the relationship between housing loans and economic growth turkey has been facing house shortage since the urbanization starts with the effect of industrialization around 1950’s. migration began from rural areas to cities and this brought housing problem in big cities both in qualitative and quantitative aspects. around 1980’s, some measurements had been taken for solving the housing problem. in some countries, there are advanced funding methods for people to buy homes. concerning turkey as a developing country before 1980, money had to be saved before buying a home. there were no any advanced funding mechanisms. after 1980, turkish governments took some measurements for supporting the housing sector. the housing development administration of turkey (toki̇-toplu konut i̇daresi başkanlığı) and housing development fund was established. mass housing projects also started with the initiative of emlak bank (türkiye emlak bankası). at this period, remarkable improvements were observed in the housing sector. but, the lack of efficient housing loan system was a very important problem. economic problems in the late 90’s and crises in turkey in 2001’s made a negative effect on housing sector. after crises, structural reforms were implemented and banking sector was rehabilated. banking sector increased the share of credits in their portfolio and also decreased the funding rate borrowing from outside. vi. the real estate sector and financing methods there are some different methods of housing finance: finance by construction firm or mortgaged loans. as an important housing financing method, mortgage loans are very sensitive to the interest rate and uncertainty. people who want to buy a house carry some different purposes as owning a house to live or making an investment. especially, if the purpose is investment, sensitivity to interest rate is at a high level. uncertainty is another important factor for decision to buy house. if there is uncertainty in the market, people prefer to wait. however, the ratio of housing loans to gdp increased from 2,31 % in 2006 to 9,81 % in 2015. the reason of this increase is widening from requirement of structural transformation to increasing requirement of housing due to increased population as well as changing life styles. figure 7. housing loans to gdp (2006-2015) source: tcmb, http://evds.tcmb.gov.tr/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.127 | http://emaj.pitt.edu the impact of housing loans on economic growth in turkey: times series analysis for 2010-2015 period page |29| emerging markets journal parallel to the increase in construction sector, real estate market also accelerated in turkey. figure 7 shows the increase in housing sales by the finance method. housing finance methods are mortgage sales and other methods which include construction firms’ finance facilities and cash payment. through 2010-2017, other housing finance methods also increased while mortgage finance fluctuated by years. other finance methods increased from 360.357 in 2010, to 891.945 in 2016 by 147 %. mortgage finance method increased from 246.741 in 2010 to 449.508 in 2016 by 82 %. it seems that other finance methods are preferable to the mortgage finance method. figure 8. housing sales by the financing method (2010-2017*) source: tuik database, general directorate of land registry and cadastre (2017, january, february and march) in turkey, the share of housing loans in individual loans has increased by years. figure 8 shows this increase as value, while figure 9 shows this increase as percentage. figure 9. the share of housing loans in individual loans (2005-2017*) source: tcmb, http://evds.tcmb.gov.tr/ the share of mortgage housing loans in individual loans has increased by years. the share in individual loans increased by 43,9 % in 2005 to 47,72 % in 2017. figure 10. the share of housing loans in individual loans (%) source: tcmb, http://evds.tcmb.gov.tr/ increase in the interest rates by cbta affects the consumer confidence very sharply. it shows that there is a very strong and close relationship between house buying and housing loans’ interest rate. figure 10 shows the interest rate trend since 2002 and it is seen that housing loans’ interest rate trend is downward. figure 11. trend of housing loans’ interest rate as of end of year (2002-2017*) source: tcmb, http://evds.tcmb.gov.tr/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.127 | http://emaj.pitt.edu gülay selvi hanişoğlu, özlem arzu azer emerging markets journal | p a g e |30 vii. conclusion economic theory, empirical studies and policy makers have emphasized the economic significance of the construction sector to national output. there are various types of construction types. our paper focuses on the residential type of construction activity due to high share in the total construction activity. housing demand, which is the basic human need, requires large amount of savings and borrowings. economic growth, stable economic environment, improving credit facilities will have a positive impact on housing demand in turkey. demand for housing will continue for the following years due to young population of turkey and changing lifestyles. in turkey, economic growth and construction sector figures always move together. it means if the economic growth figures are improving, construction sectors also improve and if the economic growth figures are contracting, the construction sector figures also contract. economic growth, stable economic environment and improving credit facilities will have a positive impact on the housing demand. there is also a close relationship between the construction sector and economic growth in turkey. there were no advanced funding mechanisms before 1980’s in turkey. after 2000, structural reforms were implemented and banking sector was rehabilated.. the share of housing loans increased in the banking sector portfolio. analyzing the housing sales by finance methods through 20102015 shows that, the share of other finance methods is higher than housing loans and mortgage loans. so, other finance methods including cash payment are more preferable than housing loans and mortgage loans. references alhowaish,a.k.,(2015). causality between the construction sector and economic growth: the case of saudi arabia, internatıonal real estate revıew . vol. 18 no. 1: pp. 131 –147. emlak konut gayrimenkul yatırım ortaklığı a.ş.(2016). gayrimenkul ve konut sektörüne bakış. imf conference paper, (2014). housing markets, financial stability and the economy. min zhu, deputy managing director, imf. kar,m.,pentecost,e.j.,(2000). financial development and economic growth in turkey: further evidence on causulty issue, economic reserch paper no: 00/27 loughborough university. kargı,b., (2013). housing market and economic growth relation:time series analysis over turkey (20002012)volume: 10 issue: 1 year: 2013 international journal of human sciences issn:1303-5134. shahini,i., (2014). how is mortgage lending influencing the economic growth in albenia, international journal of science and engineering applications, volume 3 issue 4, 2014. issn-23197560 (online). stratejik düşünce enstitüsü,(2014). türkiye konut sektörü raporu. the world bank (1984). the construction industry:issues and strategies in developing countries. washington,d.c. topaloğlu,m,(2012). an evaluation of turkish mortgage system from the perspective of global economic crises, china us business review,issn 1537-1514, july 2012 vol. 11, no.7,886-895. tcmb database tuik database tsuru, k (2000), “finance and growth: some theoretical considerations, and a review of the empirical literature” economics department working papers, oecd, january, no.228. ünalmış , d., (june 2002),the causality between financial development and economic growth: the case of turkey, the central bank of the republic of turkey, research department working paper no:3. yılmaz. c.,(2014). banka kredileri ve büyüme i̇lişkisi-21-22 mart 2014 tarihli üretim ekonomisi kongresi. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the hype of big data analytics and auditors prem lal joshi multimedia university, malaysia | prem.joshi@mmu.edu.my govindan marthandan multimedia university, malaysia | marthandan@mmu.edu.my abstract in the era of fast-tracking digitization and unconventional big data analytics, business models are being reshaped and they impact auditing amongst auditors. this viewpoint paper takes into account the procedures underlying on big data and its analytics in driving the evolution of business and identifies some of the unresolved issues and concerns on auditors, especially in the context of cognitive tasks. the paper continues to focus on the current spate of discussions on big data and auditing profession. it explains the nature of big data and its characteristics as well as the output types. this paper also tries to find answers for what is new in it, how it assists the auditors along with some unresolved issues and concerns. since big data analytics is the future, auditors need to reshape themselves in terms of skills and competencies to meet the emerging technological challenges. keywords: big data, big data analytics, auditors, unresolved issues new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.153 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:prem.joshi@mmu.edu.my mailto:marthandan@mmu.edu.my http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.153 | http://emaj.pitt.edu prem lal joshi, govindan marthandan emerging markets journal | p a g e |1 the hype of big data analytics and auditors prem lal joshi govindan marthandan 1. introduction the emerging technologies are driving several changes in accounting and auditing fields. the institute of chartered accountants of england and wales (icae& w) argued that ”it is critical for audit profession to keep pace with these changes and be proactive in understanding how new technology trends can tranform the audit approaches”. among such technologies, big data analytics is of great importance for accounting and auditing professionals and educators. therefore, the objective of this paper is to critically examine issues, concern and challenges arising from the big data analytics to auditing professionals. 2. big data defined and its characteristics collecting, mining and exploiting the data which are available from a wide variety of sources have become the demanding tasks for the organisations. big data analytics (bda) is a growing methodology for helping the organisations in this regard. big data crunches massive volume of data obtained from internal and external sources (jiang and zhang, 2015). big data refers to massive volume of structured, semi-structured and unstructured data that is so large that it is very difficult to process using traditional data processing techniques. big data comprises of extremely large data sets that may be analyzed using emerging technologies to reveal patterns, trends and relationships. according to connolly (2012), big data includes the following and can be formulized as follows: big data = transactions + interactions + observations for example, transactions data are erp data. interactions data are tweets or facebook posts. observations data come from internet of things iot) such as gps, cctv or monitoring data. big data also have five vs characteristics, which are listed below:  volume (magnitude of data in multiple terabytes and petabytes)  variety (structural heterogeneity in a dataset)  velocity (the rate at which data are generated and the speed at which it should be analyzed and acted upon)  value (attribute of big data low value density)  veracity (unreliability inherent in some sources of data) moreover, big data analytics has been defined as a comprehensive way to retrieve, process and analyze the „5 vs‟ data-related characteristics in order to create valuable intelligence insights for continual value delivery, performance assessment and forging competitive advantages (bumblauskas et al., 2017). 3. big data analytics there are five types of big data analytics that may help the businesses and professionals. these are indicated below:  descriptive (what is happening?).  diagnostic (why did it happen?)  discovery (what do i learn?)  predictive (what is likely to happen?)  prescriptive (what should i do about it?) 4. what is new about big data analytics (bda) for auditors? the incapability of traditional database management system in handling wide data formats coming in high volume in real time paved the way for the big data technologies. they help the firms to go for real time intelligence extracted from high volume of data. the need for evidenced-based decision making, especially by auditors, is taken care by the intelligent processes which bring out the meaningful insights from the data. they are capable of processing high volume of wide variety of data with unimaginable speed to bring out high value information for decision making. figure 1 shows the five processes grouped under two main categories, namely data management and analytics. methods, tools and processes used to crunch the data and generate business intelligence are referred as analytics. thus, the big data analytics can be seen as a subprocess of within the all-inclusive processes of „insight extraction‟ for big data (gandomi and haider, 2015). figure 1. big data process source: gandomi, a. and haider, m., (2015). “beyond the hype: big data concepts, methods, and analytics”, international journal of information management, 35 (2), pp. 137–144. it is posited that, in conventional analytical procedures, there is absolute comparisons of accounts balances with prior year balances, budgets with forecasts, ratio comparisons and trend analysis ( cfrr, 2017). on the other hand, it is claimed that bda has depth and it is much broader compared to conventional analytical procedures. audit data analytics involve applications of powerful software tools and statistically complex procedures. there are several bottlenecks / barriers that hinder the implementation of bda for auditing system volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.153 | http://emaj.pitt.edu the hype of big data analytics and auditors page |2| emerging markets journal (shukla and iana, in press). accounting firms are coming out to say that, big data is becoming an essential part of their assurance practices (alles and gray, 2016). for example, ernst&young (ey) states: “data analytics, new technology and access to detailed industry information will all combine to help auditors better understand the business, identify risks and issues and deliver additional insights. moreover, the ability to review and analyse entire sets of data, rather than applying sampling techniques, will help bring more confidence to the audit.” as such, in data handling, data sources are different from the analytics used on them. figure 2 shows the relationship between the data sources and techniques in the audit domain. figure 2. data source and techniques in auditing traditionally, the auditing firms are using the manual data capture of the transactions, to generate the standard outputs for the auditing practioners. when the globalisation and complex supply chains entered the business, the firms are forced to capture the data from the source of transaction, automatically. centralised processing are taking place to crunch the data. when the volume of data started increasing expoentially, conventional method analysis could not cope with the expectation of the business, including auditing. real-time instaneous results have become the necessity to beat the competion. on the other side, technological advancements are taking place in handling the big data optimally and at the same time generating intelligence that were not possible earlier. so the firms moved to predictive analytics, visualisation etc. similar trend is also noticed in the non-conventional non-financial data. storage and retrival have become challenges for the volume of data generated / captured. with the advent of social media and internet of things (iot), lots and lots of semi-structured and unstructured data started pouring in. the conventional methods of data handling are not good enough to manage such huge and variety of data, particularly to auditing and accouting. the sheer volume and variety are forcing the firms to move towards advanced methods of analysis. the tools available to the auditors may include cluster analysis, predictive models, data layering, visualizations, and “what if” scenarios. for example, with audit data analytics, auditors may be in a sound position to predict more accurately and reliably about the going concern position of the clients or their credit worthiness, collectibility of account receivaables etc. under the future vision of auditing, public companies would give auditors access not just to a sample of their transactions, but to their entire general ledger and their databases. using theise tools, auditors will have the capability to access, and look the entire gamut of data, not merely summary data. 5. benefits claimed from big data analytics for auditors as specialists in their domain, accountants / auditors have distinct proficiency in business intelligence, regulatory compliance, and internal controls and thereby recognizing them as treasured collaborators in managing data assets (coyne et al, 2018). currently, lot of discussions are taking place among accounting and auditing academicians, researchers, and practitioners on how big data is going to transform the audit planning, processes, techniques, evidence, documentations, reports as well as auditing professionals' skills. competencies and the training requirements are discussed as well. because of this reason, there is a growing concern among auditing professionals that, big data and its analytics are opening up new opportunities and challenges (appelbaum et al, 2018). it is claimed that, big data is going to affect tremendously the work of internal auditor and financial statement audit (external auditors). however, it is claimed that auditing profession would be the last to adopt new technologies, be it any ( appelbaum et al., 2018). more said so, it is to be accepted that big data techniques and analytics would be a high value item for the auditing profession, where rigorous analytical procedure and audit techniques are combined to produce results unknown so far (gepp et al., 2018). at the same time, inappropriate analysis of big data can be a disaster landing in misleading conclusions (rajaraman, 2016). because of the interesting and valuable information could be extracted from the so called big data, many firms are vouching for big projects in all functional areas (oussous et al., 2017). a few authors claim that, big data may assist the auditors in the following areas:  providing audit evidence through a comprehensive analysis of organizations‟ general ledger systems  assisting them in risk assessment through identification of anomalies and trends, and comparison with industry data  testing complete sets of data instead of taking sample testing  planning proper field works for auditors  fraud detection and improving other forensic accounting  using predictive models to improve forecasting  sound judgement on clients‟ going concern issue institute of internal auditors (iia) research foundation stated that, big data analytics may be useful in performing internal audit functions such as compliance, fraud, risk assessment, detection and investigation, operational performance and internal controls. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.153 | http://emaj.pitt.edu prem lal joshi, govindan marthandan emerging markets journal | p a g e |3 6. unresolved issues and concerns researchers and professionals, however, have not yet lucidly shed light on the following questions:  what are the tools or approaches available for big data analytics that can make big data useful in auditing work?  which of these tools are the most promising?  should auditing standards be modified in order to facilitate these tools?  what are the specific and general skills and competencies needed for auditors to apply them under big data enviornment?  does big data analytics enhance audit efficiency?  does big data analytics increase audit quality? the emergence of new and non-conventional data pose higher demand on internal and external reporting, and make organisations to face the new risks. this draws the attention of the regulators and the organisations, which have to take care of them. more information challenges and control risks have started arising because of the 3vs of big data, namely volume, velocity and variety. big data analytics is not a mere job of information technology (it) professionals alone. the accounting experts and audit professionals who know the intricacies of accounting and auditing, have an exemplary knowledge on them, grasp the needs of the top management / decision makers and know regulatory compliance in terms of information needs should collaborate with it professionals to develop and maintain the information systems. while accounting and auditing professionals have the required knowledge, they have to upgrade their knowledge with new skills through education and training (coyne et al, 2018). a few researchers and practititioners suggest that, the emerging data analytics approaches that may assist with the audit process are deep learning, text mining, blockchain accounting/smart contracts, predictive analytics, r programming, hadoop and structured query language (sql). however, in the absence of clearly identified data analytical apparoaches, this is presenting a big challenge on how to appropriately train and educate future auditors. the reason is that, it has implications for the preand post-qualifications that professional accounting and audiiting bodies presently catered to. therefore, empirical as well as case studies research are urgently needed to answer these grey areas. 7. concluding remarks no doubt, big data is emerging as a valuable resource to organizations in today‟s context. it offers high potential to be an extremely valuable resource for internal and external auditors. however, there are certain unresolved issues and concerns which need to be tackled as soon as possible. these are listed below: 1. there are still concerns about the reliability and integration of big data. 2. security for big data in the storage may be a concern. because, aggregate big data may include sensitive information as well as toxic data. therefore, confidentiality of big data is important for both clients and regulators. so far, literature or practitioners review do not provide much solutions to these emerging problems. additionally, many companies fear of releasing data because of risk of cyber security threat. companies want to make absolutely sure that, they control their data and this is a big challenge for auditors as they have the right to access such data. so, they need to recognize and understand that, their clients‟ data are very secured. 3. a strong case needs to be made that, there are audit decisions that fit big data scope and scale (alles and gray, 2015). 4. for auditors to perform analytics in auditing, they should be able to extract their clients data efficiently and in a cost effective manner. in a multiple accounting systems within the same company, extraction of data may be a pain taking process, particularly in the case of an unfamiliar accounting system (sidhu and balasubramaniam, 2018). in big data environment, there could be complexities of data extraction and data mapping. the reason is that, auditors would need structured and unstructured, financial and non-financial data. 5. there is still lack of a theory for bda and its wider applications in auditing. in this context, athey (2013) argued the following: “i think what is true is that when you have large amounts of data, if you ask it the right questions, you have a greater ability to let the data speak, and so you can be much less reliant on assumptions. but you still need a strong conceptual framework to understand what’s coming out.”. 6. a few researchers and auditors believe that, pursuing software and functionality may not be the appropriate direction in big data analytics. instead, auditors should think more about the questions they can ask and address. this is so, because there may be a danger for auditors to take big data correlations at face value and they may not question these big data correlations sufficiently. references alles, m. and gray, g. (2015). “the pros and cons of using big data in auditing: a synthesis of the literature and a research agenda”, rutgers. accessed 30 august 2018. alles, m. and gray, g. (2016). “incorporating big data in audits: identifying inhibitors and a research agenda to address those inhibitors”, international journal of accounting information systems, 22, pp.44–59. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.153 | http://emaj.pitt.edu the hype of big data analytics and auditors page |4| emerging markets journal appelbaum, deniz a., kogan, alex,m & vasarhelyi, miklos a., (2018). “analytical procedures in external auditing: a comprehensive literature survey and framework for external audit analytics”, journal of accounting literature, 40, pp.83-101. athey, s., (2013). “interview with susan athey: stanford economist on optimal auctions, better models and the future of big data”, federal reserve bank of minneapolis. accessed 1 september 2018. https://www.minneapolisfed.org/public ations/the-region/interview-with-susanathey cfrr., (2017), “audit data analytics: opportunities and tips”, center for financial reporting reform, world bank group. accessed on 1 september 2018, http://siteresources.worldbank.org/ext cenfinrepref/resources/41521171427109489814/smps_spreads_digital .pdf connolly, s., (2012), “7 key drivers for the big data market”. blog posting, accessed 31 august 2018, http://hortonworks.com/blog/7-keydrivers-for-the-big-data-market/ coyne, emily m., coyne, joshua g. and walker, kenton b. (2018). “big data information governance by accountants”, international journal of accounting & information management, 26 (1), pp.153-170. daniel bumblauskas, d., nold, h., bumblauskas,p., igou, amy., (2017). “big data analytics: transforming data to action”, business process management journal, 23 (3), pp.703720. gandomi, a. and haider, m., (2015). “beyond the hype: big data concepts, methods, and analytics”, international journal of information management, 35 (2), pp.137–144. gepp, a., linnenluecke, martina k., o‟neill, terrence j. and smith, t. (2018). “big data techniques in auditing research and practice: current trends and future opportunities”, journal of accounting literature, 40, pp.102–115. j.e. boritz consultants limited (2018). “the pros and cons of using big data in auditing”, jebcl.com/.../alles-thepros-and-cons-of-using-bigdata-in-auditing ming, jiang and li, zhang. (2015). “big data analytics as a service for affective humanoid service robots”, procedia computer science, 53, pp.141–148. oussous, a., benjelloun, fatima-zahra., lahcen, ayoub ait and belfkih, samir. (2017). “big data technologies: a survey”, journal of king saud university computer and information sciences. rajaraman, v., (2016). “big data analytics”, resonance, 21 (8), pp.695–716. shukla, m., mattar, lana., (in press), “next generation smart sustainable auditing systems using big data analytics: understanding the interaction of critical barriers”, computers & industrial engineering, accessed on 3 september 2018, https://doi.org/10.1016/j.cie.2018.04.05 5 sidhu, s. and balasubramaniam, r. ( 2018). “big data and data analytics: the future of audit”, the malaysian accountant, may-june, pp.12-17. volume 6 no 1 (2016) | issn 2158-8708 (online) | doi 10.5195/emaj.2016.92 | http://emaj.pitt.edu the role of participation banking as alternative financing channels to substitute for deposit banks and its growth in the turkish finance market period: 2007-2015 ferhat sayım yalova university | f_sayim@hotmail.com abstract financial systems and companies have become the most important reasons in the weakness of world economic system. the formation and development process of the financial structure also constitute the infrastructure of the world economic system. the path of the financial system and development has led to discuss with the financial crisis in 2008-2011. one of the solutions in order to reduce problems caused by the conventional banking system is alternative financing systems. in turkey, the corporations based on profit share system are named participation banks. these banks which settle on different principles in the risk distribution of the portfolio acquired are analyzed more nowadays. participation based banks are placed in practically every regulation related to banking terms and get their legal infrastructure more steady in the banking legislation of turkey. this study is a continuation of a series related to the situation of participation banking in turkey. on the other hand, the literature and the history of participation banking have been given less attention in this study. literature information on methods in participation banks has been described in previous work of the series. two analyzes were conducted in this study. one analysis is interpretive analysis that expresses the situation of applications of participation banking against banking risks. the other is an analysis of the figures of participation banks in turkey as a continuation of the series. this study is a 2007-2015 part of research series. the study tries to explore the place and the importance of participation based banking with the various sub-headings, especially in turkey. for this reason, we examine the comparative review 2007-2015 data of participation banks which are composed of total assets, equity net profit, collected funds and bank loan funds. then we compare the total figures with deposit banks for the same period in turkey. keywords: bank, finance market, participation bank, interest free banking, alternative banking system new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.106 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.106 | http://emaj.pitt.edu the role of participation banking as alternative financing channels to substitute for deposit banks and its growth in the turkish finance market period: 2007-2015 page |47| emerging markets journal the role of participation banking as alternative financing channels to substitute for deposit banks and its growth in the turkish finance market period: 2007-2015 ferhat sayım 1introduction participation banks gather funds from saving owners, use them in industrial and trade sectors according to the interest free financing ethics and shares the profit or loss with saving owners. the word “participation” in their name expresses that this type of banking is based on the opinion of participation to profit and loss (the participation banks association of turkeyfaq, 2010). banking methods of this system are generally called “islamic banking” in the international literature. these banking operations are methods such as various kinds of project partnership and others are based on prohibition of interest (moles &tery, 1999, p. 304). as islamic banking is part of the banking system of a country, its performance may affect the soundness and stability of the banking system (abdul-majid; 2008, p.4). moreover, for conventional banks with islamic banking windows, the performance of these windows has certain influence on the performance of conventional banks (abdul-majid 2008, p.4). islamic bank works as a trading concern and financial intermediary to perform interest-free activities purely according to principles of sharia’h. it is a welfare organization that promotes business and trade activities by pooling the financial resources for the sake of profit and loss for mutual benefit (ahmad, humayoun, & hassan, 2010, p. 8). the sources of funds for the banks are deposits, capital and equity. deposits can be divided into transaction deposits or investment deposits which are respectively equivalent to current and fixed deposit accounts in conventional banking. formerly, banks act as the safe-keeper which promises the nominal value of the transaction deposits, but does not guarantee returns on this liability and is known as wadiah. later, depositors are not guaranteed nominal value nor paid with a fixed return. instead, depositors are considered as shareholders, hence share profits or losses from the investment account with the bank. in addition, the proportion of the profits or the loss to be distributed is pre-determined and agreed by both parties (abdul-majid; 2008, p.4). participation or islamic banks are not institutions specific to turkey. all over the world, especially in muslim countries, there are many financial institutions that operate according to a similar system. even if it is known as "interest-free banking" or "islamic banking", the system consisting of such institutions operating through profit and loss is perceived as a "special finance house" and later defined as "participation banking" under turkish law. mitghamr savings bank established in 1963 in egypt and the first modern experiment with islamic banking can be traced to establishment of mitghamr savings bank. the number and size of players operating in islamic banking sector increased significantly along the past four decades. all over the world, there are applications of islamic banking in more than 50 countries. there are countries where only islamic banking is allowed such as iran, pakistan, and sudan. on the other hand, there are some countries such as bangladesh, egypt, indonesia, jordan and malaysia where both islamic banking and conventional banking are allowed together. also, islamic banking can take place in non islamic countries. (chong & liu, 2009, s. 125-126). the determination of the relative performance between islamic banks and conventional banks will assist policy makers in devising a strategy to improve the performance of a banking system in a country and help managers in the conventional banks that choose having islamic banking windows besides conventional banking to improve bank performance ( abdul-majid; 2008, p.4). volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.106 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |48 figure 1. application of funds (islamic) source: (aminuddin, i.2010) this study is a continuation of a series related to the situation of participation banking in turkey. on the other hand, the literature and the history of participation banking have been given less attention in this study. literature information on methods in participation banks has been described in previous work of the series. two analyzes were conducted in this study. one analysis is interpretive analysis that expresses the situation of applications of participation banking against banking risks. the other is an analysis of the figures of participation banks in turkey as a continuation of the series. i. the position of participation banks against general risks related to banking below, the situation of participation banking applications against banking risks is interpreted. interpreted risks are defined risks for banking. these can be listed as follows: 1. interest rate risk 2. exchange rate risk 3. security price risk 4. credit risk 5. liquidity risk 6. operational risk a) interest rate risk according to the dividend-based system, it is uncertain that how much capital gains one can yield on the maturity. it is also possible that one can lose due to the credited projects. on the other hand, in the interestbased system, the committed amount is required to be paid to the capital owner on the maturity. the major difference between interest and dividend is that in the former, the capital gains are guaranteed on the maturity, whereas in the latter, the gains are closely connected to the efficiency of the projects. the difference in those systems is able to minimize the interest risk for participation banks into a great extent. however, increasing deposit rates to manage funds of deposit banks facing interest rate risk in case of increasing interest rates may lead funds in deposit banks shifting from high-yield maturities into banks. increasing participating fund customers that are insensitive to interest rates following rising integration of participation banks into the system may also lead to such initiatives. in this case, it is likely for participation banks to face with liquidity risk. b) exchange rate risk participation banks pay attention for not taking open or closed position that lead to exchange rate risk. however, nowadays, funding has been realized through various instruments, and the commodity-based transactions have become more and more related to participation banks. similar to the exchange risk, there might be also a risk related to commodity-based funds when they are turned into cash and used in lieu of credit. exchange rate risk is a risk that is supposed to be seriously considered by all the financial institutions. c) security price risk participation banks do not trade interest rate-based bonds and bills, but equities. the funds that are generated as basing upon the cmb regulations can be directed by managers that are authorized by participation banks. this risk would continue to be borne as long as the idle funds, apart from the ones that are already been established, have been used through security trade-off. the rest of this part is related to the idiosyncratic risks, namely, credit risk, liquidity risk and operational risk. d) credit risk as participation banks do not offer cash credits, they are pulled away from taking credit risks based upon fictive transactions. however, like others, participation banks also bear risks of no – or missing repayment in credits. moreover, the no repayment risk in credits grows with sector-specific risk if there are sectorspecific concentrations. it is also recommended to take it into consideration that the increase in non-cash credits is likely to be devastating if those credits are integrated into the sector-specific risks. https://plus.google.com/100211611322222933243 volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.106 | http://emaj.pitt.edu the role of participation banking as alternative financing channels to substitute for deposit banks and its growth in the turkish finance market period: 2007-2015 page |49| emerging markets journal e) liquidity risk liquidity risk is, as for all banks, extremely dangerous for participation banks so that it is widely thought that participation banks not borrowing in the interbank market are more likely to face this risk. almost none of the financial institutions have reserved money to fund sudden giant cash outflows. an absolute and a considerable liquidity risk occur when there is maturity differences between funds collected and credits distributed. it has been already known that the average maturity of deposits is lower than credit maturities in turkey. it might be worth to mention that the encompassment of participation banks by deposit guarantee system that is built to avoid abrupt withdrawals through established recent fund may decrease the liquidity risk for those banks. recently, according to the knowledge gained through sectorspecific meetings, the infrastructure for funding mechanisms, such as a central bank, has been attempted to be developed for participation banks to create funds. such a system is likely to decrease the liquidity risk for those banks. f) operational risk most of the operational risks are also the case for participation banks. apart from them, participation banks will have continued to bear operational risks with their potentials related to fast growth and to branching. although the strategies such as the choice of branch locations, and the determination process of priorities, seem to be successful, the alternative costs associated with those might be greater. participation banks are, on the one hand, expected to benefit from the experiences of deposit banks. on the other hand, they are supposed to create academic and applied working groups to determine alternative strategies. especially, they are anticipated to produce boards that are prone to undertake technique-based studies, from the perspective of accounting and law order, for instrumental diversification. 2. evaluation of sectoral quantitative data total funds collected, 2007-2015 as of the end of 2015, total funds collected by participation banks reached to approximately 74 billion turkish liras, after an increase of 400% compared to the end of 2007. figures of participation banks and deposit banks are shown below which facilitates to make a relative analysis between them. the increase rate for deposit banks is 241% in the same period. when figures are compared as of the end of 2007 and 2015, it is seen that participation banks have almost two times bigger percentage of increase than deposit banks on the percentage basis in terms of rate of increase. table 1: fund distribution of participation and deposit banks, 2007-2015 (million tl) 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 07 -2 01 5 in c. r at e deposit banks 343. 031 435. 554 487. 909 583. 947 656. 276 724. 296 884. 457 987. 433 1. 170. 689 241 % participati on banks 14. 834 19. 045 26. 711 33. 089 39. 220 47. 921 61. 313 65. 230 74. 176 400 % deposit+p articipatio n b. 357. 865 454. 599 514. 620 617. 036 695. 496 772. 217 945. 770 1. 052. 663 1. 244. 865 248 % source: composed from data provided by (pbat: the participation banks association of turkey, 2007-15 consolidated company reports). table 2: funds utilized-participation banks and deposit banks in turkey 2007-2015 (million tl) 20 07 20 13 20 07 in c. r at e 20 14 20 07 in c. r at e 20 15 20 07 in c. r at e deposit banks total loans 262. 572 939. 772 258% 1.118 .887 326% 1.339 .149 410% participation banks total loans 14. 072 62. 029 341% 64. 065 355% 72. 038 412% *increase rate calculated based on 2007. source: composed from data provided by (bat: the bank association of turkey, 2016) (http://ebulten.bddk.org.tr/abmvc/#) increase rate of loan-fund utilization from the end of 2007 to the end of 2013 of participation banks is higher than deposit bank’s rate. they are 341% and 258% in that order. but difference reduced especially after one biggest participation bank is seized by insurance fund. they are 410% and 412% in that order. growth of total assets when we look at the table of growth of assets, it is seen that participation banks provide the growth in the 2007-2015 period according to deposit banks. participation banks increased their total assets by 394% owing to deposit banks which increased their total assets by 189. the table clearly shows that participation banks have increased theirs shares in the sector. while the share of participation banks was %3,3 in 2007, the share reached to %5,6 in the end of 2013. after 2013, volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.106 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |50 there was a drop in the growth trend of the participation banks. as a reason for this, the political problems faced by the owners of the largest participation banks are shown. but since 2007, the market share increase seems to be a trend. table 3: the shares of participation banks within the sector (1.000. 000)tl deposit banks dev. and inv. banks participation banks y e a r sector total assets ratio in the sector total assets ratio in the sector total assets ratio in the sector 20 15 2.355. 561 2.129 .397 90,40% 106. 597 4,53% 119. 567 5,08% 20 14 1.992. 538 1.803 .780 90,53% 84. 529 4,24% 104. 229 5,23% 20 13 1.731. 392 1.565 .258 90,40% 70. 112 4,05% 96. 022 5,55% 20 12 1.368. 387 1.245 .416 91,01% 52. 726 3,85% 70. 245 5,13% 20 11 1.217. 695 1.119 .911 91,97% 41. 636 3,42% 56. 148 4,61% 20 10 1.006. 668 932. 371 92,62% 30. 958 3,08% 43. 339 4,31% 20 09 834. 014 773. 357 92,73% 27. 029 3,24% 33. 628 4,03% 20 08 732. 536 683. 823 93,35% 22. 943 3,13% 25. 770 3,52% 20 07 581. 605 543. 272 93,41% 18. 888 3,25% 19. 445 3,34% source: composed from data provided by (bat, the bank association of turkey, 2011-2015) (bat, the bank association of turkey, 2012-15) (pbat, the participation banks association of turkey, 2012-15). figure 2. share of participation banks in turkish banking sector 3. conclusion “participation banks” formerly known as “special finance houses” are companies collecting funds similar to deposit through private current accounts and accounts giving right to profit/loss participation, and utilizing funds through methods such as production support, leasing, document against payment, partnership of profit and loss. the establishment of these companies in turkey has been allowed since 1984. the general risk assessment for participation banking is as follows:  the difference in those systems is able to minimize the interest risk for participation banks into a great extent.  participation banks pay attention for not taking open or closed position that lead to exchange rate risk. however, exchange rate risk is a risk that is supposed to be seriously considered by all the financial institutions.  participation banks do not trade interest ratebased bonds and bills, but equities. the funds that are generated as basing upon the cmb regulations can be directed by managers that are authorized by participation banks. this risk would continue to be borne as long as the idle funds, apart from the ones that are already been established, have been used through security trade-off.  as participation banks do not offer cash credits, they are pulled away from taking credit risks based upon fictive transactions. however, like others, participation banks also bear risks of no – or missing repayment in credits.  liquidity risk is, as for all banks, extremely dangerous for participation banks so that it is widely thought that participation banks not borrowing in the interbank market are more likely to face this risk.  most of the operational risks are also the case for participation banks. apart from them, participation banks will have continued to bear operational risks with their potentials related to fast growth and to branching. these companies which are subject to most limitations of general arrangements and loan limitations in the turkish banking act differ from deposit banks at most in terms of that they don’t undertake the risk of interest. these kinds of banks don’t undertake the risk of interest which is one of the greatest risks which have to be managed in banking sector. we can talk about an asset-liability balance which is less sensitive to financial crisis. however not to undertake the risk of interest, in these kinds of banks, differently from deposit banks, eliminates the opportunity to obtain sudden and high institutional profit based on interest rate difference. 0,00% 1,00% 2,00% 3,00% 4,00% 5,00% 6,00% share in the sector share in the sector volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.106 | http://emaj.pitt.edu the role of participation banking as alternative financing channels to substitute for deposit banks and its growth in the turkish finance market period: 2007-2015 page |51| emerging markets journal however, growth of volume and branch number in the finance sector particularly in the last years is also extremely valid for these companies. their share is relatively small today in total sector, but it grows in a steady way with their higher development rate than other banks. in 2001, participation banks had total asset amount of 2,4 billion tl which meant a share of 1,08 % in the total assets of the sector. these amounts and shares were 7,3 billion tl and 2,33 % in 2004, 13.730 billion tl and 2,75 % in 2006, 25.769 billion tl and % 3,50 in 2008, and 96.022 billion tl and 5,6 % as of the end of 2013. after 2013, there was a drop in the growth trend of the participation banks. as a reason for this, political and legal problems faced by the owners of the largest participation bank are indicated. but since 2007, the market share increase seems to be a trend. it can be summarized as follows on the comparison of deposit and participation banks:  increase rate of loan-fund use from the end of 2007 to the end of 2013 of participation banks is higher than deposit banks’ rate. they are 341% and 258% in that order. but, differences have reduced after 2013. they are 410% and 412% for that order.  the rate of participation banks is slightly higher than deposit banks. in terms of average profit per bank, deposit banks intrinsically have very high figures compared to participation banks. however, the average number of branches, their scale and the history of deposit banks are above participation banks. by the way, the participation banks also have some problems. for example, they need the interbank system which provides urgent proper credits for the depository banks in the short run. but, this situation negatively affects the participation banks’ performance. because, they are sharing almost all of their funds for the creditors or investors who uses them for leasing, sales, trade, production, export and imports which constitutes the real sector in the economy. for that reason, it is very important for participation banks forming the similar interbank organization which would increase their customers and operational transactions. for instance, the establishment of guaranty insurance system among the participation banks optimistically influenced their growth in the market. references abdul-majid,m.a.(2008), “islamic and conventional bank performance: a review of literature”, working paper in islamic economics and finance no. 0819; universiti kebangsaan malaysia, https://www.academia.edu/4410417/islamic_a nd_conventional_bank_performance_a_revi ew_of_literature ahmad, a., humayoun, a. a., & hassan, u. u. (2010). an analysis of functions performed by islamic bank: a case of pakistan. european journal of social sciences, 17 (1), 7-12. aminuddin, i.(2010), “application of funds”, http://www.islamicbankingway.com/2010/11/2 2-application-of-funds.html bat, the bank association of turkey. (2008). bankalarımız 2007. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2009). bankalarımız 2008. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2010). bankalarımız 2009. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2011). bankalarımız 2010. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2012). bankalarımız 2011. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2013). bankalarımız 2012. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2014). bankalarımız 2013. i̇stanbul: türkiye bankalar birliği. bat, the bank association of turkey. (2014). 2013 4.quarter information. i̇stanbul: türkiye bnk. birliği. chong, b. s., & liu, m. h. (2009). islamic banking: interest-free or interest-based? pacific-basin finance journal, 17, 125–144. moles, p., & tery, n. (1999). the handbook of international financial terms. united kingdom: oxford university press. volume 7 no 1 (2017) | issn 2158-8708 (online) | doi 10.5195/emaj.2017.106 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e |52 the participation banks association of turkey-faq. (2010, 12 28). retrieved 2010, from the participation banks association of turkey: http://www.tkbb.org.tr/index.php?option=com_ content&task=blogcategory&id=46&itemid=8 3 http://www.tkbb.org.tr/index.php?option=com_content&task=blogcategory&id=46&itemid=83 http://www.tkbb.org.tr/index.php?option=com_content&task=blogcategory&id=46&itemid=83 http://www.tkbb.org.tr/index.php?option=com_content&task=blogcategory&id=46&itemid=83 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the influence of dividend payments on share price in manufacturing firms quoted on the nigerian stock exchange samson ogege university of lagos, nigeria | ogegesamson@yahoo.com abstract this paper examined the influence of dividend payments on the price of share of quoted manufacturing companies in nigeria employing panel data with 125 data observations spanning from 2014-2018. a purposeful sampling technique was used to select twenty-five manufacturing companies investigated from the nigerian stock market. a linear regression model was specified and was further broken down into a bivariate regression model and the method of least square regression was adopted for data analysis. the outcome of the panel regression indicated that, dividend per share has a positive influence on the price of shares of high and low geared manufacturing firms; earnings per shares positively influence the shares price of both dividend and non-dividend paying manufacturing companies; dividend yield show an adverse effect on the share price of new and old manufacturing companies; credit risk was found to positively impact share price of big manufacturing companies, but adversely affect the share price of small manufacturing companies in nigeria. in view of the outcomes of the analysis, the study therefore recommended that a conducive and favorable business environment should be created by the government for both old and new manufacturing companies in nigeria to thrive. also, credit risk should be effectively and efficiently managed by small manufacturing companies in particular in order to eliminate its adverse influence on their share price. keywords: finance, dividend payments, share price, manufacturing firms, nigeria new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.196 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.196 | http://emaj.pitt.edu the influence of dividend payments on share price in manufacturing firms quoted on the nigerian stock exchange page |64| emerging markets journal the influence of dividend payments on share price in manufacturing firms quoted on the nigerian stock exchange samson ogege i. introduction the basic concept of dividend payout as well as its policy has remained one of the major issues generating controversy in corporate finance. since the inception of joint stock firms, the payment of dividend by firms has become an interesting issue in financial literature. over the years, the modeling as well as the evaluation of corporate dividend payout and returns had been engaged by financial economists as they influence the stock price of firms in nigeria (alqudah et al., 2015). in a simple form, dividend is the apportionment of returns or earnings in real assets amidst the company’s shareholders in relation to their share ownership. the payment of dividend is quite sacrosanct for the effective and efficient management of a business operation to ensure its survival and it has been viewed as one of the most vital tools for assessing the existence and performance of corporate organizations. a great value is performed by dividends to restore confidence to the shareholders and it is extremely significant as a result of its negative influence on the values of share. a stable policy on dividend is anticipated to bring about a higher price of share due to the high level investors’ confidence regarding the potential of the firm to make higher profit in the future. however, the firm still needs to be assessed in a wider scope. basically, at the end of every financial period, firms assess their financial performance by determining whether earnings had been actualized or not. the payment of dividend continues to be viewed as one of the major significant financial policies not just only from the firms’ outlook, but as well from that of the employees, the consumers, shareholders, regulatory bodies as well as the government (jakata and nyamugure, 2015). it is generally specified as a nominal value percentage of the ordinary share capital of firm or as a stable amount per share. in all, when the market is greatly influenced either positively or negatively, it may as well pose a similar influenced on the payment and policies of dividend. alqudah et al. (2015) posited that, the rationale behind the dividend payout of firms is the need for cash and/or to avoid the cost of agency and minimizing the insecurity of investors. sharma (2011) indicated that, earnings and dividend per share are key components that provide vital information regarding the share price’s value in the market. previous studies conducted in nigeria on dividend payout appeared to have revealed that, the dividend payment trend had been inconsistent in various sectors of the economy. jakata and nyamugure (2015) came up with the conclusion that, the association of dividend payment with equity on shares prices has produced conflicting results based on the sector the study is conducted. however, considering the manufacturing industry, the payment of dividend has been inconsistent. thus, the challenges identified prompted the researcher to carry out this study with the main purpose of ascertaining the influence of dividend payment on share prices of the quoted manufacturing firms. ii. literature review based on this theory, lintner (1956) and gordon (1959) formally contended that, there is need for the investors to actualize their wealth for the purpose of consumption and hence prefer cash dividends to capital gains. however, it was theoretically opposed by miller and modigliani (1961) in their seminar paper revealing that dividends and capital gains are substituted for each other. again, ‘home-made dividends’ could be produced by the investors by issuing stock if that is what they have decided to do. this theory is majorly adopted by firms for justifying the essence of having a well-established dividend policy in operation. traditionally, the bird in hand theory posits that, the share prices of firms can be influenced via variation in their policies of dividend. the theory further asserts that, dividend is preferred by the investors to capital gain for that ‘a bird in the hand is worth more than one in the bush’. that is to say, dividend today is more preferred than capital gain that is not certain in the future (gordon, 1963). several empirical studies had been conducted home and abroad on the association of dividend payment and policy with share price as to whether there exists a positive or negative association between the variables. few of such studies are empirically reviewed below: a study was conducted in nigeria by augustine et al. (2019) investigating the association of the ratio of dividend payout with the value of brewery and beverage companies quoted on the nigerian stock exchange (nse). the study also examined other factors that influence the value of firm. however, the variables (cash holding, profitability, size of company as well as leverage and dividend policy ratio) were regarded as the factors influencing the value of companies. ols regression analysis was adopted to analyze the secondary data collected from the firms spanning from 2007-2016. it was established that, profitability and leverage ratio have significant and positive influence on the companies’ value. this implies that, only the variables of firm leverage, and profit after tax are significant factors that drive firm value in both breweries and beverages companies among listed companies in nigeria. hence, the work suggested that, policies which will optimize the leverage ratio of companies should be put in place and that companies which wish to optimize their values should ensure that profit after tax is maximized. adopting a panel least square regressions method, alfred et al. (2019) appraised the dividend policy influence on the prices of stock of ten consumer goods companies listed on the nigerian stock exchange. the secondary data adopted were collected from the financial statements of the firms investigated spanning volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.196 | http://emaj.pitt.edu samson ogege emerging markets journal | p a g e 6 5 from 2011 to 2015 and established that dividend yield influences market price share insignificantly and adversely; earnings per share and dividend pay-out ratio influenced market price share significantly and positively while net asset per share show non-significant positive impact on market price share. in view of the outcomes of the analysis, it was inferred that the policy of dividend has the potential to impact on the prices of stock in the consumer goods sector pointing out that the irrelevancy theory of dividends does not take effect as the case may be in nigeria. by investigating about two hundred and twenty-eight quoted companies in the amman stock exchange, muhannad et al. (2018) obtained the data spanning from 2010 to 2016 to ascertain the influence of dividend policy on the fluctuation of stock price of the study sample. with the adoption of pearson correlation analysis and the estimation of panel gmm to investigate the association between the observed variables, it was established that dividend policy and payout, dividend yield have adverse significant causality with stock price fluctuation. it therefore means that the more the companies increase their dividend payout and dividend yield, there will be more reduction in the fluctuation of the price of stock which invariably brings about a more stable stock price. hence, the study recommended that dividend policy that is favorable to both the current and future investors should be formulated and maintained by the companies quoted on the amman stock exchange. between 2006 and 2015, a similar study was conducted in nairobi for a case of six insurance firms quoted on the nairobi securities exchange and it was revealed based on the regression analysis adopted by joseph and symon (2017) that earnings per share, dividend yield and inflation significantly and positively influenced the share price value. based on the outcomes established, it is inferred that dividend policies should be thoroughly and accurately considered by the insurance companies as a result of their potentials to impact the price of share by making the price of stock to either increase or decrease based on the dividends declared by the firms’ management. thus, it is highly required by the management to be honest and responsive in dividends declaration. to further ascertain how the payment of dividend affects the share value, akram (2017) sourced for data from 44 companies quoted on istanbul stock exchange spanning from 2007-2015 and a fixed effect analysis was employed. the result from the analysis indicated that, the payment of dividend has a significant and positive association with companies’ value. thus, the outcomes of this study upheld the agency cost theory inferred that, the irrelevance hypothesis of dividends is not valid considering the companies quoted on the ise. ahmed et al. (2017) conducted a study on the association of dividend policy with the stock prices belonging to a firm in the banking sector. the data between 2005 and 2014 regarding the financial structure as well as the basic dividend policies of the firms investigated were sourced from the financial statement of five banks selected and the websites of state bank of pakistan and karachi stock exchange. the outcomes indicated that, a sound dividend policy plays a significant function in alluring potential investors as well as making a substantial contribution towards enhancing the financial structure of companies. furthermore, it was revealed by the findings that dividend policies might pose a significant and positive effect on the prices of stock if considered and executed after thorough investigation of financial structure as well as the dividend policies of various companies. iii. methodology secondary data were employed in this study and had been collected from the financial statement and average share prices per year of the chosen manufacturing companies quoted on the nigerian stock exchange spanning from 2004-2018. the study covers manufacturing companies that specialize in consumer goods, industrial goods, technological development, oil and gas, health care and basic materials. panel ordinary least square technique was adopted for analyzing the panel data in order to assess the influence and the association between the variables observed in this research. on the basis of this literature, the model was formulated as follows: sp =f (dps, eps, dy, cr)………………………………………….…eq. 1 where: sp -share price; dps dividend per share; eps earnings per share; dy dividend yield; cr credit risk ; b0 = slope of the regression; b1,2,3 coefficient of the variables u = error term model specification in linear form iv. data analysis regression analysis for high geared manufacturing firms investigate the influence of dividend per share on the price of share of high geared manufacturing firms in nigeria. spt = β0 + β1dps+ µ………………………………………………………… ……eq.3 volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.196 | http://emaj.pitt.edu the influence of dividend payments on share price in manufacturing firms quoted on the nigerian stock exchange page |66| emerging markets journal table 1: regression result of high geared manufacturing firms source: eview7, 2019 analysis for low geared manufacturing firms restatement of objective one assess the influence of dividend per share on the price of share of quoted low geared manufacturing firms in nigeria. spt = β0 + β1dps+ µ…………………………………………………eq.4 table 2: regression outcome source: eview7, 2019 analysis for dividend paying manufacturing firms restatement of objective two understand the impact of earnings per share on the price of share of quoted dividend paying manufacturing firms in nigeria. spt = β0 + β1eps + µ…………………………………………………eq.5 table 3: regression outcome for dividend paying firms analysis for non-dividend paying manufacturing firms restatement of objective two understand the impact of earnings per share on the price of share of listed non-dividend paying manufacturing companies in nigeria. spt = β0 + β1eps + µ………………………………………………eq.6 table 4: regression outcome for nondividend paying manufacturing firms analysis for old manufacturing firms the firms presented in the data presentation were regrouped into old and new manufacturing firms based on their year of operation as manufacturing firms in nigeria. restatement of objective three find out the influence of dividend yield on the price of share of quoted old manufacturing firms in nigeria. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.196 | http://emaj.pitt.edu samson ogege emerging markets journal | p a g e 6 7 spt = β0 + β1dy + µ…………………………………………….eq.7 table 5: regression outcome for old manufacturing firms source: eview7, 2019 analysis for new manufacturing firms restatement of objective three find out how dividend yield influences the share price of quoted new manufacturing firms in nigeria. spt = β0 + β1dy + µ…………………………………………… eq.8 table 6: regression outcome for new manufacturing firms source: eview7, 2019 analysis for big manufacturing firms restatement of objective four assess how credit risk influences the share price of quoted big and small manufacturing firms in nigeria. spt = β0 + β1cr + µ………………………………………………eq.9 table 7: regression outcome for big manufacturing firms source: eview7, 2019 analysis for small manufacturing firms restatement of objective four assess how credit risk affects the share price of quoted small manufacturing firms in nigeria. spt = β0 + β1cr + µ………………………………………………eq. 10 table 8: regression outcome for small manufacturing firms source: eview7, 2019 iv. discussion of findings this study appraises the influence of dividend payment on share prices of the quoted manufacturing firms in nigeria. in response to table 1, dividend per share was revealed to positively influence share price of high geared manufacturing firms in nigeria. this implies that, 1% rise in dps will bring about a rise in sp. similarly, table 2 revealed that dividend per share positively influence share price of low geared manufacturing firms in nigeria. this implies that, 1% volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.196 | http://emaj.pitt.edu the influence of dividend payments on share price in manufacturing firms quoted on the nigerian stock exchange page |68| emerging markets journal rise in dps will bring about a rise in sp. this result is line with the outcome of mohannad et al (2018) although it did not indicate if the firms were highly geared or not. table 3 eps was revealed to positively influence sp of dividend paying manufacturing firms in nigeria. this signifies that for every 1% rise in eps, there will be a similar increase in sp. this outcome corroborates with the result of the study conducted by iqbal et al. (2015) inferring that, eps determines significantly the share prices and the availability of future funds for dividend payment and reinvestment. regarding the non-dividend paying manufacturing firms, it was revealed in table 4 that, eps positively influences sp. this signifies that for every 1% rise in eps, there will be a similar increase in sp. this outcome is consistent with the study of ishfaq (2018). it therefore implies that, eps has the potential of raising future capital for reinvestment in non-dividend paying firms. as regard to table 5, dy was revealed a have an adverse effect on sp of old manufacturing firms in nigeria. this implies that when dy increases by 1%, the sp will decrease by 1%. however, this outcome does not corroborate with the result of freshia and pauline (2016) where in this study, there is positive association of dy with sp. considering new manufacturing firms, table 6 established that, dy adversely influences sp. this implies that when dy increases by 1%, the sp will decrease by 1%. however, this outcome does not corroborate with the result of freshia and pauline (2016) where in this study, there is a positive association between dy and sp. table 7 reveals that, cr positively influences sp of big manufacturing firms in nigeria. this implies that when cr increases by 1%, the sp will increase by 1%. literature does not empirically emphasize the effect of credit risk on share prices of manufacturing firms in nigeria. however, table 8 revealed that cr negatively influences sp of small manufacturing firms in nigeria. this implies that when cr increases by 1%, the sp will decrease by 1%. the variables used in the study are dividend per share, earnings per share, dividend yield and credit risk. in as much as these variables used in the study are important, some are given optimum attention in investment decisions. in finance, dividend per share had been given optimum attention because of its cash flow nature. only dividend announcement had caused great influence in share price in any capital market. finance analysts over time have used dividend announcement in the form of insider information to manipulate the share price. the arguments of dividend relevance surpass the argument of dividend irrelevance. however, dividend argument had led to dividend theory. most academic studies on dividend payment included dividend per share as relevant independent variable. v. conclusion and recommendations based on the findings from the analysis, it can be observed that all the variables adopted in the model employed are significant. hence, this led the researcher to draw a conclusion that, the findings achieved the research objectives. this study makes a significant contribution to the body of knowledge by empirically revealing the evidence on how dividend payment influences the price of share of manufacturing companies in nigeria. in view of the study’s analysis, the coefficient of determination reveals more than average percent signifying that the dependent variable captured the level of significance of the independents variables. on this note, we can draw our conclusion that the manufacturing companies that are highly geared have a better model than the low geared companies, while dividends paying manufacturing companies have a better model compared to non-dividend paying manufacturing companies. inclusively, the new and old manufacturing companies have a fair model implying that in totality, the manufacturing companies in nigeria are not operating at the optimal level. big and small manufacturing companies are progressing as the model of big manufacturing companies out-way the model of small manufacturing, as revealed by the coefficient of determination (r-square). parallel to the findings discovered in this work, it is therefore recommended that credit risk should be effectively and efficiently managed by small manufacturing companies in particular in order to eliminate its adverse influence on their share price. also, the manufacturing companies that are not paying dividend with adequate earnings per share should be dividend in order to make the sector attractive to the investors. the government should provide the enabling environment for manufacturing companies to thrive and survive in nigeria. finally, well-reputable companies should be eager to pay out smooth dividends rather than investing more on the growth opportunities references ahmed, b. i., raja, n. j. khan, n. s. (2017). impact of dividend policy on stock prices of firm. international scientific journal theoretical and applied science, vol. 3, no. 47, pp. 32-37. akram, b. (2017). dividend payment and its impact on the value of firm listed on istanbul stock exchange, international journal of economics and finance issues, vol. 7, nol. 2, pp. 370376. alfred. c. o., vincent, n. e. and jessie, i. c. (2019). effect of dividend policy on stock prices: evidence from nigeria. international journal of economics and financial management, vol. 4 no. 3. alqudah, a., yusuf, d. & el-deen, a.n. (2015). stock price volatility and dividend policy in jordanian firms. research journal of finance and accounting, 6(22), 15-22. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.196 | http://emaj.pitt.edu samson ogege emerging markets journal | p a g e 6 9 augustine, n. o., odum, c. g., omeziri, r. i. and chinedu, f. e. (2019). impact of dividend payout ratio on the value of firm: a study of companies listed on the nigerian stock exchange. indonesian journal of contemporary management research, vol. 1, no. 1, pp. 25-34. freshia, m. w. and pauline, a. o. (2016). cash dividend change announcement effect on share price returns: evidence from nairobi securities exchange. the international journal of business and finance research, vol. 10, no. 3, pp. 39-47. gordon, m. j. (1959). dividends, earnings and stock prices. review of economics and statistics, vol. 41, no. (2), pp. 99-105. gordon, m. j. (1963). optimal investment and financing policy. journal of finance, 18(2), pp. 264-272. iqbal, a., ahmed, f., zaidi, s.s.z. and raza, h. (2015). determinants of share prices, evidence from oil and gas and cement sector of karachi stock exchange (a panel data approach). journal of poverty, investment and development, 8(1), 14-19. ishfaq, a. (2018). impact of dividend per share and earnings per share on stock prices: a case study from pakistan (textile sector). international journal of social sciences, humanities and education, vol. 2, no. 2. jakata, o., and nyamugure, p. (2015). the effects of dividend policy on share prices: empirical evidence from the zimbabwe stock exchange. international journal of science and research, 4(10), 674-683. joseph, k. c. and symon, k. k. (2017). effect of dividend policy on share price performance: a case of listed insurance companies at the nairobi securities exchange, kenya. international journal of accounting, finance and risk management. vol. 2, no. 3, pp. 98106. lintner, j. (1956). distribution of incomes of corporations among dividends, retained earnings, and taxes, american economic review, 46 (2), pp. 97-113. miller, m. h., and modigliani, f. (1961). "dividend policy, growth and valuation of shares", journal of business.(34), 411-33. muhannad, a. a., ashraf, m. s. a. and hussein, m. a. (2018). the effect of dividend policy on stock price volatility: empirical evidence from amman stock exchange. academy of accounting and financial studies journal, vol. 22, no. 2, pp. 1-8. sharma s. (2011). determinants of equity share price in india. journal of arts, science and commerce. 2(4), 51-60. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu structure and strategies of multinational enterprises in nigeria moruff sanjo oladimeji olabisi onabanjo university, nigeria | sanjolanre4life@yahoo.com benneth uchenna eze hallmark university, nigeria | beneze7@gmail.com kazeem adeyinka akanni office of federal head of service, nigeria | adeyinka_akanni@yahoo.com abstract this study sought to examine the effect of organization structure on organization strategy. survey research design was employed through the administration of structured questionnaire to staff of nestle nigeria plc, unilever nigeria plc and pz (cussons) plc. the findings revealed that, organization structure positively and significantly affects strategy implementation (f stat 107.52* 0.000) and that organization structure account for 53% (adjusted r2= 0.5312) variat ion in organization strategy. it can therefore be concluded that, organization structure plays a significant role in strategy formulation and implementation in nigeria multinational enterprises. it could be seen that, global matrix structure and product division structure are the most critical elements of organization structure driving strategy implementation in a multinational firm. it is therefore recommended that, multinational firms in nigeria should employ matrix structure towards the enhancement of their organization strategy. this is because matrix structure has the highest effect on organization strategy. keywords: matrix structure, product division structure, area division structure, organization structure, organization strategy new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.169 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.169 | http://emaj.pitt.edu moruff sanjo oladimeji, benneth uchenna eze, kazeem adeyinka akanni emerging markets journal | p a g e |63 structure and strategies of multinational enterprises in nigeria moruff sanjo oladimeji benneth uchenna eze kazeem adeyinka akanni i. introduction the advent of multinational enterprises (mnes) can be traced to the colonial era. it was first set up to systematize colonial expeditions by facilitating exploration, sourcing of raw materials and the creation of market to facilitate international trade. in nigeria, mnes’ entry into the market was noticeable by its policies of imperialism and colonialism, mnes came into being in nigeria after the abolition of slave trade, and this was necessitated by the need to sale surplus european and american products and a place to obtain cheap raw materials for their industries. they dominated nigeria’s business environment during the colonial era and even after independence. today, mnes still control a significant percentage of nigeria economy. the concept of structures and strategy of mnes has developed considerably (adler, 1997; bartlett & ghoshal, 1998; 2012). the enhancement of production line and engagement in global activities by firms, propel mnes to come up with organization structure and strategy that is suitable for the attainment of their organizational goals. scholars, such as: lekkerkert (2015); raluca (2015); miozzoa, yamin & ghauri (2012) and heather (2009) in their various studies revealed how organizational strategy influences organizational structure. they opined that, strategy formulated and implemented by firms determines their organizational structure. however, chitale, mohanty and dubey (2013) as well as webster (1997) posit that organization structure plays an important role in the successful implementation of organizational strategies. webster (1997) further posits that, the appropriate organizing of activities in an organization reduces the challenges managers have to confront during the process of implementing strategies in the face of turbulent global operating environment. scholars have conducted several empirical studies on the relationship between structure and strategy implementation (al-atwi, 2014; chitale et al., 2013; wheelen & hunger, 2006; brickley, smith, zimmerman, & willett, 2002; david, 2001). david (2001) emphasizes that, a clearly defined structure is essential in the implementation of organizational strategies. furthermore, wheelen and hunger (2006) opine that organizational structure plays an influential and strategic role in the successful implementation of organizational strategies. in nigeria, the effect of organizational structure on strategy implementation appears not to have been fully examined. studies examining the effect of organizational structure on strategy implementation of mnes in nigeria are sparse. in addressing this research gap, this study seeks to examine the extent to which organizational structure significantly affects strategy implementation of mnes in nigeria. the specific objectives are to explore how matrix structure significantly affects the strategy of multinational enterprises in nigeria, determine the effect of product division structure on the strategy of multinational enterprises in nigeria, evaluate the influence of division structure on the strategy of multinational enterprises in nigeria and examine the effect of the combined organizational structure elements on the strategy of multinational enterprises in nigeria. the study will answer the following research questions: to what extent does matrix structure significantly affects the strategy of multinational enterprises in nigeria? to what degree does product division structure significantly affects the strategy of multinational enterprises in nigeria? does area division structure significantly affects the strategy of multinational enterprises in nigeria? what is the effect of the combined organization structure elements on the strategy of multinational enterprises in nigeria? this research was divided into five sections. section one introduces the subject matter, while section two presents a review of literature. section three presents the research methodology employed for the study. section four presents the research findings and discussion of the findings. section five provides the conclusion of the study. ii. literature review strategy can be perceived as a creation associated with military tactics to defeat the enemies. the concept was adapted to the business world to gain competitive advantage over competitors and to attain organizational goals (mainardes, joao, ferreira & raposo, 2014). considering the context of multinational enterprises (mne), that is characterized by formulating and implementing strategies that will be operational across national boundaries. ansolf (1990) define strategy as a set of rules or guidelines that aid decision making, which usually incorporate international business activities. strategy tends to influence mnes growth rate and complexity in terms of policies, tactics, goals and programs among others. the concept of structure emanates in ancient times. it was developed by organizational theorist, who noted that structure is a function of strategy and that strategy is equally a function of structure, which is influenced by the business environment that the firm operates in. however, multinational firms experience more organizational challenges than firms operating in their domestic market due to the global nature of their organizational structure, such as area division structure, product division structure and matrix structure among other organizational structures. structure focuses on how different organizational schedule in the form of responsibilities, productive tasks or processes are allocated, directed and supervised towards achieving overall organizational goals (raluca, 2015), it could also volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.169 | http://emaj.pitt.edu structure and strategies of multinational enterprises in nigeria page |64| emerging markets journal be noticed that, structure influences mnes’ activities in two ways: it determines the type of individual or personality to participate in the decision making process and operation of mnes. it establishes the basis for operational process and procedure. blackwell (1997) identified five organizational structures of mnes: international division structure, products division structure, area division structure, matrix or mixed structure and worldwide functional structure. product division structure refers to an organizational structure that assigns operational responsibilities to managers handling some range of products. it is more common in mnes that strive to enhance their competitive advantage through innovativeness in their manufacturing techniques. area division structure refers to a structure that assigns operational responsibilities to managers covering a particular geographical area. product division strategy involves organization structure that allocates responsibility along product line. on the other hand, matrix or mixed structure refers to an organizational structure that emphasizes efficiency in production, organizational learning and local responsiveness. it is a combination of product division structure, area division structure as well as other organizational structures. structure and strategy strategy is a plan of action on how firms set out to use their major resources towards specific goals. in addition, structure is a way subsidiaries as well as departments within the organization fit together internally towards the attainment of organization goals. strategy and structure are interwoven. though, firms’ uses structure to highlight hierarchy, assign schedules or operation to personnel towards long term sustainable growth. mnes naturally assess both internal and external environments in order to determine the nature of strategy and structure to adopt amid competition and pressure. however, when mnes strategy is in place, structure becomes clearer (al-atwi, 2014). al-atwi (2014) opines that, strategy follows structure and the structure follows strategy dynamically. lekkerkert (2015) asserts that, strategy proclaims structure which aid competitiveness and targeted customer base. numerous empirical studies on structures and strategy of mnes reveal issues of strategic orientation among scholars and managers to include governance, business process and practices, culture, value creation, market, information technology alignment and environment scanning to identify opportunity and availability of resources. chitale, mohanty and dubey (2013) posit that, organizational structure is an important determinant in strategy implementation. wheelen and hunger (2006) opine that, organizational structure plays an influential and strategic role in the successful implementation of organizational strategies. scholars have conducted several empirical studies on the relationship between structure and strategy implementation (ali-atwi, 2014; chitale et al., 2013; wheelen & hunger, 2006; brickley, smith, zimmerman, & willett, 2002; david, 2001). david (2001) emphasizes that a, clearly defined structure is essential in the implementation of organizational strategies. in contrast, scholars, such as: lekkerkert (2015); raluca (2015); miozzoa, yamin & ghauri, (2012) and heather (2009) in their various studies revealed how organizational strategy influences organizational structure. they opined that, strategy formulated and implemented by firms determines their organizational structure. multinational enterprises (mnes) multinational enterprises are as old as the history of colonialism. they were first established to organize colonial expeditions by facilitating exploration and international trade. mnes engage in foreign direct investment by controlling and managing production or sales of goods and services in different countries. major features of mnes include their large size and global activities centrally managed by the parents firm. other characteristics include: facilitating export and import of goods and services embracing investment in foreign countries buying and selling licenses in foreign markets facilitating assembly of operations in foreign countries facilitating local production of foreign products mnes control and manage subsidiaries across national boundaries and operate in different national contexts (heidenreich, 2012). spero and hart (1999) posit that, multinational firms are business enterprises that maintain foreign direct investments and also uphold value-added holdings in more than one country. an enterprise is not truly multinational if it only operates in overseas or acts as a contractor to foreign firms. a multinational firm propels capital, technology, managerial talent and marketing skills towards sustainable performance in foreign countries. some mnes in nigeria are cadbury, nestle, unilever, pz, mtn, standard chartered bank and multichoice among others. mnes boost host countries’ assets, revenues, employment opportunities, transfer of technology as well as contribution to innovations and novelty. it can be noticed that, mnes are criticized based on their emphasis on foreign earnings maximization for their parent firm and less emphasis on the developmental goal of the host countries. figure 1: conceptual framework source: authors the conceptual framework indicates that, the three elements of organization structure employed for this study (product division structure, area division structure and matrix structure) affect strategy. strategy area division structure product division strure matrix structure volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.169 | http://emaj.pitt.edu moruff sanjo oladimeji, benneth uchenna eze, kazeem adeyinka akanni emerging markets journal | p a g e |65 theoretical review the two theories underpinning this study are the dynamic capabilities theory and the institutional theory. dynamic capabilities theory postulates that, speedy product innovation and appropriate responsiveness to market fluctuations is the major determining factor for organization’s success and those successful firms have the ability to effectively coordinate and redeploy internal and external competence. a dynamic capability is a source of competitive advantage over business rivals. organizations develop definite competences to respond to market dynamics, which are related to firm’s market position, business process, and opportunities. the theory posits that, firms’ internal and external resources are both sources of dynamic capabilities (kitenga & thuo-kuria, 2014). these internal and external resources are related to the firm’s structure and strategic choice. mnes usually develop internal and external competencies towards surmounting the business challenges in the host country. the institutional theory focus on the host country’s institutional environment (economic, political and socio-cultural institutions) vis a vis its similarity with the home country institutional environment (brouthers & hennart, 2007). it postulates that, the institutional environment of the host country vis a vis its similarity with the home country institutional environment determines the internationalization decisions of mnes. cui and jiang (2012) opine that, the process of obtaining regulatory approval and the interaction between mne and host country’s institutions affect mnes internationalization strategy. the combination of dynamic capabilities theory and institutional theory, which is the integration of internal and external competences of mnes also include the organization structure and strategy, as well as the institutional environment of the host country, where the mne is operating. this also tends to affect mnes strategic decision and structure. for instance, if the institutional environment is not friendly, the mne might use low capital entry strategy, like exportation, licensing and franchising, among others. this study adapts the dynamic capabilities theory as well as the institutional theory, as these theories capture the internal and external resources of firms, which include a firm’s structure and strategy. it equally considers the institutional environment of the host countries, which is an important consideration for multinational firms. iii. methodology this study employed survey research design in order to determine the effect of organization’s structure on the organization strategy of multinational enterprises (mnes) in nigeria. this was done by administering a structured questionnaire to junior and senior management staff of nestle nigeria plc, unilever nigeria plc and pz (cussons) nigeria plc. the target population for this study was 401 junior and senior staff of nestle nigeria plc, unilever nigeria plc and pz (cussons) nigeria plc. a sample of 296 junior and senior management staff of the three mnes was purposively selected. however, 283 questionnaires were returned. this brought the response rate to 95.61%. the research instrument (questionnaire) was rated using a 4 point likert scale of strongly disagree (1), disagree (2), agree (3) and strongly agree (4). some experts in the field of academics validated the instrument (questionnaire) and content validity index that is employed, through the independent assessment of six assessors. the instrument was assessed on two point scale (relevant and not relevant). content validity index, which is the extent to which an instrument adequately samples the research domain of interest, was employed to ascertain the validity of the instrument. the content validity index is (cvi) = n/n, where cvi represents content validity index, n represents the number of questionnaire items rated as relevant and n represents the total number of questionnaire items. this provided a value of 0.8459, which implied that the instrument measured what it was designed to measure (validity). a pilot study through test-retest method was equally conducted to test the consistency (reliability) of the instruments with pearson’s product moment correlation coefficient, which provided a cronbach’s alpha of 0.82. this indicated that the instrument is consistent (reliable). ordinary least square (ols) estimation technique was employed to test the regression model, with the aid of stata version 12, at 5% level of significance. statement of hypotheses h01: matrix structure does not significantly affect the strategy of multinational enterprises in nigeria. h02: product division structure does not significantly affect the strategy of multinational enterprises in nigeria. h03: area division structure does not significantly affect the strategy of multinational enterprises in nigeria. h04: combine organization structure elements do not have significant effect on the strategy of multinational enterprises in nigeria. model specification the model aggregates the elements of organizational structure. it is estimated to examine how these elements jointly affect the organizational strategy of multinational enterprises (mnes) in nigeria. the model addresses the main objective of the study, which is to examine the effect of organizational structure on the organization strategy of mnes in nigeria. the model specification is stated below: (i) iiii adspdsmsos   3210 ...... (ii) where: os represents organization strategy β 0 is the constant term β1, β2, β3 are the coefficient of the estimator β1, β2, β3> 0 ms= matrix structure pds= product division structure ads= area division structure is the error term for the apriori expectation, it is expected that global matrix structure, product division structure and area division structure will all have positive effect on the volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.169 | http://emaj.pitt.edu structure and strategies of multinational enterprises in nigeria page |66| emerging markets journal strategy of multinational enterprises in nigeria; hence the parameters of matrix structure, product division structure and area division structure should all have a positive sign. iv. findings and discussion table 1: regress strategy product division structure area division structure global matrix structure the results from table 1 above revealed that, organization structure has a significant effect on organization strategy (f stat 107.52* 0.000). the results also revealed that, organization structure accounts for 53% (adjusted r2= 0.5312) variation in organization strategy. the t-statistics indicated that, while product division structure and matrix structure positively and significantly affect organization strategy, area division structure does not significantly affect organization strategy. matrix structure has the highest effect on strategy implementation, which might be because matrix structure combines features of area structure and product structure as well as other organizational structures. the findings further reveal that, assigning operational responsibilities to managers covering a particular geographical area as well as allocating responsibility along product line, which are features of matrix structure, tend to enhance strategy implementation. v. conclusion, limitations and recommendations for future studies the study examines the effect of organization structure on organization strategy, by employing three out of five elements of organizational structure as identified by blackwell (1997); product division structure, area division structure and matrix structure. the findings revealed that, organization structure positively and significantly affects organization strategy (f stat 107.52* 0.000) and that organization structure accounts for 53% (adjusted r2= 0.5312) variation in organization strategy. however, out of the three elements of organization structure employed for this study, only product division structure and matrix structure positively and significantly affect organization strategy with tstatistics and p-value of 2.27 (0.024) and 12.64 (0.000) respectively, area division structure revealed an insignificant effect on organization strategy 1.10 (0.272). the empirical findings of this study provide evidence that organization structure significantly affects strategy implementation. it can therefore be concluded that, organization structure plays a significant role in strategy formulation and implementation in multinational firms in nigeria. specifically, the study concluded that matrix structure and product division structure are the most critical elements of organization structure driving organization strategy. the study contributes to the sparse literature examining the effect of organization structure on strategy formulation and implementation of multinational manufacturing enterprises in nigeria. the findings are consistence with the study by ali-atwi (2014). the study was conducted for multinational firms in nigeria’s manufacturing sector. its’ results might not be applicable to other local firms without international presence, as the structure of a local firm tends to differ from that of an international firm and the structure and strategy of a manufacturing firm tends to differ from that of a service firm. the findings might differr in other countries. therefore, the conclusion and recommendations are limited to manufacturing multinational firms in nigeria. the implication for practitioners is that matrix or mixed structure, which emphasizes efficiency in production, organizational learning and local responsiveness as well as combining product division structure, area division structure and other organizational structures are towards the enhancement of strategy implementation. top executives of multinational manufacturing firms should employ matrix organization structure by assigning operational responsibilities to managers covering a particular geographical area as well as allocating responsibility along product line towards better strategy implementation. researchers in nigeria should consider studying the relationship between structure and strategy of multinational firms in other sectors in nigeria, like the telecommunication sector where almost all of the global service for mobile communication (gsm) providers are mnes, or the banking sector that equally have so many mnes or the oil and gas sector, that have high mnes presence. this will help ascertain if the positive relationship between organization structure and strategy implementation found for this study is applicable to other sectors. researchers across the globe can also consider the relationship between organization structure and strategy implementation in manufacturing mnes in other climes, as this will help unravel the universal interaction between structure and strategy in manufacturing mnes across the globe. it is therefore recommended that, multinational manufacturing firms in nigeria should employ global matrix structure towards the enhancement of its organization strategy. this is because matrix structure has the highest effect on organization strategy implementation. product division structure can also be considered as it equally has a significant effect on organization strategy. further studies are required to develop new hypotheses, by considering other elements of organization structure. this is because, the three elements of organization structure employed for this study only account for 53% variation in organization strategy. therefore, 47% variation in organization strategy is accounted for by other factors not captured by this study. furthermore, other multinational firms in other sectors other than the manufacturing sector can be considered. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.169 | http://emaj.pitt.edu moruff sanjo oladimeji, benneth uchenna eze, kazeem adeyinka akanni emerging markets journal | p a g e |67 references adler, n.j. (1997). international dimension of organizational behavior (3rd ed). cincinnati: south west college publishing. al-atwi, a. (2014). strategy follows structure dynamically, researchgate review, 3(7). ansoff, h. (1990). corporate strategy: an analytic approach to business policy for growth and implanting strategic management. new jersey: prentice-hall. bartlett, c., & ghoshal, s. (1989). managing across borders: the transnational solution. harvard business school press, boston, ma. bartlett, c., & ghoshal, s. (2012). managing across borders: the transnational solution (2nd ed.). london: random house. belderbos, r., capannelli, g., &fukao, k. (2001). backward vertical linkages of foreign manufacturing affiliates: evidence from japanese multinationals. world development, 29(1), 189-208. blackwell, r.d. (1997). strategy, structure and performance of u.s-based multinational organization: a fit theory study. unpublished doctoral dissertation, university of north texas, usa. brickley, j., smith, c., zimmerman, j. l., & willett, j. (2002). designing organizations to create value: from strategy to structure. new york, ny: mcgraw-hill. brouthers, k.d., &hennart, j. (2007). boundaries of the firm: insights from international entry mode research, journal of management, 33(3), 395425. brown, r. (1998). electronics foreign direct investment in singapore: a study of local linkages in‘winchester city. european business review, 98(4), 196 –210. chitale, a. mohanty, e., & dubey, d. (2013). organizational behaviour: text and cases. new york: phil learning. cui, l., & jiang, f. (2012). state ownership effect on firms fdi ownership decisions under institutional pressure: a study of chinese outward investing firms. journal of international business studies, 43(3), 264-284. david, f.r. (2001). strategic management concepts & cases (8th ed.). prentice hall: new jersey. dunning, j.h. (1980). toward an eclectic theory of international production: some empirical tests. journal of international business studies 11(3), 9–31. dunning, j.h. (2008) multinational enterprises and the global economy, uk, edward elgar publishing limited. fayaz ali, s., rosman m., y. altaf, h., & jawad, h. (2012). a critical review of multinational companies, their structures and strategies and their link with international human resource management, journal of business and management, 3(5). heather, b. (2009). the strategies and structure of multinational firms. management science, 19 (3), 905-917. heidenreich, m. (2012). the social embeddedness of multinational companies: a literature review. socio-economic review, 549–579. lekkerkert, l.j. (2015) structure and strategy; researchgate review, 4(9). kitenga, g.m., & thuo-kuria, j. (2014). theoretical underpinnings of dynamic capabilities. european journal of business and social sciences,3(9), 181-190. li, x., & yeung, y. (1999). inter-firm linkages and regional impact of transnational expansion. new york: mcgraw. mainardes, e., joão, j, ferreira, m., & raposo, a. (2014). strategy and strategic management concepts: are they recognised by management students? business administration and management journal, 21(1). miozzo, m., yamin, m. & grimshaw, d. (2012). strategy and structure of service multinationals and their impact on linkages with local firms. the service industries journal, 8(4), 142-149. oyedijo, a. (2012). key concept in international business. lagos: molifin publishing. pol, a.& stephen, r. (2013). multinational firms and the structure of international trade; nber working paper. no. 18775. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.169 | http://emaj.pitt.edu structure and strategies of multinational enterprises in nigeria page |68| emerging markets journal raluca, d. r. (2015). growth strategies of multinational companies. economic insights review, 4(67), 143-141. rugman, a. (2010). reconciling internationalization theory and the paradigm. multinational business review, 18(2). spero, j., & hart, j. (1999). the politics of international economic relations. london, thompson wadsworth. webster, f. (1997), the future role of marketing in the organization, in reflections on the futures of marketing, donald r. lehmann and katherine e. jocz, (eds). cambridge, ma: marketing science institute. wheelen, t.l., & hunger, j.d. (2006). strategic management and business policy (10th ed.). new jersey: pearson, prentice hall. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu determinants affecting internal audit effectiveness prem lal joshi western regional centre (an institute of indian council of social sciences research), india | prem@acadjoshi.com abstract this study tries to identify the determinants that affect the effectiveness of internal auditing for listed firms in india. a sample of 300 listed companies was drawn. questionnaires were mailed to the head of audit department, internal audit managers, internal auditor and head of accounts of each company. the overall response rate was 28.3%. the results were derived by applying multiple regression method and the three determinants turned out to be significant. the three determinants are risk-based planning, usage of big data and analytics, and frequency of meetings of internal auditor (ia) with audit committee (ac) respectively. the model explains 42.8% of variations in the dependent variable (ia effectiveness). the study indeed encourages internal auditors to develop their core skills and competencies in the area of risk assessment and big data and analytics for delivering better services to the auditees, the board of directors and the ac members. the implications of these findings may be of importance to internal audit professionals, accounting professional bodies and the regulators. direction for future research is also provided. keywords: risk-based planning and guidelines, big data and analytics, internal audit and audit committee meetings, india new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.208 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.208 | http://emaj.pitt.edu prem lal joshi emerging markets journal | p a g e |11 determinants affecting internal audit effectiveness prem lal joshi i. introduction * organizations have been facing rapid changes in economic complexity, increased regulatory requirements, and emergence of digital technology in recent years. besides, the recent world-wide covid-19 pandemic have also affected them badly. in the past, the corporate scandals and the global financial crisis also created awareness in the public and regulatory bodies to give unique position to internal audit in corporate governances for internal assurance services (soh & bennie, 2011). according to the institute of internal auditors (iia, 2010), internal audit is viewed as a significant tool to control the governance and operations of the organizations. according to the researchers (ali & omri, 2016), ia function deals with financial control, compliance assurance and safeguarding of all types of assets. however, the contemporary ia functional areas have been focusing more on the added value of ia from all audit stakeholders, because the requirements of regulatory bodies have increased particularly with respect of risk management (cohen & sayag, 2010; erasmus & coetzee, 2018). the value creation function of contemporary ia depends on how effectively ia is maintained by the organizations and there is need to measure the achievements of ia in terms of effectiveness and efficiency. the term „effectiveness‟ has been defined as “the capacity to obtain results that is consistent with target objective” (arena & azzone, 2009). while, bednarek (2018) points out the following: “if the ia quality is maintained, it will contribute to the adherence of the process and operations to the regulation or standard, and thus ia contributes to effectiveness of the auditee.” there is plethora of studies on the concept of ia effectiveness and a number of literature reviews that discusses determinants of iae (badara & saidin, 2013; lenz, sarens & jeppesen, 2018). the influential factors of ia effectiveness are to be quantified and operationalized. considering the ia through its value-added services, until now there are no absolute or concrete metrics in existing literature to measure ia effectiveness. additionally, there is lack of consensus among scholars to provide the best framework for ia effectiveness. this * the author is grateful to indian council of social sciences research, india for awarding a senior fellowship to the author for conducting this research work. varies depending on different organizations, industries, and countries context. therefore, this research discusses the determinants that are considered to have an influence on the effectiveness of ia as are studied in the literature. both researchers and practitioners do accept that an effective ia contributes value to the entities by ensuring the adherence to the established procedures, laws, and regulations. additionally, ia provides opportunity to improve existing processes (yee et al., 2008). according to erasmus and coetzee (2018), stakeholders are concerned with the widening gap that exists between the expectations of different stakeholders. such concerns are usually found after the audit is conducted and reports whether the audit was effective or not (bender, 2006). furthermore, bender (2006) suggested that quantifying the effectiveness might be peroxided by evaluating the factors that may influence the effectiveness of ia. therefore, this study provides insights into factors that influence ia effectiveness, so the focus of this study is on providing insights into factors that can enhance or detract from ia effectiveness. the rest of the paper is divided into six sections. section two discusses prior literature review, while sections three and four contain research framework and research methodology respectively. section five discusses the study results and finally section six concludes the research findings and provides implications of the study findings. ii. literature review it is posited by many researchers in the academic research that ia effectiveness has been largely unaddressed, therefore hermanson and rittenberg (2003) encouraged future research. arena and azzone (2007) suggested that, future studies could research the problem of the effectiveness of internal audit units in much more detail. in this context, pwc (2010) suggests that, “internal audit must seize opportunities to enhance its relevancy.” providing evidence of added value and effectiveness is one way to be perceived as a legitimate function in the eyes of major stakeholders. effectiveness is viewed as the most important word for internal auditing. it appears that „risk-based planning‟ is a fairly new factor to internal auditing function. often, ia effectiveness is referred as a “risk-based concept that helps the organization to achieve its objectives by positively influencing the quality of corporate governance” (lenz, 2013). in a survey conducted by iia (2010), 77% of the respondents stated that the current role of internal auditor is to informally to provide consulting and advice on risk management practices while 40% stated that ia provides an independent assurance on risk management. the findings support the prior study by castanheira et al. (2009) in the context of portugal. the study examined five company-specific factors associated with the adoption of risk-based auditing and its relationship with the role of internal auditing in enterprise risk management. their findings reveal that 82 percent of entities use a risk-based approach in annual audit planning; while only 31 percent applied it in planning each audit engagement. similarly, dejnaronk et al. (2015) in their study found that, the use volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.208 | http://emaj.pitt.edu determinants affecting internal audit effectiveness page |12| emerging markets journal of a risk-based audit plan has a high influence to the internal audit function effectiveness in the context of thailand. iia standards state that, a risk-based audit plan comes from the risk management framework, including using risk appetite levels set by management for the different activities or parts of the organization (iia, 2012). risk-based audit activities have stronger support for corporate governance stakeholders who are senior management and the board of directors including the audit committee (sarens et al., 2012). prior research have documented support to risk-driven approach by ia (e.g. griffiths, 2006; pelletier, 2008). internal auditors perform their own risk assessment based on the objectives of the activity under review (pelletier, 2008). it is also argued that, the ia perspective has been changed from traditional focus on the compliance and monitoring against certain standards/regulatory requirements into a new perspective of organization‟s performance (allegrini et al., 2006; arena & azzone, 2009). risk-based planning is viewed as a changed perspective which assists organizations to understand the risks that can hinder them in reaching their objectives (arena & azzone, 2009). by understanding their risk profile, companies can define certain controls to manage their risks and ultimately improve their processes and enhance ia effectiveness. in this context, risk-based audit activities have stronger support for corporate governance stakeholders who are senior management and the board of directors including the audit committee (sarens et al., 2012). additionally, cioban (lucan) et al., (2015) in romanian context report that an early and accurate identification of the risks influences the internal audit effectiveness. internal audit can be a valuable resource for the ac, because disclosures suggest a possible underemphasis of internal audit. spira (1998) argued that, one benefit of ac establishment is the raising of the status of the internal audit function. the iia (2004) strongly insists that the chief audit executive (cae) should report functionally to the ac, which is critical to good corporate governance. frequent meetings of ia with ac enable the ac to regularly evaluate the iaf‟s objectivity and independence of judgement; and monitor and assess the role and effectiveness of the internal audit function. raghunandan et al. (1998) argue that, the information asymmetry between audit committees and management is more likely to be reduced when there is high-quality interaction between ac and ia. regular meetings between them make it more likely that the ac remains informed and knowledgeable about relevant accounting and auditing issues. bishop et al. (2000) give an overview of more specific (theoretical) roles of internal auditors to support the audit committee. providing information to ac enables ac in its evaluation of whether the company has satisfied its control objectives, monitor the company‟s control environment, and providing information that will help the ac to monitor key financial and business risks. thus frequent meetings enhance the ia effectiveness. similarly, arena and azzone (2009) in italian context report that it is possible that the structural characteristics of internal audit impact its effective work. the increase in internal audit effectiveness is contributed by the participation of ac in the internal audit tasks. furthermore, the ia and ac are two different control bodies. the co-operation and frequent meetings between them is important for both parties as it is considered to have an impact on the effectiveness of the ia activities through exchanging of data and information (alshbiel, 2017; bednarek, 2018). the use of technology-based audit techniques has also become an important part of the internal audit function. big data and analytics (bda) is one of such techniques. big data can be explained by five attributes namely as volume, velocity, variety, veracity and value. volume refers to a large amount of data; velocity to the high speed of data; variety reflect the variety of different data sources; veracity to the integrity of the information; and value means converting data to something useful (cao et al., 2015; zhang et al., 2015). ia may determine an appropriate plan to provide coverage of big data risks and controls. internal auditors may also leverage big data solutions in support of their data analytic efforts for audit projects. bda enables auditors testing complete sets of data, rather than just testing samples (murphy & tysiac, 2015). therefore, big data is forming part of the internal (and external) audit process, supporting the identification, management and reporting of risk, as well as the effectiveness of internal controls (sandwith, 2017). in this context, bierwirth (2019) states the following: “data analytics and “big data” have become a game changer for internal auditing, as firms search for opportunities to provide more value to clients and respond to new regulations and increased pressure from stakeholders. integrating data analytics into the internal audit approach isn’t easy, but the investment of time and money will help firms and businesses stay on the cutting edge and remain valuable in a dynamic business environment”. kaya et al. (2018) found that, bda increases the effectiveness of internal audit. using analytics in internal control, risk management and fraud detection have many benefits in identifying anomalies. alles and gray (2018) also stress the positive effect of implementing bda in auditing and emphasize that bda could be a way to increase the likelihood of detecting fraud. similarly, in a survey by protiviti (2015) on changing trends in ia and use of advanced analytics, reports that more ia analytics functions appear intent on having access to business data when they need it. tang et al. (2017) investigate the types of tools internal auditors use, given the large amounts of data available to them for analytic purposes. the findings reveal that chief audit executives (caes) value professional certifications and the use of data analytics in the ia function and they employ data analytics at different times and for different purposes. deloitte (2018) survey of cia finds that they apply analytics during the fieldwork stage of the audit. in case studies, it is found that data analytics have enabled internal audit to increased sample sizes to 100% in various audits, providing greater levels of assurance. joshi and marthandan (2019) make a strong case for the applications of big data and analytics in continuous internal auditing. last but not the least, yoon et al., (2015) posit that, big data plays an important role in auditing because it complements and accompanies traditional evidence with sufficient, reliable, and relevant information. use of big data decreases auditors' dependency on client data and also provides an https://www.financialdirector.co.uk/category/risk-and-economy/audit/ volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.208 | http://emaj.pitt.edu prem lal joshi emerging markets journal | p a g e |13 independent benchmark to evaluate internal audit evidence. thus, it may enhance the effectiveness of ia. iii. research methodology based on the above description of prior literature, the following hypotheses are proposed: h01: there is an association between risk-based plan and guidelines used by internal auditors and effectiveness of ia. h02: a frequent meeting of ia with ac enhances the effectiveness of ia. h03: the usage of bda by ia is associated with ia effectiveness . the research proposes the following regression model: y (iae) = β0 + β1 (bda) + β2 (risk-based plan) + β3 (freq. of interaction of ia with ac) + β4 (log roic) + ε where; dependent variable y = internal audit effectiveness (measured by likert scale 1-5) independent variable β0 = constant β1 = big data and analytics (measured by likert scale 1-5) β2 = risk-based plan and guidelines (measured by likert scale 1-5) β3 = frequency of interactions between internal auditor and audit committee (measured by likert scale 1-5) β4 = return on invested capital (financial data: operating profit/capital employed) ε = error term in the light of the above literature review, formulation of hypotheses and the model, the framework is developed as indicated in figure 1. figure 1. model framework a proportionate progressive random sampling method was used in the present study. the nifty500 listed companies was the universe for sample source. based on 2018 market capitalization for 2018, a total of 252 companies were sent questionnaire or online link. the sample companies represented various industries such as manufacturing, information technology, trading, banking and financial services. the study was conducted during january-april 2020. after working on outliers and excluding incomplete responses, finally 60 responses were analyzed for the results. questions in the questionnaire were measured using likert scale of 1 to 5. iv. discussion of results in the exploratory factor analysis (efa), the researcher used the varimax rotation, the principal component extraction method to get the factor loading. results are presented in table 1. table 1: results of factor loading, kaiser-meyerolkin (kmo) and reliability test the collected data were analysed using factor loading, kpo and reliability test which are presented in table 1. it is clear that, the questions included in the study to indicate the independent variables meet the required parameters. the reliability of the measures was assessed by cronbach‟s alpha test and the values are greater than 0.70 for all the independent variables “frequent meetings of ia with a”, “risk-based planning” and “usage of bda”. on the other hand, it is clear that kmo values are greater than 0.5 with a significant bartlett‟s test (p < 0.01). descriptive statistics i.e., mean and standard deviation for the dependent and independent variables are presented in table 2. the number of responses (n) is 60. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.208 | http://emaj.pitt.edu determinants affecting internal audit effectiveness page |14| emerging markets journal table 2: descriptive statistics mean std. deviation n iae 4.540 0.420 60 bda 4.187 0.658 60 log roic 0.980 0.340 60 risk-based plan and guidelines 4.390 0.545 60 frequent meetings of ia with ac 4.290 0.698 60 table 3: correlations we performed pearson correlations on the independent and dependent variables and results are shown in table 3. results show that, by and large a correlation among independent variables is on lower side. the highest correlation is 0.331 between bda and riskbased planning as well as guidelines. this also indicates absence of any multicollinearity problems in the study. table 4: regression coefficients dependent variable: internal audit effectiveness r: 0.654 r square: 0.428 adjusted r square: 0.386 f: 10.288, sig: .000 a perusal of results related to regression coefficients are presented in table 4. the sign is positive for all independent variables. it is interesting to note that, three independent variables are explaining the effectiveness of ia. the variables are big data and analytics bda (t = 2.016; p < 0.05), risk-based plan and guidelines (t = 3.010; p < 0.001) and frequent meetings of ia with ac (t = 3.018; p < 0.001). all the three independent variables are positively significant in explaining the effectiveness of ia. this means that, all three independent variables have a positive effect on iae. the f value is very high and significant, which implies that the regression model is significant at 0.01 level. the r square value shows that, 42.8 percent of variations in dependent variable (iae) can be explained by the independent variables. there is no multicollinearity problem in the data set as the vif values are low. regarding relationships between the dependent and independent variables, two main findings are worth for further analysis. in other words, regression results show very strong support for all the three hypotheses. risk-based internal auditing allows internal auditor to provide assurance to the board of directors that risk management processes are managing risks effectively. zacchea (2003) suggested that, the risk-based audit plan may be improved by risk management framework. this factor can focus and assists ia to target audits that are highly productive in adding value and maximizing the utilization of scarce resources. the positive and significant relationship of “frequent meetings of ia with ac” provides an insight that ia function is an important information provider to the ac which may be considered useful for strengthening corporate governance practices. iia (2004) suggested reporting by the chief internal auditor (cia) to the ac for discussing on confidential matters and strengthening the corporate governance practices. they may also enable the organization to maintain organizational independence of ia from management. the bda also turned out to be a positive and significant determinant in our study despite very limited prior evidence. this suggests that, the integration of bda into the internal audit may help to mitigate compliance and reputational risks. additionally, it may also lead to better financial reporting and insights to ultimately drive better decisions and actions within an organization to create strategic value (ernst & young, 2015). additionally, ia can use big data to help highlight red flags like significant control weaknesses, potential fraud risks, and pick up emerging trends (sandwith, 2017). internal auditors may use bda to develop a good understanding of the audit process that enhances internal audit effectiveness. v. conclusions and recommendations for future research the recent global unprecedented events have brought the corporate sector operations at the global level at standstill. the corona virus spread and increasing war clouds are impacting economies and corporate sector companies‟ performance. these events are forcing ia function to re-think in changing their approaches and methodologies for investigating risks and control issues in the organization. this study is especially important because – firstly, it may convey policy makers some information on the major determinants of ia effectiveness in indian companies. this should ensure that, the scarce resources are effectively utilized for robust organization performance. secondly, the findings would add to acute lack of literature on the subject matter in indian context. the present study elucidates the factors that will help the ia effectiveness in terms of “frequent meetings of ia with ac”, using “big data analytics” and “risk-based planning”. considering these factors by internal auditors in the conduct of their audit of the operational efficiency, control, and risk assessment enable management to review business continuity planning. this contributes to the ability of the ias to perform an audit approach which improves the volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.208 | http://emaj.pitt.edu prem lal joshi emerging markets journal | p a g e |15 effectiveness of the internal audit. furthermore, through interactions with ac, ia needs to independently assess the going concern assumption. asare (2009) opines that, the modern concept of internal auditing can be identified as dealing with the evaluation and improvement of risk management, control and governance processes. it is to be noted that, this study is considered the first one in indian context that investigates the determinants of ia effectiveness. it contributes to the indian internal auditing profession in addition to providing information to important accounting professional bodies in india viz., the institute of internal auditors (india), the institute of chartered accountants of india (icai) and the institute of cost and management accountants of india (icmai). the findings and implications of this empirical study may be for non-management level, management level, chief of ia function, and the board of directors. needless to state that an understanding of the main determinants affecting the ia effectiveness and the framework may help internal auditors to improve the efficiency, efficacy and effectiveness of ia function. regulatory body should pay more attention to the issue of maintaining an ia function mandatory. future research should investigate the effects of covid-19 on internal audit effectiveness as covid19 might have changed the going concern issues of the organizations. new variables such as usage of data analytics, mediation effect of ia and interactive skills on the effectiveness of ia may also be examined. these determinants may also be examined using alternative research methods such as mixed methods and case studies approach in specialized industries. references alles, m., & gray, g. (2018). the pros and cons of using big data in auditing: a synthesis of the literature and a research agenda. rutgers. pp. 1-37. allegrini, m., d‟onza, g., paape, l., melville, r., & sarens, g., (2006). the european literature review on internal auditing. managerial auditing journal, 21(8),pp. 845-853. alshbiel, s. o. (2017). internal auditing effectiveness success model: a study on jordanian industrial firms. in proceedings of the second american academic research conference on global business, economics, 26, finance and social sciences. pp. 978–101. arena, m., & azzone, g. (2007). internal audit departments: adoption and characteristics in italian companies, international journal of auditing, 11(2), pp. 91-114. arena, m., & azzone, g. (2009). identifying organizational drivers of internal audit effectiveness. international journal of auditing, 13, pp. 43–60. asare, t., (2009). internal auditing in public sector: promoting good governance and performance improvement. international journal on governmental financial management, 3(1), pp. 15-27. badara, m. s., & saidin, s. z. (2013). the journey so far on internal audit effectiveness: a calling for expansion. international journal of academic research in accounting, finance and management sciences, 3(3), pp. 340– 351. bednarek, p. (2018). factors affecting the internal audit effectiveness: a survey of the polish private and public sectors. in efficiency in business and economics, pp. 1–16. bender, r. (2006). what is an effective audit and how can you tell? accessed 3 august 2020. https://dspace.lib.cranfield.ac.uk/handle/1826/5 672 bierwirth, m. (2019). improving the internal audit function through enhanced data analytics. september 13, accessed on 28 july 2020. https://www.surgentcpe.com/blog/improvinginternal-audit-function-through-enhanced-dataanalytics. bishop, w.g., hermanson, d.r., lapides, p.d., & rittenberg, l.e. (2000). the year of the audit committee, internal auditor, 57, pp. 46-51. cao, m., chychyla, r., & stewart, t. (2015). big data analytics in financial statement audits. accounting horizon, 29(2), pp. 423–429. castanheira, n., rodrigues, l.l., & craig, r., (2010), factors associated with the adoption of riskbased internal auditing, managerial auditing journal, 25 (1), pp. 79–98. cioban (lucan), a.n., hlaciuca, e., & zaiceanua, a.m. (2015). the impact and results of the internal audit activity exercised in the public sector in romania. procedia economics and finance, 32, pp. 394 – 399. cohen, a., & sayag, g. (2010). the effectiveness of internal auditing: an empirical examination of its determinants in israeli organizations. australian accounting review, 20(3), pp. 296307. dellai, h., ali, m., & omri, b., (2016). factors affecting the internal audit effectiveness in tunisian organizations. research journal of finance and accounting, 7(16), pp.2222–2847. https://dspace.lib.cranfield.ac.uk/handle/1826/5672 https://dspace.lib.cranfield.ac.uk/handle/1826/5672 volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.208 | http://emaj.pitt.edu determinants affecting internal audit effectiveness page |16| emerging markets journal dejnaronk j., mcclelland., r.j., & mujtaba, b.g., (2015). factors influencing the effectiveness of the internal audit function in thailand, conference: business and social sciences research conference: research for development, bangkok thailand. accessed 2 august 2020. https://www.researchgate.net/publication/2860 13042_factors_influencing_the_effectiveness _of_the_internal_audit_function_in_thailand. deloitte. (2018). the innovation imperative: forging internal audit's path to greater impact and influence. accessed 3 august 2020. https://www2.deloitte.com/us/en/pages/audit/ar ticles/global-chief-audit-executivesurvey.html#:~:text=deloitte's%20global%20s urvey%20report%2c%20the,influence%20wit hin%20their%20broader%20organization. erasmus, l., & coetzee, p., (2018). drivers of stakeholders‟ view of internal effectiveness, managerial auditing journal, 33(1), pp.90114. ernst & young (2015) big data and analytics in the audit process: mitigating risk and unlocking value. accessed 1 august 2020. https://www.ey.com/publication/%20vwluas sets/ey-big-data-and-analytics-in-the-auditprocess/$file/ey-big-data-and-analytics-inthe-audit-process.pdf griffiths, d. (2006). risk-based internal auditing: an introduction. accessed 3 august 2020. https://www.internalaudit.biz/files/introduction /rbiaintroduction.pdf hermanson, d.r., & rittenberg, l.e. (2003). internal audit and organizational governance, institute of internal auditors research foundation. iia. (2004). about internal auditing, the institute of internal auditors. accessed 3 august 2020. https://global.theiia.org/about/aboutinternalaud iting/pages/about-internal-auditing.aspx. iia., (2010). measuring internal audit effectiveness and efficiency. ippf practical guide. institute of internal auditors (iia) report. iia., (2012). international standards for the professional practice of internal auditing (standards), the institute of internal auditors. accessed 3 august 2020. https://na.theiia.org/standardsguidance/public%20documents/ippf%202013 %20english.pdf iia., (2019) data analytic: is it time to take the first step? accessed 30 july 2020. https://www.iia.org.uk/media/1689102/0906iia-data-analytics-5-4-17-v4.pdf joshi, p.l., & marthandan, g. (2019). continuous internal auditing: can big data analytics help? international journal of accounting auditing and performance evaluation, 16(1), pp. 25-42. kaya, i., akbulut, d.h., & ozoner, k. (2018). big data analytics in internal audit, press academia procedia (pap),7, pp. 260-262. lenz, r.. (2013), insights into the effectiveness of internal audit: a multi-method and multiperspective study, dissertation at the université catholique de louvain louvain school of management research institute. accessed 5 august 2020. https://fdocuments.in/document/2013-01doctoral-thesis-rainer-lenz.html. lenz, r., sarrens, g., & jeppesen, k.k., (2018) in search of a measure of effectiveness for internal audit functions: an institutional perspective, edpacs the edp audit, control and security newsletter 58(2), pp. 1-36. murphy, m. l.,& tysiac, k., (2015). data analytics helps auditors gain deep insight, journal of accountancy. accessed 3 august 2020. https://www.journalofaccountancy.com/issues/ 2015/apr/data-analytics-for-auditors.html pelletier, j., (2008). adding risk back into the audit process, internal auditor, 65(4), pp. 73 76. protiviti., (2015). changing trends in internal audit and advanced analytics. accessed 3 august 2020. https://www.protiviti.com/sites/default/files/uni ted_states/internal-audit-data-analyticswhitepaper-protiviti.pdf pwc. (2010). a future rich in opportunity internal audit must seize opportunities to enhance its relevancy. pricewaterhousecoopers. accessed 3 august 2020 (03.08.2020) https://www.pwc.com/mu/en/services/pwc_201 0_global_internal_audit_survey.pdf raghunandan, k.r., rama, d.v. & scarbrough, d.p., (1998), accounting and auditing knowledge level of canadian audit committees: some empirical evidence , journal of international accounting, auditing and taxation, 7 (2), pp. 181-194. sandwith, l., (2017). big data & internal audit: what fds need to know. accessed 3 august 2020. https://www.financialdirector.co.uk/2017/05/30 /big-data-and-internal-audit-what-fds-need-to know/#:~:text=internal%20audit%20can%20us e%20big,based%20on%20better%2dinformed %20insight. https://www.researchgate.net/scientific-contributions/2121070147_dejnaronk_j https://www.researchgate.net/profile/robert_mcclelland https://www.researchgate.net/profile/dr_mujtaba https://global.theiia.org/about/about-internal-auditing/pages/about-internal-auditing.aspx https://global.theiia.org/about/about-internal-auditing/pages/about-internal-auditing.aspx https://global.theiia.org/about/about-internal-auditing/pages/about-internal-auditing.aspx https://global.theiia.org/about/about-internal-auditing/pages/about-internal-auditing.aspx https://global.theiia.org/about/about-internal-auditing/pages/about-internal-auditing.aspx https://na.theiia.org/standards-guidance/public%20documents/ippf%202013%20english.pdf volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.208 | http://emaj.pitt.edu prem lal joshi emerging markets journal | p a g e |17 sarens, g., abdolmohammadi, m., & lenz, r., (2012) factors associated with the internal audit function's role in corporate governance, journal of applied accounting research 13(2), pp, 191-204.. shu, f., li, q., wang, q., & zhang, h. (2010). measurement and analysis of process audit: a case study. in international conference on software process, 6195, pp. 285–296. soh, d.s.b. and martinov-bennie, n. (2011), the internal audit function: perceptions of internal audit roles, effectiveness, and evaluation, managerial auditing journal, 26 (7), pp. 605-622. soh, d.s.b., & martinov-bennie, n., (2015). internal auditors‟ perceptions of their role in environmental, social and governance assurance and consulting, managerial auditing journal 30(1), pp. 80-111. spira, l.f. (1998) an evolutionary perspective on audit committee effectiveness, corporate governance: an international review, 6, pp. 29-38. tang, f., norman, c.s., & vendrzyk, v.p., (2017). exploring perceptions of data analytics in the internal audit function, behaviour & information technology, 36 (11), pp. 11251136. yee, c.s.l., sujan, a., james, k., & leung, j.k.s. (2008). perceptions of singaporean internal audit customers regarding the role and effectiveness of internal audit, asian journal of business and accounting, 1(2), pp. 147-174. yoon, k., hoogduin, l.a., & zhang, li. (2015). big data as complementary audit evidence, accounting horizons, 29(2), pp. 431-438. zacchea, n. m., (2003). risk-based audit target selection can increase the probability of conducting value-added audits. the journal of government financial management, 52, (1), pp.22-28. zainal abidin, n.h., (2017), factors influencing the implementation of risk-based auditing, asian review of accounting, 25 (3), pp. 361-375 zhang, j., yang, x., & appelbaum, d. (2015). towards effective big data analysis in continuous auditing, accounting horizon, 29(2), pp.469– 476. https://www.researchgate.net/profile/gerrit_sarens?_sg%5b0%5d=de9tullwwrooygg8tk3i7ptrqc0ct08erkaen0ipcshdp25fwylotwagq-c_9ldjw5qs0cm.ddpsmqvc577e7xmt909fkpdy_ugcgs7ptwwjmkd9tq_s3xhibmquef59ghnxmz8yaevyet0ll_1c8z0hvfbvga&_sg%5b1%5d=xcfjpovv834vz8ih263w-dq9vphgkszvoaze69p8rw9e_aj1mbr8dvunciuhulbscu16zqq.kxht3uscuajw8g2xhl8xuybx3r9w6-s6q2zau_eyegc2_jq1c2mm8yw1cl5qy7yoksa5wspmdc3-rvyfnhlgfa https://www.researchgate.net/journal/0268-6902_managerial_auditing_journal https://www.researchgate.net/journal/0268-6902_managerial_auditing_journal https://www.emerald.com/insight/search?q=nor%20hafizah%20zainal%20abidin https://www.emerald.com/insight/publication/issn/1321-7348 https://www.emerald.com/insight/publication/issn/1321-7348 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the influence of oil price uncertainty on economic activities in nigeria samson ogege university of lagos, nigeria | ogegesamson@yahoo.com tarila boloupremo university of africa, toru-orua, nigeria | taribolou@yahoo.com abstract this paper seeks to appraise the uncertainty of oil price influence on the activities of nigerian economy with regard to human development in nigeria. the research utilized the annual time series data spanning between 1981-2018, and the stationarity of the observed variables was tested by carrying out a unit root test and the stationarity of most of the observed variables were revealed at first difference. the secondary data employed were analyzed with the aid of least square technique of data analysis to assess the association between the observed variables. in response to the outcomes of the analysis, it was revealed that crude oil price positively and insignificantly influences life expectancy, but significantly influences consumption per capital and contrarily, it revealed negative and insignificant influence on physical quality of life and education index. it was inferred by the study that, there is existence of a comparative association of oil price with the indicators of nigerian economic development. however, there is divergence of influence of the mechanisms of economic attributes as well as performance indicators. the study recommends that, a strict measure of monetary policy should be adopted by the government to regulate the rates of interest and inflation in the economy on a regular basis. keywords: crude oil price, economic development, human development, life expectancy, performance indicators new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.195 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.195 | http://emaj.pitt.edu samson ogege, tarila boloupremo emerging markets journal | p a g e |19 the influence of oil price uncertainty on economic activities in nigeria samson ogege tarila boloupremo i. introduction for decades, it has become a tradition for the nigerian economy to be exclusively dependent on crude oil and it has as well become a yardstick for determining the national budget and planning, revenue sharing and the allocation of capital. oil price shock is viewed as the unstable movement of global prices of oil. it is quite significant to assert that, the determinant factors of oil price are exogenous in nature and are beyond the control of nigeria. thus, it causes stagnation in the naira value and that nigeria as a country does not have the potential to independently control the causes of the upward and downward movement in the oil price. due to the significant role crude oil plays in revamping and resuscitating the country’s economy as well as its political fate, it has become the main source of generating revenue for the nigerian economy. the fluctuations in the oil price have had a resultant multiplier effect on the activities of country’s economy. crude oil’s influence on the economic activities of nigeria has been ascertained to be positive and negative. its influence is positive in the sense that it presents a lot of benefits to the country in diverse means, and has negatively ended up to be a curse (ogwumike and ogunleye, 2008). in comparison with other african nations’ economy, the economy of nigerian has maintained a substantial track record of growth via extensive free trade as well as privatization. the consumption of petroleum as well as total energy within the west african subregion are continually influenced and dominated by the nigerian economy. notwithstanding, being a net exporter of crude oil, nigeria keeps on relying exclusively on the returns from crude oil and as a matter of fact, it is anticipated to be affected or influenced by the shock in the global price of oil. based on the stand point of the consumer, any increase in the price of oil would in return breed inflation on the ground that, the prices of commodities manufactured by petroleum products increase. furthermore, there will be a general increase in the cost of production as well as transportation among others. in view of the perspective of the producer, most firms are faced with increased cost production/operation which has affected their profitability level adversely and has resulted in a decrease in firms’ productivity, which by implication has posed adverse effects on investment and employment as well as breed inflation. several empirical studies have adopted volatility to measure uncertainty in the price of oil. elder and serletis (2010) and recently in the studies of baumeister and kilian (2016) as well as demirbas et al. (2017), oil prices volatility was evidently documented. furthermore, it has been revealed in the research of junior and goodness (2018) as well as alley et al. (2014) that, the uncertainty in the price of oil significantly influences economic activity and it is anticipated that these significances fluctuate between oil exporting and importing nations. the problem of this study takes into cognizance the essence of understanding the oil price’s influence on four basic economic components (life expectancy, education, physical quality of life, and consumption per capita) in nigeria. therefore, the researcher attempts to appraise the existence of association between oil price and index of economic development. the focal point of this study is to appraise the uncertainty of oil price influence on the activities of nigerian economy with regard to human development in nigeria. however, the specific objectives are to ascertain how oil price uncertainty influences life expectancy in nigeria, investigate the effect of the uncertainty of oil price on education index in nigeria, appraise the oil price uncertainty’s influence on consumption per capital in nigeria and assess how oil price uncertainty impacts on physical quality of life index in nigeria. ii. literature review based on the structural theory, the volatility of the macroeconomic variables could be accountable for the structural shocks in the economy for instance, when there is sudden huge amount of variations in the prices of oil and food (sommer, 2002). there is however, a stabbing dissension amidst the structural economist regarding the amplitude influence of structural shocks. it was contended by a faction of the structural school that, the supply shocks are only experienced in the short-run and have only a temporary influence on the macroeconomy (ball and mankiw, 1995). furthermore, they contended that since the onus is on the policy makers to formulate and execute policies that will promote suitable environment for economic activities in the long term, the unfavorable pressures from the prices of oil as well as food that are extremely erratic in the short-run should not be responded to by the policy makers so as to prevent the economy from driving into recession. instead, they should concentrate on how “the second-round effect” would be prevented which is liable to take a long time and could lead to recession (armando, 2009). according to fischer (1985), the supply shock in itself does not need response from the policy makers if the workers do not resist the real wage. according to this school of thought, the strategies of the resource based growth would only retard the growth of the economy. for a country to achieve sustainable growth and development, it is quite expedient for her to be industrialized and as well diversify its economy into manufacturing sector. they stressed on the significance of achieving sustainable growth and inferred that economic growth can only be attained in the short run via resource dependency. a lot of empirical research had been conducted in order to assess how the oil price uncertainty influences the economic activities of a country. in g7 countries, abebe et al. (2019) executed a study on the association of oil prices with the uncertainty volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.195 | http://emaj.pitt.edu the influence of oil price uncertainty on economic activities in nigeria page |20| emerging markets journal of economic policy employing monthly data that span between 1997-2018 and also adopted the technique of a nonparametric panel data that permits the trend as well as the coefficient functions to transform as unknown timevarying functional dimensions. based on the analysis, the oil prices’ influence on the uncertainty of economic policy was revealed to be time-varying. the outcome of the analysis also indicated that, the negative oil price estimated time-varying coefficient function in the period in which large increase in the global aggregate demand for oil hike the price of oil. in the final analysis, the findings of this study are significant to endogeneity as well as specifications alternative. in relation to the study of adeleke et al. (2019), nigeria is considered as one of the major net oil producers in africa. the influence of the price shocks of crude oil on the macroeconomic performance was ascertained spanning from 1980-2016. in the course of this study, the oil price in each quarter was compared with the optimum value indicated during the preceding four quarters, which is adopted to obtain the sharp upward and downward movement in the oil price for capturing the fluctuation in the price. the study employed the analysis of a panel structural vector autoregression model. in view of the outcomes of the analysis, it was indicated that the output’s reaction to sharp upward and downward movement in the oil price vary and also revealed that sharp downward movement in the price of oil is accompanied by structural inflation to a greater extent than monetary inflation as a result of the significant decrease in both outputs as well as investment. similarly, using the egarch model to estimate the series of oil price variation in iraq, munaf et al. (2018) collected data from opec official statistics on oil prices and hdi. they also applied the technique of ardl bound test for ascertaining the association of hdi with the fluctuating price of oil in the long run. the outcomes of the analysis exposed the existence of a long run association between the observed variables in the study. furthermore, there is evidence of a significant influence on human development index due to the instability in the price of oil. however, junior and goodness (2018) ascertained the association of the shocks in oil price uncertainty with key indicators of macroeconomics of a net oil importing nation (south africa) by adopting the monthly data spanning between 1990-2015. the study engaged the technique of structural vector autoregressive by integrating the realized fluctuation as the oil price uncertainty’s indicator in determining influence of oil price uncertainty in the short run. in response to the analysis of the generalized impulse response functions, the shock of oil price uncertainty was revealed to influence negatively and persistently over time. hence, the analysis of svar shows the significant impact of oil prices exogenetic on the south africa economy when there is existence of heavy impact in oil price uncertainty. in the context of disaggregated measures of industrial manufacturing which include indexes for industrial manufacturing, energy and non-energyassociated special aggregates, elder (2018) revealed that, the influences of the fluctuation in the price of oil are majorly centred on the activities associated with the primary energy generation as well as the oil and gas drilling in relation to other energy-associated market groups. additionally, the fluctuation in the oil price impacts a wide range of special aggregates amidst the non-energy associated market groups that also include the aggregates sorted by consumer goods as well as business equipment. ishmael et al. (2017) appraised the influence of variations in the prices of crude oil on economic development between 1986 and 2015. the study employed the time series data collected from the statistical bulletin of central bank of nigeria and were analyzed using the techniques of johansen’s cointegration test as well as the vector error correction model. in view of the analysis of the data, there exist a co-integration amidst the observed variables while the outcomes of the empirical analysis indicates that the coefficients of ect possesses negative signs and are significant in all vecms. based on the outcomes of the analysis, it was inferred that the country should adopt the policy of floating exchange rate, diversify her economy, build more refineries as well as overhaul the existing ones. similarly, umar et al. (2017) carried out a study in nigeria investigating the association of oil price with economic development using the annual time series data spanning between 1974-2014. the study adopted the dickey-fuller generalized least squares unit roots test to examine the stationarity of the observed variables and the granger causality test was conducted to determine the direction of causality. results revealed the nonexistence of a long-run association amidst the observed variables. notwithstanding, the granger causality test shows a significant causation of unidirectional that runs from the price of oil to economic development in the short run. in a similar vein, the existence of a significant positive unidirectional causation that flows from human capital to economic development was revealed. inclusively, a significant positive unidirectional causation that runs from the price of oil to total exports was indicated by the findings. hence, it is recommended that the price of oil should be stabilized so as to attain high rate of economy growth in the short run. mhamad and saeed (2016) appraised the influence of oil price on economic development in iraq employing the secondary data spanning between 20002015. the multiple regression model and ols technique was engaged to accomplish the purpose of the study. it was revealed based on the analysis that, oil price as well as oil export are key determinants of economy development due to the significant and positive influence of oil price on economic development of iraq. iii. methodology this study employed the time series data obtained from the central bank of nigeria, publications and the world bank. this research utilized the augmented dickey-fuller (adf) unit root test to examine the stationarity among the observed variables. in addition, least square method of analysis was engaged to assess the association between the observed variables. the econometric model adopted in this paper takes inflation, gross national income, life expectancy at birth, crude oil prices, government expenditure on secondary school education and unemployment rate as explanatory variable and the elements of human development index volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.195 | http://emaj.pitt.edu samson ogege, tarila boloupremo emerging markets journal | p a g e |21 as dependent variable respectively. the model to ascertain the influence of the price of crude oil on human development is clearly specified as follows: gni = f (c, i, u)………………………………………… (1) sse = f (c, i, u) ……………………………...………… (3) lie = f (c, i, u) ………………………………………… (5) where; gni gross national income sse expenditure on secondary school enrollment lie life expectancy at birth c crude oil price i inflation u unemployment apart from the crude oil price, other variables are treated as control variables to restrain the likelihood of obtaining false outcomes. these variables greatly ascertain the price of crude oil and its influence on human development. therefore, they are adopted in the course of this study. this can be specified in explicit econometric form as follows: gni = b0 + b1c + b2i + u……………………………....(4) sse = b0 + b1c + b2i + u……………………………....(5) lie = b0 + b1c + b2i + u…………………………........(6) where u denotes stochastic error term (with usual properties of zero mean and non-serial correlation) and the expected signs of the coefficients of the explanatory variables are: b1> 0, b2> 0. iv. data analysis unit root test the adf unit root test was applied so as to examine the stationarity of the data series utilized by the study. the estimation of the unit root test has shown that by employing the techniques of classical estimation, such as the least square to assess the associations with the variables of the unit root presents deceptive conclusions. when there is non-stationarity of variables, a false regression might occur. a false regression essentially reveals a high r² as well as t-statistics that are considered as significant results, but are with no economic value. hence, the decision rule of the adf adopted is by comparing the test statistic of the adf for individual variable in absolute terms with their corresponding critical value (cv). when the value of the test statistic is more than the cv, it implies the nonexistent of unit root problem but on the contrary, there is existence of unit root problem and if the p-value of adf is less than the significance value of 5%, it implies that the null hypothesis will be nullified and the alternative hypothesis will be accepted by stating the stationarity of the time series data. table 1: unit root test at level (augmented dickeyfuller) variables adf test statistics critical value s/ns hdi /0.631796/ /-1.951332/ ns lif /2.211590/ /-1.951000/ s edi /0.126815/ /-1.950117/ ns infl /-1.897252/ /-1.950117/ ns pqli /-3.357042/ /-1.951332/ s exch /-2.816112/ /-2.971853/ ns cpc /0.129849/ /-1.950117/ ns cop /-0.356703/ /-1.950117/ ns scs /0.412232/ /-1.950117/ ns source: researcher’s computation, 2019 where; s significant ns not significant table 2: unit root test at first difference variables adf test statistics critical value s/ns hdi /-5.558473/ /-1.951000/ s edi /-6.324449/ /-1.950394/ s infl /-5.676778/ /-1.950394/ s exch /-2.816112/ /-1.950394/ s cpc /-2.129849/ /-1.950394/ s cop /-5.208080/ /-1.950394/ s scs /-5.964078/ /-1.950394/ s source: researcher’s computation, 2019 where; s – significant ns not significant in responses to table 2, all the observed variables are stationary at first difference i.e. 1(1), will become the order of integration of the variables, since the t-statistics is greater than their respective c v at 0.05 level of significance in absolute term. the outcomes of the adf reveals significance of carrying out a cointegration test in order to set up a long run equilibrium, since the study variables are not of the same order in relation to their stationarity. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.195 | http://emaj.pitt.edu the influence of oil price uncertainty on economic activities in nigeria page |22| emerging markets journal regression table 3: model 1 (least square method of analysis) source: researcher’s computation, 2019 from table 3, the findings reveal the p-value to be < 5%, indicating that the estimated model attained a strong goodness of fit. furthermore, the analysis shows that, about 76.6% of the influence of the prices of crude oil on the growth of nigerian economy is accounted for by the mix of input variables used in this model, while the variation of 23.4% is caused by the variables not considered in the model. by “rule of thumb”, the durbin watson statistic has a value between 1.5 and 2.5. thus, it reveals no suspicion of auto relationship. table 4: model 2 (least square method of analysis) (1) source: researcher’s computation, 2019 from table 4, the analysis shows that about 7.2% of the influence of the prices of crude oil on the growth of nigerian economy is accounted for by the mix of input variables used in this model, while the variation of 92.8% is caused by the variables not considered in the model. by “rule of thumb”, the durbin watson statistic has a value between 1.5 and 2.5. thus, it reveals no suspicion of auto relationship. table 5: model 2 (least square method of analysis) (2) source: researcher’s computation, 2019 table 5 exposed that, the price of crude oil and hdi significantly and positively influences consumption per capita while inflation rate and social community service, significantly and negatively influence consumption per capita in nigeria within the study period. notwithstanding, the p-value of oil price is > 0.05 significance level signifying the acceptance of the null hypotheses that oil price does not influence significantly the education index. table 6: model 2 (least square method of analysis) (3) source: researcher’s computation, 2019 from table 6, it is revealed that crude oil price as well as social community service influence adversely but significantly the physical quality of life index and it also shows a favorable and significant influence of inflation rate on physical quality of life index. in view of these outcomes, the null hypotheses should be accepted that, oil price does not influence significantly the physical quality of life. v. discussion of findings this study investigates the uncertainty of oil price influence on the activities of nigerian economy with regard to human development and results of the volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.195 | http://emaj.pitt.edu samson ogege, tarila boloupremo emerging markets journal | p a g e |23 analysis reveals positive and significant influence of the volatility in the price of crude oil on consumption per capital in nigeria. this implies that, as the crude oil continues to increase, there will also be a correspondent increase in consumption per capita and this will influence the life style of nigerians positively. during the study period, consumption per capita was greatly influenced by the price of oil. when there is an upsurge in the price of oil, it provides avenue for nigeria to raise her budget and embark on huge projects without the intention of increasing development. this makes more money to be in circulation in the economy. this result attests to the outcome of the study by munaf et al. (2018), which shows a significant influence of oil prices volatility on consumption per capital. this is however contrary to the outcomes of the study carried out by offiong et al (2016), revealing that the shocks of oil price adversely affected the economy of the state. inclusively, the outcomes of the analysis reveal that, physical quality of life is adversely influenced by the crude oil price. the coefficient of 0.16 indicates that an upward movement in the price of crude oil will result in a reduction in the physical quality of life by 16%, implying that the increase in the oil price does not improve the quality of life in nigeria. therefore, it can be inferred that the price of crude oil has little significance on the economy of nigeria. this outcome is supported by the study of charles et al. (2019), indicating that oil price uncertainty does not impact significantly on the wellbeing of the society. vi. conclusion and recommendations this study appraised the influence of oil price fluctuations on the economic development of nigeria. one of the basic goals of macroeconomic variables is to measure the sustainability of a country’s economy in aggregate term in relation to how a particular variable impacts on the general performance of such economy. based on this, the study deemed it to be of great benefit by disaggregating the variables with the main purpose of investigating how the price of oil has impacted the consumption per capita, physical quality of life, human development, education and life expectancy. in view of the analysis, it was concluded that crude oil price has a positive and insignificant influence on life expectancy, negative and insignificant influence on education development index, a positive and significant impact on consumption per capita, and negative as well as significant influence on physical quality of life index in nigeria. references abebe, h., russell, s. and xibin, z. (2019). oil prices and economic policy uncertainty: evidence from a nonparametric panel data model. energy economics, vol. 83, 40-51. adeleke, o., harol, n. and adebayo, k. (2019). crude oil price shocks and macroeconomic performance in africa’s oil-producing countries. journal of corgent economics and finance, vol. 3, issue: 1. alley, i., asekomeh, a., mobolaji, h., and adeniran, y. (2014). oil price shocks and nigerian economic growth. european scientific journal, 10(19), 375-391. armando, f.d. (2009), latin american structuralism and economic theory, cepal review no. 98, 175-195. baumeister, c. and l. kilian (2015). understanding the decline in the price of oil since june 2014. journal of the association of environmental and resource economists, vol. 3, no:1, 131−158. charles, felicia, jonathan, okoro, aja and kenneth (2019). oil price fluctuation, oil revenue and well-being an nigeria. international journal of energy economics and policy, 9(1), 346-355. demirbas, a., al-sasi, b. o., nizami, a.s. (2017). recent volatility in the price of crude oil. energy sources, part b: economics, planning and policy, 12(5), 408–414. elder, j. and serletis, a. (2010). oil price uncertainty. journal of money credit and banking, 42(6), 1137-1159. fischer, s. (1985), supply shock, wage stickiness and accommodation, journal of money, credit, and banking, 17: 1-15. ishmael, o., matthew, t. r. and park, i. (2017). the impact of changes in crude oil prices on economic growth in nigeria. journal of economics and sustainable development, vol.8, no:12. junior, t. c. and goodness, c. a. (2018).the effects of oil price uncertainty on economic activities in south africa. journal of cogent economics & finance, vol. 6, issue: 1. mankiw, n. g. (1995). the growth of nations", brookings paper on economic activity, pp. 275-326. mhamad, s.h. and saeed, s.t. (2016). impact of oil price on economic growth: empirical evidence from iraq. journal of economics and sustainable development. vol.7, no.14, 2016. munaf, m., sundus, j. s. and shatha, s. d. (2018). impact of oil price fluctuations on human development: a standard study of iraq. offiong, a.i., atsu, i.a., ajaude, e. &ibor, b.i. (2016). the impact of oil price shocks on the economic growth and development of cross river state, nigeria. international journal of financial research, vol. 7, no. 4. https://www.sciencedirect.com/science/article/pii/s0140988319301975#! https://www.sciencedirect.com/science/article/pii/s0140988319301975#! https://www.sciencedirect.com/science/article/pii/s0140988319301975#! volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.195 | http://emaj.pitt.edu the influence of oil price uncertainty on economic activities in nigeria page |24| emerging markets journal ogwumike, f. o and ogunleye, e. k. 2008. resourceled development: an illustrative example from nigeria. [online]. available at http://onlinelibrary.wiley.com/doi/10.1111/j.14 67-8268.2008.00182.x/full sommer, m. (2002), supply shocks and persistence of inflation, retrieved on march 31, 2014, http://econ.jhu.edu/wpcontent/uploads/pdf/papers/wp485sommerinfl ation_12-02.pdf umar, m. g., aliyu, i. b. and ahmad, m. (2017). oil price fluctuations and economic growth in nigeria. australian journal of social science, vol. 3, pp. 1-16. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu evaluation of relationship between oil revenues and government budget in iraq: 2006-2016 period mehmet dağ siirt university, turkey | mehmetdag323@gmail.com semih serkant aktuğ siirt university, turkey | semihaktug@siirt.edu.tr zavar salah ali alı independent researcher, iraq | zavar.babiry@gmail.com abstract the primary purpose of this study was to examine the relationship between oil revenues and government budget in iraq for 2006-2016. the study found that, iraq’s oil production curve in recent years has remarkably specified the positions, even if not mainly at the levels estimated earlier, as more positive forecasts. iraq has developed to be the world’s fourth-largest oil exporter. this study confirmed that, the critical element for iraq’s economy is that, the country depends on oil and 97% of the government revenues are from its oil exports. while challenges continue to achieve the aims of increased oil production, opportunity for iraq’s resources to produce revenue and pay for broad-based economic development still exists. keywords: energy, oil production, government budget, budget revenues, oil exports * this study is derived from the doctorate thesis titled "evaluation of political economy of oil production in iraq: 20062016”. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.164 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:mehmetdag323@gmail.com mailto:semihaktug@siirt.edu.tr mailto:zavar.babiry@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.164 | http://emaj.pitt.edu mehmet dağ, semih serkant aktuğ, zavar salah ali alı emerging markets journal | p a g e |49 evaluation of relationship between oil revenues and government budget in iraq: 2006-2016 period mehmet dağ semih serkant aktuğ zavar salah ali alı i. introduction oil production is frequently reflected as a political commodity. so, since its essential significance as a crucial source of energy, governments are concerned for its continued availability and pursue to minimize import reliance. hence, energy and in particular oil is one of the essential elements and pillars of societies and nations. all economic sectors need energy, such as transportation, electricity, household appliances, and so on. thus, the oil industry has become one of the essential modern industries of the global industrial economy (haddad, 1989). devolde (2006) mentioned that, oil is the main engine of global economy. it is one of the most important criteria that have a global influence, both economically and politically and it is one of the signs that focus on human civilization, and among all other sources of energy. oil is one of the most strategic commodities in the world. today, oil is considered as the lifeblood of industry, in addition to its high degree of safety, unlike other sources. according to basri and al‐sebahi (2013), iraq is estimated to be one of the fastest developing countries in the region and the country could experience further growth, if oil and gas law as well as governing reform permits. so, recent years have undoubtedly revealed that iraq’s socio‐economic problems can be attributed to the ineffective use of oil revenues and too weak institutions, which have become a constraint to delivering even essential services. however, according to the arab energy conference aec (2014), oil is known in iraq since its early appearance on the surface of the earth, where old iraqis used it to build and paint boats, as well as burn it in the eternal fire in kirkuk. the babylonians launched the name of oil on the kair, which was found in the form of a solid block on the sides of the euphrates river and knew how to use it in the construction and manufacture of water transport as well as paving roads. oil was also used by the assyrians in various industries. thus, iraq was subjected to the struggle of foreign countries to obtain the privileges of prospecting in its territory. the states tried to obtain oil concessions from the ottoman empire when iraq was part of the empire. this conflict still continues following the american companies entering iraq (battat, 2010). following this concession, the granting of another concession to mosul petroleum company and finally the granting of the basra petroleum company's concession and granting iraq the concession of using oil in the khanaqin area of the khanaqin oil company are other important issues. the government ended its franchise in 1958, because the company did not implement its commitments and took the process of producing oil directly from khanaqin fields (alnasrawi, 1994). as battat (2010) mentioned, the oil production began in iraq for the first time in kirkuk on october 15, 1925 when the british government (the direct ruler of iraq) granted a concession to turkish petroleum corporation (tpc). the oil was extracted in baba ghargar and is now one of three domes in the kirkuk fields. the study found that, iraq’s oil production curve in recent years has remarkably specified the positions, even if not mainly at the levels estimated earlier. iraq has developed to be the world’s fourth-largest oil exporter. moreover, it is the second major producer in opec organization, with a production above 4.1 million bpd for the first time in 2015. the amount was roughly 4.5 million bpd in 2016 for northern iraq. also in 2017, the country also proved a new record for annual exports. however, production levels in 2006 were just 2 million bpd, demonstrating a more than doubling of production during a ten-year period (iraq oil report, 2014). while challenges continue to achieve the aims of increased oil production, there is considerable opportunity for iraq’s resources to produce revenue and pay for broad-based economic development, if managed appropriately. the oil prices have significant impacts on iraq’s revenues and all its economic sectors. through 2006 to 2008, oil prices in international markets sharply increased from $55.60 to $91.50 in 2008, just before losing its value by nearly 40% in 2009. once again, oil price in the global oil markets suddenly increased from $74.20 in 2010 to $106.70 in 2012. this was due to increases in demands of oil markets, particularly more demands coming through china and india. however, just after the oil price reached the highest level in ten years, it started to decline from $102.90 in 2013 to $34.50 in 2016, which lost 68% of its value. iraq’s energy sectors will remain to be an essential portion of the iraqi economy for many years to come. oil revenue provides the bulk of iraqi national budget, as well as the budget in the kri, that provides a vital source of revenue and funds for recovery and development. so, the decline in oil prices will lead to significant shortages and create significant problems for iraqi rebuilding and sustainable economic development. ii. the oil production of iraq the oil sector is the heart of the iraqi economy, where 95% of the revenues of the state come from oil production. thus oil regarding discovery and the level of reserves, production, oil prices, and exports are also essential for the iraqi economy (basri & al‐sebahi, 2013). the oil industry is the basis on which the iraqi economy depends. but the destruction that has hit the volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.164 | http://emaj.pitt.edu evaluation of relationship between oil revenues and government budget in iraq: 2016-2016 period page |50| emerging markets journal sector in recent years after 2003 has exposed this sector to looting and sabotage, which targeted the infrastructure of production and export mainly as well as the lack of investment (alnasrawi, 1994). iraq is among the countries with a rich and varied resource base. it is the third largest known global reserve after saudi arabia and iran, with abundant water resources. there is also a sizeable national workforce of more than 7 million people of the arab oil countries. these resources can, within a decade, bring iraq back to its former status as a middle-income country. the average poverty rate in iraq ranges between 8-10%. between 12-15% is prone to decline to a similar level regarding the proportion of iraqi population (portman, 2005). however, iraq currently ranks as one of the poorest countries in the world despite its unlimited resources. this is due to structural imbalances in its agriculture, industry, and even oil-producing institutions, which are due to at least war-production levels. iraq is a country that depends on other countries at a high rate. it also gives considerable attention to the public sector by ignoring the private sector. that is still observed despite the increasing calls of international institutions to pay attention to the private sector (hammadi, 2010). the iraqi oil fields are divided into four areas: southern fields, central fields, northern fields and the fields of northern iraq. the rumaila region in the southern field has the highest level of production at 1430 million barrels per day. the west qurna region is the second largest oil region in iraq located in the southern fields with a daily production level of 550 thousand barrels per day, which consists of about one-sixth of the total production in the southern fields (oil & gas journal, 2016). according to hammadi (2010), economists also classify iraq's oil fields as the world's unique one regarding the low cost of production because crude is close to the surface and it is without geological obstacles. one of the encouraging characteristics of investment in this sector is related with existing fields. there is a small amount of production of iraqi oil compared to the stock. the wells produced in iraq range from 1500 to 1700 wells, while the wells are expected to be a subject of search for at least 100 thousand wells. in the same regard, rubaie (2006) argued that the majority of iraq's oil reserves are concentrated in large fields. about 40% of the total fixed reserves concentrated are in 15 developed fields, where 69% of the reserves concentrated are in the first category, which contain more than 5000 million barrels. 24% of the reserves concentrated are in the second category, which range between 1000-5000 million barrels. 58 non-developed fields contain 60% of iraq's total fixed reserves.. however, according to manhal (2006), the iraqi economy in the current stage of the economies is onesided. this is still observed despite iraq’s vast agricultural and industrial potential. however, the control of oil revenues on gdp is what made it unilateral. iii. iraq’s oil data, oil production and budget revenue statistics iraq is a founding member of opec, thus the country always joined its meetings, even after 1991. however, there are many unresolved concerns in an attempt to reliably analyze a future relationship between iraq and opec, although many factors refer to iraq's remaining membership in opec. in addition to opec's participation as a typical situation, iraq's neighbors are also geographically involved. thus, iraq’s share in the global oil market will grow as exports expand, and opec provides a safety cushion for oil prices. despite significant improvements in increasing oil production and smaller but equally meaningful advances in gas development, difficulties for iraq to reach its production potential still continue. in addition to confiscating obstacles to improved production and export progress, maybe the major challenge for iraq is sustainably managing the resulting resource revenue in a way that serves the country’s long-term growth benefits and improves the living conditions for all iraqis. sustainable management of resource revenue, along with making the foundation for a more diversified economy, is critically important both for iraq and the kri (scholl, 2018). as shown in figure 1, iraq’s daily oil production always increased through the period of 2006-2016. figure 1. iraq daily oil production source: iraq’s ministry of oil (2016). figure 2 shows iraq’s total petroleum and consumption. the gulf war in 1990-91 and iraq war beginning in 2003 dramatically impacted iraq’s oil production capacity. through the gulf war, iraq’s daily production decreased from over 2.0 million bpd in 1990 to around 400,000 bpd. the iraq war beginning in 2003 also declined the country’s levels of production. on the positive side, starting from 2005, the oil production levels in iraq gradually increased. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.164 | http://emaj.pitt.edu mehmet dağ, semih serkant aktuğ, zavar salah ali alı emerging markets journal | p a g e |51 figure 2. iraq's total petroleum and consumption source: eia, (2016). the first gulf war and subsequent sanctions devastated the already exhausted economy. the bombing campaign of 1990-1991 has severely damaged or destroyed many of the oil infrastructure, transport, energy, and industrial infrastructure. the government initially directed its efforts to reform the oil and telecommunications infrastructure as well as the state security apparatus. a rationing program was introduced to disseminate available food and consumables. however, the government's policy had a fundamental reaction, since the sanctions regime (and system priorities) had left little to restore and develop the economy. due to iraq’s dependence on international trade in oil for the functioning of its economy, the sanctions regime had an immediate damaging effect. so, the oil for food program improved this situation. however, the shortages, hyperinflation and the absence of international trade characterized the iraqi economy in the 1990s (eia, 2015). oil production in iraq did not stabilize at a certain level. it witnessed a significant decline, especially in the 1990s, due to the embargo imposed on the country. of course, the economic blockade is an exceptional factor. oil production in all countries of the world is affected by other factors. the aspects influencing oil production is affected by three factors: exploring the process of new oil fields, raising the level of exploitation of working fields, and prices-sources of supply of energy sources. table 1 shows the budget and oil production statistics of iraq for the 2014-2016 period. figure 3 illustrates the budget and oil production statistics of iraq. both table 1 and figure 3 indicate that, iraq depends on oil revenues more than any other middle eastern country. as previously mentioned, iraq’s oil production amounts to two-thirds of its gdp. according to joseph (2016), nearly 95% of central government revenues and 99% of total export revenues of iraq arise from oil. in 2014, iraq’s total revenues had accounted to 104 billion us dollars, were 99 billion were gained from oil exports. however, the entire country’s expenditures were 119 billion us dollars, which led to a 14% budget deficit. declining oil prices led to the increase in budget deficit in 2015, by 26%, due to a decrease in oil price by 48.9%. in 2016, the oil price (per barrel) declined to 34.50%. but in that period, iraq increased its oil exports to 4.5 mbpd, thus the budget deficit declined to 17%. so, this result confirms that the critical element for iraq’s economy is oil and 97% of the government revenues are composed of oil exports. table 1: budget and oil production statistics of iraq for the 2014-2016 period source: iraq’s ministry of oil (2016). figure 3. budget and oil production statistics of iraq for the 2014-2016 period source: iraq’s ministry of oil, (2016). according to imf, (2016) the oil price decline was caused by a substantial decrease in budget revenue, pushing the fiscal deficit to an unmaintainable level. thus, the iraqi authorities responded to the crisis with a mix of required fiscal adjustment and financing, sustaining their commitment to the exchange rate peg. the exchange rate peg system offers a main nominal anchor in a highly uncertain environment with policy capability destabilized by the war against isis. also, the iraqi budget originates from oil revenues rather than taxation. this is a situation, which uses the income as a key “consensus builder,” converting it into mostly unproductive public expenditure. moreover, the negative impact of the energy sector’s significance over other national production sectors is evident. future production prospects in iraq contrast commonly. while most experts acknowledge the existence of proven reserves to meet the official target, unlike many regions of the world, geological hazards are virtually non-existent in iraq. there is a general view that these figures are intended for public consumption. so, this view is realized in official figures as part of an intentional scheme to justify the re-entry of international oil companies into iraq after nearly four decades of nationalization in the face of iraqi people. however, this volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.164 | http://emaj.pitt.edu evaluation of relationship between oil revenues and government budget in iraq: 2016-2016 period page |52| emerging markets journal sector will be subject to continuing obstacles such as security, politics and infrastructure. skeptics point to the fact that, within seven years iraq would not reach pre-war levels of crude oil. iraqi government officials have interpreted spending decisions as a reaction to long-term trends in inadequate investment and insufficient payments from public salaries in iraq as a result of war, isolation and civil war. in 2009, the budget shrank due to the collapse of the markets, but not as much as the decline in revenues in the world markets, which suffered a substantial decline and showed a massive fiscal deficit. in this sense, iraq has fallen victim to one of the traditional phenomena in the oil-producing countries, namely the growing reliance on oil revenues associated with a highly volatile income situation. the proposal to distribute partial oil revenues is mainly in line with planning economic situation of the government of iraq and the international financial institutions. it is assumed that, public spending will rise moderately, just over 2% annually, in line with iraq's annual population growth over the past few years, allowing public service and public investment to continue at current levels. it also assumed conservatively that, revenues of the government from the non-oil good and services will rise by about one trillion dinars ($850 million) per year, lower than the levels achieved in recent years. iraqi economy suffers from a severe shortage of capital, even when evaluated according to traditional concepts and works, before any consideration of questions of social inclusion. the world bank issued a report indicating that state-owned banks own nearly twothirds of all state assets since the days of the former regime and that they represent the only financial institutions with branch networks throughout the country. the vast majority of these assets, in turn, belong to the state. therefore, new governments in both baghdad and erbil must recognize that ambiguity at this critical moment for oil markets, and as oil or gas development struggles to gain a position, that could negatively affect iraq’s standing as a low-cost producer with high potential. undertaking this issue should be a priority as part of the governing command. iv. conclusion the primary purpose of this study was to examine the relationship between oil production and budget revenues in iraq during 2006-2016. firstly, it should be noted that, although challenges to increasing oil production in iraq broadly remain, the country has made incredible progress over the last decade. iraq’s economy is substantially reliant on oil revenues. so, in 2014, crude oil export revenue amounted to 93% of iraq’s overall public budget. according to the imf (2015), iraq (excluding northern iraq) received marginally more than $49 billion dollars in crude oil export revenue in 2015. that is $35 billion less than in 2014, despite a substantial increase in export volumes, due to a sharply decline in oil prices from $97 in 2014 to $47 in 2015. the study found that, iraq’s oil production curve in the recent years has remarkably specified the positions, even if not mainly at the levels estimated earlier. iraq has developed to be the world’s fourthlargest oil exporter. moreover, it is the second major producer in opec organization, with a production above 4.1 million bpd for the first time in 2015. the country’s energy sectors will remain as an essential portion of the iraqi economy for many years to come. hence, oil revenue provides the bulk of the iraqi national budget. that provides a vital source of revenue and funds for recovery and development. so, the decline in oil prices will lead to significant shortages and create significant problems for iraqi rebuilding and sustainable economic development. according to imf (2016), the oil price decline was caused by a substantial decrease in budget revenue, pushing the fiscal deficit to an unmaintainable level. thus, the iraqi authorities responded to the crisis with a mix of required fiscal adjustment and financing. on the other hand, regarding the events of fall 2017, these events illustrate the difficulties in continued reliance on budget transfers in baghdad or oil exports facilitated by a neighbor country that sees the energy in geopolitical terms. the northern iraq should also focus on diversification, which can lay the groundwork for a more sustainable and politically-insulated economy over the long term. the development of a diversified economy that is not entirely dependent on oil revenues is also a must. besides, one might argue that, iraqi government shall develop alternative economic resources to oil revenues, which can help the stabilization of the national economy. references aec. (2014). iraq republic paper. the 10th arab energy conference, abu dhabi, united arab emirates, 1-34. alnasrawi, a. (1994). the economy of iraq, oil, wars, destruction of development and prospects, 1950-2010, london: greenwood press. westport, connecticut. battat, m. s. (2010). the economic effects of the implementation of the oil and gas law in iraq. al-ghari journal of economic and administrative sciences, 3(17), 56-89. devolde, h. (2006). oil and gas production, handbook, an introduction to oil and gas production. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.164 | http://emaj.pitt.edu mehmet dağ, semih serkant aktuğ, zavar salah ali alı emerging markets journal | p a g e |53 eia. (2015). country analysis brief: iraq. washington d.c.: u.s. energy information administration, u.s. department of energy. retrieved 7 17, 2018 (july 17, 2018), from https://www.eia.gov/beta/international/analysis _includes/countries_long/iraq/iraq.pdf. energy information administration (eia). (2007). official energy statistics from the u.s. gov’t, iraq: oil. energy information administration. retrieved 2 12, 2018, from www.eia.doe.gov/emeu/cabs/iraq/oil.html. haddad, a. (1989). petroleum industry and derivatives. beirut, lebanon: institute for arab development. hammadi, i. o. (2010). structural imbalances in the iraqi economy: diagnosis and treatment (3rd edition ed.). iraq center for studies. hughes, m. p. (2011). shaping and re-shaping social capital in buyer-supplier relationship. j.bus.res., 64(2), 164-171. iea. (2011). key world energy statistics. international energy agency. imf. (2015). imf country report no. 15/235. imf. (2016). imf country report no. 16/379. washington, d.c.: international monetary fund publication services. iraq oil report. (2014). despite march exports drop, record output for new buoys. ior. iraqi ministry of oil. (2016). iraq oil report. ministry of oil. retrieved 07 03, 2018 (july 3, 2018), from https://oil.gov.iq/index.php?name=pages&op= page&pid=91 joseph, s. (2016). iraq: oil prices and economic management. meea 15th international conference, doha. manhal, m. y. (2006). feasibility of iraq's accession to the world trade organization. baghdad: university of baghdad. oil & gas journal. (2016). worldwide look at reserves and production. ogj. opec. (2006). annual statistical bulletin 2005. vienna: opec. portman, c. (2005). reconstruction of iraq: economic reform and transition. world bank. rubaie, k. f. (2006). iraq's oil sector between reality and future prospects. baghdad: university of baghdad. scholl, e. (2018). shaping iraq's oil and gas future. atlantic council, global energy center. u.s. energy information administration. eia, (2016). country analysis brief: iraq. eia. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu mergers, acquisitions and financial performance: a study of selected financial institutions tarila boloupremo university of africa, nigeria | tboloupremo@gmail.com samson ogege university of lagos, nigeria | samsonogege@yahoo.com abstract the aim of the study is to examine the impact of mergers and acquisition on financial performance in the nigerian financial system. the study examined selected financial institutions in the banking sector. specifically, some financial indicators such as asset profile, credit risk, capital structure, liquidity, size and cost control ratios, were extracted from the audited financial reports of the selected banks for the period 2000-2010 to compare the performance of the selected financial institutions in the ex-ante period and compare these performance with the ex post period of their mergers and acquisitions. longitudinal and time series analyses were employed to observe the performance of the selected banks. results from the analysis suggest that credit risks showed a better post merger performance, but were statistically insignificant and negatively related with the performance of the selected financial institution pre-merger. asset profile was found to be significant and positively related with post-merger in relation to the performance of the selected financial institutions, but it was insignificant and negatively related to the financial performance of the selected firms pre-merger. capital structure of the selected firms was found to be significant and positively related to the performance of the firms’ pre-merger, but insignificant and negatively related to the performance of the firms post-merger. liquidity of the firms indicated a significant and positive relationship with the performance of the banks pre-merger. however, post merger result indicates that, there was no significant and positive relationship between the liquidity of the firms and financial performance postmerger. the size of the selected banks indicated a significant relationship with their performance in both the pre-merger and post-merger periods. the cost control variable indicated a statistically significant and negative relationship with the performance of the banks post-merger period, but showed no significant relationship with performance of the banks in the pre-merger period. finally, the results indicate that mergers and acquisitions can have significant impact on the performance of the selected financial institutions in nigeria. keywords: corporate strategy; mergers; acquisition; consolidation; finance new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.162 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:tboloupremo@gmail.com mailto:samsonogege@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.162 | http://emaj.pitt.edu mergers, acquisitions and financial performance: a study of selected financial institutions page |36| emerging markets journal mergers, acquisitions and financial performance: a study of selected financial institutions tarila boloupremo samson ogege i. introduction the banking industry in nigeria has been one of the major drivers of economic development for several decades. the importance of the banking sector to any economy is unarguable; this is because of its function as the engine of growth. as the lead financial intermediary in an economy, it mobilizes funds from savings in surplus units in the economy and transfers these funds to deficit units in the economy thereby facilitating capital formation, fostering investment and value creation and the promotion of growth (benneth, adebiyi & moruff, 2018). to enable the banking sector to continue play its key role in the nation’s financial system, the apex regulatory body for deposit money banks operating in the country has continuously introduced several radical reforms in recent years. the most popular among these reforms by the government in the nigerian banking sector is the banking sector recapitalization policy in 2004 (jimmy, 2016). the banking consolidation reform of 2004 was aimed at arresting system decadence, restoring public confidence, building of strong, competent and innovative players in the global arena ensuring liquidity and value returns to shareholders (okpanachi, 2015) and enable banks develop the required resilience to support the economic development of the nation by efficiently performing its functions as the fulcrum of financial intermediation (adeyemi, 2007). the reform had two major elements: the requirement that deposit money banks shore up their operating capital to a minimum capitalization of n25 billion by 31st december 2005 and to encourage consolidation in the banking industry through mergers and acquisition. the aim of the reforms was to make nigerian banks become global players in the international financial system and improve their financial performance. to enable deposit money banks operating in the economy as the time the reform was introduced and to carry out the reform, banks were through moral suasion encouraged to either merge or give up their operating license for acquisition (soludo, 2010). the case for mergers and acquisition was proffered drawing from the perceived successes of economies that adopted this strategy such as: the merger between two french banks in 1998 that resulted in a capital base of us $688 billion; merger between two german banks in 1998 that resulted in a new capital base of us $541billion; in korea where eight mega banks were left after a consolidation exercise with a branch network of four thousand and five hundred (4500); amalgamated bank of south africa (absa) that has more asset base than all the nigerian banks put together as at that year; malaysia where eighty banks shrunk to 12 after a consolidation exercise. the need for mergers and acquisition in the nigeria banking sector was highlighted on the premise that banks in nigeria would become africa’s financial hub and reposition themselves to compete with international banks (ogbonna, 2007; adesida, 2008); act as catalyst to the economic development of nigeria through the provision of excellent intermediary services through the extension of adequate capital to investors (jimmy, 2016) and the provision of befitting returns to investors through efficiencies and a better range of quality financial services (soludo, 2006). the nigerian banking industry following the reform in 2004 has witnessed several mergers and acquisitions in recent years. it is against this background that this research seeks to examine the impact of these mergers and acquisitions and if there exists any correlation with financial performance of selected banks in the nigerian banking industry. the main aim of this paper therefore, is to identify and examine the possible financial impacts of mergers and acquisitions on the nigerian banking industry. ii. materials and methods bank mergers and acquisition are among the most widely studied and highly contentious issues in finance economics (cyree, 2010). this follows from the extensive studies conducted by various scholars and differences in opinions formed by them. these studies have so far failed to produce empirically conclusive evidence (bernard et al, 2010). there are a couple of studies that show a positive effect of mergers and acquisition on banks (humphrey and vale, 2002; shaffer, 1993; rhoades, 1998; resti, 1998) and studies that conclude that mergers and acquisition have a negative effect on banks (diaz et al, 2008; linder and crane, 1992; srinivasin, 1992). other studies analyzed the reasons for bank mergers and general effects, to wit, pillof and santomero (1998) hold that the dominating reasons for bank mergers include; improving the bidder bank’s value through increased revenue or cost savings, efficiency gains, market power and increased economies of scale and scope. berger et al (1999) analyzed 250 studies conducted on mergers and acquisition in banks in order to find out the trend of thought on this corporate growth strategy and found that in general, mergers and acquisition in banks appear to increase profit efficiency and help diversify the portfolio risks of the participants and have improved the local real economies where they occurred. in a study conducted by berger et al (1995) to review the banking sector mergers through regulatory frameworks and competitive environmental changes, they concluded that regulatory changes and technological advancements increased the merger activities of banks. further, critchfield (2005) developing the study of berger et al (1995) implied that mergers and acquisition volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.162 | http://emaj.pitt.edu tarila boloupremo, samson ogege emerging markets journal | p a g e 3 7 is a continuing phenomenon and will be greatly influenced by regulations and globalization. similarly, deyoung et al (2004) argued that deregulation, technological advancements and commoditization have diminished the barriers to mergers and acquisition in banks. further, a study conducted by ibanez and altunbas (2005) on european banks mergers between 1994 and 2001 to examine the impact of mergers and acquisition on post-merger financial performance, found that mergers among banks bearing substantial elements of geographical or product relatedness create value and there is improved performance in banks after mergers have taken place when there is consistency on the efficiency and deposit strategies of merging banks. they also argued that mergers are more successful when larger and more efficient banks combine with smaller and better-capitalized institutions with more diversified sources of income. however, differences between merging banks capitalization and investment in technology and financial innovation were found to enhance performance. evidence was found to be thin on the factors that influence the choice of a target bank in a merger; wheelock and wilson (2000) found that smaller banks that are less efficient with lower return on asset were more likely to be acquired; in contrast, beatty et al (1987) found that, bidders pay larger market to book premiums for targets with higher return on equity and operating in a more concentrated market while palia (1993) found that there is a growth in premium with a growth in target assets and core deposits. olsen and pagano (2005) argued that the bidders’ returns are higher after a merger if they can sustain or increase growth rates. similarly, cyree (2010) found in his study that, banks use mergers and acquisitions to enter fast growing and high performing markets and to obtain deposit. in a study conducted on seventeen spanish banks to examine the impact of mergers and acquisition on performance, bernard et al (2010) found that, though mergers and acquisition have been effective in increasing productivity, they could not transfer the result to profitability because in spain, most of the mergers were either used to penetrate new markets or increase efficiency under stiff competition. nevertheless, they found that mergers and acquisition constitute a way to increase market power. further, in a study conducted by umoren and olokoyo (2007) on 13 nigerian banks to examine the impact of consolidation on performance and consider whether there exists a considerable improvement in liquidity, profitability and solvency, they found that on average, bank mergers resulted in improved performance. focarelli et al (2002) in a study aimed at finding the reasons for bank mergers with a sample drawn from the italian banking sector from 1985 to 1996, found a result consistent with the hypothesis that expansion of revenues from financial services is a strategic objective for mergers. the resulting increase in non-interest income, offset by higher labor costs in the first few years, an increase in lending activity and a more efficient use of capital produced an increase in profitability. a number of studies were identified that measured the impact of mergers and acquisition on the financial performance of banks through the use of various accounting ratios on profitability, return to shareholders and productive efficiency indicators (delong and deyoung, 2007). the dominating conclusion is that, the assurances of scale economies resulting from size rarely materialize after the merger (berger et al, 1999, berger et al, 2000; auster and sirower, 2002). the reason identified for this is that, some efficiency gains take longer to accrue. specifically, while some efficiency gains like risk diversification can be achieved in the short run, others such as cost control are only achievable in the long run (vennet, 2002). furthermore, in a study conducted by beccalli and frantz (2009) on 714 deals from 1991 to 2005 between random picked bidder and target banks to investigate whether merger and acquisitions influence the performance of banks, using standard accounting ratios and x-efficiency measures, they found that merger and acquisition operations are associated with a slight deterioration in return on equity, cash flow return and profit efficiency and with a marked improvement in cost efficiency. iii. mergers and firm performance there is divided opinion on the impact of mergers and acquisition on the financial performance of organizations; epstein (2005) argued that, mergers and acquisition have been studied using narrow and uninformative measures such as short term stock valuation. the capital market is volatile in nature; the economic climate of the period a merger is undertaken to an extent, determines the interpretation of its impact. in a strong economy, a poor merger could be seen as successful and vice versa. this underscores the inadequacy of measuring a merger success with changes in stock prices or short-term analysis. delong and deyoung (2007) argued that, it is important to distinguish between factors that actually damage the value of a merger and those factors that damage perception of a merger. this lack of clarity regarding the elements of merger success, along with a couple of measurement flaws has incited a debate that questions the relevance of mergers and acquisition. however, scholars have noted that the correct application of some factors would ensure the success of mergers and acquisition (maire and collerette, 2011; jimmy, 2008; chanmugan et al, 2005; epstein, 2005; houston and ryangaert, 2001). these factors are considered below. strategic fit among merging firms is a critical element in determining the success or failure of a deal (houston and ryangaert, 2001), because it refers to the degree to which merging firms complement each other and make identifiable contributions to the financial and non-financial goals of the new firm (bernard et al, 2010). the strategic vision of the merger should clearly articulate a merger rationale that is centered on the creation of long-term competitive advantage rather than just short-term improvements in operational efficiency (maire and collerette, 2011). therefore, it is important that real growth is an expectation of the merger and that the entire rationale is not centered on cost cutting and elimination of redundancies. it is also important for the firms to analyze the strategic vision and compatibility with respect to culture, systems and processes (chanmugan et al, 2005). amel et al (2004) found that, the concept of strategic fit is associated with synergies and with the possibility for the resulting firm to obtain economies of scale that promote efficiency and reduce average costs. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.162 | http://emaj.pitt.edu mergers, acquisitions and financial performance: a study of selected financial institutions page |38| emerging markets journal further, another factor identified in the literature that has led to the failure of mergers and acquisition to deliver on its promise of higher profitability is the premium paid for a target firm and the type of financing used (epstein, 2005). prior studies conducted on this subject show that merger premiums to targets are large, positive and statistically significant (cyree, 2010). becher (2000) found that, publicly traded targets gain 22% on average for a sample of mergers studied in the 1990s. further researches show that bidding companies that make cash offers make postmerger returns that are either minimal or negative (gaughan, 2011). chanmugan et al (2005) stated that, bids are better informed when they are driven by downstream evaluation and defined in terms of a target return on investment and plans to realize it. however, palia (1993) concluded from her study that, the higher the target return-on-assets and the more the target is concentrated. it is therefore necessary on one hand to assess the payment paid for the target firm to avoid overvaluing or over paying with the resultant effect of overburdening the new company with high debt and on the other hand, find the best payment method that would serve the interest of the shareholders of the bidding company. for example, in 1999, federated acquired fingerhut for $1.7billion in order to harness its marketing expertise to improve sales and market share, but sold the company for $800million in 2002 because after three years, federated was yet to reap the benefits of the acquisition and market analysts claim that the shares of fingerhut was overpaid for by a premium of 30%. likewise, the merging firms should take care to ensure that, the potential deal can succeed in implementing the proposed strategic vision. this would include the conduct of due diligence, review of assets, liabilities, revenues and expenses; an investigation and evaluation of organization fit, culture symmetry, technological and human fit, comparison of accounting and budgeting practices, appraisal of business philosophies, work practices, leadership styles, expectations and facilities. according to bernard et al (2010), it involved ensuring a match between administrative practices, cultural practices, personnel characteristics and integration of day-to-day post-merger operations. this process is necessary as the lack of careful evaluation of both the hard financial and soft personnel and organizational issues have been found to be a cause of merger failure (beccali and frantz, 2009; okonkwo, 2004). in addition, pre-merger planning is important because without clear and defined objectives, the merger integration, synergies and success are unachievable (epstein, 2005). the pre-merger planning entails the formulation of the integration process and the making of key decisions with respect to board composition, structure of merger and timeline. cyree (2010) claimed that, in pre-merger planning, it is better to create an entirely new organization in order not to be constrained by the existing structures. on the contrary, epstein (2005) claimed that, dismantling of existing structure could be resource consuming and creates hostilities between the merging bodies. chanmugan et al (2005) stated that a successful, integrated approach treats mergers as a life cycle that starts with the pre-merger strategies of goals, target identification, valuation and progress through deal execution and flows to post-merger integration. this value-creating approach to post-merger integration is only achievable through meticulous planning, de-emphasizing functional integration and ensuring that all resources are channeled only towards the creation of value and not destroying it (cyree, 2010). in like manner, to maintain a seamless operation and ensure fast realizations of synergistic values, there should be a sound post-merger integration. auster and sirower (2002) described integration as a group of activities designed to maximize the strategic and organizational fit. it starts with the merger deal and ends when all the conscious efforts directed to achieving the optimum fit have stopped having an effect on the new entity. this integration carefully blends the processes including the management of resources, technical operations and customer relationships. a successful integration is achieved when all the different parts of an organization have the knowledge, resources and commitment to move forward without destroying values in the process (epstein, 2005). during this phase, the management faces enormous challenges which range from steering reconfiguration, achieving strategic objectives, synchronizing activities, streamlining processes to sustaining customer satisfaction (schneider, 2003). to achieve a successful integration, adequate attention must be paid to both cost reduction and revenue growth synergies and progress measure in terms of financial and non-financial indicators. bernard et al (2010) underlined the fact that, the structure of postmerger integration should be designed and managed at the strategic level and be critical for explaining performance differences between resulting firms. nevertheless, in pursuit of perfect integration, the focus should be on clients to avoid loss of business to competitors and the employees should be encouraged to see the merger as a vehicle for business growth to minimize resistance (maire and collerette, 2011). moreover, chanmugan et al (2005) argue that, postmerger integration should be about value creation and activities prioritized according to the value they create. a study by jemison and sitkin (1986) that analyzed 253 mergers and acquisitions in europe and america showed that, a successful integration was responsible for improved capabilities in majority of the cases. likewise, in a study conducted on 350 mergers by chanmugan et al (2005), they claimed that the most successful mergers and acquisition were characterized by the superior execution of an explicit value-capture strategy and a determination by management and staff to pursue the set goals from formation to implementation. still on, gadiesh et al (2003) argued that, explanations regarding why numerous mergers fail to deliver on their promises relate partly to the way the post-merger period and related internal issues were resolved and partly to inappropriate business decisions. bernard et al (2010) concluded that, a proper management of the integration process has clear positive effects on the success of mergers and acquisition. empirical research on the impact of mergers on performance of companies has been dominated by the use of event study methodology (focarelli et al, 2002; huyghebaert and luypaert, 2010). the wide adoption of this method is hinged on the argument by finance scholars that financial markets are able to offer a correct valuation of the expected returns coming from any share traded on the stock exchange (bernard et al, 2010). this volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.162 | http://emaj.pitt.edu tarila boloupremo, samson ogege emerging markets journal | p a g e 3 9 method assesses the impact of the announcement of the merger on the abnormal returns of the bidder and target firms around the period. a positive value in the difference of the measures is interpreted to mean a successful value creation. while this method is popular and well grounded, it is faulted on a number of grounds. it depends on an assumption of perfect foresight that is at odds with the perception of the integration process (ibid.). an illustrative example is the failed acquisition bid of aer lingus by ryanair. the shares of both companies rose during the period of resistance by aer lingus and hostility by ryanair and when the government intervened and vetoed the takeover, the shares of both companies fell. further, this research argues that the post-integration process and the resolution of its complexities is an important factor in the achievement of successful mergers. integration usually takes longer than the period the events study (abnormal loss) method values. this point underscores the importance of a longitudinal approach to the study of company performance, because such analyses are based on the actual reported financial performance of the company (olokoyo and umoren, 2008). nevertheless, the principles identified in the literature shall be adopted in the conduct of this research. although the bulk of the studies are multi case studies, the opinions formed and results generated from those studies shall serve as a guide in the application of the various identified concepts and parameters. iv. methodology this study which is a longitudinal and time series analysis of the impact of mergers and acquisition on the financial performance of two nigerian banks, united bank for africa (uba) and standard trust bank (stb) shall examine the financial period of 2000-2010 consisting 5 year pre-merger and 5 year post-merger years. the methods adopted follow the perspectives of economic theories in line with the studies of altunbas and ibanez (2004), and olokoyo and umoren (2007). this research assumes that the financial data from the individual banks reflect the strategic profile of merging institutions and supports the argument by altunbas and marques (2008), that mergers between strategically similar firms are likely to provide greater benefits than mergers involving dissimilar strategies. in the first instance, financial ratios shall be used to compare the performance of the two banks in the ex-ante period and compare these performance with the ex-post period which is then followed by a statistical examination of the impacts using a linear regression model. the methods of analysis to be adopted in this study are defined below: return on equity this ratio was adopted in order to measure the value gained by shareholders for investing in the company. it is measured by; roe = pbt/shareholder assets return on capital employed this ratio was embraced in this research to measure the ability of the banks to generate returns from its capital. it is measured by; roce = pbit/net asset return on asset this ratio shall be used to evaluate how well the management of the banks is employing the banks’ assets to make a profit. it is measured by; roa = pat/total asset liquidity ratio this ratio shall measure the banks’ ability to meet its obligations as and when due. it is measured by; current ratio = current assets/current liabilities these ratios show how well the companies utilized resources in generating returns and increasing shareholder value. the rationale supporting the adoption of ratio analysis is to achieve a timely and concise description of the performance of the banks (casu et al, 2006) and to enable a comparative analysis of uba and stb in the pre-merger (ex-ante) period. ratio analysis was used by jimmy (2008) in a comparative study of mergers and organic growth in the nigerian banking sector to arrive at a conclusion that mergers and acquisition has a positive impact on bank performance. further, okpanachi (2011) used ratio analysis in comparative study of the impact of mergers and acquisition on financial efficiency of nigerian banks. multiple performance indicators such as return on equity, return on assets, return on capital employed and current ratio were used in the analysis. however, the use of financial ratio is limited by the fact that it does not account for differences in accounting policies between the banks (mishkin 2006) and it does not detect window dressing or creative accounting and the bearing of inflation and economic effects of business cycles such as a recession on earnings is not reflected. nevertheless, in order to overcome these limitations, further testing was carried out on the banks using linear regression. regression model in order to statistically test the impact of mergers on the banks, linear regression was adopted and a longitudinal analysis of the banks’ financial statement was undertaken which was built on the approach of altunbas and marques (2008), altunbas and ibanez (2004), ramaswamy (1997), chatterjee et al (1992) and datta et al (1991). the formulae and variables are briefly explained below. uba bank (post-merger): a) profitability it= β0 + β1 asset profile i(t-1) + β2 capital structure i(t-1) + β3 credit risk i(t-1)+ β4 cost controlling i(t1) + β5liquidity risk i(t-1) + β6 performance i(t-1) uba & stb bank (pre-merger): b) profitability it= β0 + β1 asset profile i(t-1) + β2 capital structure i(t-1) + β3 credit risk i(t-1)+ β4 cost controlling i(t1) + β5liquidity risk i(t-1) + β6 performance i(t-1) volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.162 | http://emaj.pitt.edu mergers, acquisitions and financial performance: a study of selected financial institutions page |40| emerging markets journal where i represents the firm and t represents time measured by their calendar year end. the dependent variable is profitability, which is measured by the ratio of profit after tax to total assets. this ratio indicates the asset turnover that translates to the way that bank uses its assets to make profit while the independent variables are as follows: asset profile strategy is considered as the bank’s balance sheet loan composition. it is measured by the ratio of total loan and advances to total assets ratio (tl/ta). credit risk is measured as the level of loan loss provisions divided by total loans (pll/tl). in general, it can be argued that better post-merger performance may be expected when banks with very similar asset quality merge (umoren and olokoyo, 2007). the greater the similarities among the asset profile strategies, the higher the performance expected after merging. capital structure is measured as the ratio of shareholders fund to total assets (sf/ta). regulators have given this strategy increased importance in order to introduce competition in banking and to check risktaking with capital requirements. banks with lower capital ratio can signal favorable information after merging with banks with larger capital ratio. this ratio is expected to be high, because the merger increases both equity and total asset. the cost controlling strategy shows the emphasis to minimize cost by relating operating expenditure to returns and it is measured by the operating expenses to net earnings (oe/ne). as a result of economies of scale derived from horizontal mergers, the bank is competing on the basis of low-cost and operating efficiency was one of the underlying synergies expected as benefit from merging with another similarly strategized bank. therefore, uba is expected to show a higher performance after merging. the liquidity risk strategy refers to the banks’ strategy towards managing liquidity risk and is measured by the ratio of cash and short-term funds to deposits (cst/d). a better liquidity management of the merged banks would imply a better performance. v. results descriptive analysis table 1 provides descriptive summary statistics of the financial indicators of uba and stb in aggregate from 2000 to 2005 and uba group from 2006-2010. table 1: descriptive statistics source: author’s computation. table 2: linear regression of the pre-merger uba and stb and the post-merger period source: author’s computation. the coefficients reported in table 2 which are ** and *, indicate a statistical significance level of 5% and 10% respectively based on the p-values. vi. discussion asset profile and credit risk are indicators of the profitability of a bank relative to its total assets and level of effectiveness of the management in using the assets to generate returns. credit risk was measured by the ratio of provision for bad debt to total loan and the results in table shows a better post-merger performance (-0.042879 < -0.0429511). this shows that, the bank was able to curtail the level of risk existing in the pre-merger period. that is in line with the findings of umoren and olokoyo (2008). however, credit risk generated a negative result in both the pre-merger and post-merger periods, which is statistically insignificant to the profitability of the bank. with reference to the impact of mergers and acquisition on the bank’s performance, there was an increase in post-merger performance with a mean of 0.309 as against the 0.293, which was received in the pre-merger period in table 1. the improvement extends to asset profile in table 1 with a post-merger mean of 0.278, vis-à-vis 0.274 of the pre-merger period. further, in table 1 the mean of the size of the bank increased to 5.417 in the post-merger period, from the pre-merger value of 5.061. this confirms the argument that, size is a valid rationale in the choice of mergers and acquisition as a means of external growth (bernard et al, 2010). in addition, there was a significant improvement in the capital adequacy ratio of the bank, as the post-merger ratio rose to 0.772 from a pre-merger ratio of 0.079. this reflects an increase in the equity capital of the bank propelled by regulations and bank policy. in line, the rise in the asset risk ratio in table 1 of the post-merger (0.761>0.098) is a pointer that the merger improved the risk profile of the bank. furthermore, the cost control ratio recorded a lower ratio in the post-merger period (0.541<0.541) in table 1, which is an indicator that uba has amassed the benefits of economies of scale resulting from a combination of strategic similarities and geared toward a reduction in costs. likewise, in table 1 there was a decrease in the liquidity risk of the bank in the post-merger period in comparison with the pre-merger period (0.389<0.508), which shows that the bank has reduced its default risk to the barest minimum. however, volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.162 | http://emaj.pitt.edu tarila boloupremo, samson ogege emerging markets journal | p a g e 4 1 in terms of asset profile, the increase in the post-merger loan to asset ratio by 0.004 shows that the risk profile of the bank has changed and the management extends more loans to customers. the result obtained in asset profile contradicts the findings of altunbas and marques (2000). they had argued that in asset profile, a lower performance was expected due to conflicts arising from managerial disparities on asset composition. contrary to the prediction, asset profile was positive and higher in the post-merger period as against the negative, and negative results in table 2 was received in the pre-merger period (0.0088801 > 0.207261). this shows that, uba adopted an expansionary policy in generating return and improvement in credit management (rawasmy, 1997). however; the result obtained is not statistically significant to the profitability of the bank. the capital structure is a tool used by the management of the bank to signal a favorable asset profile and in the pre-merger period, capital structure was statistically significant to the profitability of the banks at 5%. but in the post-merger period, though the result is positive, it is not significant and does not affect financial performance. similarly, liquidity risk refers to the bank’s attitude towards managing solvency. the reason is that, pursuing a tolerant liquidity ratio could be costly. uba pursues a policy that would improve the earnings of the bank and this explains the significance of the liquidity risk at 10% in the pre-merger period and a negative result in the post-merger which bears no significance to the performance of the bank in table 2. furthermore, the result on size shows that the size of the bank plays an important role in the financial performance of uba. both the pre-merger and postmerger results on size show that size has a 10% statistical significance on the financial performance of uba in table 2. this is in line with the findings of altunbas and ibanez (2004). finally, the cost control variable which emphasizes the minimization of cost by relating expenditure to earnings is predicated on the premise that firms competing on the basis of low cost is expected to benefit from merging with one another (bollenbacher, 1995). hence, in the post-merger period, cost control is negative and is statistically significant to the financial performance of the post-merger period in table 2. this shows that the management of uba embraced a low cost strategy, which is the result of economies of scale deriving from the combination of similar skills and technology. this result is parallel with the findings of umoren and olokoyo (2008). vii. conclusion and recommendations mergers and acquisition have been noted to be the most popular means of external growth pursued by financial institutions (adeyemi, 2007). but, their impact on the financial performance of merged entities is still inconclusive (bernard et al, 2010). however, as noted earlier, the majority of studies that have found a negative relationship between mergers and acquisition, and performance have mostly evaluated the success based on short-term changes in stock (epstein, 2005). in contrast, this research argues that mergers and acquisition should neither be undertaken to affect these short-term changes, nor be examined on that basis. mergers should be studied in the long-term with the consideration of firm goals and performances as well other economic indicators. the study has implications for future research on the impact of mergers and acquisition on the financial performance of the nigerian banking sector. the sample of the population should be expanded to include at least 75% of the banks in nigeria in order to enable the researcher form a general view that would capture the nigerian banking sector and other variables such as the market, regulation and tax. they should be included in the examination of the effects of mergers and acquisition on banks’ performance. further research on the merger between uba and stb should examine the extent to which the results in this study relate to other banks. also, other underlying mechanisms apart from post-merger integration like strategic fit, due diligence, culture and organizational fit should be investigated to ascertain whether it justifies the results. another opportunity for future research would be to evaluate the extent positive results are obtained and the duration of merger is affected by resources and capabilities. references akpan, a. b. (2005). effectiveness of bank capitalisation and consolidation in building market confidence: an assessment of customers perception in nigeria. journal of business administration, 1(2). amel, d., barnes, c., panetta, f and salleo, c. (2004). consolidation and efficiency in the financial sector: a review of the international evidence. journal of banking and finance, 28, 24932519. andrade, g. and stafford, e. (2004). investigating the economic role of mergers. journal of corporate finance, 10, 1-36. auster, e. and sirower, m. (2002). the dynamics of merger and acquisition waves: a three-stage conceptual framework with implications for practice. journal of applied behavioural science, 38(2), 216-244. beccalli, e. and p. frantz. (2009). m&a operations and performance in banking. journal of financial services research 36(2): 203-226. becher, d. a. (2000). the valuation effects of mergers. journal of corporate finance, 6, 189–214. behr, a. and heid, f. (2011). the success of bank mergers revisited. an assessment based on a matching strategy. 18(1), 117-135. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.162 | http://emaj.pitt.edu mergers, acquisitions and financial performance: a study of selected financial institutions page |42| emerging markets journal berger, a. and demsetz, r. and strahan, p. (1999). the consolidation of the financial services industry: causes, consequences and implications for the future. journal of banking and finance, 23, 135-194. bernard, c., fuentelsaz, l. and gomez, j. (2010). the effects of merger and acquisitions on productivity: an empirical application to spanish banking. omega, 38(5), 283-293. bryman, a. and bell, e. (2001). business research methods. 3rd ed. oxford: oxford university press. cassiman, b., colombo, m. garrone, p. and veugelers, r. (2003). the impact of mergers and acquisitions on the research and development process: an empirical analysis of the role of technological and market relatedness. res policy, 34, 195-220. chanmugan, r., shill, w., mann, d., ficery, k. and pursche, b. (2005). the intelligent clean room: ensuring value capture in mergers and acquisitions. journal of business strategy, 26 (3), 43-49. chatterjee, s., lubatkin, m., schweiger, d. m and weber, y. (1992). cultural differences and shareholder value in related mergers: linking equity and human capital. strategic management journal, 7, 119-139. chu, k. h. (2010). bank mergers, branch networks and economic growth: theory and evidence from canada, 18891926. journal of macroeconomics, 32(1), 265-283. cyree, k. (2010). what do banks acquirers value in nonpublic bank mergers and acquisitions?. the quarterly review of economics and finance, 50(3), 341-351. denis, d., denis, d. and yost, k. (2002). global diversification, industry diversification and firm value. journal of finance, 57, 19511979. delong, g. and deyoung, r. (2007). learning by observing: information spillovers in the execution and valuation of commercial banks m &a. journal of finance, 62(1), 181-216. devos, e., kadapakkam, p. and krishnamurthy, s. (2009). how do mergers create value? a comparison of taxes, market power and efficiency improvements as explanations for synergies. review of financial studies, 22, 1179-1211. deyoung, r., hunter, w. c. and udell, g. f. (2004). the past, present and probable future for community banks. journal of financial services research, 25, 85-133. deyoung, r. (2005). the performance of internet-based business models: evidence from the banking industry. journal of business, 78, 893–947. epstein, m. j. (2005). the determinants and evaluation of merger success. business horizons, 48, 3746. focarelli, d. (2002). why do banks merge?, journal of money, credit and banking, 34(4), 1047-1066. ghaughan, p. (2011). m & a resurgence: good or bad?, journal of corporate accounting and finance, 22(2), 3-8. ghaughan, p. (2002). mergers, acquisition and corporate restructurings. 3rd ed. new jersey: john wiley and sons. ghauri, p. and gronhaug, k. (2010). research methods in business studies. 4th ed. harlow: prentice hall. hillier, d., ross, s., westerfield, r., jaffe, j. and jordan, b. (2010). corporate finance: european edition. london: mc graw-hill. houston, j., james, c. and ryngaert, m. (2001). where do merger gains come from? bank mergers from the perspective of insiders and outsiders. journal of financial economics, 60(2), 285331. houston, j. and ryangaert, m. (1994). the overall gains from large bank mergers. journal of banking and finance, 18(6), 1155-1176. huyghebaert, n. and luypaert, m. (2010). antecedents of growth mergers and acquisitions: empirical results from belgium. journal of business research, 63, 392-403. jemison, d. and sitkin, s. (1986). corporate acquisitions: a process perspectives. academy of management review, 11, 145-163. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.162 | http://emaj.pitt.edu tarila boloupremo, samson ogege emerging markets journal | p a g e 4 3 jimmy, a. e. (2016). an evaluation of organic growth and mergers and acquisition as strategic growth options in the nigerian banking sector. ma thesis, university of nottingham. jin, q. j. and ligon, j. a. (2011). how much is reasonable? the size of termination fees in mergers and acquisitions. journal of corporate finance, 17, 959-981. lehto, e. and lehtoranta, o. (2004). becoming an acquirer and becoming acquired. technol forecast social change, 71, 635-650. lemo, t. (2005). regulatory oversight and stakeholder protection. a paper presented at the bgl mergers and acquisitions interactive seminar, held at eko hotels& suits. v. i., on june 24. lubatkin, m. (1986). towards reconciliation of market performance measures to strategic management research. academy of management review, 11(3), 490-512. moruff,s.o., adebiyi, j.a. & benneth, u.z. (2018). innovation and internationalization of nigeria deposit money banks. emerging markets journal, 8(1), 1-11. maire, s. and collerette, p. (2011). international postmerger integration: lessons from an integration project in the private banking sector. international journal of project management, 29, 279-294. malmendier, u. and tate, g. (2008). who makes acquisition? ceo overconfidence and the market’s reaction. journal of finance economics, 89, 20-43. moeller, s. b. and schlingermann, f. p. (2005). global diversification and bidder gains: a comparison between cros border and domestic acquisitions. journal of bank finance, 29, 533-564. ogbonna, a. (2007). can the real sector count on nigerian banks?. the sun news online (online) 18 october 2007. available at: <http://www.sunnewsonline.com/webpages/fea tures/money/2007/oct/18/mone y-1810-07-002.htm. okpanachi, j. (2015). comparative analysis of the impact of mergers and acquisitions on the financial efficiency of banks in nigeria. journal of accounting and taxation, 3(1), 1-7. okafor, e. e. (2009). post consolidation challenges and strategies for managing employees resistance to change in the banking sector in nigeria. journal of social sciences, 19(2), 129-139. okonkwo, c. o. (2004). legal framework for mergers and acquisitions. central bank of nigeria (online). available at: <http://www.cenbank.org/out/publications/bsd/ 2005/legal%20framework%20for%20mergers %20%acquisitions.pdf olsen, g. t., & pagano, m. s. (2005). a new application of sustainable growth: a multi-dimensional framework for evaluating the long run performance of bank mergers. journal of business, finance and accounting, 32, 1995– 2036. palia, d. (1993). the managerial, regulatory and financial determinants of bank merger premiums. journal of industrial economics, 41, 91-102. pilloff, s. j., & santomero, a. m. (1998). the value effects of bank mergers and acquisitions in y. amihud, & g. miller (eds.), mergers and acquisitions. ny: kluwer academic publishers 59–78. powell, r. and yawson, a. (2005). industry aspects of takeovers and divestitures: evidence from the uk. journal of bank finance, 29, 3015-3040. ramaswamy, k. (1997). the performance impact of strategic similarity in horizontal mergers: evidence from the u.s. banking industry. academy of management journal 40, 697-715. roll, r. (1986). the hubris hypothesis of corporate takeovers. journal of business 69, 197-216. sanusi, l. (2011). banks in nigeria and national economic development: a critical review (online). bis central bankers speeches. available at: http://www.bis.org/review/r110323b.pdf schiereck, d., sigl-grub, c. and unverhau, j. (2009). investment bank reputation and shareholder wealth effects in mergers and acquisitions. research in international business and finance. 23(3), 257-273. shleifer, a. and vishny, r. (2003). stock market driven acquisitions. journal of finance economics, 70, 295-311. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.162 | http://emaj.pitt.edu mergers, acquisitions and financial performance: a study of selected financial institutions page |44| emerging markets journal schneider, w. (2003). trouble at the top: a sign of deal disorder. mergers and acquisition: the dealmakers journal, 38 (4), 30-33. soludo, c. c. (2004). consolidating the nigerian banking industry to meet the development challenges of the 21st century. bis review, 43. umoren, a. and olokoyo, f. (2007). merger and acquisition in nigeria: analysis and performance pre and post consolidation. lagos journal of banking, finance and economic issues, 1(1), 1-17. valkanov, e. and kleimeier. (2007). the role of regulatory capital in international bank mergers and acquisition. research in international business and finance, 21(1), 5068. vennet, v. r. (2002). cross-border mergers in european banking and bank efficiency. university of gent working paper, 152. vennet, v. (1996). the effect of mergers and acquisitions on the efficiency and profitability of ec credit institutions. journal of banking and finance,20, 1531-1558. went, p. (2003). a quantitative analysis of qualitative arguments in a bank merger. international review of financial analysis, 12(4), 379-403. weston, j. f. and jawien, p. s. (1999). perspectives on mergers and restructuring. journal of business economics, 34, 29-33. wheelock, d. c. and wilson, p. w. (2000). why do banks disappear? the determinants of u.s. bank failures and acquisitions. the review of economics and statistics, 82(1), 127-13. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu determinants of foreign direct investment: a panel data analysis for sub-saharan african countries semra boğa adana alparslan türkeş science and technology university, turkey | sboga@atu.edu.tr abstract the aim of this study is to investigate the determinants of fdi inflows in sub-saharan african countries. in this study, panel data analysis was performed by using annual data from 23 countries for the period of 1975-2017. the pesaran (2004) cross-section dependence test was performed to test correlation and ips unit root test was applied to reveal the stationary level between the units. based on the pmg estimator results gdp growth, trade openness, domestic credit, natural resources and telecommunication infrastructure are all found to be the determinants of fdi inflows in sub-saharan countries in the long term. but, in the short term, only the gdp growth and trade openness determines the fdi inflows. keywords: foreign direct investment, panel data analysis, sub-saharan africa, capital flows, determinants of fdi new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.175 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:sboga@atu.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.175 | http://emaj.pitt.edu determinants of foreign direct investment: a panel data analysis for sub-saharan african countries page |80| emerging markets journal determinants of foreign direct investment: a panel data analysis for sub-saharan african countries semra boğa i. introduction one of the major economic issues of developing countries is the shortage of domestic resources necessary to subsidize national investments. this leaves countries in constant need for both indirect and direct investments. initially, developing countries, which have been on the path to lending from predominantly international banks, have started to redesign their foreign investment policies and business climate to attract more stable foreign capital types, since the debt crises in the 1980s restricted access to credit. due to its structure, direct investments, which give ownership rights to the investor and require a certain physical investment, have been considered the most secure and largest component of capital flows in developing countries by being seen as a good alternative to foreign capital flows coming in the form of bank loans. along with the globalization trends seen in the post-1990 period, there has been a significant change also in the attitude towards foreign direct investment (fdi) in developing countries. the debate among academics and policy-makers on whether to encourage fdi or not has largely been replaced by how fdi should be encouraged. the fact that the world bank and some other international development agencies have proposed fdi as one of the most effective tools in fighting against the global poverty by increasing employment, technological know-how and competitiveness has motivated less developed and developing countries to pursue policies to encourage fdi inflows. fdi is also seen as an important source of poverty alleviation for african countries with inadequate financial resources, technological and production infrastructure. united nations economic commission for africa (uneca) claims that, foreign investment is the main factor in coping with the financial issues of africa in their african economic report. institutions like the imf and the world bank have asserted that, big inflows of fdi would lead to economic development and that sub-saharan african governments are very keen to attract fdi. indeed, most african countries have taken significant measures to attract fdi. first, countries in the region have implemented fdi-specific legislative frameworks to promote their investment goals. these measures included the establishment of investment incentive agencies and facilities and the creation of specific plans to attract investments such as export processing zones (epzs) and special economic zones (sezs). by 2019, total number of sezs reached to 237 established by 32 countries (unctad, 2019). in addition, initiatives have been taken at the global level by signing the bilateral investment treaties (bits) and double taxation treaties (dtts). the number of bits signed in africa reached to almost 1000 and dtts went over 500 in 2012 (uneca, 2016). however, despite all the efforts and new regulations implemented, fdi inflows have not reached to desired levels in sub-saharan african countries. fdi inflows to developing countries showed a substantial increase since the beginning of the 21th century, reaching $706 billion (54% of total investment) in 2018, which was $ 24 billion in 1990 (24% of total investments) (unctad, 2019). this has been a good development, especially for poor and underdeveloped countries with no access to international capital markets. africa, however, the poorest region in the world, has not benefited from this increase in fdi inflows. for example, in 1980-1989 and 1990-1998, investments in sub-saharan africa increased by only 59%. considering that fdi inflows to developing countries increased by 672% in the same period, the increase in sub-saharan africa is quite low (asiedu, 2002). due to the unstable structure of foreign aid and the volatility of portfolio flows, attracting various types of fdi in the region is essential. given that fdi will accelerate growth and development by enhancing employment, managerial skills and technology, it is worrying that the region, which does not have the financial resources required for investments, cannot attract enough foreign investment. fdi is critical in this region, where domestic savings and incomes are quite low, due to the generally high levels of poverty, to catch the other developing countries' economic growth and development. as mentioned in the united nations millennium declaration, a significant improvement in fdi levels would help the region halve the millennium development goal (millennium development goals) in 2015 to reduce poverty rates. based on africa's development (nepad) statement, the region must fill an annual resource gap of $64 billion, for the continent to meet the millennium development goals. due to low income levels and domestic savings in the region, most of the finance will have to come from abroad. however, official assistance to the region is diminishing. moreover, most of the countries in africa have no access to global financial funds which leaves the fdi as the best alternative resource to overcome the poverty in the region. the annual fdi flow was an average of $7 billion between 1995 and 2001. therefore, filling the annual resource gap of $64 billion needed for poverty reduction will require a significant increase in fdi (asiedu, 2006) the sub-saharan africa area, which is the subject of this study, is made up of 48 countries, most of them in the list of least developed nations with trouble attracting foreign investment due to investors' perception of the risky region because of the bad business environment. even though the region has a rich variety of natural resources and a big population; corruption, very low level of employment, political conflicts and poor infrastructure impede these countries to fully realize their potential. both academic studies and unctad reports have shown that in order to attain sustainable growth and volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.175 | http://emaj.pitt.edu semra boğa emerging markets journal | p a g e 8 1 decrease poverty, national and foreign investments must be encouraged in the region. after two consecutive years of decline, fdi inflows to sub-saharan africa increased by 13% in 2018 and rose to $ 32 billion. the main reasons behind this increase in fdi were the recovery in the resource-seeking investment, and the increase in investments in south africa, the continent's second largest economy. these two developments compensated the significant declines in fdi to some countries in the sub-region due to political uncertainty and unfavorable economic fundamentals. moreover, increasing demand and rising prices for some commodities also contributed to the increase in investments. however, lower than forecasted global economic growth, accelerating trade tensions and moderate growth in sub-saharan africa were the factors limiting the magnitude of fdi growth. in 2019, the anticipated increase in africa's financial development, progress towards the application of the african continent free trade area agreement and some big greenfield investments are regarded factors that will stimulate the foreign investments in the area (unctad, 2019). considering the latest improvements in fdi flows to sub-saharan african region, it is worthwhile to investigate the factors that drive the foreign investment. there exists numerous empirical studies estimating the determinants of fdi inflows in developed and developing countries. however, the absence of the generally agreed determinants of fdi inflows both in terms of theoretical and empirical findings motivates the researchers to scrutinize this topic. studies on subsaharan african countries have mostly focused on natural resources in these countries as the main determinant of fdi inflows. in some other studies conducted for developing countries determinants such as economic growth, trade openness, financial development, infrustructure and macroeconomic stability have been found as important determinants of fdi inflows in accordance with the theoretical literature in this field. therefore, this study aims to close the gap in the literature by testing these variables for sub-saharan african countries. the findings of the study are believed to shed a light on the policies of african countries to attract more foreign investment. the paper is structured with five sections. in the following section, the theoretical and conceptual framework of fdi determinants will be explained. in section iii, the findings of the empirical literature will be analyzed. in section iv, steps of the econometric analysis will be presented. finally, in the conclusion part, empirical findings of the study will be elaborated. ii. the determinants of fdi: theoretical and conceptual framework in the economics literature, fdi is defined as a type of investment made by a foreign investor by acquiring a company, providing an establishment capital for a new firm or increasing the capital of an existing firm in the host country, bringing technology, management knowledge and control of the investor on the invested country (karluk, 2009). one of the first attempts to explain the fdi was made by classical economist david ricardo in his theory of comparative advantages. however, assumptions of this theory, such as two country, two products and the full mobility of production factors were insufficient to explain the globally rising fdi trends (denisia, 2010). theories developed in the field of fdi mainly seek answers to questions such as why a company established in the home country invests in another country, how it can compete with local firms in the foreign country of investment, and why companies prefer to invest directly instead of export or license agreements. according to vernon (1966), an innovative product first emerges in the united states or in other developed countries, where technology and skilled workforce are advanced. in his theory of "product life cycle", he argues that in the first stage of the cycle, only the products sold in the domestic market are exported to foreign countries due to increased production. after the export stage, the producers choose to directly invest to produce and sell the products in other countries. on the other hand, in his theory called "oligopolistic reaction" knickerbocker (1973), suggested that investors take the decision of fdi to follow the behavior of their competitors who invested in another country to move from exporting stage to direct investment. in his "industrial organization theory", hymer (1976) argues that companies that are currently exporting products will invest directly in the host countries in order to compete with local producers in these countries. however, in order to make international investments profitable, companies need to have superior advantages such as know-how, scale economie, access to cheap financial resources, marketing and management skills. according to "internalization theory" developed by buckley and casson (1976), market disruptions in the host country can be prevented by fdi in the country. companies use vertical and horizontal integration techniques and with direct investments in different countries, a product manufactured by one of the subsidiaries can be used as an input in another subsidiary. the "eclectic" or "oli paradigm", developed by dunning in the late 1970s, has been the most recognized and cited work than other models in terms of explaining the fdis in a more holistic approach compared to aforementioned theories based on market disruptions. of the initials constituting the model "o" represents ownership advantages, "l" represents location specific advantages, and "i" represents internalization advantages. according to dunning, fdi should only be made if these advantages are realized at the same time. ownership advantages include leading-edge technologies, specialized manufacturing processes, patents, and managerial skills. locational advantages such as special tax regimes, low production and transportation costs, market size, access to protected markets and low risk are considered important factors for the profitability of the investment. finally, risks arising from market failures can be mitigated by using internalization advantages (pedersen, 2003). looking at the underlying motivation behind the investment, dunning (1993) proposes three different types of fdi: market-seeking, resource-seeking, and efficiency-seeking. according to dunning, the factors that investors take into consideration when choosing a country to invest will vary according to these three types of investment. for example, a market-seeking (also called horizontal) fdi whose aim is to provide easy access to local and regional markets will focus on factors such as market size and economic growth potential of the volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.175 | http://emaj.pitt.edu determinants of foreign direct investment: a panel data analysis for sub-saharan african countries page |82| emerging markets journal host country. investors will consider investing directly, especially in situations where it is difficult to enter the country via export due to high tariffs or transportation costs. the main motivation of the resource-seeking fdi is to provide access to natural resources (natural gas, oil, minerals etc.), raw materials or low-cost labor in the host country. especially for the multinational companies considering to invest in the manufacturing sector for export purposes, the factor endwoments in the host country will be an important attraction factor. finally, the efficiency-seeking fdi aims to benefit from the common management by combining the geographically dispersed activities of the company in one country in the presence of economies of scale and scope. unctad, making use of also the findings of dunning, has established a report in 1998 defining the host county determinants of fdi. below figure shows the political, economic and business environment related determinants of fdi in the host country. figure 1. host country determinants of fdi source: world investment report 1998: trends and determinants, table iv, p.91. as seen in figure 1, classification of fdi types of unctad coincides with the model proposed by dunning. according to unctad, there are three main factors that determine the decision of multinational companies in which country to invest: the policies of host countries, the proactive measures of countries to stimulate and facilitate investments and the characteristics of their economies. therefore, investors make investment decisions by taking into consideration many different variables depending on location, type of investment and the investment strategy (unctad, 1998). iii. the determinants of fdi: empirical literature most of the empirical studies for africa have focused mostly on the natural resource variable, assuming that fdi inflows are resource-seeking. therefore, most empirical literature has not adequately considered the impact of factors such as the availability of credit, trade openness, telecommunication infrastructure, and macroeconomic stability. there exists an extensive literature on determinants of fdi inflows. in this section of the paper, particularly the studies used similar independent variables in this research included. asiedu (2002), using data from 32 developing countries for the period 1970-1999, examined the factors that determine fdi in developing countries, making a distinction between sub-saharan african and non subsaharan african countries. the study revealed a welldeveloped infrastructure and the greater return on capital determines the fdi in non sub-saharan african countries, while openness is a good predictor of fdi for both groups of developing countries. onyeiwu and shrestha (2004) described economic growth, openness of the economy, international reserves and the availability of natural resources as determinants of fdi for 29 african countries in the period of 1975-1999. in addition, unlike other studies, they concluded that political rights and infrastructure are not important indicators of fdi inflows to africa. in the study conducted by erkisi and ceyhan (2019) to investigate the relationship between trade liberalization and economic growth in transition economies, it was concluded that economic growth has an impact on fdi in the short-run, however it reduces the fdi in the long-run. in the research carried out by erkişi (2018) to explore the causal relationship between fdi, trade openness and economic growth in turkey, economic growth, export, and import were not found to be the granger cause of fdi. the empirical literature measuring the impact of natural resource endowments on fdi reveals contradictory results. asiedu (2006), using the panel data analysis showed that natural resource endowments and the big domestic market support fdi inflows to africa. on the other hand, basu and srinivasan (2002) found that some countries in africa could attract fdi not only due to natural resources, but also through business climate improvement efforts and image development campaigns. asiedu and lien (2011) using a dynamic panel model analysis revealed that, the intensity of natural resource exports negatively impacts the fdi inflows. research conducted by wadhwa and reddy (2011), udoh and egwaikhide (2008) and ahn, adji and willet (1998) revealed a negative relationship between inflation and fdi inflows. the reason behind this negative relationship is due to the fact that, inflation is seen as a macroeconomic instability which constitutes a potential risk for the foreign investors. using time series data for the period 1960-2005, ang (2008) examined the determinants of fdi inflows to malaysia. based on the findings, the author concludes that financial development, infrastructure development and openness encourage fdi inflows. this means that, trade liberalization leads to more fdi inflows in a host country. the findings of this study were also confirmed by neumayer and de soysa (2005), who indicated that the fdi inflows of the countries were higher in countries where the trade openness is high. demirhan and masca (2008) analyzed the determinants of fdi inflows in 38 developing countries for the period of 2000-2004 using an econometric model based on cross-sectional analysis. the findings of the study revealed a significant and positive relationship between the growth rate in gross domestic product (gdp) per capita, telephone lines (measured by the number of telephone lines per 1000 people) and trade openness variables as well as fdi inflows. it was also found that, fdi inflows increased as inflation and tax rate decreased in selected developing countries. sichei and kinyondo (2012) predicted the determinants of fdi volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.175 | http://emaj.pitt.edu semra boğa emerging markets journal | p a g e 8 3 inflows by using panel data analysis method for 45 african countries using 1980-2009 annual data. they found agglomeration economies, real gdp growth, domestic and foreign international direct foreign investment policy and the existence of natural resources as the main determinants of fdi inflows to africa. using data from 36 emerging economies for the period of 1990–2000, liargovas and skandalis (2011) conducted a panel regression analysis to estimate the impact of trade openness on fdi inflows. trade openness was found to be an important determinant in the long term for selected latin america, asia, africa, cis, and eastern european countries. in addition to trade openness, other factors such as political stability, exchange rate stability and market size (as expressed by gdp) have been found to have a positive impact on fdi inflows. on the other hand, in the study of seim (2009), the effect of trade openness on fdi shows complex results. while trade openness is an important factor in oecd and sub-saharan african countries, the same effect is not seen in oil exporting and non-oecd countries. investigating the impact of financial development on fdi by using domestic credit indicators in 10 middle east and north africa (mena) developing countries between 1988-2015, shah (2016) found that financial development is important for foreign investors' investment decisions. by using data mining technique and data from 78 countries for the period 1980-2009, korgaonkar (2012) questioned whether financial development has an impact on a country's fdi inflows or outflows. as pointed out by the findings, fdi is not directed towards the financially weak countries and that the development of the financial system of the receiving country is an important prerequisite for the positive effect of fdi on economic growth. on the other hand, using panel data from 38 sub-saharan african (ssa) countries, ezeoha and cattaneo (2012) investigated the impact of financial development, institutional quality and natural resources on fdi for the period of 1995-2009. however, they could not find a clear evidence of the relationship between the two variables. using both transportation and telecommunication indicators, koyuncu and ünver (2016) conducted a panel data analysis with univariate and multivariate models in 187 countries for the period of 1990-2014 to explore the effect of infrastructure on fdi inflows. all independent variables caused an increase in fdi inflows. on the other hand, openness to foreign trade, domestic credit to the private sector and urbanization ratio used to control the robustness of the model also had a positive and statistically significant effect on fdi inflows, while no statistically significant effect of population growth and inflation was observed. tampakoudis et al. (2017) conducted a panel data analysis with the data from 15 middle-income countries for the period of 1980-2013. they emphasized the importance of foreign exchange, gdp and population growth for fdi inflows, while financial development, inflation, infrastructure and fuel exports proved to be insignificant. iv. econometric analysis data set, variables and methodology the data set consists of 1204 observations of foreign direct investment (fdi), economic growth (gdp), international trade (trade), domestic credit (credit), inflation (inf), natural resources (nr) and fixed telephone subscriptions (fts) series for 28 subsaharan african countries (benin, burkina faso, botswana, central african republic, cote d'ivoire, cameroon, congo dem. rep., congo rep., gabon, ghana, gambia, kenya, madagascar, mali, mauritania, mauritius, malawi, niger, nigeria, rwanda, sudan, senegal, sierra leone, eswatini, seychelles, chad, togo, south africa) between 1975 and 2017. the data set was compiled from world bank database. in the world bank's database, the number of sub-saharan african countries is 48. however, only 28 of them are included in this study due to data availability. primarily, the model was defined. before examining the relationships between the series, to choose the proper testing methods, the correlation between the units, the stationarity of the series and the homogeneity of the parameters were examined. after defining the optimal lag-length, cointegration test was performed to define the existence of long-term relationship and pmg estimator was employed to reveal both the long-term and the short-term relationships of the series of the model. the model the functional expression of the model is presented in eq. (1). in the model, fdi is the predicted variable while economic growth (gdp), international trade (trade), domestic credit (credit), inflation (inf), natural resources (nr) and fixed telephone subscriptions (fts) are the predictor variables of the model. ( ) fdi: foreign direct investment, net inflows (% of gdp) gdp: gdp growth (annual %) trade: trade (% of gdp) credit: domestic credit to private sector (% of gdp) inf: inflation, gdp deflator (annual %) nr: total natural resources rents (% of gdp) fts: fixed telephone subscriptions (per 100 people) (1) eq.1 the functional model can be expressed in statistical form, as in eq. (2) (2) in eq. (2), shows the “constant term”, while ( … ) represents the coefficients that specify the relationship between the predicted variable and the predictor variables; ( ) denotes the countries, and refers to the error term. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.175 | http://emaj.pitt.edu determinants of foreign direct investment: a panel data analysis for sub-saharan african countries page |84| emerging markets journal the model can be redefined based on ardl model. the re-parameterised ardl (m, n, n, n) error correction model is expressed as: (3) in eq.3, is the vector that symbolises the long-term relationships. the expression of [ ] represents the error correction term. and are the short-term dynamic coefficients. the model can be described as: (4) findings descriptive statistics presented in table 1 shows the values of observation, mean, standard deviation, minimum and maximum to reveal the characteristics of the series. once the standard deviation values revised, it can be seen that the series are large enough to explore the variations in the data. table 1: descriptive statistics it is needed to revise the correlation between the explanatory variables. if the correlation statistic is 0.80 or above, it is an evidence of the linear relationships among the variables and therefore should be dropped because the model does not include both repressors. the outcomes of the correlations between the variables are presented in table 2. table 2: correlation analysis the outcomes of correlation analysis in table 2 show that none of correlation statistics are equal or higher than 0,80. so, there is no linear relationship between the explanatory variables. the stationarity of the series or in other words, the integration level of the series is a crucial point to define the proper testing method, which reveals the relationships between the series. one of unit root tests will be employed to explore the integration level of the series. however, to choose the right unit root test method, the cross-sectional dependence between the units should be investigated. in case of existence of cross-section dependence between the units, “one of the firstgeneration panel unit root tests”, otherwise “one of the second-generation panel unit root tests” should be performed. pesaran (2004) cd-test was performed to reveal the cross-section dependence and the outcomes of the test, “under the null hypothesis of cross-section independence”, are reported in table 3. table 3: pesaran (2004) cd test outcomes as seen in table 4, the p-values of the series are 0.000 and lower than 0.05. therefore, the null hypothesis is rejected and it is concluded that, there is cross-section dependence between the units. therefore, it is needed to employ one of the second-generation unit root test methods in the stationary analysis. im, pesaran and shin (ips) is one of the second-generation unit root test that was performed and the null hypothesis “h0: all panels contain unit roots” is tested against “ha: some panels are stationary” and the outcomes are presented in table 4. table 4: ips unit root test outcomes the outcomes of table 4 show that fdi, trade, inf and nr are stationary at the level because p-values of the statistics are below 0.05, while gdp, credit and fts are not. however, once the first order differences are taken; gdp, credit and fts became stationary because p-values of the statistics are below than 0.05 significance levels. as a result, the integration orders of fdi, trade, inf and nr are i(0) and the integration orders of gdp, credit and fts are i(1). it is needed to define the proper lag-length value. for this purpose, hansen j test was employed and the outcomes of the test are presented in table 5. table 5: optimal lag-length outcomes the lag-length that makes the mbic, maic and mqic selection criteria minimum is 1. r2 is approx. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.175 | http://emaj.pitt.edu semra boğa emerging markets journal | p a g e 8 5 0.83 and significantly high. therefore, it is concluded that optimal lag-length is 1. pedroni co-integration test was performed “under a null of no cointegration” to verify the existence of long-term relationships among the series and the outcomes are shown in table 6. table 6: pedroni cointegration test outcomes panel group 2.883 . ( ) -6.105 -5.744 -12.91 -16.34 -11.36 -11.87 the cointegration test outcomes in table 6 show that, the values of test statistics of for both panel and group are above of 1,960 the table value is significant at 5%. therefore, “h0: no cointegration” was rejected and it was concluded that, the series are cointegrated. so, there is a long-term relationship between the variables. as pedroni cointegration test concluded a long-term relationship, mean group (mg) estimator or pmg (pooled mean group) estimator will be employed to reveal both long-term and the short-term relationships. hausman test was performed to determine the most appropriate estimator and the outcomes are reported in table 7. table 7: hausman test note: “b = consistent under h0 and ha; obtained from xtpmg. b = inconsistent under ha, efficient under h0; obtained from xtpmg. test: h0: difference in coefficients not systematic.” table 7 shows the estimations of the coefficients of the variables based on mg and pmg estimators. the differences between the coefficients (bb), the values of the standard errors, chi-square(6) and probability value of chi-square are reported in table 7. the null hypothesis homogeneity through hausman test was investigated and because the probability of chisquare is 0.7484 and significantly higher than 0.05, the null hypothesis is rejected. therefore, the model supports the pmg estimator and it is decided to employ pmg estimator. the outcomes of pmg estimator are presented in table 8. table 8: pmg estimator results table 8 covers the coefficient values, standard errors, z statistics and probabilities belonging to the variables in the model. the upper part of the table shows the long-term relationships. bottom part of the table shows the short-term relationships. ect represents the joint effects of the variables. the long-term results indicated that gdp, trade, credit, nr and fts have a positive impact on fdi because p-values are less than 0.05 the significance level. however, inf does not have an impact on fdi in the long-term. accordingly; (a) a 1% rise in gdp increases fdi by 0.09% (b) a 1% rise in trade increases fdi by 0.03% (c) a 1% rise in credit increases fdi by 0.011% (d) a 1% rise in nr increases fdi by 0.064% (e) a 1% rise in fts increases fdi by 0.022% in the short-term, only gdp and trade have an impact on fdi, however, credit, inf, nr and fts do not have an impact on fdi in the short term. accordingly; (a) a 1% rise in gdp increases fdi by 0.032% (b) a 1% rise in trade increases fdi by 0.056% on the other hand, the outcomes of ect show that, the variables affect each other in the short term and create a joint effect on fdi in the long term. approximately, 51% of imbalances in one period will improve in the next period. in other words, it will be balanced in about two years. v. conclusion the aim of this study is to investigate the determinants of fdi inflows in sub-saharan african countries. in this study, panel data analysis was performed by using annual data from 23 countries for the period of 1975-2017. in order to test the impact of volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.175 | http://emaj.pitt.edu determinants of foreign direct investment: a panel data analysis for sub-saharan african countries page |86| emerging markets journal market potential, annual gdp growth rate; to test the impact of openness of the countries, trade (export+import) as % of gdp; to test the impact of financial development in domestic markets, domestic credit to private sector (% of gdp) variable; to test the impact of macroeconomic stability, inflation (gdp deflator (annual %) variable, to test the impact of natural resources, which have been considered as the strongest motivation of resource-seeking investment in the region, total natural resources rents (% of gdp), to test the impact of telecommunication infrastructure, fixed telephone subscriptions (per 100 people) were included as explanatory variables. procedures for obtaining the econometric results have been fulfilled. primarily, the functional, the statistical and the ardl error correction models were established. the pesaran (2004) cross section dependence test was performed to figure out the existence of correlation between the units. ips unit root test was applied to reveal the stationary level of the series. hansen j test was employed to define the proper lag-length value. pedroni co-integration test verified the existence of long-term relationships among the series and the results of the hausman test confirmed that, the pmg (pooled mean group) estimator can be employed to reveal both long and short-term relationships. based on the pmg estimator results it can be concluded that gdp growth, trade openness, domestic credits, natural resources and telecommunication infrastructure are the determinants of fdi inflows in subsaharan countries in the long term. however, in the short term, only the gdp growth and trade openness determines fdi inflows. these findings of the study support the theoretical framework developed by dunning (1993), who asserts that locations specific factors influence the investor decision. it can also be concluded that, sub-sahara african region is not only attracting resource-seeking investments, but it is also marketseeking. when the results of the study are evaluated as a whole, it can be suggested that in sub-saharan africa, where already substantial efforts are done to improve the business environment, implementation of policies that facilitate import-export transactions, increase financial development, ease the access to natural resources, and extend the telecommunication infrastructure to wider segments of society in africa is believed to help this region to attract foreign investment. references ahn, y. s., adji, s. s., & willet, t. d. (1998). the effects of inflation and exchange rate policies on direct investment to developing countries, international economic journal, 12(1), 95– 104. ang, j.b. (2008). determinant of fdi in malaysia, journal of policy modelling, 30, 185-189. asiedu, e. (2002). on the determinants of foreign direct investment to developing countries: is africa different?, world development, 30(1), 107119. asiedu, e. (2006). foreign direct investment in africa: the role of natural resources, market size, government policy, institutions and political instability, the world economy, 29(1), 63–77. asiedu, e. & lien, d. (2011). democracy, foreign direct investment and natural resources, journal of international economics, 84(1), 99– 111. basu, a. & srinivasan, k. (2002). foreign direct investment in africa – some case studies. imf working paper wp/02/61, international monetary fund: washington dc. buckley, p. j. & casson, m. c. (1976). the future of the multinational enterprise, london: the macmillan press. demirhan, e. & masca, m. (2008). determinants of foreign direct investment flows to developing countries: a cross-sectional analysis, prague economic papers, 2008, 4, 356-369. denisia, v. (2010). foreign direct investment theories: an overview of the main fdi theories, academy of economic studies, 2(2), 104-110. dunning, j. h. (1977). trade, location of economic activity and the mne: a search for an eclectic approach. in b. ohlin, p. o. hesselborn, & p. m. wijkman, the international allocation of economic activity, london: macmillan. dunning, j. h. (1993). multinational enterprises and the global economy, harlow, essex: addison wesley publishing co. erkişi, k. (2018). foreign direct investment, trade openness and economic growth: a case of turkey, the academic elegance, 5(10), 189202. erkisi, k. & ceyhan, t. (2019). trade liberalization and economic growth: a panel data analysis for transition economies in europe, journal of economic, finance and accounting, 6(2), 82-94. ezeoha, a. e. & cattaneo, n. (2012). fdi flows to subsaharan africa: the impact of finance, institutions, and natural resource endowment, comparative economic studies, 54, 597–632. hymer, s. h. (1976). the international operations of national firms: a study of direct foreign investment, cambridge: the mit press. karluk, r. (2009). uluslararası ekonomi: teori ve politika, 9. baskı, i̇stanbul: beta basım. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.175 | http://emaj.pitt.edu semra boğa emerging markets journal | p a g e 8 7 knickerbocker, f. t. (1973). oligopolistic reaction and multinational enterprise, the international executive, 15(2), 7-9. koyuncu, c. & unver, m. (2016). the impact of infrastructure on fdi inflows: a panel data analysis, 2nd international osmaneli social sciences congress, 12-13-14 october, bilecikturkey. pedersen, k. (2003). the eclectic paradigm: a new deal?, journal of international business and economy, 4(1), 15-27. liargovas, p.g. & skandalis, k.s. (2011). foreign direct investment and trade openness: the case of developing economies, social indicators research, 106 (2), 323-331. neumayer, e. and de soysa, i. (2005). trade openness, foreign direct investment and child labour, world development, 33(1), 43-63. onyeiwu, s. & shrestha, h. (2004). determinants of foreign direct investment in africa, journal of developing societies, 20(1-2), 89-106. pesaran, m. (2004). general diagnostic tests for corss section dependence in panels. iza discussion paper, 1240. seim, l. t. (2009). fdi and openness: differences in response across countries. chr. michelsen institute, working paper. shah, m. h. (2016). financial development and foreign direct investment: the case of middle east and north african (mena) developing nations, mpra paper no. 82013. sichei, m. m. & kinyondo, g. (2012). determinants of foreign direct investment in africa: a panel data analysis, global journal of management and business research, 12(18), 85-97. tampakoudis, i. a., subeniotis, d. n., kroustalis , i. g. & skouloudakis, m. i. (2017). determinants of foreign direct investment in middle-income countries: new middle-income trap evidence, mediterranean journal of social sciences, 8(1), 58-70. udoh, e., & egwaikhide, f. o. (2008). exchange rate volatility, inflation uncertainty and foreign direct investment in nigeria, botswana journal of economics, 5(7), 14–31. unctad (2019). world investment report, chapter iv special economic zones. unctad (1998). world investment report trends and determinants. uneca united nations economic commission for africa (2016). investment policies and bilateral investment treaties in africa: implications for regional integration, addis ababa, ethiopia. vernon, r. (1966). international investment and international trade in the product cycle, quarterly journal of economics, 80(2), 190195. wadhwa, k., & reddy, s. (2011). foreign direct investment into developing asian countries: the role of market seeking, resource seeking and efficiency seeking factors, international journal of business management, 6(11), 219– 226. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu hybrid entrepreneurship as a tool for poverty reduction in nigeria: a review of literature with qualitative research and content analysis olajide olubayo thomas lagos state university, nigeria | e-mail: bayolajide2005@yahoo.com olajide idowu okunbanjo olabisi onabanjo university, nigeria | e-mail: okunbanjoolajide@yahoo.com abstract in today’s nigeria, employment in organizations has turned upside down due to poor economic situations which do not allow many companies to pay their employees well. there is a need for individuals to look for ways to increase their incomes for meeting financial obligations. the need for hybrid entrepreneurship is critical as well. this paper conducts a review of literature on hybrid entrepreneurship as a tool for poverty reduction. the research employs qualitative research approach and content analysis. the study concludes that, hybrid entrepreneurship is a determinant practice to reduce the rate of poverty in nigeria. the paper recommends that, hybrid entrepreneurship should be encouraged among the nigerian citizens so as to reduce the poverty level that has become a problem of nigerians. also, every nigerian should try to get involved or engage in other businesses to augment their incomes so as to achieve their personal and family goals. keywords: entrepreneurship, hybrid entrepreneurship, paid employment, self-employment, poverty reduction new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.216 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.216 | http://emaj.pitt.edu hybrid entrepreneurship as a tool for poverty reduction in nigeria: a review of literature with qualitative research and content analysis page |42| emerging markets journal hybrid entrepreneurship as a tool for poverty reduction in nigeria: a review of literature with qualitative research and content analysis olajide olubayo thomas olajide idowu okunbanjo i. introduction poverty has become a major concern for world leaders, governments, international bodies, nongovernmental bodies, individuals as well as researchers. as a matter of fact, poverty is a great challenge in the globe. as aristotle states, “poverty is the parent of revolution and crime” (aristotle, 3843-22bc). the concern has forced the local and international bodies to focus on methods to eliminate and to reduce poverty rate in the world, especially in developing economies. ezeanyeji, imoagwu and ejefobihi (2019) mention that when there is no development in the entrepreneurial or business activities, the daily income of individuals could be stagnant or reduced. therefore, there is need for the development of business activities in order for poverty to be decreased in any economy. one of the entrepreneurial or business activities identified is hybrid entrepreneurship (kurczewska, mackiewicz, doryń, & wawrzyniak, 2020; luc, chirita, delvaux & kepnou, 2018; dzomonda & fatoki, 2018; solesvik, 2017; raffiee & feng, 2014). kurczewska et. al. (2020) posit that, hybrid entrepreneurship brings a new employment phenomenon into entrepreneurial practices and theory. the state of developing economies like nigeria has forced the people to think and rethink on a source of income to achieve their personal and family goals. hybrid entrepreneurship is more of a creative and supportive entry mode into full entrepreneurship (dzomonda & fatoki, 2018; xi, block, lasch, robert & thurik, 2017; raffiee & feng, 2014). as noted by viljamaa and varamäki (2015), hybrid entrepreneurship serves as a vantage platform for learning which allows individuals to develop relevant entrepreneurial skills for entrepreneurial venture (solesvik, 2017) and establish the market demand for their offering (raffiee & feng, 2014). in africa at large, poverty has been viewed as part of the continental characteristics due to the high level of unemployment and high rate of inflation. nigeria as a developing economy in africa is faced with a series of challenges that have led to poor living conditions which has resulted in poverty. umaru and ibrahim (2019) point that, poverty level is identified when the daily income in an economy is less than $1.25 or exactly $1.25 and contextual observation indicates that most daily income in nigeria is not up to $1.25. this signifies the evidence of poverty in nigerian economy which requires vigorous efforts from the government to curb this menace. nigeria is rated second in the list of poorest countries all over the world in recent times. among the reasons accounted for this high level of poverty is the orientation towards paid employment. most nigerians that finish secondary school or university are looking for paid employment. this was going on well after the country’s independence in 1960 till say 1980s. but the situation changes as the jobs are no longer able to sustain the population depending on the income (salary). the population has grown geometrically. besides, the jobs are no longer there. the few who are still having the jobs are now considering how to sustain themselves, thus, giving birth to hybrid entrepreneurship. necessity of the present situation (economic situation) could be attributed to the development of hybrid entrepreneurship in nigeria even though this is not the case in many other climes. poverty and degree of need is making many that even have jobs to think out of the box on how to survive, hence hybrid entrepreneurship. according to olajide (2018), several concerted efforts have been made by the federal government of nigeria to reduce the level of poverty through entrepreneurship programs. among the programs introduced include small and medium-size enterprise development association of nigeria (smedan), the industrial development coordinating centre (iddc), family economic advancement programme (feap), youth enterprise with innovation in nigeria (youwin), industrial training institute (iti), young entrepreneur scheme (yes), trader moni among others. yet, there is still a strong existence of high poverty level in nigeria and poverty still dominates many parts of the globe (ezeanyeji et al 2019; umaru & ibrahim, 2019; hussain & noma, 2019; alvarez & barney, 2014). thus, the question of what other means can be done for poverty to be reduced in nigeria arises. in the opinion of bogenhold (2018), hybrid entrepreneurship could make an individual entrepreneurial billionaire. therefore, it could be postulated that hybrid entrepreneurship could aid in reducing poverty level. thus, it is important to see how hybrid entrepreneurship has been used as a tool for poverty reduction in nigeria. ii. hybrid entrepreneurship luc et. al. (2018) see hybrid entrepreneurship as the process that involves combination of self-employment and wage labor. it is a situation whereby an individual combines both paid job and entrepreneurial venture together. it implies that an individual works and still engages in self-employment activities. hammarström and nylén (2014) see hybrid entrepreneurship as the means which a person tries out a business idea and business entrepreneurial skills while still maintains wage-work in order to alleviate personal financial risk. according to dzomonda and fatoki (2018), hybrid entrepreneurship is a situation where individuals integrate their time in both self and wage employment. in other words, the individual has a business of his own while he/she still works as an employee. thus, hybrid entrepreneurship could be the mixture of an individual being an employee as well as employer in different organizations. hammarström and nylén (2014) further see hybrid entrepreneurship as method for minimization of personal risk, which involves entrepreneurial venture and paid employment. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.216 | http://emaj.pitt.edu olajide olubayo thomas, olajide idowu okunbanjo emerging markets journal | p a g e 4 3 hybrid entrepreneurship has been confused with part-time entrepreneurship. some studies state that hybrid entrepreneurship is the same with part-time entrepreneurship (luc et al 2018; schulz, urbig, & procher, 2016; petrova, 2012) while some studies state that hybrid entrepreneurship is different from part-time entrepreneurship (dzomonda & fatoki, 2018; nordstrom, 2015; hammarström & nylén, 2014; viljamaa & varamäki, 2014; folta, delmar, & wennberg, 2010; petrova, 2010; kim, aldrich & keister, 2006). nordstrom (2015) is of the view that part time entrepreneurship covers a series of alternatives compared to hybrid entrepreneurship. part-time entrepreneurship could make an individual to mix unemployment and entrepreneurship at a go or it could be having a series of portfolio businesses (nordstrom, 2015; petrova, 2012). part-time entrepreneur is recognized by having a normal wage job while balancing the work with personal business at the same time (petrova, 2010). an individual can only engage in part-time entrepreneurship in as much as the individual is not under a paid or wage job while practicing entrepreneurship. specifically, the combination of paid employment and self-employment is known to be hybrid entrepreneurship (kurczewska et al., 2020; dzomonda & fatoki, 2018). hammarström and nylén (2014) narrate that, hybrid entrepreneurship is aimed at attempting business or entrepreneurial idea while still under employment contract with an organization. this is a strategy in which an individual tries his/her entrepreneurial abilities and the opportunities of his/her ideas in order to minimize personal financial risk while still keeping a wage-work. hybrid entrepreneurship serves as an understanding of the practice of entrepreneurship without worrying about income or profit. in other words, it is preentrepreneurship practice. therefore, a hybrid entrepreneur may have the intention of becoming a full entrepreneur (kurczewska et al., 2020). part-time entrepreneurship has the sole aim to complement the current income of an individual. a part-time entrepreneur does not have the aim of becoming a full entrepreneur unlike a hybrid entrepreneur. a part-time entrepreneur sticks to the wage job while being able to meet his/her other financial obligations with a side venture (hammarström & nylén, 2014). basically, hybrid entrepreneurship is associated with the early stages of entrepreneurial venture development. it is worth noting that, establishing a part-time business is not necessarily indicative of a desire to enter full-time entrepreneurship (viljamaa, varamäki, & joensuu-salo, 2017). hybrid entrepreneurship could be established based on passion motive, changes in employment market, job insecurity or uncertainty, creative challenges, contract job status, non-standard working arrangements, government policy, desire for autonomy or independence, a need for social recognition and additional income among others (dzomonda & fatoki, 2018; luc et al., 2018; clark, 2018; solesvik, 2017; popiel, 2017; schulz et al., 2016; kelley, singer, & herrington, 2016; kuhn, 2016; florida, 2014). iii. poverty reduction poverty is seen as a condition of low-income or low consumption (ezeanyeji et al., 2019). poverty is the inability of individuals in an economy to attain a minimum standard of living (world bank report, 1990). ibotoye, atoyebi and sufian (2015) refer poverty as the absence of command over basic consumption needs such as insufficient food, clothing and/or shelter while olayemi (1995) refers to the poor as those having no access to the basic necessities of life such as food, clothes and economic obligation. they lack skillful employment, have few, if any economic assets and sometime lack self-esteem. world bank (2011) sees poverty as an economic situation where people lack plenty income to obtain certain minimal levels of health services, food, housing, clothing and education which are necessities for the standard of living. therefore, poverty is the incapacity of people in an economy to meet basic needs of life. ikechukwu, onyi and edeh (2017) divide poverty into three categories: absolute poverty, relative poverty and subjective poverty. absolute poverty is a situation where an individual is constrained with limited financial resources and he is unable to meet his/her basic needs of life such as food, clothes, shelter and health. relative poverty is a situation where an individual’s income is less than the average income of the population in the society being considered. subjective poverty is based on the individual perception about an individual’s standard of living. poverty reduction is the alleviation of level of poverty in an economy. ezeanyeji et. al. (2018) identify agricultural development programmes (adps), directorate of food, roads and rural infrastructure (dfrri), national agricultural land development authority (nalda), better life programme (blp), national directorate of employment (nde), people’ bank of nigeria (pbn), agricultural credit guarantee scheme, river basin development authorities, community bank and interventions from international development agencies among others as policies or strategies employed since the inception of nigeria to reduce poverty. iv. lazear theory of entrepreneurship lazear theory of entrepreneurship is also known as jack-of-all-trades theory. it is propounded by edward lazear in 2002. astebro and thompson (2011), backesgellner and moog (2013), hartog, van praag and van der sluis (2010), stuetzeret, obschonka, davidsson and schmitt-rodermund (2013), wagner (2003) and wagner (2006) are among the supporters of lazear theory of entrepreneurship. lazear theory of entrepreneurship indicates that, entrepreneurs should be jacks-of-all-trades in order to have broad and diverse knowledge, skills and professional experience in different aspects of business (kurczewska & mackiewicz, 2020). the theory explains an individual selection into entrepreneurship (hsieh, parker and van praag, 2017), which signifies alternative perception to the risk aversion theory. the theory considers that individuals with a balanced but diversified combination of skills and knowledge, collected from diverse sources and domains, are more likely to become entrepreneurs, therefore capturing hybrid entrepreneurship in theory and in practice. despite the relevance of lazear theory of entrepreneurship to the practice and concept of hybrid entrepreneurship, kurczewska and mackiewicz (2020) state that this theory fails to capture how entrepreneurs as jacks-of-all-trades become successful. thus, volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.216 | http://emaj.pitt.edu hybrid entrepreneurship as a tool for poverty reduction in nigeria: a review of literature with qualitative research and content analysis page |44| emerging markets journal entrepreneurial performance is not captured in the theory. in the same vein, it is also pointed that self-efficacy is not included in lazear theory of entrepreneurship as a factor that predicts individual entry into entrepreneurship. lazear did not include it in his set of factors explaining entrepreneurial career (tegtmeier, kurczewska & halberstadt, 2016). v. conceptual framework the conceptual framework of research is indicated in figure 1 below. as it is observed, three factors which are paid employment, hybrid entrepreneurship and selfemployment affect poverty reduction. figure 1. conceptual framework of research source: researchers’ conceptual framework, 2021 vi. research methodology the study adopts qualitative research approach and employs exploratory research design. the paper makes use of secondary data and the data are retrieved via review of the past studies on hybrid entrepreneurship. the study employs a critical review on past studies on the subject matter so as to identify the relationship that exists between hybrid entrepreneurship and poverty reduction. content analysis is used to analyze the observations in the studies reviewed. review of studies on hybrid entrepreneurship and poverty reduction the review of studies on hybrid entrepreneurship and poverty reduction via qualitative research and content analysis are listed below in table 1: table 1: studies on hybrid entrepreneurship and poverty reduction s/ n author name and year title methodo logy findings gap 1 demir, werner and kraus (2020) hybrid entrepreneur ship: a systematic literature review qual. research approach, syste matic literature review and content analysis the study concludes that there is a missing consensus in applied terminolog y, criteria and conception of hybrid poverty reduc tion is not capture d in the study and it is not a paper authore d by entre. in theory and practice nigeria n research ers 2 aladeje bi (2020) hybrid entrepreneu rship: combining employmen t and self employmen t in nigeria quant. research approach, purposive sampling and descrip tive statistics most of the hybrid business owners were employees in the public sector and they are approxi mately 3150 years old. also, autonomy and desire for extra income are the main reasons for running hybrid entrepre neurship poverty reduc tion is not conside red in the study, althoug h this research was conduc ted in nigeria 3 ferreira, (2020) experiential learning theory and hybrid entrepre neurship: factors influencing the transition to full-time entre preneurship sec. data analysis and thematic analysis it indicated hybrid entrep reneurship as an effective learning ground and path toward full-time entre preneurship the study is not empiric ally conduc ted and poverty reduc tion is not capture d. more over, the study is not conduc ted in nigeria 4 kurcze wska et. al. (2020) peculiarity of hybrid entre preneursrevisiting lazear’s theory of entre preneurship survey research design, primary data and logistic regressio n professiona l and managerial experiences enhance hybrid entre preneurship than education experience the study does not focus on poverty level reduc tion and it is not done in nigeria 5 jayathila ka & sachitra (2020) examine the drivers to engage in hybrid entre preneurship in sri lanka quant. research approach, primary data and binary logistic regressio n sufficient skills acquired and receiving family support have statistically significant influence for engaging in hybrid entre preneurship poverty reduc tion is not capture d and it is not exa mined in nigeria 6 kurcze wska and mackie wicz (2020) are jacksof-all-trades successful entre preneurs? revisiting lazear’s theory of survey research design, primary data and logit regressio n individuals with more diverse educational and prof. background tend to have both the study focuses on characte r istics of hybrid volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.216 | http://emaj.pitt.edu olajide olubayo thomas, olajide idowu okunbanjo emerging markets journal | p a g e 4 5 entre preneurship greater chances of starting a company and being successful as hybrid entre. compared to managerial experience entre. without conside r ing how it can influenc e poverty level in nigeria 7 iram, bilal & rasool (2020) hybrid entre preneurship escalating in women academi cians qual. approach, snowball sampling technique , primary data via interview and thematic analysis most teachers are facing financial constraints due to low salary packages, single parenting and time flexibility towards hybrid entre preneurship the study does not capture how hybrid entre preneur ship can be used to reduce poverty. also, it is not conduc ted in nigeria 8 luc et. al. (2018) hybrid entre preneurship: employees climbing the entre preneurial ladder descrip tive research design, simple sampling, primary data and descrip tive statistics . employees’ progress on the entre preneurial ladder is stimulated by soft support and high wage job poverty reductio n is not capture d in the paper and it is not conduc ted in nigeria 9 indudew i (2015) success factors of hybrid entre preneurs: case study of universitas ciputra academician qual. research approach, case study, expl. research design, and content analysis it is revealed that all academi cians need their lecturing job to be successful as hybrid entre preneurs as well as good communi cation skills the study does not focus on poverty reduc tion and it is not done in nigeria 10 schulz, urbig, & procher, (2017) the role of hybrid entrepreneur ship in explaining multiple job holders' earnings structure sec. data from british househld . panel survey and logit regressio n selfemploy ment is more profitable to earnings than paid employ ment the study is not done in nigeria and poverty reduc tion is not capture d 11 folta, delmar and wennbe rg (2010) hybrid entrepreneur ship in sweden primary data, multistage sampling and epro (entre preneuria l processes database) hybrid entry influences self-employ ment the study is not done in nigeria and poverty reduc tion is not capture d 12 xi, block, lasch, mode of entry into hybrid syste matic sampling it is indicated that poverty reduc tion is robert and thurik (2017) entrepreneur ship: new venture start-up versus business takeover method, primary data and regressio n analysis educational attainment and manage ment experience are associated with new venture start-up not capture d in the paper and it is not conduc ted in nigeria 13 hussaini & ibrahim (2019) entrepreneu r ship as a viable tool for poverty reduction in nigeria quant. research approach, primary data, syste matic sampling and partial least square only entre. education and attraction are significantl y related to poverty reduction. intention and knowledge are not related to poverty reduction despite being done in nigeria, the study does not capture hybrid entrepre neurshi p 14 ikechuk wu, onyi and edeh (2017) entrepre neurship and poverty reduction in enugu state, nigeria survey research design, primary data, and inferentia l statistics there is a positive and significant relationship between entrepre neurship and poverty reduction the study is conduc ted in a state of nigeria. the study does not capture hybrid entre preneur ship 15 ezeanye ji et al (2019) entre preneurship developmen t and poverty reduction in nigeria qual. research approach, narrativetextual case study (ntcs) and content analysis the study shows that the state of depravation can only be remedied through the develop ment of entrepreneu rship skills among the citizens despite being done in nigeria, the study does not capture hybrid entre preneur ship 16 ibitoye, atoyebi and sufian (2015) entrepreneu r ship and poverty reduction in nigeria stratified random sampling, primary data and correlatio n analysis there exists a positive and significant relationship between entrepreneu rship and poverty reduction the study is not extende d to hybrid entre preneur ship 17 cannon (2019) hybrid entre.s’ intention to transition to full entrepreneur ship: a career approach survey research design, primary data and regressio n analysis the study informs that hybrid entrepreneu rship is a start-up to career develop ment into transitionin g to full entrepre neurship the study is not done in nigeria and poverty reduc tion is not capture d 18 hammar stro & nylen (2014) pursuing hybrid entre preneurship in academia qual. research approach and content analysis the study reveals that hybrid entre preneurship is a good method for someone the study exclude d poverty reduc tion. also, it volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.216 | http://emaj.pitt.edu hybrid entrepreneurship as a tool for poverty reduction in nigeria: a review of literature with qualitative research and content analysis page |46| emerging markets journal who wishes to lower their financial risks when developing their own business is done in nigeria 19 ferreira, ferguso n & pitt (2019) entre preneurial marketing and hybrid entrepreneur ship: the case of jm reid bamboo rods case study research design primary data via obser vation and content analysis entre preneurial marketing enhances the success of an individual hybrid entrepre neurship poverty reduc tion is not conside red in the study and the study is not exami ned in nigeria 20 solesvik (2017) hybrid entrepre neurship: how and why entrepre neurs combine employmen t with selfemploymen t case study research design and content analysis hybrid entre preneurship is a viable path for people willing to realize their entre preneurial ambitions in a lowerrisk and organic way the study is not done in nigeria and poverty reduc tion is not capture d 21 kritskay a, kolverei d and isaksen (2017) hybrid entre preneurs: character istics and achieve ments descrip tive research design, primary data via question naire and descrip tive statistics the study indicates that most of the new businesses are started by hybrid the study is not done in nigeria and poverty reduc tion is not capture d 22 dzomon da & fatoki (2018) demystify ing the motivations towards hybrid entre preneurship among the working populace in south africa quant. research, conven ient sampling method, primary data and t-tests there is no significant gender difference on hybrid entrepre neurship. it further showed that participants are motivated mainly by both a desire to supplement income and derive nonmonetary benefits the study fails to capture poverty reduc tion. also, it is not carried out in nigeria 23 petrova (2012) entrepre neurial dynamics and hybrid entrepreneur ship primary data, descrip tive statistics and inferentia l statistics financial constraints do not impact hybrid entrepre neurship. whilst, changes in the labor market may be driving the study fails to capture poverty reductio n. also, it is not carried out in nigeria individuals towards hybrid entre preneurship 24 raffiee and feng (2014) small-scale entry via hybrid entre preneurship as a real option qual. research approach and descrip tive statistics hybrid entre preneurs could choose to either invest heavily in their entre preneurial project or exit easily from it, depending upon the early returns the study fails to capture poverty reduc tion. also, it is not carried out in nigeria 25 viljama, & evaram äki (2015) do persistent and transitory hybrid entrepreneu rs differ? survey research design, primary data via question naire and descrip tive statistics it is indicated that not all hybrid entre preneurs are intended to transit to full entre preneurship the study fails to capture poverty reduc tion. also, t is not carried out in nigeria 26 schulz, urbig & procher (2016) hybrid entre preneurship and public policy: the case of firm entry deregulation survey research design, primary data via question naire and logit regressio n hybrid entre preneurs are more responsive to changes in entry regulation than fulltime entrepre neurs. however, educated hybrid entrepre neurs respond to changes more than the uneducated the study fails to capture poverty reduc tion. also, it is not carried out in nigeria 27 cestino (2019) hybrid entre preneurship as the pursuit of valued forms of work qual. research design, multi casestudy research design and thematic analysis it is revealed that both monetary and nonmonetary benefits are the factors that enhance hybrid entre preneurship the study fails to capture poverty reduc tion. also, it is not carried out in nigeria source: authors’ own compilation vii. findings and discussion one of the contemporary issues in entrepreneurship is hybrid entrepreneurship. hybrid entrepreneurship is very important for the survival of individuals, especially in developing economies like nigeria. the challenges in nigerian economy have made living conditions for nigerians difficult to bear. the high rate of inflation as a volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.216 | http://emaj.pitt.edu olajide olubayo thomas, olajide idowu okunbanjo emerging markets journal | p a g e 4 7 result of high prices of goods and services, high rent and high transportation costs among other have weakened the purchasing power of nigerians. the findings show that, hybrid entrepreneurship helps individual to comfortably meet their daily expenses. it is a source of additional income, but not yet popular in nigeria. additionally, it is observed that there are studies on hybrid entrepreneurship in the globe. most of the studies are not done in africa, especially in nigeria as they are conducted in developed countries. the study of aladejebi (2020) on hybrid entrepreneurship does not capture poverty reduction. relatively, the studies of hussaini and ibrahim (2019), ezeanyeji et. al. (2019), ikechukwu, onyi and edeh (2017), ibitoye, atoyebi and sufian (2015) examine entrepreneurship and poverty reduction in nigeria, but hybrid entrepreneurship is not captured. this is a strong evidence that, more about hybrid entrepreneurship need to be examined. it is obvious that much focus has not been given in the literature to how hybrid entrepreneurship could reduce poverty level, because most of the studies are from developed economies where poverty is not a major issue of concern. the few studies in nigeria and probably in developing economies are only looking for how entrepreneurship activities could be promoted. what is prevalent in nigeria and many other developing economies is part-time entrepreneurship which has not enhanced poverty reduction as such, because there is still evidence of poverty from the contextual observation. this could be as a result of the legal framework as it operates in nigeria. besides, the medical and legal professionals running self-employment with official jobs are not tolerated as such. government and many private organizations see this as divided interest, which will jeopardize the main interest of organization. also, it could be as a result of poor risk taking ability and poor income that are not sufficient to engage in extra activity. viii. conclusion literature shows that, hybrid entrepreneurship has elevated some notable businessmen and businesswomen to achieve their personal goals for becoming billionaires of the world. for instance, steve wozniak as the founder of apple worked in a paid job while running his personal business. similarly, pierre omidyar was a paid personnel at a software development firm when he founded e-bay. thus, one could see that hybrid entrepreneurship will lift individuals out of poverty to the point of becoming millionaires if embraced. it is concluded that, hybrid entrepreneurship is a determinant practice to reduce the rate of poverty in nigeria because of availability of many untapped resources and opportunity. thus, hybrid entrepreneurship has several advantages in terms of economics and finance. therefore, the study recommends that hybrid entrepreneurship should be encouraged among the citizens in nigeria to reduce the poverty level. also, every nigerian should try to get involved or engage in other businesses to augment their income for achieving their personal and family goals. this would create jobs and minimize the poverty level. references astebro, t., & thompson, p. (2011). entrepreneurs, jacks of all trades or hobos? research policy, 40(5), 637-649. aladejebi, o. (2020). hybrid entrepreneurship: combining employment and self-employment in nigeria. archives of business research, 8(7). 404-418. alvarez, s.a., & barney, j.b. (2014). entrepreneurial opportunities and poverty alleviation. entrepreneurship: theory and practice, 38(1), 159-184. backes-gellner, u., & moog, p. (2013). the disposition to become an entrepreneur and the jacks-of-alltrades in social and human capital. the journal of socio-economics, 47, 55-72. bögenhold, d. (2019). from hybrid entrepreneurs to entrepreneurial billionaires: observations on the socioeconomic heterogeneity of selfemployment. american behavioral scientist, 63(2), 129-146. cannon, s. (2019). hybrid entrepreneurs’ intention to transition to full entrepreneurship: a career approach. ph.d dissertation, georgia state university. cestino, j. (2019). hybrid entrepreneurship as the pursuit of valued forms of work. academy of management, 1, 1-13. clark, d. (2018). how to get your side hustle off the ground. harvard business review. demir, c., werner, a., kraus, s., & jones, p. (2020). hybrid entrepreneurship: a systematic literature review. journal of small business & entrepreneurship, 1, 82-91. dzomonda, o., & fatoki, o. (2018). demystifying the motivations towards hybrid entrepreneurship among the working populace in south africa. academy of entrepreneurship journal, 24(4), 1-9. ezeanyeji, c.i., imoagwu, c.p., & ejefobihi, u.f. (2019). entrepreneurship development and poverty reduction in nigeria: the synergy. international journal of economics, commerce and management, 7(4), 584-601. ferreira, c.c. (2020). experiential learning theory and hybrid entrepreneurship: factors influencing the transition to full-time entrepreneurship. international journal of entrepreneurial behavior & research, 26(8), 1845-1863. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.216 | http://emaj.pitt.edu hybrid entrepreneurship as a tool for poverty reduction in nigeria: a review of literature with qualitative research and content analysis page |48| emerging markets journal ferreira, c., ferguson, s.l., & pitt, l.f. (2019). entrepreneurial marketing and hybrid entrepreneurship: the case of jm reid bamboo rods. journal of marketing management, 35(9-10), 867-885. florida, r. (2014). the rise of the creative class, revisited. new york city, ny: basic books. folta, t.b., delmar, f., & wennberg, k. (2010). hybrid entrepreneurship. management science, 56(2), 253-269. hammarström, n., & nylén, v. (2014). pursuing hybrid entrepreneurship in academia. retrieved from http://www.divaportal.org/smash/get/diva2:730441/fulltex t01.pdf hartog, j., van praag, m., & van der sluis, j. (2010). if you are so smart, why aren’t you an entrepreneur? returns to cognitive and social ability: entrepreneurs versus employees. journal of economics and management strategy, 19(4), 947-989. hussaini, u., & noma, i.a. (2019). entrepreneurship as a viable tool for poverty reduction in nigeria. international journal of commerce and management research, 5(1), 5-12. ibitoye, o., atoyebi, k. o. & sufian. j.b. (2015). entrepreneurship and poverty reduction in nigeria: an empirical analysis journal of business and management, 17(3), 16-19. ikechukwu, d., onyi, a. j., & edeh, f. o. (). entrepreneurship and poverty reduction in nigeria: empirical analysis of industrial layout coal camp, enugu-state, nigeria. journal of educational policy and entrepreneurial research, 4(3), 115-130. indudewi, f.y.r. (2015). success factors of hybrid entrepreneurs: case study of universitas ciputra academician. mediterranean journal of social sciences, 6(5), 84-90. iram, t., bilal, a.r., & rasool, y. (). hybrid entrepreneurship escalating in women academicians. paideuma journal, 8(8), 86-106. jayathilaka, g., & sachitra, v. (2020). examine the drivers to engage in hybrid entrepreneurship in sri lanka. sri lankan journal of entrepreneurship, 2(1), 102-131. kelley, d. j., singer, s., & herrington, m. (2016). global entrepreneurship monitor: 2015/2016 global report. london: global entrepreneurship research association. kim, p., aldrich, h., & keister, l. (2006). the impact of financial, human, and cultural capital on entrepreneurial entry in the united states. small business economics, 27, 5-22. kuhn, k. (2016). the rise of the gig economy and implications for understanding work and workers. industrial and organizational psychology, 9(1), 157-162. kurczewska, a., & mackiewicz, m. (2020). are jacksof-all-trades successful entrepreneurs? revisiting lazear’s theory of entrepreneurship. baltic journal of management, 1, 1-21. kurczewska, a., mackiewicz, m., dory, w., & wawrzyniak, d. (2020). peculiarity of hybrid entrepreneurs – revisiting lazear’s theory of entrepreneurship. journal of business economics and management, 21(1), 277-300. lkritskaya, l., kolvereid, l., & isaksen, e.j. (2017). hybrid entrepreneurs: characteristics and achievements. de boeck supérieur, 34, 7-19. luc, s., chirita, g., delvaux, e., & kepnou, a. (2018). hybrid entrepreneurship: employees climbing the entrepreneurial ladder. international review of entrepreneurship, 16(1), 89-113. nordström, c. (2015). the passionate combining entrepreneurs. ph.d thesis, mid sweden university, sweden. petrova, k. (2010). part-time entrepreneurship, learning and ability. journal of management policy and practice, 12(1), 64-75. petrova, k. (2012). part-time entrepreneurship and financial constraints: evidence from the panel study of entrepreneurial dynamics. small business economics, 39(2), 473-493. popiel, p. (2017). boundaryless in the creative economy: assessing freelancing on upwork. critical studies in media communication, 34(3), 1-14. raffiee, j., & feng, j. (2014). should i quit my day job? a hybrid path to entrepreneurship. academy of management journal, 57(4), 936-963. schulz, m., urbig, d., & procher, v. (2016). hybrid entrepreneurship and public policy: the case of firm entry deregulation. journal of business venturing, 31(3), 272-286. schulza, m., urbiga, d., & prochera, v. (2017). the role of hybrid entrepreneurship in explaining multiple job holders’ earnings structure. journal of business venturing insights, 7, 914. solesvik, m.z. (2017). hybrid entrepreneurship: how and why entrepreneurs combine employment with self-employment. technology innovation management review, 7(3), 33-41. stuetzer, m., obschonka, m., davidsson, p., & schmittrodermund, e. (2013). where do entrepreneurial skills come from? applied economics letters, 20(12), 1183-1186. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.216 | http://emaj.pitt.edu olajide olubayo thomas, olajide idowu okunbanjo emerging markets journal | p a g e 4 9 tegtmeier, s., kurczewska, a., & halberstadt, j. (2016). are women graduates jacquelines-of-alltrades? challenging lazear’s view on entrepreneurship. small business economics, 47(1), 77-94. umaru, h., & ibrahim, a. (2019). entrepreneurship as a viable tool for poverty reduction in nigeria. international journal of commerce and management research, 5(1), 5-12. viljamaa, a., & varamäki, e. (2014), part-time or nascent entrepreneurs? academic hybrid entrepreneurship. in: managing in an interconnected world: pioneering business and technology excellence, global business and technology association 16th annual international conference readings book, july 8th–12th, baku, azerbaijan, 636-643. viljamaa, a., & varamäki, e. (2015). do persistent and transitory hybrid entrepreneurs differ? international journal of economics and management engineering, 9(3), 936-940. viljamaa, a., varamäki, e., & joensuu-salo, s. (2017). best of both worlds? persistent hybrid entrepreneurship. journal of enterprising culture, 24(4), 56-71. viljamaa, a.h., & evaramäki, e.m. (2015). do persistent and transitory hybrid entrepreneurs differ?. international journal of economics and management engineerin, 9(3), 936-940. wagner, j. (2003). testing lazear’s jack-of-all-trades view of entrepreneurship with german microdata. applied economics letters, 10(11), 687689. wagner, j. (2006). are nascent entrepreneurs ‘jacks-ofall-trades’? a test of lazear’s theory of entrepreneurship with german data. applied economics, 38(20) 2415-2419. world bank (1990). nigeria –poverty in the midst of plenty. the challenge of growth inclusive: a world bank poverty assessment. population and human resource, divisions report, no. 14733. world bank (2011). world development report. new york: oxford university press. xi, g., block, j., lasch, f., robert, f., & thurik, r. (2017). mode of entry into hybrid entrepreneurship: new venture start-up versus business takeover. iza institute of labor economics, discussion paper series. https://www.worldscientific.com/doi/pdf/10.1142/s0218495817500133?download=true https://www.worldscientific.com/doi/pdf/10.1142/s0218495817500133?download=true https://www.worldscientific.com/doi/pdf/10.1142/s0218495817500133?download=true volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu information level representation of small and medium enterprises (sme) managers about securities ferhat sayım yalova university, turkey | f_sayim@hotmail.com abstract this research was carried out with private company owners and shareholders-managers in yalova. these managers were asked about the general approach for the most commonly used securities in the financial system. they were asked to express the level of knowledge they felt. the interviews were conducted face to face with the managers. the level of knowledge expressed by the managers was evaluated on a triple scale. it was examined with various cross tables. percentages were taken. according to the findings, most owners and shareholders managers accept that they do not have enough knowledge about the securities used in the financial markets. the lowest level of knowledge is expressed for the derivative products. the highest level of knowledge is expressed for the stock types. as a first step, this study is important in terms of raising awareness on this issue. this research and its results can be used for the development of training and programs for businessman. also, they can be used in the chambers of commerce and universities. keywords: sme, business, securities, financial markets, finance * some findings of this research were presented in the 2.international symposium on silkroad academic studies, in turkish language. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:f_sayim@hotmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu information level representation of small and medium enterprises (sme) managers about securities page |16| emerging markets journal information level representation of small and medium enterprises (sme) managers about securities ferhat sayım 1. introduction a very important part of economic production units is defined as small and medium enterprises (sme). some of these enterprises can reach a certain size and turnover volume in their cities. most, however, do not turn into enterprises on a national or global scale. there are many other reasons for this. the level of financial knowledge of business owners and managers is important. how these managers define themselves in financial information is a research topic. the studies in the literature are mostly made on stock market companies. these studies focus on the financial situation and the use of certain instruments or the existence of risks. another mode of work is for various segments of the population. financial literacy levels are measured in these studies. financial literacy surveys were mostly applied to students and various sections of the population. apart from the studies on measurement of financial literacy, the following studies have been found. the following publications measure the proximity of businesses to some financial products and concepts. 2. literature review in the literature, similar studies were searched. there has not been enough research on businessmen and entrepreneurs. the financial literacy researches are a topic as a close and common research topic. these researches and their results have been examined, but the universe of research is generally students and other sections of the public. at a more conceptual level, the ability of these segments was investigated about evaluating financial institutions and instruments (coşkun, 2016; bayram, 2014; akkaya and yağlı, 2015). in a study called financial access for smes, a general assessment was made, without detailing the financial instruments and institutions. the opportunities for smes to benefit not only from the financial market, but also from the state subsidies have been investigated. regarding the financial markets, issues related to the opening of securities exchanges and the use of bank resources as venture capital have been discussed (türkonfed akbank, 2009). bayrakdaroglu, sarı and heybeli published a study in 2013. the study is related to the use of derivative products in financial risk management. risk perceptions, risk management policies and use of derivative instruments of the enterprises are discussed. according to the findings of the study, most of the companies are affected by the exchange rate risk. large firms have a tendency to use speculative derivative products. the number of companies using derivative products is low and this is noteworthy. although companies are aware of derivative products, they are reluctant to use them (bayrakdaroğlu, sarı and heybeli, 2013) in another study, the financial risk management and derivative product utilization of enterprises were investigated. it was implemented to companies in istanbul stock exchange (ise) 100 index. in this study, the financial risks that the firms are exposed to, the management policies of these risks, the use of derivative instruments and foreign currency positions are examined. what kind of information about the risk management is disclosed to the public was investigated. financial statements and footnotes of 67 companies in the non-financial sector included in the ise 100 index were analyzed. according to the study findings, the risks that the firms exposed are credit, liquidity, exchange rate and interest rate risk to in turn. although the firms stated that they are exposed to the mentioned financial risks, they did not report the management techniques of these risks in detail. the most important result of the study is about use of derivative products. although the firms in the sample are largescaled, the number of firms using derivative products is low. in addition, it has been seen that there is not enough public information about risk management (yücel, mandacı and kurt, 2007). the name of another study in the literature is “foreign exchange hedging methods and reasons for use: ise example“. one aim of the study is to determine the reasons of the use of foreign exchange derivative products and foreign currency borrowings which are hedging strategies in developing markets. another purpose is to determine whether these two strategies are alternative or complementary strategies. based on these objectives, the indicators that can best represent the reasons for hedging is investigated (demir, 2009). there is another study in the literature called “conceptual investigation of conjunctive movements and investment decisions of firms in terms of firmsecurities investments”. the subject is conceptually dealt with without field work (benli, 2017). based on trakya development agency, finance specialization commission report, the term financial access is used which expresses reasonable supply of quality financial services at reasonable costs. compared with other countries, turkey ranks 26 in the world (yıldırak, n.d.). apan and islamoğlu published a paper named "finance management in smes". in this study, financing sources of smes are sorted as banks, venture capital, factoring, financial leasing, angel investor and sme stock exchange (apan and i̇slamoğlu, 2014). yörük has run a research named "use of alternative financial techniques in entrepreneurship". in this study, it is tried to determine the level of volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e 1 7 application of financial techniques such as leasing, factoring, forfeiting, franchising and barter in entrepreneurship. the survey was applied to companies of the corporation type without any sector discrimination. at each stage of entrepreneurship, alternative financing techniques which are important in terms of capital and resources was examined. other than leasing, it was observed that they could not reach to the level of adequate use (yörük, 2006). karamustafa and karakaya conducted a study in 2002 named "the bank preferences, usage and satisfaction of financial instruments: a study on customer of special finance houses in turkey ". in this study, it has been tried to reveal to what extent the financial products offered by the private finance institutions are known among the customers. the second objective of the study was to determine whether there is a relationship between the products that the customers are aware of and the levels of use. although the customers who were surveyed were classified according to various criteria such as income level, age and education, there was no classification as entrepreneur or owner (karamustafa and karakaya, 2002). zor and akın conducted a study in 2008 named "the use of finance tools in smes in the context of strategic projections". in this study, the factors separating smes in the use of financial instruments other than shareholders' equity are discussed. export, legal status and age of business owner were found to be statistically significant, but these variables could not function in stepwise discriminant analysis. also, the educational level of the owner, the age of the enterprise, the number of personnel and the existence of accounting and finance department were not statistically significant (zor and akın, 2008). some chambers of commerce may prepare working papers and reports to make smes more aware of alternative financing sources (alptekin, 2007). 3. field study this field study was conducted through face-toface interviews with the owners and managers of local firms, the biggest stakeholders of the economy. this field study includes several sub-factors. the volume of the information collected in the study, the need to examine the sub-factors separately, the differences in the processing and tabulation of some information require the presentation and dissemination of the results in separate titles. the sub-factors planned during the first set-up of the study constituted the basis of these distinctions. importance of research-method accounting financial researchers are interested in how business owners and managers define themselves in terms of financial information. the study has a hypothesis. based on this hypothesis, most firm owners and managers think that financial concepts are important, but they do not know enough about the financial markets and securities used. the general approach of these owners and managers for the most used securities in the financial system has tried to be measured. this measurement was carried out through face-to-face interviews with business owners. in this study, the level of knowledge that local business owner-managers define for themselves about some securities is discussed. this level of knowledge is not a measure of information that can be measured parametrically. how the surveyed participants stated their level of knowledge about the securities asked was investigated. they are offered three options. 0 = i have no knowledge of this. 1 = i have a general level of knowledge on this subject 2 = i have more detailed information, such as risk, cost and earning. the obtained data were subjected to reliability test for nonparametric data evaluated in the statistical program. general information about the study and the findings are presented below. in this measurement made with various subfactors, data such as turnover size of the enterprises and some personal and educational information of the owner have been obtained. the level of knowledge that sme owners and managers express on securities is also a subfactor. these factors are examined in this study. information on smes, the collected sector and size information as well as the personal information for managers were investigated. it is also examined whether these change the responses. spss 17.0 program was used in the analysis. 4. scope and sample in the study, the owners and managers of the enterprises, which are defined as legal smes and especially related to the chambers of commerce industry, were taken as a sample. the people selected for the sample were obtained from the chamber of commerce and the kosgeb. the interviews were done by filling the questionnaire face to face. in this study, only the businessmen or entrepreneurs were evaluated. frequency tables are presented below. frequency tables related to sampling the survey was planned to be made on decision makers in smes. analysis was performed on the sample of 50 owner-managers. business life experience and age it can be stated that the sample has a balanced distribution in terms of age and years of work experience. both arguments are divided into 4 subgroups. table 1:business experience year frequency frequ ency percent valid percent cumulative percent valid 1-10 5 10,0 10,0 10,0 11-20 15 30,0 30,0 40,0 21-30 19 38,0 38,0 78,0 31-40 11 22,0 22,0 100,0 total 50 100,0 100,0 volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu information level representation of small and medium enterprises (sme) managers about securities page |18| emerging markets journal table 2:age frequency frequ ency percent valid percent cumulative percent valid under 30 6 12,0 12,0 12,0 31-40 9 18,0 18,0 30,0 41-50 22 44,0 44,0 74,0 50-60 13 26,0 26,0 100,0 total 50 100,0 100,0 table 3:annual turnover frequency frequency percent valid percent cumulative percent valid 1 20 40,0 40,0 40,0 2 22 44,0 44,0 84,0 3 8 16,0 16,0 100,0 total 50 100,0 100,0 reliability testing the cronbach alpha for the survey is 0.833. this is a sufficient result to analyze the study. table 4:case processing summary n % cases valid 50 100,0 excludeda 0 ,0 total 50 100,0 a. listwise deletion based on all variables in the procedure. table 5:reliability statistics cronbach's alpha n of items ,833 5 table 6:item-total statistics scale mean if item deleted scale variance if item deleted corrected itemtotal correlatio n cronbach' s alpha if item deleted (bond types, repo ....) 3,160 4,872 ,738 ,770 (asset backed securities, sukuk ....) 3,140 4,980 ,597 ,810 (stock types ....) 3,040 5,019 ,538 ,830 (type a-b etc. investment fund .....) 3,320 5,079 ,661 ,792 (derivative products ....) 3,740 5,258 ,658 ,794 5. findings annual turnover factor the sample was measured in 8 different categories in terms of turnover range. the sample was examined in three groups. these groups are expressed in tables as 1-2-3. group 1 consists of company representatives with annual turnover up to 1 million tl and it includes 20 people. group 2 consists of company representatives with a turnover in the range of 1 to 8 million tl and consists of 22 people. group 3 includes company representatives with a turnover of more than 8 million tl and consists of 8 people. the answers to the questions were evaluated. especially the group 1 and group 2 turnover level hierarchical order are reflected in the level of knowledge about these securities. in other words, company representatives with more turnovers feel more informed. although group 3 sees itself more informed than the first group, they think that the level of knowledge for some types of securities is lower than group 2. derivatives were the financial instrument in which all groups felt themselves least knowledgeable. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e 1 9 table 7: (bond types, repo ....)annual turnover crosstabulation annual turnover total 1 2 3 (bond types, repo ....) 0 count 9 2 2 13 % within (bond types, repo ....) 69,2 % 15,4 % 15,4 % 100,0 % % within annual turnover 45,0 % 9,1 % 25,0 % 26,0 % 1 count 9 15 3 27 % within (bond types, repo ....) 33,3 % 55,6 % 11,1 % 100,0 % % within annual turnover 45,0 % 68,2 % 37,5 % 54,0 % 2 count 2 5 3 10 % within (bond types, repo ....) 20,0 % 50,0 % 30,0 % 100,0 % % within annual turnover 10,0 % 22,7 % 37,5 % 20,0 % total count 20 22 8 50 % within (bond types, repo ....) 40,0 % 44,0 % 16,0 % 100,0 % % within annual turnover 100,0 % 100,0 % 100,0 % 100,0 % business people felt themselves knowledgeable at basic level in the type of financial bond. in total, the percentage of those who have no knowledge remains at 26% while 54% stated that they are knowledgeable at basic level. in total, 20% of the businessmen stated that they had good knowledge about this issue. in this case, 80% defines the level of knowledge as little or no. the rate of those who do not know about it in the lowest annual turnover is high. table 8: (asset backed securities, sukuk ....) annual turnover crosstabulation annual turnover total 1 2 3 (asset backed securities, sukuk ....) ,0 count 11 3 1 15 % within (asset backed securities, sukuk ....) 73,3 % 20,0 % 6,7 % 100,0 % % within annual turnover 55,0 % 13,6 % 12,5 % 30,0 % 1,0 count 7 11 4 22 % within (asset backed securities, sukuk ....) 31,8 % 50,0 % 18,2 % 100,0 % % within annual turnover 35,0 % 50,0 % 50,0 % 44,0 % 2,0 count 2 8 3 13 % within (asset backed securities, sukuk ....) 15,4 % 61,5 % 23,1 % 100,0 % % within annual turnover 10,0 % 36,4 % 37,5 % 26,0 % total count 20 22 8 50 % within (asset backed securities, sukuk ....) 40,0 % 44,0 % 16,0 % 100,0 % % within annual turnover 100,0 % 100,0 % 100,0 % 100,0 % volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu information level representation of small and medium enterprises (sme) managers about securities page |20| emerging markets journal the percentage of those who have no knowledge in this type of securities is 30% and 44% is knowledgeable at the basic level. in total, 26% of businessmen stated that they had a good level of knowledge on this subject. in this case, 74% describe the level of knowledge as little or no. the lowest rate of those who define themselves as unfamiliar is 55%. table 9: (stock types ....)annual turnover crosstabulation annual turnover total 1 2 3 (stock types ....) 0 count 9 2 3 14 % within (stock types ....) 64,3 % 14,3 % 21,4 % 100,0 % % within annual turnover 45,0 % 9,1 % 37,5 % 28,0 % 1 count 9 9 1 19 % within (stock types ....) 47,4 % 47,4 % 5,3 % 100,0 % % within annual turnover 45,0 % 40,9 % 12,5 % 38,0 % 2 count 2 11 4 17 % within (stock types ....) 11,8 % 64,7 % 23,5 % 100,0 % % within annual turnover 10,0 % 50,0 % 50,0 % 34,0 % total count 20 22 8 50 % within (stock types ....) 40,0 % 44,0 % 16,0 % 100,0 % % within annual turnover 100,0 % 100,0 % 100,0 % 100,0 % the percentage of those who have no knowledge in this type of securities is 28% and 38% of them are at a basic level. in total, 34% of businessmen stated that they had a good level of knowledge on this issue. in this case, 66% define the level of knowledge as little or no. the ratio of those who define themselves as unfamiliar is the highest with 45% in the group of lowest annual turnover. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e 2 1 table 10: (type a-b etc. investment fund .....) annual turnover crosstabulation annual turnover total 1 2 3 (type a-b etc. investment fund .....) 0 count 11 4 3 18 % within (type a-b etc. investment fund .....) 61,1 % 22,2 % 16,7 % 100,0 % % within annual turnover 55,0 % 18,2 % 37,5 % 36,0 % 1 count 7 16 2 25 % within (type a-b etc. investment fund .....) 28,0 % 64,0 % 8,0 % 100,0 % % within annual turnover 35,0 % 72,7 % 25,0 % 50,0 % 2 count 2 2 3 7 % within (type a-b etc. investment fund .....) 28,6 % 28,6 % 42,9 % 100,0 % % within annual turnover 10,0 % 9,1 % 37,5 % 14,0 % total count 20 22 8 50 % within (type a-b etc. investment fund .....) % within annual turnover 40,0 % 100,0 % 44,0 % 100,0 % 16,0 % 100,0 % 100,0 % 100,0 % the ratio of those who have no knowledge in this type of securities was 36%. 50% stated that they are knowledgeable at basic level. in total, only 14% of businessmen stated that they had a good level of knowledge on this issue. in this case, 86% define the level of knowledge as little or no. the ratio of those who define themselves as unfamiliar is the highest with 55% in the group of lowest annual turnover. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu information level representation of small and medium enterprises (sme) managers about securities page |22| emerging markets journal table 11: (derivative products….)annual turnover crosstabulation the level of knowledge about derivative products is much lower. the percentage of those who have no knowledge in this type of securities was 72%. 20% stated that, they are knowledgeable at basic level. in total, only 8% of businessmen stated that they had a good level of knowledge on this issue. in this case, 92% define the level of knowledge as little or no. the ratio of those who define themselves as unfamiliar is the highest with 95% in the group of lowest annual turnover. business experience year factor table 12: (bond types, repo ....)business experience year crosstabulation business experience year tota l 1-10 11-20 21-30 31-40 0 count 3 4 3 3 13 % within (bond types, repo ....) 23,1 % 30,8 % 23,1 % 23,1 % 100, 0% % within business experience year 60,0 % 26,7 % 15,8 % 27,3 % 26,0 % 1 count 1 7 12 7 27 % within (bond types, repo ....) 3,7 % 25,9 % 44,4 % 25,9 % 100, 0% % within business experience year 20,0 % 46,7 % 63,2 % 63,6 % 54,0 % 2 count 1 4 4 1 10 % within (bond types, repo ....) 10,0 % 40,0 % 40,0 % 10,0 % 100, 0% % within business experience year 20,0 % 26,7 % 21,1 % 9,1 % 20,0 % annual turnover total 1 2 3 (derivative products ....) 0 count 19 13 4 36 % within (derivative products ....) 52,8 % 36,1 % 11,1 % 100,0 % % within annual turnover 95,0 % 59,1 % 50,0 % 72,0 % 1 count 1 7 2 10 % within (derivative products ....) 10,0 % 70,0 % 20,0 % 100,0 % % within annual turnover 5,0 % 31,8 % 25,0 % 20,0 % 2 count 0 2 2 4 % within (derivative products ....) ,0 % 50,0 % 50,0 % 100,0 % % within annual turnover ,0 % 9,1 % 25,0 % 8, 0% total count 20 22 8 50 % within (derivative products ....) 40,0 % 44,0 % 16,0 % 100,0 % % within annual turnover 100,0 % 100,0 % 100,0 % 100,0 % volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e 2 3 total count 5 15 19 11 50 % within (bond types, repo ....) 10,0 % 30,0 % 38,0 % 22,0 % 100, 0% % within business experience year 100,0 % 100,0 % 100,0 % 100,0 % 100, 0% while 60% of those with the lowest work experience have no knowledge of this type of securities, the remaining 20% state that they have only the first level knowledge. those who have 11-20 years of work experience are more confident about this. 9% of those with more than 30 years of work experience feel sufficiently informed about this. when the whole sample is taken into account, only 20% of the sme managers feel that they are well informed in this regard. 80% agree that the level of knowledge is incomplete. table 13: (asset backed securities, sukuk ....) business experience year crosstabulation business experience year total 1-10 11-20 21-30 31-40 (asset backed securiti es, sukuk ....) ,0 count 4 5 3 3 15 % within (asset backed securitie s, sukuk ....) 26,7 % 33,3 % 20,0 % 20,0 % 100,0 % % within business experien ce year 80,0 % 33,3 % 15,8 % 27,3 % 30,0 % 1, 0 count 0 6 11 5 22 % within (asset backed securitie s, sukuk ....) ,0 % 27,3 % 50,0 % 22,7 % 100,0 % % within business experien ce year ,0 % 40,0 % 57,9 % 45,5 % 44,0 % 2, 0 count 1 4 5 3 13 % within (asset backed securitie s, sukuk ....) 7,7 % 30,8 % 38,5 % 23,1 % 100,0 % % within business experien ce year 20,0 % 26,7 % 26,3 % 27,3 % 26,0 % total count 5 15 19 11 50 % within (asset backed securitie s, sukuk ....) 10,0 % 30,0 % 38,0 % 22,0 % 100,0 % % within business experien ce year 100,0 % 100,0 % 100,0 % 100,0 % 100,0 % almost all those with the lowest work experience have no knowledge of this security. as the number of years of experience in business life increases, the proportion of those who feel basic knowledge about this issue is increasing. when the whole sample is taken into consideration, it is seen that 30% of the managers of the smes do not know about it, 44% have basic knowledge and 26% of them feel well informed. thus, 74% agree that the level of knowledge is incomplete. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu information level representation of small and medium enterprises (sme) managers about securities page |24| emerging markets journal table 14: (stock types ....)business experience year crosstabulation business experience year total 1-10 11-20 21-30 31-40 (stoc k type s ....) 0 count 2 2 6 4 14 % within (stock types ....) 14,3 % 14,3 % 42,9 % 28,6 % 100,0 % % within business experienc e year 40,0 % 13,3 % 31,6 % 36,4 % 28,0 % 1 count 2 5 8 4 19 % within (stock types ....) 10,5 % 26,3 % 42,1 % 21,1 % 100,0 % % within business experienc e year 40,0 % 33,3 % 42,1 % 36,4 % 38,0 % 2 count 1 8 5 3 17 % within (stock types ....) 5,9 % 47,1 % 29,4 % 17,6 % 100,0 % % within business experienc e year 20,0 % 53,3 % 26,3 % 27,3 % 34,0 % total count 5 15 19 11 50 % within (stock types ....) 10,0 % 30,0 % 38,0 % 22,0 % 100,0 % % within business experienc e year 100,0 % 100,0 % 100,0 % 100,0 % 100,0 % when the whole sample is taken into consideration, it is seen that 28% of the managers of the smes do not know about it, 38% of them feel knowledgeable at the basic level and 34% of them feel well informed. thus, 66% accept that the level of knowledge is incomplete. table 15: (type a-b etc. investment fund .....) business experience year crosstabulation business experience year total 1-10 11-20 21-30 31-40 (type ab etc. investme nt fund .....) 0 count 2 4 6 6 18 % within (type ab etc. investme nt fund .....) 11,1 % 22,2 % 33,3 % 33,3 % 100,0 % % within business experien ce year 40,0 % 26,7 % 31,6 % 54,5 % 36,0 % 1 count 2 9 10 4 25 % within (type ab etc. investme nt fund .....) 8,0 % 36,0 % 40,0 % 16,0 % 100,0 % % within business experien ce year 40,0 % 60,0 % 52,6 % 36,4 % 50,0 % 2 count 1 2 3 1 7 % within (type ab etc. investme nt fund .....) 14,3 % 28,6 % 42,9 % 14,3 % 100,0 % % within business experien ce year 20,0 % 13,3 % 15,8 % 9, 1% 14,0 % volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e 2 5 total count 5 15 19 11 50 % within (type ab etc. investme nt fund .....) 10,0 % 30,0 % 38,0 % 22,0 % 100,0 % % within business experien ce year 100,0 % 100,0 % 100,0 % 100,0 % 100,0 % a significant portion of those who have had a work experience of less than 10 years and over 30 years of experience stated that they have no knowledge of these securities. groups between 11-30 years work experience are more self confident about this issue and their rates are close to each other. when the whole sample is taken into consideration, 36% of the managers of the smes do not know about it, 50% of them feel at the basic level knowledge and 14% of them feel well informed. thus, 86% accept that the level of knowledge is incomplete. table 16: (derivative products ....) business experience year crosstabulation business experience year total 1-10 11-20 21-30 31-40 (derivati ve products ....) 0 count 4 8 17 7 36 % within (derivati ve products ....) 11,1 % 22,2 % 47,2 % 19,4 % 100,0 % % within business experien ce year 80,0 % 53,3 % 89,5 % 63,6 % 72,0 % 1 count 0 5 2 3 10 % within (derivati ve products ....) ,0 % 50,0 % 20,0 % 30,0 % 100,0 % % within business experien ce year ,0 % 33,3 % 10,5 % 27,3 % 20,0 % 2 count 1 2 0 1 4 % within (derivati ve products ....) 25,0 % 50,0 % ,0 % 25,0 % 100,0 % % within business experien ce year 20,0 % 13,3 % ,0 % 9,1 % 8,0 % total count 5 15 19 11 50 % within (derivati ve products ....) 10,0 % 30,0 % 38,0 % 22,0 % 100,0 % % within business experien ce year 100,0 % 100,0 % 100,0 % 100,0 % 100,0 % the level of knowledge about derivative products is much lower. when the whole sample is taken into account, 72% of the company owners do not know about it, 20% of them have the basic knowledge, only 8% of them feel well informed. thus, 92% accept that the knowledge level is incomplete. 6. conclusion and recommendations the rate of those who have no knowledge in the type of mutual funds, such as a-b type, was 36%. 50% stated that they are knowledgeable at basic level. in total, only 14% of businessmen stated that they had a good level of knowledge on this issue. in this case, 86% define the level of knowledge as little or no. the rate of those who define themselves as unfamiliar is 55% in the lowest annual turnover group. a significant number of those with 10-year or six-to-30-year-old business experience have no knowledge of these securities. groups between 11-30 years are more self-confident about this issue and their rates are close to each other. the level of knowledge about derivative products is much lower. when the whole sample is taken into consideration, 72% of the company managers feel completely ignorant about this issue, 20% of them have volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu information level representation of small and medium enterprises (sme) managers about securities page |26| emerging markets journal basic knowledge, and only 8% of them feel well informed. thus, 92% define the level of knowledge as little or no. the ratio of those who define themselves as ignorant in the lowest annual turnover group ones is highest with 95%. companies with the lowest business life experience and minimum annual turnover are the ones who feel the least knowledgeable. 11-20 years of work experience is more confident in this regard group. only 9% of those with a work experience of above 30 years feel sufficiently knowledgeable in this regard. when the whole sample is taken into account, only 20% of the sme managers feel that they are well informed in this regard. 80% agree that the level of knowledge is incomplete. with regard to asset-backed securities, almost the entire lowest work experience group is unaware of these securities. as the number of years of experience in business life increases, the proportion of those who feel basic knowledge about this issue is increasing. the same relationship, with less rigidity, is true also on the increase in turnover. when the whole sample is taken into consideration, it is seen that 30% of the managers of the smes do not know about it, 44% feel basic knowledge and 26% of them feel well informed. thus, 74% agree that the level of knowledge is incomplete. the ratio of those who said that they have no knowledge in the type of securities is 28% and 38% of them are at the basic level knowledge. in total, 34% of businessmen stated that they had a good level of knowledge on this issue. in this case, 66% define the level of knowledge as little or no. the lowest rate of those who define themselves as unfamiliar is 45%. in the group with the least work experience, this rate was 40%. during the analysis, the level of knowledge that business people feel about the age range and securities is also tabulated and analyzed. as expected in this variable, the situation was parallel with the years of experience in the business life. although there are some small differentials, it is not necessary to include these tables in the study. the analysis can be summarized as follows. the relationship between the age range and the level of knowledge about securities is observed. a significant number of managers under the age of 30 see themselves as ignorant about securities. the groups that are between the ages of 31-50 are the ones trusting themselves the most. however, in some types of securities, the level of knowledge felt by the age group above 50 is close to age groups between 31 and 50. the group over 50 years of age was the most uninformed about derivative financial instruments. this study is important in terms of testing the deficiency expressed in the hypothesis and creating awareness on this issue as a first step. this awareness needs to begin and be defined by professional organizations such as chambers of commerce and industries, universities etc. also, it can be used to determine the need for certification programs to be implemented by institutions. it can also be used to increase interest and to shape the curriculum. in addition, new academic studies on the interaction of fieldwork data with different factors can be made in the future. again, using this information, the central economic management can use this information to better understand the owners and managers of smes, to create policies and to make arrangements. references alkaya, a., & yağlı, i̇. (2015, ekim). finansal okuryazarlık finansal bilgi, davranış ve tutum: nevşehir hacı bektaş veli üniversitesi i̇i̇bf öğrencileri üzerine bir uygulama. uluslararası sosyal araştırmalar dergisi, 8(40), 585-599. alptekin, e. (2007). kobi̇’ler alternatif finansman kaynakları’nın farkında mı? retrieved kasım 12, 2018, from i̇zmir ticaret odası web sitesi: http://www.izto.org.tr/portals/0/iztogenel/dok umanlar/kobiler_alternatif_finansman_kaynakl arinin_farkindami_e_alptekin_26.04.2012%20 21-41-56.pdf apan, m., & i̇slamoğlu, m. (2014, temmuz). kobi̇'lerde finans yönetimi. international journal of science culture and sport, 2(special issue 1), 208-218. bayrakdaroğlu, a., sarı, b., & heybeli, b. (2013). i̇şletmelerinin finansal risk yönetiminde türev ürün kullanımlarına i̇lişkin bir saha araştırması: denizli i̇li örneği. muhasebe ve finans(ocak), 57-72. bayram, s. s. (2014). finansal okuryazarlık ve para yönetimi davranışları: anadolu üniversitesi öğrencileri üzerine uygulama. business & management studies: an international journal, 2(2), 105-135. benli, t. (2017). konjonktür hareketler ve i̇şletmelerin yatırım kararlarının firma-menkul kıymet yatırımları açısından kavramsal i̇ncelemesi. turkish journal of marketing, 2(3), 104-124. coşkun, s. (2016, 07 05). üniversite öğrencilerinin finansal davranış ve tutumlarının belirlenmesi: finansal okuryazarlık algıları üzerine bir araştırma. i̇nsan ve toplum bilimleri araştırmaları dergisi, 5(7), 22472258. demir, s. (2009). döviz riskinden korunma yöntemleri ve kullanılma nedenleri: i̇mkb örneği. muhasebe ve finansman dergisi(41), 156-170. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.178 | http://emaj.pitt.edu ferhat sayım emerging markets journal | p a g e 2 7 karamustafa, o., & karakaya, a. (2002, ekim). banka tercihi, finansal araçların kullanımı ve memnuniyeti: türkiye’deki özel finans kurumu müşterileri üzerine bir araştırma. muhasebe ve finansman dergisi(16), 82-96. türkonfed akbank. (2009, aralık). türkonfed. retrieved ekim 24, 2018, from türk girişim ve i̇ş dünyası konfederasyonu: http://www.turkonfed.org/files/contentfile/tur konfed-rapor-2009-kobi-c2.pdf yıldırak, k. (n.d.). finans özel i̇htisas komisyonu raporu. retrieved 11 12, 2018, from trakya kalınma ajansı web sitesi: https://www.trakyaka.org.tr/upload/domain/tra kyaka/28062013bkkmqe.pdf yörük, n. (2006). girişimcilikte alternatif finansman tekniklerinin kullanımı. uluslararası girişimcilik kongresi, kırgızistan-türkiye manas üniversitesi yayınları: 86, (pp. 313322). bişkek. yücel, t., mandacı, p. e., & kurt, g. (2007). i̇şletmelerin finansal risk yönetimi ve türev ürün kullanımı: i̇mkb 100 endeksinde yer alan i̇şletmelerde bir uygulama. muhasebe ve finansman dergisi(36), 1-9. zor, i̇., & akın, a. (2008). stratejik projeksiyonlar bağlamında kobi̇'lerde finansman araçları kullanımı. afyon kocatepe üniversitesi, i̇.i̇.b.f. dergisi, x(1), 177-199. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu volatility model choice for sub-saharan frontier equity markets a markov regime switching bayesian approach carl hope korkpoe university of cape coast, ghana | ckorkpoe@ucc.edu.gh nathaniel howard university of cape coast, ghana | nhoward@ucc.edu.gh abstract we adopt a granular approach to estimating the risk of equity returns in sub-saharan african frontier equity markets under the assumption that, returns are influenced by developments in the underlying economy. four countries were studied – botswana, ghana, kenya and nigeria. we found heterogeneity in the evolution of volatility across these markets and also that two-regime switching volatility models describe better the heteroscedastic returns generating processes in these markets using the deviance information criteria. we backtest the results to assess whether the models are a good fit for the data. we concluded that, the selected models are the most suitable for predicting the volatility of future returns in the markets studied. keywords: regime-switching, bayesian markov chain monte carlo, frontier equity markets, business, statistics * this paper is the first extract of the ongoing phd in statistics thesis by the first author. the second author is the principal supervisor. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:ckorkpoe@ucc.edu.gh mailto:nhoward@ucc.edu.gh http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu carl hope korkpoe, nathanial howard emerging markets journal | p a g e |69 volatility model choice for sub-saharan frontier equity markets a markov regime switching bayesian approach carl hope korkpoe nathanial howard i. introduction investor interest in frontier equity markets of sub-saharan africa has been growing lately. this interest is topical in a growing finance and economics literature (sukumaran, gupta and jithendranathan 2015; de groot, pang and swinkels 2012; quisenberry jr and griffith, 2010) and in international finance corporation (2013), the world bank's private sector arm's newsletters for some time now. bley and saad (2012) suggest that, the principal motivation for this development is the low correlation of frontier market asset returns with their counterpart returns in the developed and emerging markets. however, perceived heightened risk is prevalent in the discussions related to investment and portfolio management activities in the frontier markets as a whole (hassan, et al., 2003). much is known about volatility and the strategies for managing risks in investments in various assets in the developed and emerging markets. however, the same cannot be said for the smaller frontier markets which are ironically becoming important additions to portfolios of global investors seeking additional returns in the face of dwindling markets returns in the developed and emerging markets (marshall, nguyen and visaltanachoti, 2013). the characteristics of these frontier markets are quite different from the emerging and developed market counterparts. for one thing, investors in frontier markets are starved of information about the markets they invest in (sukumaran, gupta and jithendranathan, 2015). in equities markets, there are still problems of corporate governance of the listed firms and also insider market transactions, which are shrouded in secrecy (la porta, et al. 2000, klapper and love, 2004). besides, frontier economies are prone to bouts of uncertainty, foreign exchange crises, changing capital market regulations and at times political upheavals. one, therefore, will expect these to be transmitted to the broad asset markets as regime changes in market outcomes. externally, global developments influence the dynamics of economic activity in much of the developing world where some of these frontier markets are located. for long, a key factor that roils markets in emerging and frontier markets is us monetary policy and the demand for commodities from the developed world and china. a surge in the value of the us dollar normally causes a fall in the equities of the smaller markets of the frontier economies as global investors rebalance their portfolio holdings away from such markets towards profitable opportunities in developed markets. in the process, there is a surge in volatility of frontier market equities. the aversion for frontier market equities is further strengthened if the developed country economies are growing robustly. the environment, therefore, generating the market data is influenced by economic, social and political developments which are in a continuous flux across time. these should determine the magnitude and the associated fluctuations of the asset returns conditional on the regimes generating the data. modeling the volatility of stock market returns using regime switching is therefore motivated by these developments in the underlying economy. volatility modeling incorporating regimes have been studied extensively across the developed and emerging markets in various asset classes starting with the pioneering efforts of hamilton (1989). subsequent to this, hamilton and susmel (1994) and hamilton (1996) gave additional insights into the behavior of returns using extensive economic data. other authors, for example, hardy (2001) and gray (1996) have utilized regime switching models in equities and interest rates respectively and they have concluded that such models provide a better fit to the data than single regime garch models. in the emerging markets, the first attempt at characterising the volatility of market returns with regime switching models was by assoe (1998). he assigned changing government policies and reforms in capital markets as the main factors driving regime changes in emerging markets. since then, a number of papers have appeared in the literature identifying regimes in the returns of various assets in emerging markets (ozdemir and akgul 2015; van gysen, huang and kruger 2013; li, 2013). in contrast, academic research on frontier markets has focused little attention on the exploration of volatility behavior using regime switching models. the little there is incorporating regime-switching in volatility models is concentrated in the gulf and north africa regions. balcilar et al. (2013), for example investigated herd behaviour among investors in the gulf arab stock markets and incorporated regime switching into the analysis. samarakoon (2011) and khalifa, hammoudeh and otranto (2014) looked at the spillover effects of the recent us financial crisis on emerging markets using regime switching. charfeddine and ajmi (2013) used regime switching to capture long memory effects on market returns on the tunisia stock exchange. still, aloui, hammoudeh & hamida (2015) adopted a regime switching approach to investigate the relationship between sharia stocks and sukuk. for much of the frontier markets south of the sahara, our search of the literature on google scholar did not reveal any such papers. single regime garch models are the principal tools of choice for volatility modeling in the frontier markets in sub-saharan africa. some recent papers are carsamer (2016), uyaebo, atoi and usman (2015), chinzara and slyper (2013), esman nyamongo and misati (2010), adjasi (2009), among others. there is plenty of evidence in the finance literature suggesting that multi-regime volatility models provide a better description for modelling asset returns. lamoureux, and lastrapes (1990) investigated the volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu volatility model choice for sub-saharan frontier equity markets a markov regime switching bayesian approach page |70| emerging markets journal performance of garch models in financial markets and concluded that they perform poorly in the face of changing regimes in the data. they attributed this to lack of fit of the models to the data. single-regime volatility garch models are slow to react to changes in the returns structure that results from the sudden, albeit, inevitable changes that buffet the economy; hence the data generating process. such changes in regimes are observed empirically. regime switching models, thus, serve to capture the resulting rich heteroscedastic dynamics. the clearest evidence of the presence of market regimes is the behaviour of the stock market during a recession vis-a-vis during an expansion in the economy. standard garch models do not staircase risk across time, effectively discounting the empirical evidence of the behavior of equity prices in periods of recessions and expansions alternately. during recessions, nervous investors flee the equity markets to the safety of sovereign instruments. the reverse is seen in economic expansions. thus, characterising the risks in the financial markets cannot be divorced from the underlying dynamics at play in the economy especially in measures of volatility, a pure financial construct for risk. regime switching models are therefore seen as providing sound econometric explanation to the empirics of volatility in equity markets. marcucci (2005) demonstrated the superiority of markov switching garch models over all standard classes of garch models in use by examining the volatility of us stock markets returns. accurately estimating volatility in equity markets is important in more ways than one. equities are now tied to many financial products in the market for assets. thus, any jolt in equities roils all assets creating feedback loops which unsettle investors and spark more selling into falling markets, exacerbating volatility even further (shleifer and vishny, 2011). models that provide the flexibility to adapt to changing market outcomes or regimes provide investors with tools to position trading strategies that avoid losses during market downturns. single regime models lack this flexibility as a result of few parameters in their specification. this causes overfitting of the data (cheng, yu and li, 2009) and predictably breakdowns in the face of regime changes in the underlying data generating process. this study, therefore, seeks to identify appropriate regime switching models that correctly characterize the volatility dynamics of returns of selected sub-saharan frontier market equities and also serve as the basis of forecasting risks in such markets. we used a sample of daily returns of the broad market indices of ghana, nigeria, kenya and botswana stock exchanges from january, 2011 to december, 2017 for our models. using a number of popular regime switching models in the finance literature, we estimated the volatility of the returns of these indices as regime switching markov volatility models. we used the bayesian monte carlo simulation to get round the path dependency problem identified in augustyniak (2014) and hahn et al. (2010). we backtested the results for accuracy of the tail forecasts with value-at-risk methodologies. the following are our findings. sub-saharan frontier equity markets are not homogeneous. different regime-switching garch models describe the heteroscedastic behavior of all the market returns and with varying tail behaviour for the respective markets. the data generation processes of the returns are characterized by fat-tails. this can be a source of profitable opportunities at the same time risk of extreme losses for the investing community. we make two important contributions to the literature on volatility in sub-saharan frontier equity markets. first, we fill the void in the literature and provide concrete evidence of volatility regimes of market outcomes in the equity markets of sub-saharan africa. investors have a guiding model to use in quantifying the evolving heteroscedastic risk with regime changes in frontier equity markets. this is true particularly for active managers implementing volatility-sensitive trading strategies who might seek to profit from market gyrations. secondly, the paper provides a volatility model for monitoring regime changes in the volatility of returns in the frontier markets studied. this is fundamental to investment and portfolio management in the information starved environment of sub-saharan frontier equity markets. the progression of the rest of the paper is as follows: section two looks at the regime-switching garch models employed in the study. an explanation of the bayesian methodology is provided in section three. we undertake the analysis of the data in section four and make a decision on the appropriate regime switching model that provides the best fit to our respective sample data. a summary of the findings goes into section five. we backtest our result to assess model fit and the ability to forecast accurately in section six. section seven concludes the paper. ii. model we denote the market returns by where is the log returns calculated from the closing prices on day . adapting the notation of ardia et al. (2018), the evolution of the volatility of returns in regime given the information set at a time , , parameters and , the markov regime switching garch is generally stated as: . (1) represents a mean zero continuous distribution with a time-varying variance in regime and parameter , a vector describing the shape of the distribution. the markov model assumes that is a discrete unobserved variable of the regimes taking values in the vector space . heteroscedastic models the modified heteroskedastic functions incorporating regime changes are based on the specifications of haas, mittnik and paolella (2004) as: the garch model the garch(1,1) of bollerslev (1986) is: . (2) volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu carl hope korkpoe, nathanial howard emerging markets journal | p a g e |71 the parameters , and are constrained as , and to ensure a positive variance. an additional constraint is to guarantee regime piecewise covariance stationarity. the egarch model the egarch model was proposed by nelson (1991) to capture the leverage effect identified in black (1976). the model is specified as: ( ) (| [| |]|) (3) where e[| |] is the expectation conditional on a given regime . to ensure that a given regime is stationary, we impose the restriction . the gjr-garch model glosten et al. (1993) proposed the gjrgarch model to capture the asymmetry stylized fact of financial time series. this model is stated as: ( ) , (4) with an indicator function taking a value if the condition is true and otherwise. the joint distribution of the regimes, , is given by: (5) which becomes ∏ (6) as the first-order markov model. for two-regime states, and , we define the transition matrix as: [ ]. (7) iii. bayesian parameter estimation via mcmc let the parameter space be and . we derive the posterior as joint distribution of the parameters conditional on the returns . invoking bayes’ rule and the conditional probability property, we write the joint distribution for the posterior as follows: . (8) the first term, , on the right hand side is the prior specifying the hyperparameters of the distribution. this prior is expanded further as: . ( (9) using the assumption of independence, (9) becomes: . (10) das and yoo (2004) and kim and nelson (1999) suggested normal priors for , and . ardia and hoogerheide (2010) used truncated normal distributions to specify the priors for these garch parameters in order to maintain the constraints required for the variance to be positive. this approach is what we adopt in this paper. we specify an inverse gamma distribution for the variance, , as: (11) where and are the respective shape and scale parameters of the inverse gamma distribution. the full conditional density of the posterior is complicated and unknown a priori, so we adopt the metropolis-hastings (hastings 1970; metropolis, et al., 1953) algorithm of the mcmc for our posterior simulation. iv. data and analysis data for our analysis came from botswana, ghana, kenya and nigeria bourses. these countries were selected to reflect the regional groupings of west, east and southern african frontier equity markets based on the classification of msci frontier index (2019). nigeria was added to the countries, because it has the most thriving equity market in sub-saharan africa classified as frontier. our sample is made up of the respective broad market daily index from january 04, 2011 to december 29, 2017. figure 1 plots the evolution of the levels of the indices. figure 1. evolution of indices of the stock exchanges of the four indices, the nigeria stock exchange (hereafter nse) index shows more gyrations culminating in a sharp market correction mid-2015. the index has been on a downward trend since. the ghana stock exchange (hereafter gse) index rose in the mid2011 before touch a low point at the end of 2011. it then rose sharply until it peaked in the first quarter of 2014. it stayed roughly at this level until mid-2015 when it took a nose-dived and trended downward in a sustained manner till the last quarter of 2016 when it bottomed out. the nairobi stock exchange (hereafter nairobi) index level fell persistently in 2011 till the beginning of 2012 when it climbed steadily eventually peaking in the first quarter of 2015. it has since seen a sustained fall. the botswana stock exchange (hereafter bsi dci) index trended upwards albeit bobbing up and down to about the beginning of the first quarter of 2015 when it started falling and has been on that trajectory up to the end of our sample period. we plotted the log-returns of the various indices in figure 2. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu volatility model choice for sub-saharan frontier equity markets a markov regime switching bayesian approach page |72| emerging markets journal figure 2. the log-returns of the broad market indices the returns of the four indices have been generally volatile during the sample period. day-to-day returns of the bsi dci, gse and nairobi have gyrated more wildly than the nse. volatility clusters characterize the returns of the gse and nairobi index returns compared to the nse returns. on occasion, however, nse has seen extreme outcomes. for example, mid-2016 saw the market return hitting close to -27%. the bsi dci exhibits frequent turbulence during the period with negative returns mostly. a summary of the statistics of the returns is provided in table 1. table 1: summary statistics of the returns of the indices the results in table 1 show varying degrees of deviation of the returns from normality. in particular, the tails of the distributions are fat with the severity exhibited by the returns from the nse. additionally, the returns from all the markets with the exception of the gse are left skewed. we plotted the returns to visually assess how far the returns deviate or otherwise conform to the gaussian distribution. this is shown in figure 3. figure 3. histograms of log-returns with kernels and normal density curves superimposed in all cases, the returns seem to deviate from the normal density (in blue) superimposed on the distributions. extreme outcomes are common. the returns for the nse are within a narrow range, but with extreme outcomes. the tails exhibit heavier tails than normal in all cases with the severity of extremes much pronounced for the bsi dci. this is confirmed by the summary statistics in table 1. a formal shapiro-wilk test for normality returned the w-statistics and the corresponding p-values shown in table 2. table 2: result of the shapiro-wilks test index w-statistics p-value gse 0.9057 < 2.2e-16 nse 0.76805 < 2.2e-16 nairobi 0.93099 < 2.2e-16 bsi dci 0.78162 <2.2e-16 using a significant level at the conventional 5%, we reject the null hypothesis of each of the returns being normally distributed. markov switching models are built from garch primitives, so we tested for the presence of (g)arch effects using engle’s lm test (engle, 1982). under this test, in finite samples, the null hypothesis states that the residuals of a return series exhibits no arch effects, against the alternative that arch effects are present in the residuals. the test results are summarized in table 3. table 3: engle’s lm test for (g)arch effects lags p-value gse 170.78 12 < 2.2e-16 nse 458.94 12 < 2.2e-16 nairobi 221.95 12 < 2.2e-16 bse 20.64 12 0.056 from table 3, there are clearly arch effects in the returns series of the gse, nse and nairobi at the 5% significance level. the arch effects in bsi dci returns are just borderline at 5% significant level. we built the regime switching models for singleand two-state regime-switching garch models. the garch models considered are the normal garch, the egarch and gjr-garch for the skewed and student-t innovations. these are the garch models popular in the finance literature for volatility modeling. in all, we have twelve models to choose from. we employed the msgarch package developed by ardia et al. (2016) using the r statistical language (r core team, 2018). the deviance information criterion (dic) served as a basis in selecting the best fitting garch model to the data. the results of the analyses are displayed in table 4 and 5. the respective selected models for the various stock exchanges with the minimum deviance 𝜒 volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu carl hope korkpoe, nathanial howard emerging markets journal | p a g e |73 information criteria (dic) of spiegelhalter et al. (2002) have been highlighted in table 4 and 5. table 4: dics for two-state regime switching garch models table 5: dics for single-state regime switching garch models overall, the 2-state regime-switching garch models fit the returns better than the single-regime models. for the aggregate market index of ghana, the fitting model is the 2-state regime switching gjrgarch(1,1) with skewed student-t innovations. this would suggest asymmetry in response to shocks. the nse returns are best described by a 2-regime gjrgarch(1,1) with student-t shocks. the nairobi and botswana bourses have returns during this sample period well described by 2-state regime switching egarch(1,1) with skewed student-t innovations. this shows the dominance of leverage effects in these markets. model diagnosis results of the posterior estimates are reported in tables 6, 7, 8 and 9 for gse, bsi, nse and nairobi respectively. we assess the efficiency of the sampling method using the relative numerical efficiency (rne) (geweke, 1989). there are no clear guidelines in literature on the cut-off for an efficient rne. values close to one are efficient while those close to zero are an indication of working with non-independent samples. from the tables 6-9, the values of rne are low but not zero and so some degree of efficiency is achieved in our sampling. table 6: estimates for the 2-state regime gjrgarch with skewed student-t innovations – gse table 7: estimates of 2-state regime e-garch with skewed student-t innovations – bsi dci table 8: estimates of 2-state regime gjr-garch with student-t innovations – nse volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu volatility model choice for sub-saharan frontier equity markets a markov regime switching bayesian approach page |74| emerging markets journal table 9: estimates of 2-state regime e-garch with skewed student-t innovations – nairobi v. discussion in all the exchanges studied, there is strong evidence that the statistical properties of the regimes are different, confirming the heterogeneous nature of the various markets as well as the regime switching nature of the volatility of returns. ghana stock exchange the garch error terms are and . the reaction of the conditional volatility to market shocks differs for the respective regimes. in the high volatility regime, investors react much more to market shocks than in the low volatility regime when market events are much more serene. this is expected naturally in the financial market as investors would react to any market news when they are jittery. the persistence of volatility as shown by the values of the garch lags also differs to both regimes. volatility is much persistent in regime 1 ( ) than in regime 2 ( ). as pointed out by alexander (2008), a above 0.9 is an indication that volatility takes a long time to die out following a market shock. thus, the low regime volatility is persistent. this is in line with observations of thin and asynchronous trading on the gse which effectively ensure that a given level of volatility is maintained for a long time. the unconditional volatility for regimes 1 and 2 are 3.01% and 13.06% respectively. the low volatility could be a reflection of lack of activity in most listed stocks. the rate of convergence to the long term volatility for regime 1 ( is slightly faster than that of regime 2 ( . again, a low tail thickness value, , indicates that the distribution of the returns in regime 1 has thicker tails than regime 2 with . to summarize, both regimes are skewed ( ) with the tendency to remain in regime 1 rather dominant . regime 1 has a low reaction to past negative shocks with a high persistence in volatility. regime 2 which is much more volatile with unconditional volatility of 18.5%, tends to be short lived ( ) with low volatility persistence. nigeria stock exchange the volatility dynamics of the nigeria stock exchange is characterized by two regimes, each with a different unconditional volatility of 12.92% and 52.43%. a dominant low regime has a probability of 87% and a high regime lasting approximately 10% of the time. the market shows a swift reaction to market shocks in the high volatility regime ( than in the low market regime ( ). similar to the gse, the persistence of the volatility indicated by the values of the garch lags also differs by regimes. volatility is persistent in regime 1 ( ) compared to that in regime 2 ( ). here, the values of this garch estimate is less than the threshold of 0.9 indicating that volatility takes relatively short time to abate following a market disturbance. the rate of convergence to the long term volatility for regime 1 ( is faster than that of regime 2 ( . the distribution of the returns in the high volatility regime exhibits heavier tails ( ) than the distribution in the low volatility regime ( ). we summarise the heteroscedastic characterization of the nse as having a swift reaction to market shocks in regimes with a longer time for volatility to die out in regime 1. the low volatility regime is dominant with the high regime persisting only about 10% of the time. bsi dci the volatility of the low regime of the bsi dci index with an unconditional volatility of 10.49% is relatively longer (with a probability of ) than the high volatility regime (unconditional volatility of 23.74%) with a probability of . the regimes alternate after short periods. this is confirmed in the graph in figure 2. the garch error parameters for regime 1 and regime 2 are and respectively. this is below the threshold of 0.1 stated in alexander (2008). thus, the market has different reactions to negative past returns but, it is very insensitive to market events. this observation could be due to the asynchronous and thin trading effects in much of the frontier markets of sub-saharan africa with a small number of institutional investors and market analysts keeping an eye on market developments. the rate of convergence of the volatility to its long term level is and , respectively, for the low and high regimes. the term structure of volatility for regime 2 is therefore relatively flat compared to regime 1. the tails of both regimes are fat. this is supported by the histogram in figure 3 of the returns of the bsi dci index. investors can therefore make rich pickings in the market with careful selection of equities. the shape of the distribution in regime 1 is relatively skewed ( volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu carl hope korkpoe, nathanial howard emerging markets journal | p a g e |75 ) compared with the almost symmetrical shape of regime 2 ( ). nairobi stock exchange the volatility of the market index in nairobi in both regimes is very sensitive to past market events ( ). this might suggest an active market with lots of market analysts and seasoned or institutional investors. unconditional volatility of regimes 1 and 2 respectively is 11.23% and 29.52%. the distributions of returns are heavy-tailed in both regimes ( ), suggesting the possibility of extreme returns for either regime. the volatility persistence across both regimes are similar, and . these values suggest that, volatility takes a long time to die out following a market jolt. the shape of the distribution parameters, and respectively for regimes 1 and 2, suggest slight asymmetries in the distributions. in their work, fernandez and steel (1998) suggest for a symmetrical distribution. the evolution of the conditional volatility for the four exchanges during the sample period is shown in figure 4. figure 4. conditional volatility of the index returns of the four sub-saharan equities for each of these countries, volatility surges are sharp, but revert quickly to moderate levels. the volatility uptick in most cases is clearly due to investor nervousness about developments in the underlying economy. for the most part, the effects of thin and asynchronous trading observed by mlambo and biekpe (2005) in most african equities is prevalent as seen in the dominance of low volatility regimes across the countries studied. vi. backtesting the results we checked our results out-of-sample as a precaution against overfitting of the models to the data. complex statistical models are notoriously prone to overfitting and perform poorly out-of-sample, where they are most relevant. cawley and talbot (2007) discuss extensively the problems particularly with bayesian models in machine learning. we aim to assess the robustness of our models in predicting correctly the value-at-risk at the standard 5% quantile. we utilized the conditional coverage test (cc) of christoffersen (1998) and the dynamic quantile (dq) test of engle and manganelli (2004). the cc test jointly tests for the independence (kupiec 1995) and unconditional coverage (christoffersen 1998) provided that, the var exceedances are independent and non-autocorrelated. thus, the null hypothesis is that, exceedances are independent and are also derived from the conditional and unconditional coverage test statistics. the joint statistic has a distribution with one degree of freedom. the dynamic quantile (dq) test of engle and manganelli for backtesting var models is a regression of the hit sequence, , on a set of explanatory variables including the var quantiles and a finite number of lagged hits. the dynamic quantile test provides an overall goodness-of-fit test of the models under consideration. we generated 700 samples ex-post for the 0.05 percentile of the returns from the model. the test covered the chosen regime switching model and its corresponding non-switching counterpart for each of the stock markets studied. the results are shown in table 10. table 10: results of conditional coverage and dynamic quantile tests results show a better model fit for the tworegime switching models for all exchanges, except the conditional coverage of nairobi. the p-values of the dq for the two-regime switching models are consistently higher than the single regime models. the conflicting finding of nairobi has been discussed in the finance literature. komunjer (2013) discussed at length the performance of these var tests and concludes that the dynamic quantile test by relying on out-of-sample simulations instead of the in-sample tests on which conditional coverage is based is a far more powerful test. we therefore conclude that, the two-regime markov switching egarch for nairobi is a better fit to the returns. vii. conclusion financial markets are subject to the developments in the underlying economy, which ultimately transmits to regime changes in returns. as it is, single regime models do not track closely the changing variability between bull and bear markets volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu volatility model choice for sub-saharan frontier equity markets a markov regime switching bayesian approach page |76| emerging markets journal observed in equity returns. risk dynamics do change in response to the economies in which markets operate. for the sub-saharan african equity markets with a dearth of market information to aid decision-making (enisan and olufisayo 2009), keeping an eye on the developments in the broader economy together with how this affects market returns should provide competitive advantage to investors. estimating volatility using regime switching informs investing by using risk estimates, which fairly reflect existing market conditions through the responsiveness of the estimating models to risk. as our study shows, sub-saharan africa frontier equity markets are far from homogenous. different dynamics, be it social, political or economic, are the driving forces behind the financial markets in these countries. single regime models are likely to under-or over-estimate risk during periods of high or low volatility respectively. therefore, a granular approach to estimating volatility that we have done for these subsaharan frontier equity markets seem the most rational way market actors can fine-tune their investment strategies to avoid losses during high volatility periods. all the markets studied show clear regimes in market volatility with different statistical properties. again, it is clear that though these markets are classified in the same bracket of frontier markets, different dynamics are driving their heteroscedastic evolution. different heteroskedastic functions with varied tail behavior described the return data of ghana, nigeria, nairobi and botswana stock indices with observed asymmetric and leverage effects in the markets. investors therefore have to be alert to generalizations that most likely will not fit all markets. optimal risk-based allocation of investing funds based on volatility regimes across these markets adds to the benefits of diversification in equities trading in sub-saharan african equity markets. in addition, any future risk-based capital allocation such as for value-at-risk or expected tail loss that is regime aware based on the findings in this study should lead to prudent risk management and control. in all the markets under study, the low volatility regime dominates, leaving brief spells of market turbulence. this will provide investors with the information to lean against the winds during brief market gyrations. references adjasi, c. k. (2009). "macroeconomic uncertainty and conditional stock-price volatility in frontier african markets: evidence from ghana." the journal of risk finance 10, no. 4, 333-349. alexander, c. (2008). “market risk analysis: practical financial econometrics”, (vol. ii), hoboken: wiley. aloui, c, s hammoudeh, and h. b hamida. (2015). "price discovery and regime shift behavior in the relationship between sharia stocks and sukuk: a two-state markov switching analysis." pacific-basin finance journal 34, 121-135. ardia, d, and l. f hoogerheide. (2010). "bayesian estimation of the garch (1, 1) model with student-t innovations." the r journal 2, no. 2, 41-47. ardia, d, k bluteau, k boudt, and l catania. (2018). "forecasting risk with markov-switching garch models: a large-scale performance study." international journal of forecasting 34, no. 4, 733-747. ardia, d, k bluteau, k boudt, l catania, and d.a trottier. (2016). "markov-switching garch models in r: the msgarch package ." journal of statistical software, forthcoming. assoe, k.g. (1998). "regime-switching in emerging stock market returns." multinational journal 2, 101-132. augustyniak, m. (2014). "maximum likelihood estimation of the markov-switching garch model." computational statistics & data analysis 76, no. 1, 61–75. balcilar, m, r demirer, and s hammoudeh. (2013). "investor herds and regime-switching: evidence from gulf arab stock markets." journal of international financial markets, institutions and money 23, 295-321. black, f. (1976). "studies of stock price volatility changes." proceedings of the 1976 meetings of the business and economics statistics section. american statistical association, 177-181. bley, j, and m saad. (2012). "idiosyncratic risk and expected returns in frontier markets: evidence from gcc." journal of international financial markets, institutions and money 22, no. 3, 538-554. bollerslev, t. (1986). "generalized autoregressive conditional heteroskedasticity." journal of econometrics 31, no. 3, 307-327. carsamer, e. (2016). "volatility transmission in selected african foreign exchange markets." international journal of economic perspectives 10, no. 2, 43-61. cawley, g. c, and n. l talbot. (2007). "preventing overfitting during model selection via bayesian regularisation of the hyper-parameters." journal of machine learning research 8, april 2007, 841-861. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu carl hope korkpoe, nathanial howard emerging markets journal | p a g e |77 charfeddine, l, and a. n ajmi. (2013). "the tunisian stock market index volatility: long memory vs. switching regime." emerging markets review 16, 170-182. cheng, x, p. l yu, and w. k li. (2009). "on a dynamic mixture garch model." journal of forecasting 28, no. 3, 247-265. chinzara, z, and s slyper. (2013). "volatility and anomalies in the johannesburg securities exchange daily returns." financial markets journal 17 , no. 1, 25-41. christoffersen, p. f. (1998). “ evaluating interval forecasts.” international economic review, 841-862. das, d, and b. h yoo. (2004). "a bayesian mcmc algorithm for markov switching garch models." econometric society, 1-16. de groot, w, j pang, and l swinkels. (2012). "the cross-section of stock returns in frontier emerging markets." journal of empirical finance 19, no. 5, 796-818. engle, r. f. (1982). "autoregressive conditional heteroscedasticity with estimates of the variance of united kingdom inflation." econometrica: journal of the econometric society, 987-1007. engle, r. f, and s manganelli. (2004). "caviar: conditional autoregressive value at risk by regression quantiles." journal of business & economic statistics 22, no. 4, 367-381. enisan, a.a, and a.o olufisayo. (2009). "stock market development and economic growth: evidence from seven sub-saharan african countries." journal of economics and business 61, no. 2, 162-171. esman nyamongo, m, and r misati. (2010). "modelling the time-varying volatility of equities returns in kenya." african journal of economic and management studies 1, no. 2, 183-196. fernández, c, and m. f steel. (1998). "on bayesian modeling of fat tails and skewness." journal of the american statistical association 93, no. 441, 359-371. geweke, j. (1989). "bayesian inference in econometric models using monte carlo integration." econometrica: journal of the econometric society, 1317-1339. glosten, l.r, r jagannathan, and d.e runkle. (1993). "on the relation between the expected value and the volatility of the nominal excess return on stocks." journal of finance 48, no. 5, 1779-1801. gray, s. f. (1996). "modeling the conditional distribution of interest rates as a regimeswitching process." journal of financial economics 42, no. 1, 27-62. haas, m, s mittnik, and m. s paolella. (2004). "a new approach to markov-switching garch models." journal of financial econometrics 2, no. 4, 493-530. hahn, m, s frühwirth-schnatter, and j sass. (2010). "markov chain monte carlo methods for parameter estimation in multidimensional continuous time markov switchingmodels." journal of financial economics 8, no. 1, 88– 121. hamilton, j. d. (1989). "a new approach to the economic analysis of nonstationary time series and the business cycle." econometrica: journal of the econometric society, 357-384. hamilton, j. d. (1996). "specification testing in markovswitching time-series models." journal of econometrics 70, no. 1, 127-157. hamilton, j. d, and r susmel. (1994). "autoregressive conditional heteroskedasticity and changes in regime." journal of econometrics 64, no. 1-2, 307-333. hardy, m. r. (2001). "a regime-switching model of long-term stock returns." north american actuarial journal 5, no. 2, 41-53. hassan, m. k, n. c maroney, h. m el-sady, and a telfah. (2003). "country risk and stock market volatility, predictability, and diversification in the middle east and africa." economic systems 27, no. 1, 63-82. hastings, w. k. (1970). "monte carlo sampling methods using markov chains and their applications." biometrika 57, 97–109. international finance corporation. (2013). annual report. washington, d.c., usa: international finance corporation. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu volatility model choice for sub-saharan frontier equity markets a markov regime switching bayesian approach page |78| emerging markets journal khalifa, a. a, s hammoudeh, and e otranto. (2014). "patterns of volatility transmissions within regime switching across gcc and global markets." international review of economics & finance 29, 512-524. kim, c. j, and c. r nelson. (1999). "has the us economy become more stable? a bayesian approach based on a markov-switching model of the business cycle." review of economics and statistics 81, no. 4, 608-616. klapper, l. f, and i love. (2004). "corporate governance, investor protection, and performance in emerging markets." journal of corporate finance 10, no. 5, 703-728. komunjer, i. (2013). “quantile prediction”. vol. 2, in handbook of economic forecasting, by g elliott and a timmermann, 961-994. amsterdam: elsevier. kupiec, p. h. (1995). "techniques for verifying the accuracy of risk measurement models." the journal of derivatives 3, no. 2, 73–84. la porta, r, f lopez-de-silanes, a shleifer, and r vishny. (2000). "investor protection and corporate governance." journal of financial economics 58, no. 1, 3-27. lamoureux, c. g, and w. d lastrapes. (1990). "persistence in variance, structural change, and the garch model." journal of business & economic statistics 8, no. 2, 225-234. li, h. (2013), "integration versus segmentation in china's stock market: an analysis of timevarying beta risks." journal of international financial markets, institutions and money 25, 88-105. marcucci, j. (2005). "forecasting stock market volatility with regime-switching garch models." studies in nonlinear dynamics & econometrics 9, no. 4. marshall, b. r, n. h nguyen, and n visaltanachoti. (2013). "liquidity measurement in frontier markets." journal of international financial markets, institutions and money 27, 1-12. metropolis, n, a.w rosenbluth, m.n rosenbluth, a.h teller, and e teller. (1953). "equation of state calculations by fast computing machines." journal of chemical physics 21, 1087–1092. mlambo, c, and n biekpe. (2005). "thin trading on african stock markets: implications for market efficiency testing." investment analysts journal 34, no. 61, 29-40. msci frontier markets (2019). may 16, 2019. https://www.msci.com/market-classification. nelson, d. b. (1991). "conditional heteroskedasticity in asset returns: a new approach." econometrica, 347-370. ozdemir, s, and i akgul. (2015). "inflationary effects of oil prices and domestic gasoline prices: markov-switching-var analysis." petroleum science 12, no. 2, 355-365. quisenberry jr, c, and b griffith. (2010). "frontier equity markets: a primer on the next generation of emerging markets." the journal of wealth management 13, no. 3, 50-58. r core team. (2018). r: a language and environment for statistical computing. vienna, austria: r foundation for statistical computing. samarakoon, l. p. (2011). "stock market interdependence, contagion, and the us financial crisis: the case of emerging and frontier markets." journal of international financial markets, institutions and money 21, no. 5, 724-742. shleifer, a, and r vishny. (2011). "fire sales in finance and macroeconomics." journal of economic perspectives 25, no. 1, 29-48. spiegelhalter, d.j, n.g best, b. p carlin, and a van der linde. (2002). "bayesian measures of model complexity and fit." journal of the royal statistical society: series b (statistical methodology) 64, no. 4, 583-639. sukumaran, a, r gupta, and t jithendranathan. (2015). "looking at new markets for international diversification: frontier markets." international journal of managerial finance 11, no. 1, 97116. uyaebo, s. o, v. n atoi, and f usman. (2015). "nigeria stock market volatility in comparison with some countries: application of asymmetric garch models." cbn journal of applied statistics 6, no. 2, 133-160. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.172 | http://emaj.pitt.edu carl hope korkpoe, nathanial howard emerging markets journal | p a g e |79 van gysen, m, c. s huang, and r kruger. (2013). "the performance of linear versus non-linear models in forecasting returns on the johannesburg stock exchange." the international business & economics research journal (online) 12, no. 8, 985. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu funding entrepreneurship and innovation with debt capital: the relevance of capital structure george obeng university of education, ghana | georgeobeng29@yahoo.com abstract funding entrepreneurial innovation with debt capital, defiling capital structure optimality, to push an economy forward in emerging economies is the focus of this study. it is targeting potential investors through a survey to seek clarification on their understanding and knowledge on capital structure as to its threat to business and investment failure. it prevailed that, entrepreneurship is not adequately defined to identify the right funding sources. investors understand capital structure and engage funds at proportions as dictated by necessity and their utilities as against strict adherence to theory. entrepreneurs accept responsibility to be efficient and innovative for growth and success; failure is not assignable to any theoretical shortcoming. this is acknowledging the optionality of capital structure and the need to develop the debt market to support entrepreneurial drive to ease unemployment in society. keywords: capital structure, entrepreneurial innovation, funding entrepreneurship, agency compensation new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.193 | http://emaj.pitt.edu | mailto:georgeobeng29@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.193 | http://emaj.pitt.edu george obeng emerging markets journal | p a g e |51 funding entrepreneurship and innovation with debt capital: the relevance of capital structure george obeng i. introduction entrepreneurship has been the major source of economic engagement before the advent of formal education assuring students of factory and clerical employment. businesses were financed from personal equity or debt as the circumstances may warrant and owners accepted unlimited liability. today unemployment is the lot of young men (kuschel, lepeley, espinosa, and gutiérrez, 2017) graduating from educational institutions, and creating social dislocation. re-orienting entrepreneurship for economic eminence faces the challenge of personal equity funding (block, colombo, cumming and vismara, 2018; fischer, malycha, and schafmann, 2019). initiating a business with debt funds has to contend with capital structure and the threat of financial distress. before industrial revolution for mass production that required formal training for engagement, men were born into family vocations, trade and professions offering them immediate jobs. the existing family business structures required of no capital investment that the young man has to struggle for. the young ones were engaged by their parents, relatives and acquaintances for training and absorption into the family business. the tools and implements of production were simple, easier to learn and be trained to make use of them, with little automation. as population surged on, demand for goods and services of different forms and nature as well as for different purposes prompted social change and economic taste. business entities formed by group of persons with public financial support emerged in mass production during the industrial revolution. people were trained for skills and competencies in formal school setups to take up jobs in industries. today, schools just supply labor and are not matched by the required demand from industry, creating unemployment in many societies and countries like ghana. knowledge acquired in schools should be translated into the creation of small businesses as has been before. however, the challenge in most cases, is lack of personal equity (block, colombo, cumming and vismara, 2018; fischer, malycha, and schafmann, 2019). external equity to push innovation and entrepreneurial initiative is not an easy venture and debt capital becomes an obvious alternative, but risk of capital structure is a threat. the fear of financial distress is obscuring the opportunities of initiating entrepreneurial engagements using debt capital to finance entrepreneurship. the relevance of capital structure in finance has been considered in different ways in theory. the understanding and knowledge of capital structure and its interpretations as well as application in different environments, circumstances and by different investors has not received in-depth attention. capital structure explains how a firm secures and engages long term funds, equity and debt, with different terms and conditions of reward and repayment (pratheepkanth, (2011). debt and equity should be at equilibrium to ensure optimum performance and derive some benefits from tax savings over financial distress (modigliani & miller 1958). there is possible departure from the capital structure theory of optimality to focus on optional choice of capital structure. the choice is at the discretion of the investor, contingent on the prevailing financial systems, financial needs in the life cycle of the firm, social settings and culture from where the decision is made (obeng, 2019). modigliani and miller (mm) (1958) observed the irrelevancy of capital structure postulating that a firm cannot change the value of its outstanding securities by changing its capital structure. the value of the firm remains same under different capital structures. the understanding and knowledge of capital structure relevance in application may differ in interpretation for different environments, situations and by different investors and their disposition. capital structure understood on the basis of innovation, accepting risk to ensure change of hopeless situation to seek opportunities will zero-in capital structure as threat and make it irrelevant. risk avoidance stance of any investor zero-in innovation and accept relevance of capital structure. investors may understand and know that business is financed from personal equity and debt making the capital structure. however, the returns, reward and their risk may have different meaning and understanding to an investor dependant on the prevailing necessity and circumstances. investors who understand the financial system and financial needs of the business and that reward or benefit goes with risk always turn around risk for opportunity and capital structure cannot deter them. investment is about risk taking in response to a challenge, creating an opportunity to turn a hopeless situation to vibrancy. the risk of using debt capital to take up any opportunity with innovative ideas, summon available resources efficiently. investors in this case understand the financial system and needs of the business and its environment. they do away with their selfinterest of charging their compensation as expense against income; rather they see their interest as appropriation of profit with other stakeholders for success and benefit to society to reduce unemployment. such entrepreneurial initiative sees capital structure risk as irrelevant in their investment drive. on the other hand, ordinary entrepreneurs may lack innovation and understanding of the financial system and needs of the business. they may be inefficient in mobilizing resources and see their interest as charge against income. they recognize capital structure and its risk as relevant and avoid liability in a way to protect selfish-interest and cripple employment. https://www.emerald.com/insight/search?q=katherina%20kuschel https://www.emerald.com/insight/search?q=katherina%20kuschel https://www.emerald.com/insight/search?q=maría-teresa%20lepeley https://www.emerald.com/insight/search?q=fernanda%20espinosa https://www.emerald.com/insight/search?q=sebastián%20gutiérrez volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.193 | http://emaj.pitt.edu funding entrepreneurship and innovation with debt capital: the relevance of capital structure page |52| emerging markets journal figure 1. the risk/vibrancy model source: composed by author, 2020 ii. entrepreneurship and unemployment unemployment has been a problem the world is battling with. a lot of young men graduate from schools with high hopes of securing befitting jobs to use the skills acquired from their educational training. however, such opportunities are disillusioned. according to the international labour organisation, an estimated of 1.4 billion workers were in states of vulnerable employment in 2017, and an additional 35 million were expected to join them by 2019. northern africa has the highest jobless percentage in the world, 11.5% in 2018. with sub-saharan africa, the rate is expected to stick to levels observed since 2017 at 7.2%. almost half of all workers more than 900 million are in vulnerable forms of employment. there is some attempt to use entrepreneurship to address the gloomy picture of unemployment among the youth (gupta, beninger and ganesh, 2015; doherty, haugh and lyon, 2014; nziku and struthers, 2018; bongani and chinaza, 2018). the g20, of the global political leaders, in their summit in turkey had the intention of increasing employment through an initiative dubbed g20 youth entrepreneurs alliance (yea). it is observed that entrepreneurs play a vital role in job creation and providing opportunities to young people (maria pinelli, 2015; alinejad, balaguer, hendrickson, 2015; felix moses edoho, and edoho, 2015). entrepreneurial development should provide an avenue for job creation to absorb job seekers and for economic growth (saha, 2016; kuschel, lepeley, espinosa, and gutiérrez, 2017; felix moses edoho, and edoho, 2015). to use entrepreneurship as a means of solving the unemployment menace, two strategically approaches can be considered. entrepreneurship that is of large scale approach which is solely manned or owned by group of persons and entrepreneurship that can be absorbed more in a way as social enterprises (gupta, beninger and ganesh, 2015; doherty, haugh and lyon, 2014; nega and schneider, 2014). the other approach is on small scale operated by one person to make a living. in any of these approaches, the entrepreneurship can be capital intensive with some automation or labor intensive absorbing more hands (gupta, beninger and ganesh, 2015; doherty, haugh and lyon, 2014; nega and schneider, 2014; john and storr, 2018). the adoption of any of the strategies may depend on the socio-economic environment and the available traditional industries as well as cultures (john and storr, 2018). in industries with long multiple processes of production requiring capital investment and some automation, one person or group of individual entrepreneurs may pull resources together in an initiative to engage more hands. this is symbolic in the agroprocessing businesses of converting raw agricultural produce of fruits and vegetables into juice as well as designing and fashion in the textile industry and catering. cooperatives can be formed to handle the different aspects of the production chain and they can be supported. members of the cooperatives can be given training and they may be specialized in different aspects of the production processes. individual entrepreneurs as self-employed in their small ways, in agriculture, trade and cottage industries can offer some services and produce dairy products for immediate communities and environments requiring simple implements. such businesses should consider the means and needs of society to ensure its sustainability (saha, 2016). the educational system of the country should factor these traditional industries and practices into the educational systems, particularly technical and vocational education to equip majority of the people. through entrepreneurial initiatives and innovations, these industries can turn around efficiently to absorb greater numbers of the unemployed of society. iii. understanding capital structure to attract funding this section discusses capital structure relevance on the valuation of the firm. capital structure should be a contingency concept, dependent on innovation. innovation should drive efficiency to zero-in capital structure and make it irrelevant. classical financial theories and models demonstrate the relevance of capital structure. it is defined severally as the ratio of equity to debt capital, a mix that maximizes a firm’s return on capital, and maximizes its value (pratheepkanth, 2011). return on capital may vary from time to time to influence the value of the firm to obtain an expected optimal capital structure for the best value of the firm. the absence of capital structure optimality exposes the firm to risk, a consideration of cost of capital, return on capital, tax savings, cost of bankruptcy, agency cost and information asymmetry (modigliani & miller 1958). the theory postulate returns to be higher than weighted average cost of the capital structure, thereby increases the value of the firm. tax savings occasioned by interest deductibility improve returns, subsequently increasing the value of the firm (candela, retrieved 2/10/19), as debt increases more tax gains, which is expected to increase the value of the firm. however, as the debt increases the chances of bankruptcy and cost threatens the security, sustenance and stability of the firm emanates from possible default in paying the debt as they fall due. as the cost of capital increases with highering in capital demand, bankruptcy cost rises due to default risk. business firms trade off debt and equity to have an optimal mix of capital structure to maximize the value of the firm (candela, retrieved 2/10/19). https://www.emerald.com/insight/search?q=sudheer%20gupta https://www.emerald.com/insight/search?q=stefanie%20beninger https://www.emerald.com/insight/search?q=jai%20ganesh https://www.emerald.com/insight/search?q=dina%20modestus%20nziku https://www.emerald.com/insight/search?q=john%20joseph%20struthers https://www.emerald.com/insight/search?q=professor%20felix%20moses%20edoho https://www.emerald.com/insight/search?q=felix%20moses%20edoho https://www.emerald.com/insight/search?q=katherina%20kuschel https://www.emerald.com/insight/search?q=maría-teresa%20lepeley https://www.emerald.com/insight/search?q=fernanda%20espinosa https://www.emerald.com/insight/search?q=sebastián%20gutiérrez https://www.emerald.com/insight/search?q=professor%20felix%20moses%20edoho https://www.emerald.com/insight/search?q=felix%20moses%20edoho https://www.emerald.com/insight/search?q=sudheer%20gupta https://www.emerald.com/insight/search?q=stefanie%20beninger https://www.emerald.com/insight/search?q=jai%20ganesh https://www.emerald.com/insight/search?q=sudheer%20gupta https://www.emerald.com/insight/search?q=stefanie%20beninger https://www.emerald.com/insight/search?q=jai%20ganesh https://www.emerald.com/insight/search?q=jai%20ganesh https://www.emerald.com/insight/search?q=arielle%20john https://www.emerald.com/insight/search?q=virgil%20henry%20storr https://www.emerald.com/insight/search?q=arielle%20john https://www.emerald.com/insight/search?q=virgil%20henry%20storr volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.193 | http://emaj.pitt.edu george obeng emerging markets journal | p a g e |53 there is also information asymmetry (vy le, thi bich, 2017), which explains how information is controlled by management against making it public. this has cost implications, because investors get their information through deduction of management behaviour, which can be negative in making investment decisions. any wrong signal can affect the firm negatively in capital structure decisions. management dilemma in employing capital to work for the benefit of their principals or for their own interest, has been of concern and be a cost to the firm. it is often postulated that, managers consider their interest before the owners. in this case, capital structure is considered as another means to control agency behavior by requiring them the provision of relevant information (vy le, thi bich, 2017). these factors give cognizance to the relevance of capital structure. the relevance of capital structure is a tutelage of market imperfection, where risk is prominent and these steps are worthy for consideration if risk is to be avoided or controlled in the investment process. return on investment and its optimization is dependent on how costs emanating from these factors are managed. with this understanding, securing funds for new venture initiatives in imperfect market environment, that would be disillusioned. however, entrepreneurial initiative should be seen in a different light and perspective as an innovation with the drive to turn around a hopeless situation into vibrancy (reyad, musleh al-sartawi, badawi and hamdan, 2019) to the benefit of society. entrepreneurship as innovation is not anchoring heuristic or confirmation bias, that does not accept and appreciate opportunities coming along with challenges. innovation sees and unveils opportunities in challenges, delimits and quarantine risks, set objectives achievable within perfect market orientation (reyad, musleh al-sartawi, badawi and hamdan, 2019). the demand of investors for higher rewards, security of investment on capital assets and contractual relationship for the payment of reward and repayment of capital are not ordinarily or something out of place. it is a call on management to accept their responsibility to be efficient in handling and putting to good use the resources made available to them (wilson and zhenyu wu, chowdhury, and maung, 2013). management is under obligation to honor the demands of the owners for their rewards and security of their assets. management should have their ultimate goal efficiency in the internal information and communication systems in making finance and investment decisions (maung and chowdhury, 2014). in this dispensation any risk that comes the way of entrepreneur presents him an opportunity, requiring innovation to handle each case on its merits efficiently, and turn around hopeless situation into vibrancy. the entrepreneur who understands the financial systems and needs of the business and the environment it is operating sees capital structure optimality as irrelevant with relevancy going with optionality. this to an entrepreneur with innovation, who combines production resources efficiently for success. figure 2. entrepreneurial-liability-possibility model: turning hopeless situation to vibrancy source: composed by authors, 2020 the entrepreneurial-liability-possibility model the indicated entrepreneurial-liabilitypossibility model depicts entrepreneurial initiative, which is innovation and efficiency driven (line xy). entrepreneurs with innovation are risk seekers and employ available resources efficiently to achieve their objectives with no reference to capital structure as risk to hold them aback. they understand the financial systems, the financial needs of the business and its operational environment. they can efficiently use 100% debt at x to achieve success. risk avoiders may not understand their systems, needs and environment, see capital structure as relevant and may prefer 100% equity at y. the more the innovation and efficiency bring on board by entrepreneurs, the more irrelevant capital structure becomes. in the absence of innovation and efficiency, the more capital structure becomes relevant. entrepreneurs accepts liability to others with an inner possibility drive to achieve and appropriate success to benefit stakeholders. they see their reward as appropriation not as expense to others. iv. classification of entrepreneurs for capital attraction in an attempt to classify entrepreneurship, it is important to understand that it takes different meaning from separate authors. according to the macmillan dictionary, “an entrepreneur is someone who uses money to start businesses and make business deals”. peter kilby (1971) described the entrepreneur as “heffalump”; a character with different particulars. an entrepreneur is an independent minded person who accepts the challenge to lead a hopeless situation, marshalling available resources and applying innovative skills, to give meaning to life and optimize the lots of society (obeng, up). entrepreneurship may be classified essentially according to its engagement as to either self-employed in own private business or in employment with another person. it may be classified according to the different levels of engagement of entrepreneurial capacity in any economic activity (john and storr, 2018; teixeira, casteleiro, rodrigues and guerra, 2018). https://www.emerald.com/insight/search?q=sameh%20m.%20reda%20reyad https://www.emerald.com/insight/search?q=abdalmuttaleb%20musleh%20al-sartawi https://www.emerald.com/insight/search?q=abdalmuttaleb%20musleh%20al-sartawi https://www.emerald.com/insight/search?q=sherine%20badawi https://www.emerald.com/insight/search?q=allam%20hamdan https://www.emerald.com/insight/search?q=sameh%20m.%20reda%20reyad https://www.emerald.com/insight/search?q=sameh%20m.%20reda%20reyad https://www.emerald.com/insight/search?q=abdalmuttaleb%20musleh%20al-sartawi https://www.emerald.com/insight/search?q=sherine%20badawi https://www.emerald.com/insight/search?q=allam%20hamdan https://www.emerald.com/insight/search?q=craig%20wilson%20and%20zhenyu%20wu https://www.emerald.com/insight/search?q=reza%20h.%20chowdhury https://www.emerald.com/insight/search?q=reza%20h.%20chowdhury https://www.emerald.com/insight/search?q=min%20maung https://www.emerald.com/insight/search?q=arielle%20john https://www.emerald.com/insight/search?q=arielle%20john https://www.emerald.com/insight/search?q=virgil%20henry%20storr https://www.emerald.com/insight/search?q=sergio%20jesus%20teixeira https://www.emerald.com/insight/search?q=carla%20maria%20lopes%20casteleiro https://www.emerald.com/insight/search?q=ricardo%20gouveia%20rodrigues https://www.emerald.com/insight/search?q=maria%20dulce%20guerra volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.193 | http://emaj.pitt.edu funding entrepreneurship and innovation with debt capital: the relevance of capital structure page |54| emerging markets journal a person may depend on others for engagement to make ends meet in a routine task under instructions. the person contributes little or no other resources apart from labor, no managerial or leadership skills, take no risk to effect change. in this case, we may say he is at the lower level of employing his entrepreneurial capacity. other persons are independent minded, may be engaged by others or have their own businesses, contributing resources, bring in managerial and leadership skills, take risk in decision making and bring change to bear on society. the level of combination of the behavioral variables of dependency, resources, leadership skills, take risk to effect change to benefit society implies the level of innovation and the order of entrepreneurship. such consideration and innovation is not limited by capital structure. wickham (2004) gave some classifications according to the venture and the strategic approach taken. he gave classification of approach as entrepreneurs themselves or their ventures. entrepreneurship is classified as nascent (start-up) entrepreneurs and singular entrepreneurs. singular entrepreneur is also made of opportunist, who maximizes profit from short-term deal; and craftsmen who make living in selling their trade or products. opportunist may be growth-oriented aiming to maximize their potentials or be independent-oriented, who work for themselves. craft may be income oriented or expansion oriented. craft may also have skill classification as; traditional, technological or professional skills. other classifications are cantillon, industry maker, administrative entrepreneur and small business. further classification is on the ratio of expected return and payoff. there is large payoff with many participants; small payoff with few participants and large payoff with few participants. clearly defining entrepreneurship distinctively to attract the right sources of funding is absurd. it does not matter the type and classification. entrepreneurship needs funding either from equity or debt. an entrepreneur may choose any structure of capital according to his understanding and interpretation of the prevailing circumstances in the immediate environment and the innovation he is bringing on board. the entrepreneur would have to take risk in making the choice and the propensity to risk and his adventurous innovation should dictate the relevancy or otherwise of his capital structure. one major classification of entrepreneurship innovation ventures that, what has been overlooked in literature is the compensation and benefits due to entrepreneurs and how they are treated in the books. in this regard, entrepreneurs can be classified as; entrepreneurs with benefits charge as expense against the business income and entrepreneurs with benefits seen as appropriation of income or profit among stakeholders. in this regard, the entrepreneurs (either employed or owner of business) who charge their compensation as expense against the business income may see themselves strictly as agents of the business and should be paid compensation as determined or agreed upon. the compensation is charged whether the business made enough profits or not and whether the business is solvent and liquid or not. such entrepreneurs may lack innovation. they can borrow to pay themselves and satisfy their interest to the detriment of the business and other stakeholders. entrepreneurs with compensation as an appropriation of income consider themselves as agent and owner of the business even if employed. their objective is bringing innovation to bear on the business activities to succeed and solve social problems and share in the glory and profits. they employ available resources efficiently to better the lot of stakeholders and the general society. they don’t make distinction of funds made available to the business and make capital structure irrelevant to achieve their goal. this classification gears towards the quest of entrepreneurs to be independent, owner-agent in employing and contributing resources of a venture. they bring managerial and leadership skills to bear on the venture. they take risk and accept liability to reward stakeholders as conventional practice to be honored, bring change in an innovative manner to create wealth for growth to the benefit of stakeholders and society at large. funding in such innovation limits capital structure factors and their risk, therefore capital structure is seen as irrelevant. this encourages the use of any fund as contracted fund or debt capital in whatever structure in an efficient manner to achieve results. v. funding entrepreneurships this section looks at the problem of securing funding for entrepreneurial initiative and innovation. according to alinejad, balaguer, hendrickson, (2015) innovative entrepreneurial firms denote a congruence of three business initiatives; innovative firms, young and high growth firms and small and medium enterprises (smes). in this case, any personal attempt by any individual or group of persons that initiate business firm to offer any product for commercial use can be prescribed as innovative entrepreneurial firm. we go further to say that, the innovative firm should denote efficiency in an effort to turn a hopeless situation into vibrancy for the good of society. funding entrepreneurship and innovation is seen as a big challenge (alinejad, balaguer, and hendrickson, 2015) in an attempt to motivate and encourage people unemployed to engage themselves privately (nziku and struthers, 2018). the funding problem may stem from the initiator or promoter of a new business, expansionary work, implementing a research outcome of innovation for new idea or efficiency in providing a product, not having personal equity funding or unable to secure external funding from equity or debt capital. the problem of funding such innovations disappoints young persons who are unemployed or may not want to be employed by other persons, but be on their own. the problem of funding ventures deprives society of economic growth (nziku and struthers, 2018), creates unemployment (kuschel, lepeley, espinosa, and gutiérrez, 2017) and deprives governments of tax revenues to secure the welfare of the general citizenry. funding entrepreneurial innovation may take different forms, from separate sources and at different stages of the business development with some form of conditions to be fulfilled (carr, 2019). at the start-up level, funding may come from the personal equity of the entrepreneur and family and friends’ equity. start-ups can also secure funding from external sources of equity and debt. if entrepreneur in start-up is a craft with https://www.emerald.com/insight/search?q=dina%20modestus%20nziku https://www.emerald.com/insight/search?q=john%20joseph%20struthers https://www.emerald.com/insight/search?q=dina%20modestus%20nziku https://www.emerald.com/insight/search?q=john%20joseph%20struthers https://www.emerald.com/insight/search?q=katherina%20kuschel https://www.emerald.com/insight/search?q=maría-teresa%20lepeley https://www.emerald.com/insight/search?q=fernanda%20espinosa https://www.emerald.com/insight/search?q=sebastián%20gutiérrez volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.193 | http://emaj.pitt.edu george obeng emerging markets journal | p a g e |55 interest to earn income for a living, personal equity and that from family may be enough. the issue is not about innovation to expand or come out with anything new, therefore may not accept external funding. they may want to avoid dilution and have to control a family interest and cultures. to their understanding, capital structure is relevant in terms of dilution and not about risk of bankruptcy. further, such entrepreneurs will go to take debt, because they are owner-agent entrepreneurs appropriating income for their compensation and not the expense. therefore, they can pay their debt even against their interest. the entrepreneur with innovation to achieve efficiency and go for expansion and growth, in any case, may go for external funding such as debt (wilson and zhenyu wu, chowdhury, and maung, 2013) or equity and other innovative sources of funds. the owner-agent entrepreneurs appropriating income for their compensation and not as expense take their innovation as change agent. then, they expect to change a hopeless situation to vibrancy and may not want to lose control through capitalisation, therefore may go for debt capital. the issue of failure is not anticipated, but the attainment of and focus on the objective of creating wealth and growth. in this case, capital structure relevancy is not in the decision equation. with management-agency position where compensation is an expense and managers seeking their interest, decision for external funding may consider capital structure. they reject liability to others, but protect their interest in limiting or avoiding risk of financial distress. this can be averted if the management ignore this expense treatment and behave as if their expense is appropriation to secure efficiency and performance, which will render capital structure irrelevant in their understanding and interpretation. a research work in australia on financing innovative entrepreneurship by alinejad et’al (2015) established that, debt finance is not an issue and there is 90% success in securing debt finance, however, request for equity and venture capital are on the lower side. we can classify the funding in perspectives of debt or equity, investment goal, investment approach, and investment target (block, colombo, cumming and vismara, 2018). we may have founders’ equity, family and friends, government grants and loans, angel investors, incubators, venture capitalists, banks, bootstrapping, crowd funding, external equity financing and debt capital. equity financing is the ownership interest in the enterprise, which is from the business operator or families and friends who do not have contractual obligation to receive interest and repayment of principal. it is also funds received from selling shares to the public, who become shareholders in the firm. shareholders receive dividend as their returns and is received when the directors declare it at the firm’s annual general meeting. shareholders have the risk of not receiving any dividend when not declared and also lose their funds when the firm is liquidated on grounds of inability to pay their debt when due. shareholders in this case may consider capital structure as relevant when management as agent have their interest at stake and consider their compensation as expense against income. management then may not be innovative enough to ensure efficiency to turn any hopeless situation to vibrancy. they reject liability to others, but protect their interest and capital structure relevant to them. when agency is innovative, efficiency and performance are prime (wilson and zhenyu wu, chowdhury, and maung, 2013). they see their compensation as appropriation and interpret capital structure as irrelevant, accept liability to capital providers in securing additional funding and reject strict adherence to entity and limited liability concepts. debt financing is funds borrowed by the firm for which it is obliged to pay interest on regularly and repay the principal at maturity, else bankruptcy proceedings may be filed against the firm. venture capital is special form of equity to finance costly, highrisk, high-return technology-based innovative firms attractable at any stage of the development of the firm (alinejad et’al, 2015). its acquisition is also dependent on dilution and control of the owner-agent interest, management-agency and their treatment of compensation. accelerators (and incubators) are described as organizations, which aim to help start-ups with mentorship, advice and network access for growth. business angel (ba) financing have traditionally been a source of financing young innovative firms, that find it difficult to access bank or debt finance. angel networks are networks of business angels with focus of investing together in early-stage high growth ventures. the group provides equity and offer management support and network access with higher amounts of financing. crowd-funding covers diverse forms of fundraising, using the internet. groups of people contribute funds to support a particular goal in different forms including; reward-based, donation-based, lending-based, and investment-based (equity) crowd-funding. rewardbased crowd-funding project takes some customized product or service, ego-boosting or the offering of symbolic objects that display support for a project. donation-based crowd-funding may comprise individuals or non-governmental organizations raising money with the motivation to donate for charitable giving and social image. lending-based crowd-funding including peer-to-peer lending are motivated to invest as lenders to receive fixed interest rates for their loans. with equity-based crowd-funding, entrepreneurs make an open call to sell a specified amount of equity or bond-like shares in a company on the internet. corporate venture capital (cvc) is investments by large, established firms into start-ups or growth firms. large firms in protecting their interest and develop in growth do not acquire ventures and absorb them. they take a minority equity stake in innovative young firms, make them independent, and help them further develop their promising technologies and markets. the cvc is interested in strategic goals of having access to new technology, new markets or customer segments. families with large firms establish family offices as intermediaries to manage their wealth (block, et al, 2018). they avoid direct ownership and hold on to the family office, where they unload their interest to a professional wealth management to reduce conflicts, which may lead to fail investment for efficiency. they invest in growth ventures and have become important players in the market for entrepreneurial finance as equity investors (block et al, 2018). governmental venture capital (gvc) fund is a funding source to reduce the financial gap for entrepreneurial initiatives and to pursue investments, that will yield social payoffs and positive externalities to https://www.emerald.com/insight/search?q=craig%20wilson%20and%20zhenyu%20wu https://www.emerald.com/insight/search?q=reza%20h.%20chowdhury https://www.emerald.com/insight/search?q=min%20maung https://www.emerald.com/insight/search?q=craig%20wilson%20and%20zhenyu%20wu https://www.emerald.com/insight/search?q=reza%20h.%20chowdhury https://www.emerald.com/insight/search?q=min%20maung https://www.emerald.com/insight/search?q=min%20maung volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.193 | http://emaj.pitt.edu funding entrepreneurship and innovation with debt capital: the relevance of capital structure page |56| emerging markets journal the society. the government objectives differences result in the heterogeneity in the types of firms available to receive gvcs investment funds and their efficiency in using the funds. the heterogeneity of government objectives and its intentions come out with some categories of; direct public funds, hybrid private-public funds, and funds-of-funds. direct public funds invest through government-supported venture capital schemes to facilitate the development of a venture capital industry within a region or industry. co-investments with private investors, an innovation is initiated to cater for areas lacking skills and crowing-out issues. government support may take the form of funds-offunds to invest in other investment funds rather than investing directly into companies (block et al, 2018). other funds as documented by block et al (2018) include intellectual property fund (ip), a form of patents where innovative firms or investors see monetarism in their intellectual property and use the funds generated to grow their venture. it is not equity nor debt, but intellectual assets of a company. it backs debt funding to give firms the opportunity to use the economic value of their ip to obtain loans from banks or other financial institutions. mini-bonds are public bonds issued in special sme bond segments used as a financing instrument by smes. social venture capital fund is a seed-funding to social enterprise (doherty, et al 2014), that works for profit. the funding can come in both debt and equity, with the goal to achieve a reasonable financial return and at the same time delivering social impact. university-managed or university-based funds supports ideas or research findings from university faculty, staff, and alumni. technology innovation developed in labs is not close to the market. therefore, universities need to fund research internally to get the technology ready to a development partner from the private sector. venture debt lenders or funds are specialized financial institutions bringing together venture capital and traditional debt sources of funding. they provide loans to start-ups that do not require securities or positive cash flows from start-ups. the emerging and proliferation of funding sources may be a direct response to social, economic and cultural changes that manifest in a world of dynamism with challenges of different business structures. this makes entrepreneurship complex in classification and categorization to attract the right source of funding for the fear of loss of investment assets and their reward. this has called for new legislation and stiffer regulations and control that may work against businesses (felix moses edoho, and edoho, 2015). consequently, return to investors becomes unattractive and they may also bring innovations to develop other means to engage their funds. in the absence of internal flow of funds and collateral to secure funding, businesses are challenged to be innovative and open up to provide investors with the right information. entrepreneurs and agency should be transparent and accept liability in dealing with investors or financiers. investors may require business efficiency with innovative agency in an effort to turn a hopeless situation into vibrancy for the good of society and zero-in the risk of capital structure. vi. methodology research design the investigation made use of the descriptive design and the survey research strategy for data collection. the survey strategy is appropriate for study with broad setting to help achieve economy (saunders et al 2007). estimation technique the study used the logit model to establish the relationship between the dependent variable, capital structure, as to how an investor will choose equity or debt to finance entrepreneurial innovation or initiative as well as the independent variables of; understanding (perception of capital structure), reality of capital structure to an investor, consideration of capital structure in investment decision, knowledge in capital structure, advice and guidance on capital structure, changes in capital structure and how they influence investment decision. generally, the logit model is formulated as follows: 𝐿𝑖 = 𝑙𝑛 ( 𝑃𝑖 1 − 𝑃𝑖 ) = 𝛽1 + 𝛽2𝑋𝑖 + 𝜇𝑖 (1) to estimate (1), we need, apart from𝑋𝑖, the values of the regressand, or logit,𝐿𝑖. the dependent variable, capital choice is such that 𝑃𝑖 = 1 if an individual prefers bond and 𝑃𝑖 = 0 if otherwise. limitations the major limitation of this study is data collection from the potential investors, who may come from different backgrounds and cultures. cultural differences can affect the responses and defile the technical position of investment decision. these may influence the outcome of the study and therefore call for further studies. empirical model specification the empirical model formulated by the study to be estimated is as follows: 𝑃𝑟𝑜𝑏(𝐶𝑎𝑝𝐶ℎ𝑜𝑖𝑐𝑒 = 1|𝑋𝑖) = 𝑏0 + 𝑏1𝑈𝑛𝑑1𝑖 + 𝑏2𝑈𝑛𝑑2𝑖 + 𝑏3𝐾𝑤𝑙1𝑖 + 𝑏4𝐾𝑤𝑙2𝑖 + 𝑏5𝐾𝑤𝑙3𝑖 + 𝑏6𝐾𝑤𝑙4𝑖 + 𝑒𝑖 where; capchoice is capital structure choice which is how an investor will choose equity or debt to finance entrepreneurial innovation or initiative (takes the value one if an individual prefers bond and zero if otherwise). und1is the variable representing understanding (perception of capital structure). und2 is reality of capital structure to an investor. https://www.emerald.com/insight/search?q=professor%20felix%20moses%20edoho https://www.emerald.com/insight/search?q=felix%20moses%20edoho volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.193 | http://emaj.pitt.edu george obeng emerging markets journal | p a g e |57 kwl1 is the knowledge variable that represents how an investor considers capital structure in investment decision. kwl2 is knowledge of capital structure influencing investment decision. kwl3 is advice and guidance on capital structure influence investment decision. kwl4 is how changes in capital structure affect investment decision. three empirical models were considered to run the logit to measure how capital structure influences investment decision or test the relevance of capital structure or otherwise in investment decision. model 1 runs the logit test on influence of understanding (perception) and reality of capital structure on investment decision. model 2 measures consideration of capital structure, knowledge of capital structure, advice and change in capital structure influencing investment decision. model 3 measures both understanding and knowledge of capital structure influencing the investment decision. table 1: logit regression for understanding and knowledge of capital structure note: standard errors are in the bracket from the empirical model und 1 = perception of capital structure in investment decision, und 2 = reality of understanding of capital structure, kwl 1 = consideration of capital structure influencing investment decision, kwl 2 = knowledge in capital structure influencing investment decision, kwl 3 = advice and guidance on capital structure influencing investment decision, kwl 4 = changes in capital structure affecting investment decision. significance level: * p < 0.05 ** p < 0.01 vii. results and discussion stata 14.0 was used to run the logit models 1, 2 and 3 on the influence of choice of capital made of equity and bond. the test results for equity and bond in qualitative and quantitative terms came up with same results. to safe space, the report on bond is presented here as representing both bond and equity. the log likelihood test gave p-values of -132.169, -132.893 and 114.422 for models 1, 2, and 3. these attest the fact that, the models fit significantly better for the study to make relevant predictions. potential investors’ perception of capital structure was seen to be statistically significant to influence their choice of investment assets and the reality of capital structure was also seen to be statistically significant to influence a person’s choice of capital. the likelihood that a person would choose a particular investment asset over the other according to his understanding or perception is greater than the other four variables measuring knowledge of capital structure, advice and guidance on capital structure, as well as changes in capital structure by a factor of 1.109 at 5 percent significant level. the reality of capital structure influencing investors in their choice of investment was also statistically significant by a factor of -1.118 and a chi square of 0.000 at significance level of 1 percent. this relationship reveals that, the likelihood that a person’s understanding, perception and reality of capital structure in making investment decision has more predictable returns. model 2 on four measurements of knowledge as consideration of capital structure, knowledge of capital structure, advice and counselling on capital structure, and change in capital structure influencing investment decision was not statistically significant with a chi-square value of 0.2062. for model 3, measuring both understanding and knowledge of capital structure were found to be a significant predictor of an individual’s choice of capital. potential investors were found to have a greater likelihood of choosing investment assets (bond and shares), when they have knowledge and understand of capital structure according to their interpretation than just consideration of capital structure, knowledge in capital structure, advice and guidance on capital structure, changes in capital structure by a factor of 1.293, at 1 percent level of significance with chi-square value of 0.001. this result points to the fact that capital structure perception and reality to the investor have a stronger preference and influence on choice of investment assets when compared to knowledge, advice and guidance, and changes in capital structure. it can be deduced from this result that perception and reality as seen by the investor have a stronger preference for capital choice with more predictable returns over the other variables of consideration of capital structure, knowledge in capital structure, advice and guidance on capital structure, changes in capital structure, which have less predictable returns. viii. conclusion and recommendations securing funds for the development of entrepreneurship and innovation in a way to engage the youth coming out from educational institution and to address the unemployment menace have been a challenge. people with entrepreneurial innovative ideas may lack personal equity capital and support from family as well as friends. employing debt capital also has the flaw of financial distress. how capital structure can influence funding entrepreneurial funding was the subject of this study. potential investors’ understanding or perception and reality of capital structure influencing volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.193 | http://emaj.pitt.edu funding entrepreneurship and innovation with debt capital: the relevance of capital structure page |58| emerging markets journal investment decisions were tested. moreover, four measures of knowledge namely; consideration of capital structure, knowledge of capital structure, advice and guidance on capital structure as well as changes in capital structure influencing investment decision were also tested. the study reveals that, there is a strong relationship between an individual’s perception and reality on capital structure as well as investment decision with significant factors of 1.109 for perception and 1.118 for reality and chi square of 0.000. the investors understanding of financial system and needs of the business in accordance with their socio-economic disposition, culture and environment they find themselves give them varying options to make a choice. entrepreneurs with innovative ideas are risk seekers determined to use all debt capital structure, be efficient in employing available resources to bring change by turning hopeless situations into vibrant economic piece and space. they ensure performance to benefit all stakeholders and they see their compensation as appropriation of profits and not as an expense against profits. such individuals see capital structure not being risky nor threat to their success. investors who prefer equity are risk avoiders and understand the relevancy of capital structure as risky and threat to their success. such investors are critical about where and how their resources are put to use. they shirk their responsibility to others and always protect their interest against others by accepting the concepts of entity and limited liability when they have recklessly managed the affairs of the business. the test that measured consideration of capital structure, knowledge of capital structure, advice and counselling on capital structure and change in capital structure influencing investment decision was seen not to be significant with a chi-square factor of 0.2062. with this revelation, we posit that investors who rely on consideration of knowledge from the market place and advice of others lack understanding of the financial system in making investment choice. they are influenced by psychological distortion of herding, deficient in innovative ideas to change any hopeless situation into vibrancy. application of the available resources may not signal efficiency and the market environment may be evidenced by imperfections with little success to count on. such entrepreneurs factor their compensation as an expense against income, seeking their own interest. such entrepreneurs don’t have fair understanding of capital structure as to its relevance or irrelevance and are conscious of their investment in order not to risk what they have and depend on others for direction. it is important to note that, having knowledge about capital structure in itself does not significantly affect or influence investment decisions. understanding of capital structure in terms of perception and the reality to the investor can influence investment decision. it can be deduced that, capital structure as a factor on its own cannot influence investment decision. knowledge of capital structure can be fruitful only when an investor understands the issues at stake in accordance to his/her situation and prevailing circumstances as demonstrated by model 3. this produced a significant factor of -1.293 and a chi-square of 0.001. the relevancy of capital structure in investment decision therefore becomes optional in accordance with the objectives the investor seeks to achieve and not just the dictate of theory. using debt to finance entrepreneurial innovation and initiative is feasible and may not pose any threat to an entrepreneur with innovative ideas, who understands the financial system and needs of the business and accepts liability to financiers without the excuse of entity and limited liability concepts. entrepreneurship is not adequately defined with specified features and characteristics to help identify the appropriate sources of funding. it is important that entrepreneurship with innovation is clearly positioned with distinct objective and features. the concepts of entity and limited liability in owner-agent controlled enterprises should be properly addressed and possibly distinguished from the public limited liability company with large shareholding. entrepreneurship with innovation should establish owner-agent responsibility and liability to financiers. owner-agent responsibility in small enterprises should have a second look on limitation of liability. their compensation should not be seen as expense against profit, but as an appropriation of income among all stakeholders with none exonerated from liability when there is failure. entrepreneurship with innovation should have stated objectives and oriented research, coming out with new products of superior potency, an improvement to an existing product or a new technology to improve efficiency as well as effectiveness in the production process. there should be consideration for separate legislation for such entrepreneurial initiatives to enforce owner-agent responsibility and liability to assure investors of the security of their investment in small innovative enterprises. references alinejad, m., balaguer, a., and hendrickson, l (2015). financing innovative entrepreneurship; australian government, department of industry, innovation and science, research paper 8/2015 block, j. h., colombo, m. g., cumming, d. j. et al. (2018). small bus econ 50:239 https://doi.org/10.1007/s11187-016-9826-6 bongani t. g., chinaza, u. (2018). entrepreneurship: solution to unemployment and development in rural communities, journal of entrepreneurship education, vol: 21 issue: 1s, issn: 10988394; online issn: 1528-2651). carr, p. (2019). technology innovation and entrepreneurship; establishing connections with potential investors (google scholar, retrieved: 10/10/19). doherty, b., haugh, h. and lyon, f. (2014), “social enterprises as hybrid organizations: a review and research agenda”, international journal of management reviews, vol. 16 no. 4, 417-436. https://technicalentrepreneurship.wordpress.com/ https://technicalentrepreneurship.wordpress.com/ volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.193 | http://emaj.pitt.edu george obeng emerging markets journal | p a g e |59 felix moses edoho, p. and edoho, f. (2015). "entrepreneurship and socioeconomic development: catalyzing african transformation in the 21st century", african journal of economic and management studies, vol. 6 no. 2, 127-147. https://doi.org/10.1108/ajems-03-2013-0030 fischer c., malycha c. p., schafmann, e. (2019).the influence of intrinsic motivation and synergistic extrinsic motivators on creativity and innovation; front. psychol., 04 february 2019 https://doi.org/10.3389/fpsyg.2019.00137 global finance global news and insight for corporuate financial professionals; unemployment rates around the world 2018; (retrieved 29/9/19) global youth unemployment is on the rise again; from ilo http://goo.gl/6mui2r (retrieved 29/9/19) government department of industry, innovation and science; research paper 8/15 gupta, s., beninger, s. and ganesh, j. (2015). "a hybrid approach to innovation by social enterprises: lessons from africa", social enterprise journal, vol. 11 no. 1, 89-112. https://doi.org/10.1108/sej-04-2014-0023 john, a. storr, v. (2018), “kirznerian and schumpeterian entrepreneurship in trinidad and tobago”, journal of enterprising communities: people and places in the global economy, vol. 12 no. 5, 582-610. http://doi.org/10.1108/jec-05 2018-0034 kilby, p. (1971). hunting the heffalump; university of illinois, at urbana-champaign, academy for entrepreneurial leadership; historical research reference in entrepreneurship. posted 4th november, 2009. kuschel, k., lepeley, m., espinosa, f. and gutiérrez, s. (2017). "funding challenges of latin american women start-up founders in the technology industry", cross cultural & strategic management, vol. 24 no. 2, 310-331. https://doi.org/10.1108/ccsm-03-2016-0072 lmencandela, boundless finance; capital structure conservations (retrieved: 2/10/19) maung, m. and chowdhury, h.r. (2014). “is there a right time for corporate investment?”, studies in economics and finance, vol. 31 no. 2, pp. 223-243, available at: https://doi.org/10.1108/sef-08-2013-0112 [link], [google scholar] [infotrieve] modigliani, f. and miller, m.h. (1958). “the cost of capital, corporation finance and the theory of investment”, american economic review, 48(3), 261-297. nega, b and schneider, g. (2014). “social entrepreneurship, microfinance, and economic development in africa”, journal of economic issues , vol. 48 no. 2, pp. 367-376. nziku, d. and struthers, j. (2018). "female entrepreneurship in africa: strength of weak ties in mitigating principal-agent problems", journal of small business and enterprise development, vol. 25 no. 3, 349-367. https://doi.org/10.1108/jsbed-032017-0115. obeng, g. (2019). sociological and cultural influence on choice of capital in emerging markets; international journal of economics and management studies 6 (9) 56-65: doi; 10,14445/2393125.ijems=v619p105 obeng, g. (press). contractual obligation of claims, a factor influencing investors’ choice of capital. pinelli, m. (2015). can entrepreneurship solve the youth unemployment crisis? (retrieved 29/9/19). pratheepkanth, p., (2011). capital structure and financial performance evidence from selected business companies in colombo stock exchange, sri lanka; journal of arts, science and commerce. reyad, s., musleh al-sartawi, a., badawi, s. and hamdan, a. (2019). "do entrepreneurial skills affect entrepreneurship attitudes in accounting education?", higher education, skills and work-based learning, vol. 9 no. 4, 739-757. https://doi.org/10.1108/heswbl-01-20190013 teixeira, s., casteleiro, c., rodrigues, r. and guerra, m. (2018). "entrepreneuria intentions and entrepreneurship in european countries", international journal of innovation science, vol. 10 no. 1, 22-42. https://doi.org/10.1108/ijis-07 2017-0062 vy le t. p., thi bich n. p. (2017). capital structure and firm performance: empirical evidence from a developing country; research in international business and finance 42. july; doi: 10.1016/i.ribaf.2017.07.012 wickham, a. p. (2004). strategic entrepreneurship, financial times, business & economics, boston. prentice hall. wilson and zhenyu wu, c., h. chowdhury, r. and maung, m. (2013)."corporate entrepreneurship and debt financing: evidence from the gcc countries", international journal of managerial finance, vol. 9 no. 4, 294-313. https://doi.org/10.1108/ijmf-11-2012-0124 https://www.emerald.com/insight/search?q=professor%20felix%20moses%20edoho https://www.emerald.com/insight/search?q=felix%20moses%20edoho https://www.emerald.com/insight/publication/issn/2040-0705 https://www.emerald.com/insight/publication/issn/2040-0705 https://doi.org/10.1108/ajems-03-2013-0030 https://doi.org/10.3389/fpsyg.2019.00137 http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_513739.pdf https://www.emerald.com/insight/search?q=sudheer%20gupta https://www.emerald.com/insight/search?q=stefanie%20beninger https://www.emerald.com/insight/search?q=jai%20ganesh https://www.emerald.com/insight/publication/issn/1750-8614 https://doi.org/10.1108/sej-04-2014-0023 http://doi.org/10.1108/jec-05 https://www.emerald.com/insight/search?q=katherina%20kuschel https://www.emerald.com/insight/search?q=maría-teresa%20lepeley https://www.emerald.com/insight/search?q=fernanda%20espinosa https://www.emerald.com/insight/search?q=sebastián%20gutiérrez https://www.emerald.com/insight/publication/issn/2059-5794 https://www.emerald.com/insight/publication/issn/2059-5794 https://doi.org/10.1108/ccsm-03-2016-0072 https://doi.org/10.1108/sef-08-2013-0112 https://doi.org/10.1108/sef-08-2013-0112 https://doi.org/10.1108/sef-08-2013-0112 https://doi.org/10.1108/sef-08-2013-0112 https://doi.org/10.1108/sef-08-2013-0112 https://doi.org/10.1108/sef-08-2013-0112 https://doi.org/10.1108/sef-08-2013-0112 https://doi.org/10.1108/sef-08-2013-0112 https://doi.org/10.1108/sef-08-2013-0112 https://www.emeraldinsight.com/doi/10.1108/sef-08-2013-0112 https://www.emeraldinsight.com/doi/10.1108/sef-08-2013-0112 http://scholar.google.com/scholar_lookup?hl=en&publication_year=2014&pages=223-243&issue=2&author=m.+maung&author=h.r.+chowdhury&title=is+there+a+right+time+for+corporate+investment%3f& http://scholar.google.com/scholar_lookup?hl=en&publication_year=2014&pages=223-243&issue=2&author=m.+maung&author=h.r.+chowdhury&title=is+there+a+right+time+for+corporate+investment%3f& https://www.contentscm.com/vlib/order/openurlreceive.aspx?clientid=8710&rft_val_fmt=info:ofi/fmt:kev:mtx:journal&rft.volume=31&rft.issue=2&rft.atitle=is+there+a+right+time+for+corporate+investment%3f&rft.jtitle=studies+in+economics+and+finance&rft.date=2014 https://www.contentscm.com/vlib/order/openurlreceive.aspx?clientid=8710&rft_val_fmt=info:ofi/fmt:kev:mtx:journal&rft.volume=31&rft.issue=2&rft.atitle=is+there+a+right+time+for+corporate+investment%3f&rft.jtitle=studies+in+economics+and+finance&rft.date=2014 https://www.contentscm.com/vlib/order/openurlreceive.aspx?clientid=8710&rft_val_fmt=info:ofi/fmt:kev:mtx:journal&rft.volume=31&rft.issue=2&rft.atitle=is+there+a+right+time+for+corporate+investment%3f&rft.jtitle=studies+in+economics+and+finance&rft.date=2014 https://www.emerald.com/insight/search?q=dina%20modestus%20nziku https://www.emerald.com/insight/search?q=john%20joseph%20struthers https://www.emerald.com/insight/publication/issn/1462-6004 https://www.emerald.com/insight/publication/issn/1462-6004 https://www.emerald.com/insight/search?q=sameh%20m.%20reda%20reyad https://www.emerald.com/insight/search?q=abdalmuttaleb%20musleh%20al-sartawi https://www.emerald.com/insight/search?q=sherine%20badawi https://www.emerald.com/insight/search?q=allam%20hamdan https://www.emerald.com/insight/publication/issn/2042-3896 https://www.emerald.com/insight/publication/issn/2042-3896 https://doi.org/10.1108/heswbl-01-2019-0013 https://doi.org/10.1108/heswbl-01-2019-0013 https://www.emerald.com/insight/search?q=sergio%20jesus%20teixeira https://www.emerald.com/insight/search?q=carla%20maria%20lopes%20casteleiro https://www.emerald.com/insight/search?q=ricardo%20gouveia%20rodrigues https://www.emerald.com/insight/search?q=maria%20dulce%20guerra https://www.emerald.com/insight/publication/issn/1757-2223 https://www.emerald.com/insight/search?q=craig%20wilson%20and%20zhenyu%20wu https://www.emerald.com/insight/search?q=reza%20h.%20chowdhury https://www.emerald.com/insight/search?q=min%20maung https://www.emerald.com/insight/publication/issn/1743-9132 https://www.emerald.com/insight/publication/issn/1743-9132 https://doi.org/10.1108/ijmf-11-2012-0124 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu consumption at the bottom of the pyramid: current state of research and suggestions for future study alyce cardoso campos universidade federal de lavras, brazil | alycecardosoc@yahoo.com.br daniel carvalho de rezende universidade federal de lavras, brazil | rezendedc@gmail.com josé willer do prado universidade federal de lavras, brazil | jwprado@gmail.com thaísa barcellos pinheiro do nascimento universidade federal de lavras, brazil | thaisapinheiro35@gmail.com humberto rodrigues marques universidade federal de lavras, brazil | hbetorm@hotmail.com andré grutzmann universidade federal de lavras, brazil | andregrutzmann@gmail.com abstract this article reviews the state of the literature on consumption at the bottom of the pyramid and summarizes the studies' suggestions for future research. this study was conducted using data from the web of science and scopus databases with the help of citespace and citnetexplorer 1.0.0. this research is justified due to: (a) absence of a broad systematization of the theme; (b) contribution and encouragement of new researchers to take part in studies on the subject; and (c) indication of a broad international literature that can encourage studies on consumption at the base of the pyramid. keywords: bottom of the pyramid, low income, consumption, market, future research new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.192 | http://emaj.pitt.edu | mailto:alycecardosoc@yahoo.com.br mailto:rezendedc@gmail.com mailto:jwprado@gmail.com mailto:thaisapinheiro35@gmail.com mailto:hbetorm@hotmail.com mailto:andregrutzmann@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.192 | http://emaj.pitt.edu alyce cardoso campos, daniel carvalho de rezende, josé willer do prado, thaísa barcellos pinheiro do nascimento, humberto rodrigues marques, andré grutzmann emerging markets journal | p a g e |41 consumption at the bottom of the pyramid: current state of research and suggestions for future study alyce cardoso campos daniel carvalho de rezende josé willer do prado thaísa barcellos pinheiro do nascimento humberto rodrigues marques andré grutzmann i. introduction interest in research on the behavior of lowincome consumers has grown since prahalad's studies on the consumption potential at the bottom of the pyramid in the early 2000s (prahalad and hart, 2002; prahalad and hammond, 2002). the term, bottom of the pyramid (bop), was coined to refer to people with low purchasing power. although this topic received increased attention in the early 2000s, the concept's real impact began to gain strength in 2007 when the number of publications about the topic grew significantly (kolk et al., 2014). one of the most frequently cited studies in this literature is prahalad's book “the fortune at the bottom of the pyramid” (2005). in that study, the author defends doing business in poorer markets and identifies examples of good investments in a large underexplored sector. as markets at the top of the pyramid become saturated, an opportunity for profit and growth appears in the large number of poor people who make up the bottom of the pyramid (cooney and shanks, 2010). recent years have seen considerable economic growth, and new approaches to reducing poverty have appeared (cooney and shanks, 2010). nevertheless, the poor still have limited participation in the consumer society. studies on business initiatives at the bottom of the pyramid are still rare. despite the large population belonging to the bop, companies continue to target their products and services to higher classes. research also takes a similar course, neglecting this large market segment. consumers at the bottom of the pyramid are overloaded with low-quality products and lack goods that actually meet their needs. furthermore, the poor are seen in a more dignified light when they are perceived as consumers rather than as recipients of aid or donations. they therefore resort to consumption as a way to feel respected. these and other reasons support arguments for investing in businesses at the bop as a way to make a profit while also helping to alleviate poverty and raising the living standard of this population. the main motivation for this study is to further advance academic knowledge about the population at the bottom of the pyramid. that market segment is sizable, relevant and important to the economic and social development. a research that connects those individuals to consumption and provide information to marketing researchers and society is desirable. based on the research by filser et al. (2017), this study reviews the literature on consumption at the bottom of the pyramid and summarizes suggestions for future research found in articles published in (2017) in order to collaborate with future research on the topic. this research is justified due to: (a) absence of a broad systematization of the theme; (b) contribution and encouragement of new researchers to take part in studies on the subject; and (c) indication of a broad international literature that can encourage studies on consumption at the base of the pyramid. the introduction part is followed by a section that addresses what has been studied about the bottom of the pyramid and analyzes reviews of the literature on the topic. the methodology section describes the steps taken to conduct the review. next, the results are presented, showing the volume of publications, the most frequently cited articles in the sample, the journals with the greatest number of publications in the field, a map of the world showing the number of publications per country, the keywords most frequently cited over time, a network of the most cited articles in the selection and a table summarizing suggestions for future research composed by authors published in 2017. finally, the conclusions and references used to conduct the review are presented. ii. literature review agarwal et al. (2017) argue that, in the last two decades there has been progress in innovation processes carried out with special focus at the base of the pyramid. however, the literature in this field resulted in a variety of approaches to innovation, leading to a fragmented literature and confusion with regard to terminology. the authors therefore undertook a systematic review of the literature for the purpose of organizing the study of approaches to innovation that arose from emerging markets. the literature was examined according to the methodologies used, current trends, research outcomes and industrial and geographic focus. the authors' analysis found a growing standardization of the use of terminology and increasing emphasis on "bottom-up" and structured approaches to innovation. the results showed significant applications of the innovations beyond emerging markets to wider markets and instigate further studies (agarwal et al., 2017). in 2014, kolk, rivera-santos and rufín conducted a systematic review aimed at determining what happened to the bottom of the pyramid concept since it was introduced by prahalad in 1999. the review found 104 articles published in journals over a ten-year period (2000-2009) and concluded that the concept developed radically from prahalad's original form for volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.192 | http://emaj.pitt.edu consumption at the bottom of the pyramid: current state of research and suggestions for future study page |42| emerging markets journal multinational companies. over the course of ten years, a more complex scenario emerged, with large variations in the terms, initiatives and impacts of the concept of the bottom of the pyramid. the study identifies gaps in the literature and makes suggestions for future research (kolk et al., 2014). in 2008, rocha and silva reviewed studies conducted in brazil on consumption by the poor and grouped the results into five categories. the first was family spending, which was divided into five groups: those who suffer from rent, the brazilian "way of getting by," valorization of having possessions and those who struggle to survive and investors. the second was the use of credit, identifying aspects such as credit as inverted savings and anticipated consumption, credit as a means of budget control, credit as a means of distinguishing oneself and credit as a gift. it also found that, informal credit is more commonly used than formal credit among lower-income people. the third category was brand choice, which serves as a sign of quality and social hierarchy, distinguishing between name-brand and offbrand products, as well as "rich-man" and "poor-man" brands. it also includes strategies for brand consumption, with more prestigious brands being more widely used. the fourth category was choice of store, which, for lowincome consumers, constitutes an important space that can arouse emotions ranging from joy and pleasure to embarrassment and humiliation (rocha and silva, 2008). the final category was the meaning of having possessions, including housing as a central element in a family's possessions, electronics as a sign of modernity and prosperity, household appliances as a sign of distinction, furniture as the house's dressing, clothing as a sort of camouflage or a symbol of distinction, and food as also playing an important symbolic role. the authors then analyze ways companies can act in this low-income segment, providing examples of creative ways that have proven successful in brazil. they also propose a research agenda related to consumption by low-income individuals and marketing directed toward them (rocha and silva, 2008). iii. data and methodology to achieve its objective, the study employed a bibliometric research method, which has proven to be a great ally of researchers, providing the state of the art in various knowledge fields (nogami and pacagnan, 2011; bojović et al., 2014). studies in the bibliometry and scientometry field are mainly focused on measuring and classifying scientific production on a particular topic (hayashi, 2013). however, some commonly occurring limitations of this method are polysemy (multiplicity of word meanings), errors in data collection, and a superficial view of the field of study (bittar et al., 2011; taşkın and al, 2014). to minimize these and other problems that can occur during the study, a research framework was used, as recommended by prado et al. (2016), adjusted to sources from two databases, and mapping of future research as proposed by chen and wu (2017) and filser et al. (2017), as shown in figure 1. figure 1. research framework source: prado et al. (2016) following the research framework in step 1, the theme was defined as studies on the market and consumption at the bottom of the pyramid. web of science and scopus were selected as suggested by filser et al. (2017). in step 2, to minimize the difference between the two databases, the search procedures were defined to use the fields "article title, abstract and keywords" for scopus and "topic" for wos, which include the article title, abstract, and the keywords author as well as keywords plus, as defined below: wos: ts=(bottom_of_the_pyramid or bottom_of_pyramid) and ts=(consum* or market*) scopus: title-abs-key (bottom_of_the_pyramid or bottom_of_pyramid) and title-abs-key (consum* or market*) the searches were conducted in august 28, 2018, in the international databases web of science and scopus. the search was also filtered by article to standardize the type of document. some boolean operators such as "or" and "and" were also used to add the results of all terms, thus ensuring a greater number of articles focused on consumption or the market at the bop. in step 3, regarding the procedures for data selection and importing, microsoft excel, citespace (chen, 2004, 2006), citnetexplorer 1.0.0 (van eck and walman, 2014) and google fusion tables were chosen. step 4 allowed organizing the downloaded bibliographic data. in step 5, bibliometric analyses were undertaken to review and consolidate information about research on the bop. in step 6, a framework was created for the trends in future studies based on the recommendations volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.192 | http://emaj.pitt.edu alyce cardoso campos, daniel carvalho de rezende, josé willer do prado, thaísa barcellos pinheiro do nascimento, humberto rodrigues marques, andré grutzmann emerging markets journal | p a g e |43 for future research found in articles about the bop in the year (2017), as suggested by filser et al. (2017). iv. results the venn diagram in figure 2 shows the number of articles about consumption at the bottom of the pyramid in scopus, web of science and both. more articles appeared in scopus (n = 223) than those in web of science (n = 139). after excluding the 167 articles found in both databases, a total of 254 unique articles were identified. although there is considerable overlap, many articles appeared only in one database: 115 appeared only in scopus, while 31 appeared only in wos. this means that, a search of only scopus would have missed 12.2% of the articles, while a search of only wos would have missed 45.28% of the articles. figure 2. articles about bop in the scopus and web of science databases figure 3 shows publications by year in the sample analyzed. the first publication to appear in wos and scopus is “case study: hindustan lever limited and marketing to the poorest of the poor,” by ahmad, gorman and werhane in 2004 (ahmad et al., 2004). this study addresses marketing activities in the 1970s, in which hindustan lever limited (a subsidiary of unilever in india) remained focused on the middle class and urban elite, while an indian entrepreneur produced and marketed nirma detergent to the poor rural sector. nirma became the second-best-selling brand in the country in 1997, causing analysts to rethink their perception that the bottom of the pyramid as of no interest. articles that were older but nevertheless significant in the field, such as prahalad and hart (2002) and prahalad and hammond (2002), were not included in the sample. this exclusion occurred because the first did not appear in either of the databases used, and the second contained no abstract and its title does not mention the bottom of the pyramid. figure 3. bop literature development based on data from scopus and web of science in 2012 and 2013, there was a significant increase in the volume of publications, with 30 publications in each of these years, a number that remained practically steady with little variation in subsequent years. since the search was conducted before the end of 2018, it cannot be stated there was a decline in publications. table 1 shows the frequently cited articles on the topic in the web of science and scopus. the ten frequently cited studies in each database were selected, leaving a total of 15 articles after duplicates were excluded. the most frequently cited article was karnani (2007), “the mirage of marketing to the bottom of the pyramid: how the private sector can help alleviate poverty,” with 329 citations in scopus and 265 in wos. the author argues that, large companies can reap large profits at the bottom of the pyramid while simultaneously helping eradicate poverty by seeing the poor as producers and giving preference to the products they sell rather than trying to sell something to them. table 1: most frequently cited articles in the literature on bop in scopus and web of science the article that received the second largest number of citations was “profitable business models and market creation in the context of deep poverty: a strategic view,” by seelos and mair (2007), which was found only in web of science. this work discusses how businesses can grow profitably in the bop segment if they know how to rethink their strategies and business models to involve new resources and local partnerships, thereby creating new markets that include the poor. however, it claims that the literature says nothing about how to implement this. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.192 | http://emaj.pitt.edu consumption at the bottom of the pyramid: current state of research and suggestions for future study page |44| emerging markets journal prahalad is one of the leading authors on this topic. one of his articles ranks among the most frequently cited in the sample: “bottom of the pyramid as a source of breakthrough innovations” (prahalad, 2012). in this study, the authors recognize bop markets as a new source of radical innovation, stating that global companies are increasingly applying innovations at the bottom of the pyramid to developed markets. ansari, munir and gregg's article “impact at the 'bottom of the pyramid': the role of social capital in capability development and community empowerment” (2012), which is only found in the scopus database, adopts a more community-centered and socially integrated approach to the bottom of the pyramid. it states that alleviating poverty is not limited to increasing income, ignoring critical questions of ethical, social and political significance. the authors present a structure to gain a better understanding of the impact of businesses at the bottom of the pyramid, in which businesses engage the bop and other organizations to build social capital and improve resources. as seen, the articles focus on how to alleviate poverty while making a profit for businesses. pitta, guesalaga and marshall's article “the quest for the fortune at the bottom of the pyramid: potential and challenges” (2008) also discusses this subject by providing guidance about how companies need to adapt their marketing strategies to sell to the bop market and what type of partnerships should be forged to achieve success. table 2 shows the journals with the greatest number of publications in the databases used in the sample. the most prominent are the journal of consumer marketing and marketing theory, with 12 and seven publications, respectively. table 2: journals with the most articles published in the scopus and web of science databases the journal of consumer marketing (jcm) publishes studies that provide information about the consumer behavior throughout the world, as consumption is a key element to knowledge of human behavior and understanding consumer behavior as a key to creating marketing strategies. these studies therefore examine the theoretical and managerial implications of such behavior. this journal publishes not only research, but also case studies and commentary and covers both theory and practice. one of the most cited articles, “the quest for the fortune at the bottom of the pyramid: potential and challenges” (pitta et al., 2008) appears in this journal. marketing theory provides a high-quality specialized channel for social and management scientists involved in developing and reformulating marketing as an academic discipline, conducting a critical analysis of existing theory. it covers the full range of theoretical and methodological debates, including consumer behavior, strategy, development of new products and others. the journal is not limited to specific fields, but covers the full range of marketing issues. california management review is highly relevant to this field, having published four of the 15 most frequently cited articles in the sample, including the most commonly cited study: “the mirage of marketing to the bottom of the pyramid: how the private sector can help alleviate poverty” (karnani, 2007). figure 4 shows the geographical distribution of authors by institutions that conduct bop research. the leading institutions in terms of the number of publications are located in the united states, united kingdom, india and australia. these countries appear in warm colors (red) on the map. according to the web of science, the united states accounts for 47 articles, the united kingdom for 27, india for 23 and australia for 11. according to scopus, the united states accounts for 67 articles, india for 38, the united kingdom for 36 and australia for 24. figure 4. geographical distribution of bop researchers the first publication in the united states was ahmad, gorman and werhane's article (2004) “case study: hindustan lever limited and marketing to the poorest of the poor,” which focused on nirma detergent, produced by an indian entrepreneur who marketed to the rural low-income sector, while other leading brands remained focused on the middle and upper classes. within a few years, nirma detergent became the country's second-best-selling brand. the article suggests that, this product can serve as an example and help identify opportunities to serve the bottom of the pyramid. the most frequently cited study from the united states was karnani's critique of prahalad's idea, "the mirage of marketing to the bottom of the pyramid: how the private sector can help alleviate poverty.” in this study, the author shows that, it is a dangerous illusion to think that one can make a profit and eradicate poverty by selling to the poor. the solution is to view the poor as producers rather than as consumers. the first publication in the united kingdom was blake's (2006) "from protection to innovation: bt's journey in corporate social responsibility," which presents a study of corporate social responsibility by the british telecommunications giant bt, describing how it not only takes steps to reduce greenhouse gas emissions, but also creates new products and services for the bop, helping to reduce poverty. the most frequently cited article from the united kingdom, ansari et al. (2012) “impact at the 'bottom of the pyramid': the role of social capital in capability development and community empowerment,” presents a more community-centered https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-38749084037&origin=resultslist&sort=plf-f&src=s&nlo=&nlr=&nls=&sid=fcd056a376985cac2edeb53d2ac1ac2b&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22united+states%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=66&citecnt=17&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-38749084037&origin=resultslist&sort=plf-f&src=s&nlo=&nlr=&nls=&sid=fcd056a376985cac2edeb53d2ac1ac2b&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22united+states%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=66&citecnt=17&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-38749084037&origin=resultslist&sort=plf-f&src=s&nlo=&nlr=&nls=&sid=fcd056a376985cac2edeb53d2ac1ac2b&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22united+states%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=66&citecnt=17&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-34249698682&origin=resultslist&sort=plf-f&src=s&nlo=&nlr=&nls=&sid=78d63af67606d928ca5a60b2d8d28c84&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22united+kingdom%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=35&citecnt=5&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-84860690762&origin=resultslist&sort=cp-f&src=s&nlo=&nlr=&nls=&sid=78d63af67606d928ca5a60b2d8d28c84&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22united+kingdom%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=0&citecnt=119&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-84860690762&origin=resultslist&sort=cp-f&src=s&nlo=&nlr=&nls=&sid=78d63af67606d928ca5a60b2d8d28c84&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22united+kingdom%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=0&citecnt=119&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-84860690762&origin=resultslist&sort=cp-f&src=s&nlo=&nlr=&nls=&sid=78d63af67606d928ca5a60b2d8d28c84&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22united+kingdom%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=0&citecnt=119&searchterm= volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.192 | http://emaj.pitt.edu alyce cardoso campos, daniel carvalho de rezende, josé willer do prado, thaísa barcellos pinheiro do nascimento, humberto rodrigues marques, andré grutzmann emerging markets journal | p a g e |45 and socially integrated approach to the bottom of the pyramid. it redefines poverty as constituting not only a lack of income, but also a lack of abilities that can be developed. india's first publication was the article "study of the principles of innovation for the bop consumer the case of a rural water filter" (prasad and ganvir, 2005). it discusses differences in the principles of innovation for markets at the base and the top of the pyramid, taking as an example the development of a household water filter for the rural population in india and leading to a significant reduction in the number of water-transmitted diseases. the most frequently cited article from india was "information and communication technologies for development: the bottom of the pyramid model in practice" (kuriyan et al., 2008), which examined the akshaya project, an information services franchise in india that promotes both financial viability and social development through access to computers. as figure 4 also shows, this survey of the wos identified a total of 209 research organizations worldwide involving in studies on the bottom of the pyramid in the period of 2004 to 2018. the leading institutions include the indian institute of management calcutta (with six articles, 57 citations and h-index of 5), lancaster university (six articles, 22 citations and hindex of 3) and the university of london (six articles, 66 citations and h-index of 3). according to scopus, there are 160 such institutions. the leading ones include western sydney university (with seven articles), swinburne university of technology (with seven articles) and the indian institute of management calcutta (with six articles). the indian institute of management calcutta has six articles in scopus and six in web of science, with only three articles listed in both databases, for a total of nine articles, making it the institution with the greatest involvement in research on the bottom of the pyramid in the analyzed sample. figure 5 analyzes the co-authorship network of articles in the search. some of the most significant relationships among the networks will be discussed below. a network with seven authors appears at the top of the figure. it consists of ahmed m., ozaki a., ozaki a., ogata k., ito s., miyajima i., ahmed a., and okayasu t. they worked together on the article "poor farmer, entrepreneurs and ict relation in production and marketing of quality vegetables in bangladesh." they are all associated with kyushu university, located in fukuoka, japan, as professors, associate professors and assistant professors. they are members of the institute of tropical agriculture, advanced information and communication technology, bioproduction environmental sciences and the department of mechanical engineering. next, there are several central authors on the networks with six, five or three authors, namely, saren m., singh r. and gupta s., respectively. saren m. carried out the work “a qualitative enquiry into the appropriation of mobile telephony at the bottom of the pyramid” together with binsardi b. and prendergast r. and the article “co-creation of value at the bottom of the pyramid: analysing bangladeshi farmers' use of mobile telephony” with bhowmick s., pandit a. e woodruffeburton h. mike saren is a marketing professor in the school of business at university of leicester, leicester, uk. ben binsardi is from glyndwr university, wrexham, uk, renee prendergast belongs to queen's university belfast, belfast, uk, sanjay bhowmick is from northumbria university newcastle upon tyne, uk, helen woodruffe-burton is a professor at edge hill university, ormskirk, uk and, lastly, the only author who is not from the united kingdom, ameet pandit, a professor at the university of newcastle, newcastle, australia. ramendra singh conducted two studies with monideepa tarafdar and prashanth anekal, “impact of ict-enabled product and process innovations at the bottom of the pyramid: a market separations perspective” and “market development at the bottom of the pyramid: examining the role of information and communication technologies." ramendra singh is an assistant professor focusing on marketing at the indian institute of management calcutta, kolkata, india; monideepa tarafdar is a professor at lancaster university, lancaster, uk; and prashanth anekal is an assistant professor at saginaw valley state university, university center, michigan, usa. ramendra singh also conducted a study with katy mason and ronika chakrabarti, forming the other connection in the figure. katy mason and ronika chakrabarti are professors in the department of marketing at lancaster university in lancaster, uk. the network shown in purple consists of ashish kumar, ravi shankar, kirankumar s. momaya and sandeep gupte, the four co-authors of "the market for wireless electricity: the case of india." ashish kumar works for nokia, in espoo, finland and is interested in business, management, strategic management and marketing management. ravi shankar is at the indian institute of technology delhi, new delhi, india. kirankumar s. momaya is a professor at the indian institute of technology bombay, mumbai, india and sandeep gupte works at indus towers, in gurgaon, india. figure 5. network of co-authorship of the articles in the search (frequency >= 2) shruti gupta worked with pratish srivastav in the articles “an exploratory investigation of aspirational consumption at the bottom of the pyramid” and “despite unethical retail store practices, consumers at the bottom of the pyramid continue to be loyal”. shruti gupta is a marketing professor at pennsylvania state university, abington, usa and pratish srivastav is from ganeshi lal aggarwal university, mathura, india. shruti gupta also worked on the article "brand adoption by bop retailers" with saurabh rawal, who is from the university of alberta, edmonton, canada. https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-79954456794&origin=resultslist&sort=plf-f&src=s&nlo=&nlr=&nls=&sid=045a4d1e5a66ebf26edfd08f6698234c&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22india%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=37&citecnt=15&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-79954456794&origin=resultslist&sort=plf-f&src=s&nlo=&nlr=&nls=&sid=045a4d1e5a66ebf26edfd08f6698234c&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22india%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=37&citecnt=15&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-79954456794&origin=resultslist&sort=plf-f&src=s&nlo=&nlr=&nls=&sid=045a4d1e5a66ebf26edfd08f6698234c&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22india%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=37&citecnt=15&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-40749145321&origin=resultslist&sort=cp-f&src=s&nlo=&nlr=&nls=&sid=045a4d1e5a66ebf26edfd08f6698234c&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22india%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=0&citecnt=68&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-40749145321&origin=resultslist&sort=cp-f&src=s&nlo=&nlr=&nls=&sid=045a4d1e5a66ebf26edfd08f6698234c&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22india%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=0&citecnt=68&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-40749145321&origin=resultslist&sort=cp-f&src=s&nlo=&nlr=&nls=&sid=045a4d1e5a66ebf26edfd08f6698234c&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22india%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=0&citecnt=68&searchterm= https://www-scopus.ez26.periodicos.capes.gov.br/record/display.uri?eid=2-s2.0-40749145321&origin=resultslist&sort=cp-f&src=s&nlo=&nlr=&nls=&sid=045a4d1e5a66ebf26edfd08f6698234c&sot=a&sdt=cl&cluster=scosubtype%2c%22ar%22%2ct%2bscoaffilctry%2c%22india%22%2ct&sl=105&s=title-abs-key+%28%22bottom_of_the_pyramid%22+or+%22bottom_of_pyramid%22%29+and+title-abs-key+%28%22consum*%22+or+%22market*%22%29&relpos=0&citecnt=68&searchterm= https://www.researchgate.net/institution/lancaster_university https://www.researchgate.net/institution/lancaster_university volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.192 | http://emaj.pitt.edu consumption at the bottom of the pyramid: current state of research and suggestions for future study page |46| emerging markets journal although the connection between tendai chikweche and richard fletcher consists of only two authors, they have published five articles together, these being “customer relationship management at the base of the pyramid: myth or reality?”, “family purchase decision making at the bottom of the pyramid”, “franchising at the bottom of the pyramid (bop): an alternative distribution approach”, “revisiting the marketing mix at the bottom of pyramid (bop): from theoretical considerations to practical realities” and “undertaking research at the bottom of the pyramid using qualitative methods: from theoretical considerations to practical realities”. tendai chikweche and richard fletcher are from western sydney university, sydney, australia. this analysis shows authors in the four countries that are highlighted in figure 4 as being those most active in research on the bottom of the pyramid, namely, the united kingdom, united states, india and australia. to analyze the bursts of keywords that occurred in each year of the sample, that is, the topics most related to consumption at the bottom of the pyramid in the analyzed articles, table 3 lists the 30 main keywords appearing between 2007 and 2018. table 3: keywords with the most pronounced bursts in publications about the bop as shown in table 3, no citation bursts appeared in the early years (2004-2006), with the first bursts occurring in 2007 with the words "mobile communication" and "diffusion." currently, research related to the market or consumption at the bottom of the pyramid is mainly about microcredit, financial services, market and management. the analysis shows that many studies were conducted in countries such as bangladesh and india, regions with many poor people. figure 6 shows the network with the most cited articles in the analyzed sample. for example, karnani (2007) was the most frequently cited, as in the analysis of table 1, with 50 citations. prahalad's book (2005) “the fortune at the bottom of the pyramid: eradicating poverty through profits” is in second place with 39 citations. however, there is some confusion about the year of citation of two works, as prahalad (2004) and prahalad (2005) refer to the same book. this makes it the work most cited by articles in the sample, with 69 citations. this book is a point of reference for research on the bottom of the pyramid, which refers to the more than 4 billion people who survive on less than $2 per day. the book aims to show that stereotypes of poverty end up hiding the fact that the poor are also conscious entrepreneurs and consumers. figure 6. network of co-citations of works cited by articles in the search (frequency >= 8) the articles by prahalad (2012) and pitta, guesalaga and marshall (2008), which also appeared among the most cited in table 1, appear with 30 and 29 citations, respectively, figuring prominently in the network. hammond et al.'s study (2007) “the next 4 billion: market share and business strategy at the base of the pyramid” also stands out in the network with 23 citations. like prahalad's book (2005), the study by hammond et al. (2007) addresses the majority of the world's population, the 4 billion people who live in relative poverty and constitute the bottom of the pyramid, suggesting important opportunities for them to enter the formal economy, having their needs met and increasing income and productivity. the citnetexplorer tool helped visualize and analyze the publication citation networks (van eck and waltman, 2014), as shown in figure 7. this program makes it possible to identify related publications and the creation of clusters. publications with more than 10 citations were selected and grouped into three clusters based on their relationships with regard to the subject, that is, those located in the same cluster tend to describe a certain topic in the academic literature. publications belonging to the same group are shown in the same color. the first study appearing in the citations network is hernando de soto's 2000 book the mystery of capital: why capitalism triumphs in the west and fails everywhere else. de soto argues that capitalism has enriched western countries, but failed in less developed countries for reasons such as the fact that individuals do not hold legal title to their property and onerous legal restrictions to the creation of businesses affect their proper functioning. most developing countries do not have an efficient and reliable way of registering and transferring property ownership. therefore, citizens cannot convert their property into capital to invest in businesses or use as collateral for loans. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.192 | http://emaj.pitt.edu alyce cardoso campos, daniel carvalho de rezende, josé willer do prado, thaísa barcellos pinheiro do nascimento, humberto rodrigues marques, andré grutzmann emerging markets journal | p a g e |47 it can also be observed that kolk et al. (2014) account for most of the publications in the network, with a total of 20 connections. this study consists of a systematic review of the literature covering articles from 2000 to 2009 for the purpose of showing how the concept of the bottom of the pyramid evolved over this period. the article does not perform a traditional analysis of the literature, but concentrates on the set of articles that clearly built on prahalad's original concept. figure 7. publication citations networks (frequency >= 10) the blue cluster addresses prahalad's ideas about businesses investing at the bottom of the pyramid, a large and potentially lucrative market, offering products at lower prices and contributing to reducing poverty, with the idea of being both socially responsible and profitable. many articles provide guidance about the challenges encountered and how companies can adapt their strategies to sell to the bop market. the articles appearing in green in figure 7 criticize prahalad's idea (2005) about "doing well by doing good," pointing out the challenge of being profitable while fostering social development and stating that this is fundamentally misleading. critics claim it is a dangerous illusion to believe that companies have the welfare of low-income people at heart and that this romanticized view harms vulnerable poor consumers. furthermore, even if the segment is seen as a viable market, poverty has not been reduced. the idea advocated by karnani (2007) is that, the only way to increase income and reduce poverty is to see the poor as producers rather than as consumers. the orange cluster shows articles that view individuals at the bottom of the pyramid as both consumers and producers or in an even more holistic perspective, extending beyond these two roles. the publications shown in gray did not fit into any of these three clusters. table 4 shows the earliest and most cited publication in each cluster. the citation score represents the number of times a publication is cited within the analyzed network, that is, the number of citations received from other publications about the “bottom of the pyramid” and “consum*” or “market*” in the web of science database. table 4: earliest and most cited publication in each cluster of the citations network it can be seen that, the publication with the highest citation score in the network is prahalad and hammond's article (2002) “serving the world's poor, profitably” found in the table. v. conclusion and recommendations this article reviews the state of the literature on consumption at the bottom of the pyramid and summarizes suggestions for future research made by articles published in 2017. two leading databases, scopus and the web of science, were used to conduct research on important international and brazilian journals. the review identified the most frequently cited articles, including karnani (2007) seelos and mair (2007) and prahalad (2012), and the journals that published the greatest number of articles, such as the journal of consumer marketing and marketing theory. a world map illustrates countries with highest publications number in the field, including the united states, united kingdom, india and australia. keywords were also analyzed, showing that the terms mobile communication and diffusion began gaining prominence in 2007, with current focuses on microcredit, financial services, markets and management. a co-citations network showed that karnani's (2007) article and prahalad's (2005) book appeared prominently. finally, a table showing a summary of the suggestions for future research made by articles published in 2017. the suggestions were analyzed to identify research gaps with the aim of encouraging other interested researchers to explore the topics discussed in this review, as they are highly relevant to the study of consumption at the bottom of the pyramid and to improving the living standards of this segment of the population. similar to any research, this article has its limitations. because it worked with two databases, the study was limited in its ability to conduct joint analyses. for example, the citnetexplorer program used to map citations employs only data from the web of science. furthermore, this review used only articles published in journals. although it is common to include only these articles in reviews, a number of studies published in conference proceedings address interesting topics that can contribute to the study of the subject. also, important scholars studying the bottom of the pyramid, including prahalad, have published books that are important references in this field but were not considered in this study. another point is that, this study concentrated only volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.192 | http://emaj.pitt.edu consumption at the bottom of the pyramid: current state of research and suggestions for future study page |48| emerging markets journal on papers that used the bottom of the pyramid concept due to the need to dig deeply into the subject. to show future research trends, the articles published in 2017 were analyzed with regard to their authors' suggestions for further research to identify gaps to be filled by future studies. it was decided to limit this analysis to articles published in 2017 as this was the last full year included in the study. of the 26 articles published that year, two were not accessible and ten did not make any recommendations for future research. based on 12 of the 26 articles analyzed, figure 8 shows four of the most commonly occurring themes. the themes are: (1) increasing the knowledge on the bottom of the pyramid; (2) businesses and the bottom of the pyramid; (3) loyalty/satisfaction; and (4) brand, product and retail. these were subdivided into 13 topics and connected according to the similarity of their proposals. the authors also suggested that, future research be conducted with larger samples and different methodologies than the ones they had used. figure 8. map of directions for future research on the bottom of the pyramid the first theme includes the need for more indepth studies to better characterize and understand the bottom of the pyramid, as well as to better understand poverty and its concept through the study of new contexts that have been neglected (yurdakul et al., 2017; faria and hemais, 2017; mason and chakrabarti, 2017; gerhard et al., 2017; leonhardt and chu, 2017). the second trend is projects that aim to explain or boost investment at the bottom of the pyramid, such as fairs, microloans and multinational activities. this theme also includes the necessary levels of social entrepreneurship and the relationship between the frugal economy and value generation (gerhard et al., 2017; ladd, 2017; leonhardt and chu, 2017; jose and chacko, 2017; hopkinson and aman, 2017; surie, 2017; farooq, 2017). the third theme is related to better understanding loyalty and satisfaction, how these are affected by resource availability and how consumers' loyalty to a supplier can be due simply to a lack of alternatives (leonhardt and chu, 2017; sinha et al., 2017). the fourth theme addresses brand, product and retail, discussing how products or services affect both personal and financial well-being at the bottom of the pyramid, such as the use of online banking, the understanding and complexity of the product, purchasing structure, market pressures and retailers' decisions about adopting brands and retail (leonhardt and chu, 2017; sinha et al., 2017; hasan et al., 2017; farooq, 2017). suggestions are also made for long-term studies to assess consumer behavior over time and qualitative research such as ethnographies. it is hoped that this summary will contribute to future research on consumption at the bottom of the pyramid, with recent suggestions for studies that have probably not yet been undertaken. references agarwal, n. et al. (2017), a systematic literature review of constraint-based innovations: state of the art and future perspectives, ieee transactions on engineering management, vol. 64 n. 1, pp. 315. ahmad, p. s. et al. (2004), case study: hindustan lever limited and marketing to the poorest of the poor, international journal of entrepreneurship and innovation management, vol. 4 n. 5, pp. 495-511. ansari, s. et al. (2012), impact at the ‘bottom of the pyramid’: the role of social capital in capability development and community empowerment, journal of management studies, vol. 49 n. 4, pp. 813-842. bittar, m. et al. (2011), produção científica em dois periódicos da área de educação, avaliação: revista da avaliação da educação superior, vol. 16 n. 3, pp. 655-674. bojović, s. et al. (2014), an overview of forestry journals in the period 2006–2010 as basis for ascertaining research trends, scientometrics, vol. 98 n. 2, pp. 1331-1346. chen, c. (2006), citespace ii: detecting and visualizing emerging trends and transient patterns in scientific literature, journal of the american society for information science and technology, vol. 57 n. 3, pp. 359-377. chen, c. (2004), searching for intellectual turning points: progressive knowledge domain visualization, proceedings of the national academy of sciences, vol. 101 n. 1, pp. 53035310. chen, y. and wu, c. (2017), the hot spot transformation in the research evolution of maker, scientometrics, vol. 113 n. 3, pp. 1307-1324. cooney, k. and williams shanks, t. r. (2010), new approaches to old problems: market-based strategies for poverty alleviation, social service review, vol. 84 n. 1, pp. 29-55. de soto, h. (2000), the mystery of capital: why capitalism triumphs in the west and fails everywhere else, basic civitas books. faria, a. and hemais, m. (2017), rethinking the bottom of the pyramid: a critical perspective from an emerging economy, marketing theory, vol. 17 n. 3, pp. 271-287. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.192 | http://emaj.pitt.edu alyce cardoso campos, daniel carvalho de rezende, josé willer do prado, thaísa barcellos pinheiro do nascimento, humberto rodrigues marques, andré grutzmann emerging markets journal | p a g e |49 farooq, r. (2017), a conceptual model of frugal innovation: is environmental munificence a missing link?, international journal of innovation science, vol. 9 n. 4, pp. 320-334. filser, l. d. et al. (2017), state of research and future research tendencies in lean healthcare: a bibliometric analysis, scientometrics, vol. 112 n. 2, pp. 799-816. gerhard, f. et al. (2017), exploring utilitarian and hedonic aspects of consumption at the bottom of pyramid, revista brasileira de marketing, vol. 16 n. 3, pp. 268-280. hammond, a. l. et al. (2007), the next 4 billion, innovations: technology, governance, globalization, vol. 2 n. 1-2, pp. 147-158. hasan, m. r. et al. (2017), visual cues and innovation adoption among bottom of the pyramid consumers, qualitative market research: an international journal, vol. 20 n. 2, pp. 147-157. hayashi, m. c. p. i. (2013), afinidades eletivas entre a cientometria e os estudos sociais da ciência. hopkinson, g. and aman, a. (2017), women entrepreneurs: how power operates in bottom of the pyramid-marketing discourse, marketing theory, vol. 17 n. 3, pp. 305-321. jose, s. and chacko, j. (2017), sustainable development of microfinance customers: an empirical investigation based on india, journal of enterprise information management, vol. 30 n. 1, pp. 49-64. karnani, a. (2007), the mirage of marketing to the bottom of the pyramid: how the private sector can help alleviate poverty, california management review, vol. 49 n. 4, pp. 90-111. kolk, a. et al. (2014), reviewing a decade of research on the “base/bottom of the pyramid”(bop) concept, business & society, vol. 53 n. 3, pp. 338-377. ladd, t. (2017), business models at the bottom of the pyramid: leveraging context in undeveloped markets, the international journal of entrepreneurship and innovation, vol. 18 n. 1, pp. 57-64. leonhardt, j. m. and chu, r. (2017), online banking adoption at the bottom of the pyramid: a survey of chinese migrant workers, international journal of emerging markets, vol. 12 n. 4, pp. 742-752. mason, k. and chakrabarti, r. (2017), the role of proximity in business model design: making business models work for those at the bottom of the pyramid, industrial marketing management, vol. 61, pp. 67-80. nogami, v. k. c. and pacagnan, m. n. (2012), produção acadêmica sobre o consumo na base da pirâmide na área de marketing: uma pesquisa bibliométrica, revista adm. made, vol. 15 n. 3, pp. 100-122. pitta, d. a. et al. (2008), the quest for the fortune at the bottom of the pyramid: potential and challenges, journal of consumer marketing, vol. 25 n. 7, pp. 393-401. prado, j. w. et al. (2016), multivariate analysis of credit risk and bankruptcy research data: a bibliometric study involving different knowledge fields (19682014), scientometrics, vol. 106 n. 3, pp. 10071029. prahalad, c. k. (2005), the fortune at the bottom of the pyramid, pearson education. prahalad, c. k. (2012), bottom of the pyramid as a source of breakthrough innovations, journal of product innovation management, vol. 29 n. 1, pp. 6-12. prahalad, c. k. and hammond, a. (2002), serving the world's poor, profitably, harvard business review, vol. 80 n. 9, pp. 48-59. prahalad, c. k. and hart, s. l. (2002), the fortune at the bottom of the pyramid, strategy & business. rocha, a. d. and silva, j. f. (2008), inclusão social e marketing na base da pirâmide: uma agenda de pesquisa, rae-eletrônica, vol. 7 n. 2. seelos, c. and mair, j. (2007), profitable business models and market creation in the context of deep poverty: a strategic view, academy of management perspectives, vol. 21 n. 4, pp. 4963. sinha, p. k. et al. (2017), brand adoption by bop retailers, qualitative market research: an international journal, vol. 20 n. 2, pp. 181-207. surie, g. (2017), creating the innovation ecosystem for renewable energy via social entrepreneurship: insights from india, technological forecasting and social change, vol. 121, pp. 184-195. taşkın, z. and al, u. (2014), standardization problem of author affiliations in citation indexes, scientometrics, vol. 98 n.1, pp. 347-368. van eck, n. j. and waltman, l. (2014), citnetexplorer: a new software tool for analyzing and visualizing citation networks, journal of informetrics, vol. 8 n. 4, pp. 802-823. yurdakul, d. et al. (2017), redefining the bottom of the pyramid from a marketing perspective, marketing theory, vol. 17 n. 3, pp. 289-303. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu auditing techniques to avoid cost accounting frauds vedat akman beykent university, turkey | akmanvedat@yahoo.com berkan acar yalova university, turkey | acarberkan@hotmail.com cevdet kızıl istanbul medeniyet university, turkey | cevdetkizil@yahoo.com abstract today, we observe the importance of accuracy of financial statements in every corporation. accounting scandals have caused important losses both in the macro and micro levels. this issue proves the significance of financial statement accuracy. this accuracy is provided by the trust environment. therefore, it is necessary to provide the required environment of confidence for financial markets to improve and function effectively against increasing accounting frauds gradually. that can only be possible by using different auditing techniques, running inventory counting such as cash and stock, establishing strong internal controls, managing efficiently and benefiting from technology integrated auditing. the aim of this study is to investigate the most effective auditing techniques to avoid cost accounting frauds. in this research, the most effective auditing techniques for detecting and preventing fraud are investigated by using the case analysis method. also, the well known scandals related with olympus, worldcom, tesco, sunbeam and parmalat companies are examined as a part of the case analysis. finally, recommendations and suggestions regarding fraud prevention methods are presented. keywords: accounting, cost accounting, auditing, scandals, fraud new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.210 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.210 | http://emaj.pitt.edu vedat akman, berkan acar, cevdet kızıl emerging markets journal | p a g e |61 auditing techniques to avoid cost accounting frauds vedat akman berkan acar cevdet kızıl i. introduction accounting is a science and art that records, classifies, summarizes, reports and interprets the financial events and transactions expressed in monatary terms and notifies results to interested individuals and institutions (kızıl and kızıl, 2007; öztürk, 2016). accounting reveals an information system that provides common core for management’s success and effective control in all enterprises. it is of great importance to design, establish and implement the accounting system in today’s advanced industrial environments (şakrak, 1997). cost accounting is an account and registration system that allows the determination and monitoring of types of costs that make up the cost of manufactured goods or services in terms of their place of origin and type of related product or service. also, cost accounting is one of the sources, where the information necessary to prepare the budget is provided. the information obtained from cost accounting is not directly used in budgets. however, forward-looking estimates can be made using this information. it is predicted how the expenditures will follow in the future and what the sales volume will be based on the cost data of the past years (akdoğan, 2014). futhermore, cost accounting is an accounting system that analyzes the production cost information required in the main activities of enterprises. this information is used in all parts of the management function from planning to control of production activities. at the same time, cost accounting system is one of the most important factors determining a firm's competitive power. thus, the best way to determine costs directly relates to firm profitability and the amount of product sales, which provide a direct competitive advantage (özay, 1992). accounting audit is a systematic process that collects and evaluates evidence objectively in order to investigate the extent of compliance with predetermined criteria. in accounting, an auditor is an expert who carries out auditing activities, possesses professional knowledge and experience. auditors should also act independently and possess high moral qualifications required by the profession. an accounting auditor investigates accuracy of financial statements of business and they aim to provide reliable and accurate information to the financial statement users such as creditors, business executives and prospective investors. thus, auditing satisfies the need of reliable information for internal and external users. it also increases the reliability of financial statements (öztürk, 2016). it is very important that the financial statements related to cost accounting reflect the reality. information users need to be certified by a third party to increase the credibility of the information contained in the financial statements prepared by the business executives. therefore, auditing should especially intervene at this point (güredin, 1999). fraud is a significant issue that cannot be ignored in public enterprises and the private sector. fraud operations inhibit the operating activities and operating efficiency of the corporations. additionally, it weakens the competitive power of the enterprises and it minimizes the profits as well as services of the companies. although, the fraud and irregularities have begun very long time ago, it is once again revealed that important measures against fraud and corruption have to be taken. crises in the united states (u.s.) and europe, especially the enron scandal, as well as the financial crises spreading to the world should be mentioned concerning this issue (kandemir and kandemir, 2012). fraud is not just peculate. it is at the same time an irregularity, unethical behavior and abuse of power. because of this situation, it is almost impossible to reveal all forms of fraud. the purpose of the audit techniques against fraud and corruption is to take the necessary precautions and to minimize the damages that will be caused (emir, 2008). in this study, we focused on auditing techniques towards cost accounting frauds. thus, we tried to investigate the most effective auditing techniques for detecting fraud. additionally, we attempted to determine fraud methods that are commonly used in cost accounting and we also aimed to identify appropriate methods for detecting fraud. ii. literature review omair and alturki’s paper (2020) titled “a systematic literature review of fraud detection metrics in business processes” emphasized that, fraud is a leading source of corporate losses, amounting up to 5% of yearly revenues. the research findings showed that, a great portion of research had examined detection metrics for possible fraud, but less attention had been paid to process-based fraud (pbf). also, the already available pbf detection metrics did not sufficiently address the needs of separate conceptual perspectives on firm processes (omair and alturki, 2020). aslan and kızıl’s study (2019) titled “üretim maliyetlerinin denetimine genel bir bakış” stressed that, audit is a very important and critical for businesses in today's business world. because, while auditing prevents asset losses in enterprises, it is also effective in providing efficiency and productivity. at the same time, technological advances observed in recent years have further increased the critical role of auditing. the production costs of businesses can be controlled with the help of auditing (aslan and kızıl, 2019). research by kızıl et. al. (2019) titled “i̇ktisadi ve sosyal yönleriyle i̇novasyon” concentrated on the impact of innovation on accounting and auditing professions. it was mentioned that, auditing techniques today were highly integrated with technology. the implemention of modern audit techniques on cost accounting and managerial accounting was dicussed as well (kızıl c. et. al., 2019). kızıl and kaşbaşı (2018) conducted a reseearch about accounting scandals and fraud titled “accounting volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.210 | http://emaj.pitt.edu auditing techniques to avoid cost accountings frauds page |62| emerging markets journal scandals and eye-catching frauds: usa-japan comparison by considering the role of auditing". the authors underlined the fact that, independent auditing firms do not always fulfill their duties completely. thus, legislation was introduced in united states of america (u.s.), europe and asian countries, including japan. public oversight bodies were also set up as well. however, despite the introduced laws, regulations, arrangements and public oversight bodies, the risk of accounting scandals still goes on. this is because laws, regulations, arrangements and introduction of public oversight bodies are delayed and they are not matching the demands of changing market conditions. accounting scandals and eye-cathing frauds were discussed by making a comparison between the u.s. and japan, while considering and discussing the role of auditing (kızıl and kaşbaşı, 2018). kızıl and doğan’s study (2017) titled “"audit techniques for protecting against cyber attacks: a bilateral approach of case studies and interview" discussed issues such as risk based audit, information technologies (it) audit with cobit, integrated audit, corporate governance, the coso framework, big data in auditing, cloud technologies, internet of things (iots), data fraud and theft, classification of data risks, encryption of data, data analytics and log records, as well as auditing and ethics relationship. these were listed as contemporary issues related to auditing. plus, it was mentioned that cyber attacks were harming the corporations. thus, auditing techniques to protect against cyber attacks were presented. this study benefited from case analysis and an interview with a retired it professional as a bilateral approach for data and methodology (kızıl and doğan, 2017). aslan, kızıl and din’s (2017) research titled "muhasebe hata ve hileleri üzerinde etkili faktörlerin muhasebe meslek etiği kapsamında analizi: yalova örneği” focused on the difference between accounting errors and fraud. additionally, the negative consequences of accounting scandals in the world and turkey were mentioned. the research was conducted on independent accountants and certified public accountants (cpas) residing in yalova province by using the survey methodology. it was found that, insufficient audit in organizations was leading to accounting errors and fraud (aslan, kızıl and din, 2017). adalı and kızıl’s (2017) study titled "a research on the responbility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample" included a questionnaire that was distributed to 36 accounting professionals residing in edirne city of turkey. research data were analyzed by the spss package program. study revealed several important results and one of them was especially eye-catching. most significant and effective tool to prevent errors and fraud was indicated as external audit, but internal audit and internal control were valued as well by the accounting professionals (adalı and kızıl, 2017). in fido’s study (2016) titled “finansal tablolarda hile denetimi ve hileyi önlemeye yönelik denetim teknikleri: türkiye ve ab uygulamalarının karşılaştırılması”, the most effective techniques and methods were examined both in the prevention of errors and in the examination of fraud. also, importance of auditing, the concepts of fraud and the most appropriate methods as well as techniques for detecting fraud were described. according to the research, fraud is one of the biggest problems in the face of corporations which prevent them to achieve their aims. thus, it is essential to minimize errors occuring in financial statements. this case can only be possible by creating a suitable environment and shaping a corporate culture against fraud. using proactive methods, following the laws and regulations, adopting accountability, setting up internal control systems and creating a zero tolerance corruption culture are all important (fido, 2016). kızıl, akman and korkmaz’s research (2015) titled "marmara bölgesinde muhasebe-denetim mesleğinin önemi üzerine bir araştırma" discussed the importance of accounting and auditing professions in marmara region of turkey. it was pointed out that, the significance of accounting and auditing in the world as well as turkey was now more evident. the reason was that, both accounting and auditing were providing several advantages to a wide range of stakeholders. private and public sector audit practices were investigated together in this study (kızıl, akman and korkmaz, 2015). demir’s study (2014) titled “benford yasası ve hile denetiminde kullanılması”, investigated the concept and elements of audit as well as fraud. furthermore, the benford’s law as one of the types of controls that can avoid fraud was examined. according to the study, businesses should constitute internal control systems that can prevent fraud and create communication networks which enable employees to report to required positions about fraud incidents when they suspect. also, fraud control units should be created to prevent fraud and errors. moreover, firms should provide environments where these units can work effectively. plus, numerical analysis by using benford’s law is a useful tool for determining the probability of fraud because of its detection properties. thus, the use of other auditing techniques by the auditor with information obtained using benford’s law method will help to find out fraudulent transactions (demir, 2014). kostova’s study (2013) titled “audit procedures for disclosure of errors and fraud in financial statements of bulgarian companies’’ stated the factors that confirm the formation of frauds and errors in financial stataements as well as procedures applied in audit. also, audit techniques are defined to detect fraud and errors at various audit phases. based on this research, the auditing profession is not solely a job of meeting the demands of individual clients or employers. the auditor’s role in error and fraud disclosure is not only related to compliance with ethical principles, but it is also tied to high professionalism evinced in response to changes in the economic environment that entities operate. auditing procedures should aim to identify misstatements and fraudulent factors. auditing procedures should also initiate appropriate actions to reduce audit risk. however, autitors should apply the proper techniques to respond to internal and external factors creating errors as well as frauds (kostova, 2012). kandemir and kandemir’s study (2012) titled “muhasebe hilelerinin önlenmesi ve ortaya çıkarılmasında kullanılan geleneksel araç ve yöntemler” explained how traditional tools and methods can be used more effectively to prevent and detect accounting frauds. in line with this study, various problems specific to the accounting-audit sector exist, volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.210 | http://emaj.pitt.edu vedat akman, berkan acar, cevdet kızıl emerging markets journal | p a g e |63 which limit the effective functioning of such mechanisms. both factors require the continuous development and update of traditional mechanisms. in view of the inability of independent auditors to reveal errors and fraud with traditional tools, it is clearly observed that proper coordination and teamwork among the professionals for the discovery of errors and frauds are a must. these professionals should not work as competitors against each other. they should complement each other for the prevention and detection of frauds (kandemir and kandemir, 2012). concerning oyinlola’s research (2010) titled “the role of auditors in fraud detection, prevention and reporting in nigeria”, the role of auditors is examined in fraud detection, prevention and reporting. also, extent of the related auditing procedures is investigated. based on this study, there is a great expectation towards auditors’ duties on fraud prevention and detection. the perception is in contrast to the primary purpose of audit as projected in intenational standard on auditing (isa) 200, which only requires inspectors’ comments on the financial statement, but not the company’s fraud prevention and detection efforts (oyinlola, 2010). in regards to kandemir’s paper (2010) titled “muhasebe hilelerinin ortaya çıkarılmasında ve önlenmesinde bağımsız denetimin rolü ve bağımsız denetçinin sorumluluğu”, research was conducted to determine whether independent auditors are involved in the discovery and prevention of accounting frauds within the framework of individual liabilities or joint liability. also, this study tried to reveal which institutions were responsible for accounting scandals, and how they appreciated their share of responsibility. according to the author, the contribution of all components in the control environment and financial reporting process as well as the ability of independent audit firms to increase the success and efficiency level are significant (kandemir, 2010). ata, uğurlu and altun’s article (2009) titled “finansal tablo hilelerinin önlenmesinde denetçi algılamaları” investigated the potential impact of auditors' demographics on fraud risk indicators. research also tried to identify the most significant fraud risk indicators for audit sample groups. additionally, auditor perceptions of risk factors were compared that could assist auditors in the prevention of fraudulent financial statements, taking into account the auditors' sociodemographic characteristics. based on the analysis of authors, pressure factor of management had emerged as the most effective factor for both sample groups. this result reveals the importance of relationship between board of directors and the audit committee. also, the factor of management's inability to demonstrate the correct approach to internal controls is shown up as one of the most significant fraud risk indicators based on first sample group. also, the factor of difficulties in implementing organizational control was perceived as one of the most important risk indicators (ata, uğurlu and altun, 2009). erol’s manuscript (2008) titled “i̇şletmelerde yaşanan yolsuzluklara (hata ve hileler) karşı denetimden beklentiler”, focused on the corruption issue and risk factors leading to corruption. also, expectations from the audit operations were investigated. according to the author, most of the corruption experienced in business stem from the preparation or concealment of incomplete or fraudulent financial reporting. additionally, the procedure to struggle with corruption is to implement corporate governance effectively and perform the requirements of auditing. moreover, in order to secure the financial reporting process, there is a need for honest managers, auditors equipped with sufficient information and users with sufficient skills (erol, 2008). iii. case analysis olympus, worldcom, tesco, sunbeam and parmalat companies are examined as part of the case analysis and the events leading to these scandals are analzyed. these are some of the leading accounting scandals in the world. thus, they were selected to be included in the study. olympus corporation was established by takeshi yamashita on october 1919 in tokyo, japan. olympus is a japanese firm that produces medical imaging equipment and cameras. in 2011, a big accounting scandal came to light in olympus company. announcement of the job termination of company's former ceo, woodford led to the outbreak of olympus scandal. after being fired, woodford made a statement to the press that olympus forced him to resign from his job because he interrogated the payment of $687 million in consulting fees for 2008, when british medical equipment maker gyrus purchased $2 billion. it was found that, japanese olympus had hidden its losses for many years. an independent committee was set up to examine the company’s accounting operations. in an examination of the delegation established to examine the company's accounting processes, it was determined that the company with a 92-year history had used funds and other measures for purchases to postpone the loss-related records. in order to hide the losses, olympus paid 73,4 billion yen ($948 million) for the purchase of three japanese companies altis, news chef and humalabo between 2006 and 2008. it was reported that, olympus had lost 76 percent of its purchase price in march 2009 ( 55,7 billion yen ) from these three companies. olympus company preliminarily could hide these losses by registering their assets between historic cost and fair market value. when accounting arrangements changed, management of the company forced them to book its assets at fair market value. ultimately, the company created off-balance sheet assets to hide these losses. olympus company purchased gyrus and recorded investment losses as goodwill to complete this plan. consequently, olympus company was ordered to pay 700 million yen in fines for its role. also, the accounting scandal hit the company’s shareholders because company lost almost 80% of its value. mr kikukawa who was a former assistant general manager and the former auditing officer mr yamada were arrested. this scandal now has a place in the japanese history as one of the biggest financial frauds (norris, 2011). worldcom company was founded in 1983 by bernard ebbers. in a short time, the market value of the company grew to 180 billion dollars in 1990. worldcom was the second largest u.s. phone company in 1999. a big accounting scandal showed up in worldcom company in 2002. scott sullivan who had been the chief financial officer of the corporation was fired after discovering transfers from operating expenses amounting volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.210 | http://emaj.pitt.edu auditing techniques to avoid cost accountings frauds page |64| emerging markets journal to $3,8 billion in the 5th quarter of january 2001 march 2002. worldcom announced that, the profit figures for the last 15 months were to be recounted and announced, after the previous announcement indicating that the company had made a profit of $1,4 billion in 2001. the company reported that, a total of $3,8 billion in corporate expenses was shown as inadvertently capital investment in 2001 and in the first quarter of 2002. the worldcom’s auditing company was arthur andersen. arthur andersen realized that, there was maximum risk on worldcom. in spite of all this, arthur andersen stated that, all accounts were examined and that there were no irregularities. in 1999, when the company was at peak, the stock price was over $64. however, after the scandal in 2002, the stocks of firm declined by 9% and the company went bankrupt (the guardian, 2002). tesco company as one the largest supermarket chains of united kingdom (uk) was established by jack cohen in east of london in 1919. a big accounting scandal showed up in tesco company in 2014. financial conduct authority (fca), which is a institution that regulates and monitors the capital markets in the uk investigated tesco company on the grounds of its irregularities in accounting records. as a result of the examination, it was determined that the company overstated its profits in the first half of 2014 by £263 million. tesco company asked deloitte to run a comprehensive and independent audit. deloitte completed its audit and examination. it was detected that, in the first half of 2014 the firm’s profits were overrated by £118 million. this figure was £70 million in the 2013. in 2014 financial year, this figure was £75 million. as a result, tesco company had to pay the penalty of £129 million for this accounting scandal and also had to pay £85 million for a plan to compensate investors. the company’s market value decreased significantly because of the mentioned scandal (chapman, 2020). another case involves the extensive manipulation of financial statements of sunbeam company, which was headquartered in florida, u.s. this manipulation had two important sources: first was the inconsistent determination of income and the other was creation of funds. the mentioned funds were created to be spent on restructuring after the change in management, but these funds were very overrated. in following periods, operating expenses were not implemented to ordinary income of the current period, but they were instead deducted from the mentioned funds. thus, it was ensured that the income figure would not decrease. another trouble corcerning the determination of income was that, goods that had not been actually sold were shown as sold and invoiced. thus, the sales income was increased. as of the end of 1997, sunbeam company recorded a revenue by $189 million in its financial statements. however, $62 million dollar of this figure was due to fraudulent transactions. these fraudulent figures, created by the company's general manager and senior finance manager, caused the company's share price to rise from us $12 to us $52 in the period of 1996-1998. it was stated that, sunbeam firm’s auditor requested only a 16% correction in the figures related to income from company management through the controls of 1997. this is because, the firm’s auditor analyzed problematic transactions staying out of 16%, but he did not qualify them as significant. therefore, it was understood that the auditor did not reflect these fraudulent figures which significantly affected the owners of shares in terms of share prices. in other words, while the auditor needed to organize a negative audit report considering the total misstatement of 32,8%, the auditor described only 16% of the false pretence as problematic and accordingly prepared a positive audit report (hilzenrath, 2001). parmalat company was established in 1961 by calisto tanzi as a milk pasteurization centre in parmaitaly. in 1990, the company registered for milan capital markets and it grew to be italy’s 8th largest company in a short time. at the end of 2003, $8 billion deficit came to the foreground due to irregularities in the accounting records and it became one of the greatest scandals of italy’s history. the reason for the bankruptcy of company was shown as the exhaustion of financial resources between the year 1990 which company went to public and the year 2003 when banktruptcy occured. financial resources were transferred to offshore and special purpose institutions in foreign countries through the banks. the scandal came into being when bank of america rejected the €500 million bond payment. despite the fact that there was €4,2 billion in cash on the company's balance sheet, the company had caused suspicion. the reason is that, the company had paid €150 million for current maturity with bank and government loans. as a result of the examinations initiated on this basis, it was understood that, approximately €4 billion of the money was in the accounts of bonlet finance company which was a subsidiary of parmalat company. bonlet finance company was located in cayman islands. however, it was seen that there was no such money and the company accounts were inflated by €8 billion. that was related with the participation of bonlet finance company located in cayman islands. on this occasion, it was determined by the italian prosecutors that, during 15 years there were always irregularities on accounts. the most important factor that sets the ground for the parmalat scandal was the inadequacies observed in the independent audit of the company. grant thornton and deloitte touche were accused of not detecting the fraud in parmalat (jucca and stempel, 2007). iv. conclusion and recommendations fraud audit gains importance every day because of increasing accounting scandals. accounting scandals in businesses have caused significant losses both in the world and turkey. they have macro and micro impacts. although fraud prevention is difficult, an audit based on standards and codes of ethics can enable to reduce fraud and help for timely detection. thus, corporations should first take their financial statements under control. for this, corporations need reliable financial statements and a powerful cost accounting system, that is used in all parts of the management function from planning to control of production activities. the information contained in financial statements prepared by the business must be delivered to interested parties in a timely, accurate, reliable, understandable, complete and up-to-date manner. independent auditors are needed to provide this tremendous target and to increase investor confidence in financial information. in addition, the independent auditors who audit the companies must be brought to the intended level by volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.210 | http://emaj.pitt.edu vedat akman, berkan acar, cevdet kızıl emerging markets journal | p a g e |65 providing adequate training before and after the tasks. the reason is that, the independent auditing sector has a crucial role in ensuring the trusting environment in financial markets. independent auditing sector is also critically important for transparency. many different auditing techniques can be used in fraud audits. when a symptom on the presence of fraud shows up, the subject should be examined in detail with additional audit techniques. the essential element to be able to detect the fraud is that, the auditor should move in professional skepticism. in this process, inventory counting such as cash and stock can be done, the audit techniques applied can be changed, interviews with employees and management can be made and verification can be run. also, establishing strong internal controls and benefiting from technology integrated auditing will definitely help. when a fraud is detected, it should be reported to the appropriate administrative level and related parties should face penalties. also, solutions and recommendations should be submitted to the management of corporations in this process. the business management should establish a necessary control system as well. finally, fraud is a very powerful concept since it can be observed in many formats. because of this situation, techniques to prevent fraud are as important as running audits. internal and external auditors have big roles in detecting, preventing and reporting fraud. these are all also valid for manufacturing firms, which are involved in cost accounting practices. references adalı, s., kızıl, c. (2017). "a research on the responbility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample", emerging markets journal (emaj), university of pittsburgh press (usa), vol. 7, no: 1, issn: 2158-8708 (online), http://dx.doi.org/10.5195/emaj.2017.1 29 ,53-64. akdoğan, n. (2014). maliyet muhasebesi, anadolu üniversitesi, eskişehir (haziran 2014), 10-11. aslan, t., kızıl, c. (2019). üretim maliyetlerinin denetimine genel bir bakış, i̇ktisadi yenilik dergisi, cilt: 6, sayı: 1, ocak 2019, 112. http://dergipark.gov.tr/download/articlefile/616547 aslan, t., kızıl, c., din, a. (2017). "muhasebe hata ve hileleri üzerinde etkili faktörlerin muhasebe meslek etiği kapsamında analizi: yalova örneği", journal of social and humanities sciences research (jshsr), cilt: 4, sayı: 12, issn: 24591149, http://dx.doi.org/10.26450/jshsr.191, 1125-1138. ata, h. a., uğurlu, m., altun, m. ö. (2009). finansal tablo hilelerinin önlenmesinde denetçi algılamaları, gaziantep üniversitesi sosyal bilimler dergisi, no: 8, sayı: 1, 215-230. chapman, b. (2020). watchdog closes five-year probe into tesco’s £250m accounting scandal, independent, https://www.independent.co.uk/news/busi ness/news/watchdog-closes-tescoaccounting-scandal-investigationa9554296.html (accessed: 22.05.2020). demir, m. (2014). benford yasası ve hile denetiminde kullanılması, yayınlanmamış yüksek lisans tezi. i̇stanbul ticaret üniversitesi sosyal bilimler enstitüsü, i̇stanbul. emir, m. (2008). hile denetimi, mali çözüm dergisi, no: 86., mart-nisan 2008, 110. erol, m. (2008). i̇şletmelerde yaşanan yolsuzluklara (hata ve hileler) karşı denetimden beklentiler, süleyman demirel üniversitesi, i̇i̇bf dergisi, cilt: 13, sayı: 1, 229-237. fido, e. m. (2016). finansal tablolarda hile denetimi ve hileyi önlemeye yönelik denetim teknikleri: türkiye ve ab uygulamalarının karşılaştırılması, yüksek lisans tezi, selçuk üniversitesi sosyal bilimleri enstitüsü, konya. güredin, e. (1999). denetim, beta basım yayım dağıtım a.ş., i̇stanbul. hilzenrath, d. s. (2001). sunbeam accussed of fraud, the washington post, https://www.washingtonpost.com/archive/busi ness/2001/05/16/sunbeam-accused-offraud/4e03a2b8-c4da-4a00-bea8f0cb55cb8d77/ (accessed on: 24.05.2020). jucca, l., stempel, j. (2007). update 3-deloitte to pay parmalat $149 mln to settle suit, the reuters web site, https://www.reuters.com/article/parmalatdeloitte-agreement-idusl124205520070112 (accessed on: 25.05.2020). kandemir, c. (2010). muhasebe hilelerinin ortaya çıkarılmasında ve önlenmesinde bağımsız denetimin rolü ve bağımsız denetçinin sorumluluğu, doktora tezi, çukurova üniversitesi sosyal bilimler enstitüsü, adana. kandemir, c., kandemir, ş. (2012). muhasebe hilelerini önlemede çözüm yolu olarak kullanılacak stratejilerin bileşenleri, mali çözüm dergisi, no: 111, mayıs-haziran 2012, 15-42. kandemir, c., kandemir, ş. (2012). ’muhasebe hilelerinin önlenmesi ve ortaya çıkarılmasında kullanılan geleneksel araç ve yöntemler, mali çözüm dergisi, no:113, eylül-ekim 2012, 39-74. http://dx.doi.org/10.5195/emaj.2017.129 http://dx.doi.org/10.5195/emaj.2017.129 http://dx.doi.org/10.26450/jshsr.191 volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.210 | http://emaj.pitt.edu auditing techniques to avoid cost accountings frauds page |66| emerging markets journal kızıl, a., kızıl c. (2007). accounting: financial, cost, managerial. bahar yayınevi, i̇stanbul, türkiye, isbn: 994463070-5. kızıl, c., akman, v., korkmaz, h. (2015). "marmara bölgesinde muhasebe-denetim mesleğinin önemi üzerine bir araştırma", akademik sosyal araştırmalar dergisi (asos journal), yıl: 3, sayı: 10, mart 2015, 193211.http://www.asosjournal.com/makaleler/75 4101230_510%20cevdet%20 kizil.pdf kızıl, c., doğan, e. (2017). audit techniques for protecting against cyber attacks: a bilateral approach of case studies and interview in societal complexity, data mining and gaming; state-of-the-art 2017, dorien detombe, gerhard-wilhelm weber and semih kuter (eds.), amsterdam europe: greenhill & waterfront. versiyon: 001, amsterdam, hollanda, isbn /ean: 978-90-77171-54-7. 125-135. kızıl, c. et. al. (2019). i̇ktisadi ve sosyal yönleriyle i̇novasyon kitabı içerisinde bölüm 5: i̇novasyonun muhasebe ve denetime etkileri kitap bölüm yazarlığı. editörler: birgül uyan ve musa çakır, iksad yayınevi (iksad publications), temmuz 2019, ankara, türkiye, isbn: 978-605-7695-031. https://www.iksad.net/product-page/iktisadive-sosyal-y%c3%b6nleriyle-inovasyon kızıl, c., kaşbaşı, b. (2018). accounting scandals and eye-catching frauds: usa-japan comparison by considering the role of auditing, journal of asian research (jar), issn: 2575-1581 (online), vol. 2, no: 3, ss.123138, http://dx.doi.org/10.22158/jar.v2n3p123 kostova, s. (2012). audit procedures for disclosure of errors and fraud in financial statements of bulgarian companies, faculty of economic accounting d.a. tsenov academy of economics, svishtov, bulgaria (july), 49-66. norris, f. (2011). deep roots of fraud at olympus, the new york times, https://www.nytimes.com/2011/12/09/business /deep-roots-of-fraud-at-olympus.html (accessed: 20.05.2020). omair, b., alturki, a. (2020). systematic literature review of fraud detection metrics in business processes, ieee access, doi: 10.1109/access.2020.2971604 https://ieeexplore.ieee.org/stamp/stamp.jsp?arn umber=8981992 oyinlola, a. o. mr. (2010). the role of auditors in fraud detection, prevention and reporting in nigeria, library philosophy and practice, 517. özay, t. (1992). yönetimde muhasebenin yeri, mali çözüm dergisi, no: 12, şubat-mart 1992. öztürk, v. (2016). muhasebe, ankara kariyer yayınları, 3. baskı, ankara. şakrak, m. (1997). maliyet yönetimi, yasa yayınları, i̇stanbul. the guardian. (2002). worldcom accounting scandal. the guardian website. https://www.theguardian.com/business/2002/au g/09/corporatefraud.worldcom2 (accessed: 21.05.2020). http://www.asosjournal.com/makaleler/754101230_510%20cevdet%20kizil.pdf http://www.asosjournal.com/makaleler/754101230_510%20cevdet%20kizil.pdf https://www.iksad.net/product-page/iktisadi-ve-sosyal-y%c3%b6nleriyle-inovasyon https://www.iksad.net/product-page/iktisadi-ve-sosyal-y%c3%b6nleriyle-inovasyon http://dx.doi.org/10.22158/jar.v2n3p123 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu emerging countries as the main destinations for european value-added exports luisa marti universitat politecnica de valencia, spain | mlmarti@esp.upv.es rosa puertas universitat politecnica de valencia, spain | rpuertas@esp.upv.es abstract nowadays, production chains may cross the borders of several continents in search of greater profitability. in order to more accurately calculate countries’ foreign demand, value-added exports should be used rather than gross exports. this study takes the value-added exports calculated for european union countries and uses extended gravity models to analyze the determinants of this trade, differentiating between countries according to the main destinations for their value-added, usa, russia and china. the results reveal certain changes according to the economic period analyzed and the destination of the goods, with respect to key variables such as the wealth of the exporting country, the level of logistics performance and distance. in 2014, china registered an improvement in its position compared to russia. keywords: emerging countries, global value chains, european union, gravity models, exports new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.205 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ mailto:mlmarti@esp.upv.es mailto:rpuertas@esp.upv.es http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.205 | http://emaj.pitt.edu emerging countries as the main destinations for european value-added exports page |26| emerging markets journal emerging countries as the main destinations for european value-added exports luisa marti rosa puertas i. introduction globalization, the expansion of world trade and offshoring are key elements of the 21st century economy. certain sophisticated products that would, in principle, be tied to developed countries are in fact the result of a production chain that crosses more than one border. the fragmentation of manufacturing processes is a modernday phenomenon and becoming increasingly widespread in all large companies. the initial design of the product, the manufacture of the constituent pieces, the assembly and even the sales processes make up a set of activities which are currently spread over a number of different continents, in search of greater specialization. it involves dividing up the production chain so that each link is produced in the best possible location, thus resulting in lower costs and products that are better adapted to the needs of the market. this new state of affairs gives rise to the double counting problem associated with the exports; the statistical tools traditionally used have not been able to properly cope with this new production model (leamer 2006, grossman and rossi-hasberg 2008). exported goods incorporate intermediate value-added, the origin of which lies among a number of different territories. as such, the monetary value assigned distorts the reality, which may lead to misinformed economic policy decisions. hence, there is a need to analyze global value chains (gvcs) in order to determine each country’s position and participation in the production process, which in turn will enable a more accurate identification of international trade patterns. gvcs are defined as the set of activities encompassed in the production process of goods and services, divided into stages which are distributed between different countries. the most developed countries employ people specialized in research and development (r&d), engineering and finance, among others; that is, high value-added jobs. this is not to belittle the contribution of developing countries, where the lower level of technical training required of workers comes with lower associated labor costs. the first studies on the specialisation of countries emerged more than a decade ago with the pioneering work of hummels et al. (2001). they suggested that a country can be involved in vertical specialization in two ways: using imported intermediate inputs to generate exports; and exporting intermediate goods that can be used as inputs in other countries to produce goods intended for international sale. these authors proposed the use of input-output tables (iots) to measure the part of total exports that had previously been imported and should be attributed to another country. however, the method rested on two assumptions that were soon contested by koopman et al. (2008, 2012). they pointed out that the imported intermediate inputs were allocated in the same way regardless of whether the production was intended for export and for domestic sales; in addition, the method did not account the possibility of more than one country exporting intermediate goods. koopman et al. (2010) constructs a gvc position index, which indicates whether a country specializes in the initial or the final stages of the production process. international statistical agencies have proved unable to measure value-added trade, due to the difficulty of accessing information about these records. to this end, the literature proposes the use of international iots to build up a global picture of intersectoral trade relations between different economies. iots here are global trade analysis project (narayanan and walmsley 2008), world input-output database (timmer 2012), oecdwto tiva, unctad-eora gvc database and idejetro (institute of developing economies japan external trade organisation). these tables enable a distinction to be made between the contribution of domestically-generated value-added to trade flows and that of foreign value-added. following this line of thought, the studies of daudin et al. (2011), johnson and noguera (2012) and stehrer et al. (2012) propose the use of iots to determine the value-added of exports. for their part, koopman et al. (2010, 2014) highlight the need to jointly analyze vertical specialization and valueadded trade. these two concepts provide the basis for a conceptual framework for decomposing a country’s gross exports into the different elements of value-added, determining the impact of the double counting inherent in official trade statistics. against the backdrop of this innovative foreign trade research, the aims of this paper are as follows: (1) to calculate value-added exports in order to avoid double counting inherent in official trade statistics, using the methodology proposed by koopman et al. (2014); (2) to identify the determinants of value-added exports from the european union (eu) from its main trading partners, usa, russia and china, by means of extended gravity equations. these equations incorporate a logistics component (logistics performance index, lpi), which various authors such as hertel and mirza (2009), felipe and kumar (2012), martí and puertas (2017) among others have shown to be relevant in the analysis of bilateral international trade relations; (3) european countries are grouped according to the main destinations for their exports, to quantitatively verify whether this classification affects the explanatory variables for countries’ trade in value-added. the analysis focuses on 2008 and 2014, two years marked by very different economic situations in europe, to paint a broader picture of how economic circumstances affect trade relations. the results provide new information contributing to the existing knowledge on international operations and can facilitate trade-policy decisionmaking. replacing gross foreign sales with value-added exports, along with a specific analysis of the final destination for european goods, provides an accurate perspective of the relative importance of the explanatory volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.205 | http://emaj.pitt.edu luisa marti, rosa puertas emerging markets journal | p a g e 2 7 variables for european trade. in addition, the two years under analysis, representing very different economic realities, enable an analysis of the possible link between changes in trade patterns and the period of the economic cycle in which they occur. the rest of the paper is structured as follows: section 2 explains the method used to determine valueadded exports and provides the results for the eu. section 3 presents the gravity model developed in the empirical part of the paper. section 4 analyzes the results regarding the determinants of european exports, differentiating between countries according to the destinations for their value-added trade. section 5 summarizes the main conclusions. ii. extra-eu trade: value-added exports official statistics overstate the bilateral trade by taking the final sale price instead of the value that is actually added in the country selling the product. in this regard, dedrick et al. (2010) show how chinese exports of apple’s ipod are computed according to their final sale price of $144, despite the fact that less than 10% can be considered chinese value-added, since the bulk of the component parts come from japan, the usa or korea. a new school of thought has thus emerged, comprising researchers who recommend using value-added exports rather than gross exports in the analysis of international trade, as the former provide a more accurate approximation of the real situation and change distorted trade patterns. the value-added exports in this paper have been calculated using the method proposed by koopman et al. (2014). it involves matrix calculations using international iots, which enables a determination of the value-added traded with third countries. the double counting problem inherent in official trade statistics can thus be avoided. this method has been used to compute eu-28 value-added exports to third countries corresponding to the years 2008 and 2014. the table 1 shows both the absolute values and their rate of change, giving an initial indication of the degree of specialisation of these countries. table 1: eu-28 value-added exports (in $ millions) 2008 2014 growth rate estonia 2,025 3,081 52.15% lithuania 3,796 5,548 46.15% latvia 1,738 2,524 45.22% bulgaria 3,072 4,425 44.07% malta 619 836 35.22% romania 8,222 10,965 33.35% slovakia 7,321 9,735 32.98% poland 26,732 35,129 31.41% czech republic 14,523 18,944 30.45% portugal 8,189 10,418 27.23% luxembourg 5,992 7,212 20.36% germany 383,371 456,024 18.95% belgium 47,154 55,434 17.56% hungary 10,836 12,651 16.75% austria 30,881 35,816 15.98% spain 52,573 60,393 14.87% slovenia 2,758 3,150 14.23% italy 126,778 141,859 11.90% united kingdom 185,635 205,744 10.83% denmark 31,157 33,572 7.75% netherlands 80,973 86,635 6.99% france 154,220 161,531 4.74% sweden 56,169 55,974 -0.35% ireland 43,878 43,578 -0.68% croatia 2,987 2,824 -5.46% grecia 10,106 9,506 -5.94% cyprus 1,083 990 -8.54% finland 29,606 25,991 -12.21% mean 47,585 53,589 11.20% source: authors’ compilation as shown in table 1, there are wide disparities in the manufacture and trade of european products. average value-added exports in eu countries exceed 47.5 billion dollars in 2008 and 53.5 billion in 2014, representing an increase of 11.2%. the economic recovery in 2014 is reflected in an increasing commitment to specialization, with countries occupying relevant positions in gvcs to ensure greater competitiveness in the global trade of their products. although germany, the united kingdom, france and italy stand out in terms of volume, with far higher value-added exports than the european average, the countries that joined the eu most recently show a very distinct development. with the exception of cyprus, the accession of the eastern european countries in 2004 has been accompanied by a gradual process of widespread specialization. leading the way are countries such as estonia, lithuania and latvia, which have low levels of volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.205 | http://emaj.pitt.edu emerging countries as the main destinations for european value-added exports page |28| emerging markets journal value-added exports but show a promising growth trend; in just six years they have registered increases of more than 45%. bulgaria and romania, meanwhile, which joined the eu in 2007, are also clearly making efforts to add value to goods and services traded with third countries. at the other extreme, lying below the average european growth rate are countries such as the united kingdom, denmark, the netherlands and france. these are nations with an intense export culture and strong presence in gvcs; however, in recent years, their trade in value-added has not kept pace with the growth reported by other european nations, either due to the effects of the economic crisis or because they have a smaller margin for growth than other less developed economies. in this context, escaith and gaudin (2014) analyzed different groups of exporting countries, marking out the central european countries as small exporters that incorporate a higher content of valueadded into products for international sale, additionally investing in r&d in order to better position themselves in gvcs. on the other hand, they indicate that the large european economies register a relatively high proportion of both manufactured goods and services. ireland and luxembourg, meanwhile, form their own group due to their small size and deep integration in eu value chains. iii. european exports according to their destination: gravity model gravity equations in their most basic specification include explanatory variables based on income levels for the countries of origin and destination, their population, and geographical distance as proxy for transport costs, with their origin going back to tinbergen (1962) and pöyhönen (1963ab). in this paper, theoretically socio-cultural variables that determine trade relations are included (e.g., sharing a language or border, having colonial ties). expression of equation (1) is as follows: log (xijt) = 0+ 1 log (dij)+ 2 log (yit) +3 log (yjt) + 4 log (pit) + 5 log (pjt) +6 lpiit + 7lpijt +awij+ uijt (1) (6) where, xijt: quantity exported by country i to country j at time t (gross export or add value export) dij: distance between country i and country j yit: gdp nominal of country i at time t yjt: gdp nominal of country j at time t pit: population of country i at time t pjt: population of country j at time t lpiit: logistic performance index for country i lpijt: logistic performance index for country j wij: dummy variables (border, official languages, colony). uij: standard error according to equation (1), export volume is a function of economic, geographic, demographic and logistic variables. as an export performance indicator (xijt) we use the logarithm of value added in exports (logva). in this proposal, the original hypothesis is that the included variables have a significant impact on trade, and the signs are coherent with the postulates of economic theory. distance, as an indication of transport costs, is problematic when assumed to be independent of the mode of transport used and the capitals or economic centres of the country. the effect of distance between countries (1) should be negative, because closeness promotes more trade. theoretically, the gross domestic product (gdp) coefficients of both the exporter and importer (2 and 3) will be positive, and with more economic value, there is an expectation that exports and imports will be more significant. however, the population coefficient for the exporter (4) can be positive or negative depending on whether the more populous country exports less due to an absorption effect of domestic production or exports more due to the predominance of technological and logistic variables associated with the level of economic development. in turn, the population coefficient of the importer (5) also has an ambiguous sign for the same reasons that have been presented above. lpi index provides both qualitative and quantitative measurements, helping to build logistical profiles for countries, and to measure performance throughout the entire supply chain, values of lpi for both exporter and importer are included in the gravity model coefficients (6 and 7); a positive sign is expected in both cases. the three qualitative characteristics that are represented by dummy variables (border, language and colonial ties) are expected to have a positive coefficient (a) since they encourage bilateral trade relations between countries. regarding explanatory variables, distance between countries, expressed in kilometres, has been obtained from cepii (centre d´etudes prospectives et d´informations internationals), serving as a first approximation given the complexity of determining the location of production areas, which are often distributed throughout a given territory. the gdp data (expressed in dollars) and population have been obtained from the united nations database. the set of dummy variables that characterise countries socially and culturally has also been obtained from cepii. the world bank has published the lpi index for 5 years (arvis et al 2007, 2010, 2012, 2014 and 2016), ranking 150-160 countries and providing an extensive explanation of logistic performance in these countries. the lpi is built on the basis of a worldwide survey carried out on companies responsible for the transport of goods and for the facilitation of trade globally. the aggregate index is calculated by analyzing six main components, being the indicators the following: customs, infrastructure, international shipments, competence, tracking and timeliness. none of these independently guarantee a good level of logistics performance, and their inclusion is conditioned to empirical studies and extensive interviews carried out with specialists on international freight transport. each component is defined as follows:  customs: measures the efficiency and effectiveness of the customs despatch procedure (speed, simplicity and predictability of customs agencies). all of this is configured through a series of administrative tasks that allow the existing legislation on international trade to be volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.205 | http://emaj.pitt.edu luisa marti, rosa puertas emerging markets journal | p a g e 2 9 implemented and taxes on the import/export of goods and services to be collected.  infrastructure: measures the quality of the country’s transport and telecommunications infrastructure. it is related to the procedure used for moving the goods to the final consumer, and is not totally controlled by companies due to external factors. however, it is important to measure how organizations cope with the available facilities, being either an advantage or an obstacle that prevents them from being competitive.  international shipments: measures how easy it is to arrange shipments at competitive prices.  logistics quality and competence: measures the competence and quality of logistics services. it shows how certain parties within the organizational structure behave, representing the quality of service to the customer and optimizing the relationship between organizations and consumers.  tracking and tracing: measure the tracking and tracing of shipments. it is important to identify the exact location and the route of each consignment up to its delivery to the end customer. all parties in the good’s supply chain are involved in this component, and consequently traceability is the result of the activity of the sector as a whole.  timeliness: measures the punctuality of shipment delivery times. this is an important factor for consideration, because with the existing high level of competition, failure to comply with delivery schedules is unacceptable. this has influenced the need for increasingly sophisticated computerization processes. these components cover the various areas that define lpi and it has been proved that they have a greater impact than distance and transport costs (korinek and sourdin 2011). specifically, they include elements of essential logistical value, such as the transparency of processes and their quality, as well as the predictability and reliability of services. the indicators have been added and properly weighted, receiving a score of 1 to 5 where the higher value represents better logistics. the total sample consists of the eu-28 countries as exporters, with their value-added representing the dependent variable, while the importers are australia, brazil, canada, switzerland, china, indonesia, india, japan, korea, mexico, norway, russia, turkey and the usa. the research has been carried out with statistical data sourced from wiod, and the choice of these importers is based on the information available therein. the total sample of european countries has then been divided into two groups according to the relative importance of their value-added trade destinations. the main buyer is the usa, which ranks in either first or second place for all european countries. the classification has therefore been made depending on which country is the second most important (or in some cases, most important) destination; namely, russia or china. the resulting groups for 2008 are shown in table 2. table 2: countries by importance of destination in 2008 (% of total value-added exports) group 1 group 2 russia usa china usa slovakia 34.54 19.92 germany 15.42 28.64 estonia 30.46 21.98 netherlands 13.73 33.02 lithuania 29.77 26.69 france 12.87 32.06 poland 27.56 20.73 austria* 12.7 27.23 latvia 22.74 24.31 malta 12.19 27.73 chez republic 20.36 23.54 netherlands* 12.11 24.88 finland 19.47 24.30 sweden* 11.08 27.33 slovenia 15.78 25.98 belgium 11.02 34.85 hungary 15.17 27.74 luxembourg* 10.53 21.56 cyprus 11.28 48.11 italy 10.13 28.71 bulgaria 9.56 21.62 greece* 9.79 31.60 portugal* 9.54 37.50 croatia 9.07 36.05 spain 9.02 33.28 ireland 8.52 53.94 united kingdom* 8.22 43.05 romania* 7.81 22.85 source: authors’ compilation data from wiod note: (*) for these countries, china is the third destination in importance table 2 shows that, the usa absorbs the largest volume of intermediate goods from the eu-28. the north american country has become the primary destination, or sometimes the second most important destination, for european value-added exports. as a percentage of all eu value-added exports, values range between 19.9% and 53.9%, with slovakia registering the lowest percentage and ireland the highest. given the importance of trade with the usa, any new trade agreement that facilitates openness and the transit of goods between these two great powers, in other words, an eu-usa free-trade area, would open up a new phase in trade relations between the two sides of the atlantic. the second most important destinations are russia and china. since 1994, russia has been party to an eu partnership and cooperation agreement, leading to an ongoing growth in trade relations between the two. the results show the prominence of slovakian, estonian and lithuanian exports to russia (34.54%, 30.46% and 29.77%, respectively, of their total foreign trade goes to russia), as their proximity represents a strong boost to trade between these countries. china is also a significant importer: due to its status as an emerging economy. it uses many products and materials from european countries, most notable of which is germany, with 15.42% of its exports destined for the asian giant. the opening up of china to trade in 1978 resulted in a staggering increase in relations with the different nations that currently make up the eu. in just over 30 years, the volume traded between europe and china has multiplied by 40, and in 2003 it exceeded volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.205 | http://emaj.pitt.edu emerging countries as the main destinations for european value-added exports page |30| emerging markets journal 100 billion euros for the first time, according to official statistics. presented below is the distribution of destinations in 2014, by which time european countries are in a very different phase of the economic cycle (table 3). table 3: distribution of countries by importance of trade destination in 2014 (% of total value-added exports) group 1 group 2 russia usa china usa estonia 32.69 15.87 slovakia 23.37 21.35 latvia 32.52 15.12 germany 22.74 27.24 lithuania 32.42 26.70 denmark 20.18 22.33 cyprus 24.99 21.57 bulgaria* 18.90 18.06 poland 20.41 23.53 netherlands 18.63 31.66 chez republic 20.09 21.67 france 18.14 29.50 luxembourg* 18.00 19.02 austria 17.53 26.25 hungary 17.22 30.03 finland 16.88 25.48 belgium 16.33 34.44 croatia 16.27 30.59 portugal 15.98 30.94 romania 15.50 24.68 slovenia 15.31 23.23 greece* 15.00 17.34 united kingdom 14.92 38.05 sweden* 14.40 22.67 spain 13.81 27.79 italy 13.45 28.87 ireland 12.92 46.59 malta 11.20 16.73 source: authors’ compilation data from wiod note: (*) for these countries, china is the third destination in importance an analysis of 2014 reveals some significant differences compared to 2008. slovakia, finland, slovenia, hungary and bulgaria, which in 2008 sent between 34.54% and 9.56% (corresponding to slovakia and bulgaria, respectively) of their value-added to russia, have shifted towards china, with values ranging between 23.37% for slovakia and 15.31% for slovenia. the growth of the asian giant has meant that it has improved its position with respect to russia. deemed "the world’s factory", china has become one of the largest buyers of european value-added. as a result, china and the usa are the top two destinations for 78% of eu-28 counties. the results also confirm that countries which have china as a primary destination in 2008 continue to do so in 2014. in fact, the importance of this destination has even increased overall, with the exception of malta, which registers a drop of just over one percentage point. china has consolidated its position as a recipient of european goods; as a consequence, the eu should promote trade policies that foster the relationship with this asian country, since an increase in its purchases will obviously help boost european economic growth. the analysis of the determinants of bilateral trade between the eu and its main destinations (the usa, russia and china) was carried out for 2008 and 2014, and the total sample was divided according to whether the primary destinations were the usa and russia (group 1) or the usa and china (group 2), as shown in tables 2 and 3. the other importers are the countries provided by the wiod database that are not part of the eu. table 4 shows the size of each of the six samples analysed, while tables a1-a6 in the appendix present the main statistics for all six samples. table 4: sample size according to groups of countries group 1 usa-russia group 2 usa-china total sample 2008 154 (39.28%) 238 (60.71%) 392 (100%) 2014 84 (21.42%) 308 (78.57%) 392 (100%) source: authors’ compilation the size of the samples indicates once again the importance of this giant asian economy as the final destination for european intermediate goods, to the detriment of russia. the change in the economic cycle that european countries underwent in 2014 has been reflected in a search for trading partners that support the use of their intermediate goods for assembly, be it thanks to the quality of these goods and/or superior trade conditions between the countries. iv. results: determinants of european value-added exports in line with the main aims of this paper, a gravity equation has been estimated to reveal any potential changes in the determinants of value-added exports resulting not only from a change in the final destination, but also due to the different economic situation. the results shown in figure 1 have been standardized so that the variables used all have the same measurement units, which allows for a meaningful comparison of the coefficients. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.205 | http://emaj.pitt.edu luisa marti, rosa puertas emerging markets journal | p a g e 3 1 figure 1. significant determinants of value added in exports for ue-28 economies source: authors’ compilation note: the regression results are in table a7 in annex. no significance was found betwen exporter population and colony. the independent variables explain more than 93% of value-added exports in 2008, and more than 91% in 2014. in addition, the signs of the coefficients that were found to be significant are in line with those established by economic theory of international trade. in both estimates, the gdp of the exporter is the most important variable; its coefficient is positive, confirming the direct relationship between a country’s level of domestic production and its export volume. with respect to the importer, its gdp is also relevant, although not as markedly so as that of the exporter; there is a positive correlation between the wealth of the importer country and its trade flows. the third most important variable is distance, indicating the difficulties inherent in the distance separating trading partners: the farther countries are from one another, the lower their export volume. population is only significant for the importer in 2014, with the negative sign indicating that the most populated countries import the least value-added, since they primarily rely on domestic production. a priori, logistics should foster the trade in products between countries, as it not only facilitates international trade but also improves the transport and reception of goods, among other aspects. in this study, the lpi index, representing logistics, is only significant for the exporter; that is, the trade facilities provided by the country selling the goods play a decisive role in its ability to find buyers for its products. the aspects rated in this index are as follows: the level of infrastructure, the efficiency of the customs clearance process, the timeliness of shipments; the ease of arranging competitively priced shipments, the quality of logistics services, and the availability of a good system for tracking and tracing consignments. finally, the dummy variables, border and language, are influential in the two years analysed and have a positive effect. next, the estimates are carried out by separating the sample into groups of countries according to the destination of their value-added exports, as defined in table 2. the results for 2008 are shown in table 5, with countries’ allocation to group 1 or group 2 depending on whether their second most important (or sometimes most important) destination for its exports is russia or china, respectively. table 5: estimated coefficients for destination groups in 2008 group 1 usa-russia group 2 usa-china distance -0.284*** -0.194*** gdp export 0.536*** 0.492*** gdp import 0.372*** 0.288*** pop export -0.069* 0.053 pop import -0.052* 0.030 lpi export -0.005 0.227*** lpi imp -0.022 0.070*** border 0.045 0.044*** language -0.069*** 0.046*** colony 0.019 -0.011 observations 154 238 r2adj 0.911 0.937 *** p-value<0.01; ** p-value<0.05; * p-value<0.1 source: authors’ compilation as the results show, the distance coefficients for european countries whose main destinations are russia and the usa are higher than for countries whose main destinations are china and the usa. this indicates that, each kilometre of distance between buyer and seller places greater restrictions on trade for the former. indeed, this result is in line with the ease and cost of transporting goods and with the interpretation of the coefficients obtained for the lpi. the logistics of the exporter and the importer (lpi) have different effects in each group: the coefficients are significant and positive only in group 2, with this group belonging to a group of countries whose level of logistics development is above the european average, according to the classification by puertas et al. (2014). at the other extreme, however, group 1 comprises countries with deficiencies in logistics and so their trade is not influenced by this variable, a fact that explains the lack of significance of these variables. the wealth of the exporting and importing country continue to be the most important variables in determining value-added exports, and this result is even more marked in the countries comprising group 1. as they are less developed countries, their level of wealth is crucial with respect to the volume traded. table 6 below presents the standardized coefficients of the gravity models for the two groups of exporting countries in 2014. -0,4 -0,2 0 0,2 0,4 0,6 0,8 distance gdp exp gdp imp pop imp lpi exp lpi imp border language 2014 2008 volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.205 | http://emaj.pitt.edu emerging countries as the main destinations for european value-added exports page |32| emerging markets journal table 6: estimated coefficients for destination groups in 2014 group1 usa-russia group 2 usa-china distance -0.314*** -0.189*** gdp export 0.731*** 0.401*** gdp import 0.452*** 0.368*** pop export -0.249 0.133* pop import -0.173*** -0.077*** lpi export 0.103*** 0.201*** lpi imp -0.082** 0.009 border 0.003 0.041*** language -0.081*** 0.042*** colony 0.050 -0.014 observations 84 308 r2adj 0.935 0.908 *** p-value<0.01; ** p-value<0.05; * p-value<0.1 source: authors’ compilation in terms of logistics, notable changes can be seen with respect to 2008. in the exporting countries of group 1, whose main destinations are the usa and russia, logistics assumes a significant role. the european economic crisis itself and the need to export have had a favorable influence on the changes detected, but also that the adoption of european policy is resulting in these european countries being remarkably successful in this respect. issues such as the modernization of customs services and the widespread acceptance of the figure of the authorised economic operator, the single foreign trade windows at ports, the incorporation of global private operators into port terminal management, the development of port community systems and, in turn, the icts at the services of the logistics chain, among other initiatives, have prompted greater competence, more regular shipping lines and have permitted to overcome the traditional model of the freight forwarder in favor of a mature model. in addition, the inclusion of these countries in the trans-european transport networks has contributed to the provision of infrastructure that logically culminates in enhanced logistics performance. along with logistics, in group 1 distance, exporter gdp and importer gdp gain in importance as determinants of value-added exports compared to the results for 2008. for group 2 countries, however, only importer gdp assumes greater relevance. this may be due to the fact that the change in the economic cycle has a greater impact on eastern european countries, with these countries making notable efforts to increase their value-added trade in an attempt to adapt to the new global production model. v. conclusion and recommendations in the empirical study carried out, it has been shown that gravity models are a useful tool for quantifying the relative importance of the determinants of value-added exports, with european countries classified according to their main trade destinations. the two years selected for analysis allow the effect of the economic cycle on foreign trade patterns to be identified. the results obtained show changes in european countries’ trade patterns. in the first place, the vast majority of eastern european countries, which represent more recent additions to the eu, have opted for ever-greater participation in gvcs, increasing their value-added trade by around 45% in just six years. these are countries with lower levels of economic development seeking active integration in cross-border production processes, in which other european countries such as germany, the united kingdom, france and italy have strengthened their participation. secondly, the economic recovery of 2014 has meant that distance does not pose a barrier to trade. as a result, european countries have replaced russia with china as one of their principal destinations for valueadded exports. this indicates that the asian giant and the usa have become the main assemblers of intermediate goods from europe. thirdly, although the contrasting economic circumstances in 2008 and 2014 are not reflected in the determinants of european value-added exports, when the analysis is carried out according to trade destinations, different patterns are observed. the changes in the economic cycle have had a greater effect on countries whose main destinations are russia and the usa. all significant variables show greater explanatory power for trade in 2014. furthermore, this economic growth has also resulted in logistics becoming more relevant in terms of boosting trade. in summary, the results of this empirical study help build up a picture of trade that more closely reflects the current reality. by replacing gross exports with valueadded exports, the double counting problem in official statistics is avoided, and the varying levels of european participation in gvcs is revealed. trade policies and international free trade agreements should take into account this new reality, where every country is assigned what it actually exports. the variables used in the research do not favor the analysis of the economic policies adopted during these years. future research will include information on tariff barriers, carrying out a more extensive analysis over time that will make it possible to detect possible changes that have occurred as a result of the different policies adopted by european countries. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.205 | http://emaj.pitt.edu luisa marti, rosa puertas emerging markets journal | p a g e 3 3 references arvis, j.f., mustra. m., ojala, l., shepherd, b. and d. saslavsky. 2010. connecting to compete 2010: trade logistics in the global economy--the logistics performance index and its indicators. the world bank, washington dc. arvis, j.f., mustra, m., ojala, l., shepherd, b. and d. saslavsky. 2012. connecting to compete 2012: trade logistics in the global economy--the logistics performance index and its indicators. the world bank, washington dc. arvis, j.f., mustra, m., panzer, j., ojala, l. and t. naula. 2007. connecting to compete 2017: trade logistics in the global economy--the logistics performance index and its indicators. the world bank, washington dc. arvis, j.f., saslavsky, d., ojala, l., shepherd, b., busch, c. and a. raj. 2014. connecting to compete 2014: trade logistics in the global economy--the logistics performance index and its indicators. the world bank, washington dc. arvis, j.f., saslavsky, d., ojala, l., shepherd, b., busch, c., raj, a. & t. naula. 2016. connecting to compete 2016: trade logistics in the global economy--the logistics performance index and its indicators. the world bank, washington dc. daudin, g., rifflart, c. and d. schweisguth. 2011. “who produces for whom in the world economy?”. canadian journal of economics 44 (4): 140337. dedrick, j., kraemer, l. and g. linden. 2010. “who profits from innovation in global value chains?: a study of the ipod and notebook pcs”. industrial and corporate change 19(1): 81-116. escaith, h. and h. gaudin. 2014. “clustering valueadded trade: structural and policy dimensions”. world trade organization economic research and statistics division staff working paper no. ersd-2014-08. paris. felipe, j. and u. kumar. 2012. “the role of trade facilitation in central asia: a gravity model”. eastern european economics 50(4): 5-20. grossman, g. and e. rossi-hansberg. 2008. “trading tasks: a simple theory of offshoring”. american economic review 98(5): 1978-97. hertel, t. and t. mirza. 2009. “the role of trade facilitation in south asian economic integration”. in australian government adb (eds.), study on intraregional trade and investment in south asia (pp. 12-39). mandaluyong city; asian development bank hummels, d., ishii, j. and k. yi. 2001. “the nature and growth of vertical specialization in world trade”. journal of international economics 54(1): 75-96. johnson, r. and g. noguera. 2012. “accounting for intermediates: production sharing and trade in value added. journal of international economics 86(2): 224-36. koopman, r., powers, w., wang, z. and s.j wei. 2010. “given credit where credit is due: tracing value added in global production chains”. nber working paper 16426. cambridge, ma. koopman, r., wang, z. and s.j. wei. 2008. “how much chinese exports if really made in chinaassessing foreign and domestic value-added in gross exports?”. nber working paper 14109. washington, dc. koopman, r., wang, z. and s.j. wei. 2012. “estimating domestic content in exports when processing trade is pervasive”. journal of development economics. 99(1): 178-89. koopman, r., wang, z. and s.j. wei. 2014. “tracing value-added and double counting in gross export”. american economic review. 104(2): 459-494. korinek, j. and p. sourdin. 2011. “to what extent are high-quality logistics services trade facilitating?”. oecd trade policy working papers 108. oecd publishing. leamer, e. 2006. analyzing the u.s. content of imports and the foreign content of exports. the national academies press. washington dc. narayanan, b. and t. l. walmsley. 2008. global trade, assistance, and production: the gtap 7 data base. center for global trade analysis, purdue university, west lafayette. pöyhönen, p. 1963a. “a tentative model for the volume of trade between countries”. weltwirschaftlichesarchiv 16: 93-99. pöyhönen, p. 1963b. “toward a general theory of international trade”. ekonomiskasamfundetstidskrift 16: 69-78. puertas, r., marti, l. and l. garcía 2014. “logistic performance and export competitiveness: european experience”. empirica 41: 467-480. stehrer, r., foster, n. and g. de vries 2012. “value added and factors in trade: a comprehensive approach”. vienna institute for international economic studies working paper 80. tinbergen, j. 1962. shaping the world economy: suggestions for international economic policy. the twentieth century inc, new york. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.205 | http://emaj.pitt.edu emerging countries as the main destinations for european value-added exports page |34| emerging markets journal timmer, m. 2012. “the world input-output database (wiod): contents, sources and methods”. wiod working paper, 10. timmer, m.p., dietzenbancher, e., los, b., stehrer, r. and g.j. vries, 2015. “an illustrated user guide to the world input-ouput database: the case of global automotive production”. review of international economics 23(3): 575605. annex table 1a: main statistics 2008 total sample max min mean standard error va (1) 109,803.1 7 3,399.0 9,177.8 distance 18,190.6 252 6,981.1 4,197.1 gdp exp (1) 2,923,573 8978 653,039 933,105 gdp imp (1) 14,718,582 461947 2,566,423 3,642,262 pop exp (2) 82.2 0.4 17.5 22.7 pop imp (2) 1,326 4.7 273.6 413.6 lpi exp 4.1 2.8 3.5 0.4 lpi imp 4 2.6 3.5 0.5 note (1): millions of usa$ note (2) millions of persons source: authors’ compilation data from wiod table 2a: main statistics 2008 for group 1 max min mean standard error va (1) 672 7,367.5 11.5 1,198.8 distance 6,765.7 16,152.8 377.9 4,197.9 gdp exp (1) 141,127 533,806 24,165 150,267 gdp imp (1) 2,566,423 14,718,582 461,946 3,649,481 pop exp (2) 7.9 38.1 0.8 10.1 pop imp (2) 273.7 1,326.7 4.8 414.5 lpi exp 3.2 3.9 2.8 0.3 lpi imp 3.5 4 2.6 0.5 note (1): millions of usa$ note (2) millions of persons source: authors’ compilation data from wiod table 3a: main statistics 2008 for group 2 max min mean standard error va (1) 5163.5 109,803.1 6,9 11,405.2 distance 7,120.5 18,190.6 252.3 4,199.5 gdp exp (1) 984,276 2,923,573 8,977 1,068,368 gdp imp (1) 2,566,423 14,718,582 461,946 3,645,279 pop exp (2) 23.9 82.3 0.4 26.3 pop imp (2) 273.7 1,326.7 4.8 414.0 lpi exp 3.6 4.1 2.8 0.5 lpi imp 3.5 4 2.6 0.5 note (1): millions of usa$ note (2) millions of persons source: authors’ compilation data from wiod table 4a: main statistics 2014 total sample max min mean standard error va (1) 124,226.8 7,5 3827.8 10,699.7 distance 18,190.6 252.3 6981.1 4,197.1 gdp exp (1) 3,879,276 10,737 663,374 1,013,248 gdp imp (1) 17,393,103 498,339 3,436,487 4,611,704 pop exp (2) 80.6 0.4 18.1 22.9 pop imp (2) 1,369.4 5.1 288.6 436.4 lpi exp 4.2 2.8 3.6 0.4 lpi imp 4 2.6 3.5 0.4 note (1): millions of usa$ note (2) millions of persons source: authors’ compilation data from wiod table 5a: main statistics 2014 for group 1 max min mean standard error va (1) 788.3 7,213.4 12.9 1,403.8 distance 6,706.1 16,097.5 377.9 4,211.0 gdp exp (1) 147,066 545,151.8 23,307 190,513 gdp imp (1) 3,436,48 7 17,393,103 498,339 4,633,48 1 pop exp (2) 9.4 38.6 0.9 13.6 pop imp (2) 288.6 1,369.4 5.1 438.4 lpi exp 3.4 3.7 3 0.2 lpi imp 3.5 4 2.6 0.4 note (1): millions of usa$ note (2) millions of persons source: authors’ compilation data from wiod table 6a: main statistics 2014 for group 2 max min mean standard error va (1) 4656.7 124,226.8 7.5 11,918.8 distance 7,056.1 18,190.6 252.3 4,197.1 gdp exp (1) 804,186 3,879,276 10,737 1,097,698 gdp imp (1) 3,436,487 17,393,103 498,339 4,613,314 pop exp (2) 20.5 80.6 0.4 24.4 pop imp (2) 288.6 1,369.4 5.1 436.5 lpi exp 3.7 4.2 2.8 0.4 lpi imp 3.5 4 2.6 0.4 note (1): millions of usa$ note (2) millions of persons source: authors’ compilation data from wiod volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.205 | http://emaj.pitt.edu luisa marti, rosa puertas emerging markets journal | p a g e 3 5 table 7a: estimated coefficients of the gravity equation for the total sample 2008 2014 distance -0.221*** -0.210*** gdp export 0.601*** 0.525*** gdp import 0.324*** 0.387*** pop export 0.002 0.070 pop import -0.005 -0.099*** lpi export 0.159*** 0.154*** lpi import 0.030* -0.011 border 0.065*** 0.053*** language 0.042*** 0.036*** colony -0.020 0.014 observations 392 392 r2adj 0.934 0.917 note: *** p-value<0.01; ** p-value<0.05; * p-value<0.1 source: authors’ compilation data from wiod volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu effect of interest rate spread and bank specific factors on survival of tier-one and tier-two deposit money banks in nigeria segun kamoru fakunmoju lagos state university, nigeria | e-mail: k.fakunmoju@gmail.com babatunde jinadu lagos state university, nigeria | e-mail: mybjinadu@gmail.com alexander a. akindele lagos state university, nigeria | e-mail: lexfad77@gmail.com abstract in today’s economic setting, there must be a healthy banking sector for banks to survive. banks survival determine sound financial mediator in achieving economic performance. however, bank spread and unstable policies towards bank specific factors have become threat to bank survival in nigeria. secondary data and ex-post facto research design were used within the period of 2011-2020 for both tier-1 and tier-2 deposit money banks in nigeria. the study found that interest rate spread, asset quality, management efficiency, bank size and board size affect bank survival in nigeria. the study suggests that bank managers should give maximum attention to interest rate spread, and bank specific factor like asset quality, management efficiency, bank size and board size so as to ensure their survival. keywords: assets quality, bank size, capital adequacy, management efficiency, spread new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.264 | http://emaj.pitt.edu | mailto:k.fakunmoju@gmail.com mailto:mybjinadu@gmail.com mailto:lexfad77@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.264 | http://emaj.pitt.edu effect of interest rate spread and bank specific factors on survival of tier-one and tier-two deposit money banks in nigeria page |20| emerging markets journal effect of interest rate spread and bank specific factors on survival of tier-one and tiertwo deposit money banks in nigeria segun kamoru fakunmoju babatunde jinadu alexander a. akindele i. introduction banks and other financial entities are pivotal in mediating the flow of funds within the economy. channeling funds from the surplus side to the deficit side of the economy to enhance economic growth and productivity, bank’s stability becomes a significant factor for the government to always consider, monitor, and carefully promote since any threat to banks’ survival is an indirect threat to economic stability and productivity. the survival of banks for economic growth and development cannot be overemphasized as they are the mediator in the finance of the economy (kocenda & iwasaki, 2021). for an economy to be stable in its growth, it is mandatory to have a banking sector that is financially healthy. the camels supervisory rating method is utilized for accurate bank health assessments. capital sufficiency, asset quality, management quality, profitability, liquidity, and market vulnerability are the six pillars of the camels framework (kocenda & iwasaki, 2021). the insolvency of a bank contributes to the population experiencing financial difficulties in view of them entrusting all their resources to the banking institution. insolvency of a bank has severe effects on the financial system and the entire population’s economic activities especially in a country like nigeria. survival in this context is measured with capital adequacy ratio (car) which describes a firm’s ability to continue with operations regardless of any changes they might be confronted with (cefis & marsili, 2012; kocenda & iwasaki, 2021). for a firm to survive as long as intended is subject to the acquisition of inputs from suppliers, its processes and provision outputs to stakeholders. to this end, a firm is regarded as having failed when it is unable to achieve both short-term and long-term obligations to its stakeholders. odibi et al (2015), revealed the connection between internal and external factors necessary for bank survival. bank specific features as indicated in the acronyms camel as seen in kocenda and iwasaki (2021) represents the premise for the discussion. helmers and rogers (2010) in their study examined the factors that can contribute to the survival of a firm, to which human capital, firm size, market level, productivity, environment, research activities and innovation amongst other factors were identified. the study by rahman and islam (2018) opined that camel is used in the evaluation and prediction of banks’ survival. in the business world today, one needs to put plans into action if he/she wants to stay in business. the government pressure and poor economic forecasts in nigeria have prompted the central bank to employ hostile and unorthodox monetary policies, making this task much more difficult. this has led to fears being entertained in view of negative interest rates, that such steps can place pressure on the already weak banking sector that reduce rates below the zero level as a result of poor economic growth, unemployment, financial instability, low levels of inflation and volatile asset prices. the rationale behind this is to encourage borrowing in order to finance investment and consumption, which sets off a selfsustaining growth cycle. with the continuous economic crunch being experienced, policymakers have slashed interest rates more, resulting in a flattening of the yield curve. the implication of this is that banks, which possess huge amounts of government debt, tend to experience a further decline in their profits thus threaten nigerian bank survival (mbachu, 2022). literature has revealed that a bank’s survival is subject to various factors such as the bank’s internal factors, as well as macroeconomic factors. this is especially true in the nigerian banking industry where interest rate spread (spread) is unstable as well as smoothing of asset quality, management efficiency, bank size with bias board size which directly collapse deposit money banks in nigeria. studies have not been carried on combined effect of spread and bank-specific factors on the survival of nigerian banks of tier-1 and tier-2 categories. this study is therefore focused on the gap in the literature which serves as the motivation for this study. considering the gap identified, hypotheses below were developed: hypotheses h01: there is no combined significant effect of spread, asset quality, management efficiency, bank size and board size on capital adequacy ratio of tier-1 deposit money banks quoted in nigeria. h02: there is no combined significant effect of spread, asset quality, management efficiency, bank size and board size on capital adequacy ratio of tier-2 deposit money banks in nigeria. ii. literature review and hypothesis development bank survival is the continuous financial and non-financial operations of deposit money bank assets in managing and overriding internal and external environmental factors. in this study, bank survival was measured with capital adequacy ratio. car assesses the strength of the bank while taking into account the quality volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.264 | http://emaj.pitt.edu segun kamoru fakunmoju, babatunde jinadu, alexander a. akindele emerging markets journal | p a g e 2 1 of its assets. its financial health and capital adequacy are all key factors to protect the investment of depositors. it is intended to safeguard depositors while also enhancing the efficiency and stability of the global financial system (ajayi et al., 2019). one way to assess a bank in term of safety is the portion of its capital ratio, the higher the ratio, the safer the bank is and vice versa. the car embodies two forms of capital: tier 1 and tier 2 are separately calculated to determine the capital adequacy ratio of the bank (brian, 2018). interest rate spread is the spread difference between the interest rate paid for demand, time, or savings deposits and the interest rate that banks charge on loans. bank specific factors are bank internal indices that determine bank continuity. in this study, bank specific factors were asset quality, management efficiency, bank size and board size. using car, one can see where problems exist in the lending portfolio. if the ratio increases, this could be an indication that the quality of the loan portfolio is declining, which would result in an increased credit risk. the exposures to core capital are included in this. the formula for calculating this ratio is to take the total outstanding balances of all loans with balances of at least 10% of the bank's core capital and divide that number by the total outstanding balances of all loans with balances of at least 10% of the bank's core capital. this ratio illustrates the concentration problems that exist with credit risk. an important stage of risk is initiated which exceed 10% of the core capital of the firm. a separation of the ratio of non-performing loans (npls) from provisions to core capital is the final indicator. to calculate the percentage of loan loss, the loan loss provision is divided by the value of the loans that are not being repaid. management efficiency is a measure and determinant of bank survival. the management efficiency is proxy with ratio of cost to income. bank management efficiency indicates that bank costs are maximally utilized to achieve targeted income. mekonnen (2015), found that the larger the bank, the more likely will the car. similar studies such as el-ansary and hafez (2015), as well as polat and alkhalaf (2014) also supported that bank size has great impact on car. bateni et al., (2015) and alajmi and alqasem (2015) found that bank size has significant negative impact on car (2014) in which car decreases when there is an increase in bank size and vice versa. in order to get a ballpark estimate of how big a bank is, the natural logarithm of its total assets is sometimes utilized. the size of a bank is significant because it influences how it is owned and how easy it is to obtain equity capital and survive. according to price (2017), one of the topics that is being discussed in the new best practices is the question of whether or not board size matters. to this, there is no consensus yet regarding the actual number that should make up the board of directors. price referenced a study conducted by gmi ratings that came to the conclusion that smaller boards have more returns, better monitoring, and are better overall. he reasoned that in order to be effective, boards of directors "must meet the particular demands of each organization when determining board size and makeup." that the size of the company, the type of industry it is in, its strategic needs, and where it is in its business cycle all have a part in determining how few board members it requires to function optimally. kristijan and mirjana (2020) looked at how npls changed in the banking industry of the republic of serbia from 2010 to 2019. they did this to find out what factors have a big effect on credit risk. the research that looked at data from a vector autoregressive model found that things like capital adequacy ratio, inflation, gdp, roa, income diversification, unemployment and cost efficiency all have an effect on npls (var). the analysis showed that the number of loans that are not being paid back relies on macroeconomy and the extent to which it affects bank-specific factors that regulatory authorities have to take into account when figuring out the credit risk that banks face. yilmaz (2019) using panel data sought out the determinant of bank survival between 2000 and 2013. the result revealed that economic growth, economic freedom and inflation are essential for bank survival. other factors identified include return on assets and equity, and noninterest income to total income all hurt non-performing loans. on the other hand, public debt, unemployment, lagged values of nonperforming loans, credit growth, cost to income ratio, and lagged values of performing loans all helped nonperforming loans. moeidh and khalid (2015) conducted a study from 2005 to 2013 to determine how seven internal factors affected the car of five traditional banks in kuwaiti. the proportions of loan to assets and deposits, non-performing loans as a percentage of total loans, returns on assets and equity, dividends paid out, and total liabilities as a percentage of the total assets are all taken into account. according to the results, when a fixed effect model was employed, neither dividend nor lar nor ldr nor npllr nor roe influenced the capital adequacy and liquidity ratio. capital adequacy ratio was discovered to have a substantial and inverse relationship with both roa and size. based on the random effect model, it is found that car negatively impacts size (the proportion of a bank's total liabilities to its total assets), and roa has a robust and negative relationship with capital adequacy ratio. a definite and positive correlation existed, however, between the loan to deposit ratio (ldr) and the capital adequacy ratio. in contrast, the random-effect model found no relationship between car and dividend per share, loans to assets, quasi loans to total loans, or return on equity. using data from the year 2020, feyen and huertas (2020) analyzed the movements of nominal lending interest rates and the lending-deposit interest rate spreads in emerging and developing markets. data from 140 developing and emerging economies were analyzed, and the results showed that between 2003 and 2017 both nominal lending rates and spreads declined, while regional diversity was observed. correlations between nominal lending rates and other factors were found in the illustrative regressions. inflation, public debt, and the policy interest rate are all examples of macro-financial conditions; banking characteristics such as overhead expenses, non-interest income, and non-performing loans; and finally, credit bureau coverage and the time it takes to resolve insolvency are examples of banking characteristics (business environment). finally, breakdowns of the level and 10-year change in nominal loan rates between 2007 and 2017 illustrated regional differences. the years 2007-2017 were the focal point of these studies. the authors attribute the observed decline in nominal interest rates to a combination of factors, including falling inflation, the policy interest rate, and volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.264 | http://emaj.pitt.edu effect of interest rate spread and bank specific factors on survival of tier-one and tier-two deposit money banks in nigeria page |22| emerging markets journal overhead costs, as well as an improved business climate. the study, which was carried out in light of the current international financial crisis, found that a worldwide component led to the current downward trend in nominal lending rates. between 2007 and 2018, usman, lestari, and puspa (2019) analyzed the factors affecting the car of 27 randomly selected conventional banks listed on the indonesia stock exchange (idx). estimates were made using the regular general least squares (gls) approach, and the information was examined using a panel data regression. liquidity was found to have little effect on car in the banking industry, although bank size, leverage, loan loss reserve, net interest margin, and loan asset ratio all had substantial effects. in a study covering 2011-2019, washeka (2021) looked into what effects conventional banks in bangladesh had on the interest rate spread. banks' interest rate spread was one of the variables taken into account among others such as those unique to the banking industry, the economy as a whole, and macroeconomic conditions. credit risk, operating costs, and liquidity risk were found to positively affect interest rate spread. depending on the context, a positive or negative correlation between asset size and gross domestic product (gdp) was discovered. contrarily, an inverse link was discovered between market share and variables such net interest income, capital adequacy, return on assets, and return on equity. a theory that aptly fits this study is the buffer theory of capital adequacy given its view that banks have a preference for absorbing excess capital with the intent of preventing any shortcomings in the legal capital requirements. the buffer theory, based on its observation of the capital requirement serving as one of the important basis of primary banking supervisory instrument in nigeria, has indicated that failure to attain this requirement will be considered as infringement of banking stipulations. external auditors are often assigned the task of conducting on site examination, however there is minimum interference in the activities of banks. the recapitalization of nigerian banks, which took place in 2005 has shown to a great extent that when banks are undercapitalized for long periods, they face the risk of being shut down and having their licenses withdrawn. however, when banks are able to mobilize deposits from the public, they are able to prevent their capital base from being disintegrated (aruwa & naburgi 2014). the buffer theory further propounds that a bank approaching the regulatory minimum capital ratio is influenced to minimize risk and boost their capital to prevent the capital requirements triggering their regulatory costs. this strategy of accepting more risk with the expectation of getting higher expected returns by poorly capitalized banks in order to increase their capital is not advised (ajayi, ajayi, enimola, & orugun, 2019). when bankruptcy occurs, nigeria deposit insurance corporation (ndic), the bank, and the customers absorb the risk (aruwa & naburgi 2014). in this regard, customers are specifically concerned about the banks’ capital position every time. as noted by faisal, shazaib, omar and kiran (2019), the capital buffer theory indicates that when there is excessive increase in capital more than required, it tends to decrease bank risk. according to the theory, capital buffer has a tendency of enhancing the performance of banks as a result of the reduced lending rate, thus leading to increased loan demand. this has the effect of influencing banks to charge on limited loans, a higher rate of interest. furthermore, proper screening of borrowers would reduce the default risk, and banks’ profitability in the short run. shim (2013) opined that the challenges of higher deposits faced by banks can be attributed to risks, which has the effect of enabling the increased capital to decrease these risks and funding costs, and eventually increasing profitability (shim, 2013). this is an indication that banks tend to maintain a capital buffer through their profitability so as to maintained bank survival. iii. methodology the study was based on existing data for different purposes, and this is considered to be relevant for the current study. the study used ex-post facto design while the data used were sourced from secondary sources. data were collected for a period of 25 years spanning between 1997-2021. data used were sourced from tier-one and tier-two deposit money banks in nigeria, in which tier 1 comprised of first bank, guaranty trust, access bank, and while tier 2 comprised of fcmb, sterling bank, and fidelity bank. data were collected from the central bank of nigeria bureau of statistics for the years investigated. for the study, the dependent variable was bank survival which was proxy by with capital adequacy ratio (car). the independent variables and their proxies include:  interest rate spread proxy with spread (spr) between deposit rate and lending rate  bank specific factors proxy with asset quality (aq), management efficiency (me), and bank size (bas) whereas the control variable was proxy by board size (bs). panel data analysis was carried out using e-views. econometric model car = f(sprit, aqit, meit, basit, bsit) carit = β0+ β1sprit+ β2aqit + β3meit β4basit + β5bsit +µi + εit-----equation for tier-1 and tier2 banks where; car= capital adequacy ratio proxy with total debt/total assets spr= interest rate spread proxy with spread between deposit rate and lending rate aq= bank specific factors proxy with asset quality ratio me = management efficiency proxied with ratio of cost to income bas=bank size proxy with total assets bs= board size proxy with total number of both executive directors and non-executive directors β0 =constant β1β5= coefficient εit = error term volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.264 | http://emaj.pitt.edu segun kamoru fakunmoju, babatunde jinadu, alexander a. akindele emerging markets journal | p a g e 2 3 iv. results amd imterpretation the objective model was estimated using the static panel data techniques. table 1: correlation coefficients for multicollinearity test variables spr aq me bas bs vif spr 1 0.164 0.241 0.321 0.352 1.96 aq 0.521 1 0.563 0.190 0.680 1.80 me 0.217 0.672 1 0.621 0.220 1.32 bas 0.332 0.109 0.290 1 0.198 1.24 bs 0.624 0.245 0.621 0.762 1 1.19 source: authors’ computation (2022) table 1, depicted the connection among the explanatory variables which were below the rule of thumb threshold of 0.8 for testing multicollinearity. this insinuated that explanatory variables in the model do not have problem of severe multicollinearity. table 2: panel result for objective of the study dependent variable: capital adequacy ratio (bank survival) notes: standard errors ( ), t-statistic [ ] and p-value { } are reported in parentheses. *, ** and *** show the 10%, 5% and 1% significance level respectively. where; spread (spr), asset quality (aq), management efficiency (me), bank size (bas) and board size (bs) are also indicated. source: e-views output table 2 is a representation of the model for deposit money banks’ survival proxy with capital adequacy ratio (car) for both tier-1 and tier-2 banks. it is shown by the significant f-statistics that the model is correctly specified and fit. it was concluded by the lm test and hausman rest that the fixed effect model is considered most suitable for this analysis representing the model for the study. in this study, spread (spr) between deposit rate and lending rate proxies for interest rate spread while asset quality (aq), management efficiency (me), bank size (bas) and board size (bs) were proxied for bank specific factors. fixed effect (fe) panel regression was adopted for this study. for tier-1 banks, the results show that spread, assets quality, and management efficiency have positive and significant effect on bank survival while board size has negative and significant effect on bank survival among tier-1 banks in nigeria since the p<5% and 10%. for tier-2 banks, the study found that spread and board size have negative and significant effect on capital adequacy ratio (car) proxy with bank survival while asset quality, management efficiency and bank size have positive and significant effect on bank survival. thus, the study rejected the two null hypotheses that; h01: there is no combined significant effect of spread, asset quality, management efficiency, bank size and board size on capital adequacy ratio of tier-1 deposit money banks quoted in nigeria. h02: there is no combined significant effect of spread, asset quality, management efficiency, bank size and board size on capital adequacy ratio of tier-2 deposit money banks in nigeria. v. discussion of findings the results of this study indicate that spread, asset quality, and management efficiency have a positive and significant effect on bank survival, while board size has a negative and significant effect on bank survival among tier-1 banks in nigeria since p<5% and 10%. these results imply that the increase in the spread of asset quality and management efficiency will bring about increase in bank survival regardless of the size of the board. bank survival is largely dependent on the extent to which the management efficiently manages both the human capital and other bank resources, especially asset quality. the result of this study which led to the rejection of the null hypotheses implies that the survival bank depends largely on the combined attributes or effects of spread, asset quality, management efficiency, bank size and board size on the capital adequacy ratio (car) of tier-1 as well as tier -2 deposit money banks quoted in nigeria. this is because these variables asset quality, management efficiency, bank size and board size collectively contributed towards the enhancement of bank capital adequacy, that is, the ability to endure unsound market practices and occurrences of moral hazard, which leads to improved system-wide risk-management capabilities. banks’ credibility is experienced in its ability to return customers’ money as when needed while functioning efficiently. although there is no study known to the researchers which studied the combined effects of asset quality, management efficiency, bank size and board size on capital adequacy, there have been studies supporting the connection between individual variable with capital adequacy. for instance, the result of this study supports the positive significant connection which el-ansary and hafez (2015), mekonnen (2015), and polat and al-khalaf (2014) found between bank size and capital adequacy ratio (car) in their respective studies; but disagreed with volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.264 | http://emaj.pitt.edu effect of interest rate spread and bank specific factors on survival of tier-one and tier-two deposit money banks in nigeria page |24| emerging markets journal the negative connection found between bank size and car by alajmi and alqasem (2015). the results of this study also support pastory and mutaju (2013) who found a positive significant relationship between asset quality and car in 33 commercial banks studied for eight years. for pastory and mutaju, the higher the asset quality, the higher the capital adequacy ratio. this finding is consistent with thoa and anh (2017) who also found the existence of a positive relationship between bank size, asset quality and board size. in abusharba et al. (2013), a significant positive relationship was found to exist between bank size, assets quality, management quality and capital adequacy ratio. other studies that share similar positive relationship, especially between bank size and capital adequacy ratio include buyuksalvarc and abdioglu (2011), williams (2011) and romdhane (2012) respectively. vi conclusions and recommendations the results of this study clearly indicated a positive significant effect of spread, asset quality, and management efficiency on bank survival as measured by capital adequacy ratio (car) among tier-1 and tier-2 banks. data were collected from cbn statistical bulletin for the period selected for evaluation. based on the findings there is a significant positive relationship among spread, asset quality, management efficiency and bank survival as measured by capital adequacy ratio (car). the implication of this finding is that the increase in spread, asset quality, and management efficiency leads to an equal increase in capital adequacy ratio (car). against this finding, the study recommends that banks should grow their bank and board sizes, increase their asset quality as well as improve on their management efficiency in other to enhance their survival through increasing the capital adequacy. references abdulateef, y., oyindamola, o. & teryima s. (2019). the determinants of survival of listed deposit money banks in nigeria. ndic quarterly, 34(12). abusharba, m., triyuwono, i., ismail, m., & rahman, a. (2013). determinants of capital adequacy ratio (car) in indonesian islamic commercial banks. global review of accounting and finance, 4(1), 139-170. ajayi, s., ajayi, h., enimola, d. & orugun, f. (2019). effect of capital adequacy ratio on profitability of deposit money banks. a study of dmb’s with international operating license in nigeria. research journal of finance and accounting, 10(10), 84-91. al shubiri, f., & jamil, s. (2017). assessing the determinants of interest rate spread of commercial banks in oman: an empirical investigation. european research studies, 20(2), 90-108. alajmi, m., & alqasem, k. (2015). determinants of capital adequacy ratio in kuwaiti banks. journal of governance and regulation, 4(4), 315-322. arezoo, g., & malihe, r. (2015). determinants of interest rate spread in banking industry. international journal of applied research, 1(9), 338-346. aruwa, s. a. s., & naburgi, m. m. (2014). impact of capital adequacy on the financial performance of quoted deposit money banks in nigeria. 4th international conference of faculty of administration, nasarawa state university, keffi, nasarawa state, nigeria, at nasarawa state, nigeria. bank of tanzania. (2011). risk based financial institution framework. retrieved from www.bot.co.tz. bateni, l., vakilifard, h., & asghari, f., (2014). the influential factors on capital adequacy ratio in iranian banks”. international journal of economics and finance, 6(11), 108-116 bibi, s., & mazhar, f. (2019). determinants of bank's profitability & liquidity and the role of basel iii in islamic & conventional banking sector of pakistan: a case study of nbp. the economics and finance letters, 6(1), 40-56. buyuksalvarci, a., & abdioglu, h. (2011). determinants of capital adequacy ratio in turkish banks: a panel data analysis”. african journal of business management, 5(27), 11199-11209. cefis, e., & marsili, o. (2012). going, going, gone. exit forms and the innovative capabilities of firms. research policy, 41, 795-807. el-ansary, o., & hafez, h. m. (2015). determinants of capital adequacy ratio: an empirical study on egyptian banks. corporate ownership and control, 13(1), 806-816. faisal, a., shazaib, b., omar, m., & kiran, j. (2019). the effect of bank capital buffer on bank risk and net interest margin: evidence from the us. global journal of social sciences studies, 5(2), 72-87. faris, n., & syed, a. (2017). assessing the determinants of interest rate spread of commercial banks in oman: an empirical investigation. european research studies journal, 20(2), 90-108. feyenigor, e., & huertas, z. (2020). bank lending rates and spreads in emdes: evolution, drivers, and policies. world bank group: policy research working paper, 9392, 10. kristijan, r., & mirjana, j. (2020). analysis of nonperforming loans’ determinants in the banking sector of the republic of serbia. economic themes, 59(1), 133-151. kocenda, e., & iwasaki, i. (2021). bank survival around the world: a meta‐analytic review. center for economic institutions: cei working paper series no. 2021‐2. http://www.bot.co.tz/ volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.264 | http://emaj.pitt.edu segun kamoru fakunmoju, babatunde jinadu, alexander a. akindele emerging markets journal | p a g e 2 5 mbachu, d. (2022). nigerian banks face survival of the fittest in fintech era. https://african.business/2022/04/technologyinformation/nigerian-banks-face-survival-ofthe-fittest-in-fintech-era/ mcshane, r., & sharpe, i. g. (1985). a time series/cross section analysis of the determinants of australian trading bank loan/deposit interest margins: 1962–1981. journal of banking & finance, 9(1), 115-36. mekonnen, y., (2015). determinants of capital adequacy of ethiopia commercial banks. european scientific journal, 11(25), 315-326. moeidh, a., & khalid, a. (2015). determinants of capital adequacy ratio in kuwaiti banks. journal of governance and regulation, 4(4), 315-322. odibi i., basit, a., & hassan z. (2015). bankruptcy prediction using altman z-score model: a case of public listed manufacturing companies in malaysia. international journal of accounting & business management, 3(2), 178-185. polat, a., & al-khalaf, h. (2014). what determines capital adequacy in the banking system of kingdom of saudi arabia? a panel data analysis of tadawal banks. journal of applied finance and banking, 4(5), 27-43. shim, j. (2013). bank capital buffer and portfolio risk: the influence of business cycle and revenue diversification. journal of banking & finance, 37(3), 761-772. thoa, p. t. x., & anh, n. n. (2017). the determinants of capital adequacy ratio: the case of the vietnamese banking system in the period 20112015. vnu journal of science: economics and business, 33(2), 49-58. usman, b., lestari, h. s., & puspa, t. (2019). determinants of capital adequacy ratio on banking industry: evidence in indonesia stock exchange. jurnal keuangan dan perbankan, 23(3), 443-453. washeka, a. (2021). an empirical study on the factors affecting the interest rate spread of listed conventional commercial banks of bangladesh. european journal of business and management research, 6(5), 192-199. williams, h. t. (2011). determinants of capital adequacy in banking sub-sector of the nigeria economy: efficiency of camels: a model specification with co-intergration analysis. international journal of academic research in business and social sciences, 1(3), 233-248. yilmaz, b. (2019). macroeconomic, institutional and bank-specific determinants of non-performing loans in emerging market economies. journal of central banking theory and practice, 3, 95-110. zulqurnain z., kashif n., & zahid, b. (2021). capital adequacy and management quality for banking liquidity management decision in pakistan. kasbit business journal, 13(1), 2542. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu factors affecting attitudes towards adoption of mobile banking: users and non-users perspectives cherinet boke chakiso ankara yildirim beyazit university, turkey | chrnt.b@gmail.com abstract the advent and dispersal of technology is an interesting area of study since its success is dependent on the attitude for the adoption of it by customers. extant literature indicates that mobile banking is the least adopted type of electronic banking when compared to other types of banking like automated teller machine (atm), despite its being the cheapest and quickest mode of communication. this study empirically examines and tests factors affecting users and non-users‘ attitude towards the adoption of mobile banking. data were collected from 256 participants both from users and non-users of mobile banking. collected data were analyzed using chi-square, anova, and correlation analysis. findings indicate that trust, perceived ease of use, relative advantage, and compatibility have strong correlations with both users and non-users‘ adoption towards mobile banking. however, perceived risk is found to have no significant relationship with users and nonusers‘ attitude towards the adoption of mobile banking. moreover, it is found that there is a difference between users and non-users‘ attitude towards the adoption of mobile banking. furthermore, managerial implications, limitations of the study and future research directions were discussed. keywords: trust, perceived ease of use, perceived risk, relative advantage, compatibility, attitude * the author would like to thank professor omur akdemir for his constructive comments on the earlier drafts of this study. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.167 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:chrnt.b@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.167 | http://emaj.pitt.edu factors affecting attitudes towards adoption of mobile banking: users and non-users perspectives page |54| emerging markets journal factors affecting attitudes towards adoption of mobile banking: users and non-users perspectives cherinet boke chakiso i. introduction technology is becoming one of the bases for competitions in all facets of human activities (sohail and al-jabri, 2014). it was during the 1970s that automated teller machines (atm) followed by mobile banking in the 1980s which were introduced to banking distribution channels (mullen, bradley and loane, 2017). among those technologies, mobile banking and service transactions play a vital role in the day to day life of marketers and customers (laukkanen, 2017). mobile banking as one of the promising technologies for modern society (baabdullah, alalwan, rana, kizgin, and patil, 2019), empirical evidence indicates that the adoption of mobile banking improves the quality of human life and furthers the efficiency of banks (malaquias and hwang, 2016). as one of the quickest and cheapest modes of communication, mobile phones are now providing not only hello but also made banking services to palms of customers. chawla and joshi (2017) defined mobile banking as ―using a mobile phone for performing financial transactions such as getting account information, transferring funds, request for a checkbook, opening or renewing fixed deposits, opening a dematerialized account, opening a loan account, making utility payments, and so on‖. laukkanen & pasanen, (2008) defined mobile banking as ―a channel whereby the customer interacts with a bank via a mobile device such as a smartphone or a personal digital assistant‖. mobile banking provides several banking services with full of efficiency for both bankers and customers. this unequivocally promotes service efficiency for both customers as well as bankers (sohail and al-jabri, 2014). similarly, szopiński (2016) pointed out that the use of electronic banking can reduce costs for both customers and bankers. studies about mobile banking and its antecedents have got significant attention from academics since its inception to technology market (kim, shin, and lee 2009; khasawneh, 2015; koeniglewis, palmer, and moll, 2010). findings of wan and chow (2005) indicate that mobile banking is the least adopted type of electronic banking when compared to other types of banking like atm. davies et al. (1989) proposed the user's acceptance model for new technology. technology adoption model (tam) is one of the most widely used and discussed a model for predicting the adoption of users for new technology and innovation (chawla and joshi, 2017). in cases where customers have alternative ways of getting service, the rate of adoption for new technology would be no easy task. as new technological innovations at infancy stage usually face barriers to technological adoption, mobile banking is no exception (luo, li, zhang, and shim, 2010). the existing literature about the adoption of mobile banking technology adoption is more centered on developed countries (sohail and al-jabri, 2014). calhoun et al. (2002) underlined the difference in culture for technology adoption. in the case of turkish context, akturan and tezcan (2012) conducted the adoption of mobile banking in the context of youth market but they collected data from only nonusers and suggested other studies to focus on users. tam and oliveira (2016) pointed out that there is a lack of studies which focus on post-adoption of mobile banking. moreover, there are no comparative studies in turkey that empirically investigated both users and nonusers attitude towards mobile banking. therefore, the purpose of this study is to investigate the factors affecting both users and nonusers attitude towards the adoption of mobile banking in turkey. ii. conceptual framework this section reviews the literature and attempts to synthesize extant studies based on the previous theory that can explain factors which can affect the attitudes of customers towards the adoption of mobile banking. trust trust is among the vital factors in exchange relationship between two partners to have noble outcomes such as loyalty (morgan and hunt, 1994; chakiso, 2015) and related with satisfaction (luakkannen, 2017). the existing uncertainty with mobile banking and service by its nature make one of the critical factors for marketers (luo, li, zhang, and shim, 2010). trust is the partners‘ confidence in exchange for partners reliability and integrity (morgan and hunt, 1994). as cited by singh and srivastava (2018), in mobile banking, trust is defined as ―the belief that allows individuals to willingly become vulnerable to the bank, the telecommunication provider, and the mobile technology after having the banks, and the telecommunication provider‘s characteristic embedded in the technology artefact‖ masrek et al. (2012). morgan and hunt (1994) asserted that in rational contracting behavior, trust plays a vital role between exchange partners. the trust between the exchange partners leads to productivity and efficiency preceded by cooperative behavior (morgan and hunt, 1994). building trust would take time and it differs types of offerings especially in services which are intangible in nature (chakiso, 2015). for example, chawla and joshi (2017) pointed out that the level of trust varies for different types of technological innovations associated with its perceived risks. chawla and joshi‘s (2017) finding indicates that trust predicted 68% of users perceived adoption of mobile banking. correspondingly, the findings of koenig-lewis (2010) indicate that trust and credibility found to be crucial in reducing the overall perceived risk of mobile banking. chawla and joshi‘s (2017) finding indicate that trust is one of the most important elements in banking transactions, especially in online banking. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.167 | http://emaj.pitt.edu cherinet boke chakiso emerging markets journal | p a g e 5 5 trust can be developed between exchange partners with three integral parts namely successful accomplishment and provision of service, ethically delivering service with full integrity with no deceiving, and caring the needs of customers by due benevolence (farah, hasni, and abbas, 2019). despite its developmental stages, some studies indicate that initial trust is the most important (gao and waechter, 2015) and it can build at the early stages of exchange relations with the exchange partners (sharma and sharma, 2019). in an empirical study, farah et al. (2018) found that trust predicts mobile banking adoption intention. h1a: trust has a positive and significant effect on users attitude towards the adoption of mobile banking. h1b: trust has a positive and significant effect on nonusers attitude towards the adoption of mobile banking. perceived ease of use perceived ease of usefulness (peu) can be defined as the degree to which an innovation is easy to use (lin, 2010). davis (1989) defined peu as achieving innovation with free of effort and perceiving that mobile banking is advantageous and make service easier (akturan, 2012). akturan (2012) studied about mobile banking adoptions and found that perceived ease of use has a positive and significant effect on customers. in the study of user‘s adoption of internet banking, yiu, grant, and edgar (2007) found that perceived ease of use has a direct relationship with the user‘s adoption to internet banking. in contrary, boateng, adam, okoe, and dorson (2016) found that perceived ease of use has no significant effect on user‘s adoption of internet banking. this would be due to the difference in culture for the adoption of new innovative technology. h2a: perceived ease of use has a positive and significant effect on users attitude towards the adoption of mobile banking. h2b: perceived ease of use has a positive and significant effect on nonusers attitude towards the adoption of mobile banking. perceived risk perceived risks are factors that make consumer contemplate about the nature and amount of risk for purchase decision (bauer, 1960). murray (1991) conceptualized that due to inseparability nature of service, perceived risk is higher in service than goods. moreover, consumers lack knowledge about the product increases consumers perceived risk. murray (1991) stated that the greater perceived risk increases the consumer's propensity to seek information about the product. this depends on the consumer's source of information (for example, friends, family, media, etc.) acceptance and readiness for the service for purchase decision and continual use. studies on technology adoption indicate that perceived risk is one of the important factors that affect consumers attitudes and intention towards the adoption of new technology. for example, laforet and li, (2005) found that perceived risk is one of the important factors for the adoption decision of chinese customers. there are major dimensions of risks which are identified by jacoby and kaplan, (1972); kaplan, jacoby, and szybillo, (1974) and, time risk is by roselius (1971) and more recently by (featherman and pavlou, 2003). they are shown below in table 1. table 1: types of risks financial risk the potential monetary cost incurred to make the product work properly, or to replace it with a satisfactory product (roselius, 1971: 58). product performance risk the loss incurred when a brand or product does not perform as expected (forsythe and shi, 2003: 869). social risk ―potential loss of status in one‘s social group as a result of adopting a product or service, looking foolish or untrendy‖ (featherman and pavlou, 2003: 455). physical risk the potential risk of that can be sustained by using the product. psychological risk the risk of potential disappointment, frustration, and shame experienced if one‘s personal information is disclosed (forsythe and shi, 2003: 869). time risk refer to the loss of time and inconvenience incurred due to difficulty of navigation and/ or submitting order, finding appropriate web sites, or delays receiving products (forsythe and shi, 2003: 869). privacy risk ―potential loss of control over personal information, such as when information about you is used without your knowledge or permission.‖ (featherman and pavlou, 2003: 455) overall risk ―a general measure of perceived risk when all criteria are evaluated together.‖ (featherman and pavlou, 2003: 455) akturan (2012) found that, performance risk and social risk have a direct and significant effect on nonusers‘ attitude towards the adoption of mobile banking. riquelme & rios (2010) found that, social risk can affect the intention to adopt mobile banking. similarly, farah et al. (2018) determined that, perceived risk predicts intention to adopt mobile banking. therefore, it can be hypothesized as: h3a: perceived risk has a positive and significant effect on users’ attitude towards the adoption of mobile banking. h3b: perceived risk has a positive and significant effect on non-user’s attitude towards the adoption of mobile banking. compatibility compatibility can be defined as the extent to which innovation is compatible with the existing beliefs and values of the user previous experiences and habits (chen and tan, 2004; sohail and al-jabr, 2014). among those factors that shape individual‘s values and beliefs are social norms and those products that the extent to volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.167 | http://emaj.pitt.edu factors affecting attitudes towards adoption of mobile banking: users and non-users perspectives page |56| emerging markets journal which products long depend on the fit with the trend of the society (kotler and keller, 2012: 311). in an empirical study, riquelme and rios (2010) found that social norms (including families, friends, etc.) have a direct influence on the adoption of mobile banking. similarly, sohail and al-jabr (2014) found that compatibility can impact the adoption of mobile banking. besides, kotler and keller (2012: 153) stated that reference groups can influence individuals‘ attitude or behavior directly or indirectly. chawla and joshi (2017) corroborated that perceived lifestyle compatibility is one of the most important predictors of attitude and intention of mobile banking adoption. lin (2011) asserted that the congruence in lifestyle as an important factor affecting user attraction towards technology-oriented services. h4a: compatibility has a positive and significant effect on users’ attitude towards the adoption of mobile banking. h4b: compatibility has a positive and significant effect on non-users’ attitude towards the adoption of mobile banking. relative advantage williamson (2007) stated that human agents are intendedly rational even if their rationality is bounded. thus, rational agents seek comparative benefits by comparing alternative services (here in this case as mobile banking instead of other distribution channels) and opportunity costs. in an empirical study, shareef et al (2018) finding indicates that functional benefit found to be the strongest predictor of user adoption of mobile banking. shareef et al. (2008) defined perceived functional benefit as ―the degree to which consumers perceive the overall functional benefits, both absolute and relative—including cost, time, efficiency, and effectiveness of using mobile banking system—instead of using traditional physical office functions‖. it is explained in extant literature with different names like perceived benefit (lin, 2011; akturan and tezcan, 2012); perceived efficiency (chawla and joshi, 2017); relative advantage (sohail and al-jabr, 2014). all these concepts in their respective studies underlined about the economic benefit functions mobile bank fulfills, and relative efficiency mobile bank provides to the user in comparison to predecessors (see also rogers, 2003). h5a: relative advantage has a positive and significant effect on users attitude towards mobile the adoption of banking. h5b: relative advantage has a positive and significant effect on users attitude towards mobile the adoption of banking. demographics extant literature indicates that there is a significant difference between groups of demographic characteristics (age, gender, education, income, occupation, so on) and attitude and intention towards the use of mobile banking (chawla and joshi, 2017). laforet and li (2005) found that males, young age, and highly educated are predominant users of mobile and online banking. similarly, kolodinsky, hogarth, and hilgert (2004) found that demographic variables of income, assets, age, marital status, education, and gender can affect adoption or intention in electronic banking technologies over time. akinci, aksoy, and atilgan (2004) findings indicated that males, middle-aged adults, educated persons were users of internet banking. again, shareef et al. (2018) finding corroborated that middleaged, highly educated, males are predominant users of mobile banking and have more tendency to the adoption of new technology. h6: there is a difference between across genders on the adoption of mobile banking. attitude fishbein and azjein (1975) defined ―attitude‖ as an individual‘s positive or negative feelings about performing a target behavior. davis (1989) pointed out that, the attitude of user has a relationship with it usage. the behavioral orientation of the user is heavily dependent on the favorable attitude of the user towards the product. rogers (2003) developed the diffusion of innovation theory and identified factors that can influence how the products are adopted by users. in one of the classic studies, davis (2003) developed a technology adoption model which involves user adoption of innovation and behavioral intention. extant literature about the study of attitude towards a given product is analyzed for various types of products like computers, stores, internet banking, mobile banking, and so on. most of these studies embraced perceived usefulness, compatibility, and ease of use to measure the attitude of user towards a given innovation (taylor and todd, 1995; davis, 1989; sohail and aljabr, 2014; chawla and joshi; 2017). moreover, a host of studies proposed and found that, attitude is antecedent of behavioral intention (taylor and todd, 1995; davis, 1989; sohail and al-jabr, 2014). iii. methods this study is conducted with the objective of assessing factors that can influence attitudes towards the adoption of mobile banking both from users and nonusers of it. among quantitative approaches, this study volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.167 | http://emaj.pitt.edu cherinet boke chakiso emerging markets journal | p a g e 5 7 followed correlational research design which is used for relating variables or predicting outcomes (cresswell, 2012). this design suited to employ a cross-sectional self-administered survey was employed which is one of the cheapest and popular methods of data collection in quantitative designs in social science (neuman, 2014). a number of studies have recommended survey in previous related studies (sharma and sharma, 2019; saunders, lewis and thornhill, 2007). the sample was drawn from university students in the city of ankara, turkey irrespective of their age, gender, level of education and other demographic factors. in total, 256 responses were collected from university students. the data for this study was collected through a survey questionnaire. a self-administered questionnaire was distributed for participants through online. before the actual distribution of data, 20 samples were distributed to sample respondents for checking any problems with measurement. then, some corrections were found, and the edited survey was effectuated. for analyzing the data, descriptive statistics of frequencies and percentages were employed followed by discussions. moreover, nonparametric tests of chi-square statistic are employed for demographic variables for the first part of the study. for the second part of the questionnaire survey, correlation analysis was employed for analyzing the relationship between theoretically identified influencing factors and users and nonusers‘ attitude towards mobile banking. finally, the results were interpreted and discussion and analysis and compare the findings of this study with previous literature. iv. measures instrument the instrument employed in this study which is the survey questionnaire consists of two parts. first part is about questions which demographics of the respondents viz. gender, age, level of education, user nonuser status of mobile banking and the purpose of using mobile banking if they are users. the second part consists of the multi-item measures which are constructed to measure the concept of attitude with five constructs namely perceived trust, perceived risk, perceived usefulness, perceived compatibility, and perceived functional benefit. the first part of the instrument consists of close-ended questions in the form of multiple questions. in the second part, each item consists of multi-items. trust consists of 3 questions which are adapted from koenig-lewis, palmer, and moll (2010) perceived risk contains 3 items which are adapted from sohail and aljabr (2014). on the other hand, relative advantage consists of three questions and are adapted from akturan and tezcan (2012) with a little modification to make it align with the purpose of the study. and lastly, perceived compatibility contains five items adapted from sohail and al-jabr (2014) and relative advantage consists of 8 items adapted from sohail and al-jabr (2014). finally, the dependent variable-attitude was measured with four items adapted from akturan and tezcan (2012). all items in part two were measured with likert-scale items ranging from strongly disagree with the value of 1 and strongly agree with the value of 5. moreover, all the items were translated into the turkish language with authorized translators because the original source of measures is in the english language. for reassurance, the measures were back-translated before the distribution of the items. finally, the copy is checked by three bilinguals in which all of them have a business studies background. reliability and validity reliability is the degree to which the measure of a construct is consistent or dependable (bhattacherjee, 2012). as an important element in the research process, reliability enables the consistency and dependability of the study. for measuring reliability, the popular measure of internal consistency is an alpha coefficient of reliability or commonly cronbach‘s alpha (cohen et al., 2007). in multi-item measures, it is compulsory to check inter-item correlations. the reliability of this study is depicted in table 2. table 2 indicates that all the constructs have good reliability because all dimensions have the reliability of greater than .70. based on the suggestion proposed by guielford (1965) cited by taleghani et al., (2011), the higher the cronbach‘s alpha value, the higher the internal consistency is. if a value was higher than 0.70, then it showed that the reliability of measurement was high. table 2 shows that the value of the cronbach‘s alpha ranges from 0.760 to 0.875. this indicates a good acceptable internal consistency of the items in the scale for this study. table 2: questionnaire items volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.167 | http://emaj.pitt.edu factors affecting attitudes towards adoption of mobile banking: users and non-users perspectives page |58| emerging markets journal v. data analysis and interpretation introduction this chapter outlines the analysis of data and presents it. the results presented in this chapter are data collected through survey response from users and nonusers of mobile banking. regarding the response rate, all 256 responses were fully filled, returned and found valid for further analysis. this is because the data were collected through online by making all questions compulsory for respondents. therefore, there are no invalid and missing responses. demographic profile of the respondents table 3 depicts respondents profile including their gender, age, level of education, number and percentage of users and non-users of mobile banking, and purpose for the use of mobile banking. table 3: demographic profile of the respondents as shown in table 3, 72.65 percent of the respondents were males whereas 27.34 percent of the respondents were females. regarding age, the majority of the respondents (78.13%) are between the ages of 20-30. this is because the sample was drawn on public university students. as shown in table 3, the majority of respondents are educated. table 3 depicts that, majority of the respondents (70.3%) are users of mobile banking at least for one purpose. among the users of mobile banking, the respondents use mobile banking for the purposes of depositing money (7.8%), to withdraw money (11.67%), for online shopping (10.56%), checking balance (27.7%), and 57 (42.2%) of the respondents use mobile banking for all reasons stated above. moreover, there is a significant number of respondents who use mobile banking in addition to the reasons stated above like transferring money and for forex services. in addition, chi-square tests (both phi and cramer‘s v) were conducted. the results indicated that, there is a difference across gender on attitudes towards the adoption of mobile banking. similarly, there is a difference across the level of education and users‘ and non-users‘ attitudes towards the adoption of mobile banking. mchugh (2013) stated the assumption of chisquare as ―the value of the cell expected should be 5 or more in at least 80% of the cells, and no cell should have an expected of less than one‖. the dimensions of gender and level of education satisfied this assumption. however, age violated the assumption of chi-square, because 4 cells (50%) have expected count less than 5. trust morgan and hunt (1994) conceptualized that, trust exists when one party has confidence in an exchange partner's reliability and integrity. shifera bekele (2011), noted that, in practical business activities, the development of trust is considered to be a critical result of establishing a long-term successful relationship among all the parties involved. in the face of complicated service markets, customers tend to behave and make purchasing decision depending on their previous consuming experiences. investing in a long-term relationship with customers helps to develop customer trusts and improve the effective quality of a relationship in order to obtain mutual interests. as shown in table 4, the correlation coefficient between trust and attitude is 0.475 at a p value of 0.01. therefore, there is a moderate relationship between trust and both users‘ and non-users‘ attitude towards the adoption of mobile banking. table 4: correlations between variables **. correlation is significant at the 0.01 level perceived ease of use as shown in table 4, the correlation coefficient between perceived ease of use and attitude is .557 significant at a p value of 0.01. this implies that, there is a moderate relationship between perceived ease of use and attitude towards the adoption of mobile banking both for users and non-users. perceived risk unlike the other variables, perceived risk is found to have no relationship with user and non-user attitudes towards the adoption of mobile banking. the correlation coefficient between perceived risk and users‘ and non-users‘ attitude towards adoption of mobile volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.167 | http://emaj.pitt.edu cherinet boke chakiso emerging markets journal | p a g e 5 9 banking as shown in table 4 is -.117 with an inclination towards negative weak correlation, which is not significant at a p value of .01. relative advantage as shown in table 4, the correlation coefficient between relative advantage and attitude is .779 significant at a p value of 0.01. this implies that, there is a strong relationship between relative advantage and users‘ as well as non-users‘ attitude towards the adoption of mobile banking. perceived compatibility table 4 indicates that, the correlation coefficient of .643 is significant at a p value of 0.01. this implies that, perceived compatibility is found to have moderately correlation with users‘ and non-users‘ attitude towards the adoption of mobile banking. group comparison with anova since one of the objectives of this study is to compare the user and non-user attitude towards the adoption of mobile banking, anova is used for the analysis. the results shown in table 5 indicates that trust, perceived ease of use, compatibility and relative advantage are found to have a significant difference between users and non-users of mobile banking. all of the findings are significant at the value of (p<.01). however, perceived risk has no significant difference between users‘ and non-users‘ attitude towards the adoption of mobile banking. the descriptive and anova results are displayed in table 5 and table 6 respectively. table 5: descriptive results table 5 above shows descriptive results about mean, standard deviation, standard error, lower bound and upper bound of the factor results influencing attitude towards the adoption of mobile banking for both users and non-users. table 6: anova vi. discussion the ever-increasing competition and proliferation of technology have brought new frontiers for challenges and opportunities for serving customers and keep them loyal (baabdullah, et al., 2019). mobile banking as an alternative form of service distribution channel is widely documented with the predictors which can influence its attitude towards adoption (farah, hasni, and abbas, 2018; baabdullah et al., 2019; koenig-lewis, palmer, and moll (2009). extant literature indicates that there is a difference between users and nonusers‘ adoption of mobile banking across cultures (sohail and al-jabr, 2014). this study‘s findings indicated that some of the influencing factors are found to have no, moderate and strong correlation with users and nonusers‘ attitude towards the adoption of mobile banking. trust is the partners‘ confidence in exchange for partners reliability and integrity (morgan and hunt, 1994). they also asserted that in rational contracting behavior, trust plays a vital role between exchange partners. the trust between the exchange partners leads to productivity and efficiency preceded by cooperative behavior (morgan and hunt, 1994). for the successful exchange to exist, partners must trust each other. this is more important for consumers who have little strength on quid pro quo when service providers fail to offer as promised. the absence of a direct in-person connection between consumers and service providers in mobile banking makes trust among one of the important influencing factors in the adoption of users and nonusers‘ attitudes towards mobile banking. in this study, trust found to have, moderate relationship with an attitude of users and nonusers towards mobile banking. koenig-lewis, palmer, and moll (2009) found that trust can influence behavioral intention. moreover, the anova result indicated that there is a difference between users and nonusers with regard to trust in the attitude towards the adoption of mobile banking. perceived ease of usefulness (peu) can be defined as the degree to which an innovation is easy to use (lin, 2010). davis (1989) defined peu as achieving innovation with free of effort and perceiving that mobile banking is advantageous and make service easier (akturan, 2012). peu is found to be one of the important volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.167 | http://emaj.pitt.edu factors affecting attitudes towards adoption of mobile banking: users and non-users perspectives page |60| emerging markets journal factors that can influence users and nonusers‘ attitude towards the adoption of mobile banking. the findings indicated that there is a moderate relationship between perceived ease of use and attitude. moreover, there is a difference between users and nonusers‘ perceived ease of use on the attitudes towards the adoption of mobile banking. perceived risks are factors that make consumer contemplate about the nature and amount of risk for purchase decision (bauer, 1960). the nature of risk differs from service to service and product to product. in this study, perceived risk has no significant relationship with users and nonusers‘ attitude towards the adoption of mobile banking. similarly, there is no significant difference between users and nonusers‘ attitude towards the adoption of mobile banking regarding perceived risk. shareef et al. (2008) defined perceived functional benefit as ―the degree to which consumers perceive the overall functional benefits, both absolute and relative—including cost, time, efficiency, and effectiveness of using mobile banking system—instead of using traditional physical office functions‖. it is the users‘ comparison for the services provided through mobile with other models of services. relative advantage elicits the consumers perceived comparison for a product in relation with others (shareef et al., 2018). this involves factors like efficiency, cost, time, and effectiveness of a given product with others. the advent of technology is by the assumption that it can ease and reach users with minimum cost and effort. this study‘s finding indicated that relative advantage has a strong positive relationship between users and nonusers‘ attitude towards the adoption of mobile banking. this finding is similar to the existing literature‘s findings like akturan and tezcan (2012). the existing beliefs, values, experiences, and habits of the consumers for new innovation is one of the influencing factors for attitudes towards the adoption of mobile banking (chen and tan, 2004; sohail and aljabr, 2014). the result indicates that there is a moderate relationship between compatibility and users and nonusers‘ adoption of mobile banking. in the indian context, chawla (2017) also found that lifestyle compatibility has a positive and significant effect on user intention. moreover, there is a difference between users and nonusers on the attitude towards the adoption of mobile banking vis-à-vis compatibility. vii. conclusion, limitations and future research directions the factors influencing users and nonusers‘ attitude towards the adoption of mobile banking one of the contemporary research areas especially from perspectives of users in emerging markets and developing countries with the spread of technology. this study attempted to identify and indicate the factors influencing users and nonusers‘ adoption of mobile banking in turkey. moreover, the findings of this study identified and indicated how users and nonusers‘ attitude is influenced across gender and level of education. the findings indicated the correlation between four of the influencing variables (viz. trust, perceived ease of use, compatibility, and relative advantage) and users and nonuser adoption of mobile banking. however, perceived risk found to have no relationship with both users and nonusers attitude towards the adoption of mobile banking. managerially, this study can provide insights about how users and nonusers attitude towards mobile banking can be influenced. this lets managers focus their innovation on factors like lifestyle compatibility that fits with different types of customers, and relative advantage alongside with trust and perceived ease of use. moreover, the demographic differences also have its own implication on devising innovations that consider those differences. this study had the following limitations. one limitation is the data for this study were collected from students which would have more interest to try new innovation and have knowledge about new technology. concurrently, the first limitation is associated with the second limitation which is pooling of age groups to narrow domain. moreover, the study employed a convenience sampling technique and data were collected from only ankara turkey. thus, future research should consider conducting studies in entire turkey and other settings, especially cross-cultural studies. to recall, most of the respondents were users of mobile banking. this suggests that mobile banking has become an established mode of service delivery. therefore, future researchers should consider studies on the relationships between service quality, users satisfaction, and loyalty to the brand. references baabdullah, a.m., alalwan, a.a., rana, n.p., kizgin, h. & patil, p. (2019). consumer use of mobile banking (m-banking) in saudi arabia: towards an integrated model. international journal of information management, 44, 38– 52. bhattacherjee, a. (2012). social science research: principles, methods, and practices, (2nd edition). the global text project. boateng, h., adam, d.r., okoe, f.a., and dorson, t.a. (2016). assessing the determinants of internet banking adoption intentions: a social cognitive theory perspective. computers in human behavior 65, 468-478. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.167 | http://emaj.pitt.edu cherinet boke chakiso emerging markets journal | p a g e 6 1 calhoun, k.j., teng, j.t.c., and cheon, m.j., (2002). impact of national culture on information technology usage behavior: an exploratory study of decision making in korea and the usa. behavior & information technology, 21 (4), 293–302. chakiso, c.b. (2015). the effect of relationship marketing on customers loyalty: evidence from zemen bank. emerging markets journal, volume 5 no 2, doi 10.5195/emaj.2015.84. chawla, d. and joshi, h. (2017). high versus low consumer attitude and intention towards adoption of mobile banking in india: an empirical study. vision, 21 (4), 1-15. cláudio hoffmann sampaio, wagner junior ladeira, fernando de oliveira santini, "apps for mobile banking and customer satisfaction: a cross-cultural study", international journal of bank marketing, https://doi.org/10.1108/ijbm09-2015-0146 cohen, l. manion, l. and morrison, k., (2007). research methods in education. (6th edition), routledge taylor & francis publications group, london and new york. davis, f.d., bagozzi, r.p., and warshaw, p.r., (1989). user acceptance of computer technology: a comparison of two. management science, 35 (8), 982–1002. etzo, s. and collender, g. (2010). briefing the mobile phone ‗revolution‘ in africa: rhetoric or reality? african affairs, 109/437, 659–668. farah, m.f., hasni, m.j.s., and abbas, a.k. (2018). mobile-banking adoption: empirical evidence from the banking sector in pakistan. international journal of bank marketing, https://doi.org/10.1108/ijbm-10-2017-0215. featherman, m.s., & pavlou, p.a. (2003). predicting eservices adoption: a perceived risk facets perspective. international journal of humancomputer studies, 59, 451–474. forsythe, s.m. & shi, b. (2003). consumer patronage and risk perceptions in internet shopping. journal of business research, 56 (2003) 867– 875. gao, l., & waechter, k. a. (2015). examining the role of initial trust in user adoption of mobile payment services: an empirical investigation. information system frontiers, 19, 525–548. jacoby, j. and kaplan, l.b. (1972). the components of perceived risk, in venkatesan, m. (ed.), third annual conference of the association for consumer research, association for consumer research, college park, md, 382-93. kaplan, l.b., jacoby, j. and szybillo, g. (1974). components of perceived risk in product purchase: a cross-validation. journal of applied psychology, vol. 59 no. 3, 287-91. khasawneh, m.h. (2015). an empirical examination of consumer adoption of mobile banking (mbanking) in jordan. journal of internet commerce, 14:341–362. kidane assefa, (2012). relationship marketing in the hotel industry: the nexus between concepts and practices (a case of ghion hotel, addis ababa branch, ethiopia). unpublished ma project. addis ababa university. kim, g., shin, b., & lee, h.g. (2009). understanding dynamics between initial trust and usage intentions of mobile banking. info systems journal, 19, 283–311. koenig-lewis, n., palmer, a. and moll, a. (2010). predicting young consumers' take up of mobile banking services. international journal of bank marketing 28(5), pp. 410-432. kolodinsky, j.m., hogarth, j.m., hilgert, m.a. (2004). the adoption of electronic banking technologies by us consumers. the international journal of bank marketing, vol. 22 no. 4, pp. 238-259. kothari, c.r. (2004). research methodology methods and techniques. (2nd edition). new age international publishers, india. kotler, p. and keller, k.l. (2012). marketing management. 14th edition. pearson education inc. laforet and li (2005). consumers‘ attitudes towards online and mobile banking in china. international journal of bank marketing, vol. 23 no. 5, pp. 362-380. laukkanen, t. (2017). mobile banking. international journal of bank marketing, vol. 35 issue: 7, pp.1042-1043, https://doi.org/10.1108/ijbm10-2017-0218. laukkanen, t., & pasanen, m. (2008). mobile banking innovators and early adopters: how they differ from other online users? journal of financial services marketing, 13(2), 86–94. https://doi.org/10.1108/ijbm-10-2017-0215 volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.167 | http://emaj.pitt.edu factors affecting attitudes towards adoption of mobile banking: users and non-users perspectives page |62| emerging markets journal lin, h.f. (2011). an empirical investigation of mobile banking adoption: the effect of innovation attributes and knowledge-based trust. international journal of information management 31, 252–260. luo, x., lin, h., zhang, j. & shim, j.p. (2010). examining multi-dimensional trust and multifaceted risk in initial acceptance of emerging technologies: an empirical study of mobile banking services. decision support systems, 49, 222–234 malaquias, r.f., and hwang, y. (2016). an empirical study on trust in mobile banking: a developing country perspective. computers in human behavior. 54, 453-461. masrek, m. n., nor‘ayu, a. u., & irni, i. k. (2012). trust in mobile banking adoption in malaysia: a conceptual framework. journal of mobile technologies, knowledge & society, 2012, 1–12. mchugh, m.l., (2013). the chi-square test of independence. biochemia medica; 23(2):143– 9. morgan, r. & hunt, s. (1994). the commitment-trust theory of relationship marketing. journal of marketing. vol. 58, p20-38. muge arslan, f. and altuna, o.k. (2010). the effect of brand extensions on product brand image. journal of product & brand management. 19/3, 170–180. emerald group publishing limited. mullan, j., bradley, l., & loane, s. (2017). bank adoption of mobile banking: stakeholder perspective. international journal of bank marketing, https://doi.org/10.1108/ijbm-092015-0145 murray, k.b. (1991). a test of services marketing theory: consumer information acquisition activities. journal of marketing, vol. 55, no. 1, pp. 10-25. neuman, w.l. (2014) social research methods: qualitative and quantitative approaches, seventh edition, pearson education limited. riquelme, h.e., and rios, r.e. (2010). the moderating effect of gender in the adoption of mobile banking. international journal of bank marketing. vol. 28 no. 5, pp. 328-341. rogers, e. (2003). diffusion of innovations. 5th ed. new york: free press. roselius, t. (1971). consumer rankings of risk reduction methods. journal of marketing, vol. 35, no. 1, pp. 56-61. shareef, m.a., baabdullah, a., dutta, s., kumar, v., and dwivedi, y.k. (2018). consumer adoption of mobile banking services: an empirical examination of factors according to adoption stages. journal of retailing and consumer services, 43, 54–67. sharma, s.k. & sharma, m. (2019). examining the role of trust and quality dimensions in the actual usage of mobile banking services: an empirical investigation. international journal of information management 44, 65–75. singh, s., srivastava, r.k. (2018). predicting the intention to use mobile banking in india. international journal of bank marketing, https://doi.org/10.1108/ijbm-12-2016-0186. sohail, m.s., and al-jabri, i.m. (2014). attitudes towards mobile banking: are there any differences between users and non-users? behaviour & information technology, vol. 33, no. 4, 335–344. szopiński, t.s. (2016). factors affecting the adoption of online banking in poland. journal of business research. taleghani, m. gilaninia, s., and mousavian, s.j. (2011). the role of relationship marketing in customer orientation process in the banking industry with focus on loyalty (case study: banking industry of iran). international journal of business and social science vol. 2 no. 19. tam, c. & oliveira, t. (2016). understanding the impact of m-banking on individual performance: delone & mclean and ttf perspective. computers in human behavior, 61, 233-244. taylor, s., and todd, p. a. (1995b). understanding information technology usage: a test of competing models. information systems research (6:2), pp.144-176. wan, w.n., and chow, c.l. (2005). customers‘ adoption of banking channels in hong kong. international journal of bank marketing, vol. 23 no. 3, pp. 255-272. williamson, o.e. (2007). transaction cost economics: an introduction. economic discussion papers, 3. yiu, s.y., grant, k., and edgar, d. (2007). factors affecting the adoption of internet banking in hong kong—implications for the banking sector. international journal of information management 27, 336–351. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu market dynamism and firm performance relation: the mediating effects of positive environment conditions and firm innovativeness cemal zehir yıldız technical university, turkey | czehir@yildiz.edu.tr dilek balak beykent university, turkey | dilekbalak@beykent.edu.tr this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. abstract there has been a great interest in terms of environment and its effects in the organization. apart from environmental conditions, market dynamism is emphasized as another important factor that affects firm performance. organizations have to compete to survive in a changing environment. in our study, we expected to find out significant relationship through dependent variables (operational performance and market performance) and independent variable as market dynamism. another goal of our study is to reveal the mediation effects of positive environment conditions and firm innovativeness to firm performance. it should be noted that, our study is based on a survey distributed to 327 people who work in companies in turkey and analysis results represented the mediating effects of positive environment conditions on firm performance. the obtained data from the questionnaires are analysed through the spss statistical packaged software. further, we compared relationship among the factor analysis, reliability, correlations and regressions. consequently, our hypotheses are supported and positively related. keywords: market dynamism, positive environment conditions, firm innovativeness, firm performance new articles in this journal are licensed under a creative commons attribution 3.0 united states license. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.152 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:dilekbalak@beykent.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.152 | http://emaj.pitt.edu cemal zehir, dilek balak emerging markets journal | p a g e |45 market dynamism and firm performance relation: the mediating effects of positive environment conditions and firm innovativeness cemal zehir dilek balak 1. introduction with globalization, it is observed that businesses need to consider factors such as manufactured good or service offered, market conditions and uncertainty. at the same time, the potential opportunities and threats that these factors bring with them also suggest that innovation may be another issue that concerns businesses. in most of the organizational strategy research, the relationship between the two structures is better explained by looking at unexpected situations or moderator effects. dynamism is expressed by li and simerly (1998) as an important moderator of the link between organizational decisions and outcomes. in numerous studies on organizational theory, environmental uncertainty is defined as an important determinant of the relationship between organization and performance (homburg et. al., 1999, p. 344). since environmental uncertainty is a multi-dimensional structure, dynamism has been focused on as an important component of environmental uncertainty in this study. the richest courses of research in organizational theory has centered on organizationenvironment relations. because, environment provides restricts and opportunities for organizational action (tushman and anderson, 1986, p. 439). the organizational environment is operationalized in ways that are consistent with the population-ecology and resource-dependence conceptualization of the interplay of organization and external environment. both the resource-dependence and population-ecology paradigms are resources required for organizational survival, which are the most important focus in describing organizational environments (dess and beard, 1984, p. 52). most of the previous studies have focused on one aspect of the environment, namely uncertainty or rate of change. however, there are two critical aspects of the environment in which a firm is operating, such as relatively less noticeable complexity and uniformity (ting, wang and wang, 2012, p. 517). according to dess and beard (1984), the significant three dimensions of the organizational environment are dynamism (stability-instability), munificence and complexity (homogeneity-heterogeneity). in this study, organizational munificence as the positive environmental conditions is tried to be addressed. environmental possibilities is seen as a multidimensional construct, that involve dynamism, technological opportunities, industrial growth, and demand for new products. dynamism and technological opportunities are two environmental features for innovation. dynamism refers to perceived instability and constant changes in the company's markets. increased dynamism is seen as favorable to innovation as it tends to create opportunities in a company's markets. organizations often adopt an innovative stance to respond to challenging conditions in dynamic or hightech environments. it is thought that, the competitive nature of the sector, environmental changes and basic technologies are influencing innovativeness (antoncic and hisrich, 2001, p. 503). nevertheless, in markets with dynamic structure, the findings of the applied studies reveal that firms focus more on innovation applications (thornhill, 2006, p. 687; cadogan et. all., 2009, p. 75). innovation strategy is a key indicator of firm performance. organizational innovation is the application of a new organizational method in practical, organizational or external relations of the firm. organizational innovation improves firm performance by reducing administrative and transaction costs, and at the same time increases workplace satisfaction (rajapathirana and hui, 2018, p. 46). businesses always try to formulate the right competitive strategy to ensure optimal business performance. such an effort is also important for a company not only to survive, but also to become a competitive company in the business environment. on the other hand, a significant amount of research has shown that organizational innovation is positively related to performance and provides a competitive advantage for the firm (rubera and kirca, 2012, p. 130; thornhill, 2006, p. 687; gunday et. al., 2011, p. 662). in a study conducted in iran, the relationship between organizational innovation and performance was researched and it was found out that, innovation has a positive and significant effect on the financial and organizational performance (rajapathirana and hui, 2018, p. 49). in our research, considering the structure of the industry and the competition environment, positive environment conditions and market dynamism as environmental elements and firm innovativeness as organizational elements were discussed. also, it was aimed to examine the effects of these variables on performance of the firm. in the study, firstly a conceptual framework was established, research hypotheses were revealed, then the collected data were subjected to the analysis process and finally research findings were discussed and a number of suggestions for researchers were presented. 2. literature review and theoretical framework 2.1. market dynamism dynamism refers to the degree of uncertainty in market and industry conditions, including the state of technology and general economic performance. this indicates that, some innovations have to be made to maintain competition for companies in dynamic volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.152 | http://emaj.pitt.edu market dynamism and firm performance relation: the mediating effects of positive environment conditions and firm innovativeness page |46| emerging markets journal industries. many research in the literature indicate that environmental dynamism is positively related to innovation (thornhill, 2006, p. 690). high market dynamism describes the environment in which changes often take place, but the direction and consequences of this change are unpredictable. a dynamic market can affect the effectiveness of the firm's behavior. a dynamic market is emerging when changes in the behavior of market players are considered important to a company. in addition, changes in the behavior of competitors arise quickly and uncertainly. changes in customer behaviors are difficult to predict. but, the needs and expectations of them for a product can change very easily. in such a market, the effectiveness of a company's behavior is based on more recent information except for is available information. because, market dynamism can offer new and broader perspectives that will help to solve the firm's problems and capture new opportunities. high market dynamism ensures that firms are more sensitive to environmental changes. in this case, business process becomes more effective by using new information (ikhsan et. all., 2017, p. 374). strategic management considers the environment as an important contextual factor with a strong influence on a company's strategic direction. moreover, the strategy literature supports the view that both firm owners and senior executives must deal with the impact of environment (li and simerly, 1998, p. 169). for example, gatignon and xuereb (1997) show that, under the conditions of high-level market dynamism, firms have become more interested in technological trends and that the relationship between technological orientation and business success has become stronger. similarly, lumpkin and dess (2001) state that, innovation orientation is more closely related to business success in the context of increased dynamism, and that the relationship between innovation propensity and performance is stronger when the level of dynamism is higher (cadogan et. al., 2009, p. 75). our hypothesis from these considerations is that, market dynamism has positive effects on firm innovativeness. in addition to this, it is also expected that innovativeness is a positive reflection of firm performance. 2.2. firm innovativeness innovation is seen as a fundamental component of competitive superiority. it is embedded in organizational structures, processes, products and services within an enterprise (gunday et. all., 2011, p. 662). factors such as demographic change, financial reforms, emerging market, changing customer behavior with the advancement of communication and information technology; has an important influence on shaping the structure of the industry, efficiency and productivity. this condition can create a very serious threat or opportunity. the ability to innovate allows the organization to innovate in a constantly changing market environment. at the same time, it requires that all strategies, systems and structures that support innovation in a company are included (rajapathirana and hui, 2018, p. 44). certain environmental attributes, such as dynamism, technological opportunities, industry growth and demands for new products, are thought as positive variables for innovativeness (antoncic and hisrich, 2001, p. 503). innovativeness is considered a highly competitive market environment and a factor of success for the global economy. firm's innovative perspective also provides information about the future position of the market (rajapathirana and hui, 2018, p. 44). innovativeness can only happen if the firm has innovative capacity (laforet, 2011). innovation capability is considered to be a valuable asset for companies to maintain competitive advantage and to implement the entire strategy (lawson and samson, 2001). the firm's ability to innovate makes it easier for firms to quickly introduce new products to the market and to adopt new systems. it is also seen as an important factor to feed ongoing competition. innovative performance can be described as a combination of assets and resources. for this reason, a wide variety of resources, assets and skills are required to achieve success in a rapidly changing environment (sen and egelhoff, 2000). according to adler and shenbar (1990), innovation capability is defined as the ability to respond to market requirements of new products. in addition, innovation capacity is also described as the application capacity of appropriate process technologies to produce these new products and the capacity to develop and adopt new products and processing technologies to meet future needs; it is also referred to as the capacity to respond to competitive technology activities and unforeseen opportunities composed by competitors. company innovation is referred with two different perspectives. first point of perspective is innovation as a behavioral factor. that is the rate of adoption of innovations by the firm. second perspective is the willingness of the organization to change (calantone et al., 2002, p. 517). auh and menguc (2005) refers to firm innovativeness as a tendency for an organization to engage in innovative behavior. the adoption of innovativeness is conceived to encompass the generation, improvement, and implementation of new opinions or behaviors. the adoption of innovation is generally intended to contribute to the performance of the organization. innovation is a means of changing an organization, whether as a response to alterations in its internal or external environment. as even the most stable environments change, organizations adopt innovativeness in ordinary over time (damanpour, 1991, p. 556). 2.3. positive environment conditions some management academics have defined the organization as either flexible or turbulent, stable or uncertain, simple or complex, and static or dynamic. in general, a typical business environment is described in terms of uncertainty, complexity and munificence (adegbite et. al., 2018, p. 12). for a long time, the environmental factors have been regarded as one of the critical elements of organizational theory and strategic management. many conceptualizations of the volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.152 | http://emaj.pitt.edu cemal zehir, dilek balak emerging markets journal | p a g e |47 environment are substantially consistent with dess and beard’s (1984) three dimensions. these are munificence, complexity, and dynamism (lumpkin and dess, 2001, p. 436). in our study, we will handle the munificence dimension as an environmental factor. munificence (or resource availability) is a crucial ingredient of business environment. it refers to the scarcity or plenteous of key resources needed by firms operating within an environment. environmental munificence manifests in the form of fast-growing markets, adequate infrastructure, lower taxes, competent workforce and national/global economic improvement (adegbite et. al., 2018, p. 17). munificence is usually considered to the extent, which an environment can provide adequate resources for the companies operating in it (fuentes et. al., 2004, p. 427). munificence may be assumed as the extent to which the environment can support growth. environments with greater munificence lay fewer restricts on firms than those environments with resource restricts (tushman and anderson, 1986, p. 445). environmental munificence is positively related to variety of strategies and choices available to the firm. empirical results support the view that firms operating with high munificent environments have less competitive pressures (adegbite et. al., 2018, p. 17). organizational environment is a major risk source for company. environmental features have significant implications for businesses in all these areas, including management, strategy, processes and outputs. therefore, the environmental context is an important determinant of the suitability of rational strategic decision-making processes (goll and rasheed, 1997, p. 583-584). change in the external environment has an impact on the innovativeness of organizations (antoncic and hisrich, 2001, p. 503). in fact, the firm's ability to innovate is considered as the most important factor for competitive advantage in highly dynamic market conditions (rajapathirana and hui, 2018, p. 44). chang and colleagues (2012) argue that, internal organization structures of organizations in an extremely dynamic environment reveal the usefulness of innovation. moreover, it has been found that innovation is the relationship between organizational and environmental forces and firm performance is mediated in part (chang et. al., 2012). 2.4. firm performance performance is expressed as the effort of employees in an organization when they are performing their duties. for this reason, firms' success is directly proportional to their employees' performance (yıldız et. al., 2014, p. 787). firm performance refers to the level of success that the organization achieves through its strategies, efforts or activities at the end of a particular period (porter, 1991). fuentes et al. (2004) indicate that organizational performance consists of three dimensions (financial, operational and employee performance). they considered that, organization’s environment such as dynamism, munificence, and complexity may have influence on its performance. also, venkatraman and ramanujam (1986) argued that, business performance is multiple hierarchical structures including operational performance (such as market share and quality) and financial performance. there are many studies in the literature that examine the relationship between innovation and firm performance. innovativeness has a direct impact on organizational performance (rajapathirana and hui, 2018, p. 46). yıldız and colleagues (2014) argued that, innovation has a positive influence on business performance. firm's innovation efforts, despite market dynamism, act as an important determinant of business performance. at the same time, the innovation process is seen as a driving force to increase the institution's innovativeness and performance. in the light of the literature, we argue that market dynamism increases the firm performance through the positive environment conditions and we propose the following hypothesis: h1: there is a positive relationship between each of the research variables and firm performance. h2: positive environmental conditions mediate the relationship between market dynamism and firm performance. h3: positive environmental conditions mediate the relationship between market dynamism and firm innovativeness. h4: firm innovativeness mediates the relationship among market dynamism, positive environmental conditions and firm performance. 3. research method 3.1. sample and data collection the study was conducted in turkey. the aim of the study was to investigate the effects of positive environment conditions and firm innovativeness on the relationship between market dynamism and firm performance. in this study, we gathered data from a sample of 327 people who work in regional, national, international and global companies, and data were gathered by meeting the people face-to-face or via email. the collected data were analysed by the spss statistical package program. factor analysis, correlation analysis, reliability tests, means of the variables and regression analysis were run to analyse the relationship among variables of the research model. the frequencies of demographic variables were analysed after that the average and standard deviations were calculated. the results were presented in tables. the constructs in our study were developed by using measurement scales, which were adopted from prior studies. all of them were measured by five-point likert scales ranging from (1) strongly agree to (5) strongly disagree. data were collected from the employees working in companies belonging to distinct sectors (manufacturing industry 79.8%; service industry 14.1% and information sector 6.1%). respondents’ age range mostly varied between 28-40 with 59.3%. the lowest rate for respondents’ age range belonged to individuals older than 41 with 12.7%. on the other hand, 36.8% of the participants were staff, while senior management had a rate of 8.3%. other respondents accounted for 54,9%. about three quarters of participants (78.4%) had at least an undergraduate degree. lastly, volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.152 | http://emaj.pitt.edu market dynamism and firm performance relation: the mediating effects of positive environment conditions and firm innovativeness page |48| emerging markets journal 30.9% of respondent were females, while 69.1% of respondent were males. 3.2. analyses to measure market dynamism, we used a 4 items scale developed by zahra and garvis (2000) as well as goll and rasheed (1997). to measure firm innovativeness, we used a 4 items scale developed by hult et al. (2004). we measured firm performance in two dimensions: market performance and operational performance. to measure firm performance, we used a 2 items market performance scale adapted from rahman and bullock (2005) and a 5 items operational performance scale adapted from fuentes et al. (2004). further, to measure positive environment conditions, we used a 3 items scale adapted from fuentes et al. (2004). table 1 illustrates the reliabilities, mean, standard deviations and correlations for the variables in the study. overall, 18 items using 5 likert-type scale are used to measure market dynamism, positive environment condition, firm innovativeness and firm performance. hence, as can be seen along the diagonal of the correlation matrix, each scale has a satisfactory reliability of cronbach’s alpha above 0,70. the correlation matrix of the variables shows that, all variables are significant and correlated among themselves. table 1: correlations means, standard deviations, reliabilities ** correlation is significant at the 0.01 level (2tailed). * correlation is significant at the 0.05 level (2-tailed). 4. findings in this study, regression analysis is also conducted to test the hypothesis and to define the direction of relations. when we examine table 2, it can be seen that, market dynamism and positive environment conditions have significant effects on firm performance and firm innovativeness. according to the table 2, there is a significant relationship between market dynamism and positive environmental conditions (β=,380; p=,000), operational performance (β=,138; p=,013) and market performance (β=,145; p=,009). also, there is a significant relationship between positive environmental conditions and operational performance (β=,250; p=,000), market performance (β=,243; p=,000) and firm innovativeness (β=,291; p=,000). furthermore, regression analysis results show that there is a significant relationship between firm innovativeness and market dynamism (β=,174 ; p=,002), operational performance (β=,465; p=,000) and market performance (β=,396 ; p=,000). according to the results of our study, there is a positive relationship between each of the research variables and firm performance. so, h1 is supported according to regression analyses. also, regression analyses 4, 7 and 10 show that, positive environment conditions have significant effects on firm performance and firm innovativeness. so, h2 is supported according to regression analyses. moreover, in the regression analyses, it is seen that positive environment conditions mediate the relationship between market dynamism and firm innovativeness, which means h3 is supported. as results of regression analyses 16 and 17 show, when the operational performance is included in the regression analyses, the significant effect of firm innovativeness on market performance can be observed. based on this issue, the results of the regression analysis in table 2 show that, firm innovativeness mediates the relationship among market dynamism, positive environment conditions and firm performance. so, h4 is a supported. but, positive environment conditions have a partial mediation effect on the relation among market dynamism, firm innovativeness and firm performance. lastly, table 2 shows that market dynamism, positive environment conditions and firm innovativeness have significant effects on firm performance (operational and market performance). table 2: regression analysis results significance: ***p<0.001 ** p<0.01 * p<0.05 volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.152 | http://emaj.pitt.edu cemal zehir, dilek balak emerging markets journal | p a g e |49 in accordance with the regression analysis results, our research model is presented in figure 1 below: figure 1. research model 5. conclusion and discussions this study highlighted the relationship among market dynamism, positive environment conditions, firm innovativeness and firm performance. the results to emerge from data is that, positive environment conditions and firm innovativeness mediate the effect of market dynamism on firm performance. so, h2 (positive environmental conditions mediate the relationship between market dynamism and firm performance), h3 (positive environmental conditions mediate the relationship between market dynamism and firm innovativeness) and h4 (firm innovativeness mediates the relationship among market dynamism, positive environmental conditions and firm performance) are supported. these results are consistent with the literature, which supports that market dynamismfirm performance relationship can be mediated by other variables which can be external. for example, environmental conditions affect a company's innovation strategy and performance. thus, the environment is a moderator of the innovation strategy firm performance link. for clercq et al., innovation has an important relationship with the financial performance of a firm. they also suggest that, innovation sources and different types are related to performance. according to oke et al., high research and development expenditures are associated with higher firm performance (ting, wang and wang, 2012, p. 518). environmental conditions have a dominant influence on the decision-making processes involved in choosing the right strategy, effort or activity (chang and hughes, 2012). on the other hand, in literature review, tanrıverdi and zehir's (2006) research results show that a strong and positive correlation among firm innovativeness, operational performance and market performance exist, while there is no significant correlation among any of these variables and market dynamism. also, empirical studies of organizational innovation show that, there is a positive relationship between innovativeness and firm performance (calantone et. al., 2002; damanpour, 1991; han et. al., 1998; matsuo, 2006). the reason behind the firm innovativeness-performance relationship is that, innovations function as a coping mechanism for environmental conditions (matsuo, 2006). for organizations, innovativeness is a means to cope with complexity of the external environment (han et. al., 1998, p. 35). in this context, it can be said that the level of market dynamism is a very critical factor in terms of firm performance (eren, 2012, s. 106). because, in a dynamic industry, change is inevitable. firms need to be innovative to protect their speed of change. thus, a path extending from dynamism to innovation, to performance from innovation can be conditioned by environmental conditions. environmental conditions that provide a favorable environment for innovative behavior can also affect the relationship between this behavior and firm performance (thornhill, 2006, p. 691). although there are so many studies examining the market dynamism-performance relation (goll and rasheed, 1997; li and simerly, 1998; cadogan et. al., 2009; ikhsan et. al., 2017) and innovativenessperformance relation (hult et. al., 2004; thornhill, 2006; gunday et. al., 2011; rubera and kirca, 2012; rajapathirana and hui, 2018) in literature; the mediator effects of positive environment conditions and firm innovativeness on the relationship between market dynamism and firm performance are examined and revealed for the first time through that survey, which differentiates this survey from others. this study contributes literature by showing the importance of positive environment conditions and firm innovativeness on the market dynamism – firm performance relation. with the effective innovativeness strategy, firms can improve capabilities and perform better than their rivals. according to the study of fuentes's (2004), dynamism and munificence directly influence customer focus, which points to customer satisfaction as the most important requirement for longterm organizational success. in this regard, higher degrees of consumer trends are associated with more frequent changes in environment, and the abundance of resources influences financial performance directly (fuentes et. al., 2004, p. 436-438). the dynamics of market conditions in determining the success of an organization play an important role, and firms should not ignore it. because, any changes in the environment will affect how companies will react to the environment. in other words, environmental conditions will have a contextual effect on the behavior of firm. at the same time, the market conditions can give firms new ideas and motivate them, so that they can respond to environmental changes (ikhsan et. al., 2017, p. 374). lastly, this study has some limitations. first of all, we conducted our survey on firms which operate in and around istanbul, turkey. further researcher can collect data from other countries for the generalizability of results. also, we used subjective performance measures depending on subjective perceptions of managers. further research can focus on objective performance measures which are more reliable and precise. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.152 | http://emaj.pitt.edu market dynamism and firm performance relation: the mediating effects of positive environment conditions and firm innovativeness page |50| emerging markets journal references adegbite, o. e. (2018). the organization business environment organizational adaptations, springer briefs in business, doi: 10.1007/978-3-319-635101_2 adler, p. s. and shenbar, a. (1990). adapting your technological base: the organizational challenge. sloan management review, 25, 25–37. antoncic, b and hisrich, r. d. (2001). intrapreneurship: construct refinement and cross-cultural validation. journal of business venturing, 16, 495– 527. auh, s. and menguc, b. (2005). top management team diversity and innovativeness: the moderating role of interfunctional coordination. industrial marketing management, 34 (3), 249‐261. cadogan, j. w., kuivalainen, o., sundqvist, s. and sunqvist, s. (2009). export market-oriented behaviour and export performance: quadratic and moderating effects under differing degrees of market dynamism and internationalization. journal of international marketing, vol: 17, no: 4, 71-89. calantone, r. j., cavusgil, s. t. and zhao, y. (2002). learning orientation, firm innovation capability, and firm performance. industrial marketing management, 31, 515‐ 524. chang, y. and hughes, m. (2012). drivers of innovation ambidexterity in small-to medium-sized firms. european management journal, 30, 1-17. chang, y.; hughes, m. and hotho, s. (2011). internal and external antecedents of smes’ innovation ambidexterity outcomes. management decision, vol: 49, no: 10, 1658-1676. damanpour f. (1991). organizational innovation: a meta‐analysis of effects of determinants and moderators. academy of management journal, 34 (3), 555‐ 590. dess g. g. and beard dw. (1984). dimensions of organizational task environments. administrative science quarterly. 1, 52–73. eren, s. s. (2012). stratejik esneklik ve pazar dinamizminin girişimsel pazarlama odaklılığa etkisi. journal of entrepreneurship and development, 7 (2), 101-112. fuentes-fuentes m. m, albacete-saez c. a., llorensmontes f. j. (2004). the impact of environmental characteristics on tqm principles and organizational performance. omega-international journal of management science, 32(6), 425-442. goll, i. and rasheed a. m .a. (1997). rational decision making and firm performance: the moderating role of environment. strategic management journal, 18 (7), 583‐ 591. gunday, g., ulusoy, g., kılıç, k. and alpkan, l. (2011). effects of innovation types on firm performance. int. j. production economics, 133, 662–676. han, j. k., kim, n. and srivastava, r. k. (1998). market orientation and organizational performance: is innovation the missing link? journal of marketing, 62(4), 30–45. homburg, c., krohmer, h. and workman, j. p. (1999). strategic consensus and performance: the role of strategy type and market-related dynamism. strategic management journal, vol: 20, no: 4, 339357. hult g., tomas m., hurley r. f. and knight g. a. (2004). innovativeness: its antecedents and impact on business performance. industrial marketing management, 33, 429-438. ikhsan, k.; almahendra, r. and budiarto, t. (2017). contextual ambidexterity in sme’s in indonesia: a study on how it mediates organizational culture and firm performance and how market dynamism influences its role on firm performance. international journal of business and society, vol: 18 no: 2, 369-390. laforet, s. (2011). a framework of organizational innovation and outcomes in smes. international journal of entrepreneurial behaviour & research, 17(4), 380–408. lawson, b. and samson, d. (2001). developing innovation capability in organisations: a dynamic capabilities approach. international journal of innovation management, 5(03), 377–400. li, m. and simerly, r. l. (1998). the moderating effect of environmental dynamism on the ownership and performance relationship. strategic management journal, vol. 19, 169–179. lumpkin, g. t. and dess, g. g. (2001). linking two dimensions of entrepreneurial orientation to firm performance: the moderating role of environment and industry life cycle. journal of business venturing 16, 429–451. matsuo, m. (2006). customer orientation, conflict, and innovativeness in japanese sales departments. journal of business research, 59, 242‐250. porter, m.e. (1991). towards a dynamic theory of strategy. strategic management journal, 12, 95117. rahman, s. and bullock, p. (2005). soft tqm, hard tqm and organisational performance relationships: an empirical investigation. omega, 33, 73 – 83. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.152 | http://emaj.pitt.edu cemal zehir, dilek balak emerging markets journal | p a g e |51 rajapathirana, r. p. j. and hui, y. (2018). relationship between innovation capability, innovation type, and firm performance. journal of innovation & knowledge, vol: 3, 44–55. rubera, g. and kirca, ahmet h. (2012). firm innovativeness and its performance outcomes: a meta-analytic review and theoretical integration. journal of marketing, vol. 76, no. 3, 130-147. sen, f. k. and egelhoff, w. g. (2000). innovative capabilities of a firm and the use of technical alliances. ieee transactions on engineering management, 47(2), 174–183. tanriverdi, h. and zehir, c. (2006). impact of learning organizations’ applications and market dynamism on organizations’ innovativeness and market performance. the business review, 6(2), 238-245. thornhill, s. (2006). knowledge, innovation and firm performance in highand low-technology regimes. journal of business venturing, 21, 687–703. ting, h. f., wang, h. b. and wang, d. s. (2012). the moderating role of environmental dynamism on the influence of innovation strategy and firm performance. international journal of innovation. management and technology, vol. 3, no. 5, 517520. tushman ml. and anderson p. (1986). technological discontinuities and organizational environments. administrative science quarterly, 31, 439–465. venkatraman, n. and v. ramanujam (1986). measurement of business performance in strategy research: a comparison of approaches'. academy of management review, vol: 11, 801-814. yıldız, s, baştürk, f. and taştan boz, i. (2014). the effect of leadership and innovativeness on business performance. procedia social and behavioral sciences, 150, 785–793. zahra, s. a. and garvis, d. m. (2000). international corporate entrepreneurship and firm performance: the moderating effect of international environmental hostility. journal of business venturing, 15, 469–492. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu dynamics of locus of control, financial knowledge, financial behaviour and financial position: an empirical study girish karunakaran nair al rayyan international university college with university of derby, qatar | e-mail: gknair75@gmail.com abstract qatar has witnessed significant economic growth since 2008 with gross domestic product (gdp) increasing by about 10 percent annually on an average, and it is consistently listed among the richest nations in the world since then. a study on the financial behaviour of the qatari nationals would reveal their role in this achievement. this research tests the hypothesis that the locus of control, income, financial knowledge, financial behaviour and financial position of the citizens are causally related. the research methodology is typical to the empirical studies using structural equation modelling (sem). the evidence collected from randomly chosen 204 respondents supported five out of seven hypotheses which indicated that internal locus of control, financial knowledge, financial behaviour and financial position were causally related. for policy implementation, it is imperative that household of a country should be educated in terms of financial knowledge to control the financial behaviour which affects the financial position. keywords: locus of control, income, financial knowledge, financial behaviour, financial position new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.245 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.245 | http://emaj.pitt.edu girish karunakaran nair emerging markets journal | p a g e |59 dynamics of locus of control, financial knowledge, financial behaviour and financial position: an empirical study girish karunakaran nair i. introduction long-term economic health of a country demands financially capable citizens (hobman, 2010). if the citizens of a country can keep track of their financial wealth, make ends meet, and plan, the economic growth of the country can be easier. consumers who are well informed and choose financial products judiciously can naturally encourage healthy financial services markets. on a personal level, the ability to manage financial affairs independently can increase the life choices and contribute to the psychological wellbeing of an individual. thus, the financial management at individual level can contribute to financial health of households, communities, society and by and large the whole country. this research is conducted in qatar which is consistently listed as one of the richest countries in the world. qatar has mainly depended on its gas exports, and the decoupling of gas and oil prices suggest that it is likely to be one of the best placed gcc nations to weather the current fall in oil prices (qatar economy watch, 2015). however, the supply from united states (us) and australia has been a major threat to qatar, and further, it is not immune to inflation. the consensus means for the real growth estimates for 2015-2017 lie in a narrow range between 5.9% and 6.1%, with the view being that growth will drift up in 2016 and 2017 (qatar economic outlook, 2015). qatar government has promoted trade and business in a large way post globalization to ensure a stable economic growth and it is evident through the improvement in the overall business environment score of 7.3 during the period of 2010-14 to 7.4 for the forecast period of 2015-19 (the economist, 2015). these improvements are driven by the development in infrastructure, increased availability of financing and strong policies on tax and trade. political stability and the continuity of domestic policies under his highness sheikh tamim continue to provide reassurance to local and foreign investors. but, unless these initiatives of the government are understood and supported at the household level, economic progress cannot be guaranteed. ii. literature review while the government is promoting trade on one side, there is a need for the local and foreign investors to accept the invitation and invest in business opportunities. the financial environment is becoming more challenging in the present time as there are ample avenues to spend but limited opportunities to enhance income due to the stiff competition in both skilled and semi-skilled manpower (zakaria et al., 2012). this has resulted in the phenomenon of overspending and over borrowing as friendly credit system has become a universal phenomenon. there is also an increasing need for the goods and services and the prices are constantly on the rise. the social media is playing a dominant role in influencing the behaviour of people particularly the younger generation and the products and services are being bought more as a want than a need to keep up with the societal standards. so, there is a whole lot of psychological influence on the buying behaviour of an individual. this is where the ‘financial behaviour’ of the local and foreign investors in qatar comes into picture in the buying and selling of goods and services. thus, the study on the role played by the financial behaviour can provide leads to the ‘financial position’ of the household. in extreme cases where wants to supersede the needs of the individual, even if the financial status does not permit, the buying behaviour of the individual may prompt to exploit the liberal credit systems and be exposed to the risk of financial mismanagement and finally end up in bankruptcy (zakaria et al., 2012). it is in this context the research has made an attempt to study the mediating role of financial behaviour of the households in qatar in determining the financial position of the citizens so that policy rationalization could be recommended for sustainable economic growth. the hypothesis development the model is built on the literature review and essentially tests the causation between the five research constructs: locus of control, income, financial behaviour, financial knowledge and financial position. the hypothetical model is provided in figure 1. figure 1. the hypothetical model source: authors’ own compilation following hypotheses have been postulated through the model (alternative hypothesis): h1: loc has a significant influence on fnb. h2: loc has a significant influence on fnk. h3: inc has a significant influence on fnb. legend: loc – locus of control inc – income fnb – financial behaviour fnk – financial knowledge fnp – financial performance h7 volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.245 | http://emaj.pitt.edu dynamics of locus of control, financial knowledge, financial behaviour and financial position: an empirical study page |60| emerging markets journal h4: inc has a significant influence on fnk. h5: fnk has a significant influence on fnb. h6: fnb has a significant influence on fnp. h7: fnk has a significant influence on fnp. linkage between financial behaviour and financial position financial behaviour could be studied both at micro and macro level. in this research the focus is at micro level i.e., at the household level as this study basically tests the behaviour of qatari citizens in terms of their financial behaviour. so, in the context of household’s financial behaviour refers to the response of the members of the house by virtue of which the household manages its financial resources through planning, budgeting and saving with a long-term financial plan (hobman, 2010). financial position refers to the ability of the members of the household to provide the needs of the household by meeting the financial obligations (hobman, 2010). researchers have focused their studies to test whether the responsible financial behaviour has contributed to a strong financial position (lea et al., 1995; joo and grable, 2004; dowling et al., 2009). common finding is that these two research constructs are positively correlated, but causation is not proved through the empirical evidence (parrotta, j.l. and johnson, 1998 and zakaria et al., 2012). but, there are studies which have found that responsible financial behaviour has resulted in lower financial difficulties (lea et al., 1995; joo and grable, 2004) and higher financial satisfaction (dowling et al., 2009). thus, it is very evident that financial behaviour plays a crucial role in achieving a commendable financial position for a household. having realized the importance of financial behaviour, a group of researchers have made attempts to find the determinants of this research construct. the fundamental question to be answered was, ‘what explains the responsible financial behaviour and financial position?’ researchers have come with a series of variables which would explain the financial behaviour among which the first and the foremost is the sound financial knowledge (hogarth, et al., 2002; hilgert et al., 2004; perry et al., 2005). linkage between financial knowledge and financial position having realized the importance of the construct financial knowledge, many researchers have found its attributes which includes a thorough knowledge about the interest rate, cost, prices, discount rate and the time horizons (zakaria et al., 2012). researchers have also found that in many cases the financial information is complex to the common household member and in many cases it is inaccessible. many a times people fall a prey to the dunning-kruger effect (zakaria et al., 2012) which means people who do not know the details admit their ignorance and fail to seek information. lusardi (2008) considers financial literacy to be an important determinant of financial behaviour. hayhoe et al., (2005) and xiao et al., (2006) have found that having financial knowledge reduces the risk of financial mismanagement leading to credit card non-payment, check bouncing, bankruptcy etc. one aspect which plays a vital role in the way people behave is the ‘self-belief’ which has been emphasized by many researchers, but unfortunately not many have investigated the importance of this construct in shaping the financial behaviour. linkage between income and financial position going further deeper into the causation it can be said that financial behaviour and financial knowledge act as a mediator between the locus of control and financial position as well as income group and the financial position. in these relationships, it is important to understand the difference between the income and the financial position. while income refers to the income group of the household which have influence on the financial behaviour and financial knowledge, financial position refers to the outcome that could be achieved through the income available in the household. it is imperative that it is possible to have a high-income group family leading towards an inferior financial position and a low-income family with the right kind of investments and fund management leading towards a better financial position. linkage between locus of control and financial position the term which encompasses the self-belief and moves beyond it to the determination of the outcome of their own action well in advance is ‘locus of control’ (zakaria et al., 2012). locus of control reflects upon the ability of the individual to be positive about the achievement of the intended outcome which is the financial position. so, it can be conceptualized that locus of control and income could be the exogenous variables which have influence on the financial behaviour and financial knowledge which in turn have influence on financial position which are all the endogenous variables. grable et al. (2009) have studied the two extremes of locus of control i.e., internal locus of control and external locus of control. the people with internal locus of control believe that it is their own financial behaviour that decides their financial position, while those with external locus of control attribute their financial position not purely to their financial behaviour but to chance, luck, fate, and all possible external factors. according to grable et al., (2009) it is the people with internal locus of control who demonstrate more responsible financial behaviour. in other words, people with external locus of control may not demonstrate responsible financial behaviour through proper planning, budgeting and financial planning. even though locus of control is an important determinant of financial behaviour, the research on locus of control is limited and even those studies which are available are mainly conducted in the context of west. further, the study results are mixed and while one group has found that those with external locus of control are more likely to have higher debt (lunt and livingstone, 1991 and cosma et al., 2010), another group of researchers (nyhus et al., 2001 and wang, 2011) have found that those with internal locus of control have more debt and it is justified that as they are more confident of managing their debts, they can incur more debt. it is interesting to note that a group of researchers have even proved that external locus of control is negatively related to both financial behaviour and volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.245 | http://emaj.pitt.edu girish karunakaran nair emerging markets journal | p a g e |61 financial position (perry et al., 2005). thus, it is evident that the research on the influence of locus of control on the financial behaviour and financial position needs further investigation to arrive at a meaningful conclusion (figure 2). figure 2. the conceptual model source: authors’ own compilation iii. research methodology research design the concept of meta-analysis was used to screen the dimensions of the study. the approach of this study was mainly quantitative and to some extent qualitative in nature and it was exploratory and ‘ex post facto’ kind of research (creswell, 2008), the concepts and models evolved as the research made progress both in terms of literature review and field work with the households in qatar. the secondary sources such as journals and conference proceedings were used to collect the qualitative data and questionnaire with 5-point likert scale was used for collecting the quantitative data. score of 5 indicated strong agreement and 1 indicated strong disagreement with the intermediate scores varying evenly in between these two extremes. structural equation modelling (sem) was used for confirmatory factor analysis, regression and hypothesis testing using path modelling approach. the quantitative analysis involved mainly statistical analysis, which had the distinct components of descriptive statistics and inferential statistics. descriptive statistics provided the general idea about the sample demographics, sample normality study using skewness and kurtosis measures and the overall perceptions. the inferential statistics was used for drawing the inferences of the study mainly with reference to hypothesis testing. questionnaire development the development of the metric in the form of a questionnaire entailed a four-stage approach including meta-analysis of literature, informal interviews with households in qatar, questionnaire development and pilot testing of the questionnaire. the households chosen were spread across qatar. the reason for this selection was to study the influences of external factors across the cross section of the society. data collection was through electronic means as well as personal distribution of the questionnaire. table 1 summarizes the research constructs, authors, description and sample items. table 1: research construct, author, meaning and the sample item in questionnaire research construct author meaning sample item locus of control gohari et al., (2014), cobbclark, (2015) it reflects upon the ability of the individual to be positive about the achievement of the intended outcome which is the financial position. when i make financial plans, i am sure i will make them work. income joo et al., (2004), perry et al. (2005), zakaria (2012). the position of the household in terms of earning potential in the society. my income per month is above 20,00030,000 qar financial knowledge avard et al., (2005), robb, and woodyard (2011), agarwalla et al., (2012), it is the ability to understand how money works, how to manage it to earn or make it, how to invest it and how t donates it to help others. it also refers to the knowledge about the interest rate, cost, prices, discount rate, and the time horizons i do not believe in holding 3 to 4 credit cards which my financial position does not support. financial behaviour joo et al., (2004), hobman et al., (2010), zakaria (2012), it is the behaviour which prompts an individual to take a stand regarding the investment or spending of money. i have plans to set money for retirement. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.245 | http://emaj.pitt.edu dynamics of locus of control, financial knowledge, financial behaviour and financial position: an empirical study page |62| emerging markets journal financial position parrotta et al., (1998), hilgert et al., (2003), dowling et al., (2009). the state of finance in the household to meet the day-to-day requirements and be comfortable for handling financial demands. i had no financial troubles because i had enough money. source: authors’ own compilation sample design this research has been carried out based on simple random sampling which is a probability-based sampling as the total number of households in qatar was a finite sample. sampling unit was an individual in the household the sampling frame being the households in qatar. stratification was not necessary as there was no need for inter-strata comparison in this research. the standard formula for sample size calculation has been adopted which yielded a sample size of 187 and to have a cross section of the sample and meet the minimum requirement of structural equation modelling (sem) a sample size of 204 has been adopted in this research. adequate care has been taken to ensure that the sample is free from bias and distributed uniformly across the cross section of the society. iv. results and discussion demographics demographic distribution gives the general idea about the respondents who have participated in this research. this becomes important as an idea about the participants gives the strength to the inferences which are drawn through the data. it can be observed that majority of the respondents are males in this research (70.1%) and in the age group of 25-35 years (36.3%) followed by the age group of 35-45 years (30.9%) (table 2). it can be observed that majority of the respondents were bachelor’s degree holders (47.1%) followed by certificate holders (20.6%). it can be observed that the majority respondents’ income per month come under the range of 30,000-40,000 qar (41.21%), followed by 20,00030,000 qar (25.5%). majority of the respondents are having five to ten years (46.1%) experience in financial management followed by more than 10 years (32.4%). so by and large, it is evident that the respondents are very well versed with the financial management of the household and have the required experience in the organization to express their views on the topic of interest. table 2: demographic distribution of the respondents (n = 204) attributes frequency percentage gender male 143 70.1 female 61 29.9 age less than 25 years 26 12.7 25 – 35 years 74 36.3 35 – 45 years 63 30.9 45 – 55 years 26 12.7 55 years and above 15 7.4 educational qualification certificate 42 20.6 diploma 32 15.7 bachelors 96 47.1 masters 16 7.8 others 18 8.8 income per month (qar) less than 10,000 16 7.8 10,000 to 20,000 18 8.8 20,000 to 30,000 52 25.5 30,000 to 40,000 84 41.2 40,000 and above 34 16.7 experience in finance management less than two years 12 5.9 2 – 5 years 32 15.7 5 – 10 years 94 46.1 more than 10 years 66 32.4 source: authors’ own compilation normality of data normality assumption was not violated with an acceptable range of skewness and kurtosis statistics (threshold values -1.00 to +1 and -3 to +3 respectively) (table 3). therefore, the data could be subjected to further level of statistical analysis. the negative skewness shows that the response is towards the higher side of agreement in the likert scale (mean = 3.0). volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.245 | http://emaj.pitt.edu girish karunakaran nair emerging markets journal | p a g e |63 table 3: skewness and kurtosis source: spss software output measurement model a pilot study was undertaken to validate and test the reliability of the questionnaire with a sample size of 35. the questionnaire with a total 25 indicators of the latent variables was reduced to a total of 15 items through factor analysis, which were subsequently used for collecting data through a total sample size of 204. to verify the reliability of the latent variables in the model, internal consistency reliability measure, item reliability measure, and composite reliability measures were calculated. table 4 shows the cronbach’s alpha coefficient and the composite reliability result for the model. the alpha coefficient has the acceptable value ranging from (0.7 to 0.9), indicating a moderately high level of internal consistency. the result of item reliability (ir) measured as standardized confirmatory factor loading (fl) ranged from 0.8 to 0.9 (table 5). the composite reliability is in the range of 0.7 to 0.9 indicating moderate to high reliability score. the convergent validity assessment based on factor loading and composite reliability indicate moderate to high acceptable range of factor loading for all items and good composite reliabilities in general. to test for discriminant validity, the square root of average variance extracted (ave) for each construct was compared with the correlation between the construct and the other constructs (table 6) and was found to be higher, and hence, the discriminant validity is proved. the data could be subjected to the further analysis as very high measures were indicated in all the methods of reliability and validity. table 4: the reliability measures source: spss software output table 5: factor loadings (after reduction) fnb fnk fnp inc loc fnb1 0.9076 0 0 0 0 fnb2 0.9019 0 0 0 0 fnb3 0.9079 0 0 0 0 fnk2 0 0.8861 0 0 0 fnk3 0 0.8777 0 0 0 fnk4 0 0.8768 0 0 0 fnp1 0 0 0.8518 0 0 fnp2 0 0 0.8213 0 0 fnp3 0 0 0.7818 0 0 inc1 0 0 0 0.9986 0 inc2 0 0 0 0.9047 0 inc4 0 0 0 0.922 0 loc4 0 0 0 0 0.9152 loc1 0 0 0 0 0.9132 loc2 0 0 0 0 0.908 source: spss software output table 6: the correlation matrix fnb fnk fnp inc loc fnb 0.7238 0 0 0 0 fnk 0.6846 0.8631 0 0 0 fnp 0.1182 0.3402 0.8051 0 0 inc 0.1798 0.2047 0.1931 0.8349 0 loc 0.5811 0.5242 0.0388 0.3751 0.8836 source: spss software output volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.245 | http://emaj.pitt.edu dynamics of locus of control, financial knowledge, financial behaviour and financial position: an empirical study page |64| emerging markets journal structural model the hypothesized model was designed to test seven hypotheses built based on the research literature to study the dynamics of loc, inc, fnb, fnk and fnp. the model with path coefficients and the explanatory power (r2) for each dependent construct is displayed in figure 3. while path coefficients show the strength of relationship between the two latent variables, the t-values (figure 4 and table 7) are indicative of the significance of relationships which enable hypotheses testing. the r2 values range from 0.1 to 0.5 (cut-off 0.1) which indicates moderate explanatory power of the model, in other words, the exogenous variables influence up to 50% on the endogenous variables of the study. the path coefficients are up to a value of 0.5 for the variables associated through hypotheses testing and indicate a moderate influence of exogenous variables on the endogenous variables. table 7: the t-values of the hypothetical model source: spss software output following hypotheses stand supported: h1: loc has a significant influence on fnb. h2: loc has a significant influence on fnk. h5: fnk has a significant influence on fnb. h6: fnb has a significant influence on fnp. h7: fnk has a significant influence on fnp. following hypotheses are not supported: h3: inc has a significant influence on fnb. h4: inc has a significant influence on fnk. figure 3. path coefficients and factor loading source: authors’ own compilation figure 4. t-values of the hypothetical model source: authors’ own compilation v. findings and discussion the financial behaviour of citizens of qatar justifies the position of the country among the richest economies of the world. following discussion emerging through the findings of the study provides adequate evidence to this point. 1. first, the demographics of the sample chosen indicates that majority of the respondents are above the income level of 30,000-40,000 qar per month which is indicative that the household in qatar enjoys the luxury of being among the richer class. 2. hypothesis testing has revealed that the locus of control has a significant influence on the financial knowledge of the respondents. earlier studies have proved that people with external locus of control believe in chance, luck, and similar factors for financial success, but those with internal locus of control believe in their own decisions to be contributing to the financial success (e.g., zakaria et al., 2012) and financial knowledge is quintessential for making sound financial decisions. thus, the respondents have an internal locus of control which facilitates them in gaining the financial knowledge. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.245 | http://emaj.pitt.edu girish karunakaran nair emerging markets journal | p a g e |65 3. the research has provided evidence that locus of control also influences the financial behaviour of the people significantly. again, the earlier research has proved that individuals with internal locus of control believe that it is their own financial practices which lead to the financial position, and hence they exhibit more responsible financial behaviour (perry et al., 2005; grable et al., 2009). it must be noted that this finding of this research is in direct contrast to the finding which indicates that higher locus of control i.e., internal locus of control has higher debt due to a negative financial behaviour (lunt and livingstone, 1991 and cosma & pattarin, 2010). 4. it has been found that financial knowledge has a significant influence on financial behaviour. several researchers have emphasized the importance of financial knowledge in shaping the financial behaviour (hogarth, et al., 2002; hilgert et al., 2004; perry et al., 2005). thus, the research finding is consistent with the earlier studies and it also indicates that the financial behaviour of citizens of qatar is governed by the financial knowledge they acquire through various means. to that extent the government has been successful in educating the citizens of the country. 5. it has been revealed in this study that financial knowledge has a significant influence on the financial position of the household. this finding is consistent with the earlier research (e.g., hogarth, et al., 2002; hilgert et al., 2003 and grable et al., 2009). the finding indicates that if the society has an exposure to the financial knowledge it would plan accordingly and lead to better financial position. 6. the study has revealed that financial behaviour has a significant influence on financial position. earlier studies have proved that those who adhere to responsible financial behaviour report lower financial difficulties (lea et al., 1995; joo et al., 2004 and dowling et al., 2009) and higher financial satisfaction (parrotta et al., 1998 and joo et al., 2004). thus, it is evident that the qatari citizens have a positive financial behaviour which leads to their financial position. 7. finally, it was interesting to note that the income of the household had neither any significant influence on the financial knowledge or financial behaviour. this is a clear indication that the citizens of qatar have a clear idea about the financial behaviour and financial knowledge which is independent of their economic background. whether the citizen belongs to an affluent class or not the financial knowledge and the financial behaviour gets formed through observation and the practical situations. there is no rule that those with high income group should exhibit a positive financial behaviour leading to a financial position and vice versa. this is quite positive about a community and probably the main reason why the country is one of the richest counties in the world since the past several years. vi. conclusion and recommendations this research has investigated the mediating effect of financial knowledge and financial behaviour of the citizens of qatar between the locus of control and financial position and the income group and financial position. the results of hypotheses testing have revealed that income group had absolutely no role to play in the financial knowledge or financial behaviour of the households. but at the same time the financial knowledge and financial behaviour has very successfully mediated between the locus of control and the financial position. thus it can be concluded that the citizens of qatar have a sound financial knowledge, irrespective of the income group, through which they influence the financial behaviour to lead towards a better financial position. while this research has supported many of the earlier studies, it has also contradicted some of the studies as listed in the discussions. qatar is basically a progressive country in terms of the economy and consistently listed among the richest in the world and the leading economy and this research has proved that the citizens of the country have played a major role in achieving this status through their financial knowledge irrespective of the income group to which they belong to. this research is the outcome of systematic implementation of the research methodology as governed by the principles of structural equation modelling. the major limitation of the study is that it is mainly dependent in the quantitative analysis. the study would have been more meaningful if coupled with interviews with some of the most successful households. sample size of the study is also another limitation. however, through the fundamental principles of sem the results can be generalized to a great extent as the sample size meets the requirement of sem and it has been spread across the cross section of the country. this study can be treated as the benchmark for the developing economies as it provides meaningful insights on how the citizens of a leading economy respond to the financial position. references agarwalla, s.k., baarua, s.k., jacob, j., varma, j., (2012). financial literacy among working young in urban india. working paper iim, ahmadabad, india. avard, s., manton, e., english, d., walker, j. (2005). the financial knowledge of college freshmen. college student journal, 39(2), 321-338. cobb-clark, d.a. (2015). locus of control and the labor market. journal of labor economics. 4(3), 119. cosma, s., pattarin, f. (2010). attitudes, personality factors and household debt decisions: a study of consumer credit. retrieved on 12th november, 2015 from: http://ssrn.com/abstract=1685765 creswell, j. w. (2008). research design: qualitative, quantitative, and mixed methods approaches. ny: sage publishers. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.245 | http://emaj.pitt.edu dynamics of locus of control, financial knowledge, financial behaviour and financial position: an empirical study page |66| emerging markets journal dowling, n.a., corney, t., hoiles, l. (2009). financial management practices and money, attitudes as determinants of financial problems and dissatisfaction in young male australian workers. journal of financial counselling and planning. vol. 20, 5-13. gohari, m.e., bagheri, f., kiyamanesh, a.. (2014). the relationship of locus of control with life satisfaction of five district of tehran’s girl high school students, bulletin of environment, pharmacology and life sciences bull. env. pharmacol. life sci., vol. 3 (spl issue ii), 216220. grable, j.e., park, j.y., joo, s.h. 2009, explaining financial management behaviour for koreans living in the united states. the journal consumer affairs, vol. 43, 80-107. hayhoe, c.r.., leach, l., allen, m.w., edwards, r. (2005). credit cards held by college students. financial counseling and planning. 16(1), 110. hilgert, m.a., hogarth, j.m., beverly, s.g. (2003). household financial management: the connection between knowledge and behaviour, federal reserve bulletin, vol. 89, 309-322. hobman, t. (2010). transforming financial behaviour: a summary, consumer financial education body, consumer financial education body report. hogarth, j.m., hilgert, m.a., schuchardt, j. (2002). money managers: the good, the bad and the lost, proceedings of the association of financial counselling and planning education, 12-23. joo, s., grable, j.e. (2004). an exploratory framework of the determinants of financial satisfaction, journal of family and economics, vol. 25, 2550. lea, s.e.g., webley, p., walker, c.m. (1995). psychological factors in consumer debt: money management, economic socialization and credit use, journal of economic psychology, vol.16, 681-701. lunt, p.k., livingstone, s.m. (1991). psychological, social and economic determinants of savings: comparing recurrent and total savings, journal of economic psychology., vol. 12, 621-641. lusardi, a. (2008). household saving behaviour: the role of financial literacy, information and financial education programs. nber working paper, 13824. nyhus, e.k., webley, p. (2001). the role of personality in household saving and borrowing behaviour. european journal of personality, special issue: personality and economic behaviour, vol. 15, 85-103. parrotta, j.l., johnson, p.j. (1998). the impact of financial attitudes and knowledge on financial management and satisfaction of recently married individuals, financial counselling and planning, vol. 9, 59-75. perry, v.g., morris, m.d. (2005). who is in control? the role of self-perception, knowledge and income in explaining consumer financial behaviour. journal of consumer affairs, 39(2), 299-313. qatar economic outlook. (2015). qatar outlook at a glance, retrieved on 22nd october, 2015 from: http://www.gsdp.gov.qa/portal/page/portal/gsd p_en/knowledge_center/tab2/qeo2015_17.pd f. qatar economy watch. (2015). economics and policy, retrieved on 1st december, 2015 from: http://www.pwc.co.uk/services/economicspolicy/insights/qatar-economy-watchjanuary2015.html. robb, c.a., woodyard, a.s. (2011). financial knowledge and best practice behaviour, proceedings of association for financial counselling and planning education. the economist. (2015). business environment in qatar, retrieved on 5th october, 2015 from: http://country.eiu.com/article.aspx. wang, l., w. lu, malhotra, n.k. (2011). demographics, attitude, personality and credit card features correlate with credit card debt: a view from china. journal of economic psychology, 32(1), 179-193. xiao, j.j., sorhaindo, b., garman, e.t. (2006). financial behaviours of consumers in credit counseling. international j. consumer studies. 30(2), 108121. zakaria, r.h., jaafar, n.i.m., matican, s. (2012). financial behaviour and financial position: a structural equation modelling approach, middle-east journal of scientific research, 12(10), 1396-1402. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu measuring intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank) with the market value / book value method and value added intellectual coefficient (vaic) model mehmet lütfi arslan istanbul medeniyet university, turkey | lutfi.arslan@medeniyet.edu.tr cevdet kızıl istanbul medeniyet university, turkey | cevdet.kizil@medeniyet.edu.tr abstract intellectual capital is a critical concept to realize and reflect the real value of organizations. this study took advantage of market value (mv) / book value (bv) method and value added intellectual coefficient (vaic) model to measure and compare intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank). also, financial indicators such as return on assets (roa), return on equity (roe), leverage, (lev), capital adequacy ratio (car) and intellectual capital performance indicators such as mv/bv ratio, human capital efficiency (hce), structural capital efficiency (sce), capital employed efficiency (cee) and vaic of banks were compared. research also ran a pearson correlations test to investigate the relationship between these indicators and to test the hypothesis. data were gathered from istanbul stock exchange ise (borsa istanbul), public disclosure platform (kap), banks association of turkey – tbb (türkiye bankalar birliği), banking regulation and supervision agency (brsa), fortune turkey, anadolu agency and hurriyet. keywords: banking, bist, intellectual capital, measurement, vaic, xbank new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:lutfi.arslan@medeniyet.edu.tr mailto:cevdet.kizil@medeniyet.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu mehmet lütfi arslan, cevdet kızıl emerging markets journal | p a g e |101 measuring intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank) with the market value / book value method and value added intellectual coefficient (vaic) model mehmet lütfi arslan cevdet kızıl i. introduction studies and research on intellectual capital date back to early 1990s (marr and chatzkel, 2004). thomas stewart, who popularized the concept, defined intellectual capital as “the talents and skills of individuals and groups; technological and social networks and the software and culture that connect them; and intellectual property such as patents, copyrights, methods, procedures, archives, etc” (1997). however, defnitions and terminology on intellectual capital are still widely discussed (choong, 2008). a great deal of publications concentrates on theories in a broad level, which are not linked to practice and implementation as well (johansson et al., 2001; mouritsen et al., 2002; wood, 2003; dumay, 2013). serious systematic approach is not developed to indentify intangible assets (ia) and intellectual capital (ic) too (diefenbach, 2006). also, most organizations still seem to be unclear and unsure about the exact contents of intellectual capital (andreou et al., 2007). intellectual capital is defined separately by different researchers. according to one of the leading definitions, intellectual capital is the difference between a firm‟s market value and book value (edvinsson and malone, 1997; stewart, 1997; sveiby, 1997; mouritsen et al., 2001). actually, the difference between market value and book value is also known as the goodwill considering acconting science (ohlson, 1995; feltham and ohlson, 1996; beaver, 1998; holthausen and watts, 2001). however, market value book value and market value / book value formulas are still used to measure and define intellectual capital. the term intellectual capital is also linked to the term intangible assets (ias). one of the definitions relating intellectual capital to intangible assets (ias) indicates that, intangible assets are invisible assets which include a wide range of activities like technology, consumer trust, brand image, corporate culture and management skills (itami, 1991). based on a similar definiton, intangible assets are value drivers which transform productive resources into value added assets. concerning this definition, intangible assets (ia) are analyzed under two sub-categories that are intellectual property (ip) and knowledge assets (hall, 1992). in another definiton, intangible assets are defined as all the elements of a firm which exist in addition to working capital and tangible assets. they are the elements, after working capital and tangible assets, which make the organization work and are usually the main contributors to the earning power of the firm. their existence is dependent on the presence, or expectation, of earnings (smith, 1994). today, the percentage of intangibles such as intellectual capital has an increasing and more significant role in total market capitalization of firms. in other words, economic value is increasingly intangible. intellectual capital is boosting the market value of organizations and helping them to gain continuous competitive advantage. the figure below shows the increasing contribution of intangibles to s&p 500 market capitalization (market value) between 1975-2015: figure 1. contribution of intangibles to s&p 500 market capitalization (market value) between 19752015 resource: ocean tomo (2017), “intangible asset market value study”, ocean tomo official website http://www.oceantomo.com/intangible-asset-marketvalue-study/ intellectual capital is also described as market assets, human-centered assets, intellectual property assets and infrastructure assets, which result in a value creation for firm in case they are integrated (brooking, 1997). according to bontis, intellectual capital (ic) includes and reflects intellectual attributes which can contribute value of an organization (1998). intellectual capital is linked to technology, technological changes, and issues related to the management of information technology (it), as well (davenport and prusak, 1997). intellectual assets (ias) are described as knowledge and learning capability of a social organism like an organization, intellectual community or professional practice (nahapiet and ghoshal, 1998). according to sullivan, intellectual capital and intangibles are the knowledge which can be turned to profits (2000). moreover, intangible assets are indicated as a claim to future benefits which do not have a physical substance. this definition underlines the fact that intellectual assets (ias) and intellectual capital (ia) cover innovation, human capital, organizational capital, and knowledge (lev, 2001). it is also stated that, intangibles can de characterized by a group of particular attributes, and they volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu measuring intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank) with the market value / book value method and value added intellectual coefficient (vaic) model page |102| emerging markets journal have the performance of creating economic benefits rapidly, in addition to displaying network effects (daum, 2002). most studies show that, intellectual capital (ic) and intangible assets (ia) performance increase the overall performance of enterprise (guthrie et al., 2012). this has led organizations to invest in intangibles such as the intellectual capital at accelerating rates. figure below shows the intangible and tangible assets investment rates as a percentage of private sector gross domestic product (gdp) between 1977-2014: figure 2. intangible and tangible assets investment rates as a percentage of private sector gross domestic product (gdp) between 1977-2014 resource: vipal monga (2016), “accounting‟s 21st century challenge: how to value intangible assets”, wall street journal (wsj), march 21, 2016. what are the elements of intellectual capital? rastogi puts forward that intellectal capital (ic) is the result of collaborative effort among the organization‟s human capital, social capital, and knowledge management (2003). yet, the most common approach is to analyze and categorize intellectual capital under three main elements, which are human capital, structural capital and customer capital (stewart, 1998; bontis, 1998). some scholars also term and name customer capital as the relational capital, but (the conceptualization above as of three components) is still valid (sveiby, 1997; bontis, 2002; meritum, 2002; pablos, 2003; marr and adams, 2004). figure 3. three category classification (conceptualization) of intellectual capital resource: bontis, n. (1998), “intellectual capital: an exploratory study that develops measures and models”, management decision, vol. 36 no. 2, pp. 63-76. human capital refers to skill-sets, education, knowledge, abilities, aptitudes and attitudes of human resources (garcia-meca, 2006; kızıl, 2009). human capital is accepted as a main component (element) of intellectual capital (ic) by several scholars. one of the main distinctions of human capital is that, it can not be owned by organizations. when an employee leaves a particular business, human capital related to him leaves the business with him. on the other hand, the same can not be said for structural capital as an example (edvinsson and malone, 1997; stewart, 1998). structural capital includes culture, innovation and, process, where relational capital covers the organizational relationships and cooperations with stakeholders (marr et al., 2003). for instance, number of clients, stakeholders network, social responsibility projects and sponsorships can be analyzed in the context of relational capital (kızıl, 2010). there is a debate on intellectual capital measurement as well since the models utilized vary. in other words, a mutual agreement on intellectual capital measurement models does not exist. this is because particular intellectual capital models are not quantitative, but qualitative. some models are also general and broad (kaufmann and schneider, 2004). on the opposite side, intellectual capital measurement is a very critical concept since intellectual capital management becomes impossible without intellectual capital measurement. the well known sentence of “if you can‟t measure it, you can‟t manage it” can be shown as a strong proof and indicator at this point (kaplan and norton, 1992). as there is no common definition or description of intellectual capital, intellectual capital measurement, accounting and reporting techniques also vary. some of the well known intellectual capital measurement methods are market value (mv) / book value (bv), market value (mv) book value (bv), skandia (edvinsson) router pattern, roos&roos categorization, value added intellectual coefficient (vaic) model, brooking‟s technology, monitoring pattern of intangible assets, economic value added pattern (eva), sveiby‟s model, balanced scorecard pattern, tobin‟s q pattern, sullivan‟s pattern, human resources accounting, the invisible balance sheet, and human resources accounting and costing. all these techniques, creating and using knowledge, are constructed to measure non-financial and qualitative items of intellectual capital (petty and guthrie, 2000). the remainder of this paper is organized as follows: section ii reviews the literature. data and methodology follows in section iii. finally, section iv includes the conclusion of research. ii. literature review cabrita, ribeiro da silva, rodrigues and munoz duenas investigated the level of intellectual capital (ic) awareness among portuguese bank managers in 2017 and tried to find which disclosure techniques were most common. the main aims of this reseach were to investigate how portuguese bank managers perceived the effect of intellectual capital (ic) disclosure on the bank‟s competitiveness; and to assess the degree to which portuguese banks voluntarily reported their intelelectual capital (ic) in annual reports vs webpages. their method included the collection of secondary data – annual reports and websites from the 28 banks operating in portugal, and semi-structured interviews with 25 banking managers. content analysis was implemented using a constructed index based on two european frameworks. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu mehmet lütfi arslan, cevdet kızıl emerging markets journal | p a g e |103 according to the results of this research, higher level of intellectual capital (ic) disclosure in annual reports were observed more than that observed in websites. human capital and structural capital were the most reported components in annual reports and, conversely, the disclosure of relational capital was higher in the webpages. findings were parallel to former literature, which indicated a very low level of intellectual capital (ic) disclosure. also, interviews showed that not many managers still were able to recognize the need and significance of measuring and reporting intellectual capital (ic). finally, it was determined that banks were not willing to report information of sensitive nature because of confidentiality issues (cabrita, ribeiro da silva, rodrigues and munoz duenas, 2017). nawaz and haniffa empirically examined the impact of intangible resources (intellectual capital ic) on financial performance of 64 islamic financial institutions operating in 18 different countries for the period 2007-2011, while controlling for firm-specific variables, such as, bank size, level of risk, listing status, and firm complexity. conducted in 2017, the necessary data of this study to compute different constituents of intellectual capital were derived from bankscope database. value added intellectual coefficient (vaic) methodology devised by pulic was used to detect the effect of intellectual on financial performance of ifis. results showed a significant positive relationship between vaic and accounting performance based on return on assets (roa). the results also reflected a significant positive relationship between accounting performance and capital employed efficiency (cee) and human capital efficiency (hce). however, no significant relationship with regards to structural capital efficiency was determined. the results implied that value creation capability of ifis was highly affected by hce and cee (nawaz and haniffa, 2017). nawaz did run another research on intellectual capital in 2017. the aim was to provide an insight into the role of knowledge-resources, especially human capital, in times of socio-economic distress using a qualitative research approach. the study showed that this is necessary because the social and economic environment has been transformed seriously in specific regions like europe since the global financial crisis observed in the fall of 2008. the research reflected how knowledge resources interacted in building knowledgeeco society, how human intellectual capital comes to the scene under hard economic conditions, and how human capital can assist an economy to continue its fiscal position (nawaz, 2017). ikenna and ursula conducted a research in 2017 about the interaction between corporate performance variables and intellectual capital effectiveness of selected banks in nigeria. the research implemented ex-postfacto research design on a time series data covering 10 years (2006-2015). the sampling technique was purposive sampling and data were retrieved from the financial statements of the selected banks. ordinary least square regression analysis was employed to test each of the three (3) hypotheses, at 5% level of significance. the results underlined the fact that; intellectual capital contributed positively to asset quality of banks; there was no significant positive impact of intellectual capital on loan quality; there was a significant positive impact of intellectual capital on net income of the banks (ikenna and ursula, 2017). akgün and şamiloğlu‟s research in 2017 tested the financial performance acting as a sample of bist 100 listed firms, over pre and post crisis reference periods around the current financial crisis. moreover, this research investigated the effect of cash ratio, liqudity ratio and cash conversion cycle of the recent 2008 global financial crisis on the relation between a firm‟s performance and economic value-added (eva) using a sample of bist 100 companies covering the period from 2003 to 2012. based on research findings, explanatory power of independent variables to explain dependent variables was bigger in the post-financial crisis period. also, eva, which is labeled as a measure of modern performance in the post-crisis period, had bigger explanatory power for these variables (akgün and şamiloğlu, 2017). yükser‟s research dated 2017 revealed a work of the analysis of the relation of the transformative leadership model, which can higher the profitability, activity and sustainability of the banking sector, with the competition superiority and the intellectual property performance. transformative leadership model perception, firm performance and intellectual capital performances of 134 white collar workers operating in 11 banks in aydın city center (turkey) had been measured with surveys and the gathered findings had been evaluated with spss 2.1 statistics program. as a result of the evaluations, it was stressed that the competition power based only on the transformative leadership was not permanent in the face of rising globalization trend and ever-increasing competitive behaviors, the banks had to provide intellectual capital factors and improve their performances in addition to increasing their competitive power (yükser, 2017). sarıay and özulucan applied a comparative application in 2017 by means of techniques market value book value, tobin‟s q value of calculated intangible value and economic value added for measuring intellectual capital financially at firm level. in this context, intellectual capital values of the vakıf investment partnership that has been discussed in the study and operating in istanbul stock exchange ise (borsa istanbul) gauged based on four methods measuring at company level intellectual capital for the years 2010, 2011, 2012, 2013 and 2014. as a result, the intellectual capital values measured by four different techniques for five years of the firm were investigated by comparing based on the methods discussed in the study (sarıay and özulucan, 2017). thakur did conduct a research in 2017, which attempted to find out the intellectual capital performance of listed public and private banks in india using the value added intellectual coefficient (vaic) method. study covered the period of 2013-2015 and investigated the impact of intellectual capital on banks‟ financial indicators. the mentioned financial indicators included to the research were return on assets (roa) and return on equity (roe). the study benefited from annual reports of banks and panel regression method. based on research findings, relationships were determined between vaic and financial performance of the banks to varying degrees (thakur, 2017). volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu measuring intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank) with the market value / book value method and value added intellectual coefficient (vaic) model page |104| emerging markets journal dönmez and erol‟s research in 2016 aimed to measure and report intellectual capital. in this context, the relationship between financial indicators and intellectual capital of bist sustainability index companies was investigated using the value added intellectual coefficient (vaic) method. the study also took advantage of regression analysis and correlation analysis. according to the findings of study, vaic explained the return on assets (roa) by 93% (dönmez and erol, 2016). kızıl, arslan and şeker investigated the relationship between intellectual capital and web trends of the index bist-30 from an accounting viewpoint in 2014. the trends of web pages and firms were analyzed using specific web means such as the google trends. in addition, market value / book value and value added intellectual coefficient (vaic) methods were utilized to measure intellectual capital. also, enterprise web sites, firm annual reports, company financial statements and public disclosure platform (kap) were taken advantage for accounting and measurement of intellectual capital (kızıl, arslan and şeker, 2014). curado, guedes and bontis‟s paper in 2014 tried to evaluate the connection between intellectual capital elements and financial performance across three temporal terms on either side of a financial crisis. the research integrated two data collecting methods. a survey on intellectual capital components was administered during the initial period followed by objective performance ratios in subsequent time terms. concerning the three terms in the research, evidence proved that intellectual capital scores and points were good predictors of future banking performance. the study was limited to portuguese banking sector (curado, guedes and bontis, 2014). kızıl, arslan and şeker‟s research in 2013 focused on the correlation between intellectual capital and web trends of the index bist-30, which held the top 30 companies in istanbul stock exchange ise (borsa istanbul). the trends of web sites and companies were collected separately via web tools. also, intellectual capital was studied and measured based on two methods, which were market value / book value and value added intellectual coefficient (vaic) techniques. data required for studying, measuring and accounting intellectual capital were gathered from web sites, firm annual reports, company financial statements and public disclosure platform (kap) published by the borsa istanbul (bist) administration (kızıl, arslan and şeker, 2013). yalaman‟s study dated 2013 had the aim to analyze empirically the relationship between investment in intellectual capital and the performance of turkish banking sector both in short and long period between 1995-2006. the intellectual capital performance of quoted banks in istanbul stock exchange (ise) – borsa istanbul market was measured taking advantage of value added intellectual coefficient (vaic), and the impact of mentioned intellectual capital components on banking performance was tested utilizing panel data regression analysis. the findings showed that intellectual capital was increasing banks‟ profitability, market value and productivity, especially in the long run (yalaman, 2013). kızıl, erzin and kara‟s study in 2013 aimed to analyze intellectual capital measurement, intellectual capital accounting and intellectual capital reporting in the e-commerce industry by researching on amazon.com. the first section (introduction section) of the study provided general information about the development of intellectual capital concept. the second section included the literature review. the third section mentioned data set and methodology. in the fourth section, the study consisted of intellectual capital measurement, reporting and accounting in the e-commerce industry by running a research on amazon.com. the fifth section of the study discussed conclusion and recommendations (kızıl, erzin and kara, 2013). yıldız‟s research in 2011 had the goal of finding out whether intellectual capital affects banks performance with perception of managers. the research took advantage of the questionnaire method. surveys were sent to 421 managers of 8 private capital deposit banks in turkish banking sector which were quoted in istanbul stock exchange (ise) – borsa istanul, formerly named imkb. the result of this study indicated that, intellectual capital including human, organizational and customer capital had an impact on both subjective and objective performance in a positive way. elements of intellectual capital affected subjective performance more than objective performance. while the customer and organizational capital particularly affected subjective performance more positively, organizational capital affeced first objective performance. moreover, based on age, experience, length of employment and position of manager, intellectual capital elements reflected significant differences (yıldız, 2011). murthy and mouritsen aimed to analyze the link between intellectual capital and financial capital utilizing case study method. this technique helped to discuss how intellectual capital was related to value creation with a degree of nuance that was absent from most statistical studies of relationships between human, organizational, relational and financial capital. murthy and mouritsen‟s research dated 2011 tested the relationship between intellectual capital elements and financial capital by the help of interviews. relationships between intellectual capital and financial capital were challenging to determine since they were complementary rather than causal. financial capital was not only an impact factor, but also a significant input since the development of intellectual capital took place through the company's budgeting processes (murthy and mouritsen, 2011). karacan and ergin‟s study in 2011 had the purpose to investigate whether or not the intellectual capital computed based on the intangible assets method is reflected in the values which investors accord to companies in the istanbul stock exchange – ise (borsa istanbul) banking sector. a new model was developed in this paper for overcoming the limitations of the existing model in the literature. the results reflected that the intellectual capital was highly positively correlated with the market values. the correlation was even stronger for the new model presented in this research. as the importance of the intellectual capital in banking sector was relatively higher than other industries, companies had to give importance to the management of intellectual capital which is not adequately presented and shown by volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu mehmet lütfi arslan, cevdet kızıl emerging markets journal | p a g e |105 traditional accounting method. the intellectual capital had to be computed and reported to the concerned parties according to that study (karacan and ergin, 2011). kızıl‟s study in 2009 concentrated on the measurement, evaluation, accounting, reporting and management of intellectual capital in banking industry. the technical part of this study focused on türkiye garanti bankası a. ş. (garanti bank). the intellectual capital report of mentioned bank prepared as a result of technical work had shown that, the human capital and structural capital of company presented some positive and negative trends. however, no weak points had been determined related to relational capital of the firm. additionally, the technical part of this study had revealed that, intellectual capital of the bank does not reflect stability according to the market value book value measurement method. while the book value of bank rises systematically every year, fluctuations were observed for its market value. similar to the market value book value method, the value added intellectual coefficient (vaic) method also pointed that intellectual capital of the bank was away from being stable. on the other hand, in regards to both methods, intellectual capital of the enterprise did prosper in 2005 and weakened in 2008. besides, in the light of value added intellectual coefficient (vaic) method, bank‟s value added, financial capital, physical capital, human capital and structural capital had been rising steadily. finally, correlation analysis of this paper indicated that, a very strong relationship did exist between the bank‟s human capital efficiency and the structural capital efficiency (kızıl, 2009). öztürk and demirgüneş did run a research in 2007, which investigated the effect of intellectual capital on firm value using the value added intellectual coefficient (vaic) method. study covered 30 manufacturing companies whose stocks are listed on istanbul stock exchange ise (borsa istanbul) between 2000-2002. according the findings of research, capital employed efficiency (cee) and structural capital efficiency (sce) had an impact on firm profitability, efficiency and market value (kartal and demirgüneş, 2007). guthrie and petty‟s reseach in 2000 reported the findings of an empirical examination of australian annual reporting of intellectual capital. the findings indicated that the development of a model for reporting intangibles was partial and not widely spread. the results of their exploratory investigation were threefold. first, the key components of intellectual capital were poorly understood, inadequately identified, inefficiently managed, and not reported. second, the fundamental fields of intellectual capital reporting focused on human resources; technology and intellectual property rights; and organizational and workplace structure. third, a comprehensive management framework for intellectual capital was yet to be developed, particularly for collecting and reporting intellectual capital formation. as a result, australian firms did not compare favourably with numerous european companies in their ability to measure and report their intellectual capital in the annual report (guthrie and petty, 2000). bontis had published a paper in 1998 detailing an empirical pilot study which explored the development of numerous conceptual measures and models concerning intellectual capital and its effect on business performance. the aim of this pilot study was to explore the improvement of items and constructs through principal components analysis and partial least squares (pls). subjective measures and optimal structural specification reflected a valid, reliable, significant and substantive causal relationship between dimensions of intellectual capital and business performance. according to the paper, the mentioned results could assist both academics and practitioners more readily understand the elements of intellectual capital and provide insight into developing and increasing it within a company (bontis, 1998). hubert saint-onge explained in 1996 that, in an environment of shortened business cycles and fast technological change, the intellectual capital framework represented the primary value creation dynamics of the organizations. working for several years at the canadian imperial bank of commerce (cibc) to understand the concept of intellectual capital, his work had created a path for him to define intellectual capital, explore the roles of both explicit and tacit knowledge in the three constituent elements of intellectual capital, and, finally, to improve ways of encouraging value creation in mentioned elements in aid of firm strategies (saint-onge, 1996). iii. data and methodology this study utilizes market value (mv) / book value (bv) method and value added intellectual coefficient (vaic) model to measure and compare intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank). besides, financial indicators such as return on assets (roa), return on equity (roe), leverage, (lev), capital adequacy ratio (car) and intellectual capital performance indicators such as mv/bv ratio, human capital efficiency (hce), structural capital efficiency (sce), capital employed efficiency (cee) and vaic of banks were compared. research also ran a pearson correlations test to investigate the relationship between the mentioned indicators (variables) and to test the hypothesis. data were retrieved from istanbul stock exchange ise (borsa istanbul), public disclosure platform (kap), banks association of turkey – tbb (türkiye bankalar birliği), banking regulation and supervision agency (brsa), fortune turkey, anadolu agency and hurriyet. first mv / bv method was employed to measure and compare intellectual capital of banks. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu measuring intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank) with the market value / book value method and value added intellectual coefficient (vaic) model page |106| emerging markets journal table 1: market value (mv), book value (bv), mv / bv ratios of turkish banks listed on borsa istanbul banking index (bist xbank) bank name market value (mv) book value (bv) mv / bv ratio akbank 44.320.000.000 tl 38.972.100.000 tl 1,14 albaraka bank 1.431.000.000 tl 2.382.980.000 tl 0,60 denizbank 14.027.100.000 tl 12.248.200.000 tl 1,15 finansbank (qnb) 22.713.000.000 tl 11.667.500.000 tl 1,95 garanti bank 51.912.000.000 tl 39.549.600.000 tl 1,31 halkbank 13.087.500.000 tl 24.282.500.000 tl 0,54 icbc turkey bank 3.835.600.000 tl 1.103.030.000 tl 3,48 is bank (i̇ş bankası) 36.989.753.400 tl 40.940.368.922 tl 0,90 sekerbank 2.095.980.000 tl 2.615.920.000 tl 0,80 t. kalkınma bank 2.650.000.000 tl 1.232.360.000 tl 2,15 tskb 3.912.000.000 tl 3.390.250.000 tl 1,15 vakıfbank 18.925.000.000 tl 22.232.300.000 tl 0,85 yapı kredi bank 20.778.900.000 tl 28.972.800.000 tl 0,72 resource: table composed by authors based on table 1, the highest market value (mv) / book value (bv) ratio belongs to icbc turkey bank (çin endüstri ve ticaret bankası) with 3,48. icbc turkey bank is followed by t. kalkınma bank (türkiye kalkınma bankası) with a ratio of 2,15. third rank belongs to finansbank (qnb) with the rate of 1,95. garanti bank is fourth with 1,31. the fifth place is shared by denizbank and tskb (türkiye sınai kalkınma bankası) with a ratio of 1,15. they are followed by akbank that has a mv / bv of 1,14. is bank (i̇ş bankası) has a ratio of 0,90 and vakıfbank has a ratio of 0,85. sekerbank‟s mv/bv ratio is 0,80. yapı kredi bank (yapı ve kredi bankası) follows with a ratio of 0,72. then comes albaraka bank, which has a mv / bv of 0,60. the last rank belongs to halkbank (türkiye halk bankası) that has a mv / bv ratio of 0,54. the consecutive ranking of turkish banks listed on borsa istanbul banking index (bist xbank) according to their market value (bv) / book value ratios is listed below: table 2: ranking of turkish banks listed on borsa istanbul banking index (bist xbank) based on market value (mv), book value (bv), mv / bv ratios resource: table composed by authors value added intellectual coefficient (vaic) method was also used in this study to measure the intellectual capital performance of akbank, albaraka bank, denizbank, finansbank (qnb), garanti bank, halkbank, icbc turkey bank, is bank ( i̇ş bankası), sekerbank, t. kalkınma bank, tskb, vakıfbank and yapı kredi bank for september 2017 period. the term (financial period) of september 2017 was especially chosen since the banks‟ market values (mv), book values (bv) and mv/bv ratios were also retrieved and calculated as of september 2017. thus, the term (financial period) of september 2017 was preferred to enable comparisons. the vaic method was proposed by pulic (2004). this technique actually measures the intellectual capital performance of organizations by using the publicly available accounting data. in other words, the vaic model helps to present the intellectual capital success of a firm by benefiting from financial statements. thus, externally (independently) audited non-consolidated financial statements and operating reports of the banks which are accessible from the websites of banks association of turkey – tbb (türkiye bankalar birliği), banking regulation and supervision agency (brsa) and public disclosure platform (kap) were used to retrieve data. a higher vaic score (point) means a stronger intellectual capital for the organization. vaic is calculated by adding human capital efficiency (hce), structural capital efficiency (sce) and capital employed efficiency (cee). ante pulic‟s value added intellectual coefficient (vaic) model is shown below: volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu mehmet lütfi arslan, cevdet kızıl emerging markets journal | p a g e |107 figure 4. ante pulic’s vaic model resource: pulic, a. (2004). “intellectual capital-does it create or destroy value?”, measuring business excellence, vol.8 no:1, pp.62-68. the related formulas to calculate the vaic of a company are indicated below: vaic (value added intellectual capital) = hce (human capital efficiency) + sce (structural capital efficiency) + cee (capital employed efficiency) hce (human capital efficiency) = value added (va) / human capital (hc) va = op + ec + d + a where; op = operating profit ec = employee cost d = depreciation a = amortization va can also be calculated as; va = output input output = total income from all products and services sold input = total expenses and costs incurred excluding personnel expenses human capital (hc) = personnel expenses sce (structural capital efficiency) = structural capital (sc) / value added (va) sc (structural capital) = value added (va) human capital (hc) cee (capital employed efficiency) = value added (va) / capital employed (ce) capital employed (ce) = financial capital (fc) + physical capital (pc) financial capital (fc) = cash and balances with central bank amounts + financial assets (net) at fair value through profit or loss + banks + receivables from money market + available for sale financial assets (net) on the balance sheet physical capital (pc) = tangible-fixed assets (net) on the balance sheet personnel expenses (employee salaries and wages) are considered as the human capital (hc) of an organization, since they are accepted as the investment of firm in vaic model. capital employed (ce) stands for the integration and efficient use of financial capital (fc) and physical capital (pc) for creating value. based on the related formulas, vaic of 13 turkish banks listed on borsa istanbul banking index (bist xbank) for september 2017 period are shown below: akbank va = 5.875.763.000 tl akbank hc = 1.360.916.000 tl akbank hce = 4,31 akbank sc = 4.514.847.000 tl akbank sce = 0,76 akbank ce = 3.289.943.000 tl + 86.442.923.000 tl = 89.732.866.000 tl akbank cee = 0,06 akbank vaic = 5,13 albaraka bank va = 469.866.000 tl albaraka bank hc = 328.749.000 tl albaraka bank hce = 1,42 albaraka bank sc = 141.117.000 tl albaraka bank sce = 0,30 albaraka bank ce = 564.832.000 tl + 8.784.196.000 tl = 9.349.028.000 tl albaraka bank cee = 0,05 albaraka bank vaic = 1,77 denizbank va = 2.329.393.000 tl denizbank hc = 924.445.000 tl denizbank hce = 2,51 denizbank sc = 1.404.948.000 tl denizbank sce = 0,60 denizbank ce = 407.461.000 tl + 28.112.873.000 tl = 28.520.334.000 tl denizbank cee = 0,08 denizbank vaic = 3,19 finansbank (qnb) va = 2.153.686.000 tl finansbank (qnb) hc = 920.813.000 tl finansbank (qnb) hce = 2,33 finansbank (qnb) sc = 1.232.873.000 tl finansbank (qnb) sce = 0,57 finansbank (qnb) ce = 1.813.194.000 tl + 26.794.319.000 tl = 28.607.513.000 tl finansbank (qnb) cee = 0,07 finansbank (qnb) vaic = 2,97 garanti bank va = 6.649.118.000 tl garanti bank hc = 2.004.267.000 tl garanti bank hce = 3,31 garanti bank sc = 4.644.851.000 tl garanti bank sce = 0,69 garanti bank ce = 3.457.737.000 tl + 69.699.000 tl = 73.156.766.000 tl volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu measuring intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank) with the market value / book value method and value added intellectual coefficient (vaic) model page |108| emerging markets journal garanti bank cee = 0,09 garanti bank vaic = 4,09 halkbank va = 4.480.372.000 tl halkbank hc = 1.470.269.000 tl halkbank hce = 3,04 halkbank sc = 3.010.103.000 tl halkbank sce = 0,67 halkbank ce = 2.333.937.000 tl + 56.137.985.000 tl = 58.471.922.000 tl halkbank cee = 0,07 halkbank vaic = 3,78 icbc turkey bank va = 131.860.000 tl icbc turkey bank hc = 83.662.000 tl icbc turkey bank hce = 1,57 icbc turkey bank sc = 48.198.000 tl icbc turkey bank sce = 0,36 icbc turkey bank ce = 26.840.000 tl + 4.101.718.000 tl = 4.128.558.000 tl icbc turkey bank cee = 0,03 icbc turkey bank vaic = 1,96 is bank (i̇ş bankası) va = 6.614.406.000 tl is bank (i̇ş bankası) hc = 2.511.155.000 tl is bank (i̇ş bankası) hce = 2,63 is bank (i̇ş bankası) sc = 4.103.251.000 tl is bank (i̇ş bankası) sce = 0,2 is bank (i̇ş bankası) ce = 4.458.746.000 tl + 87.014.214.000 tl= 91.472.960.000 tl is bank (i̇ş bankası) cee = 0,07 is bank (i̇ş bankası) vaic = 2,9 sekerbank va = 365.888.000 tl sekerbank hc = 289.574.000 tl sekerbank hce = 1,26 sekerbank sc = 76.314.000 tl sekerbank sce = 0,2 sekerbank ce = 1.020.083.000 tl + 5.436.703.000 tl = 6.456.786.000 tl sekerbank cee = 0,05 sekerbank vaic = 1,51 t. kalkınma bank va = 149.408.000 tl t. kalkınma bank hc = 44.855.000 tl t. kalkınma bank hce = 3,33 t. kalkınma bank sc = 104.553.000 tl t. kalkınma bank sce = 0,69 t. kalkınma bank ce = 63.650.000 tl + 1.424.137.000 tl t. kalkınma bank cee = 0,10 t. kalkınma bank vaic = 4,12 tskb va = 513.827.000 tl tskb hc = 61.564.000 tl tskb hce = 8,34 tskb sc = 452.263.000 tl tskb sce = 0,88 tskb ce = 49.914.000 tl + 4.376.780.000 tl = 4.426.694.000 tl tskb cee = 0,11 tskb vaic = 9,33 vakıfbank va = 4.115.511.000 tl vakıfbank hc = 1.293.427.000 tl vakıfbank hce = 3,18 vakıfbank sc = 2.822.084.000 tl vakıfbank sce = 0,68 vakıfbank ce = 1.380.771.000 tl + 47.470.698.011 tl = 48.851.469.011 tl vakıfbank cee = 0,08 vakıfbank vaic = 3,94 yapı kredi bank va = 2.587.443.000 tl yapı kredi bank hc = 1.746.075.000 tl yapı kredi bank hce = 1,48 yapı kredi bank sc = 841.368.000 tl yapı kredi bank sce = 0,32 yapı kredi bank ce = 2.582.219.000 tl + 61.214.100.000 tl = 63.796.319.000 tl yapı kredi bank cee = 0,04 yapı kredi bank vaic = 1,84 the consecutive ranking of turkish banks listed on borsa istanbul banking index (bist xbank) according to their vaic is listed below: table 3: ranking of turkish banks listed on borsa istanbul banking index (bist xbank) based on their vaic ranking bank name vaic 1 tskb 9,33 2 akbank 5,13 3 t. kalkınma bank 4,12 4 garanti bank 4,09 5 vakıfbank 3,94 6 halkbank 3,78 7 denizbank 3,19 8 finansbank 2,97 9 is bank (i̇ş bankası) 2,90 10 icbc turkey bank 1,96 11 yapı kredi bank 1,84 12 albaraka bank 1,77 13 sekerbank 1,51 resource: table composed by authors based on the vaic values of turkish banks listed on borsa istanbul banking index (bist xbank), tskb ranks 1st with the highest score of 9,33. akbank follows as 2nd with a vaic of 5,13. t. kalkınma bank ranks 3rd with 4,12 , garanti banks ranks 4th with 4,09 , vakıfbank ranks 5th with 3,94 , halkbank ranks 6th with 3,78 , denizbank ranks 7th with 3,19 , finansbank ranks 8th with 2,97 , is bank (i̇ş bankası) ranks 9th with 2,90 , icbc turkey bank ranks 10th with 1,96 , yapı kredi bank ranks 11th with 1,84 , albaraka bank ranks 12th with 1,77 and sekerbank ranks the last (13th) with 1,51. mv/bv ratios and vaic values of turkish banks listed on borsa istanbul banking index (bist xbank) are compared below with the following table by indicating the institutions‟ rankings: volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu mehmet lütfi arslan, cevdet kızıl emerging markets journal | p a g e |109 table 4: mv / bv ratios, vaic, mv/bv ratio ranks and vaic ranks of turkish banks listed on borsa istanbul banking index (bist xbank) bank name mv / bv ratio vaic mv/bv ratio rank vaic rank akbank 1,14 5,13 7 2 albaraka bank 0,60 1,77 12 12 denizbank 1,15 3,19 5 7 finansbank (qnb) 1,95 2,97 3 8 garanti bank 1,31 4,09 4 4 halkbank 0,54 3,78 13 6 icbc turkey bank 3,48 1,96 1 10 is bank (i̇ş bankası) 0,90 2,90 8 9 sekerbank 0,80 1,51 10 13 t. kalkınma bank 2,15 4,12 2 3 tskb 1,15 9,33 6 1 vakıfbank 0,85 3,94 9 5 yapı kredi bank 0,72 1,84 11 11 resource: table composed by authors as observed from the table, mv/bv ratio and vaic performances of turkish banks listed on borsa istanbul banking index (bist xbank) are parallel for some institutions while the same can not be said for others. as an example, akbank‟s vaic performance is high with its 2nd rank, while its mv/bv ratio performance is average with its 7th rank. albaraka bank‟s mv/bv ratio and vaic performances are parallel with 12th ranks, which are unsatisfactory. denizbank‟s vaic performance is average with 7th rank while its mv/bv ratio performance is good with 5th rank. finansbank (qnb)‟s vaic performance is low with 8th rank, but its mv/bv ratio performance is good with 3rd rank. garanti bank ranks 4th both for mv/bv ratio and vaic, so its performance is good for both indicators. halkbank‟s vaic performance is average with 6th rank, but its mv/bv ratio is unsatisfactory with 13th rank. icbc turkey bank has a low performance in terms of vaic with 10th rank, but has a very good performance for mv/bv ratio with 1st rank. is bank (i̇ş bankası) ranks 9th for vaic and 8th for mv/bv ratio, thus its performance for both indicators is unsatisfactory. sekerbank ranks 13th for vaic and 10th for mv/bv ratio, so its performance for both indicators is low. t. kalkınma bank ranks 3rd for vaic and 2nd for mv/bv ratio, meaning it has a very good overall performance. tskb has a very good vaic performance with 1st rank, but an average mb/bv ratio performance with 6th rank. vakıfbank has a good vaic performance with 5th rank, but a bad mv/bv performance with 9th rank. finally, yapı kredi bank shows an unsatisfactory performance for the vaic and mv/bv ratio with 11th rank for both. aggregate performances and ranks of turkish banks listed on borsa istanbul banking index (bist xbank) are presented below when mv/bv ratios and vaic values are considered simultaneously (mv/bv ratio + vaic): table 5: aggregate performances and ranks of turkish banks listed on borsa istanbul banking index (bist xbank) – mv/bv ratio + vaic ranking bank name mv / bv ratio vaic mv/bv ratio + vaic 1 tskb 1,15 9,33 10.48 2-3 akbank 1,14 5,13 6.27 2-3 t. kalkınma bank 2,15 4,12 6.27 4 icbc turkey bank 3,48 1,96 5.44 5 garanti bank 1,31 4,09 5.40 6 finansbank (qnb) 1,95 2,97 4.92 7 vakıfbank 0,85 3,94 4.79 8 denizbank 1,15 3,19 4.34 9 halkbank 0,54 3,78 4.32 10 is bank (i̇ş bankası) 0,90 2,90 3.80 11 yapı kredi bank 0,72 1,84 2.56 12 albaraka bank 0,60 1,77 2.37 13 sekerbank 0,80 1,51 2.31 resource: table composed by authors based on aggregate performances and ranks of turkish banks listed on borsa istanbul banking index (bist xbank) when mv/bv ratios and vaic values are considered simultaneously (mv/bv ratio + vaic), tskb ranks 1st with 10,48. akbank and t. kalkınma bank share 2nd and 3rd places with 6,27 points each. icbc turkey bank ranks 4th with 5,44 and garanti bank ranks 5th with 5,40. finansbank (qnb) ranks 6th with 4,92. vakıfbank ranks 7th with 4,79 and denizbank ranks 8th with 4,34. halkbank takes the 9th place with 4,32 and is bank (i̇ş bankası) takes the 10th place with 3,80. yapı kredi bank ranks 11th with 2,56 and albaraka bank ranks 12th with 2,37. finally, sekerbank ranks the last (13th) with 2,31. intellectual capital performance indicators such as mv/bv ratio and vaic are discussed so far for turkish banks listed on borsa istanbul banking index (bist xbank). however, the banks also have some particular financial indicators such as return on assets (roa), return on equity (roe), leverage ratio (lev) and capital adequacy ratio (car). data for these financial indicators are retrieved from resources such as istanbul stock exchange – ise (borsa istanbul) (2017), public disclosure platform (kap) (2017), banks association of turkey – tbb (türkiye bankalar birliği) (2017), banking regulation and supervision agency (brsa) (2017), fortune turkey (2017), anadolu agency (2017) and hurriyet (2017). roa = net income / total assets roe = net income / shareholders‟ equity volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu measuring intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank) with the market value / book value method and value added intellectual coefficient (vaic) model page |110| emerging markets journal lev = tier 1 capital / average total consolidated assets and certain off-balance sheet exposures car = (tier 1 capital + tier 2 capital) / risk weighted assets the table below shows roas, roa ranks, roes, roe ranks, levs, lev ranks, cars and car ranks of turkish banks listed on borsa istanbul banking index (bist xbank): table 6: roas, roa ranks, roes, roe ranks, levs, lev ranks, cars and car ranks of turkish banks listed on borsa istanbul banking index (bist xbank) resource: table composed by authors according to table 6, akbank has a good performance in terms of roa, roe, lev and car. albaraka bank has an unsatisfactory performance in roa, roe and lev, but an average performance in car. denizbank has an average performance for roa and roe, an unsatisfactory performance for lev, but a very food performance for car. finansbank (qnb) has an unsatisfactory performance for roa, roe, lev and car. garanti bank has a good performance for roa, roe and car, and an average performance for lev. halkbank has an average performance for roa, good performance for roe, but an unsatisfactory performance for lev and car. icbc turkey has an unsatisfactory performance for roa, roe and car, but a good performance for lev. is bank (i̇ş bankası) has a good performance for roa and lev, and an average performance for roe and car. sekerbank has an unsatisfactory performance for roa, roe, lev and car. t. kalkınma bank has an unsatisfactory performance for roa and roe, but a good performance for lev and car. tskb has a good performance for roa, roe, lev and car. vakıfbank has a good performance for roa and roe, an average performance for lev and an unsatisfactory performance for car. yapı kredi bank has an unsatisfactory performance for roa, roe, lev and car. when the financial indicators and intellectual capital performance indicators are evaluated altogether, the following table should be analyzed: table 7: roas, roa ranks, roes, roe ranks, levs, lev ranks, cars, car ranks, mv/bv ratios, mv/bv ratio ranks, vaics and vaic ranks of turkish banks listed on borsa istanbul banking index (bist xbank) resource: table composed by authors based on table 7, specific banks reflect a good performance in terms of financial indicators and intellectual capital performance indicators, while the same can not be said for other banks. akbank, garanti bank and tskb are the institutions which show a good performance both in terms of financial indicators and intellectual capital performance indicators. on the other hand, albaraka bank, sekerbank and yapı kredi bank are the institutions which show an unsatisfactory performance both in terms of financial indicators and intellectual capital performance indicators. remaining banks‟ financial indicators and intellectual capital performance indicators have ups and downs. this study also ran a pearson correlations test to investigate the relationship between financial indicators (roa, roe, lev, car) and intellectual capital performance indicators (mv/pv, hce, sce, cee, vaic) of turkish banks listed on borsa istanbul banking index (bist xbank). in order to realize this purpose, specific hypothesis were posed. the following hypothesis were extracted as a result of extensive literature review on intellectual capital: research hypothesis: h1a: there is a positive strong/very strong relationship between vaic and hce h1b: there is a positive strong/very strong relationship between vaic and sce h1c: there is a positive strong/very strong relationship between vaic and roa h2a: there is a positive strong/very strong relationship between hce and sce h2b: there is a positive strong/very strong relationship between hce and cee h2c: there is a positive strong/very strong relationship between sce and cee h3a: there is a positive strong/very strong relationship between hce and roa h3b: there is a positive strong/very strong relationship between sce and roa volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu mehmet lütfi arslan, cevdet kızıl emerging markets journal | p a g e |111 h3c: there is a positive strong/very strong relationship between cee and roa h4a: there is a positive strong/very strong relationship between roe and roa h4b: there is a positive strong/very strong relationship between roe and hce h4c: there is a positive strong/very strong relationship between roe and sce the table below shows the pearson correlations test for indicators (variables): table 8: pearson correlations test for financial indicators (roa, roe, lev, car) and intellectual capital indicators (mv/bv, hce, sce, cee, vaic) resource: table composed by authors correlation coefficients (r) vary between -1 and +1 (dönmez and erol, 2016). a negative correlation stands for relationship in the opposite direction while a positive correlation stands for parallel relationship in the same direction (kalaycı, 2009). correlation coefficients (r) are very important and should be interpreted correctly. the following ranges are used to interpret the strength of correlation coefficients (r): 0,00 < r < 0,25 = very low relationship 0,26 < r < 0,49 = low relationship 0,50 < r < 0,69 = moderate relationship 0,70 < r < 0,89 = strong relationship 0,90 < r < 1,00 = very strong relationship thus, there is a very strong positive relationship between roa and roe as well as hce and vaic of turkish banks listed on borsa istanbul banking index (bist xbank). also, there is a strong positive link between roa and hce as well as roa and sce. likewise, there is a strong positive connection between roa and sce. there is a strong positive correlation between roa and vaic as well. additionally, there is a strong positive relationship between hce and sce. similarly, there is a strong correlation between hce and cee. moreover, a strong positive link between sce and cce is detected. finally, there is a strong positive correlation between sce and vaic. so, hypothesis 1a, hypothesis 1b, hypothesis 1c, hypothesis 2a, hypothesis 2b, hypothesis 2c, hypothesis 3a, hypothesis 3b and hypothesis 4a are accepted. however, hypothesis 3c, hypothesis 4b and hypothesis 4c are rejected. some of these findings are the same with findings of öztürk and demirgüneş (2007), kızıl (2009), dönmez and erol (2016), thakur (2017) and nawaz and haniffa (2017) in the literature. iv. conclusion intellectual capital‟s importance is becoming more evident for firm performance and continuous competitive advantage as the contribution of intangibles to market capitalization is rising. tangible assets are not now that much critical for organizations as was in previous years. that is the main reason why tangible asset investments are going down while intangible asset investments are rising. however, a business world with the eye-catching role of intangibles bring some challenges as well. one of the leading problems is related to reflecting the real value of intangibles such as intellectual capital. especially, management of intellectual capital becomes impossible without accurate measurement of intellectual capital. traditional accounting is also inadequate in measuring, accounting and reporting intellectual capital. intellectual capital strength is definitely important for the banking industry, since banks must always be innovative and competitive to survive. this study utilized market value (mv) / book value (bv) method and value added intellectual coefficient (vaic) model to measure and compare intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank). plus, financial indicators like return on assets (roa), return on equity (roe), leverage, (lev), capital adequacy ratio (car) and intellectual capital performance indicators like mv/bv ratio, human capital efficiency (hce), structural capital efficiency (sce), capital employed efficiency (cee) and vaic of banks were compared. research also ran a pearson correlations test to investigate the relationship between the mentioned indicators (variables) and to test the hypothesis. data were gathered from istanbul stock exchange ise (borsa istanbul), public disclosure platform (kap), banks association of turkey – tbb (türkiye bankalar birliği), banking regulation and supervision agency (brsa), fortune turkey, anadolu agency and hurriyet. this study firstly took advantage of market value (mv) / book value (bv) method to measure and compare intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank). based on the findings, icbc turkey bank (çin endüstri ve ticaret bankası) has the highest intellectual capital with a market value (mv) / book value (bv) ratio of 3,48. on the other hand, halkbank (türkiye halk bankası) is determined to have the lowest intellectual capital with a mv / bv ratio of 0,54. t. kankınma bank (türkiye kalkınma bankası), qnb finansbank, garanti bank, denizbank, tskb (türkiye sınai kalkınma bankası) and akbank have mv / bv ratios over 1,00 while is bank (türkiye i̇ş bankası), vakıfbank, sekerbank, yapı kredi bank (yapı ve kredi bankası), albaraka bank and halk bank (türkiye halk bankası) have mv / bv ratios under 1,00. when the vaic values of turkish banks listed on borsa istanbul banking index (bist xbank) are considered, tskb ranks 1st with the highest score of 9,33. akbank follows as 2nd with a vaic of 5,13. t. kalkınma bank ranks 3rd with 4,12 , garanti banks ranks 4th with 4,09 , vakıfbank ranks 5th with 3,94 , halkbank ranks 6th with 3,78 , denizbank ranks 7th with 3,19 , finansbank ranks 8th with 2,97 , is bank (i̇ş bankası) ranks 9th with 2,90 , icbc turkey bank ranks volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu measuring intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank) with the market value / book value method and value added intellectual coefficient (vaic) model page |112| emerging markets journal 10th with 1,96 , yapı kredi bank ranks 11th with 1,84 , albaraka bank ranks 12th with 1,77 and sekerbank ranks the last (13th) with 1,51. considering the financial indicators of turkish banks listed on borsa istanbul banking index (bist xbank), akbank has a desired performance in terms of roa, roe, lev and car. albaraka bank has an unsatisfactory performance in roa, roe and lev, but an average performance in car. denizbank has a moderate performance for roa and roe, a low performance for lev, but a disappointing performance for car. finansbank (qnb) has a low performance for roa, roe, lev and car. garanti bank has a high performance for roa, roe and car, and a moderate performance for lev. halkbank has a moderate performance for roa, good performance for roe, but an unsatisfactory performance for lev and car. icbc turkey has an unsatisfactory performance for roa, roe and car, but a good performance for lev. is bank (i̇ş bankası) has a good performance for roa and lev, and a moderate performance for roe and car. sekerbank has a low performance for roa, roe, lev and car. t. kalkınma bank has a low performance for roa and roe, but a good performance for lev and car. tskb has a good performance for roa, roe, lev and car. vakıfbank has a good performance for roa and roe, a moderate performance for lev and a low performance for car. yapı kredi bank has a low performance for roa, roe, lev and car. akbank, garanti bank and tskb are the institutions which show a good performance both in terms of financial indicators and intellectual capital performance indicators. on the opposite side, albaraka bank, sekerbank and yapı kredi bank are the institutions which show a low performance both in terms of financial indicators and intellectual capital performance indicators. remaining banks‟ financial indicators and intellectual capital performance indicators do fluctuate. based on pearson correlations test, very strong positive relationships between roa and roe as well as hce and vaic of turkish banks listed on borsa istanbul banking index (bist xbank) are observed. in case banks wish to have a high vaic, they should attain a high hce. also, this means that, if the banks can use their human capital effectively, their intellectual capital strength (vaic) will increase. so, the banks should be careful about recruiting and preserving talented personnel as well as training them continuously. furthermore, there is a strong positive link between roa and hce. this means, when banks increase their hce, their roa increases as well. so, the banks should definitely concentrate on improving their hce and using their human capital efficiently to boost their roa. our findings point out that, increasing hce leads to increasing the expertise and talent of using assets (actives). likewise, there is a strong positive connection between roa and sce. when banks‟ sce climbs, their roa also climbs. in that case, a core focus on sce is a must for the banks. according to the findings of our study, if the banks can use their structural capital effectively (sce), that will positively affect their roa. this means, so the banks should improve their technical knowhow, information technology (it), customer and supplier relationships, bank‟s reputation to higher their sce. there is a strong positive correlation between roa and vaic as well. that is a very important finding, alerting the banks that if they increase their intellectual capital strength (vaic), their roa will also go up. thus, another critical finding of our research emphasizes that, intellectual capital performance (vaic) positevely affects financial performance (roa) and vaic (intellectual capital power) is a significant predictor of bank financial performance. additionally, there is a strong positive relationship between hce and sce. this means, there is an interrelationship between these two variables. when the banks strengthen their hce, their sce strengthens as well. likewise, when the banks strengthen their sce, their hce strengthens. however, when the banks‟ hce weakens, their sce weakens. a weak sce is a signal of weak hce as well. similarly, there is a strong correlation between hce and cee. moreover, a strong positive link between sce and cce is detected. finally, there is a strong positive correlation between sce and vaic, meaning that a definite emphasis on sce is a must to enhance vaic and raise the intellectual capital strength of bank. in terms of hypothesis testing, hypothesis 1a, hypothesis 1b, hypothesis 1c, hypothesis 2a, hypothesis 2b, hypothesis 2c, hypothesis 3a, hypothesis 3b and hypothesis 4a are accepted. but, hypothesis 3c, hypothesis 4b and hypothesis 4c are rejected. as a result, some of our study‟s findings are parallel to the findings of öztürk and demirgüneş (2007), kızıl (2009), dönmez and erol (2016), thakur (2017) and nawaz and haniffa (2017) in the literature. upon these findings, we can state that banks with specialized niches are giving more weight to the concept of intellectual capital. future research can include more periods and run a time series analysis for better results. also, this study is only focused on the banking sector and banks listed on bist xbank. future research can also concentrate on different sectors, which can enable industry comparisons. finally, future research can benefit from other intellectual capital measurement methods besides the mv / bv technique and vaic model. references akgün, a. i̇. and şamiloğlu, f. (2017), “küresel finansal krizin muhasebe ve değer esaslı i̇şletme performanslarına etkisi” (“the effect of global financial crisis on accounting and value-based business performances”), business and economics research journal, no: 3, pp.453-471. anadolu agency. (2017), “qnb finansbank‟ın 9 aylık net dönem karı 1 milyar 233 milyon lira”, anadolu agency website, http://aa.com.tr/tr/sirkethaberleri/finans/qnbfinansbankin-9-aylik-net-donem-kari-1-milyar233-milyon-lira/639319 volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu mehmet lütfi arslan, cevdet kızıl emerging markets journal | p a g e |113 andreou, a.n., green, a. and stankosky, m. (2007), “a framework of intangible valuation areas and antecedents”, journal of intellectual capital, vol. 8 no. 1, pp.52-75. banking regulation and supervision agency (brsa). (2017), “istatistik”, banking regulation and supervision agency (brsa) website, https://www.bddk.org.tr/websitesi/turkce/istati stiki_veriler/istatistiki_veriler.aspx banks association of turkey tbb (türkiye bankalar birliği). (2017), “istatistiki raporlar”, banks association of turkey – tbb (türkiye bankalar birliği) website, https://www.tbb.org.tr/tr/bankacilik/banka-vesektor-bilgileri/istatistiki-raporlar/59 beaver, w.h. (1998), “financial reporting: an accounting revolution”, prentice-hall international, upper saddle river, nj. bontis, n. (1998), “intellectual capital: an exploratory study that develops measures and models”, management decision, vol. 36 no. 2, pp.6376. bontis, n. (2002), world congress on intellectual capital reading, butterworth-heinemann, boston, ma. borsa istanbul. (2017), “borsa istanbul veriler”, borsa istanbul website, http://www.borsaistanbul.com/veriler brooking, a. (1997), “intellectual capital: core asset for the third millennium enterprise”, thomson business press, london. cabrita, m.r.m.f, da silva, m.d.l.r., rodrigues, a.m.g., and munoz duenas, m.d.p. (2017), "competitiveness and disclosure of intellectual capital: an empirical research in portuguese banks", journal of intellectual capital, vol. 18 issue: 3, pp.486505, https://doi.org/10.1108/jic-11-2016-0112. choong, k. k. (2008),"intellectual capital: definitions, categorization and reporting models", journal of intellectual capital, vol. 9 iss: 4 pp.609638. curado, c., guedes, m. j., bontis, n. (2014), “the financial crisis of banks (before, during and after): an intellectual capital perspective”, knowledge and process management, vol. 21, issue: 2, pp.103-111. daum, j.h. (2002), “intangible assets and value creation”, wiley, chichester. davenport, t.h. and prusak, l. (1997), “working knowledge: how organizations manage what they know”, harvard business school press, boston, ma. diefenbach, t. (2006), “intangible resources: a categorical system of knowledge and other intangible assets”, journal of intellectual capital, vol. 7 no. 3, pp.406-420. dönmez, a. and erol, i̇. (2016), “entelektüel sermayenin ölçülmesi: vaic yöntemi yardımıyla bistsürdürülebilirlik endeksi i̇şletmeleri üzerine bir uygulama”, mali çözüm dergisi, pp.2756. dumay, j. (2013), “the third stage of ic: towards a new ic future and beyond”, journal of intellectual capital , vol. 14, no. 1, pp.5-9. edvinsson, l. and malone, m.s. (1997), “intellectual capital: realizing your company‟s true value by finding its hidden brainpower”, harper business, new york, ny. feltham, g.a. and ohlson, j.a. (1996), “uncertainty resolution and the theory of depreciation measurement”, journal of accounting research, vol. 34 no. 2, pp.209-234. fortune turkey. (2017), “borsadaki bankaların 9 aylık karı yüzde 27 arttı”, fortune turkey website, http://www.fortuneturkey.com/borsadakibankalarin-9-aylik-kari-yuzde-27-artti-49402 garcia-meca, e. (2006), “bridging the gap between disclosure and use of intellectual capital information”, journal of intellectual capital, vol. 6 no. 3, pp.427-40. guthrie, j. and petty, r. (2000), "intellectual capital: australian annual reporting practices", journal of intellectual capital, vol. 1 issue: 3, pp.241251, https://doi.org/10.1108/146919300103508 00. guthrie, j., ricceri, f. and dumay, j. (2012), “reflections and projections: a decade of intellectual capital accounting research”, the british accounting review, vol. 44, no. 2, pp. 68-82. hall, r. (1992), “the strategic analysis of intangible resources”, strategic management journal,vol. 13 no. 2, pp.135-144. holthausen, r.w. and watts, r.l. (2001), “the relevance of the value relevance literature for financial accounting standard setting”, journal of accounting and economics, vol. 31, pp. 3-75. http://www.emeraldinsight.com/author/cabrita%2c+maria+do+ros%c3%a1rio+meireles+ferreira http://www.emeraldinsight.com/author/ribeiro+da+silva%2c+maria+de+lurdes http://www.emeraldinsight.com/author/gomes+rodrigues%2c+ana+maria http://www.emeraldinsight.com/author/mu%c3%b1oz+due%c3%b1as%2c+mar%c3%ada+del+pilar https://doi.org/10.1108/jic-11-2016-0112 http://www.emeraldinsight.com/author/guthrie%2c+james http://www.emeraldinsight.com/author/petty%2c+richard https://doi.org/10.1108/14691930010350800 https://doi.org/10.1108/14691930010350800 volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu measuring intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank) with the market value / book value method and value added intellectual coefficient (vaic) model page |114| emerging markets journal hurriyet. (2017), “2017 yılı 9 aylık bilançolar”, hurriyet website, http://www.hurriyet.com.tr/2017-yili-9-aylikbilancolar-40641412 ikenna, e., ursula, e. n. (2017), “intellectual capital and corporate performance in nigeria banks”, american journal of finance, vol. 1, no: 5, pp.63-78. itami, h. (1991), “mobilizing invisible assets”, harvard university press, cambridge, ma. johansson, u., martensson, m. and skoong, m. (2001), “measuring to understand intangible performance drivers”, the european accounting review, vol. 10 no. 3, pp.407437. kalaycı, ş. (2009), spss uygulamalı çok değişkenli i̇statistik teknikleri” 4th edition, ankara: asil yayın dağıtım. kaplan, r.s. and norton, d.p. (1992), “the balanced scorecard. measures that drive performance”, harvard business review , vol. 70 no. 1, pp.71-79. karacan, s and ergin, e. (2011), “bankaların entelektüel sermayesi ile finansal performansı arasındaki i̇lişki”, (intellectual capital and financial performance in the banking sector), business and economics research journal, vol. 2, no: 4, pp.73-88. kaufmann, l. and schneider, y. (2004), “intangibles: a synthesis of current research”, journal of intellectual capital, vol. 5 no. 3, pp.366-388. kızıl, c. (2009), “bankacılık sektöründe entelektüel sermayenin ölçülmesi, değerlendirilmesi ve muhasebeleştirilmesi”, doktora tezi, kadir has üniversitesi sosyal bilimler enstitüsü. kızıl, c. (2010), “entelektüel sermaye analizleri”, derin yayınları (derin publishing), i̇stanbul. kızıl, c., arslan, m. l., şeker, ş. e. (2014), "an accounting viewpoint for the relationship between intellectual capital and web trends of bist 30 firms in turkey", maliye finans yazıları dergisi (journal of public finance and finance), year: 28, number: 101, april 2014, pp.53-81. kızıl, c., arslan, m. l., şeker, ş. e. (2013), "correlation between intellectual capital and web trends of top 30 companies in turkey", international journal of social studies and humanity studies, vol. 5 no: 2, issn: 1309-8063 (online), pp. 39-49, http://www.sosbilko.net/journal_ijss/arhieves/ ijss_2013_2/cevdet_kizil.pdf kızıl, c, erzin, n. o., kara, e. ç. (2013), "e-ticaret sektöründe entelektüel sermayenin ölçülmesi, raporlanması ve muhasebeleştirilmesi: amazon.com i̇şletmesi üzerine bir araştırma", (measurement, reporting and accounting of intellectual captial in the e-commerce industry: a research on amazon.com inc.) nişantaşı üniversitesi sosyal bilimler dergisi (nişantaşı university journal of social sciences), volume: 1, no: 2, issn: 21475121, pp.137-158. http://dergipark.ulakbim.gov.tr/nisantasisbd/art icle/download/ 5000110081/5000102400. lev, b. (2001), “intangibles: management, measurement, and reporting”, the brookings institution, washington, dc. marr, b. and adams, c. (2004), “the balanced scorecard and intangible assets: similar ideas, unaligned concepts”, measuring business excellence, vol. 8 no. 3, pp.18-27. marr, b. and chatzkel, j. (2004), “intellectual capital at the crossroads: managing, measuring, and reporting of ic”, journal of intellectual capital, vol. 5 no. 2, pp.224-229. marr, b., gray, d. and neely, a. (2003), “why do firms measure their intellectual capital”, journal of intellectual capital, vol. 4 no. 4, pp.441-464. meritum. (2002), “meritum guidelines for managing and reporting on intangibles, measuring intangibles to understand and improve innovation management” – meritum, madrid. monga, v. (2016), “accounting‟s 21st century challenge: how to value intangible assets”, wall street journal (wsj), march 21, 2016. mouritsen, j., bukh, p.n., larsen, h.t. and johansen, m.r. (2002), “developing and managing knowledge through intellectual capital statements”, journal of intellectual capital, vol. 3, no. 1, pp.10-29. mouritsen, j., larsen, h.t. and bukh, p.n.d. (2001), “intellectual capital and the „capable firm‟: narrating, visualising and numbering for managing knowledge”, accounting, organization and society, vol. 26 nos 6/7, pp.735-762. murthy, v. and mouritsen, j. (2011), "the performance of intellectual capital: mobilising relationships between intellectual and financial capital in a bank", accounting, auditing & accountability journal, vol. 24 issue: 5, pp.622646, https://doi.org/10.1108/095135711111391 20. https://search.proquest.com/pubidlinkhandler/sng/pubtitle/business+and+economics+research+journal/$n/216138/openview/905189674/$b/f223850e1c5f4075pq/1;jsessionid=c48bbb938c80c71db56b7720697a22e9.i-06e4566aa227dd1c1 https://search.proquest.com/pubidlinkhandler/sng/pubtitle/business+and+economics+research+journal/$n/216138/openview/905189674/$b/f223850e1c5f4075pq/1;jsessionid=c48bbb938c80c71db56b7720697a22e9.i-06e4566aa227dd1c1 http://www.sobiad.org/ejournals/journal_ijss/arhieves/ijss_2013_2/cevdet_kizil.pdf http://www.sobiad.org/ejournals/journal_ijss/arhieves/ijss_2013_2/cevdet_kizil.pdf http://dergipark.ulakbim.gov.tr/nisantasisbd/article/download/5000110081/5000102400 http://dergipark.ulakbim.gov.tr/nisantasisbd/article/download/5000110081/5000102400 http://www.emeraldinsight.com/author/murthy%2c+vijaya http://www.emeraldinsight.com/author/mouritsen%2c+jan https://doi.org/10.1108/09513571111139120 https://doi.org/10.1108/09513571111139120 volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu mehmet lütfi arslan, cevdet kızıl emerging markets journal | p a g e |115 nahapiet, j. and ghoshal, s. (1998), “social capital, intellectual capital, and the organizational advantage”, academy of management review, vol. 23 no. 2, pp.242-266. nawaz, t. (2017), “human capital development in socioeconomic malaise: evidence from the uk”, international journal of learning and intellectual capital, vol. 14, no: 1, pp.24-46. nawaz, t., haniffa, r. (2017), "determinants of financial performance of islamic banks: an intellectual capital perspective", journal of islamic accounting and business research, vol. 8 issue: 2, pp.130142, https://doi.org/10.1108/jiabr-06-20160071. ocean tomo. (2017), “intangible asset market value study”, ocean tomo official website http://www.oceantomo.com/intangible-assetmarket-value-study/ ohlson, j.a. (1995), “earnings, equity book values, and dividends in equity valuation”, contemporary accounting research, vol. 11 no. 2, pp.661687. öztürk, m. b. and demirgüneş, k. (2007), “entelektüel sermayenin firma değeri üzerindeki etkisinin entelektüel katma değer katsayısı yöntemi i̇le tespiti: hisse senetleri i̇mkb‟de i̇şlem gören üretim firmaları üzerine ampirik bir çalışma”, i̇mkb dergisi, pp.59-80. pablos, p.o.d. (2003), “knowledge management projects: state of the art in the spanish manufacturing industry international”, journal of manufacturing technology and management, vol. 14 no. 4, pp.297-310. petty r. and guthrie, j. (2000), "intellectual capital literature review: measurement, reporting and management", journal of intellectual capital, vol. 1 issue: 2, pp.155-176. public disclosure platform (kap). (2017), “bist şirketleri”, public disclosure platform (kap) website, https://www.kap.org.tr/tr/bist-sirketler pulic, a. (2004), “intellectual capital-does it create or destroy value?”, measuring business excellence, vol.8 no:1, pp.62-68. rastogi, p.n. (2003), “the nature and role of ic – rethinking the process of value creation and sustained enterprise growth”, journal of intellectual capital, vol. 4 no. 2, pp.227-248. saint-onge, h. (1996), “"tacit knowledge the key to the strategic alignment of intellectual capital", planning review, vol. 24 issue: 2, pp.10-16, https://doi.org/10.1108/eb054547. sarıay, m.a.i̇. and özulucan, a. (2017), “entelektüel sermayeyi i̇şletme düzeyinde ölçen yöntemlerin karşılaştırılması: bi̇st‟te bir uygulama” (“comparison methods for measuring company level intellectual capital: an application in bist”), muhasebe ve vergi uygulamaları dergisi (journal of accounting and taxation studies – jats), 2017 / 3, pp.291-314. smith, g.v. (1994), “the new role of intellectual property in commercial transactions”, wiley, new york, ny. stewart, t.a. (1997), “intellectual capital”, nicholas brealey publishing, london. stewart, t.a. (1998), “intellectual capital – the new wealth of organizations”, nicolas brealey publishing, london. sullivan, p.h. (2000), “value-driven intellectual capital: how to convert intangible corporate assets into market value”, wiley, new york, ny. sveiby, k.e. (1997), “the new organizational wealth: managing and measuring knowledge-based assets”, barrett-kohler, san francisco, ca. thakur, v. s. (2017), “intellectual capital: its effect on financial performance of indian public and private sector banks”, research reviews: journal of social sciences, vol. 3, issue: 2, pp.100-106. wood, j. (2003), “australia: an under performing knowledge nation?”, journal of intellectual capital, vol. 4 no. 2, pp.144-164. yalaman, a. (2013), “the relationship between intellectual capital and banking performance in turkey: evidence from panel data”, international journal of learning and intellectual capital, vol. 10, issue: 1, pp.71-87. yıldız, s. (2011), “entelektüel sermayenin i̇şletme performansına etkisi: bankacılık sektöründe bir araştırma”, (“the effect of intellectual capital on business performance: a research in banking sector”), anadolu üniversitesi sosyal bilimler dergisi (anadolu university journal of social sciences, vol. 11, no: 3, pp.11-28. http://www.emeraldinsight.com/author/nawaz%2c+tasawar http://www.emeraldinsight.com/author/haniffa%2c+roszaini https://doi.org/10.1108/jiabr-06-2016-0071 https://doi.org/10.1108/jiabr-06-2016-0071 https://doi.org/10.1108/eb054547 volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.180 | http://emaj.pitt.edu measuring intellectual capital of turkish banks listed on borsa istanbul banking index (bist xbank) with the market value / book value method and value added intellectual coefficient (vaic) model page |116| emerging markets journal yükser, b. (2017). "dönüştürücü liderliğin rekabet üstünlüğü ve entelektüel sermaye performansı ile i̇lişkisi: bankacılık sektöründe bir uygulama", ("competition superiority of the transformative leadership and its relation with capital performance: an implemenation in the banking sector"), adnan menderes university social sciences institute, department of economy and finance, master's thesis, aydın. http://adudspace.adu.edu.tr:8080/xmlui/ handle/11607/3088. http://adudspace.adu.edu.tr:8080/xmlui/handle/11607/3088 http://adudspace.adu.edu.tr:8080/xmlui/handle/11607/3088 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu investigation of ethnocentrism effect on turkish textile image and consumer purchase intention: isfahan and tabriz cities as a case study bahram ranjbarian university of isfahan, islamıc republic of iran | e-mail: bahram1r@yahoo.com hamed abbaszadeh avilagh university of isfahan, islamıc republic of iran | e-mail: abbaszadeh.avilagh@gmail.com abstract cultural factors such as ethnocentrism and cultural stereotypes also play a prominent role in consumers' perceptions of brands. this paper examines the impact of ethnocentrism on the image of turkish textiles and the purchase intention of these goods among isfahan and tabriz citizens. the population of this research is residents of isfahan and tabriz cities. this study's hypotheses are examined using structural equation modelling through pls software. the results showed that ethnocentrism has a significant relationship with the product image, but these results were inconsistent in isfahan and tabriz cities. on the other hand, the relationship between ethnocentrism and the cognitive image was confirmed. however, the result was not approved for the affective image in both cities either. keywords: ethnocentrism, cognitive image, affective image, product image, purchase intention new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.273 | http://emaj.pitt.edu | mailto:abbaszadeh.avilagh@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.273 | http://emaj.pitt.edu investigation of ethnocentrism effect on turkish textile image and consumer purchase intention: isfahan and tabriz cities as a case study page |2| emerging markets journal investigation of ethnocentrism effect on turkish textile image and consumer purchase intention: isfahan and tabriz cities as a case study bahram ranjbarian hamed abbaszadeh avilagh i. introduction the growth of global competition has made companies explore approaches to gain a competitive advantage. one of which is to identify proper target markets. selecting the right target markets can create opportunities, and the wrong choice is costly and disadvantageous. identifying target markets while a company tries to export goods and services to other countries is an important decision. because selling goods overseas to potential customers is different from what the company does in their local markets concerning paying necessary attention to the needs of the potential customers. consumers' needs are usually shaped by their culture and lifestyle. those companies that are incapable of detecting global opportunities cannot succeed in global markets as well as domestic ones. on the other hand, consumers have different cultures, values, and tendencies. to succeed, a company should consider cultural and ethnic differences, which are some of the necessities for entering foreign markets (svensson, 2002). people of every country, region, or group have unique lifestyles which affect their purchase preferences among a diverse range of products and services (gonzalez & bello, 2003). awareness of consumer lifestyle leads to the development of new marketing ideas. lifestyle refers to behavioral and individual characteristics with cultural and social roots, such as age, gender, ethnicity, social group, and religion. ethnicity is also considered as one of the aspects of lifestyle (mensah, bahhouth & ziemnowicz, 2011). ethnocentrism is often expressed in social groups as an attempt to express identity, loyalty, and group survival (brkic, corbo & berberovic, 2011). ethnic behaviors within the group boundaries are defined by one or more visible attributes such as language, accent, religion, and physical characteristics (hammond & axelord, 2006). international marketing researchers have long been concerned with determining whether consumers are inclined towards a preference for domestic products instead of imported products. empirical studies have consistently confirmed the existence of "domestic-country bias," manifested in stronger product preferences and intentions to buy homemade products (verlegh & steenkamp, 1999). unlike other studies, this study seeks to answer whether historical ties, geographical proximity, and ethnic origins lead to a different response for imported products. in other words, in a multi-ethnic country such as iran, which side, whether ethnic roots or political boundaries play a dominant role in choosing products? to find this answer, the two cities of isfahan and tabriz were examined, and the reaction of the people of these two cities to turkey's textiles and clothes was studied. the main point of this choice was the geographical, ethnic, and linguistic closeness of tabriz citizens to the turkish people, which lacked these potentials in isfahan. ii. theory and hypothesis the conceptual foundations of the proposed model and the related hypotheses (figure 1) are borrowed from three research streams: consumer ethnocentrism (de nisco, mainolfi & marino, 2016; he & wang. 2014; sharma, 2014; zolfagharian, saldivar & sun, 2014; evanschitzky et al., 2008; hamin & elliot, 2006; javalgi, khare & scherer, 2005; moon & jain, 2002) product image (papadopoulos, elliot & de nisco, 2013; wang et al., 2012; zolfagharian & sun, 2010; verlegh & steenkamp, 1999; martin & eroglu, 1993) and country image (de nisco et al., 2016; wang et al., 2012; maher & carter, 2011; roth & diamantopoulos, 2009; laroche et al., 2003). figure 1. conceptual model of the research source: authors’ own compilation according to the conceptual model, the study encompasses five constructs: 1) ethnocentrism, 2) cognitive image, 3) affective image, 4) product image 5) purchase intention. the following section discusses the constructs, hypotheses, and related backgrounds. ethnocentrism globalization does not ignore ethnicity and regional cultures, but has strengthened the emergence of frameworks for non-national collective identities, most notably ethnic identities. the global community has entered the third millennium, while ethnic, racial, and linguistic identities have become increasingly important. therefore, it is safe to say that almost all world nations face ethnic movements (ahmadi, 2005). evidence suggests that ethnic diversity is a global reality. according to some scholars, iran has a multi-ethnic society, and about fifty percent of its population is non-persian citizens (maghsoudi, 2001). this means that half of the people have different languages, cultures, and ethnicities, which are valuable assets for them. ethnocentric people strongly volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.273 | http://emaj.pitt.edu bahram ranjbarian, hamed abbaszadeh avilagh emerging markets journal | p a g e 3 support their traditions, symbols, and products related to their culture (kwak, 2008). sumner introduced the first official definition of ethnicity in 1906. from his point of view, ethnocentrism is a belief that people of a specific group put themselves at the center of everything. also, everything is measured and calculated compared to their group (sumner, 1906). this definition was revised to represent people’s belief that their cultures and values were superior to others outside the group (hooghe, 2008; bennett, 1993). each group is proud of itself, boasts its superiority, and belittles people from outside (nguyen, nguyen & barrett, 2008). overall, higher ethnocentric people are more likely to have unpleasant cross-cultural interactions because their ethnocentric perception prevents them from comprehending alternative cultural experiences (moss & marx, 2011). consumer ethnocentrism was first introduced as “beliefs held by american consumers about the appropriateness, indeed morality, of purchasing foreign-made products” (shimp & sharma, 1987). highly ethnocentric consumers are unwilling to buy products and services produced in other countries (jin et al., 2014). ethnocentric individuals tend to accept things culturally similar and reject things culturally unfamiliar (liu et al., 2006). on the other hand, some researches show that consumers in developing countries have various degrees of attachment toward domestic products (batra et al., 2000; schooler & wildt, 1968). in contrast to other studies (jimenez & martin, 2010; moon & jain, 2002), this study seeks to evaluate consumer ethnocentrism among different ethnic groups in iran toward a specific country and product. this study has the following hypotheses: h1t: tabriz citizens’ ethnocentrism affects their image of turkish textiles. h1i: isfahan citizens’ ethnocentrism affects their image of turkish textiles. h2t: tabriz citizens’ ethnocentrism influences their intention to purchase turkish textiles. h2i: isfahan citizens’ ethnocentrism influences their intention to purchase turkish textiles. h3t: tabriz citizens’ ethnocentrism affects their cognitive image of turkey. h3i: isfahan citizens’ ethnocentrism affects their cognitive image of turkey. h4t: tabriz citizens’ ethnocentrism affects their affective image of turkey. h4i: isfahan citizens’ ethnocentrism affects their affective image of turkey. country image (cognitive and affective) & product image the marketing literature often evaluates the country image as a multi-dimensional (cognitive and affective) structure (heslop et al., 2004; papadopoulos, 2000). differentiation between cognitive and affective country image is essential because people concurrently may hold inconsistent cognitive and affective evaluations of a specific country (wang et al., 2012). recent findings (obermiller & spangenberg, 1998) has shown this inconsistency between cognitive and affective country image. this research subscribes to the view that a country image is composed of two components (affection and cognition) independent of each other (roth & diamantopoulos, 2009). however, country image studies typically have only evaluated the cognitive aspects of products (pappu, quester & cooksey, 2007; kaynak & cavusgil, 1983). recent studies have shown that the affective image, besides the cognitive dimension, has a practical side, which includes consumer sentiment towards a specific country. researchers believe that considering cognitive and affective country image in studies will lead to a better understanding of consumer perceptions about the country’s image (baloglu & mccleary, 1999). nevertheless, the affective image in marketing literature needs to be discussed. the cognitive country image refers to the customer’s perception of the level of economic development, the standard of living, and improvement in the field of industry and technology of a particular country. also, affective image involves the consumer’s assessment of the level of social and political liberties in a particular country and the positive and negative feelings toward a particular country (wang et al., 2012). on the other hand, the country image is separate from the product image (pappu et al., 2007). product image refers to consumers’ image of products from a specific country (parameswaran & pisharodi, 1994; roth & romeo, 1992). subsequently, country image implies an attitude toward a specific country and its citizens. however, the product image is an attitude toward that country’s products. studies about the country of origin usually measure the amount of product image by considering factors such as labor, innovation, and technology that affect the quality of the product (elliot & cameron, 1994; papadopoulos & heslop, 1993; johansson, douglas & nonaka, 1985). also, studies confirmed that the product image affects consumers’ perceived product quality (ittersum, candel & meulenberg 2003). researchers have concluded that the image of a producer country generally affects the person’s assessment of a product, a particular class of product, and a brand name (liefeld, 1993). the country image and product image may affect each other and may have different effects on product assessment and consumer purchase intentions (samiee, 2010). the product image refers to the general beliefs of consumers about a particular country’s specific products (nagashima, 1977). for instance, those products made in japan are considered durable products, and those produced in germany are considered products with precision labor. these informational structures can be stored in consumers’ memory and are known as objective knowledge. subjective knowledge also refers to consumers’ knowledge about a specific product (lee & lee, 2009). generally, these associations about a particular country are triggered when the consumer becomes aware of the country of origin of a specific product (hamzaoui & merunka, 2006). the present study holds that the country image consists of two components (affect and cognition) independent of each other (roth & diamantopoulos, 2009). also, there is a relationship between these variables and product image as well as purchase intention. thus, this study also includes the hypotheses below: h5t: the cognitive image of tabriz citizens about turkey has an impact on their turkish textile image. h5i: the cognitive image of isfahan citizens about turkey has an impact on their turkish textile image. h6t: the affective image of tabriz citizens about turkey has an impact on their turkish textile image. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.273 | http://emaj.pitt.edu investigation of ethnocentrism effect on turkish textile image and consumer purchase intention: isfahan and tabriz cities as a case study page |4| emerging markets journal h6i: the affective image of isfahan citizens about turkey has an impact on their turkish textile image. h7t: tabriz citizens’ image of turkish textile affects their purchase intention. h7i: isfahan citizens’ image of turkish textile affects their purchase intention. iii. methodology sampling and data collection data were collected in two major cities from various geographic regions with different ethnic and native languages in iran. isfahan (located in the center of iran, where the native language is persian or farsi) and tabriz (situated in the north west where the native language is azeri). the samples were taken among the citizens of these two cities in shopping malls. one major mall was selected from each of these two cities in iran. customers were randomly approached and asked to participate in the study. in total, 680 questionnaires were distributed, 340 questionnaires for each city. however, 19 questionnaires in tabriz and 26 questionnaires in isfahan were ignored from the analysis mainly because they were incomplete. in the end, 635 questionnaires were used in the final analysis. a profile of the sample of respondents is presented in table 1 below. table 1: sample profile source: pls software output the native languages of these two cities are completely different. tabriz citizens speak azeri, which is very similar to the language of turkey, while isfahan citizens speak farsi, which does not have any similarity to turkish. also, the significant history between tabriz and turkey as well as the geographic distance between these two cities (275 km) provide considerable opportunity for citizens of tabriz and turkey to have an enormous amount of economic and cultural exchanges, which isfahan citizens are deprived of. measure the questionnaire was developed by adapting measurements from various studies. measures of ethnocentrism (klein, ettenson & morris, 1998) are six items. the cognitive image (parameswaran & pisharodi, 1994) and affective image (wamg et al., 2012) constructs each consist of four items. the measures for product image construction consist of five items (wang et al., 2012). the measures for purchase intention construct consist of three. the items for each construct and their scale of measurements are listed in table 2. table 2: results of measurement model for the cities of isfahan and tabriz source: pls software output iv. results a two-step approach was used in this study (anderson & gerbing, 1988). in the first step, we assessed the convergent validity and reliability (table 2). in the second step, the discriminant validity was calculated (table 2). convergent validity can be approved if the loadings are more significant than 0.5 (bagozzi & yi, 1991), the ave is more significant than 0.5 (fornell & lacker, 1981), and c.r. is more significant than 0.7 (gefen, straub & boudreau, 2000). also, discriminant validity was tested (table 3 and table 4). the average variance shared between each construct and its measures should be more significant than the variance shared between the construct and other constructs (fornell & lacker, 1981). the correlations for each construct are less than the square root of the average variance extracted by the indicators measuring that construct, indicating adequate discriminant validity. table 3: discriminant validity of constructs in tabriz source: pls software output table 4: discriminant validity of constructs in isfahan source: pls software output volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.273 | http://emaj.pitt.edu bahram ranjbarian, hamed abbaszadeh avilagh emerging markets journal | p a g e 5 in the next step, the structural model was tested. the results are presented in table 5 below. table 5: hypotheses tests source: pls software output h1t: tabriz citizens’ ethnocentrism affects their image of turkish textiles. the value of the beta coefficient for this hypothesis is 0.18, which means that 18% of the changes in the image of turkish textiles are related to the ethnocentrism of tabriz citizens. since the calculated value of t for this hypothesis is 3.87, it can be inferred that there is a positive and significant relationship between the ethnocentrism of the tabriz citizens and the image of turkish textiles. h1i: isfahan citizens’ ethnocentrism affects their image of turkish textiles. in the case of first hypothesis, since the calculated t value of this hypothesis is 0.41 and lower than 1.96, it can be argued that people’s ethnocentrism in isfahan does not affect their image of turkish textiles. previous research has shown that ethnocentrism can be developed so people have a positive image of products from similar countries in which some bonds can be generated (watson & wright, 2000). this point is in line with tabriz’s hypothesis about the image that people have of turkish textiles. h2t: tabriz citizens’ ethnocentrism influences their intention to purchase turkish textiles. in the case of second hypothesis, since the calculated value of this hypothesis is 1.07 and lower than 1.96, it can be said that people’s ethnocentrism in tabriz does not affect their intention to purchase turkish textiles. h2i: isfahan citizens’ ethnocentrism influences their intention to purchase turkish textiles. concerning this hypothesis, since the calculated value of t for this hypothesis is 0.81 and less than 1.96, it can be said that people’s ethnocentrism in isfahan does not affect their intention to purchase turkish textiles. h3t: tabriz citizens’ ethnocentrism affects their cognitive image of turkey. the value of the beta coefficient for the third hypothesis is 0.16, which means that 16% of turkey’s cognitive image changes are related to tabriz citizens’ ethnocentrism. since the calculated t value of this hypothesis is more significant than 1.96, it can be calculated that there is a positive and significant relationship between the tabriz citizens’ ethnocentrism and the cognitive image of turkey. h3i: isfahan citizens’ ethnocentrism affects their cognitive image of turkey. the value of the beta coefficient for this hypothesis is -0.23, which means that 23% of the cognitive image changes are related to the ethnocentrism of the isfahan citizens’. since the calculated value of t for this hypothesis is 3.80, it can be said that there is a negative and significant relationship between the isfahan citizens’ ethnocentrism and the cognitive image of turkey. the results of this hypothesis are consistent with recent studies (bandyopadhyay, 2012). as it turned out in this study, ethnocentrism has a negative relationship with the image of other countries. our study also confirms the results of this study. h4t: tabriz citizens’ ethnocentrism affects their affective image of turkey. h4i: isfahan citizens’ ethnocentrism affects their affective image of turkey. these two hypotheses were rejected according to the results (table 5). it can be said that tabriz and isfahan citizens’ ethnocentrism does not affect the affective image of turkey. h5t: the cognitive image of tabriz citizens from turkey has an impact on their turkish textile image. the value of the beta coefficient for the fifth hypothesis is 0.43, which means that 43% of the changes in turkish textile image are related to the cognitive image of isfahan citizens from turkey. since the calculated t value of this hypothesis is 7.64 and higher than 1.96, it can be calculated that there is a positive and significant relationship between the cognitive image of tabriz citizens from turkey and the turkish textile image. h5i: the cognitive image of isfahan citizens from turkey impacts their turkish textile image. the value of beta coefficient for this hypothesis is 0.45, meaning that 45% of changes in turkish textile image is related to cognitive image of isfahan citizens on turkey. since the calculated t value of this hypothesis is 9.23, it can be said that there is a positive and significant relationship between cognitive image of isfahan citizens from turkey and the turkish textile image. the results of this hypothesis are consistent with the findings of another study (wang et al., 2012). they stated that a cognitive image of the country has a positive relationship with a product image. h6t: the affective image of tabriz citizens from turkey has an impact on their turkish textile image. h6i: the affective image of isfahan citizens from turkey has an impact on their turkish textile image. these two hypotheses were also approved and accepted according to the results of the beta coefficient and t (table 5). the results of these hypotheses are consistent with the findings of wang et al. (2012) and albarracın & kumkale (2003). h7t: tabriz citizens’ image of turkish textiles affects their purchase intention. h7i: isfahan citizens’ image of turkish textiles affects their purchase intention. also, these two hypotheses were accepted (table 5). the results of these two hypotheses are consistent with the findings of ghazali et al. (2008) and lin & chen (2006). v. discussion and managerial implications the primary purpose of this paper was to empirically analyze the ethnocentrism among citizens of two culturally different cities in iran and their reaction to foreign products. the evidence collected for this study volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.273 | http://emaj.pitt.edu investigation of ethnocentrism effect on turkish textile image and consumer purchase intention: isfahan and tabriz cities as a case study page |6| emerging markets journal shows that the cultural similarity between tabriz and turkey plays a prominent role in the reaction of the tabriz people toward turkish products. also, they are more eager about turkey's culture and products (cognitive and product image) than isfahan citizens. also, their approach towards that culture is much friendlier than isfahan citizens (h1t, h3t, h1i, and h3i). these hypotheses show that the reaction of tabriz citizens to turkey and its textile is quite positive. however, isfahan citizens are not so positive about turkey's textiles and turkey itself as a country due to the historical and cultural differences, as is shown in table 5, even though these two hypotheses (ethnocentrism effect on the cognitive image and product image) were accepted. however, the effect was negative, which is a considerable result in this study. on the other hand, h5, h6, and h7 were accepted in both cities. cognitive and affective images of turkey in both cities separately have a direct and positive effect on the product image. likewise, product image in both cities strongly and directly affects purchase intention. according to the results of this research, following suggestions can be made for the managers: managers should pay attention to ethnic differences throughout the country. consumers with various ethnic origins tend to have biases toward imported products. individuals or companies who are trying to start a business in different parts of the country or even in foreign countries should be familiar with the culture and ethnocentrism level in these areas, because a higher ethnocentrism level will affect their behavior and they are more likely to buy products that are produced in their own culture or region. it is also important to point out that when consumers are dealing with a product that they do not know much about its quality, they first notice the country that manufactures that specific product. then, consumers try to follow the clues, perceptions, and feelings towards that manufacturing country. tabriz citizens show a more positive reaction to turkish textiles due to ethnic and historical similarities. nevertheless, such a reaction was not seen among the people of isfahan. therefore, companies that want to export their products and services to different countries must consider these similarities and differences in their target market. besides, in multi-ethnic countries such as iran, each region with different cultures may react differently to imported products and services. vi. limitations and future research directions undoubtedly, every research is confronted with limitations that may affect the results. understanding these constraints facilitates a better interpretation of the results. the present study also has some limitations. the first limitation of this research is to examine the provided model only for turkish textiles. in other words, respondents are asked about a single product to express their opinion. respondents have also expressed their feelings and perceptions only about turkey, which is also a restriction. researchers in future research can explore consumer attitudes toward different product categories or brands of turkey or other countries whose products are common in the iranian market. this study was conducted in the city of isfahan and tabriz, which has yet to address other cultures and other regions of iran that have different languages and cultures. in future studies, this model can be used to assess ethnocentrism in different parts of iran, such as western regions, southern regions or other places with unique cultures and languages. references ahmadi, k. (2005). culture and development. edition 4, tehran: management and planning organization pub. albarracın, d. & kumkale, g. t. (2003). affect as information in persuasion: a model of affect identification and discounting. j. of personality and social psychology, 84, 453-469. bagozzi, r.p. &yi, y. (1991). multitrait-multimethod matrices in consumer research. journal of consumer research, 17 (4), 426-39. baloglu, s., &mccleary, k. (1999). a model of destination image formation. annals of tourism research, 26 (4), 868-897. bandyopadhyay, s. (2012). ethnocentrism in icelandic consumers and its consequence. international business & economics res. j. ,11 (3), 307-314. batra, r., ramaswamy, v., alden, d.l., steenkamp, j.e.m., & ramachander, r. (2000). effects of brand local and non-local origin on consumer attitudes in developing countries. journal of consumer psychology, 9 (2), 83-95. bennett, m. j. (1993). toward ethnorelativism: a developmental model of intercultural sensitivity. r. m. paige (ed.), education for the intercultural experience, 21-77, yarmouth: me: intercultural. brkic, n., corbo, m., & berberovic, d. (2011). ethnocentrism and animosity in consumer behavior in bosnia and herzegovina and implication for companies. journal of economic and business, 9(1), 47. de nisco, a., mainolfi, g., marino, v., & napolitano, m. (2016). effect of economic animosity on consumer ethnocentrism and product-country images. a binational study on perception of germany during the euro crisis. european management journal, 34(2016), 59-68. elliot, r. g., & cameron, ross, c. (1994). consumer perception of product quality and the countryof-origin effect. journal of international marketing, 2(2), 49-62. evanschitzky, h., wangenheim, v, f., woisetschlager, d., & blut, m. (2008). consumer ethnocentrism in the german market. international marketing review, 25(1), 7-32. fornell, c. & lacker, d.f. (1981). evaluation of structural equation models with unobserved variables and measurement error. journal of marketing research, 18(1), 39-50. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.273 | http://emaj.pitt.edu bahram ranjbarian, hamed abbaszadeh avilagh emerging markets journal | p a g e 7 gefen, d., straub, d.w. & boudreau, m.-c. (2000). structural equation modeling and regression: guidelines for research practice. communications of the association for information systems, 4, 1-79. ghazali, m., said, o, m., zahiruddin, a., & sarif, i, m. (2008). products and country of origin effects: the malaysian consumers’ perception. international review of business research papers, 4(2), 91-102. gonzalez, a.m., &bello, l. (2003). the construct "lifestyle" in market segmentation: the behavior of tourist consumers. european journal of marketing, 36(1/2), 51. hamin., & elliot, g. (2006). a less-developed country perspective of consumer ethnocentrism and country of origin effects: indonesian evidence. asia pacific journal of marketing and logistics, 18(2), 79-92. hammond, a., & ross, a. (2006). the evaluation of ethnocentrism. journal of conflict resolution, 50(6), 926. hamzaoui, l., & merunka, d. (2007). consumers’ product evaluations in emerging markets: does country of design, country of manufacture, or brand image matter? international marketing review, 24(4), 409-426. han, c, m. (1989). country image: halo or summary construct. journal of marketing research, 26 (2), 222– 9. he, w., & wang, l, c. (2015). cultural identity and consumer ethnocentrism impacts on preference and purchase of domestic versus import brands: an empirical study in china, journal of business research, 68(6), 1225-1233. heslop, l., n. papadopoulos, m. dowdles, m. wall, & d. compeau. (2004). who controls the purse strings: a study of consumers’ and retail buyers’reactions in an america’s fta environment? journal of business research, 57,1177–1188. hooghe, m. (2008). ethnocentrism. international encyclopedia of the social sciences. philadelphia, pa: macmillan reference. ittersum k.v., candel m.j.j.m., & meulenberg m.t.g. (2003). the influence of the image of a product's region of origin on product evaluation. journal of business research, 56(3), 215-26. javalgi, r. g., khare, v, p., & scherer, f. r. (2005). an application of the consumer ethnocentrism model to french consumers. international business review, 14, 325-344. jimenez, n., & san martin, s. (2010). the role of country of origin, ethnocentrism, and animosity in promoting consumer trust the moderating role of familiarity. international business review, 19,34-45. jin, g., lynch, r., attia, s., chansarkar, b., gulsoy, t., lapoule, p., liu, x., newburry, w., nooraini, s, m., parente, r., purani, k., & ungerer, m. (2014). the relationship between consumer ethnocentrism, cosmopolitanism and product country image among younger generation consumers: the moderating role of country development status. international business review, 24(3), 380-393. johansson, j. k., douglas, s. p., &nonaka, i. (1985). assessing the impact of country of origin on product evaluations: a new methodological perspective. journal of marketing research, 22 (nov), 388-396. kaynak, e., & cavusgil, s.t. (1983). consumer attitudes towards products of foreign origin: do they vary across product classes. international journal of advertising, (2), 147–157. klein, j. g., ettenson, r., & morris, m.(1998).the animosity model of foreign product purchase: an empirical test in the people's republic of china. journal of marketing, 62(1), 89–100. kwak, h., jaju, a., & larsen, t. (2006). consumer ethnocentrism offline and online: the mediating role of marketing efforts and personality traits in the united states, south korea, and india. journal of the academy of marketing science, 34(3), 367-385. laroche, m., papadopoulos, n., heslop, l. a., & mourali, m. (2003). the influence of country image structure on consumer evaluations of foreign products. international marketing review, 22(1), 96-115. lee, j. k., & lee, w. n. (2009). country-of-origin effects on consumer product evaluation and purchase intention: the role of objective versus subjective knowledge. journal of international consumer marketing, 21(2), 137-151. liefeld, j. p. (1993). consumer use of country-of-origin information in product evaluations: evidence from experiments. in papadopoulos, n. and heslop, l. a. (eds), product country image: impact and role in international marketing, haworth, new york, ny, pp: 117-156. lin, l.y., & chen, c.s. (2006). the influence of the country‐of‐origin image, product knowledge and product involvement on consumer purchase decisions: an empirical study of insurance and catering services in taiwan. journal of consumer marketing, 23/5(2006), 248-265. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.273 | http://emaj.pitt.edu investigation of ethnocentrism effect on turkish textile image and consumer purchase intention: isfahan and tabriz cities as a case study page |8| emerging markets journal liu, f., murphy, j., li, j., & liu, x. (2006). english and chinese? the role of consumer ethnocentrism and country of origin in chinese attitudes towards store signs. australasian marketing journal, 14 (2), 5-16. maghsoudi, m. (2001). ethnic developments in iran, resons ,and background. tehran: saheb kowsar pub. maher, a. a., & carter, l. l. (2011). the affective and cognitive components of country image: perceptions of american products in kuwait. international marketing review,28(6),559-580. martin, i. m., and eroglu, s. (1993). measuring a multidimensional construct: country image. journal of business research, 28(3), 191-210. mensah, c, e., bahhouth, v., & ziemnowicz, c. (2011). ethnocentrism and purchase decisions among ghanaian consumers. journal of applied business and economics, 12(4), 20-21. moon, j, b., & jain, c, s. (2002). consumer processing of foreign advertisements: roles of country-oforigin perceptions, consumer ethnocentrism, and country attitude. international business review, 11(2), 117-138. moss, d., & marx, h. (2011). please mind the culture gap: intercultural development during a teacher education study abroad program. journal of teacher education, 62(1), 35-47. nagashima, a. (1977). a comparative ‘‘made in’’ product image survey among japanese businessmen. journal of marketing, 41 (3), 95–100. nguyen, t. d., nguyen, t.m., & barrett, n. j. (2008). consumer ethnocentrism, cultural sensitivity, and intention to purchase local productsevidence from vietnam. journal of consumer behavior, 7, 88-100. obermiller, c., & spangenberg, e. (1989). exploring the effects of country of origin labels: an information processing framework. advances in consumer research, 16, 454–459. papadopoulos, n., elliot, s., & de nisco, a. (2013). from ‘made-in’ to ‘product country images’ and ‘place branding’: a journey through research time and space. mercati e competitivita, 2, 3757. papadopoulos, y. (2000). governance, coordination, and legitimacy in public policies. international journal of urban and regional research, 24(1), 210-223. pappu, r., quester, p. g., & cooksey, r. w. (2007). country image and consumer-based brand equity: relationships and implications for international marketing. journal of international business studies, 38, 726-746. parameswaran, r., & pisharodi, m. r. (1994). facets of country of origin image: an empirical assessment. journal of advertising, 13, 43-56. roth, k.p., & diamantopoulos, a. (2009). advancing the country image construct. journal of business research, 62 (7), 726-740. roth, m. s., & romeo, j. b. (1992). matching product category and country image perceptions: a framework for managing country-of-origin effects. journal of international business studies, 23(3), 477-497. samiee, s. (2010). advancing the country image construct a commentary essay. journal of business research, 63, 442-445. schooler, r, d., & wildt, a, r. (1968). the elasticity of product bias. journal of marketing research. 5(1), 78-81. sharma, p. (2014). consumer ethnocentrism: reconceptualization and cross-cultural validation. journal of international business studies, 46, 381-389. shimp, t., & sharma, s. (1987). consumer ethnocentrism: construction and validation of the cetscale. journal of marketing research. 24(3), 280-289. sumner, w. g. (1906). folkways. boston, ma: ginn. svensson, g. (2002). beyond global marketing and the globalization of marketing activities. management decision, 40(6),574-575. verlegh, p. w., & steenkamp, j. b. (1999). a review and meta-analysis of country-of-origin research. journal of economic psychology, 20, 521-546. wang, c, l., li, d, r., barnes, b., and ahn, j. (2012). country image, product image, and consumer purchase intention: evidence from an emerging economy. international business review, 21 (2012), 1041-1051. watson, j.j., & wright, k. (2000). consumer ethnocentrism and attitudes toward domestic and foreign products. european journal of marketing, 34 (9/10), 1149-1166. zolfagharian, m, a., & sun, q. (2010). country of origin, ethnocentrism and bicultural consumers: the case of mexican americans. journal of consumer marketing, 27(4), 345-357. zolfagharian, m., saldivar, r., & sun, q. (2014), immigrant consumers, ethnocentrism, country of origin, journal of consumer marketing, vol. 31 no. 1, pp. 68-84. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the impact of liquidity risk management on the financial performance of saudi arabian banks ishaq hacini university of mascara, algeria | e-mail: i.hacini@univ-mascara.dz abir boulenfad university of mascara, algeria | e-mail: abir.boulenfad@univ-mascara.dz khadra dahou university of mascara, algeria | e-mail: khadra.dahou@univ-mascara.dz abstract this paper aims to analyze the impact of liquidity risk management on the financial performance of selected conventional banks in saudi arabia for the period of 2002-2019. liquidity risk is measured with the loan to deposit ratio (ltd) and cash to deposit ratio (ctd). financial performance is measured by the return on equity (roe). equity to total asset ratio (eta) is used as the control variable. the study uses the panel data method (pool, fixed-effects and random-effects) for testing the study hypothesis. the results show that liquidity risk has a significant negative impact on the financial performance measured by saudi arabian banks. keywords: liquidity risk, liquidity management, financial performance, banks, saudi arabia new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.221 | http://emaj.pitt.edu | mailto:i.hacini@univ-mascara.dz mailto:abir.boulenfad@univ-mascara.dz mailto:khadra.dahou@univ-mascara.dz http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.221 | http://emaj.pitt.edu the impact of liquidity risk management on the financial performance of saudi arabian banks page |68| emerging markets journal the impact of liquidity risk management on the financial performance of saudi arabian banks ishaq hacini abir boulenfad khadra dahou i. introduction in recent years, liquidity risk has become one of the most important contemporary challenges facing the banking system in the world and arab banking in particular. liquidity becomes a major risk in banking operations and liquidity management has received great intention from regulators and policy-makers. in the modern theory of financial intermediation, banks exist in the economy for their roles in providing liquidity and transferring risk (azam, 2017). for the liquidity risk, two explanations can be provided. first, the deposits on the liability side of the balance sheet create the instantaneous liabilities irrespective of the outcome of the usage of funds on the asset side. thus, if the optimal employment is not made, a discord on the liability and asset side will be observed. secondly, the flow of short period liabilities, as well as the dues of other banks fund the medium to small period assets. the liquidity issue also emerges for the reason that, the depositors set to get back their deposits, but the bank does not have the necessary cash in hand. in reality, banks discover a variance in the asset and liability side on an orderly basis and have to control that carefully or they would be facing solvency risks (anjum, 2012). liquidity risk management is highly important for not only banks but also for the total system since the consequences of liquidity insufficiency can be extremely felt on both scales from the bank to the full system. therefore, banks are responsible for sound management of liquidity risk, which focuses on conserving enough level of liquidity, moreover being ready to face a range of pressure situations, probable losses, or weakness of funding sources (sviatlana & lara, 2017). proper and efficient management of liquidity improves the financial performance, which occupies a special position at present. the financial performance determines the bank’s efficiency and the extent to which it achieves its objectives. moreover, through it, it reveals the advantages and disadvantages of performance during a specific period and analyzes its causes. these are consolidating the positive aspects and overcoming the negatives. also, contributing to raising the level of performance in the future and avoiding risks (abbas & mourouj, 2015). the study focuses on the effect of liquidity risk management on the financial performance of saudi arabian banks. in light of the foregoing, the following problem is raised: does liquidity risk management affect the financial performance of saudi arabian banks? ii. literature review the concept of liquidity emerges from various economic perspectives. liquidity can be defined in the sense of how easy to sell a security and how easy to receive financing to trade a security. the first being called market liquidity and the latter being liquidity financing (godfrey, 2015). bank liquidity stands for the bank's capacity to satisfy financial commitments, as they are due. liquidity in commercial banks implies the capacity of the bank to fund, where appropriate, all its contractual obligations, which can include the lending, investment and withdrawal of deposits and the maturity of liabilities in the normal course of banking operations (md reaz, syed m, & saurav, 2016). liquidity risk is the actual or future risk resulting from the failure of an entity to fulfill its liabilities/obligations when they are due without incurring unreasonable losses. this is commonly called the liquidity risk of funding. there is a business dimension of liquidity risk becoming more significant in recent years, where a great dependence on financing institutions exists (aldo, 2015). liquidity risk is the one that arises from the inability of a bank to fulfill its obligations when they are due without incurring unacceptable losses. as depositors may call their funds at inappropriate times, triggering the selling of assets by fire has a negative effect on the bank's profitability (erika & raimonda, 2014). liquidity management refers to the preparation and control needed to ensure that the company retains adequate liquid assets either as an obligation to satisfy the incidental lenders’ demand or as a measure to apply the requirements of the monetary authorities (olagunju, adeyanju, & olabode, 2011). the key goal of liquidity management is to ensure that the cash inflows of a bank are matched with its cash outflows. if sustained across all banks, this equilibrium promotes the development of a sound and stable banking sector, which is a necessary element in the successful execution of banking intermediation. the objectives of bank liquidity management can be summarized as follows: meeting all cash outflow obligations constantly on a regular basis (both onand off-balance sheet), evading the obtaining of funds at market premiums or via the involuntary sale of assets, compliance with stipulated liquidity conditions and statutory reserve requirements (farai, 2020). many theories emerged to discuss the liquidity management. anticipated income theory states that, the bank can control its liquidity through the careful management of loans issued and the ability to receive these loans on time when they are due which helps to minimize the risk of repayment delays at maturity. this theory implies that, the bank will schedule its liquidity based on the borrower's expected income. this policy allows the bank to issue medium and long-term loans in addition to short-term loans, as long as the repayment of those loans is related to the regularity of the borrowers' expected income. according to this theory, this policy enables the bank to hold high liquidity (enekwe, eziedo, & agu, 2017). commercial loan theory states that the selfliquidation of the short-term debt and the funding of working capital achieve the bank’s liquidity automatically. creditors successfully repay the borrowed funds after the completion of their business cycles. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.221 | http://emaj.pitt.edu ishaq hacini, abir boulenfad, khadra dahou emerging markets journal | p a g e 6 9 according to this theory, the banks do not lend money to purchase real estate or consumer goods or for investing in stocks and bonds, due to the length of the expected payback period of these investments. this theory is suitable for traders who need to fund their particular trading transactions in short periods (ali, 2015). the trade-off theory states that, holding cash reserves under ideal capital market assumptions neither generates nor destroys the corporate value. when the need occurs, the bank can always raise funds from capital markets, where there are no transaction costs in raising these funds. funds may be collected at a fair price, since it is believed that the financial markets are completely informed about the bank's prospects. according to the tradeoff principle, banks seek to balance between the profit and costs of keeping cash at an acceptable level. due to liquidity premiums and tax drawbacks, the cost of keeping cash has a low rate of return. the advantages of holding cash are saving transaction costs to collect funds, in which the assets are liquidated to make payments, and the use of liquid assets to finance their operations and investments, where there are no other sources of financing available (daniel, 2017). shiftability theory implies that the liquidity of a bank is retained if the bank can retain assets that could be transferred or sold to cash easily. this point of view argues that the liquidity of a bank will be increased if it has assets to sell which can be shifted on to the central bank, which is the lender of the last resort. this theory also suggests that the shiftability, marketability, or transferability of the assets of a bank is the foundation for maintaining liquidity. the liquidity management theory focuses on the bank balance sheet's liability hand. this theory suggests that supplementary liquidity can be extracted from a bank's liabilities (moses, tobias, & margaret, 2018). liquidity risk management for banks focuses on the ability of the bank to finance its activities and fulfill its obligations on time and at a reasonable cost. it also means the compatibility between financial reserves and employment in various assets in the medium and short term. this requires studying the nature of the bank’s deposits and the pattern of the cost of obtaining these deposits, the return realized from the use of these deposits in other investments, and the adequacy of this return to match the cost of deposits on the one hand (ahlam & aicha, 2015). there are three facets of liquidity risk management: assessment and management of net funding needs, market access, and contingency planning. a significant part of liquidity risk management is the estimation of potential future events. the analysis of net subsidizing prerequisites involves the construction of a maturity ladder and the calculation of the cumulative net excess or deficit of funds on selected dates. banks should periodically estimate the potential money projected in the future. flows instead of concentrating solely on written agreements with liquidity within which forward or backward will scroll. analyzing whether a bank is liquid depends on the conduct of flows under different circumstances. liquidity risk control can provide several possibilities. the "going-concern" scenario has established a benchmark for balance sheetrelated cash flows during the normal course of business. liquidity risk management must therefore involve various scenarios (saleh, 2014). in general, this scenario is extended to the management of deposits by the bank. the second state of affairs takes into account a bank's liquidity into the crisis, in which a large portion of its liabilities cannot be repaid or substituted, i.e. the contraction of a bank record. this scenario relates to many provisions of current management measures of cash or liquidity. a third scenario refers to a general financial crisis in which liquidity is affected. during this scenario, liquidity management relies on credit quality, with crucial variations in financing access between banks. an implicit presumption would be generated for liquidity management that the central bank will guarantee access to some kind of finance. central banks are interested in learning this scenario because of the need to build a buffer of total liquidity for the banking sector and to practically unfold the liquidity burden among key banks (azam, 2017). the liquidity risk is usually measured by the financial ratios based on banks’ financial statements. the cash to total assets ratio is used to measure the liquid assets of the bank. the increase in this ratio indicates that there are untapped cash balances, which reduces the bank’s profitability. the decrease in this ratio from its standard rates means that the bank is exposed to many risks, and the bank will enable to face sudden withdrawal (najla & tahani, 2020). total cash and short-term investments to total assets ratio indicates a decrease in the bank's liquidity risk, due to the increase in cash balances and investments with banks and the increase in their ratio to the ratio of total assets, which allows the bank to face its various obligations (lebbaz & boukhari, 2020). loans to total deposits (ltd) ratio is typically a utilized measure for evaluating liquidity and credit risk, which is estimated by separating the banks’ total loans or total financing by its total deposits. this ratio shows, in any case, the level of a bank's loans funded through deposits. on the opposite hand, a high ltd ratio may show a lot of things, but from a liquidity standpoint. a high level of this ratio indicates a possibility of no liquidity and failure due to deposits because they are a completely constant source of funding for a bank. that’s why a higher loan deposit ratio means supplementary financial pressure by making too many loans. therefore, a lower mortgage deposit ratio is continually beneficial to the better one (mustafa, 2014). financial performance refers to the act of conducting the financial activity. financial efficiency, in a wider context, refers to the extent to which financial targets have been achieved. it is used over a given period to calculate the total financial health of the bank (tahiri, 2018). financial performance refers to the extent to which a bank's financial targets are achieved. in monetary terms, financial results would calculate a bank's outcomes to get a competitive edge over the rivals. banks can set up the best financial and non-financial systems (harrison, 2015). the value of banks' financial performance stems from the fact that it seeks to assess the banks' performance by determining the banks' strengths and weaknesses. the performance evaluation helps the managers to make decisions and strategies. the value of financial performance also stems from the process of monitoring the conditions of the bank, evaluating its actions, directing performance in the right direction and leading to sound decision-making. financial performance volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.221 | http://emaj.pitt.edu the impact of liquidity risk management on the financial performance of saudi arabian banks page |70| emerging markets journal is also important for the external climate, as a bank with high financial performance is more able to adapt to new environmental challenges and opportunities and can also take advantage of different investment opportunities (tahir & wael, 2007). the value of financial performance is not limited exclusively to the bank, but also to the investor. where, the investor can follow up and learn about the operations of the bank, track the economic and financial circumstances surrounding it, and determine the extent of the effect of financial performance instruments in terms of profitability, liquidity, operation, and other aspects. moreover, the course of reviewing, evaluating and interpreting the financial statements allows the financial performance of the investor to take the appropriate decision according to the banks’ conditions (mahmoud, 2010). profitability is the first line of protection for a bank against unforeseen losses. it reinforces its capital position and increases potential profitability through retained earnings investment. ultimately, an entity that persistently makes a loss will deplete its capital base, placing equity and debt investors at risk in turn. all of the strategies and activities are built by the bank to optimize the benefit of the bank to measure profitability (zawadi, 2013, p. 136). profitability is measured using the return on assets (roa), return on equity (roe), return on resources (ror) and net interest margin (nim). return on assets (roa) is the revenue earned by the bank related to the assets used in business operation. it is calculated as net income/total assets (or pre-tax profit). it offers details about the success of management in using the company's assets to produce profits (mustafa, 2014). return on equity (roe) measures the profitability of the equity capital of a bank. its value is of particular interest to the bank's shareholders. it is roughly equal to the size of net profit to which shareholders are obliged to make their capital investments. this is the risk they are taking by spending their funds to ensure an acceptable amount of profit (havryliuk, 2017). return on resources (ror) is formulized by [net profit after tax / (total deposits + equity)]. this rate shows the share of each resource unit, whether independent or external, in the net profit achieved. this shows the efficiency of the bank in achieving income from the resources available (zaher, 2011). net interest margin (nim) is a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. the nim variable is defined as the net interest income divided by total earnings assets (vincent & gemechu, 2013). the focus of this research is to explore the impact of liquidity risk management on financial performance. eyob (2019) examined the effect of liquidity risk on the financial performance of ethiopian commercial banks. balanced data of nine commercial banks were collected from 2007 to 2016. eight factors that might affect the financial performance of ethiopian commercial banks were selected and analyzed. the result of panel data analysis showed that liquidity coverage ratio, net stable funding ratio, loan to deposit ratio and liquidity ratio have negative effects on ethiopian commercial banks’ financial performance. saifullah, rashed, & alamgir (2019) studied the relationship between liquidity and financial performance of commercial banks in bangladesh. the investigation was performed using the panel data method for a sample of 31 commercial banks listed in the dhaka stock market between the years of 2010-2017. according to the research, liquidity did not have an impact on return on asset (roa) and return on equity (roe). laminfoday (2018) tried to understand the association between liquidity risk management and financial performance of commercial banks in sierra leone. the study focused on eight commercial banks and a descriptive study design was adopted. secondary data were collected covering five years from 2013 to 2017. the result of this research shows a significant negative nexus between liquidity risk management and financial performance of commercial banks in sierra leone. the study also reveals that liquid assets to total assets had the greatest impact on financial performance and had an inverse relationship. abbas & mourouj (2015) examined the impact of the important banking indicators, such as liquidity risk indicators on financial performance. the study selected a sample of (47) banks in iraq for a period of ten years from 2005 to 2014. they started from the hypothesis that, the strongly positive relationship among those indicators and the banking financial performance had an important effect in realizing a sound banking financial performance. on the other hand, a strong banking system sustained economic growth and protected the local economy during crises. finally, researchers reached a set of conclusions, including the high percentage of cash and cash assets compared to other assets at banks. this indicates the accumulation of non-profitable liquid funds in them, which greatly affected the various financial performance ratios they have, and this may reflect the fear of bank administrations from entering into investment fields involving some kind of risk. iii. methodology data this study investigates the impact of liquidity management risk on the financial performance of saudi arabian banks for the period of 2002-2019. the data were retrieved from the banks’ annual financial reports. model specification return on equity (roe) was selected as the main proxy for bank financial performance. roe reflects how effectively a bank manages the shareholders’ equity. it shows how much the bank earns from the shareholders’ equity (berrani & hacini, 2021). roe is an important measure of banking returns because it indicates whether a bank can do well relying on its resources (farhi & hacini, 2021). roe is the net income divided by average equity (noraini, 2012). cash to total deposit ratio (ctd) and loan to deposit ratio (ltd) measure the liquidity management risk. ctd shows how much can a bank lend according to the deposits that were mobilized. it also measures the banking main activity (suman & raj, 2016). ltd is commonly used as a statistic for assessing the bank's liquidity. it is calculated by dividing the bank’s total loans by the total deposits. if the ratio is too high, it means that banks might not have enough liquidity to cover any unforeseen fund requirements. if the ratio is volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.221 | http://emaj.pitt.edu ishaq hacini, abir boulenfad, khadra dahou emerging markets journal | p a g e 7 1 too low, the bank profitability may be deteriorated (saleh, 2014). equity to assets ratio (eta) is a financial indicator that is used to measure the owner’s motivation to continue for holding the bank. this ratio examines the ability of bank’s equity to finance the bank assets (fahrul & buyung, 2018). the functional relationship among roe, liquidity risk and the other factors can be expressed as follows: roe it = β0it + β1(ctd it) + β2(ltd it) + β3(eta it) + εit table 1 shows that ltd has the highest mean value (0.765) and ctd has the lowest mean value (0.126). average ctd and ltd indicate that saudi arabian banks are lowly liquidated to pay off their creditors and their loans are more than their deposits. the standard deviation indicates that the values were widely dispersed from their mean values. this means that as the mean value increases, the value of standard deviation will also increase and vice versa. the low standard deviation of eta implies that it does not deviate more than its mean. table 1: variables’ descriptive statistics source: stata software output iv. results and discussion stationarity test the stationarity is tested using the pesaran test. the test is built on two hypotheses. h0 hypothesis states that the time series contains a unit root indicating that they are not stable over time (no stationary) and the alternative hypothesis h1 states that the time series does not contain a unit root meaning that it is stable (stationary). h0: there is a unit root (no stationary) h1: there is no unit root (stationary) table 2: pesaran s cadf test variables z(t-bar) pvalue roe (level) -3.062 0.001* ctd (level) -1.801 0.078** ltd (level) -1.422 0.078** eta (level) 0.337 0.632 eta (2ed difference) -3.736 0.000* *= significant at 5%, **=significant at 10%. source: stata software output the results in table 2 indicate that roe has pvalues less than 5%, the null hypothesis is rejected and roe is stationary at the level. the results of the test for ctd and ltd indicate that the p-value is less than 0.1 (significant at 10%). therefore, the null hypothesis is rejected and the two variables are stationary at the level. equity to assets ratio (eta) variable indicates that the pvalue is more than 5% and 10%, which means that the null hypothesis can not be rejected. this means that the variable contains a unit root and it is not stationary. the results also show that eta’s p-value is less than 5%. thus, the null hypothesis is rejected and eta at the second difference does not contain a unit root and it is stationary. model estimation the study’s model is estimated according to three methods: ordinary least squire (ols), fixed effect and random effect. table 3: ols results variable coef std t p ctd -0.2544 0.1216 -2.09 0.039* ltd -0.2328 0.0766 -3.04 0.003* eta -0.1947 0.2853 -0.68 0.497 cons 0.3781 0.0657 5.75 0.000* num obs 107 r2 0.1019 adj r2 0.0757 prob f 0.0111 *= significant at 5%, **=significant at 10%. source: stata software output table 3 shows that ols model fits well the data where f (pvalue) equals 0.0111. the variables’ coefficients analysis indicates that ctd (p-value= 0.039) and ltd (p-value= 0.003) have significant negative effects on roe, while etr (p-value= 0.497) have no significant effect on roe. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.221 | http://emaj.pitt.edu the impact of liquidity risk management on the financial performance of saudi arabian banks page |72| emerging markets journal table 4: fixed-effects results variable coef std t p ctd -0.3871 0.1404 -2.76 0.007* ltd -0.4085 0.1041 -3.92 0.000* eta -0.2378 0.2705 -0.88 0.381 cons 0.5336 0.0917 5.81 0.000* num obs 107 num of groups 07 f test u_i= 0: f(6, 97) = 3.08 prob>f 0.0083 *= significant at 5%, **=significant at 10% source: stata software output to test the appropriateness of the fixed effect model, we check the heterogeneity between the banks (i) based on the following hypothesis: h0: sigma(i)^2 = sigma^2 for all i h1: sigma(i)^2 ≠ sigma^2 for all i table 4 shows that f(6, 97) = 3.08, prob>f= 0.0083, so the h0 is rejected and the fixed effect model is appropriate because there is heterogeneity between the banks. ctd and ltd have negative significant effects on the roe, while eta has no significant effect on the roe. table 5: random-effects gls results *= significant at 5%, **=significant at 10% source: stata software output table 5 indicates that prob(chi2) of the randomeffects model (0.0035) is less than 5 %, which indicates that the model is appropriate. to test the appropriateness of the random-effects model, we use breusch and pagan lagrangian multiplier (lm) test. lm test helps to decide between a random-effects regression and an ols regression is based on the following hypotheses: h0: no difference across units. h1: difference across units table 6: breusch test test: var(u)=0 chibar2(01)= 3.98 prob>chi2= 0.0231 *= significant at 5% source: stata software output table 6 shows that the prob (chi2) of the breusch test is 0.0231, which is less than 5 %. this indicates that the random-effects model is appropriate for the data. the regression results for the random effects model reveal that ctd has a significant negative effect on roe, which means there is an inverse relationship between the two variables = -0.2936706 (p-value = 0.021). there is a significant negative effect of loan to deposit ratio ltd on roe, which means there is an inverse relationship between the two variables. this means that the higher the loan-to-deposit ratio, the lower the banks' financial performance. there is a significant negative effect of eta on roe, which means there is an inverse relationship between the two variables. this means that the higher the equity to assets ratio, the lower the banks' financial performance. the tests revealed that random and fixed effect models are appropriated compared to ols. now we should choose between the random and fixed effects models by applying the hausman test. hausman test for selecting the best model of this data, the hausman test was used to compare and choose between the results of the random-effects and fixed-effects, by testing the following hypothesis: h0: random effects model is the appropriate model. h1: the fixed effects model is the appropriate model. table 7: hausman test chi2(3)= 4.01 prob>chi2= 0.2605 source: stata software output table 7 shows that prob (chi2) of the test is more than 5 % (0.260). therefore, we cannot reject the null hypothesis and the appropriate model is the randomeffects. the random effect model is more appropriate for explaining the effect of liquidity risk on financial performance compared to the fixed effect model. random-effects gls regression (robust) to solve the problem of heteroscedasticity, we need to apply robust estimation for the random effect to obtain heteroscedasticity-robust standard errors (known as huber/white or sandwich estimators). volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.221 | http://emaj.pitt.edu ishaq hacini, abir boulenfad, khadra dahou emerging markets journal | p a g e 7 3 table 8: random-effects gls robust results variable coef std t p ctd -0.2936 0.1285 -2.29 0.022* ltd -0.2954 0.1279 -2.31 0.021* eta -0.2124 0.0835 -2.54 0.011* cons 0.4315 0.1127 3.83 0.000* num obs 107 wald chi2(3) 22.13 prob>chi2 0.0001 *= significant at 5% source: stata software output table 8 shows that prob (chi2) of the randomeffects model (0.0001) is less than 5 %, which indicates that the model is appropriate. all independent variables of ctd, itd and etr have significant negative effects on roe. discussion of the results the ratio of cash to deposits negatively affects the banks’ financial performance. ctd increases when the banks hold cash more than deposits. the increase of ctd gives the bank’s customers the trust that the bank will be able to provide the customers’ deposits when they request them. on the other hand, when ctd increases above a certain level, funds will be idle and the bank will suffer the opportunity costs and the deposit interest, which negatively affects the bank’s performance. therefore, the saudi banks maybe hold a large percentage of cash (surplus in liquidity) to face the demand of deposits’ withdraw. moreover, this what is (mishra & pradhan, 2019) suggested previously. the ratio of loan to deposits negatively affects financial performance indicators, because the loan-todeposit ratio contributes to assessing the bank's liquidity and helps investors to determine whether the bank is properly managed its liquidity. if the ratio is too high, this means that the bank does not have sufficient liquidity to cover any financing requirements such as default on loans or an economic downturn, which in turn greatly and negatively affects the bank’s performance. (abbas & mourouj, 2015) and (laminfoday, 2018) found that the increase of this ratio indicates an increase in the bank’s need for new financing sources to meet loan requests. either borrowing from the money market or selling some assets and this matter is followed by higher financing costs, which leads to lower profits and increased indebtedness. it was found that banks` management should pay more attention to maintain the optimal loans/total deposits ratio and not over lend to avoid any source of liquidity deficit risk (thair & qais, 2020). this is because more lending will expose the banking sector to high default risk which will adversely affect the banking sector’s returns and ultimately its eps. this also means that the higher the loans granted by banks, the more liquidity risk faced by them, as it decreases the operating cash flow per share generated by banks due to an increase in the amount of cash outflow. the ratio of equity to assets negatively affects financial performance. high eta means that the bank has less risk. at the same time, the bank may suffer from a shortage of funds to finance its operations and investments. thus, this leads to deteriorate the bank profitability and minimize the investment’s returns. if possible, banks should balance between risk level and profit as suggested by previous research (bassam, 2016). v. conclusion regarding the importance of liquidity management risk and its effect on the financial performance, this study focuses on studying the subject in saudi arabia for the period of 2002-2019. the financial performance is measured by the return on equity (roe) and liquidity risk is measured by the ratio of loans to deposit and cash to deposit ratio. this research presents several findings. the results found a negative effect of liquidity risk on the financial performance of saudi arabian banks. the loan to deposit ratio has a negative effect on the financial performance of saudi arabian banks. the negative effect is explained as the banks’ need for new financing sources to meet loan requests, by borrowing from the money market or selling some assets. this policy leads banks to bear high financing costs, which results in lower profits and increasing indebtedness. the results also revealed that the cash to deposit ratio negatively affects the banks’ financial performance. this is due to cash increasing above a certain level makes funds idle and the bank will suffer from the opportunity costs and the paid deposits interest, which negatively affects the bank’s performance. based on the results of this study, a set of suggestions can be presented. the necessity of preserving some semi-liquid investments to ensure that there is no exposure to any liquidity risk in the future is evident. the bank should take advantage of the excess liquidity available during granting loans and increase its investment. saudi arabian banks must invest the excess liquidity to increase the banks’ profitability. saudi arabian banks also need to adopt creative policies to manage their liquidity efficiently for avoiding risks. references abbas, k. a.-d., & mourouj, t. h. (2015). the impact of bank liquidity risk management on banking financial performance an applied study in a sample of private banks. journal of administration and economics, vol. 05, no. 20, 73-100. ahlam, b., & aicha, t. (2015). liquidity risk management in conventional and islamic banks a comparative study to banks in qatar for the period 2011-2014. economic insights journal, no. 08, 104-120. aldo, s. (2015). liquidity management, a funding risk handbook. uk: the wiley finance series products. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.221 | http://emaj.pitt.edu the impact of liquidity risk management on the financial performance of saudi arabian banks page |74| emerging markets journal ali, s. a. (2015). the effect of the liquidity management on profitability in the jordanian commercial banks. international journal of business and management; vol. 10, no. 1, 6271. anjum, i. (2012). liquidity risk management: a comparative study between conventional and islamic banks of pakistan. global journal of management and business research, vol. 12, no. 5, 54-64. azam, a. (2017). measuring liquidity risk management and impact on bank performance in iran. journal of money and economy vol. 12, no. 3, 295-315. bassam, h. (2016). a study to define the effect of financial structure on the financial performance of islamic banks listed in damascus securities exchange. research submitted for obtaining a magister degree in business administration. damascus, syrian virtual university, syria. berrani, m., & hacini, i. (2021). the role of corporate governance in improving the banks financial performance empirical evidence from listed banks in the saudi market, journal of economic integration, vol. 9, no. 2, 651-667. daniel, b. e. (2017). liquidity management and performance of deposit money banks in nigeria (1986 – 2011): an investigation. international journal of economics, finance and management sciences, vol. 05, no. 03, 146-161. enekwe, c. i., eziedo, k. n., & agu, c. i. (2017). effect of liquidity risk on financial performance of selected quoted commercial banks in nigeria. journal of global accounting, vol. 5, no. 1, 21-34. erika, b., & raimonda, m.-k. (2014). liquidity risk and its management in lithuanian banking system. mokslas–lietuvos ateitis/science–future of lithuania, 64-71. eyob, k. (2019). the impact of liquidity risk on financial performance of commercial banks in ethiopia. a thesis submitted for the requirements for the degree of magister of science in accounting and finance. addis ababa, school of graduate studies, addis ababa university, ethiopia. fahrul, p. s., & buyung, s. (2018). effect of equity to assets ratio (ear), size, and loan to assets ratio (lar) on bank performance. iosr journal of economics and finance, vol. 9, no. 4, 1-6. farai, d. d. (2020). the impact of liquidity management on bank financial performance in a subdued economic environment: a case of the zimbabwean banking industry. pm world journal, vol. ix, no. i, 01-20. farhi, m, & hacini, i. (2021). the impact of the ownership diversification on the financial performance an empirical study on financial companies in qatar. psychology and education, vol. 58, no. 5, 1553-6939. godfrey, m. (2015). liquidity and bank performance. international business & economics research journal, vol. 14, no. 3, 453-462. harrison, k. s. (2015). the effect of liquidity management on the financial performance of deposit taking saccos in nairobi county. doctoral dissertation, university of nairobi. havryliuk, o. (2017). indicators of effective bank performance. technology audit and production reserves, no. 5/5, 39-43. laminfoday, d. (2018, december). the effect of liquidity risk management on financial performance of commercial banks in sierra leone. a research proposal submitted for the award of the degree of magister of business administration. nairobi, school of business, university of nairobi. lebbaz, a., & boukhari, a. (2020). risk assessment banking liquidity in algerian commercial banks using financial analysis indicators case study of the algerian peace bank 2015-2018. journal of business administration and economic studies, vol. 01, no. 06, 223-239. mahmoud, m. e. (2010). financial performance and its impact on the stock returns of joint stock companies. oman: al jamid for publication and distribution house, first edition. md reaz, u., syed m, a. r., & saurav, d. (2016). liquidity risk and performance: a study on the banking sector of bangladesh. business reviewa journal of business administration discipline, vol. 11, no. 182, 35-42. mishra, s., & pradhan, b. b. (2019). impact of liquidity management on profitability: an empirical analysis in private sector banks of india. revista espacios journal, vol. 40, no. 30. moses, o. g., tobias, o., & margaret, o. (2018). effect of liquidity risk on financial performance of deposit taking savings and credit societies in kenya. international journal of economics, commerce and management, vol. 06, no. 1, 259-283. mustafa, h. m. (2014). evaluating the financial performance of banks using financial ratios a case study of erbil bank for investment and finance. european journal of accounting auditing and finance research, vol. 2, no. 6, 162-177. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.221 | http://emaj.pitt.edu ishaq hacini, abir boulenfad, khadra dahou emerging markets journal | p a g e 7 5 najla, i. a., & tahani, e. a. (2020). the effect of liquidity on the profitability of commercial banks in the kingdom of saudi arabia period (2010-2019). journal of economic, administrative and legal sciences vol. 4, no. 12, 109-132. noraini, m. a. (2012). liquidity risk management and financial performance in malaysia: empirical evidence from islamic banks. aceh international journal of social sciences, vol. 1, no. 2, 77-84. olagunju, a., adeyanju, o. d., & olabode, o. s. (2011). liquidity management and commercial banks’ profitability in nigeria. research journal of finance and accounting, vol. 2, no. 7/8, 24-39. ramadan, n. a. (2013). accounting and financial information role in liquidity risk management, applied study on commercial banks working in gaza strip. magister thesis in accounting and finance. ghaza, department of commerce, islamic university, palestine. saifullah, k., rashed, m., & alamgir, h. (2019). the impact of liquidity risk on banking performance: evidence from the emerging market. global journal of management and business research: c finance, vol. 19, no. 4, 46-52. saleh, t. a. (2014). bank liquidity risk and performance: an empirical study of the banking system in jordan. research journal of finance and accounting, vol. 5, no. 12, 155164. suman, g., & raj, k. (2016). analysis of cash deposit ratio & credit deposit ratio of public sector banks in india. international journal of research in management, science & technology, vol. 4, no. 2, 72-74. sviatlana, h., & lara, g. (2017). management strategies for bank's liquidity risk. international journal of economics and finance; vol. 9, no. 6, 98110. tahir, m. m., wael, m. s. (2007). strategic management: an integrated methodological perspective. oman: wael publishing house, first edition. tahiri, n. r. (2018). study on financial performance of the afghanistan bank 2015 and 2016. kabul, afghanistan: mpra paper no. 88477. thair, a. k., & qais, a. a.-k. (2020). the effect of liquidity risk management on the jordanian financial sector – the proxy of commercial banks. international journal of innovation, creativity and change, vol. 14, no. 1, 240253. vincent, o. o., & gemechu, b. k. (2013). determinants of financial performance of commercial banks in kenya. international journal of economics and financial issues, vol. 3, no. 1, 237-252. zaher, s. b. (2011). assess the financial performance of islamic and conventional banks using financial indicators. magister thesis in accounting and finance. department of commerce, the islamic university gaza, gaza-palestine. zawadi, a. (2013). comparative analysis of financial performance of commercial banks in tanzania. research journal of finance and accounting, vol. 4, no. 19, 133-143. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu a field research to identify psychological factors influencing the debt repayment behavior in turkey mehtap özşahin yalova university, turkey | mehtap.ozsahin@yalova.edu.tr senay yürür yalova university, turkey | senay.yurur@yalova.edu.tr erman coşkun mohammed bin salman college of entrepreneurship and business, saudi arabia| ecoskun@mbsc.edu.sa abstract this research aims to exploratively search relevant psychological determinants for debt repayment behavior. in this regard, the research question is: which psychological factors affect the debt repayment behavior? some research in literature argue that the socio-economic factors alone may not be sufficient to explain debt and repayment behavior, and some other factors should be also utilized. this study will focus on psychological factors consisting of personality and attitudes. to the our best knowledge, in turkey there is very limited amount of research conducted in this area and as one of the highest individual credit using countries it is essential to use psychological factors in credit risk evaluation processes. thus, this research, examines effects of personality characteristics and attitude on debt repayment behavior in the context of turkish culture, and is expected to fill a gap and to contribute to both national and international literatures. the study utilizes qualitative research methodology to explore psychological determinants and their effects on debt repayment behavior. in depth interview research methodology has been used to explore the personality characteristics and attitude influencing debt repayment behavior. the research findings revealed that, the responsibility, long term orientation, sanction fear, sense of collectivism, rational decision making and risk aversion are main characteristics of regular payers, while external locus of control, irresponsibility, short term orientation, irrational decision making, emotional imbalance are common characteristics of irregular payers. so, according to findings, , conscientious, time orientation, sanction fear, sense of collectivism, locus of control and decision making style can be enlisted as primary personal and attitudinal factors explaining the repayment behavior. keywords: debt repayment, personality, attitude, psychological factors, qualitative method new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.156 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:mehtap.ozsahin@yalova.edu.tr mailto:senay.yurur@yalova.edu.tr mailto:ecoskun@mbsc.edu.sa http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.156 | http://emaj.pitt.edu a field research to identify psychological factors influencing the debt repayment behavior in turkey page |26| emerging markets journal a field research to identify psychological factors influencing the debt repayment behavior in turkey mehtap özşahin senay yürür erman coşkun 1. introduction in practice, most of the financial institutions make credit decisions based on socio economic or demographic data and they do not use personality related factors in credit granting process. according to interactionist perspective in psychology, individuals’ behaviors are traced by not only environmental and situational factors, but also individuals’ needs and personality traits. based on this approach, it is apparent that individuals’ personality traits can be featured as primary determinants of debt repayment behavior. however, in practice, most of the financial institutions do not use personality related factors in credit granting process and to the best of our knowledge, there are a few studies in this area. these facts were the motivation of this study. in practice, customers’ financial history is the first variable considered in credit score assessment and decisions. if a person does not have any registered credit or financial history, other possible indicators such as socio economic and demographic factors including income level, spending attitude, occupation, etc. are considered by credit assessors. the main objective of including those socio-economic and demographic factors in assessment process is to predict debt repayment behavior of a person. in last decade, besides socioeconomic and demographic factors, psychological factors consisting of personality traits, attitudes and behaviors have been emphasized as potential predictors of repayment behavior in debt related studies. self-esteem, self-efficacy, locus of control, attitudes towards money and debt, risk attitude, financial literacy, time horizon, social comparison and compulsive buying behavior are some of the psychological factors examined by researchers to explain problematic debts (vieira, rovedder de oliveira and kunkel, 2016; harrison, agnew and serido, 2015; achtziger, hubert, kenning, raab and reisch, 2015; stumm, o’creevy and furnham, 2013; rogers, rogers and securato, 2015; arya, eckel and wichman, 2013; gathergood,2012; wang,lu & malhotra, 2011; mewse, lea and wrapson, 2010; lusardi and tofano, 2009; stone and maury, 2006). previous research on this issue mostly focused on economic and sociological predictors of repayment behavior. in 2000’s, psychological factors along with economic and sociological factors have been started to be considered to explain the debt related behaviors (kamleitner et al., 2012). moreover, while robb and sharpe (2009) indicate the inadequacy of socio-economic factors in explaining the debt level; wang et al. (2011) argued that psychological factors involving personality traits (lea et al., 1993, norvilitis et al., 2006; webley, 1994) and attitude factors (lea et al., 1993; livingstone & lunt, 1992; zhu and meeks, 1994) still needed to be examined. in turkey, even though there is no relevant research directly focusing on the relationship between psychological factors and repayment behavior; a few studies examining the effects of behavioral and demographic factors on credit card use, debt level, debt structure have been conducted (eg. özkan, 2014; kaptan, 2011). among psychological factors, personality traits and attitudes are more significant ones to be associated to debt and debt repayment behavior and they have been scarcely studied in literature. in this context, this study, aiming to identify personality traits and attitudes affecting debt repayment behavior exploratively, is expected to contribute and help to fill a gap in literature. moreover, findings of this research are expected to reveal repayment related psychological factors special to turkish culture, which also makes this study valuable. 2. literature review and theoretical framework according to dispositional approach, individuals possess stable traits that influence their behaviors (davisblake and pfeffer, 1989). these traits are primarily unobservable dispositions or mental states like values, needs or personalities. from this perspective, it can be said that personality and psychological states may have an effect on debt-repayment behavior of an individual. in addition to this, in the literature it is argued that socioeconomic factors are not enough to explain debt volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.156 | http://emaj.pitt.edu mehtap özşahin, senay yürür, erman coşkun emerging markets journal | p a g e |27 repayment behavior of individuals. psychological factors need to be considered for understanding and explaining these behaviors (wang et al., 2011; robb and sharpe, 2009). sullivan (1982)’s research, conducted with 1250 bankrupt participants, has been considered more comprehensive and initiating research on this subject. the research findings revealed that unexpected healthcare costs, wedding expenses and dismissal from job as main factors result in repayment default, correspondingly bankruptcy. one year after sullivian and schuchman (1983) repeated the research, and found that besides medical costs, irresponsible credit card use also leaded to default. later, dessart and kuylen (1986) conducted a survey on 400 participants who failed to repay and stated external locus of control and financial illiteracy as main characteristics of those people. those respective researches have brought out the low education level, low income level, young age, financial illiteracy, unexpected healthcare and wedding expenses, loosing job as predictors of payment default (tokunaga, 1993). lea et al. (1993) indicated that psychological factors involving social comparisons, social support for debt, economic socialization, social comparisons, money management style, locus of control, attitudes, time horizon are associated with debt extensively. parallel to lea et al., livingstone and lunt (1992: 132) also stated that people making payments regularly are more concerned with personal achievement and self-direction, and they are more likely to see their debts as temporary, caused by external, unstable and uncontrollable disasters rather than stable causes like greed or the convenience of credit. finally, they usually have positive attitude towards credit and reject the shame view of debt. similarly, norvilitis et al. (2006) searched factors like personality traits, attitudes towards debt and financial literacy as the predictors of greater debt (credit card debt) and found out that financial illiteracy is more influential factor leading problematic debt. briefly, in previous studies, personality factors, like self-control, self-esteem, self-efficacy, sensation seeking, deferring gratification, impulsiveness and locus of control, and attitude factors, like money attitude, debt attitude, credit attitude, satisfaction with life, have been come out as predominant factors influencing repayment behavior (wang et al., 2011). the studies conducted in turkey, mostly examined the effects of behavioral and demographic factors on credit card use, debt level, debt structure rather than focusing on the direct relationship between psychological factors and repayment behavior. for example, kaptan (2011) evaluated the households’ attitudes towards consumer credits and their repayment behavior by analyzing 184.603 open and close consumer credit data obtained from 194.143 customers of a turkish commercial bank. moreover, özkan’s (2014) research, aiming to investigate the main characteristics of credit card users, revealed that financial illiteracy, gender, age, income level, occupation, and irrationality are more related factors to debt litigation. the absence of research focusing on the relationship of psychological factors to debt repayment behavior in turkey and insufficiency of socio-economic factors in explaining debt and repayment behavior, indicate the essentiality of this research, investigating psychological determinants of repayment behavior. 3. research method this study, aiming to explore psychological factors related to repayment behavior, utilizes qualitative research method. recently, qualitative researches have increased in importance in social science. it is commonly accepted that qualitative and quantitative research methods complete each other to explain social circumstances and incidents. qualitative research methods, such as in depth interview and focus group, emphasize to describe events and phenomena in their natural environment, to understand and reflect participants’ view with an inductive and interpretive approach. thus, qualitative research methods are commonly used in initial stage of research in social science and detailed data obtained from qualitative research (eg. focus groups or depth interview) constitute a base for quantitative research like questionnaires (kitzinger, 1995). therefore this study used in depth interview to reveal turkish culture and socio-economic structure specific personal traits, attitudes and behaviors affecting repayment behavior. in this context, at first phase of research, in depth interview method was used. the researchers, using purposive sampling, targeted three types of sample groups to interview: (1) “bank staff” who have authority to make credit decisions, along with interacting with individual customers one to one and have at least 5-years of experience in individual customer banking; (2)“regular payers” who have debtor-creditor relationship with a bank and pay his/her debts before or on due date; and (3) volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.156 | http://emaj.pitt.edu a field research to identify psychological factors influencing the debt repayment behavior in turkey page |28| emerging markets journal “irregular payers” who have debtor-creditor relationship with a bank but have some problems with paying his/her debts (eg. paying interest/fine because of late payment or facing debt litigation or attachment proceedings). semi-structured interviews have been conducted with 10 participants. 2 participants, referred as “bank staff”, are executives in individual customer banking department of 2 different banks; 7 participants, referred as “regular payer”, pay their debts regularly and 1 participant, referred as “irregular payer”, pays his debts occasionally. demographic characteristics of participants are given in table 1 below: table 1. demographics of participants face to face interviews have been conducted and all interviews were recorded by digital voice recorder with the permissions of the participants. participants were informed that all information they shared will be used just for academic purposes and will not be published without their permission. respondents were asked different questions structured in different forms to explore and to identify distinctive personality traits, attitudes and behaviors of regular and irregular payers as depicted on following (table 2): table 2. sample questions asked to respondents the voice recordings (93 minutes) were transcripted into a written document by researchers in the same day. then, data obtained from 10 interviewees were coded and analyzed by 3 different researchers. for methodological soundness of this research, triangulation strategy (denzin 1978) was followed. as purpose of triangulation (jick 1979) strategy, firstly, data were gathered from different sources such as bank staff, regular payers and irregular payers, secondly, data were analyzed by 3 researchers individually. for data analysis process, the framework of miles and huberman (1984) has been adopted. miles and huberman (1984) proposed that qualitative data analysis should include (1) data reduction (the process of selecting, focusing, simplifying, abstracting, and transforming the data that appear in written up field notes or transcriptions), (2) data display (an organized, compressed assembly of information through diagrams, charts or tables, and (3) conclusion drawing-verification (revisiting the data as many times as necessary and check the literature to cross-check or verify these emergent conclusions) processes. in this direction, data obtained from 10 participants was grouped based on 2 main questions: (1) what are the main characteristics of regular payers?, and (2) what are the main characteristics of irregular payers. then, those data were coded by 2 different researchers independently by using the open coding technique to ensure the inter-rater reliability (armstrong, gosling, weinman, marteau 1997). 85% consistency is provided between two researchers’ coding. the 3rd researcher checked the coding, and coding differences among researchers were eliminated through reconciliation. concepts provided by initial coding process, were subsumed into subcategories at second stage by the researchers jointly and the main characteristics of regular payers and irregular payers were categorized as depicted in table 3. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.156 | http://emaj.pitt.edu mehtap özşahin, senay yürür, erman coşkun emerging markets journal | p a g e |29 table 3. codes provided by two-step coding analyses regular payers (initial coding) regular payers (subcategorization coding) responsibility (8) responsibility (23) punctual (3) prudent (3) dependable (3) planned (1) consistent (2) ethic value (3) long term orientation (5) long term orientation (5) rational decision making (4) rational decision making (5) realist (1) sense of collectivism (5) sense of collectivism (5) sanction fear (4) sanction fear (4) risk aversion(2) risk aversion (2) intolerant to stress (1) intolerant to stress internal locus of control(1) internal locus of control financial literacy (1) financial literacy irregular payers (initial coding) irregular payers (subcategorization coding) external locus of control (5) external locus of control (7) extraversion(2) irresponsible (4) irresponsible (6) dreamer (2) emotional imbalance emotional imbalance (2) inconsistent short term orientation (2) short term orientation (4) rambling (2) irrational decision making (2) irrational decision making risk oriented (1) risk oriented tolerant to stress (1) tolerant to stress low self-esteem (1) low self-esteem financial literacy (1) financial literacy compulsive buying (1) compulsive buying addiction (e.g. alcohol), (1) addiction (eg. alcohol) at the last stage, subcategorized codes, namely main characteristics of regular payers and irregular payers, were consolidated into other subcategories to reveal themes. table 4 indicates those themes revealed after refinement of subcategorized codes at third stage. researchers also benefited from literature (e.g. big five personality traits, mccrae and costa, 1987) while refining the codes. table 4. themes revealed by refinement of subcategorized codes 4. findings research findings revealed some common personality traits, attitudes and behaviors that differentiate regular payers from irregular ones. according to findings, the dominant characteristic of regular payers is “responsibility”. responsibility is coded 23 times to describe regular payers. for example, p6, a regular payer, describes his responsible characteristic with a statement of “when i have a debt, i can’t sleep. i feel a hump on my back”, while another regular payer p9, indicates that “if i promise to pay debt, i pay it on time. if i am not able to pay it on time, i usually call him and talk to him to notify him about not paying on time……. i don’t buy a new thing if i did not pay my previous debt.” p2 also describes himself as regular payer and responds the question of “why do you pay your debts regularly?” by saying that “because i am liable to pay it…. if you borrow anything else and promise to give back it on a stated date, you have to give back it on indicated time. this is liability….an internal thing indeed”. “rational decision making” is another prominent characteristics of regular payers, which is coded 5 times, while “irrational decision making” is revealed as characteristic of irregular payer, which is coded 2 times. bank staff p1 tells how they identify regular payers by words of “those people had searched interest rates, insurance cost and other costs on internet before coming to bank…. so they evaluate how they would pay debt regularly…. on the other hand irregular payers does not care about interest rate, costs or other details, they just interest in whether they receive credit or not…. focus on receiving credit…”. p10, bank staff describes the characteristics and behaviors of one regular payer by stating that “….he considers all alternatives in case of repayment default, and express those possibilities frankly….he is realist”. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.156 | http://emaj.pitt.edu a field research to identify psychological factors influencing the debt repayment behavior in turkey page |30| emerging markets journal findings of interview research also displayed that regular payers commonly have “sense of collectivism” and “sanction fear”, especially social sanction fear. sense of collectivism is coded 5 times while sanction fear is coded 4 times to describe the regular payers. for instance, p2 indicated that if a relative of debtor stands security for debt, repayment possibility increase because debtor doesn’t want to put relatives out and not to experience loss of publicity in his environment. p10, bank staff, also emphasized the role of “sense of collectivism” on regular paying behavior with the wording that “married people are more prone to pay regularly compared to single ones, because married people avoid making their family to experience execution of attachment… they perceive attachment as shame….” in terms of “sanction fear”, p5 indicates that he pays debts on time or before due dates “not to pay a fine or penal interest…not to have bad reputation”. similarly, p8 stated he pays his debts on time “because system imposes higher fines…. cost of penal interest is scary”. another common characteristic of regular payers, referring to “long term orientation”, has also become evident by the findings of this research. while long term orientation is coded 5 times as attitudinal characteristic of regular payers; “short term orientation” is coded 4 times attitudinal characteristic of irregular payers. a regular payer respondent p2 displays his long term oriented characteristic with the wording that “unless i pay my debt regularly, next step is cancellation of my credit cards which hurts my credit score. i can lose my credibility, which makes my life horrible in future. i don’t want to live such a life, thus i pay my debts regularly”. p3 also indicated that she pays regularly because she doesn’t want her debts to increase exponentially and to become unpayable in future. on the other hand, p9 describes a “short term oriented” relative, who does not pay his debt on time by stating that “my uncle focus on moment and saving the day, does not think what will happen tomorrow”. the main characteristics of irregular payers have been founded as “external locus of control” and “irresponsibility” in this research, which are coded 7 times and 6 times respectively. on the other hand “internal locus of control” is coded 1 time as characteristic of regular payers. p1 and p10, bank staffs, state that irregular payers usually blame external factors or conditions for their payment failure. p9 also describe one of his relative, who don’t pay his debt, with the words of “ … he thinks he is usually cheated and abused by people. he does not consider his faulty in payment failure…he believes that god is put out with him, thus he failed in life”. moreover, the statement of “irregular payers always apply for credit with incomplete document” by p10, indicates another characteristic of irregular payers, the irresponsible behavior of irregular payers. the concepts represents opposite tendencies (e.g. responsibility versus irresponsibility, long term orientation versus short term orientation) were consolidated into one theme. by benefiting from literature, characteristics of regular and irregular payers framed by findings of this survey, were refined into more comprehensive “themes” in order to reveal more influential factors on repayment behavior. in this direction, responsibility and irresponsibility is consolidated in term of “conscientiousness”; long term orientation and short term orientation in term of “time orientation”; external locus of control and internal locus of control in term of “locus of control”; and rational decision making and irrational decision making in term of “decision making style”. consequently, after refinement process of subcategorized codes, the findings of this survey revealed that conscientiousness, time orientation, locus of control, decision making style, sense of collectivism and sanction fear as the most influential psychological factors affecting debt repayment behavior (see table 4). 5. conclusion and discussions is personality primary determinant of debt repayment behavior? are the regular payers’ personality characteristics different from of irregular payers’ personality characteristics? what are the personality characteristics of regular payers and irregular payer? what are the most influential factors affecting debt repayment behavior? researching the answers of those questions initiated this survey. the findings of this survey responded the first question in the affirmative, namely the findings of this survey revealed that personality is the primary determining factor of debt repayment behavior. the primary finding of this qualitative descriptive study is the presence of dissimilarity between personality characteristics of regular payers and irregular payers. findings displayed the main characteristics of regular payers as responsibility, long term orientation, sanction fear, sense of collectivism and rational decision volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.156 | http://emaj.pitt.edu mehtap özşahin, senay yürür, erman coşkun emerging markets journal | p a g e |31 making while external locus of control, irresponsibility, short term orientation, irrational decision making as common characteristics of irregular payers. those finding are also consistent with the previous surveys’ results indicating the effect of personality trait premise on behaviors of credit use and developing risky indebtedness, which result in the problem indebtedness (vieira, rovedder de oliveira and kunkel, 2016; harrison, agnew and serido, 2015; achtziger, hubert, kenning, raab and reisch, 2015; stumm, o’creevy and furnham, 2013; rogers, rogers and securate, 2013; arya, eckel and wichman, 2013; gathergood,2012; wang,lu & malhotra, 2011; mewse, lea and wrapson, 2010; lusardi and tofano, 2009; stone and maury, 2006). so, previous studies have proposed individual’s personality trait as the main determinants of attitudes towards debt. when those results are interpreted with the other research findings revealing the effects of situational factors, such as healthcare costs, wedding expenses and dismissal, on debt repayment behavior (sullivan, 1982; schuchman, 1983; tokunaga, 1993), the multidimensional structure of repayment behavior becomes evident. in other words, debt repayment behavior is a multi-faced and sophisticated process, stemming from situational factors and individuals’ personality traits. the research findings revealed that conscientiousness is the primary determinant of debt repayment behavior. moreover, responsibility is the main characteristics of regular payer, irresponsibility is common characteristics of irregular payers. conscientiousness refers to tendency to be organized and dependable, show self-discipline, act dutifully, aim for achievement, and prefer planned rather than spontaneous behavior. according to nyhus and webley (2001), conscientious persons would be expected to keep track of their finance. similarly, livingstone and lunt (1992) support the positive effect of conscientiousness on regular payment behavior by indicating that people who repaid regularly are more concerned with personal achievement and self-direction. time orientation, referring to the connection of the past with the current and future actions/challenges, has been emerged as another primary factor affecting debt repayment behavior, according to this survey’s findings. long term oriented people are more prone to pay their debts regularly, while short term oriented people unlikely have problems with payment of their debts regularly. zhang and devaney (1999) supports those findings by their stating that short term oriented people, had larger amount of debt, are more likely to have debt payments difficulties. those with a relatively high «subjective discount rate» are unlikely to be able to "defer gratifications" and thus will be less likely to save and more likely to incur debt (lea, webley and walker, 1995). the research findings also revealed that the external locus of control as main characteristics of irregular payers has been supported by literature (e.g. dessart and kuylen, 1986; livingstone and lunt, 1992). livingstone and lunt (1992) state that people having higher level of external locus of control are more prone to over-indebtedness. external locus of control, the characteristics of people who attribute what happens all in their life to the external factors (spector, 1982), is appeared as trait of irregular payers and essential determinant of repayment behavior. those people having external locus of control may avoid psychological pressure of debt by attributing the reasons of nonpayment to external factors rather than themselves, so, get rid of the responsibility in short therm. another characteristic of irregular payers investigated by this research is short term orientation, is also completing the picture consistently. as been indicated previously, the findings of this research on basic characteristics of regular and irregular payers are commonly consistent with international literature. however, “sense of collectivism” and “fear of sanction (punishment avoidance)”, investigated by this research as trait of regular payers, are not relevant to international literature. turkey has been classified as collectivist nation, involving “collectivist culture” by hofstede (1980). in such a kind of collectivist cultures, individuals commonly feel that they have to obey the rules and values of group or society in which they live and mostly avoid the behaviors which are not accepted by the society and law. thus, people who have intensive sense of collectivism will likely feel and respond to social pressure aroused from society intensively. in turkish culture, “debt default” is still considered as a shame. thus, in such a culture, individual who have high level of “sense of collectivism” and “fear of sanction”, may be more prone to pay regularly to avoid social and legal pressures. moreover, those who see credit and debt, as shameful, to be avoided, a source of problems, are people who build up their savings with their resources rather than servicing their debts with (livingstone and lunt, 1992), so are not getting problem with paying. the underlying constraint of this study is failing to recruit a sufficient number of irregular payers. the volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.156 | http://emaj.pitt.edu a field research to identify psychological factors influencing the debt repayment behavior in turkey page |32| emerging markets journal number of irregular respondents can be increased by utilizing snowball sampling method to overcome this constraint in further researches. moreover, the findings of this survey are limited to in depth interview analysis results of 10 participants. so, an extensive questionnaire survey, which based on findings of in depth interview research and literature review, can be conducted to verify the findings of this survey and to depict an overall picture of repayment behavior in turkey. acknowledgments [if any] this paper is presented at 8th international conference on leadership, technology, innovation and business management 2018. references achtziger, a., hubert, m., kenning, p., raab, g. and reisch, l. (2015). debt out of control: the links between self-control, compulsive buying, and real debts. journal of economic psychology 49:141–149. armstrong, d., gosling, a., weinman, j., & marteau, t. (1997). the place of inter-rater reliability in qualitative research: an empirical study. sociology, 31(3), p. 597-606. arya, s., eckel, c. and wichman, c. (2013). anatomy of the credit score. journal of economic behavior & organization, 95:175– 185. denzin, n. k. (1978). the research act: a theoretical introduction to sociological methods. new york: mcgraw hill. dessart & kuylen (1986). the nature, extent, cause and consequence of problematic debt situations. journal of consumer policy, 9, 311–334. gathergood, j. (2012). self-control, financial literacy and consumer over-indebtedness. journal of economic psychology 33: 590–602. harrison, n., agnew, s. serido, j. (2015). attitudes to debt among indebted undergraduates:a crossnational exploratory factor analysis. journal of economic psychology, 46: 62-73. hofstede, g. (1980). culture and organizations. international studies of management & organization, 10(4), 15-41. jick, t. d. (1979). mixing qualitative and quantitative methods: triangulation in action. administrative science quarterly, 24(4), p. 602-611. kamleitner, b., hoelzl, e. and kirchler, e. (2012), credit use: psychological perspectives on a multifaceted phenomenon. international journal of psychology, vol.47, issue1, pp.1-27. kaptan, özgür burak (2011), bireysel kredilerin risk ve tüketici davranışı açısından analizi, doktora tezi, ankara üniversitesi / sosyal bilimler enstitüsü / i̇şletme anabilim dalı, ankara. kitzinger, jenny (1995).qualitative research: introducing focus groups. bmj (clinical research ed.), 311: 299-302. lea, e. g. s., webley, p., & levine, r. m. (1993). the economic psychology of consumer debt. journal of economic psychology, 14, 85–119. lea, s. e., webley, p., & walker, c. m. (1995). psychological factors in consumer debt: money management, economic socialization, and credit use. journal of economic psychology, 16(4), 681701. livingstone, m. s., & lunt, k. p. (1992). predicting personal debt and debt repayment: psychological, social and economic determinants. journal of economic psychology, 13(1), 111–134. lusardi, a. and tufano, p. (2009). debt literacy, financial experiences, and overindebtedness, cfs working paper, no. 2009/08, (http://nbnresolving.de/urn:nbn:de:hebis:30-63796) mccrae, r. r., & costa, p. t. (1987). validation of the five-factor model of personality across instruments and observers. journal of personality and social psychology, 52(1), 81. mewse, a.j., lea, s.e.g. and wrapson, w. (2010), first steps out of debt: attitudes and social identity as predictors of contact by debtors with creditors. journal of economic psychology 31:1021–1034. miles, m. b., & huberman, a. m. (1984). drawing valid meaning from qualitative data: toward a shared craft. educational researcher, 13(5), 20-30. norvilitis, m. j., merwin, m. m., roehling, v. p., young, p., & kamas, m. m. (2006). personality factors, money attitudes, financial knowledge, and credit-card debt in college students. journal of applied social psychology, 36(6), 1395–1413. nyhus, e. k., & webley, p. (2001). the role of personality in household saving and borrowing behaviour. european journal of personality, 15(s1), s85-s103. özkan, canan (2014), türkiye’de kredi kartı kullanıcı profili ve davranışı analizi, uzmanlık yeterlilik tezi, türkiye cumhuriyet merkez bankası bankacılık ve finansal kuruluşlar genel müdürlüğü, ankara. robb, a. c., & sharpe, d. l. (2009). effect of personal financial knowledge on college students’ credit card behavior. journal of financial counseling and planning, 20(1), 25–34. http://nbn-resolving.de/urn:nbn:de:hebis:30-63796 http://nbn-resolving.de/urn:nbn:de:hebis:30-63796 volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.156 | http://emaj.pitt.edu mehtap özşahin, senay yürür, erman coşkun emerging markets journal | p a g e |33 rogers, p., rogers, d. and securato, j.r. (2015). about psychological variables in application scoring models. revista de administracao de empresas, 55 (1): 38-49. shuchman, p., 1983. the average bankrupt: a description and analysis of 753 personal bankruptcy filings in nine states. commercial law journal, 288-307. spector, p. e. (1982). behavior in organizations as a function of employee's locus of control. psychological bulletin, 91(3), 482. stone, b. and maury, r. v. (2006), indicators of personal wnancial debt using a multi-disciplinary behavioral model. journal of economic psychology 27: 543–556. stumm, s. o’creevy, m.f. and furnham, a. (2013). financial capability, money attitudes and socioeconomic status: risks for experiencing adverse financial events. personality and individual differences 54:344–349. sullivan, ac., 1982. consumer bankruptcy study ii: personal bankruptcy: causes, costs, and benefits (monograph no. 24). purdue university: credit research center. tokunaga, h. (1993). the use and abuse of consumer credit: application of psychological theory and research. journal of economic psychology, 14, 285–316. vieira, k.m., rovedder de oliveira, m.o. and kunkel, f. i. r. (2016). the credit card use and debt: is there a trade-off between compulsive buying and ill-being perception? journal of behavioral and experimental finance, 10:75–87. wang, l., lu, w. and malhotra, n.k.(2011), demographics, attitude, personality and credit card features correlate with credit card debt: a view from china, journal of economic psychology 32: 179–193. webley, p. (1994). the role of economic and psychological factors in consumer debt. in: progress report 21. vsb-center savings project, tilburg university, the netherland (in wang et al., 2011,demographics, attitude, personality and credit card features correlate with credit card debt: a view from china, journal of economic psychology 32: 179–193). zhang, t., & devaney, s. a. (1999). determinants of consumer’s debt repayment patterns. consumer interest annual, 45, 65-70. zhu, y. l., & meeks, b. c. (1994). effect of low-income families ability and willingness to use consumercredit on subsequent outstanding credit balance. journal of consumer affairs, 28(2), 403–422. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the effect of renewable energy consumption on economic stability: panel data analysis on selected countries tunahan hacıimamoğlu recep tayyip erdoğan university, turkey | tunahan.haciimamoglu@erdogan.edu.tr ali rıza sandalcılar recep tayyip erdoğan university, turkey | aliriza.sandalcilar.erdogan.edu.tr abstract this study aims to investigate the effect of renewable energy consumption on economic stability. in this regard, covering the period of 1990-2016, data of 35 countries, 19 of which are developed and 16 of which are developing, were used. the cointegration analysis results reveal that, there is a long-term relationship between the two variables in developed and developing countries. according to panel coefficient estimators, the effect of renewable energy consumption on economic stability is positive and statistically meaningful in germany, denmark, italy, switzerland, and sweden, which are developed countries, and also in egypt, turkey, taiwan, pakistan, and indonesia, which are developing countries. however, the effect is negative and significant in contrast to expectations in england and belgium, which are developed countries, and in india and the philippines, which are developing countries. keywords: energy, renewable energy, non-renewable energy, economic stability, political stability new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.201 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.201 | http://emaj.pitt.edu tunahan hacıimamoğlu, ali rıza saldalcılar emerging markets journal | p a g e |11 the effect of renewable energy consumption on economic stability: panel data analysis on selected countries tunahan hacıimamoğlu ali rıza sandalcılar i. introduction* the concept of energy, defined as the ability to produce jobs in physics, is linked to many disciplines such as economics, ecology and engineering. with the industrial revolution, the demand for energy continued increasingly due to the acceleration in factors such as globalization, technological progress, and population growth. in order to meet the increasing demand for energy, which is a very important input for production activities, it is important to use the existing energy sources efficiently and to provide energy diversity by turning to alternative energy sources. energy sources are generally classified as nonrenewable energy sources and renewable energy sources. non-renewable energy sources consist of fossil origin sources such as oil, natural gas, coal and nuclear energy. renewable energy sources include solar, wind, geothermal, hydroelectric, biomass and wave energy. non-renewable energy sources are discussed in many ways. the main basis of this debate is the fact that oil shocks that occurred in the 1970s caused serious imbalances in economic indicators and external costs such as environmental pollution and health problems, threatening energy supply security and sustainability in terms of limited reserves. on the other hand, it is possible to summarize the advantages offered by the use of renewable energy resources in the form of contributions to sustainable growth and development, reducing energy price uncertainty and risks, ensuring energy supply security, socioeconomic contribution, reducing environmental damage and positive effects on climate change. in addition, increasing the share of renewable energy resources in total energy demand is expected to have a positive impact on economic stability and social welfare. economic stability implies an economy with an acceptable level of change in economic indicators, free from risks and uncertainties. in this sense, it can be said that economic shocks, economic fluctuations and economic crises may adversely affect economic stability. therefore, an energy-induced shock, fluctuation or crisis * this paper is produced from the first author's ongoing doctoral thesis titled “the effect of renewable energy consumption on economic stability: panel data analysis on selected countries”. can disrupt the balance in the economy, leading to instability. from this point of view, it is stated that the use of clean and sustainable alternative energy resources produced domestically is in an important position in ensuring economic stability by reducing possible imbalances in economic indicators. the aim of this study is to examine the effect of renewable energy consumption on economic stability. the importance of the study is an effort to make a contribution to this field, as studies on sustainable growth and economic stability are less common in the energy literature.1 the feature that distinguishes the study from its peers is the use of a more comprehensive index that includes basic macroeconomic indicators representing economic stability. the rest of the study is organized as follows: following the introduction part where the concepts of energy and economic stability are introduced, the relationship between renewable and non-renewable energy sources and economic stability is discussed in the theoretical discussion section. in the section where the current literature is examined, the previous studies are summarized and grouped in the context of economic stability indicators. following the explanations about the data set and model, method and empirical findings were shared in the panel data analysis section. in the conclusion part, the policy recommendations are evaluated by evaluating the findings. ii. theoretical discussion among the main studies examining the relationship between energy and economic activities are hudson and jorgenson (1974), allen et al. (1976), j. kraft and a. kraft (1978), hitch (1978), akarca and long (1980), eden and hwang (1984). in these studies, the relations among fossil, nuclear energy sources and economic activities were discussed. on the other hand, after the oil crises in the 1970s, the energy economy has preserved its place in the economy until today, and has made progress in two major literature axes since then. while the first main literature is formed within the framework of the relationship between energy and growth, the second is shaped by the effect of energy prices on economic performance. the pioneer of the first literature, j. kraft and a. kraft (1978), is considered to be the pioneer of the second literature, hamilton (1983). energy is regarded as an important factor for economic stability and sustainable growth. the reason is that, the effect of shocks experienced in energy prices on economic fluctuations is a generally accepted issue. on the other hand, when the economy is exposed to economic shocks caused by energy price increases and supply cuts, deteriorations may occur in the environment of economic stability and sustainable growth (aguiarconraria and wen, 2006; nkomo, 2005). in general, it is argued that energy-induced shocks and fluctuations 1the literature investigating the relationship between energy consumption and economic growth has improved greatly in the last decade. however, it is stated that studies investigating the effect of renewable energy on sustainable and stable economy are not sufficient in the literature (bhattacharya et al., 2016: 734). volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.201 | http://emaj.pitt.edu the effect of renewable energy consumption on economic stability: panel data analysis on selected countries page |12| emerging markets journal distort both the internal and external stability of economies, and significantly affect the countries that export and import energy without making a distinction between developed and developing economies (chaudhry et al., 2015). however, it is stated that the move towards renewable energy can prevent the economic instability caused by the shocks and volatility mentioned above. the reason is that, with the dissemination of renewable energy, integration of national markets with alternative energy markets may decrease the possibility of economic instability caused by fossil energy by increasing energy diversity (van de ven and fouquet, 2017). the widespread use of renewable energy sources encourages economic growth thanks to efficiency gains, creates new employment sources and reveals a more competitive structure especially in the production and manufacturing sectors (wef, 2019). on the other hand, towards the sustainable development goals,2 it reduces environmental concerns, serves energy security, provides foreign currency savings to countries, current account deficit and socioeconomic, etc. contributes positively to factors (hanff et al., 2011). when evaluated as a whole, it can be said that renewable energy is associated with a sustainable and stable economic structure and has a key role in establishing economic stability. in general, while the current literature examines the relationship among renewable energy and the economic variables, the difference of this study is that the energy is analyzed from a wider perspective, ie, the economic stability index covering macroeconomic variables. it is thought that this research will contribute to the literature and offer a different perspective. iii. data set and econometric model economic stability index (eco), renewable energy consumption (rec), non-renewable energy consumption (nrec) and political stability index (pol) variables were used in the study. these variables are included in the analysis by taking their logarithms and expressed as leco, lrec, lnrec and lpol. the study period covers the period of 1990-2016. economic stability index data were calculated by the authors following the “international country risk methodology (icrg)” of the prs group.3 renewable energy 2sustainable development is a broad concept that evaluates economic, social and environmental factors together, including long-term equilibrium in the economy, efficient use of the factors of production and transfer of resources to future generations (pearce, 1988). 3the international country risk guide (icrg) consists of 22 sub-components in three main stability / risk categories: political, economic and financial. the economic stability / risk index consists of five subcomponents: gdp per capita, growth rate, inflation rate, the share of the budget balance in gdp and the share of the current balance in gdp. the general purpose of this index is to determine whether a country is economically at risk / stable by addressing its strengths and weaknesses. these strengths and weaknesses were consumption data were obtained from the "economic development and cooperation organization (oecd)" database, and non-renewable energy consumption data from the official website of "british petroleum (bp)". political stability index data were accessed from the official website of the icrg.4 general explanations of the variables are presented in table 1. table 1: general explanations of variables the countries included in the study were selected among 40 countries listed according to the "renewable energy country attractiveness index (recai)". due to the data constraint, analyzes were carried out on 35 countries in total. these countries are classified as developed countries and developing countries. in the classification of countries, the wesp (2019) report of the united nations was used. the countries included in the analysis are given in table 2. table 2: countries included in the analysis determined by assigning risk / stability points, called economic risk / stability components, to each factor. the lower the total score (0-50), the more avoid the economic stability is the existence of an economy. on the other hand, the higher the total score, the greater the economic stability of the country concerned is expressed (prsicrg, 2018: 2-14). 4 the purpose of the political stability / risk index is to evaluate the political stability of the countries covered by the icrg comparatively. this index consists of 12 subcomponents: government stability, socioeconomic conditions, investment profile, internal conflict, external conflict, corruption, military in politics, religious tension, law and order, ethnic tension, democratic accountability and bureaucracy quality. the index gets scores ranging between 0-100. as total value gets close to 100 points, political stability increases, and as it converges to 0, political risk increases (prs-icrg, 2018: 2-7). volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.201 | http://emaj.pitt.edu tunahan hacıimamoğlu, ali rıza sandalcılar emerging markets journal | p a g e |13 in the study, kaldor (1976), kissel and krauter (2006), leblond (2006), chang et al. (2009), bhattacharya et al. (2016), maradin et al. (2017), maji and sulaiman's (2019) studies were examined and the estimation model was created as in equation number 1: , i=1,…,n; t=1,…,t (1) one of the variables in the model is lecoit; economic stability index of country i at time t, lrecit; the renewable energy consumption of country i at time t, lnrecit; the non-renewable energy consumption of country i at time, lpolit; it represents political stability index of country i at time t. uit is the error term of country i at time t. the indices i and t indicate the cross section size (n =19 for developed countries, n =16 for developing countries) and time dimension (t =27), respectively. since lrec and lnrec variables are important input positions for economic activities, their impact on the economic stability index variable is expected to be positive. the lpol variable is one of the important determinants for economic stability, and its expected impact on economic stability is also positive. eviews 10, stata 16 and gauss 19 package programs were used for panel data analysis in the study. in the study, the order of econometric method is formed as follows:  bp (1980) lm and pesaran (2004) cdlm tests for cross-sectional dependence,  pesaran and yamagata (2008) homogeneity test for testing the homogeneity of slope coefficients,  pesaran (2007) cadf panel unit root test without structural break for detection of unit root presence,  westerlund and edgerton (2007) lm bootstrap and westerlund (2008) durbinhausman tests without structural break for testing the existence of the cointegration relationship,  eberhardt and teal (2010) amg coefficient estimator test without structural break for estimation of cointegration coefficients,  emirmahmutoğlu and köse (2011) panel causality test for testing the causality relationship. panel data analysis cross-sectional dependence test and results it is expected that, it will affect other countries due to the shock experienced in any country because of developments such as globalization, technological progress and free foreign trade. such a situation may cause inter-unit correlation, that is, cross-sectional dependence (menyah et al., 2014: 389). in the study, breusch and pagan (1980) lm and pesaran (2004) cdlm tests are used to determine the cross-sectional dependence. breusch and pagan (1980) lm test statistics are calculated as follows: 𝑳𝑴 = 𝑻 ∑ ∑ �̂�𝒊𝒋 𝟐𝑵 𝒋=𝒊+𝟏 𝑵−𝟏 𝒊=𝟏 (2) based on the ols estimate in the pij equation, it is an example estimate of the bidirectional correlation of the error term for each i. the lm test is valid for panels where n is relatively small and t is large enough. for large panels with t → ∞ and n → ∞ , pesaran (2004) suggests the scale version of the lm test as follows: 𝑪𝑫𝑳𝑴 = ( 𝟏 𝑵(𝑵−𝟏) ) 𝟏/𝟐 ∑ ∑ (𝑻�̂�𝒊𝒋 𝟐 − 𝟏)𝑵 𝒋=𝒊+𝟏 𝑵−𝟏 𝒊=𝟏 (3) cdlm test shows normal distribution with n (n-1) / 2 degree of freedom and asymptotic chi-square properties. it can be applied when n and t are large. however, if n is large and t is small, it is likely to show significant distortions. considering the time dimension and section size of the study (t> n), it is stated that lm and cdlm cross-sectional dependence tests are suitable tests. in table 3, the results of the cross-sectional dependence of the model are reflected. table 3: cross-sectional dependence results notes: * represents 1% significance level. values in square brackets reflect probability values. lags is determined as 3. h0: no cross-sectional dependence; ha: there is a cross-sectional dependence. according to table 3, null hypothes for developed countries and developing countries is rejected at the level of 1% significance in the lm and cdlm tests. thus, there exists a cross-sectional dependence for both country panels. slope coefficient homogeneity test and results testing the homogeneity of slope coefficients goes back to swamy (1970). standardized distribution statistics of pesaran and yamagata (2008) δ ̃ and δ ãdj tests are formulated as follows: �̃� = √𝑵 ( 𝑵−𝟏�̃�−𝒌 √𝟐𝒌 ) (4) with the condition (n, t) → ∞, √𝐍/𝐓→ ∞ and as long as the error terms have a normal distribution, the test of δ ̃ is asymptotic standard normally distributed. δ ̃ test is a test statistic with small sampling characteristics. the δ ãdj test statistics, adapted to the large sample properties, is organized in the form below: model (cd test) developed countries developing countries bp (2004) lm 1291.29 [0.000]* 233.76 [0.001]* pesaran (2004) cdlm 60.57 [0.000]* 3.39 [0.000]* volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.201 | http://emaj.pitt.edu the effect of renewable energy consumption on economic stability: panel data analysis on selected countries page |14| emerging markets journal �̃�𝒂𝒅𝒋 = √𝑵 ( 𝑵−𝟏�̃�−𝑬(�̃�𝒊𝑻) √𝑽𝒂𝒓(�̃�𝒊𝑻) ) ; 𝑬(�̃�𝒊𝑻) = 𝒌, 𝒗𝒂𝒓(�̃�𝒊𝑻) = 𝟐𝒌(𝑻−𝒌−𝟏) 𝑻+𝟏 (5) table 4 shows the homogeneity test results of developed countries and developing countries. table 4: homogeneity test results notes: * represents 1% significance level. h0: slope coefficients are homogeneous; ha: slope coefficients are heterogeneous. in table 4, according to the model results of δ ̃ and δ ãdj tests, null hypothesis for developed countries and developing countries is rejected at 1% significance level and it is determined that both groups of countries have a heterogeneous structure. in other words, it is observed that the slope coefficients specific to the sections forming the model have changed between the units. panel unit root test and results pesaran (2007) developed the cadf (crosssectionally augmented dickey-fuller) test by including the lagged cross-section averages in the adf regression. it is used in case of t> n and n> t. in addition, this test gives reliable results even if t and n are small. the dynamic heterogeneous panel data model discussed in the test process is as follows: 𝒚𝒊𝒕 = (𝟏 − ø𝒊)µ𝒊 + ø𝒊𝒚𝒊,𝒕−𝟏 + 𝒖𝒊𝒕, i=1,2,…,n; t=1,2,…,t (6) the error term with a single factor structure is shown as follows: 𝒖𝒊𝒕 = 𝛄𝒊𝒇𝒕 + 𝒖𝒊𝒕 (7) when equations 6 and 7 are evaluated together, equation 8 is composed as follows: 𝜟𝒚𝒊𝒕 = 𝜶𝒊 + 𝜷𝒊𝒚𝒊,𝒕−𝟏 + 𝛄𝒊𝒇𝒕 + 𝒖𝒊𝒕, (8) cadf regression is shown in the form below: 𝜟𝒚𝒊𝒕 = 𝜶𝒊 + 𝒃𝒊𝒚𝒊,𝒕−𝟏 + 𝒄𝒊�̅�𝒕−𝟏 + 𝒅𝒊𝜟�̅�𝒕 + 𝒆𝒊𝒕 (9) cips (cross-sectionally ips) panel unit root statistics are obtained by averaging the unit root statistics of each cross-section in cadf regression. 𝑪𝑰𝑷𝑺(𝑵, 𝑻) = 𝒕 ̶𝒃𝒂𝒓 = 𝑵−𝟏 ∑ 𝒕𝒊 𝑵 𝒊=𝟏 (𝑵, 𝑻) (10) cadf testing is a test method that takes into account cross-sectional dependence and heterogeneous structure of cross-sections. cips statistics are reached by averaging the cadf statistics. in table 5, cips test statistics, which represent the overall panel, are shared in constant & no trend and constant & trend model forms. table 5: cips panel unit root test results (level) notes: *, ** and *** represent 1%, 5% and 10% significance levels, respectively. the maximum lag is set at 3. cips statistics critical values for developed countries are -2.38 (1%), -2.20 (5%) and -2.11 (10%) for the constand & no trend model. for the constand & trend model, it is -2.88 (1%), -2.72 (5%) and -2.63 (10%). the critical values of cips statistics for developing countries are -2.45 (1%), -2.25 (5%) and -2.14 (10%) for the constand & no trend model. for the constand & trend model, it is -2.96 (1%), -2.76 (5%) and -2.66 (10%). h0: panel has a unit root; ha: panel has not a unit root. according to table 5, the leco variable is stationary in the constant & no trend and the constant & trend model forms in developed countries. while the lrec variable is stationary in the constant & no trend model form, it contains unit root in the constant & trend model form. while the lnrec variable has a unit root in the constant & no trend model form, it has a stationary structure in the constant & trend model form. the lpol variable displays a stationary character in both model forms. when it comes to developing countries, it is determined that all variables contain unit roots in both model forms. in summary, while all variables are unit rooted in developing countries, unit root / stationary results differ according to variables and model forms in developed countries. panel cointegration test and results while the durbin-hausman panel cointegration test takes into account the cross-sectional dependence, it does not take into account the prior knowledge of the cointegration degrees of the variables. instead, common factors are taken into account. in this test, although the dependent variable is i (1), it does not matter whether the independent variables are i (0) or i (1), but dh-p and dh-g test statistics can be used according to the homogeneous and heterogeneous structure of the panel coefficients (westerlund, 2008: 205). first, the group average statistic is shown as follows: 𝑫𝑯𝒈 = ∑ 𝑺𝒊 𝒏 𝒊=𝟏 (ø̃𝒊 − ø̂𝒊)𝟐 ∑ 𝒆𝒊𝒕−𝟏 𝟐𝑻 𝒕=𝟐 (11) hypotheses of group average statistics; 𝑯𝟎: ø𝒊 = 𝟏 for all i's, 𝑯𝑨: ø𝒊 < 𝟏 it is expressed in this way for some i. developed countries delta (�̃�) delta adjusted (�̃�𝒂𝒅𝒋) model 7.05 [0.000]* 7.78 [0.000]* developing countries delta (�̃�) delta adjusted (�̃�𝒂𝒅𝒋) model 7.95 [0.000]* 8.77 [0.000]* volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.201 | http://emaj.pitt.edu tunahan hacıimamoğlu, ali rıza sandalcılar emerging markets journal | p a g e |15 panel statistics are formulated as follows: 𝑫𝑯𝒑 = 𝑺𝒏(ø̃ − ø̂)𝟐 ∑ ∑ 𝒆𝒊𝒕−𝟏 𝟐𝑻 𝒕=𝟐 𝒏 𝒊=𝟏 (12) the hypotheses of panel statistics are indicated below; 𝑯𝟎: ø𝒊 = 𝟏 for all i's, 𝑯𝑨: ø𝒊 = ø 𝐯𝐞 ø < 𝟏 created this way for all i's. the alternative hypothesis of the group average statistics differs from the alternative hypothesis of panel statistics, with the expression "for some i". the reason for this is that, in panel statistics, individual terms (n) are collected before being put together. in group statistics, firstly, various terms are multiplied and then summed up (westerlund, 2008: 203). westerlund and edgerton (2007) lm panel cointegration test is a cointegration test based on the mccoskey and kao (1998) lagrange test multiplier. the power of the test has been increased with bootstrap and it has been proved by the simulations that it gives more successful results on the small sample. cointegration equation is obtained from equation number 13. 𝒚𝒊𝒕 = 𝒂𝒊 + 𝒙𝒊𝒕 ′ 𝜷𝒊 + 𝒛𝒊𝒕, t=1,…,t; i=1,…,n (13) xit represents the independent variables that are assumed to be k-dimensional random walk property. 𝒛𝒊𝒕 = 𝒖𝒊𝒕 + 𝒗𝒊𝒕, however, is shown as 𝒗𝒊𝒕 = ∑ ƞ𝒊𝒋 𝒕 𝒋=𝟏 , ƞ𝒊𝒋~𝑰𝑰𝑫, ƞ𝒊𝒋 = 𝝈i̇ 𝟐. the vector 𝒘𝒊𝒕 = (𝒖𝒊𝒕, 𝜟𝒙𝒊𝒕 ′ )′ indicates a linear process. 𝒘𝒊𝒕 = ∑ 𝜶𝒊𝒋 ∞ 𝒋=𝟏 𝒆𝒊𝒕−𝒋 (14) eit assumes that the mean zero errors along t and αij provide the usual summability conditions of its parameters. one of the important features of this test is that, the alternative hypothesis asserts there is no cointegration in response to the null hypothesis that assumes cointegration. hypotheses are presented as follows: 𝑯𝟎 = 𝝈𝒊 𝟐 = 𝟎 for all i's, 𝑯𝑨 = 𝝈𝒊 𝟐 > 𝟎 it is expressed in format for some i's. in the case of cross-sectional independence stated in the study of mccoskey and kao (1998), the test statistics equation is formed as follows: 𝑳𝑴𝑵 + = 𝟏 𝑵𝑻𝟐 ∑ ∑ �̂�𝒊 −𝟐𝑻 𝒕=𝟏 𝑵 𝒊=𝟏 𝑺𝒊𝒕 𝟐 (15) due to the unit root characteristics of the variables of developed countries,5 the long-term 5in the developed countries, while the lpol variable is stationary at the level, other independent variables, the lrec and the lnrec differed according to the model forms. therefore, the final decision regarding the unit root / stationary process of the lrec and the lnrec variables could not be reached. relationships between them are analyzed with the durbin-hausman panel cointegration test. table 6 shows the results of the durbin-hausman panel cointegration test analysis. table 6: durbin-hausman panel cointegration test analysis results notes: * represents 1% significance level. durbinhausman panel statistics are used in homogeneous models and group statistics are used in heterogeneous models. newey-west method was preferred in bandwidth. h0: there is no cointegration relationship for all units; ha: there is a cointegration relationship for some units. considering the heterogeneous structure of the model, dh-g (group) test statistics should be taken as basis for durbin-hausman panel cointegration test analysis results. the null hypothesis is rejected, because the probability value for the group statistics is less than 1%. alternative hypothesis is accepted for some units, stating that there is a cointegration relationship. as a result, it has been proved that the variables act together in the long term, that is, cointegrated in developed countries. long-term relationships between variables in developing countries are investigated using westerlund and edgerton panel cointegration testing without structural break. in table 7, structural unbreakable cointegration test analysis results are given. table 7: westerlund and edgerton lm panel cointegration test analysis results notes: bootstrap probability values are obtained from 1000 replicate distribution and asymptotic probability values are obtained from standard normal distribution. h0: there is a cointegration relationship; ha: there is no cointegration relationship. in westerlund and edgerton (2007) panel cointegration test, asymptotic p value is used for the model without cross-sectional dependence and bootstrap p value for the model with cross-sectional dependence. therefore, since the presence of cross-sectional dependence is detected in developing countries, the bootstrap p value is taken as the basis. according to the results of lm test analysis in table 7, the null hypothesis could not be rejected in both the constant and no trend and the constant and trend model form according to the bootstrap p value. in other words, the null hypothesis was accepted in the developing countries, which means that variables act together in the long term, that is, they are cointegrated. developed countries durbin-hausman testi test stasistic p-value dh-g (group) 4.158 0.000* dh-p (panel) 0.408 0.342 volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.201 | http://emaj.pitt.edu the effect of renewable energy consumption on economic stability: panel data analysis on selected countries page |16| emerging markets journal long term panel cointegration coefficient estimator test and results the long-term "augmented average group" (amg) estimator, which allows cross-sectional dependence with the addition of the common dynamic effect to the regression, also takes into account the heterogeneity of slope coefficients. on the other hand, the amg estimator method can be used in the case of internality, which assumes the relationship between independent variables and error terms. this test statistics is subject to a two-step testing process. in the first step, the operation of the ols (fd-ols) regression model, whose first difference is taken, is discussed and this process is explained as follows (eberhardt & bond, 2009; eberhardt & teal, 2010): 𝜟𝒚𝒊𝒕 = 𝒃′𝜟𝒙𝒊𝒕 + ∑ 𝒄𝒕 𝑻 𝒕=𝟐 𝜟𝑫𝒕 + 𝒆𝒊𝒕 (16) ⇨ �̂�𝒕 = �̂�𝒕 ⦁ the first step is carried out on the pooled regression model with the primary difference process. it is suggested that non-stationary and hidden variables deviate from pooled regression estimation results in this step. therefore, a standard difference estimator (fdols) regression is introduced with the t -1 year dummy, where the dummy coefficients re-labeled as �̂�𝒕 ⦁ are summed. in the second step, the amg estimator test statistics is shown as follows: 𝒚𝒊𝒕 = 𝒂𝒊 + 𝒃′𝒙𝒊𝒕 + 𝒄𝒊𝒕 + 𝒅𝒊�̂�𝒕 ⦁ + 𝒆𝒊𝒕 (17) ⇨ �̂�𝑨𝑴𝑮 = 𝑵−𝟏 ∑ �̂�𝒊𝒊 in the second step, this variable (β) is included in each of the n standard country regressions, including linear trend terms, to capture neglected peculiar processes that develop linearly over time. table 8 and table 9 report the amg cointegration coefficient estimator results for developed and developing countries, respectively. thanks to the results of the amg coefficient estimator analysis, it is possible to discuss country-specific discussions on which variables affect the leco dependent variable for both groups. table 8 shows the amg cointegration coefficient estimator results for developed countries. table 8: amg cointegration estimator test results notes: *, ** and *** represent 1%, 5% and 10% significance levels, respectively. the t statistics was calculated using the newey-west heteroskedasticity standard errors. according to the amg coefficient estimator results shared in table 8, the effect of the lrec variable on the leco variable has been found to be significant and positive, as expected in germany, denmark, italy, switzerland and sweden. it has been observed that a 1% increase in renewable energy consumption caused an increase in the economic stability index by 0.113% for germany, 0.030% for denmark, 0.046% for italy, 0.214% for switzerland and 0.306% for sweden. on the other hand, contrary to what is expected in england and belgium, the effect of renewable energy consumption on the economic stability index is negative and statistically significant. a 1% increase in renewable energy consumption in england and belgium reduces the level of economic stability index in these countries by 0.022% and 0.029% respectively. it is thought that some factors come into prominence as the cause of the negative relationship. in general, these factors include that the facility, parts and maintenance services required for renewable energy production contain high costs and incentives create additional burden on the budget. there is not enough qualified workforce in this field. traditional energy lobby activities are active. also, financing renewable energy incentives are reflected on household electricity bills. such factors can lead to imbalances in economic activities, causing economic instability. belgium, norway and finland are the countries with statistically significant and positive relationships between the lnrec variable and the leco variable. the 1% increase in non-renewable energy consumption in these countries increases the economic stability index by 0.334% in belgium, 0.200% in norway and 0.420% in finland. in usa, japan, spain, ireland, portugal and greece, the relationship between the variables is negative. it has been determined that, an increase of 1% in non-renewable energy consumption in these countries cause a decrease in the economic stability index by 0.299% in usa, 0.803% in japan, 0.131% in spain, 0.317% in ireland, 0.257% in portugal and 0.298 in greece. considering the results that arise contrary to the volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.201 | http://emaj.pitt.edu tunahan hacıimamoğlu, ali rıza sandalcılar emerging markets journal | p a g e |17 expectations, external costs such as energy shocks, chronic current account deficit, environment and health are suggested as the reasons of the negative relationship. considered as a whole, it can be said that dependence on foreign energy causes imbalances in economic indicators through current account deficit and often causes external costs that are not taken into account. it has been determined that the lpol variable is positive and statistically significant as expected on the leco variable in france, australia, england, spain, italy, greece, sweden and finland. table 9 shows the amg cointegration coefficient estimator results for developing countries. table 9: amg cointegration estimator test results notes: *, ** and *** represent 1%, 5% and 10% significance levels, respectively. the t statistics was calculated using the newey-west heteroskedasticity standard errors. according to the test results in table 9 presented by the amg coefficient estimator, the impact on the lrec variable of the leco variable is positive and significant in egypt, turkey, taiwan, pakistan and indonesia. however, it is negative and statistically significant in india and philippines. accordingly, a 1% increase in renewable energy consumption, economic stability index increases by 0.349% in egypt, 0.405% in turkey, 0.092% in taiwan, %1.863 in pakistan and %1.730 in indonesia. however, in india and philippines, economic stability index reduces by 0.517% and 0.490% respectively. amongst developing countries, in china, india, argentina, chile, brazil, mexico, turkey, south korea and the philippines, it has been observed that there is a positive and statistically significant relationship between the lnrec and the leco variables. in these countries, when a 1% increase in consumption of non-renewable energy is observed, the index of economic stability increases by 0.077% in china, 0.302% in india, 0.863% in argentina, 0.179% in chile, 1.067% in brazil, 0.957% in mexico, 0.769% in turkey, 0.221% in south korea and 0.479% in philippines. however, in egypt and pakistan, a negative and significant relationship has been found between the variables. it has been determined that, 1% increase in non-renewable energy consumption in egypt and pakistan cause a decrease by 0.319% and 0.616% in the economic stability index, respectively. while the relationship between the lpol and the leco variables is positive in india, argentina, chile, egypt, peru and indonesia, this relationship is negative only in china, contrary to expectations. this relationship emerging in china is thought to stem from china's distinctive socioeconomic structure. panel causality test and results emirmahmutoğlu and köse (2011) panel causality test is a granger causality test based on the toda-yamamoto (1995) test. considering the heterogeneous structure of the panel and the dependence between the sections, this test can be applied on stationary series of different degrees. it can also be used in the absence of a cointegration relationship. the process of this test is summarized as follows (emirmahmutoğlu and köse, 2011: 871-873): first, the heterogeneous panel var (k_i) model with p variables is expressed as follows: 𝒛𝒊,𝒕 = 𝝁𝒊 + 𝑨𝒊𝟏𝒛𝒊,𝒕−𝟏+. . . +𝑨𝒊𝒌𝒊 𝒛𝒊,𝒕−𝒌𝒊 + 𝒖𝒊,𝒕, i=1,2,…,n; t=1,2,…,t, (18) the symbol i indicates the section size, and the symbol t indicates the time dimension. the term 𝛍𝐢 is a p-dimensional vector of fixed effects. 𝐀𝐢𝟏,…,𝐀𝐢𝐤𝐢 is the constant (p × p) matrix of parameters allowed to change between units. 𝐮𝐢,𝐭 is defined as a column vector of the error terms p. in the var model, the variables containing unit roots cause non-standard asymptotic distributions containing coefficient problems in wald statistics. in this case, the granger causality test ceases to be valid for non-stationary variables. to eliminate this problem, toda and yamamoto (1995) developed the la-var model as an alternative approach to test the coefficient constraint of the var model. in heterogeneous mixed panels, the (𝐤𝐢 + 𝐝 𝐦𝐚𝐱𝐢) model is estimated as follows: 𝒛𝒊,𝒕 = 𝝁𝒊 + 𝑨𝒊𝟏𝒛𝒊,𝒕−𝟏+. . . +𝑨𝒊𝒌𝒛𝒊,𝒕−𝒌𝒊 + ∑ 𝑨𝒊𝒍𝒛𝒊,𝒕−𝟏 𝒌𝒊+𝒅 𝒎𝒂𝒙𝒊 𝒍=𝒌𝒊+𝟏 + 𝒖𝒊,𝒕, (19) i=1,2,…,n; t=1,2,…,t to test the hypothesis that there is no granger causality in heterogeneous panels, fisher (1932) test statistics are used. fisher test statistics are shown as follows: 𝝀 = −𝟐 ∑ 𝒍𝒏(𝒑𝒊)𝑵 𝒊=𝟏 , i=1,2,…,n (20) the term pi represents the p value corresponding to the wald statistics of the section. this test statistic has a chi-square distribution at 2n degrees of freedom. it is stated that the test is valid only when n converges t → ∞. in heterogeneous mixed panels, the (𝐤𝐢 + 𝐝 𝐦𝐚𝐱𝐢) lagged var model is formulated as follows: 𝒙𝒊,𝒕 = 𝝁𝒊 𝒙 + ∑ 𝑨𝟏𝟏,𝒊𝒋𝒙𝒊,𝒕−𝒋 𝒌𝒊+𝒅 𝒎𝒂𝒙𝒊 𝒋=𝟏 + ∑ 𝑨𝟏𝟐,𝒊𝒋𝒚𝒊,𝒕−𝒋 𝒌𝒊+𝒅 𝒎𝒂𝒙𝒊 𝒋=𝟏 + 𝒖𝒊,𝒕 𝒙 (21) 𝒚𝒊,𝒕 = 𝝁𝒊 𝒚 + ∑ 𝑨𝟐𝟏,𝒊𝒋𝒙𝒊,𝒕−𝒋 𝒌𝒊+𝒅 𝒎𝒂𝒙𝒊 𝒋=𝟏 + ∑ 𝑨𝟐𝟐,𝒊𝒋𝒚𝒊,𝒕−𝒋 𝒌𝒊+𝒅 𝒎𝒂𝒙𝒊 𝒋=𝟏 + 𝒖𝒊,𝒕 𝒚 (22) volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.201 | http://emaj.pitt.edu the effect of renewable energy consumption on economic stability: panel data analysis on selected countries page |18| emerging markets journal in equations 21 and 22, 𝐝𝐦𝐚𝐱𝐢 show the highest level of integration suspected for each i in the system. while causality from x to y is tested in equation 22, causality from y to x in equation 21 is tested using a similar procedure. table 10 shows the results of emirmahmutoğlu and köse panel causality test analysis for developed countries. table 10: emirmahmutoğlu and köse panel causality test analysis results notes: *, ** and *** represent 1%, 5% and 10% significance levels, respectively. the maximum lag is taken as 3. schwarz information criterion was used. panel bootstrap critical values (lrec => leco); 1%, 5%, 10% are 79.134, 64.822, 58.473 respectively. panel bootstrap critical values (leco => lrec); 1%, 5%, 10% are 80.495, 67.305, 60.167 respectively. h0: lrec is not the granger cause of leco (renewable energy consumption is not the granger cause of the economic stability index); h0: leco is not the granger cause of lrec (economic stability index is not the granger cause of renewable energy consumption). in table 10, according to the panel fisher test statistic, which represents the overall panel, “lrec is not the granger cause of leko”, null hypothesis is rejected, while “leco is not the granger cause of lrec”, null hypothesis could not be rejected. in other words, an alternative hypothesis is accepted for the panel of developed countries, which suggests that the economic stability index is the granger cause of renewable energy consumption. on the other hand, the null hypothes could not be rejected stating that the renewable energy consumption is not the granger cause of the economic stability index. as a result, based on the one-way relationship from renewable energy consumption to economic stability index, it has been revealed that there is a “growth hypothesis” for the panel in developed countries. considering country-based causality relations, the direction of causality in australia, germany and norway is from renewable energy consumption to economic stability index, while the direction of causality in spain is from economic stability index to renewable energy consumption. in france, however, it is determined that there is a two-way relationship. as a result, within the framework of the period and countries analyzed, it has been proved that the “growth hypothesis” for australia, germany and norway, “conservation hypothesis” for spain and “feedback hypothesis” for france are valid. table 11 shows the results of emirmahmutoğlu and köse panel causality test analysis for developing countries. table 11: emirmahmutoğlu and köse panel causality test analysis results notes: *, ** and *** represent 1%, 5% and 10% significance levels, respectively. the maximum lag is taken as 3. schwarz information criterion was used. panel bootstrap critical values (lrec => leco); 1%, 5%, 10% are 69.983, 54.204, 48.885 respectively. panel bootstrap critical values (leco => lrec); 1%, 5%, 10% are 63.437, 53.881, 48.656 respectively. h0: lrec is not the granger cause of leco (renewable energy consumption is not the granger cause of the economic stability index); h0: leco is not the granger cause of lrec (economic stability index is not the granger cause of renewable energy consumption). in table 11, according to the panel fisher test statistic, which represents the overall panel, “lrec is not the granger cause leco” and “leco is not the granger cause of the lrec”. null hypotheses is not rejected. in other words, no statistically significant relationship has been found for the panel of developing countries, both from renewable energy consumption to economic stability index and from economic stability index to renewable energy consumption. when the causality results of the countries are evaluated, statistically significant relationships have been observed in india, mexico, philippines and peru from renewable energy consumption to the economic stability index. on the other hand, it has been determined that there is a significant causal relationship only in egypt and taiwan from the economic stability index to renewable energy consumption. as a result, the "growth hypothesis" in india, mexico, the philippines and peru and the "conservation hypothesis" in egypt and taiwan have been proved to be valid among developing countries in the context of the period and country panel. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.201 | http://emaj.pitt.edu tunahan hacıimamoğlu, ali rıza sandalcılar emerging markets journal | p a g e |19 iv. conclusion and recommendations considering that energy is an important input for economic activities, alternative energy sources are significant in meeting energy demand. in this way, it is stated that a more balanced process will be followed in economic activities by providing energy resource diversity. in this context, renewable energy consumption is expected to reduce imbalances in economic indicators and contribute to economic stability as a whole. in the study, the effect of renewable energy consumption on economic stability has been examined in the context of developed countries and developing countries, and crosssectional dependence and heterogeneity have been determined for both country groups. after the unit root test, the cointegration test results reveal that variables in both country groups act together in the long term. according to the long-term coefficient estimator, results contrary to expected ones have been reached in some countries and the reasons for this have been discussed. finally, causality relationships have been interpreted in terms of hypotheses. according to the long-term coefficient estimator results, as expected, a positive and significant relationship has been determined on the economic stability index of renewable energy consumption in germany, denmark, italy, switzerland and sweden. however, contrary to what is expected in england and belgium, a negative and significant relationship has been found. the reasons for the negative relationship determined in these two countries are thought to be the methods of financing renewable energy incentive mechanisms and the production of insufficient capacity energy due to climate caused imbalances. amongst developing countries, in egypt, turkey, taiwan, pakistan, indonesia, positive and significant effect of the renewable energy consumption on economic stability index has been found. contrary to expectations, negative and statistically significant results have been detected in india and the philippines. it is considered that high costs, the activities of the traditional energy lobby and the high rate of low qualified labor force are thought to be effective in explaining this negative relationship occuring in these two countries. considering the results of causality relations analysis in developed countries, a one-way relationship has been determined from renewable energy consumption to economic stability index in australia, germany and norway, and from economic stability index to renewable energy consumption in spain. in france, it has been detected that bilateral relationship exists. within the framework of the analyzed period and country group, it has been proved that the "growth hypothesis" in australia, germany and norway, "conservation hypothesis" in spain and "feedback hypothesis" in france are valid. in developing countries, there is a causality relationship from renewable energy consumption to economic stability index in india, mexico, philippines and peru, and from economic stability index to renewable energy consumption in egypt and taiwan. as a result, the “growth hypothesis” for india, mexico, the philippines and peru and the “conservation hypothesis” for egypt and taiwan have been proven to be valid in the context of the period and country group discussed. any causality could not be reached for turkey. however, according to the long-term coefficient estimator, renewable and non-renewable energy consumption have been found to be positive and statistically significant on the economic stability index. but, it can be stated that the consumption of nonrenewable energy is more effective over the economic stability index, and this result is expected for countries where a large portion of energy demand supplied from fossil resources are observed in countries such as turkey. in the study, some suggestions are made in the context of renewable energy policies and practices in general. these suggestions are summarized as follows: the proper planning of the methods of financing high costs of production, installation, parts and maintenance services of renewable energy, the decent analysis of the suitability of the climate characteristics of the renewable energy installation regions to the relevant renewable energy type, increasing the efficiency of r&d expenditures in the field of renewable energy technology, improving the storage possibilities of electricity from renewable energy, making well-equipped workforce planning for the renewable energy sector, and preventing the cartel and lobbying activities that occur in the fossil fuel sector and cause imbalances in the market. references aguiar-conraria, l., & wen, y. (2008). a note on oil dependence and economic instability. macroeconomic dynamics, 12(5), 717-723. akarca, a. t., & long, t. v. (1980). on the relationship between energy and gnp: a reexamination. the journal of energy and development, 326-331. allen, e. l., cooper, c. l., edmonds, f. c., edmonds, j. a., reister, d. b., weinberg, a. m., ... & zelby, l. w. (1976). us energy and economic growth, 1975--2010 (no. orau/iea-767). institute for energy analysis, oak ridge, tenn.(usa). bhattacharya, m., paramati, s. r., ozturk, i., & bhattacharya, s. (2016). the effect of renewable energy consumption on economic growth: evidence from top 38 countries. applied energy, 162, 733-741. breusch, t. s., & pagan, a. r. (1980). the lagrange multiplier test and its applications to model specification in econometrics. the review of economic studies, 47(1), 239-253. chaudhry, m. o., faridi, m. z., & riaz, s. (2015). energy crisis and macroeconomic stability in pakistan. pakistan journal of social sciences (pjss), 35(1). eberhardt, m., & bond, s. (2009). cross-section dependence in nonstationary panel models: a novel estimator. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.201 | http://emaj.pitt.edu the effect of renewable energy consumption on economic stability: panel data analysis on selected countries page |20| emerging markets journal eberhardt, m., & teal, f. (2010). aggregation versus heterogeneity in cross-country growth empirics. eden, s. h., & hwang, b. k. (1984). the relationship between energy and gnp: further results. energy economics, 6(3), 186-190. emirmahmutoglu, f., & kose, n. (2011). testing for granger causality in heterogeneous mixed panels. economic modelling, 28(3), 870-876. hamilton, j. d. (1983). oil and the macroeconomy since world war ii. journal of political economy, 91(2), 228-248. hanff, e., dabat, m. h., & blin, j. (2011). are biofuels an efficient technology for generating sustainable development in oil-dependent african nations? a macroeconomic assessment of the opportunities and impacts in burkina faso. renewable and sustainable energy reviews, 15(5), 2199-2209. hitch, c. j. (1978). energy conservation and economic growth. hudson, e. a., & jorgenson, d. w. (1974). us energy policy and economic growth, 1975-2000. the bell journal of economics and management science, 461-514. kaldor, n. (1976). speculation and economic stability. in the economics of futures trading (pp. 111123). palgrave macmillan, london. kraft, j., & kraft, a. (1978). on the relationship between energy and gnp. the journal of energy and development, 401-403. leblond, p. (2006). the political stability and growth pact is dead: long live the economic stability and growth pact. jcms: journal of common market studies, 44(5), 969-990. maji, i. k., sulaiman, c., & abdul-rahim, a. s. (2019). renewable energy consumption and economic growth nexus: a fresh evidence from west africa. energy reports, 5, 384-392. maradin, d., cerović, l., & mjeda, t. (2017). economic effects of renewable energy technologies. naše gospodarstvo/our economy, 63(2), 49-59. mccoskey, s., & kao, c. (1998). a residual-based test of the null of cointegration in panel data. econometric reviews, 17(1), 57-84. menyah, k., nazlioglu, s., & wolde-rufael, y. (2014). financial development, trade openness and economic growth in african countries: new insights from a panel causality approach. economic modelling, 37, 386-394. nkomo, j. c. (2005). energy and economic development: challenges for south africa. pesaran, m. h. (2004). general diagnostic tests for cross section dependence in panels. pesaran, m. h. (2007). a simple panel unit root test in the presence of cross‐section dependence. journal of applied econometrics, 22(2), 265-312. pesaran, m. h., & yamagata, t. (2008). testing slope homogeneity in large panels. journal of econometrics, 142(1), 50-93. prs group. (2018). international country risk guide (icrg), methodology. retrieved in may, https://www.prsgroup.com/wpcontent/uploads/2018/01/icrgmethodology.pdf. swamy, p. a. (1970). efficient inference in a random coefficient regression model. econometrica: journal of the econometric society, 311-323. toda, h. y., & yamamoto, t. (1995). statistical inference in vector autoregressions with possibly integrated processes. journal of econometrics, 66(1-2), 225-250. van de ven, d. j., & fouquet, r. (2017). historical energy price shocks and their changing effects on the economy. energy economics, 62, 204216. wef (2019). fostering effective energy transition 2019 edition. wesp (2019). world economic situation and prospect report. westerlund, j. (2008). panel cointegration tests of the fisher effect. journal of applied econometrics, 23(2), 193-233. westerlund, j., & edgerton, d. l. (2007). a panel bootstrap cointegration test. economics letters, 97(3), 185-190. https://www.prsgroup.com/wp-content/uploads/2018/01/icrgmethodology.pdf https://www.prsgroup.com/wp-content/uploads/2018/01/icrgmethodology.pdf volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu cultural and attitudinal tenets of ghanaians on insurance service: an empirical study francis osei kumasi technical university, ghana | e-mail: oseifrancis1234@gmail.com christian narh opata kumasi technical university, ghana | e-mail: christian.nopata@kstu.edu.gh collins kankam-kwarteng kumasi technical university, ghana | e-mail: colkann@gmail.com daniel ofori kumasi technical university, ghana | e-mail: ofori006@yahoo.com abstract this study compared the cultural and attitudinal tenets of ghanaians towards insurance service in the kumasi metropolis of ghana. the research utilized the convenience sampling to gather data from 291 respondents. statistical package for social sciences (spss) was used and the relationship between the demographic variables and the actual variables was examined. structural equation modeling (sem) statistical technique using smart partial least square (pls) 3.0 was also used to assess the study's hypothesized relationships. it was observed that a significant relationship existed between attitudinal trends and awareness, attitudinal trends and perception, attitudinal trends and purchase intention, awareness and purchase intention, cultural trends and awareness, cultural trends and purchase intention. conversely, a significant relationship did not exist between cultural trends and perception, as well as perception and purchase intention. the study revealed that attitudinal trends have a greater effect on awareness, perception, and purchase intention than cultural trends, while awareness has the strongest relationship with purchase intention but perception has the weakest relationship with purchase intention. these findings may help to bring about social change by raising awareness of the importance of life insurance in the socioeconomic development of individuals, families, organizations, and communities, resulting in insurance coverage and the reduction of poverty in ghana. insurance practitioners who want to increase insurance penetration for business and sustainability can find the study useful. keywords: attitudinal trends, cultural trends, awareness, perception, purchase intention new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu | mailto:oseifrancis1234@gmail.com mailto:christian.nopata@kstu.edu.gh mailto:colkann@gmail.com mailto:ofori006@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu cultural and attitudinal tenets of ghanaians on insurance service: an empirical study page |14| emerging markets journal cultural and attitudinal tenets of ghanaians on insurance service: an empirical study francis osei christian narh opata collins kankam-kwarteng daniel ofori i. introduction a number of recent studies such as akay, martinsson, hogarth and kunreuther (1985), medhin, and trauman (2009), ackah and owusu (2012), abdullahi (2012), stevens-benefo (2015) and balmalssaka, wumbei, buckner and nartey (2016) on the cultural and attitudinal tenets of ghanaians towards insurance service have been run. however, a review of the literature shows that the insurance business growth rate in ghana is very high (nartey and yudina, 2020). on the other hand, the relatively low penetration rate of the industry (nic, 2019) indicates that there is still considerable untapped potential. balmalssaka, wumbei, buckner, and nartey (2016) found that when looking for the determinants of insurance demand, past experience with other insurances and the degree of harm caused by it constituted the prerequisite for deciding to only accept insurance services in northern ghana. daniel (2015) found that age, income, employment, and education level have a significant impact on the acceptance of insurance policies. ackah and owusu (2012) in ghana believe that people’s low income levels cause them to give up their knowledge and understanding of insurance services. this eventually forms a negative attitude, believing that the insurance company may not fulfill its promise of compensation. on the other hand, perception, awareness, attitude, and knowledge of the services itself determine acceptance of islamic insurance (takaful) in somalia (jama, 2016), whereas awareness, perception, trust, and confidence are the primary determinants in kano metropolitan (maiyaki and ayuba, 2016). in another study, mansor, masduki, mohammad, zulkarnain, and aziz (2015) discovered that only perception and religion have an impact on muslim consumers' preferences for takaful products in malaysia, and that the lack of a social security system is increasing nigerians' awareness and consciousness about insurance (oluyemi, 1995). also, concerning the general insurance in northern nigeria, abdullahi found that the majority of individuals in northern nigeria don't consider insurance, its ability to indemnify clients, and its stand from sociocultural and non-secular perspective (abdullahi, 2012). while it is suggested that perception and attitudes of individuals should be incorporated in designing effective insurance go for tanzania. according to akay, martinsson, medhin, and trauman, (2009) and cabantous, (2007), the main reason ethiopians cannot fully accept to patronize insurance services is their negative attitude and aversion to risk and ambiguity. the same is true in belgium and other parts of europe (heselmans, donceel, aertgeerts, van-de-velde, and ramaekers, (2009; loh, nihalani, and schnus, 2012). hogarth and kunreuther (1985) and goldmann (1985) both point to ambiguity as a barrier to insurance acceptance (1948). similarly, amaefula, okezie, and mejeha (2012) indicate that, despite rural farmers in southern nigeria being aware of agricultural insurance services, they have a negative attitude toward due to concerns about gain or loss associated with or without insurance coverage. while olugbenga-bello and adebimpe (2010) discovered that there is a high level of insurance awareness in south-west nigeria, there is still less knowledge of how to competently use the insurance scheme. ojatta (2016) discovered a low level of insurance awareness and perception in kogi state nigeria. the purpose of this study is to figure out how cultural trends influence consumer preferences and attitudes in the insurance industry in kumasi, ghana. understanding ghanaians' behavioral intentions may give a beneficial framework for future marketing messages aimed at reaching the target group and determining ways to encourage more ghanaians to consider purchasing insurance. the findings are anticipated to aid insurance marketers in determining their strategic focus in developing the ghanaian insurance market, as well as insurance corporations in ensuring their long-term viability. this study intends to investigate the determinants of ghanaian intention behavior in acquiring insurance using the theory of planned behavior (fishbein and ajzen, 1975) as a research framework. the antecedents of behavioral intention are attitudinal and cultural trends, according to the idea of planned behavior (bi). this study adds to the framework's robustness by including awareness and perception as a moderating impact. the contribution of this research is threefold. to our knowledge, this is the first study to look at the planned behavior of insurance purchasing in a ghanaian scenario. despite the fact that there has been a lot of work done on insurance, there hasn't been research done in ghana using a planned behavior viewpoint. second, the study will contribute to the literature by expanding knowledge of this subject field in a large rising market like ghana. other replications of comparable studies in emerging nations are expected to utilize this study as a benchmark, according to the researchers. finally, in the context of emerging countries, the empirical study looked into how attitudes, cultural trends, awareness, and perception may all play a part in deciding insurance purchase intentions. ii. literature review the literature comprised both the theoretical literature and the empirical literature. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu francis osei, christian narh opata, collins kankam-kwarteng, daniel ofori emerging markets journal | p a g e 1 5 theory of planned behaviour according to conner and sparks (2005), the theory of planned behavior arose from the extension of an earlier theory of reasoned action (tra) by fishbein and ajzen in 1975. the theory of planned behavior (tpb) event is significant, because it overcomes the tra's shortcomings in regulating behavior by requiring individuals to make a conscious choice of action (ajzen, 1991). previous researchers have used the tpb model to investigate consumer behavioral intentions (chen, 2016; chin, 2016), ecological relationships (moser, 2016; paul et al., 2016), and other social science disciplines that investigate human relationships and factors which influence decision-making processes. rabin and thaler (2001), for example, believe that risk aversion may explain the anomalies in the insurance market, such as people buying insurance when they shouldn't and refusing when they really need it. as a result, this study employs a behavioral approach to explain the anomalies of planned behavior in the insurance industry. using the planned behavior approach, another reason for the anomalies in health insurance demand can be established. planned behavior may help to explain what elements influence people's decision to buy insurance. studies that test this theory are extremely rare in the field of insurance research. only one study, by omar and owusu frimpong (2007), has attempted to explain why nigerians require health insurance. they accepted the theory of reasoned action instead of the tpb (tra). another study based on the tpb was kurland (1995), who expanded the theory by including a measure of moral duty in the prediction of insurance agents' ethical intentions toward their consumers. current development within the insurance industry of ghana in 2018, total life insurance premiums increased by 20.1% from 1.08 billion ghana cedi (ghs) in 2017 to 1.3 billion ghs. in addition, total non-life insurance premiums in 2018 increased by 1.3 billion ghs. in 2017, it was 19 billion. this corresponds to an average annual growth rate of 9.3%. however, the industry has experienced a lot of activity and significant expansion over the years (nic, 2018). for instance, the total gross premiums increased from ghs 2,271,368,033 in 2017 to ghs 2,937,534,716 in 2018. this corresponds to an average annual growth rate of 29%. although these two benchmarks are not met, the industry appears to perform well in terms of gross premiums (representing insurance depth or demand) as a share of gross domestic product (gdp). the insurance penetration rate in 2017 was 1.12%, but in 2018 it dropped to 15%. according to the nic, the committee only considers the premiums charged by ghanaian insurance companies when calculating the insurance amount. in addition, unlike other countries with higher insurance penetration, insurance and pension contributions do not appear to be included in the calculation. although gross premiums have been increasing, as shown in table 1, the growth rate is slowing down (nic, 2018). table 1: insurance growth from 2013 to 2018 year premium income growth rate (ghs) (%) 2013 1,052,090,981 24 2014 1,239,853,442 18 2015 1,560,679,185 26 2016 1,928,838,573 24 2017 2,400,000,000 18 2018 2,937,534,716 29 source: nic, 2018 low level of insurance culture in a recent study on the quality of life in developing countries in south africa (moller, 2013), income and social security (own salary, family supply capacity, sickness/death insurance, and old-age income) were treated together as the top priority for quality of life. this view emphasizes the value of insurance in human life. however, insurance services do not seem to be popular in emerging countries. the poor state of insurance culture in developing countries has aroused the curiosity of scholars and practitioners. risk has been regarded as a major feature of life in rural areas of underdeveloped countries (udry, 1994). many of the challenges involved are related to marketing. for example, yusuf, gbadamosi, and hamadu (2009) evaluated the attitudes of nigerian consumers towards insurance sponsorship, and they found that they lacked trust and confidence in insurance companies. another key factor leading to this mentality is the scarcity of insurance product information. the deep insight of the researchers is that this involves a new marketing communication method that should be supported by raising awareness and informing consumers about the benefits related to insurance to strengthen purchasing decisions. the disadvantage of the study is that it fails to capture attitudes towards non-life insurance products, as well as its limited sampling, including automobiles, housing content, commodities in transit, maritime and aviation, fidelity guarantees, etc. however, omar's research raises important marketing questions for insurance professionals (carrin 2002; karolyi, 2016; chui and kwok 2008). it is reported that half of industrialized countries choose social insurance as their medical financial system, emphasizing the necessity of social insurance as a powerful means to provide fairness to the public in order to provide healthy opportunities for services. in 1998, it was pointed out that no developing country with a per capita gross national product (gnp) of less than us$761 had a social insurance plan. arodiogbu (2005) used the social insurance (shi) program to address the challenge of poor financial health in the health sector and identified many variables that are not conducive to the system. unfortunately, his idea did not solve the need for public-private cooperation in industrialized countries. morduch (1994) took banks as an volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu cultural and attitudinal tenets of ghanaians on insurance service: an empirical study page |16| emerging markets journal example, emphasizing that the lack of financial institutions in low-income countries is one of the reasons for the low insurance culture (kanagaretnam et al., 2014; ashraf et al., 2016; ashraf and arshad, 2017; mourouzidou-damtsa et al. people, 2017). cultural factors and consumer buying behavior it has been found that culture plays a crucial role in influencing communication, management style, and problem-solving skills (hofstede, 2011; laroche, 2012). each group or community has its own culture, and the influence of culture on purchasing behavior may vary from place to place. failure to adapt to these distinctions can lead to poor marketing or embarrassing gaffes. many studies have shown that culture affects marketing and customer buying behavior (nayeem, 2012; spiers, gundala, and singh, 2014; wursten and fadrhonc, 2012; yakup, mucahit, and reyhan, 2011). marketers in the international and domestic markets must master the culture of their respective markets and adjust their marketing skills accordingly. marketers are always looking for cultural changes in order to launch new products that are in demand. several previous studies have considered consumer culture as a factor that encourages spontaneous purchases (abratt and goodey, 1990; kacen and lee, 2002). according to the cross-cultural research of abratt and goodey (1990), instore cues are essential to promote cross-cultural impulse buying. in a multinational consumer survey, kacen and lee (2002) found that the characteristics of individualistic groups’ impulse buying behaviors are more strongly correlated with impulse buying behaviors than those of collectivist groups. cultural factors play an important role in many aspects of consumer impulsive buying behaviors. purchase intention in a buying decision, the famously cited bashir, (2019) describes purchasing intention as the likeliness of the consumer to choose from a pool of brand choices (ghalandari and norouzi, 2012). it reflects a customer's quest to make a purchase (diallo, 2012). the purpose of purchasing triggers the consumer's ability to make personal decisions about what to purchase and what to choose after assessment (hanzaee et al., 2014; revzani et al., 2012). a consumer's buying intention is affected by extrinsic and intrinsic signals such as brand, price, and product characteristics (luo et al., 2020; das, 2015). although consumers may be encouraged to provide detailed and accurate information about an offering with intrinsic indications, these indications may be absent at the point of purchase and consumers may settle on extrinsic characteristics to assess their purpose and decision to purchase (rezvani, dehkordi, rahman, and eghtebasi, 2012). price is automatically the common factor that affects the consumer's evaluation and purchasing decision (ryu and han, 2010). the bounteous experiments involving the intention to buy in marketing were borrowed from behavioral science, specifically the theory of fishbein and ajzen (1975), which claims that the intention of a person to conduct an action is the only indicator of the measure of the behavior of the individual. hence, to explain this phenomenon, wang and yang (2008) have widely adopted the principle of reasoned action. for his behavioral purpose model, fishbein (1990) earlier adopted dulany 's theory of propositional control (1967) to posit that the purpose of individual to perform a behavior arises as a function of his attitude toward performing the behavior under a given circumstance. several researchers have found that customer purchasing intent is not an involuntary behavior, but is an essential factor in recognizing, assessing and evaluating alternatives with price remaining (silva et al., 2019; noh et al., 2017; li et al., 2020; moser, 2016). the definition of revzani et al. (2012) for purchasing intention will be adopted for the purpose of this study as the willingness of consumers to take personal action against a specific brand. this basically explains what they think consumers are going to buy. attitude, perception and awareness attitude is a psychological path that determines a person's likes or dislikes for a given object (eagly and chaiken, 2007). the theory of planned behavior is essential, because it addresses the shortcomings of tra in management behavior by requiring individuals to make conscious decisions (ajzen, 1991). ghani, rusli, biak, and idris (2013) continue to say that before acting, tpb individuals consider three important factors. according to recent research conducted in india, among all tpb predictors, attitude has the most direct effect on customer purchase intention (paul et al., 2017; sreen et al., 2018; ahmed et al., 2020). in kogi state, nigeria, oteino (2018) found that insurance awareness is low. therefore, customers’ knowledge of a certain product or service is considered to play a key role in determining whether they like or dislike a certain service or product. the impression of local products is affected by many factors. in fact, these items can be regarded as a commercial expression of the heritage and culture, history, tradition, and authenticity of a region, as a result of consumer interaction with the region (kolar and zabkar, 2010; morris and kirwan, 2010) several researchers (dimara and skuras, 2003; van ittersum et al., 2006; pantano, (2011); skuras and dimara, 2004; kim et al., 2019; polenzani, 2020; baca et al., 2018; napolitano., 2017) noted that consumers attach importance to products related to a particular region or region. in addition, the uncertainty of the economic environment in emerging countries makes the confidence of business partners a key issue. as has been observed, this makes it necessary for service providers to build strong customer/customer trust and confidence in order for them to win and succeed. the conceptual model as shown in the literature, a conceptual model (figure 1) was used to empirically test and confirm whether there are positive and significant relationships among cultural trends, attitudinal trends, perception, and awareness, and consumer purchase intention of insurance services within the kumasi metropolis. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu francis osei, christian narh opata, collins kankam-kwarteng, daniel ofori emerging markets journal | p a g e 1 7 figure 1. conceptual model of the study source: authors’ own compilation hypotheses statements customer level of awareness towards purchasing life insurance has a significant positive impact on purchase intention. h1: there is a positive relationship between attitudinal trends and awareness. h2: there exist a positive relationship between attitudinal trends and perception. h3: customer level of attitudinal trends towards purchasing insurance has a significant positive impact on purchase intention. h4: customer level of awareness towards purchasing insurance has a significant positive impact on purchase intention. h5: there is a positive relationship between cultural trends and awareness. h6: there is a positive relationship between cultural trends and perception. h7: customer level of cultural trends towards purchasing insurance has a significant positive impact on purchase intention. h8: customer level of perception towards purchasing insurance has a significant positive impact on purchase intention. iii. methodology research design this study used a descriptive research approach, and because data was collected only once from a group of individuals, it is classified as a single cross-sectional study. data collection and analysis both primary and secondary data sources have been used for research purposes. second-hand data are collected from past journals, published reports and materials in and around ghana. survey methods have been used to collect raw data (ranaweera and neely, 2003). the 5-point likert type scale (1 = strongly disagree, 2 = disagree, 3 = neither agree nor agree, 4 = agree, 5 = strongly agree) has been used to measure the items of the questionnaire (jahan and sabbir, 2018; mahdzan and victorian, 2013). the main research tool is a structured questionnaire, which will be used in this research. the study uses a descriptive design. the social science statistics package (spss) version 20.0 is used to encode and cross-check demographic variables, and the structural equation modeling (sem) technology is used to view the hypothetical relationships of the study, using partial least squares multiply (pls) software version 3.0. (hair et al., 2009). sampling method the target population was all potential buyers of life and non-life insurance policy in ghana. data were gathered from individuals working in various public and commercial institutions in kumasi, ghana's capital and ashanti regional capital. employees of educational institutions, notably kumasi technical university and kwame nkrumah university of science and technologykumasi, as well as three randomly selected banks in kumasi metropolitan, formed the sampling frame. kumasi was chosen as the data collection area since it is the capital of the ashanti region and the location of practically all financial and commercial offices (mamun, 2013; khan and uddin, 2013). a convenience sampling strategy has been adopted as a sampling technique (souiden and jabeur, 2015). israel (1992) proposed employing the complete population as a sample, using specified methods, or copying the sample size of previous research when determining the same size. only 315 replies were usable among the 330 questionnaires distributed to the target group in this study. this sample size is similar to what has been used in previous research (islam and mamun, 2017; jahan and sabbir, 2018; mahdzan and victorian, 2013; mamun et al., 2013). furthermore, tabachnick and fidell (2014) stated that for exploratory factor analysis, 300 samples is sufficient. furthermore, confirmatory factor analysis (cfa) necessitates a sample size of 100 samples (maccallum et al., 1999). instrument and measure self-administered questionnaire was the main instrument, exercised for data collection. measures for perception variables were adopted from the study of ackah and owusu, (2012) with five items. cultural trends was captured by modifying twelve items used by leavitt (2003), fershtman, gneezy and hoffman, (2011), s. abdul shukor and ahmad jamal zaid ahmad ansari (2012), nwankwo, and ajemunigbohun, (2013), and ackah. and owusu (2012) for the current study. awareness toward purchase was observed by adapting three items from owusu-frimpong (2007) for the current study after the review of extant literature. four items were adopted from omar and owusu-frimpong (2007), ajzen (2008), brahmana and brahmana (2013) to measure attitudinal trends. finally, the study observed this variable by adapting the measurement of jahan and sabbir (2018), and han et al. (2010). demographic profile of respondents respondents have been profiled according to gender, age, marital status, household number, employment status, educational level, and religion. regarding the gender distribution of the respondents, 172 males representing 59.1%, and 119 females representing volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu cultural and attitudinal tenets of ghanaians on insurance service: an empirical study page |18| emerging markets journal 40.9% were engaged for the study in the kumasi metropolis. the total respondents were therefore, 291 representing 100%. in terms of age distribution, 194 respondents were between the range 21 to 30 years, representing 66.7%, whereas between the range of 21 to 30 years there were 194 respondents representing 66.7% while the age category of 41-50 years with 10 respondents representing 3.4% was the lowest. the marital status of the respondents was as follows: 204 representing 70.1% were single, whereas 1 respondent representing 0.3% was widowed. as regard the employment status of the respondents, out of the total of 291,133 respondents representing 45.7% were employed, and others were 12 representing 4.1%. as regard the educational level of the respondents, those with diploma were 137 which represented 47.1%, whereas 3 respondents representing 1.0% had no diploma. last but not the least of the demographic variable to be captured was the religion status of the respondents. out of the total of 291, christianity were 246, representing 84.5%, while others were 2 representing 0.7%. this is not surprising since christianity is far the dominant religion in ghana. validity and reliability results the validity and reliability of the consistency of the calculation were checked prior to the data analysis. reliability tests how accurate an instrument measures its build, while validity measures how well an instrument measures the basic concept to be measured by it (sekaran and bougie, 2010). the cronbach alpha is the benchmark for testing the reliability of the tests. as seen from table 2, and indicated by nunnally and bernstein (1994), all the alpha values are higher than 0.6. it can be inferred that for use in the survey, the items in the questionnaire are accurate. a composite reliability of 0.70 or greater is considered appropriate (fornell and larcker 1981), equivalent to cronbach's alpha for the reliability calculation of internal consistency. as such, the measurements are accurate. table 2: reliability and validity factor loadings source: spss software output the composite reliability (cr) values were also greater than 0.80 and the extracted average variance > .50, indicating convergent validity when there is consensus between the multiple items measuring a single definition and showing sufficient internal consistency of the constructs (fornell and larcker, 1981; hair et al, 2012; babin and zikmund, 2016). the table above shows the details of the reliability, factor loadings, and average variance extracted of the constructs. table 3: discriminant validity source: spss software output in order to quantify the degree to which the constructs differed and to evaluate the freedom of measurement model of a construct from redundant objects, discriminant validity was also used. in particular, the measure was assumed to have discriminant validity if the items in a construct were more closely correlated with each other than with items measuring other constructs. in this light, the calculation of a different construct should not be strongly associated with a scale (babin and zikmund, 2016). scholars such as fornell and lacker (1981) postulate that the ave's square root should be volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu francis osei, christian narh opata, collins kankam-kwarteng, daniel ofori emerging markets journal | p a g e 1 9 greater than the correlation between the construct and the other constructs, and this research is in line with this claim because, for each construct, all the constructs met the discriminant validity with the ave greater than the square correlation with the other constructs as shown in the above table. this is the inter-construct correlation matrix. table 4: total effects source: spss software output mediation test the mediation test is used to determine whether the mediation structure can effectively transfer the ability of the independent variable to the dependent variable (ramayah et al., 2011). on the other hand, the mediation test uses mediation variables to identify the indirect effects of independent variables on dependent variables. in addition, hayes and preacher (2010) found that the mediation analysis in multivariate analysis can be determined using a variety of techniques, including (1) simple techniques such as causal step method (baron & kenny, 1986) or sobel test (sobel, 1982). the new method only requires some unrealistic statistical assumptions. two examples are the distribution of product methods (mackinnon, lockwood and williams, 2004) and resampling techniques such as guided methods (bollen and stine, 1990; preacher and hayes, 2004, 2008; shrout and bolger, 2002). partial least squares (pls) structural equation modeling (sem) techniques were used to evaluate the hypotheses of this survey, which is important because the intermediary test used in this article is based on the pls method (wold, 1985). combined with assumptions, the intermediary test uses the bootstrap 5000 resampling technique for evaluation (hair, ringle, and sarstedt, 2011; zhao, lynch, and chen, 2010). in addition, the intermediary is determined by multiplying the average values of paths "a" and "b", and then dividing the result by the standard error of the path (kock, 2013). the positive reading of all the variables confirm that the model fits the data perfectly. figure 2. structural model of the path coefficient table 5: structural analysis source: spss software output indirect effects table 6: indirect effects note: at= attitudinal trends; a= awareness; ct= cultural trends; p= perception; ip= purchase intention. *significance at p< 0.05; **significance at p< 0.01; *** significance at p< 0.001. summary of the hypothesized relationships for hypothesis testing, structure equation modeling (sem) was used with the partial least square (smart pls) method. that was to use the route coefficients supplied by sem for testing the hypotheses. attitudinal trends (β = 0.397, t = 5.477, p = 0.000) was found to have a significant effect on awareness, thus supported h1. attitudinal trends (β = 0.168, t = 2.180, p = 0.030) was found to have a significant effect on perception, thus supported h2. attitudinal trends (β = 0.078, t = 5.819, p volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu cultural and attitudinal tenets of ghanaians on insurance service: an empirical study page |20| emerging markets journal = 0.000) was found to have a significantly positive effect on purchase intention, thus supported h3. awareness (β= 0.835, t = 22.747, p = 0.000) was found to have a significantly positive effect on purchase intention, thus supported h4. cultural trends (β = 0.175, t = 2.465, p = 0.014) was found to positively affect awareness, thus supported h5. cultural trends (β = 0.058, t = 0.718, p = 0.473) was found not to have a significantly positive effect on perception, thus rejected h6. cultural trends (β= 0.016, t = 2.226, p = 0.026) was found to have a significantly positive effect on purchase intention, thus supported h7. perception (β = 0.009, t = 0.304, p = 0.761) was found not to positively affect purchase intention, thus rejected h8. in regards to the mediation effect, awareness relationship between attitudinal trends and purchase intention is significant (b=0.332; t= 5.430; p = 0.000). this indicates that awareness has a very important role as a partial mediator in the relationship between attitudinal trends with purchase intention and becomes an important alternative in increasing purchase intention. equally, regarding the test of awareness relationship between cultural trends and purchase intention, it is also significant (b=0.146; t= 2.445; p = 0.015). this indicates that awareness has a very important role as a partial mediator in the relationship between cultural trends with purchase intention and becomes an important alternative in increasing purchase intention. in contrast to the above test, perception does not mediate the relationship between attitudinal trend and purchase intention (b= 0.001; t=0.268; p = 0.789). this indicates that perception is not a partial mediator in the relationship between attitudinal trend with purchase intention and it becomes an important alternative in increasing firm performance. related to the test of perception, it does not mediate the relationship between cultural trends and purchase intention (b= 0.001; t=0.158; p = 0.875). this indicates that perception is not a partial mediator in the relationship between cultural trends with purchase intention and becomes an important alternative in increasing firm performance. iv. discussion the current study sought to examine cultural and attitudinal tenets of ghanaians towards insurance service in the kumasi metropolis. while most previous research viewed these constructs as single measures, this study contrasted the two extrinsic measures and customer attitude and perception of purchasing intention. eight assumptions were made by way of hypotheses. the findings of the study revealed that in the comparison of cultural and attitudinal tenets of ghanaians towards insurance service, attitudinal tenets have higher impact on awareness and perception. the path coefficient of at (a=0.397, p=0.168) and ct (a=0.058, p=0.058) respectively confirms a strong positive consumer awareness and perception toward cultural and attitudinal tenets of ghanaians towards insurance service. this is consistent with the empirical results of other researchers such as ayuba et al. (2014), who discovered the non-economic factors that determine takaful consumption in the kano metropolitan area. this study measured the impact of public awareness, public perception, and public trust and confidence in takaful operators on public attitudes towards takaful patrons in kano city. according to some research (taylor, 2010; rahman et al, 2009; and ayuba, 2014), muslims’ understanding of takaful services is very important at both the individual and corporate levels. amaefula, okezie, and mejeha (2012) pointed out that although farmers in southern nigeria are aware of agricultural insurance services, they have a negative attitude towards agricultural insurance services because they consider insurancerelated or non-insurance-related gains or losses. olugbenga-bello and adebimpe (2010) found that insurance awareness is high in southwestern nigeria, but less knowledge exists about how to use insurance plans correctly. ojatta (2016) found that kogi has a low level of insurance awareness and awareness in nigeria. therefore, customers’ knowledge of a certain product or service is considered to play a key role in determining whether they like or dislike a certain service or product. secondly, cultural and attitudinal tenets were both examined on purchase intention to verify their significant positive relationships. their path coefficients were 0.016 and 0.078 respectively. the predictions for cultural and attitudinal tenets had a greater effect and was supported. this clearly shows that consumers’ purchase intentions and decisions depend to a large extent on the culture and attitude principles of their insurance services, and the influence of attitude principles is greater. this is consistent with the results of other studies by omar and owusu-frimpong (2007), olola et. al. (2010) and abbring et al. (2003), who found that perception of future risks has a significant impact on the desire to purchase health insurance through attitude behavior. individuals buy health insurance because they worry about their future health. other factors, such as concerns about future health care costs and their own health, prompt people to buy health insurance. this is consistent with the previous studies of laroche et al. (2004) and outreville (2018). finally, awareness and perception were both examined on purchase intention to verify their significant positive relationship. their path coefficient was 0.835 and 0.009 respectively, confirming a strong positive consumer awareness and perception on purchase intention. awareness has a higher impact on purchase intention. this is consistent with the results of other empirical studies, such as bello and ayuba (2014), who found that consumer perception is a function and reflection of the product awareness, and therefore the level of trust the purchaser has in the service provider is important. this describes marketers’ attitudes towards the importance of consumer product/service decision-making processes. according to marketers, perception allows consumers to select, organize, and evaluate knowledge input to create a meaningful picture of the world. what people see is subjective and may be very different from objective reality. people's selective attention (choosing what is needed), selective distortion (preventing unwanted stimuli), and selective recall are usually the culprits for this situation (retaining the stimuli needed). therefore, there are many factors that affect people’s perception, including the perceiver’s attitude, motivation, interest, experience and expectations, the novelty, movement, sound, size, background, proximity and similarity of the target object, and context (time, working environment, social environment, etc.) (makanyeza, 2014; kotler and keller, 2005; robbins and judge, 2007; akpa, 2013; teas, 1993). also, the principles of culture and attitude have a greater impact on awareness, perception, and purchase intentions. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu francis osei, christian narh opata, collins kankam-kwarteng, daniel ofori emerging markets journal | p a g e 2 1 v. conclusion and recommendations the increased competition for insurance required this analysis to compare attitudinal patterns and cultural trends, based on the theory of planned behavior for clarity in the ghanaian context, on customer knowledge and perception and purchase intent. management can derive some realistic signs from the research. in an environment of intense market rivalry where rivals work rigorously to outwit their competitors, grappling with the issue of religious sensitivity; because religion has little effect on consumer insurance patronage if discovered and people are likely to be too sensitive to religious problems, in order to gain more loyalty, insurance service providers should sponsor services that will educate consumers about why they can patronize insurance products when meeting their business obligations. but, instead of being a holistic business operation, be careful not to give the program a religious or cultural color. proactive and intensive marketing by management, workers and advertising agencies: when insurance officers are able to participate in a proactive and intensive marketing drive, the probable cap is very high for rising patronage. when approached, building a positive mindset and a high level of recognition motivates customers. as ashfaq (2010) put it, insurance service providers need to ensure holistic marketing by branding their offerings as an alternative by making of race and religious affiliation a model of profit and risk reduction. building strong financial institutions: strong, highlycapitalized financial institutions can draw more people's trust. they can also promote the process of loss claims. strong institutions also employ professionals who can build trust and trust between providers of services and customers. scholars have shown that the identification of research weaknesses does not flaw its importance, but rather enhances it by highlighting key shortcomings that may be of interest to potential researchers (woloshin and schwartz, 2002). this study was limited to a survey conducted in kumasi metropolitan, ghana as this was the most available and within the researcher’s budget. future inquiries are recommended to extend the sampling frame to include a more representative sample of rural communities and other provinces of ghana. in addition, this investigation was limited to data from 291 respondents, implying that the findings should be generalized to all ghanaian consumers with caution. for replication of the study, larger sample sizes should be used. references abdullahi, m. (2012). effect of aggregate type on compressive strength of concrete. international journal of civil and structural engineering, 2(3), 782. abratt, r., & goodey, s. d. (1990). unplanned buying and in‐store stimuli in supermarkets. managerial and decision economics, 11(2), 111121. abrokwah, s. o., moser, c. m., & norton, e. (2016). the impact of social health insurance on household fertility decisions. journal of african economies, 25(5), 699-717. ackah, c., & owusu, a. (2012, march). assessing the knowledge of and attitude towards insurance in ghana. in research conference on microinsurance. adamu, i. y. (2016). acceptance and patronage of insurance services in northern nigeria. journal department of business administration, federal university kashere, gombe state, nigeria. ahmed, n., li, c., khan, a., qalati, s. a., naz, s., & rana, f. (2020). purchase intention toward organic food among young consumers using theory of planned behavior: role of environmental concerns and environmental awareness. journal of environmental planning and management, 1-27. ajayi, i. o., soyannwo, t., & akpa, o. m. (2013). awareness and utilization of affordable medicine facility-malaria among caregivers of under-five children in ibadan north-west local government area, oyo state. malaria research and treatment, 2013. ajeigbe, h. a., waliyar, f., echekwu, c. a., ayuba, k., motagi, b. n., eniayeju, d., & inuwa, a. (2014). a farmer’s guide to groundnut production in nigeria. patancheru, 502(324), 36. ajzen, i. (1991). the theory of planned behavior. organizational behavior and human decision processes, 50(2), 179-211. ajzen, i., & fishbein, m. (1975). a bayesian analysis of attribution processes. psychological bulletin, 82(2), 261. akhtar, n., siddiqi, u. i., ashraf, a., & latif, m. (2016). impact of a brand equity on consumer purchase decision in l'oreal skincare products. international review of management and business research, 5(3), 808. alhassan, r. k., nketiah-amponsah, e., & arhinful, d. k. (2016). a review of the national health insurance scheme in ghana: what are the sustainability threats and prospects?. plos one, 11(11), e0165151. amaefula, c., okezie, c. a., & mejeha, r. (2012). risk attitude and insurance: a causal analysis. american journal of economics, 2(3), 26-32. volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu cultural and attitudinal tenets of ghanaians on insurance service: an empirical study page |22| emerging markets journal arodiogbu, i. l. (2005). introducing social health insurance to solve problems of poor health sector financing in nigeria. unpublished msc thesis submitted to the department of health management, planning and policy, university of leeds. ashraf, b. n., arshad, s., & yan, l. (2017). trade openness and bank risk-taking behavior: evidence from emerging economies. journal of risk and financial management, 10(3), 15. baca, l. f. g., & lópez, f. j. s. (2018). traditional architecture and sustainable conservation. journal of cultural heritage management and sustainable development. bashir, a. m. (2019). effect of halal awareness, halal logo and attitude on foreign consumers’ purchase intention. british food journal. beck, l., & ajzen, i. (1991). predicting dishonest actions using the theory of planned behavior. journal of research in personality, 25(3), 285-301. cabantous, l. (2007). ambiguity aversion in the field of insurance: insurers’ attitude to imprecise and conflicting probability estimates. theory and decision, 62(3), 219-240. carrin, g. (2002). social health insurance in developing countries: a continuing challenge. international social security review, 55(2), 57-69. conner, m., & norman, p. (2005). predicting health behaviour. mcgraw-hill education (uk). das, g. (2015). linkages between self-congruity, brand familiarity, perceived quality and purchase intention: a study of fashion retail brands. journal of global fashion marketing, 6(3), 180193. diallo, m. f. (2012). effects of store image and store brand price-image on store brand purchase intention: application to an emerging market. journal of retailing and consumer services, 19(3), 360-367. dziwornu, r. k., & assefuah, k. a. (2019). are poultry farmers willing to insure their farms? empirical evidence from ghana. managerial and decision economics, 40(5), 530-538. eagly, a. h., & chaiken, s. (2007). the advantages of an inclusive definition of attitude. social cognition, 25(5), 582-602. ejye omar, o., & owusu-frimpong, n. (2007). life insurance in nigeria: an application of the theory of reasoned action to consumers' attitudes and purchase intention. the service industries journal, 27(7), 963-976. falcon, e., laroche, c., fauve, s., & coste, c. (1998). behavior of one inelastic ball bouncing repeatedly off the ground. the european physical journal b-condensed matter and complex systems, 3(1), 45-57. fishbein, m. (1990). aids and behavior change: an analysis based on the theory of reasoned action. revista interamericana de psicología. ghalandari, k., & norouzi, a. (2012). the effect of country of origin on purchase intention: the role of product knowledge. research journal of applied sciences, engineering and technology, 4(9), 1166-1171. ghani, w. a. w. a. k., rusli, i. f., biak, d. r. a., & idris, a. (2013). an application of the theory of planned behaviour to study the influencing factors of participation in source separation of food waste. waste management, 33(5), 12761281. goldmann, f. (1948). labor's attitude toward health insurance. ilr review, 2(1), 90-98. heselmans, a., van de velde, s., donceel, p., aertgeerts, b., & ramaekers, d. (2009). effectiveness of electronic guideline-based implementation systems in ambulatory care settings-a systematic review. implementation science, 4(1), 1-12. hofstede, g. (2011). dimensionalizing cultures: the hofstede model in context. online readings in psychology and culture, 2(1), 2307-0919. hogarth, r. m., & kunreuther, h. (1985). ambiguity and insurance decisions. the american economic review, 75(2), 386-390. hong, l., yao, l., xie, p., & li, w. (2020). an empirical study on consumer purchase intention for nuts and influencing factors—survey based on consumers from zhejiang. food control, 117, 107343. kacen, j. j., & lee, j. a. (2002). the influence of culture on consumer impulsive buying behavior. journal of consumer psychology, 12(2), 163176. kanagaretnam, k., lim, c. y., & lobo, g. j. (2014). influence of national culture on accounting conservatism and risk-taking in the banking industry. the accounting review, 89(3), 11151149. karolyi, g. a. (2016). the gravity of culture for finance. journal of corporate finance, 41, 610-625. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu francis osei, christian narh opata, collins kankam-kwarteng, daniel ofori emerging markets journal | p a g e 2 3 kim, s., whitford, m., & arcodia, c. (2019). development of intangible cultural heritage as a sustainable tourism resource: the intangible cultural heritage practitioners’ perspectives. journal of heritage tourism, 14(5-6), 422-435. kim, y., & han, h. (2010). intention to pay conventionalhotel prices at a green hotel–a modification of the theory of planned behavior. journal of sustainable tourism, 18(8), 997-1014. kolar, t., & zabkar, v. (2010). a consumer-based model of authenticity: an oxymoron or the foundation of cultural heritage marketing?. tourism management, 31(5), 652-664. kotler, p., & keller, k. (2005). marketing [marketing]. poznań: rebis. kurland, n. b. (1995). ethical intentions and the theories of reasoned action and planned behavior 1. journal of applied social psychology, 25(4), 297-313. laroche, l. (2012). managing cultural diversity in technical professions. routledge. lee, e. b., lee, s. g., & yang, c. g. (2017). the influences of advertisement attitude and brand attitude on purchase intention of smartphone advertising. industrial management & data systems. loh, c. p. a., nihalani, k., & schnusenberg, o. (2012). measuring attitude toward social health insurance. the european journal of health economics, 13(6), 707-722. mahdzan, n. s., & victorian, s. m. p. (2013). the determinants of life insurance demand: a focus on saving motives and financial literacy. asian social science, 9(5), 274. maiyaki, a. a., & ayuba, h. (2015). consumers' attitude toward islamic insurance services (takaful) patronage in kano metropolis, nigeria. international journal of marketing studies, 7(2), 27. makanyeza, c. (2014). measuring consumer attitude towards imported poultry meat products in a developing market: an assessment of reliability, validity and dimensionality of the tri-component attitude model. mediterranean journal of social sciences, 5(20), 874. mandal, s., rakshit, a., & sarkar, n. c. (2009). agricultural insurance in developing countries: experiences and way ahead. rural insurance: a new frontier. mansor, k. a., masduki, r. m. n., mohamad, m., zulkarnain, n., & aziz, n. a. (2015). a study on factors influencing muslim’s consumers preferences towards takaful products in malaysia. romanian statistical review, 63(2), 78-89. mazaheri, e., richard, m. o., laroche, m., & ueltschy, l. c. (2014). the influence of culture, emotions, intangibility, and atmospheric cues on online behavior. journal of business research, 67(3), 253-259. mmbaga, b. t., lie, r. t., olomi, r., mahande, m. j., olola, o., & daltveit, a. k. (2012). causes of perinatal death at a tertiary care hospital in northern tanzania 2000–2010: a registry based study. bmc pregnancy and childbirth, 12(1), 19. møller, v. (2013). south african quality of life trends over three decades, 1980–2010. social indicators research, 113(3), 915-940. morduch, j. (1994). poverty and vulnerability. the american economic review, 84(2), 221-225. morris, c., & kirwan, j. (2010). food commodities, geographical knowledges and the reconnection of production and consumption: the case of naturally embedded food products. geoforum, 41(1), 131-143. moser, a. k. (2016). buying organic–decision-making heuristics and empirical evidence from germany. journal of consumer marketing. mourouzidou-damtsa, s., milidonis, a., & stathopoulos, k. (2019). national culture and bank risktaking. journal of financial stability, 40, 132143. napolitano, m. r., & de nisco, a. (2017). cultural heritage: the missing “link” in the place marketing literature “chain”. place branding and public diplomacy, 13(2), 101-106. nayeem, t. (2012). cultural influences on consumer behaviour. international journal of business and management, 7(21), 78. nic. (2018). nic annual reports. nic website. https://nationalinsurance.nic.co.in/en/aboutus/annualreports nic. (2019). nic annual reports. nic website. https://nationalinsurance.nic.co.in/en/aboutus/annualreports nwankwo, s. i., & ajemunigbohun, s. s. (2013). customer relationship management and customer retention: empirical assessment from nigeria’s insurance industry. business and economics journal, 4(2), 81. volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu cultural and attitudinal tenets of ghanaians on insurance service: an empirical study page |24| emerging markets journal ojatta, d. o. (2016). consumer awareness and perception of national health insurance scheme (nhis) healthcare services in kogi east (doctoral dissertation, doctoral dissertation). olugbenga-bello, a. i., & adebimpe, w. o. (2010). knowledge and attitude of civil servants in osun state, southwestern nigeria towards the national health insurance. nigerian journal of clinical practice, 13(4). oluyemi, s. a. (1995). deregulation and performance of insured banks in nigeria: an overview. ndic quarterly, 5(1), 49-67. oteino, o. d. (2018). effects of expectation, perception, disconfirmation, satisfaction, brand trust, and risk perception on premium bottled water repurchase intention among consumers in nigeria (doctoral dissertation, universiti sains malaysia). outreville, j. f. (2018). culture and life insurance ownership: is it an issue?. journal of insurance issues, 41(2), 168-192. owusu, a. y., ackah, c., & gruijters, r. (2012). 4.4. market survey: the demand-side-results from a survey of microinsurance clients. promoting microinsurance in ghana, 110. pantano, e. (2011). cultural factors affecting consumer behaviour: a new perception model. euromed journal of business. paul, j., modi, a., & patel, j. (2016). predicting green product consumption using theory of planned behavior and reasoned action. journal of retailing and consumer services, 29, 123-134. polenzani, b., riganelli, c., & marchini, a. (2020). sustainability perception of local extra virgin olive oil and consumers’ attitude: a new italian perspective. sustainability, 12(3), 920. preacher, k. j., & maccallum, r. c. (2002). exploratory factor analysis in behavior genetics research: factor recovery with small sample sizes. behavior genetics, 32(2), 153-161. rabin, m., & thaler, r. h. (2001). anomalies: risk aversion. journal of economic perspectives, 15(1), 219-232. rahman, a. a., sulaiman, s. a., ahmad, z., salleh, h., daud, w. n. w., & hamid, a. m. (2009). women's attitude and sociodemographic characteristics influencing usage of herbal medicines during pregnancy in tumpat distric, kelantan. southeast asian journal of tropical medicine and public health, 40(2), 330. rahpeima, a., vazifedost, h., hanzaee, k. h., & saeednia, h. (2014). attitudes toward counterfeit products and counterfeit purchase intention in non-deceptive counterfeiting: role of conspicuous consumption, integrity and personal gratification. walia journal, 30(s3), 59-66. rana, j., & paul, j. (2017). consumer behavior and purchase intention for organic food: a review and research agenda. journal of retailing and consumer services, 38, 157-165. ranaweera, c., & neely, a. (2003). some moderating effects on the service quality‐customer retention link. international journal of operations & production management. rezvani, s., dehkordi, g. j., rahman, m. s., fouladivanda, f., habibi, m., & eghtebasi, s. (2012). a conceptual study on the country of origin effect on consumer purchase intention. asian social science, 8(12), 205-215. robbins, s. p., judge, t. a., & sanghi, s. (2007). organizational behavior [with cd]. prenticehall of india. sabbir, m. m., & jahan, t. (2018). investigating the antecedents of employee attitude towards internet banking adoption based on structural equation modeling. comilla university journal of business studies, 5(1), 123-141. sheikh ali, a. y., & jama, a. k. a. (2016). determinants of islamic insurance acceptance: empirical evidence from somalia. european journal of business and management, 8(15), 102-108. silva, j., pinho, j. c., soares, a., & sá, e. (2019). antecedents of online purchase intention and behaviour: uncovering unobserved heterogeneity. journal of business economics and management, 20(1), 131-148. skuras, d., dimara, e., & petrou, a. (2006). rural tourism and visitors' expenditures for local food products. regional studies, 40(7), 769-779. spiers, s., gundala, r. r., & singh, m. (2014). culture and consumer behavior-a study of trinidad & tobago and jamaica. international journal of marketing studies, 6(4), 92. sreen, n., purbey, s., & sadarangani, p. (2018). impact of culture, behavior and gender on green purchase intention. journal of retailing and consumer services, 41, 177-189. stevens-benefo, h. (2015). perceptions of home and small business owners on insurance in accra, ghana. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.238 | http://emaj.pitt.edu francis osei, christian narh opata, collins kankam-kwarteng, daniel ofori emerging markets journal | p a g e 2 5 tabachnick, b. g., & fidell, l. s. (2014). using multivariate statistics: pearson new international edition. pearson. taylor, j. (2010). public service motivation, civic attitudes and actions of public, nonprofit and private sector employees. public administration, 88(4), 1083-1098. teas, r. k. (1993). expectations, performance evaluation, and consumers’ perceptions of quality. journal of marketing, 57(4), 18-34. uddin, m. r., mamun, a. m. a., hoque, n., & uddin, m. s. (2013). work-life balance: a study on female teachers of private education institutions of bangladesh. work, 5(13). udry, c. (1994). risk and insurance in a rural credit market: an empirical investigation in northern nigeria. the review of economic studies, 61(3), 495-526. wang, x., & yang, z. (2008). does country‐of‐origin matter in the relationship between brand personality and purchase intention in emerging economies? evidence from china's auto industry. international marketing review. woloshin, s., & schwartz, l. m. (2002). press releases: translating research into news. jama, 287(21), 2856-2858. wursten, h., & fadrhonc, t. (2012). international marketing and culture. itim international, 1(9). yakup, d., mücahit, d. c., & reyhan, o. (2011). the impact of cultural factors on the consumer buying behaviors examined through an impirical study. international journal of business and social science, 2(5), 109-114. yusuf, t. o., gbadamosi, a., & hamadu, d. (2009). attitudes of nigerians towards insurance services: an empirical study. african journal of accounting, economics, finance and banking research, 4(4). zhang, m., qin, f., wang, g. a., & luo, c. (2020). the impact of live video streaming on online purchase intention. the service industries journal, 40(9-10), 656-681. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu effect of training and career development on bank employees’ performance: evidence from selected banks in nigeria oluyemisi agboola ekiti state university, nigeria | agboolaoluyemisi123@gmail.com muideen olawale aremu fountain university, nigeria | aremu.muideen@fuo.edu.ng benneth uchenna eze hallmark university, nigeria | beneze7@gmail.com nurudeen opeyem wahab olabisi onabanjo university, nigeria | nurudeenolabisi3@gmail.com abstract this study examines the effect of training and career development on banks employees’ performance, using survey research design, through the administration of structured questionnaire on some employees of some selected banks at ijebu ode, ogun state, nigeria. the findings reveal that, all the variables have positive individual significant effect on employees’ performance. the individual significance career development has the highest effect on nigerian banks employees’ performance with t-stat = 6.256 *0.000. to further certify this, the multiple linear regression was used to test the combined effect of training and career development on employees’ performance to which only career development has positive and significant effect on employees’ performance (t-stat = 6.359 *0.000), where training has positive but insignificant effect (tstat = 1.556 * 0.123). the adjusted r2 (0.398) indicated that, 39.8% variation in employees’ performance is accounted for by training and career development. the findings revealed that, an improvement in training and career development tends to enhance banks employees’ performance. it can therefore be concluded that, training and career development are important determinants of banks employees’ performance. therefore, it is recommended that banks should enhance their training and career development activities towards the enhancement of their employees’ performance. keywords: bank, career development, employees’ performance, training, nigeria new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.204 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ mailto:agboolaoluyemisi123@gmail.com mailto:aremu.muideen@fuo.edu.ng mailto:beneze7@gmail.com mailto:nurudeenolabisi3@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.204 | http://emaj.pitt.edu oluyemisi agboola, muideen olawale aremu, benneth uchenna eze, nurudeen opeyem wahab emerging markets journal | p a g e |57 effect of training and career development on bank employees’ performance: evidence from selected banks in nigeria oluyemisi agboola muideen olawale aremu benneth uchenna eze nurudeen opeyem wahab i. introduction the nature of the work environment is dynamic due to technological advancement, globalization, political reformation and economic environment changes. so, firms are facing increased competition. (evans, pucik & barsoux, 2002). there is need for firms to provide better and crucial training to their employees to face these challenges and further enhance their performance. this is because, the success or failure of firms is usually determined by the quality of their human resources (aruna, 2019). human resource is considered to be one of the most important resources of contemporary firms, because people possess tacit knowledge which the organization can make use of to leverage its competitive advantage. this attribute of human capital fulfills the vrin (valuable, rare, inimitable, and non-substitutable) criteria of a competitive resource as advocated by barney (1991), thus making development of employees a central feature of contemporary competitive advantage for any organization. development of employees implies a managerial orientation, which ensures that human resource or capital are utilized in such a way that delivers value to the organization by giving it a competitive advantages, thus leading to the attainment of organizational goals, vision, and mission (kiiru, 2015). in contemporary economics, “capital is no longer used to describe only physical resources of an organization like plants, tools, buildings, and vehicles that are used in the production process” (olaitan, 2013). modern economics now include human capital or intellectual capital to the capital concept, which is the investment in skills and education. in the banking sector, current challenges are basically related to growing demands of the public and the regulatory factors (pérez, 2014; sutton & jenkins, 2007), so as the increase in competitors that are not part of the banking industry, but also offer financial services that banks usually render (langley, 2016; sutton & jenkins, 2007). in reaction to these challenges, banking entities tend to integrate the substantial financial capital with human capital, that is highly qualified in both knowledge and abilities (aldrich, dietz, clark & hamilton, 2015). explicitly, training plays a central role in achieving organizational objectives through improvements in individual and organizational performance (rothwell & kazanas, 2008; salas & stagl, 2009; spitzer & conway, 2002). it enhances the knowledge, capacities and dispositions demanded from employees in order to bring a company's strategy to accomplishment (ubeda, lajara, sabater & garcía, 2013) and also increase productivity, work quality, motivation, and workplace satisfaction (niazi, 2011). this is why upper management expects investments in training to translate into improved performance and company results (ubeda et al., 2013). considering human capital therefore as an integral part of production input is not an over statement to assert that the most important asset of an organization anywhere in the world is its human resources. this is because, while systems and processes do contribute to the realization of organizational goals and objectives, the real achievements would all be made possible by the people (human resources), since they are the ones who do the work, by contributing the ideas gathered from training and experiences. human resource development with refernce to training and career development holds the key to success of any organization. for this to happen, the nigerian banks must be able to train and develop their staff. the problem of this study centers on the need to expand or grow the skills of the human resources of an organization as a competitive strategy in achieving sustainable growth of a business organization in the face of competition. as a matter of fact, the extent of success achievable by any organization be it profit or non-profit oriented depends on the ability of its human resources to utilize other resources (factors of production) such as capital, equipment and land for the achievement of the organization objectives. investment in intellectual capital (human capital) therefore should not be treated merely as an expense in the profit and loss account of an organization, but rather as a capital expenditure which repays with huge gains or profit over time. although it is believed that when employees are trained or undergo developmental programs in the organization, there is likely to be improved performance in the employee work attitude and behaviour. however, the effect of training and career development on employees’ performance is inconclusive. hassan (2016) found that human resource practices such as compensation, career planning, performance appraisal, training, and employee involvement have a positive impact on employee’s performance. in contrast, rawashdeh and al-adwan (2012) found that training and development posed a negative association with the firms performance. therefore, the objective of this study is to examine the effect of training and career development on banks employees’ performance. in line with the research objectives, the following hypotheses are be tested: h01: training does not significantly affect bank employees’ performance h02: career development does not significantly affect bank employees’ performance volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.204 | http://emaj.pitt.edu effect of training and career development on bank employees’ performance: evidence from selected banks in nigeria page |58| emerging markets journal h03: training and career development do not have a combined significant effect on bank employees’ performance ii. literature review training is seen as the process of learning that modifies behavior through education, development and planned experience (armstrong, 2001). in the context of this paper, training is perceived to be a deliberate mechanism channeled at bringing out the best improvement in job performance of an employee and hence, facilitates their career advancement. the technological advancement in this modern world has made most of the organizations identify the significance of training to enhance employee productivity. this is because, it is geared towards the acquisition of targeted or specific knowledge and skills for the purpose of a given task. cole (2002) posits that, training is the most necessary component for an organization to develop employee’s knowledge, skills and ability in other to carry out their task efficiently. de-cenzo and robbins (1996) opine that training is a basic learning experience that is required for a permanent or long term change in an individual’s ability, knowledge, skills, attitude and social behavior. this shows that to become an efficient worker, employees should have a better training in other to improve their skills, knowledge, attitudes and their social behavior. in the business world, an organization’s growth, development and goodwill depend on various factors. among these factors, training plays a major role to enhance employee performance as well as organizations productivity. therefore, the organization should identify its training needs and provide better training for their employees (aruna, 2019). extant literature provides evidence about training that positively influences employees’ performance as well as organizational performance. career developments and training both go hand in hand. it is a lifelong mechanism of learning that is designed to enhance an individual’s needs, skills level and goals with current or future needs in the organization. rastogi (2000) asserts that, human resources are crucial elements of an organization, especially for employees’ continuous improvement. thus, career development is referred to as “the knowledge, skills, competencies, and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being” (oecd, 2001). according to nadler and nadler (1970), career development is a stream of action in an organization that is done to produce behavioral change and improve the ability of the employees and reciprocate to performance increase. werner and desimone (2006) supported the view of nadler and nadler (1970). they perceived career development as a continuous process that is designed by an organization and geared towards providing the employees an opportunity to learn and enhance necessary skills to perform efficiently in their current role and future job demands. solkhe and chaudhary (2011) opine that, career development is a managerial decision and practice that, it practically serves as guide for the human resources, which affect and control how they perform on the job. according to becker (1964), human capital theory distinguishes from human capital development in general-usage and firm-specific skills. in his seminal work, becker (1964) argues that employers will not be willing to invest in general training when labor markets are competitive. however, they are willing to invest in specific education and training within the organization which cannot be used outside the firm. there is an assertion that specific training yield returns in a perpetual education with the training firm i.e the sponsored firm, while general training increases the productivity of a worker in many firms besides those providing it. this theory separately addresses these phenomena and draws two main conclusions. the first conclusion was that employers will share the returns and the cost of investments in firm-specific skills with their employees. second, in a competitive labor market, firms will not invest into general skills of their employees due to their inability to collect the returns from such investments. the human capital theory represents an attempt to modify the basic neoclassical model of supply and demand in the labor market, which is based on wage levels and the relative benefits of work compared with non-work. it recognizes that differential education, training and experience levels produce differential costs/earnings in many different labor markets. wage levels are directly related to the profitability of the products in those markets and to the level of skills, which are developed through training and experience in order to produce those products. katz and ziderman (1990) however argue that, the firm may be willing to invest in a worker’s general skills if his level of training is unobserved by the market. this is supported by acemoglu and pischke (1998), who developed a study model where the training firm obtains superior information on the worker’s ability during the training period. the informational disadvantage of firms in the external labor market gives rise to adverse selection, i.e., the equilibrium market wage falls short of the marginal product of highly skilled workers. as a result, a training firm enjoys some monopoly power over its workers and is able to capture the return from general training. according to this theory, the most successful companies and the most successful countries are those that manage human capital in the most effective and efficient manner by investing in their workers, encouraging workers to invest in themselves, providing a good learning environment including social capital as well as skills and training (becker, 1964). this theory is highly relevant to training and career development as well as employees’ performance. the reason is that, it shows that training and career development will lead to superior employees’ performance. iii. methodology the survey research design was adopted for this study. this is to aid the collection of data on the subject matter. the population of the study comprises all employees of the selected deposit money banks in ijebuode, ogun state, nigeria. the population are the employees in the selected deposit money banks which are volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.204 | http://emaj.pitt.edu oluyemisi agboola, muideen olawale aremu, benneth uchenna eze, nurudeen opeyem wahab emerging markets journal | p a g e |59 access bank, diamond bank, eco bank, first bank of nigeria (fbn), first continental monument banks (fcmb), guarantee trust bank (gtb), skye bank, united bank of africa (uba), wema bank and zenith bank. a sample size of one hundred and forty nine (149) respondents was purposively selected from the selected bank branches. this was obtained from the different selected deposit money banks by the use of random sampling technique. simple random sampling techniques were employed in order to avoid a deliberate selection of a particular employee and also to give all the employees equal chance to be selected. the researcher made used of a well structured questionnaire adapted from the study of gberevbie, (2012) which is the main instrument administered for the primary data and it is designed to cover demographic data, as well as technical data. the demographic data consist of questions based on the personal characteristics of respondents, which include educational qualification and occupational status. however, the technical data consist questions based on the research questions and research hypotheses. the adapted questionnaire was assessed by three faculty members at olabisi onabanjo university. they assessed the instrument on two scales (relevant and not relevant). thereafter, the content validity index formula was employed and a cvi value of 0.81 was obtained. furthermore, to enhance the validity of the instrument, a pre-testing was conducted on a population similar to the target population. the reasons behind pretesting were to assess the clarity of the instrument items so that those items found to be inadequate in measuring the variables were either discarded or modified to improve the quality of the research instrument, thus enhancing its validity. table 1: result for reliability statistics constructs number of items cronbach’s alpha training (tra) 5 .904 career development (crd) 4 .782 employee performance (epv) 4 .811 source: spss output reliability analysis according to nunally (1978), the reliability of the scale requires the value of cronbach's alpha to be equal or greater than 0.7. to check the reliability of the scale and internal consistency of the questionnaires, the study uses the cronbach's alpha technique to determine the internal consistency of the variables. model specification the model is specified as follows; eperf = α + β1 trai+ β 2crdi + µ where: eperf represent employees’ performance tra represents training crd represents career development α is constant β1 and β2 are coefficient of the estimator β1, β2 > 0 µ is the error term the a priori expectation is that, training and career development are expected to positively affect the employee performance of nigerian banks. hence, the parameters of training and career development should have a positive sign. the simple percentage was used in the presentation and interpretation of the demographic data was collected. ordinary least square regression analysis method was adopted to test the individual and combined effect of training and career development on employees’ performance with the aid of spss 23. the formulated hypotheses were tested at 5% level of significance. iv. findings and discussion this section presents, analyzes and interprets the data collected on the effect of training and career development on employee performance of banks. one hundred and forty-nine (149) questionnaires were administered on the respondents. however, only one hundred and four (104) representing 69.7% of the respondents were returned and used for the analysis. analysis of demographic data figure 1. educational level of the respondents source: authors’ compilation figure 1 shows that, 2.4% of the respondents indicated their educational level as o’level (ssce), 31.3% of the respondent indicated their highest level as ond, 55.4% of the respondents indicated their highest level as hnd/bsc, and the remaining 10.8% of the respondents indicated their highest level as msc/mba. this is an indication that most of the respondents participating in this study are educated. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.204 | http://emaj.pitt.edu effect of training and career development on bank employees’ performance: evidence from selected banks in nigeria page |60| emerging markets journal figure 2. job status of the respondents source: authors’ compilation figure 2 shows that, 41% of the respondents indicated their job status as permanent staff and 59% of respondents indicated their job status as contract staff. this is an indication that most of the respondents focused in this study are basically contract staff. hypotheses testing hypothesis 1 h01: training does not significantly affect employee performance of banks table 2: regression results (dependent variable employees’ performance) independent variable(s) coefficient tstatistics p-value constant 21.685 20.906 0.000 training 0.193 4.542 0.001 f-statistics = 12.546 (0.001) r-square = 0.110, adj r-square = 0.101 source: spss output the result on table 2 revealed that, training significantly affects employees’ performance with a coefficient and probability value of β1 = 0.193, p < 0.05. this indicated that, an increase in training activities will enhance employee performance of banks. the coefficients of determination (r2) of 0.110 indicated that, only about 11% of variation or change in employees’ performance in the selected bank is attributable to training and the remaining 89% is due to other factors not captured in the model. the coefficient value showed that, a unit change in training activities will lead to 0.193 change in employees’ performance. the f-statistics of fstat = 12.54 p < 0.05 revealed that, the variable specified fit the model well and it is suitable for policy making. thus, the model is as follows: eper = α+ β1tra eper = 21.685+ β10.193 hypothesis 2 h02: career development does not significantly affect employee performance of banks table 3: regression result (dependent variable employees’ performance) independent variable(s) coefficient t-statistics pvalue constant 13.449 7.120 0.000 career development 0.704 6.256 0.000 f-statistics = 39.135 (0.000) r-square = 0. 279, adj r-square = 0. 272 source: spss output the result on table 3 revealed that, career development significantly affects employee performance with a coefficient and probability value of β2 = 0.704, p < 0.05). this indicated that, an increase in employee career development program will enhance employees’ performance. the coefficients of determination (r2) of 0.279 indicated that, 27.9% variation in employees’ performance in the banking sector is attributable to career development and the remaining 72.1% is due to other factors not captured in the model. the coefficient value showed that, a unit change in training activities will lead to 0.704 change in employees’ performance. the fstatistics of f-stat = 39.135 p < 0.05 revealed that, the variable specified fit the model well and it is suitable for policy making. thus, the model is as follows: eper = α+ β2crd eper = 13.449+ β20.704 hypothesis 3 h03: training and career development do not have combined significant effect on employee performance of banks table 4: multiple regression result (dependent variable employees’ performance) independent variable(s) coefficient t-statistics p-value constant 8.578 4.218 0.000 training 0.137 1.556 .123 career development 0.698 6.359 .000 f-statistics = 23.453 (0.000) r-square = 0.415, adj r-square = 0.398 source: spss output the result of the multiple linear regression indicated that, training (β1 = 0.137, p > 0.05) does not significantly affect employees’ performance while career development (β2 = 0.698, p < 0.05) significantly affects employees’ performance. training and career volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.204 | http://emaj.pitt.edu oluyemisi agboola, muideen olawale aremu, benneth uchenna eze, nurudeen opeyem wahab emerging markets journal | p a g e |61 development reports a joint significant effect on employees’ performance (f = 23.453, p > 0.05). the adjusted r-square (adj r2 = 0.398) suggests that, 39.8% variation in employees’ performance is accounted for by training and career development. by implication, career development had the strongest effect on employees’ performance for the selected banks. thus, the model is as follows: eper = α+ β1tra+ β2crd orgper = 8.578+ β10.137+ β20.698 v. discussion of findings the objective of this study is to examine the effect of training and career development on employees’ performance in the banking sector. using regression technique, it is evident that training and career development have positive individual significant effect on employees’ performance. career development has the highest effect on employee performance for nigerian banks with t-stat = 6.256 *0.000. to further certify this, the multiple linear regression was used to test the combined effect of training and career development on employees’ performance to which only career development has positive and significant effect on employees’ performance with t-stat = 6.359 *0.000. subsequently, training has positive but insignificant effect (t-stat = 1.556 * 0.123). the adjusted r2 (0.398) indicated that, 39.8% variation in employees’ performance is accounted for by training and career development. this conform with the studies of hamid, maheen, cheem and yaseen (2017), ezeanokwasa (2014) as well as gidado, kusairi and muhamad (2014) who postulate that employee development enhances organizational performance and it is also consistent with the study by ojo (2011) who found that corporate performance is largely determined by strategic human resource management practice. hassan (2016) equally found that human resource practices such as compensation, career planning, performance appraisal, training and employee involvement have a positive impact on employee performance. in contrast, the study by rawashdeh e tal (2012) do not conform with the findings of this study, as he found that training and development posed a negative association with organizational performance. vi. conclusion and recommendations the findings revealed that, an improvement in training and career development tends to enhance employee performance of banks. it can therefore be concluded that, training and career development are important determinants of employee performance of banks. as a result, it is recommended that banks should enhance their training and career development activities towards the enhancement of employee performance. references acemoglu, d., & pischke, j. (2001). the structure of wages and investment in general training. research in labour economics, 20 (2), 159202. aldrich, p., dietz, g., clark, t., & hamilton, p. (2015). establishing hr professionals' influence and credibility: lessons from the capital markets and investment banking sector. human resource management, 54(1), 105-130. armstrong m. (2001) human resource management practice: handbook, 8th edition, kegan page ltd., london. aruna, s. (2019) the impact of training on employees performance in banking sector: with special reference to bank of ceylon in sri lanka. iosr journal of humanities and social science volume 24, issue 6. 34-42. barney, j. b. (1991). firm resources and sustained competitive advantage. journal of management, 17(3), 345-376. becker s. g. (1694). human capital: a theoretical and empirical analysis, with special reference to education, human resource development quarterly. 6(3), 132-147. cole, g. a. (2002). personnel and human resource management (5th ed.). continuum london: newyork publishers. de cenzo, d. a., & robbins, s. p. (1996). human resource management. new york. usa. evans, p., pucik, v., & barsoux, j. l. (2002). the global challenge:framework for international human resources management. boston. mcgrawhill. ezeanokwasa, f. n. (2014). human resource development and organisational performance. journal of information and knowledge management, 4(11). 121-125. gberevbie, d. e. (2012). leadership, the financial sector and development in nigeria. journal of humanities and social science. 3(2), 149-158. gidado a. m., kusairi s., & muhamad s. (2014). investing in human resource development: empirical evidence from banking institutions of malaysia and nigeria. journal of economics and sustainable development. 5(12). 23-41. hamid m., maheen s., cheem a., & yaseen r. (2017). impact of human resource management on organizational performance. journal of accounting & marketing. 6(1)1-7 http://doi.org/10.4172/2168-9601.1000213. on 22nd march, 2018. http://doi.org/10.4172/2168-9601.1000213 volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.204 | http://emaj.pitt.edu effect of training and career development on bank employees’ performance: evidence from selected banks in nigeria page |62| emerging markets journal hassan, s. (2016) impact of hrm practices on employee’s performance. international journal of academic research in accounting, finance and management sciences 6, (1), 15-22. katz e., & ziderman, a. (1990). investment in general training: the role of information and labour mobility, the economic journal, 10(1), 11471158. kiiru, d. m. (2015). strategic human resource management practices and performance of parastatals in kenya. unpublished doctoral thesis. kenyatta university. langley, p. (2016). crowdfunding in the united kingdom: a cultural economy. economic geography, 92(3), 301-321. nadler, l. & nadler, z. (1991). developing human resources, 3rd edition. san francisco: josseybass. niazi, b. r. (2011). training and development strategy and its role in organizational performance. journal of public administration and governance, 1(2), 40-47. ojo, o. (2011). impact of strategic human resource practice on corporate performance in selected nigerian banks. ege academic review, 11(3), 339-347. olaitan d. s. (2013), effect of human capital development on the sustainable development of business organizations. unpublished masters of science thesis. lagos: department of business administration, university of lagos. organization for economic co-operation and development (oecd) (2001:18), the wellbeing of nations: the role of human and social capital. paris: oecd. pérez, c. (2014). the effect on competition of banking sector consolidation following the financial crisis of 2008. journal of banking & finance, 43, 124-136. rastogi, p.n. (2000). knowledge management and intellectual capital. the new virtuous of reality of competitiveness. human systems management, 19 (1): 39-48. rawashdeh, a.m., & al-adwan, i.k. (2012). the impact of human resource management practices on corporate performance: empirical study in jordanian commercial banks. african journal of business management, 6(41), 10591-10595. http://doi.org/10.5897/ajbm12.1169. rothwell, w. j., & kazanas, h. c. (2008). mastering the instructional design process: a systematic approach (4 ed.). san francisco: pfeiffer. salas, e., tannenbaum, s. i., kraiger, k., & smithjentsch, k. a. (2012). the science of training and development in organizations: what matters in practice. psychological science in the public interest, 13(2), 74-101. solkhe, a. & chaudhary n. (2011). human resource practices, organisational learning and business performance. journal international of human resource development. 8(2), 147-164. spitzer, d., & conway, m. (2002). link training to your bottom line. vol. 201. american society for training and development. sutton, c. n., & jenkins, b. (2007). the role of the financial services sector in expanding economic opportunity. harvard university. ubeda, m., lajara, b., sabater, v., & garcía, f. (2013). does training influence organizational performance? analysis of the spanish hotel sector. european journal of training and development, 37(4), 380-413. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu defining influential factors of capital adequacy ratio: an examination upon turkish banking sector (2006/q1-2019/q1) mustafa tevfik kartal borsa istanbul, turkey | mustafatevfikkartal@gmail.com abstract capital adequacy ratio (car) of the turkish banking sector (tbs) decreased dramatically from 30.9% in 2003 to 17.1% as of may 2019. this figure shows that although tbs has still a relatively high car compared to many countries, unfortunately there is a decreasing trend. a downward trend in car constitutes risks due to the limit of providing credit s. therefore, the level of car has importance for making a positive contribution to sustainable economic growth. so, influential factors of car should be determined first. in this context, multivariate adaptive regression splines (mars) method, 14 explanatory variables, and quarterly data are used for the period of 2006/q1-2019/q1. it is determined that credits/total assets ratio, legal equities, risk weighted assets, nonperforming loans (npl), npl/total credits ratio, and credit/deposit ratio are influential factors on car in turkey. keywords: banking sector, car, influential factors, mars, turkey new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.183 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.183 | http://emaj.pitt.edu mustafa tevfik kartal emerging markets journal | p a g e |17 defining influential factors of capital adequacy ratio: an examination upon turkish banking sector (2006/q12019/q1) mustafa tevfik kartal i. introduction countries have different financial systems from each other. as general, there are two types of financial systems, which are the bank-based and the market-based systems. most of the countries, including emerging countries and turkey, has a bank-based financial system which means that these countries provide most of the needs of funding for economic activities from banks (kartal et al., 2018, kartal, 2019). for this reason, banks and banking are important in such countries (dinçer et al., 2016). there is too much legislation regulating banking sectors and banks due to the fact that they are so much important for countries. that is why developments in financial systems and banking sectors have importance for the macroeconomics of countries (kar et al., 2008). similarly, banking law (bl) numbered 5411 regulates turkish banking sector (tbs) strictly. also, with the authorization of bl, banking regulation and supervision agency (brsa) has made a variety of secondary regulation on tbs (kartal & çoban çelikdemir, 2019). in addition to brsa, also other regulatory bodies could make secondary regulation on tbs. although all regulation, unfortunately, there have been crises because of the fact that regulation and supervision system on banking sector does not function (mishkin, 1999; kılcı, 2017; çam & özer, 2018). depending on the crisis like 2000 and 2001 crisis in turkey and 2008 global crisis which started in the united states of america, national authorities and international institutions have intensified their efforts and published additional principles named as basel iii criteria which regulate the banking sector in a much more efficient manner. the most important issue in basel iii regulation is how to calculate adequate capital, i.e. car. basel committee on banking supervision would increase tier 1 capital/ risk weighted assets (rwa) ratio to 4.5% and tier 2 capital/rwa to 7% (bis, 2010). this is a challenging process for some countries, because of increasing capital or decreasing rwa requirement. with the varying of transition period according to countries, basel iii process was initiated in 2013, regulations have been made in time, the transition period has been completed, and basel iii has gone into effect in 2019 fully in turkey. all countries have been in stress because of this hard transition period. when examining the development trend of car in turkey, it can be seen that it has decreased from 30.9% in 2003 to 17.1% as of may 2019 (brsa, 2019). as mentioned, car is important because it affects the capacity of providing credits of banking. when car is decreasing and reaching the legal limit which is 12% in turkey, then any bank should decrease providing credits if the bank cannot increase their capital. for this reason, having a high car for both tbs and turkish banks is crucial and definitely keeping the car high is very important. because of providing most of the financing source by banks in turkey, decreasing trend of car has a risk. to be able to sustain financing support of banks to the economy, stopping decreasing in car is a requirement. on the other hand, increasing car is very important if much more credit providing by banks is desired. however, influential factors of car should be determined firstly. for this aim, mars method, 14 explanatory variables, and quarterly data are used for the period of 2006/q1-2019/q1 to determine influential factors on car in turkey. as far as it is known, mars method is used first time in defining influential factors on car. so, it is thought that this study is a pioneer researc in terms of this characteristic. this study consists of four parts. after the introduction, part 2 reviews the related literature upon capital adequacy ratio in turkey and some other selected countries. part 3 includes the data, methodology and research results. part 4 summarizes the results. ii. literature review there are studies in the literature handling car in turkey and other countries. a variety of independent variables such as asset growth, asset quality, bank size, credits, credits/total assets, foreign exchange rates (fer), inflation, interest rates, leverage, liquidity, net interest margin (nim), npl, provisions, provisions/total credits, return on assets (roa), return on equity (roe), rwa and total assets are taken into consideration in these studies. some studies in turkey examined the whole banking sector while some of the others analyzed some selected banks. sayılgan & yıldırım (2009) examined tbs for the period of 2002 and 2007 via regression and concluded that car has a positive relationship with profitability (roa, roe). büyükşalvarcı & abdioğlu (2011) analyzed tbs for the period of 2006 and 2010 via panel data analysis and defined that provisions and roa make positive effects on car while credits, roe and leverage make a negative effect. reis & kötüoğlu (2016) observed tbs for the period of 2009 and 2015 via regression and stated that profitability (roa, roe), liquidity and npl have a positive effect on car. koç & karahan (2017) studied tbs for the period of 2005 and 2015 via panel data analysis and stated that total assets, roa and liquidity have positive effects on car. in addition to studies examining whole tbs, some of the studies examined a part of the banks volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.183 | http://emaj.pitt.edu defining influential factors of capital adequacy ratio: an examination upon turkish banking sector (2006/q1-2019/q1) page |18| emerging markets journal operating in turkey in terms of car. okuyan (2013) examined 23 banks for the period of 2002 and 2012 via panel data analysis and concluded that economic growth and roa have positive effects. on the other hand risk, size, deposits/total liabilities and credits/total assets have negative effects on car. işık (2017) analyzed tbs for the period of 2009 and 2016 via panel data analysis and defined that car does not have a meaningful effect on roa. acar balaylar & özdemir (2018a) observed foreign deposit banks for the period of 2004 and 2016 via ardl bounding test and stated that roa is positively associated with car. similarly, they (2018b) found parallel results for national deposit banks for the period of 2004 and 2016 via the ardl bounding test. afşar & karaçayır (2018) studied 9 banks for the period of 2002 and 2017 via panel data analysis and stated that, roa has positive effects on car while credits/total assets, deposits and total asset size have a negative effect. aydın (2019) examined 23 banks for the period of 2002 and 2017 via panel data regression and concluded that car is positively associated with roa until a point. after this point, it leads to negative effects. in other studies, berger (1995) examined the usa for the period of 1983 and 1992 via granger causality test and concluded that car is positively related with roe between 1983 and 1989, whereas it is negatively related with roe between 1990 and 1992. iannotta et al. (2007) analyzed 181 large banks in 15 european countries for the period of 1999 and 2004 via regression and defined that profitability (income-costs) is positively related to car. hoffmann (2011) analyzed 11,777 banks in usa for the period of 1995 and 2007 via the generalized method of moments (gmm) and stated that, car is positively associated with roa until a point. after this point, it leads to negative effects. polat & al-khalaf (2014) examined publicly held banks in saudi arabia for the period of 2008 and 2012 via panel regression and concluded that size, leverage, and roa have positive effects on car while credit/total assets have negative effects. aktaş et al. (2015) examined 71 commercial banks in 10 countries for the period of 2007 and 2012 via regression and concluded that size, roa, liquidity, nim, leverage, and economic growth are determinants of car. el-ansary & hafez (2015) analyzed 36 banks in egypt for the period of 2004 and 2013 via regression and defined that liquidity, size, and management quality are the most important variables leading to an effect on car for the whole period. klepczarek (2015) analyzed 49 banks in 22 european countries for the period of 2013 via regression and stated that size, rwa/total assets and credits/total assets are determinants of tier 1 car. yüksel et al. (2018) studied 13 post-soviet countries for the period of 1996 and 2016 via panel regression and gmm, and stated that there is a negative but meaningless relationship between roe and car. when evaluating studies taking place in the literature and summarized above, it is defined that the effects of several independent variables on car are examined and these variables have either positive or negative effects. on the other hand, determinants of car are the focal point of a variety of different researchers. furthermore, it is also identified that various methodologies were used in these studies such as ardl bounding test, fourier approach, granger causality test, gmm, regression, panel data regression, and panel data analysis. this situation indicates that, a new method could be used to identify the determinants of car. with the help of this issue, it can be possible to contribute to the literature. so, mars method is preferred in this study. iii. defining influential factors of car in turkey a. data and methodology to determine which factors have an influence on car in turkey, mars method, 14 explanatory variables, and quarterly data are used for the period of 2006/q1-2019/q1. this period is selected, because data of credit/deposit ratio are not available before 2006, which is evaluated as an important independent variable in the analysis. data regarding dependent and independent variables are gathered from brsa (2019) and central bank of the republic of turkey (cbrt) (2019). b. mars method mars method is developed by friedman in 1990s. mars method is a non-parametric method and one of the machine-learning techniques. so, it does not include any restrictive assumptions (friedman, 1991). there are no assumptions among dependent and independent variables in the mars method. in searching the effects of independent variables on dependent variables, mars also uses interactions between variables, and the effects of these interactions on dependent variables (goh et al., 2017; liu, 2018). mars model is formulated below: in equation (1), “y” represents the dependent variable, whereas independent variables are shown as x. on the other side, 𝐵0 demonstrates the constant term and 𝐵𝑛(𝑋𝑡) describes basis function. therefore, 𝑎𝑛 represents the coefficient of n. basis functions (friedman, 1991). mars method consists of two steps. in the first step, all possible models are produced by using independent variables until reaching maximum basis functions. in the second step, the best model is selected by eliminating some basis functions from the most complex model. the best model is the one that has the lowest generalized cross validation (gcv) value and the highest gcv r2 (sephton, 2001). volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.183 | http://emaj.pitt.edu mustafa tevfik kartal emerging markets journal | p a g e |19 c. independent variables in the literature, a variety of independent variables have been used to determine which factors affect car. some of these variables are summarized in table 1. table 1: independent variables independent variables references asset quality el-ansary & hafez (2015), us (2015), koç & karahan (2017) credits büyükşalvarcı & abdioğlu (2011), hazar et al. (2018) credits/total assets mpuga (2002), okuyan (2013), polat & al-khalaf (2014), klepczarek (2015), mili et al. (2015), mili et al. (2017), afşar & karaçayır (2018) deposits büyükşalvarcı & abdioğlu (2011) deposits/total liabilities kleff & weber (2008), okuyan (2013), klepczarek (2015), us (2015), mili et al. (2017), afşar & karaçayır (2018) fer williams (1998), us (2015), mili et al. (2017) growth ruckes (2004), asarkaya & özcan (2007), okuyan (2013), aktaş et al. (2015), mili et al. (2017), afşar & karaçayır (2018) interest rates demirgüç-kunt & detragiache (1998), mili et al. (2017) leverage büyükşalvarcı & abdioğlu (2011), polat & al-khalaf (2014), aktaş et al. (2015) liquidity büyükşalvarcı & abdioğlu (2011), aktaş et al. (2015), el-ansary & hafez (2015), us (2015), reis & kötüoğlu (2016), koç & karahan (2017) nim demirgüç-kunt & detragiache (2002), demirhan (2010), büyükşalvarcı & abdioğlu (2011), aktaş et al. (2015), mili et al. (2017), kılcı (2019) npl reis & kötüoğlu (2016), silaban (2017) independent variables references provisions büyükşalvarcı & abdioğlu (2011), el-ansary & hafez (2015) roa sayılgan & yıldırım (2009), demirhan (2010), büyükşalvarcı & abdioğlu (2011), hoffmann (2011), okuyan (2013), jasevičienė & jurkšaitytė (2014), aktaş et al. (2015), reis & kötüoğlu (2016), belke & ünal (2017), işık (2017), koç & karahan (2017), silaban (2017), afşar & karaçayır (2018), aydın (2019) roe berger (1995), asarkaya & özcan (2007), sayılgan & yıldırım (2009), demirhan (2010), büyükşalvarcı & abdioğlu (2011), almazari (2013), okuyan (2013), klepczarek (2015), reis & kötüoğlu (2016), afşar & karaçayır (2018), yüksel et al. (2018), kılcı (2019) rwa/total assets abba et al. (2013), jasevičienė & jurkšaitytė (2014), klepczarek (2015) total assets asarkaya & özcan (2007), okuyan (2013), klepczarek (2015), shingjergji & hyseni (2015), reis & kötüoğlu (2016), koç & karahan (2017), afşar & karaçayır (2018) taken into consideration data availability for independent variables, equity; rwa, credits, npl, provisions, net profit, roa, roe, usdtl, interest rate, npl/total credits, credits/total assets, rwa/total assets, are selected as independent variables. also, with the thought that credit/deposit ratio has importance for tbs, it is included as an independent variable. hence, a total of 14 variables are included in the study. details of variables are included in table 2. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.183 | http://emaj.pitt.edu defining influential factors of capital adequacy ratio: an examination upon turkish banking sector (2006/q1-2019/q1) page |20| emerging markets journal table 2: details of independent variables variables abbreviation description exp. eff. data source legal equity eqity legal equity (tier 1+ tier 2deductions) + brsa rwa rwa total rwa (credit risk + operational risks + market risk) brsa credits crdts credit volume brsa npl npl gross npl (not deducted provisions) brsa general provisions prvsn general provisions (stage 1 + stage 2 provisions included, but not stage 3) brsa net profit ntprft net profit + brsa roa roa net profit/total assets + brsa roe roe net profit/total legal equity + brsa credit/ deposit rate cdr credit volume/deposit volume +,brsa usdtl usdtl usd/tl fer +,cbrt interest rates ir weighted average of commercial credit interest rates +,cbrt npl/total credits npltc gross npl/total credit volume brsa credits/tota l assets crdsta total credit volume/total assets brsa rwa/total assets rwata rwa /total assets brsa d. analysis and empirical results i. descriptive statistics in this study, quarterly data for the period of 2006/q1-2019/q1 are used. so, the number of observations is 53 and descriptive statistics are included in table 3. table 3: descriptive statistics variables n min max average standard deviation car1,2 53 14.640 23.090 17.550 1.882 crdsta 3 53 40.560 65.290 55.983 7.100 eqity2 53 46.970 532.96 0 216.519 136.422 rwa2 53 1.000 993.40 0 260.327 316.008 npl2 53 7.940 106.39 0 33.113 24.040 npltc3 53 2.730 5.640 3.522 0.743 cdr3 53 65.130 123.90 0 99.548 19.116 1 shows the dependent variable. 2 shows percentage. 3 shows billion tl. ii. car estimation model findings in the first step of mars analysis, all possible basis functions are produced by using 6 independent variables which affect car. in this process, 18 functions are produced totally, which includes the best complex function. details of produced 18 functions are included in annex 1. in the second step of mars analysis, 12th model is determined as the best one which has the lowest gcv value and the highest gcv r2 value. important splines between car and independent variables are included in annex 2. in the best model, there are 14 basis functions using 6 independent variables and details of the best model are included in table 4. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.183 | http://emaj.pitt.edu mustafa tevfik kartal emerging markets journal | p a g e |21 table 4: car basis functions basis functions details coefficient constant 23.551 bf2 max(0, 54.490 crdsta) bf3 max(0, eqity 129.880) 0.072 bf4 max(0, 129.880 eqity) -0.065 bf5 max(0, npl 18.650) -0.360 bf8 max(0, 121.610 cdr) bf9 max(0, eqity 103.230) * bf2 0.032 bf10 max(0, 103.230 eqity) * bf2 -0.029 bf11 max(0, rwa 559.080) * bf2 -0.004 bf12 max(0, 559.080 rwa) * bf2 0.005 bf14 max(0, 3.420 npltc) * bf3 -0.028 bf15 max(0, rwa 259.530) -0.012 bf16 max(0, 259.530 rwa) -0.032 bf17 max(0, crdsta 60.060) * bf8 -0.119 bf19 max(0, npltc 3.430) * bf16 0.022 f test: 152,581 (0.000) adjusted r2: 0.972 as it can be seen from table 4, the probability value of the f test is 0.000, which means that the model is statistically significant. on the other hand, the explanatory value (r2) of the model is well above the acceptable limits with the value of 0.972. as a result of the analysis, the importance level of independent variables in terms of explanation of car change in turkey as included in table 5. table 5: importance level of independent variables variables importance level gcv crdsta 100,000 1,930 eqity 96,122 1,816 rwa 92,329 1,709 npl 53,725 0,864 npltc 50,156 0,808 cdr 38,004 0,648 as it can be seen from table 5, the most important variable in terms of car in turkey is credits/total assets ratio. other important variables are equity, rwa, npl, npl/total credits, and credits/deposit ratio respectively. on the other hand, other variables which are included in the analysis do not have an effect on car for the period of 2006/q12019/q1. first explanatory variable on the change of car is crdsta. the details of the basis functions regarding crdsta are included in table 6. table 6: basis functions of crdsta basis functions details coefficient bf2 max(0, 54.490 crdsta ) bf8 max(0, 121.610 cdr ) bf17 max(0, crdsta 60.060) * bf8 -0.119 table 6 shows that, the variable takes place in 3 basis functions. bf17 has a negative coefficient (-0.119). when crdsta is above 60.06% and cdr is below 121.61%, crdsta has a negative effect on car. on the other, when crdsta is below 60.06%, crdsta does not affect car. another independent variable that affects car is eqity. the details of the basis functions regarding eqity are included in table 7. table 7: basis functions of eqity basis functions details coefficient bf2 max(0, 54.490 crdsta ) bf3 max(0, eqity 129.880) 0.072 bf4 max(0, 129.880 eqity ) -0.065 bf9 max(0, eqity 103.230) * bf2 0.032 bf10 max(0, 103.230 eqity ) * bf2 -0.029 table 7 shows that, the variable takes place in 5 basis functions. bf3 has a positive effect (coefficient: 0.072) if eqity has a value above 129.88 billion tl. on the other side, bf4 provides information that, this effect becomes negative when eqity is between 129.88 billion tl and 103.23 billion tl, in addition to crdsta being below 54.49%. also, according to bf9, the effect of eqity on car is positive because of the positive coefficient (0.032). however, if eqity is under 103.23 billion tl and crdsta is above 54.49%, eqity does not affect car. third independent variable that affects car is rwa. the details of the basis functions regarding rwa are included in table 8. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.183 | http://emaj.pitt.edu defining influential factors of capital adequacy ratio: an examination upon turkish banking sector (2006/q1-2019/q1) page |22| emerging markets journal table 8: basis functions of rwa basis functions details coefficient bf2 max(0, 54.490 crdsta ) bf11 max(0, rwa 559.080) * bf2 -0.004 bf12 max(0, 559.080 rwa ) * bf2 0.005 bf15 max(0, rwa 259.530) -0.012 bf16 max(0, 259.530 rwa ) -0.032 table 8 shows that, the variable takes place in 5 basis functions. bf12 has a positive effect (coefficient: 0.005) if eqity has a value below 559.08 billion tl and crdst is below 54.49%. on the other side, bf11 provides information that this effect becomes negative when rwa is between 559.08 billion tl and 259.53 billion tl. however, if rwa is under 259.53 billion tl, rwa does not affect car. fourth independent variable that affects car is npl. the details of the basis functions regarding npl are included in table 9. table 9: basis functions of npl basis functions details coefficient bf5 max(0, npl 18.650) -0.360 table 9 shows that, the variable takes place only in 1 basis function. bf5 has a negative effect (coefficient: -0.360) if npl has a value above 18.65 billion tl. however, if npl is under 18.65 billion tl, npl does not affect car. fifth independent variable that affects car is npltc. the details of the basis functions regarding npltc are included in table 10. table 10: basis functions of npltc basis functions details coefficient bf3 max(0, eqity 129.880) 0.072 bf14 max(0, 3.420 npltc ) * bf3 -0.028 bf16 max(0, 259.530 rwa ) -0.032 bf19 max(0, npltc 3.430) * bf16 0.022 table 10 shows that, the variable takes place in 4 basis functions. bf14 has a negative effect (coefficient: -0.028) if npltc has a value below 3.42% and eqity is above 129.88 billion tl. on the other hand, bf19 has a positive effect (coefficient: 0.022) if npltc has a value above 3.43% and rwa is below 259.53 billion tl. last independent variable that affects car is cdr. the details of the basis functions regarding cdr are included in table 11. table 11: basis functions of cdr basis functions details coefficient bf8 max(0, 121.610 cdr ) bf17 max(0, crdsta 60.060) * bf8 -0.119 table 11 shows that, cdr takes place in 1 basis function. however, bf8 does not have a coefficient. on the other hand, bf8 interacts with bf17, meaning that when cdr is below 121.61%, crdsta has a negative effects on car. otherwise, crdsta does not affect car. as a result of analysis, the estimation model for car is formulated below: 𝐶𝐴𝑅 = 23.551 + 0.072 ∗ 𝐵𝐹3 − 0.065 ∗ 𝐵𝐹4 − 0.360 ∗ 𝐵𝐹5 + 0.032 ∗ 𝐵𝐹9 − 0.029 ∗ 𝐵𝐹10 − 0.004 ∗ 𝐵𝐹11 + 0.005 ∗ 𝐵𝐹12 − 0.02 ∗ 𝐵𝐹14 − 0.012 ∗ 𝐵𝐹15 − 0.032 ∗ 𝐵𝐹16 − 0.119 ∗ 𝐵𝐹17 + 0.022 ∗ 𝐵𝐹19 ( (2) iv. conclusion determining influential factors of capital adequacy ratio has crucial importance for the security of the banking sector and financial system, and also for sustainable economic growth and financial stability. the main cause underlying these is that, banks are the main financing source in some countries which have a bankbased financial system structure. so, countries try to make the banking system stronger so that they can continue to finance economic activities. however, a downward trend in car produces risks due to the limit of providing much more credits of banks. therefore, countries should determine influential factors on car firstly. this study aimed at defining influential factors of car in turkey. in this context, 14 independent variables are selected by benefitting from similar studies taking place in the literature. also, quarterly data for the period of 2006/q1-2019/q1 are gathered and analyzed by mars method. as a result of the analysis, it is defined that credits/total assets ratio, legal equities, risk weighted assets, nonperforming loans (npl), npl/total credits ratio, and credit/deposit ratio have an effect on car in turkey. according to the analysis, the most important factor is the credits/total assets ratio. car decreases when credits increase much faster than legal equities. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.183 | http://emaj.pitt.edu mustafa tevfik kartal emerging markets journal | p a g e |23 also, there is a similar relationship between legal equities and risk weighted assets. another important variable is npl. it can be said that, car decreases if npl exceeds 18.65 billion tl. however, the current npl is around 106 billion tl in turkey. unfortunately, this condition causes decreases in car. also, npl/total credits ratio has negative effects on car. on the other hand, when it is below 121.61%, credit/deposit ratio has a negative effect on car by interacting with credits/total assets ratio. with the evaluation of analysis results, it can be concluded that some negative developments in analyzed independent variables have been causing a negative effect on car. to prevent car from decreasing much more from the current level, which is 17.1% as of may 2019, negative effects should be prevented in the mentioned variables. for instance, an increase in npl should be stopped or the sale of npls by banks should be eased. hence, the negative effects of npl on car could be prevented. also, the negative effects of credit/deposit ratio on car could be prevented by easing the collection of deposits of banks. also, it is an important point to be stated that the accumulation of legal equities should be sustained so that the balance between legal equities and risk weighted assets could be kept. also, some new precautions could be developed by banks and regulatory authorities. of course, those precautions should be deployed in time so that the turkish banking sector could benefit from these. hence, banks could provide more credits for financing and supporting economic growth in turkey. besides this study, new studies such as examining why npls have been increasing so much in recent times in turkey could be studied and it is thought that these studies could be beneficial in developing the literature. also, new statistical and econometrical methods could be used in these forthcoming studies. references abba, g. o., zachariah, p., & inyang, e. e. (2013). capital adequacy ratio and banking risks in the nigeria money deposit banks. research journal of finance and accounting, 4(17), 17-25. acar balaylar, n., & özdemir, m. o. (2018a). capital adequacy and profitability relationship for foreign deposit banks in turkey. sosyoekonomi, 26(36), 209-224. acar balaylar, n., & özdemir, m. o. (2018b). the relationship between profitability and capital adequacy of domestic commercial banks in turkey. accounting & auditing review, 18(54), 57-76. afşar, a., & karaçayır, e. (2018). determinations of capital adequacy ratio in turkish banking sector. anadolu university journal of social sciences, 18(2), 149-160. aktaş, r., açıkalın, s., bakın, b., & çelik, g. (2015). the determinants of banks' capital adequacy ratio: some evidence from south eastern european countries. journal of economics and behavioral studies, 7(1), 79-88. almazari, a. a. (2013). capital adequacy, cost income ratio and the performance of saudi banks. international journal of academic research in accounting, finance and management sciences, 3(4), 284-293. asarkaya, y., & özcan, s. (2007). determinants of capital structure in financial institutions: the case of turkey. journal of brsa banking and financial markets, 1(1), 91-109. aydın, y. (2019). the relationship between bank capital and profitability: evidence from turkish banking sector. journal of international social research, 12(62), 1174-1181. belke, m., & ünal, e. a. (2017). determinants of bank profitability: evidence from listed and nonlisted banks in turkey. journal of economics finance and accounting, 4(4), 404-416. berger, a. n. (1995). the relationship between capital and earnings in banking. journal of money, credit and banking, 27(2), 432–456. bis. (2010). phase-in arrangements (shading indicates transition periods), https://www.bis.org/press/p100912b.pdf, 25.07.2019. brsa. (2019). monthly bulletin, https://www.bddk.org.tr/bultenaylik/en, 25.07.2019. büyükşalvarcı, a. & abdioğlu, h. (2011). determinants of capital adequacy ratio in turkish banks: a panel data analysis” african journal of business management, 5(27):11199-11209. cbrt. (2019). evds, https://evds2.tcmb.gov.tr, 25.07.2019. çam, ü., & özer, h. (2018). analysis of market structure of the turkish banking sector in terms of competition and contestability: panzar-rosse model. cumhuriyet university journal of economics and administrative sciences, 19(1), 336-360. demirhan, d. (2010). the effects of capital structure decisions on the profitability of deposit banks in turkey. the journal of accounting and finance, (45), 157-168. demirgüç-kunt, a., & detragiache, e. (1998). the determinants of banking crises in developing and developed countries. staff papers, 45(1), 81-109. demirgüç-kunt, a., & detragiache, e. (2002). does deposit insurance increase banking system stability? an empirical investigation. journal of monetary economics, 49(7), 1373-1406. https://www.bddk.org.tr/bultenaylik/en https://evds2.tcmb.gov.tr/ volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.183 | http://emaj.pitt.edu defining influential factors of capital adequacy ratio: an examination upon turkish banking sector (2006/q1-2019/q1) page |24| emerging markets journal dinçer, h., hacıoğlu, ü., & yüksel, s. (2016). performance assessment of deposit banks with camels analysis using fuzzy anp-moora approaches and an application on turkish banking sector. asian journal of research in business economics and management, 6(2), 3256. el-ansary, o., & hafez, h. m. (2015). determinants of capital adequacy ratio: an empirical study on egyptian banks. corporate ownership & control, 13(1), 806-816. friedman, j. (1991). multivariate adaptive regression splines. the annals of statistics, 19, 1-141. goh, a. t. c., zhang, y., zhang, r., zhang, w. & xiao, y. (2017). evaluating stability of underground entry-type excavations using multivariate adaptive regression splines and logistic regression. tunnelling and underground space technology, 70, 148-154. hazar, a., babuşçu, s., tekindal, m. a., & köksal, m. o. (2018) the risk analysis which specify the capital adequacy ratio in banking sector. international journal of economic & administrative studies, (20), 135-150. hoffmann, p. saona (2011). determinants of the profitability of the us banking industry. international journal of business and social science, 2(22), 255-269. iannotta, g., nocera, g., & sironi, a. (2007). ownership structure, risk and performance in the european banking industry. journal of banking & finance, 31(7), 2127-2149. işık, ö. (2017). internal determinants of profitability of state, private and foreign owned commercial banks operating in turkey. journal of economics, finance and accounting, 4(3), 342353. jasevičienė, f., & jurkšaitytė, d. (2014). the new capital adequacy framework (basel iii) options and issues in commercial banks of lithuania. ekonomika, 93(4), 119-134. kar, m., taş, s., & ağır, h. (2008). financial system and development. development economics, editors: sami taban, muhsin kar, 2th edition, ekin publications, bursa, turkey. kartal, m. t. (2019). the importance of harmonious monetary and fiscal policies: an examination upon credit interest rate in turkey. journal of economics business and finance research, 1(2), 88-102. kartal, m. t., & çelikdemir, n. ç. (2019). coordination of internal control and internal audit activities in banks: an examination upon branch audit activities. tide academia research, 1(1), 3353. kartal, m. t., i̇biş, c., & çatıkkaş, ö. (2018). adequacy of audit committees: a study of deposit banks in turkey. borsa i̇stanbul review, 18(2), 150165. kılcı, esra n. (2017). an assessment of the relationship between balance sheet deteriorations and financial crises; turkish case, 2000-01 crises. financial, political and economic comments, 54(631): 55-64. kılcı, esra n. (2019). analysis of the relationship between capital adequacy and profitability in turkish banking sector over the period of 19802017; fourier approach. dumlupinar university journal of social science, (59), 61-73. kleff, v., & weber, m. (2008). how do banks determine capital? evidence from germany. german economic review, 9(3), 354-372. klepczarek, e. (2015). determinants of european banks' capital adequacy. comparative economic research, 18(4), 81-98. koç, y. d., & karahan, f. (2017). financial stability indicators of turkish banking sector. international journal of academic value studies, 3(15), 148-153. liu, t. (2018). multivariate adaptive regression splines in standard cell characterization for nanometer technology in semiconductor. chapter 3 in topics in splines and applications, edited by young kinh-nhue truong, 47-62. mili, m., sahut, j. m., & trimeche, e. (2015). the role of islamic banks in the transmission of liquidity shocks across countries. journal of economic issues, 49(1), 197-225. mili, m., sahut, j. m., trimeche, h., & teulon, f. (2017). determinants of the capital adequacy ratio of foreign banks’ subsidiaries: the role of interbank market and regulation. research in international business and finance, (42), 442453. mishkin, frederic s. (1999). lessons from the tequila crisis. journal of banking & finance, (23), 1521-1533. mpuga, p. (2002). the 1998-99 banking crisis in uganda: what was the role of the new capital requirements? journal of financial regulation and compliance, 10(3), 224-242. okuyan, h. a. (2013). capital structure in turkish banking sector. ege academic review, 13(3), 295-302. polat, a., & al-khalaf, h. (2014). what determines capital adequacy in the banking system of kingdom of saudi arabia? a panel data analysis on tadawul banks. journal of applied finance and banking, 4(5), 27-43. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.183 | http://emaj.pitt.edu mustafa tevfik kartal emerging markets journal | p a g e |25 reis, g., & kötüoğlu, r. (2016). capital adequacy behavior of turkish banking sector. journal of management and economics research, 14(3 (special issue)), 101-110. ruckes, m. (2004). bank competition and credit standards. review of financial studies, 17(4), 1073-1102. sayılgan, g., & yıldırım, o. (2009). determinants of profitability in turkish banking sector: 20022007. international research journal of finance and economics, 28, 207-214. sephton, p. (2001). forecasting recessions: can we do better on mars? review federal reserve bank of saint louis, 83(2), 39-49. shingjergji, a., & hyseni, m. (2015). the determinants of the capital adequacy ratio in the albanian banking system during 2007-2014. international journal of economics, commerce and management, 3(1), 1-10. silaban, p. (2017). the effect of capital adequacy ratio, net interest margin and non-performing loans on bank profitability: the case of indonesia. international journal of economics & business administration (3), 58-69. us, v. (2015). banking sector performance in turkey before and after the global crisis. the journal of economy, business and finance, 30(353), 4574. williams, b. (1998). a pooled study of the profits and size of foreign banks in australia. journal of multinational financial management, 8(2-3), 211-231. yüksel, s., mukhtarov, s., mammadov, e., & özsarı, m. (2018). determinants of profitability in the banking sector: an analysis of post-soviet countries. economies, 6(3), 41. annexes annex 1. outputs of car estimation model basis functions number of total variables gcv gcv r2 18 6 3.012 0.166 17 6 1.690 0.532 16 6 1.110 0.693 15 6 0.789 0.782 14 6 0.615 0.830 13 6 0.518 0.857 12* 6 0.431 0.881 11 6 0.450 0.875 10 6 0.454 0.874 9 5 0.611 0.831 8 5 0.881 0.756 7 4 0.867 0.760 6 3 0.785 0.783 5 3 0.717 0.802 4 3 0.855 0.763 3 3 1.108 0.693 2 3 1.264 0.650 1 2 2.149 0.405 *shows the best model. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.183 | http://emaj.pitt.edu defining influential factors of capital adequacy ratio: an examination upon turkish banking sector (2006/q1-2019/q1) page |26| emerging markets journal annex 2. important splines between car and independent variables volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu financial instrument forecast with artificial intelligence furkan kayım beykent university, turkey | e-mail: kayimfurkan@gmail.com atınç yılmaz beykent university, turkey | e-mail: atincyilmaz@beykent.edu.tr abstract in ancient times, trade was carried out by barter. with the use of money and similar means, the concept of financial instruments emerged. financial instruments are tools and documents used in the economy. financial instruments can be foreign exchange rates, securities, crypto currency, index and funds. there are many methods used in financial instrument forecast. these methods include technical analysis methods, basic analysis methods, forecasts carried out using variables and formulas, time-series algorithms and artificial intelligence algorithms. within the scope of this study, the importance of the use of artificial intelligence algorithms in the financial instrument forecast is studied. since financial instruments are used as a means of investment and trade by all sections of the society, namely individuals, families, institutions, and states, it is highly important to know about their future. financial instrument forecast can bring about profitability such as increased income welfare, more economical adjustment of maturities, creation of large finances, minimization of risks, spreading of ownership to the grassroots, and more balanced income distribution. within the scope of this study, financial instrument forecast is carried out by applying a new methods of long short term memory (lstm), recurrent neural network (rnn), convolutional neural network (cnn), autoregressive integrated moving average (arima) algorithms and ensemble classification boosting method. financial instrument forecast is carried out by creating a network compromising lstm and rnn algorithm, an lstm layer, and an rnn output layer. with the ensemble classification boosting method, a new method that gives a more successful result compared to the other algorithm forecast results was applied. at the conclusion of the study, alternative algorithm forecast results were competed against each other and the algorithm that gave the most successful forecast was suggested. the success rate of the forecast results was increased by comparing the results with different time intervals and training data sets. furthermore, a new method was developed using the ensemble classification boosting method, and this method yielded a more successful result than the most successful algorithm result. keywords: long short-term memory (lstm), convolutional neural network (cnn), recurrent neural network (rnn), boosting, financial instrument forecast new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.229 | http://emaj.pitt.edu | mailto:atincyilmaz@beykent.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.229 | http://emaj.pitt.edu furkan kayım, atınç yılmaz emerging markets journal | p a g e |9 financial instrument forecast with artificial intelligence furkan kayım atınç yılmaz i. introduction financial instruments are defined as contracts that generate financial assets and financial liabilities by financial market instruments. financial market instruments are in the form of a payment instrument, financial rights and economic assets closely related to these (korkmaz and bakkal, 2011; yavilioğlu and delice, 2006). financial instruments such as exchange rates, commodities, securities, crypto currencies, indices and funds are indispensable for our economic life. the accurate estimation of financial instruments is important in ensuring the effective management of personal, corporate, and national economies. because, the accurate estimation means increasing the welfare of individuals as a result of investing more productively, ensuring maturity adjustment between the suppliers and demanders of funds, creating large finances by pooling small savings, minimizing the risk by establishing a balance between alternative financing, financial inclusion of ownership by including the small savers in capital markets, a decrease in the cost of using funds by an increase in competition and a more balanced income distribution. while it is quite difficult to correctly interpret the markets that are getting increasingly complicated, even for financial professionals, it is getting more difficult for individuals who do not have enough knowledge of financial literacy to interpret the markets correctly (gümüş and pailer, 2019). at this point, an accurate estimation can be made using time series in which future data can be estimated by looking at the past data set consisting of regular and consecutive time data. however, since timeseries data are extremely comprehensive and increase each second, and periodic sub-breakages occur in the time series, the most accurate approach will be analyzing the estimation using artificial intelligence that is successful in financial-based big data analysis. as a matter of fact, financial instrument estimation using artificial intelligence is the most up-to-date financial instrument estimation method. there are also similar studies where financial instrument estimation is made using artificial intelligence. for example, time series analysis consisting of btc/usd currency pair data and financial time series trend estimation are made using the lstm and rnn neural networks (safiullin et. al., 2016; qi, khushi and poon, 2020). similarly, in the forex markets, the studies include eur/gbp, usd/eur, usd/jpy, usd/gbp, usd/aud, usd/cad, usd/chf, and usd/cny (ahmed et.al., 2020; nagpure, 2019). on the other hand, there are studies in the literature in which ensemble classification algorithms and hybrid methods are also used in financial instrument estimation (bui, vu and dinh, 2018; chowdhury et.al., 2020). within the scope of the study, a network will be created from rnn and lstm. accordingly, a hybrid model will be created from cnn and lstm. the arima algorithm will be run simultaneously and the results obtained will be presented through the boosting channel, which is one of the ensemble classification methods. this way, unlike previous studies, a much more accurate estimation result will be obtained by using multiple techniques simultaneously and presenting them collectively. the financial instruments to be estimated are determined to be usd/try and ounce gold since they are the most traded financial instruments in turkey. thanks to the outputs, it is expected to provide a more inclusive perspective on financial instrument estimation to the literature and create added value for financial literacy. ii. materials and methods in this section, the algorithms used in the scope of the study and how these algorithms are used are explained. in addition, the differences made within the scope of this study are mentioned. firstly, the data sets studied are mentioned. data set within the scope of this study, usd/try and ounce gold data sets are studied. while 2019 and 20032020 years are studied for the usd/try exchange, 2017 data are studied for ounce gold. these data are obtained from the website of the central bank of the republic of turkey (turkiye cumhuriyet merkez bankası tcmb, 2019). exchange rate reports for the desired date range can be obtained by selecting effective sales usd from the central bank edds (electronic data delivery system) serial market page. for the 2019 usd/try exchange rate, 247 days of data are studied. for the 2003-2020 usd/try exchange rate, 4293 days of data are studied. for 2017 ounce gold, 250 days of data are studied. data life cycle one week of financial instrument information for data analysis studies is provided in table 1. the date field is the date of the financial instrument. the value field represents the current sales exchange rate of the financial instrument. the estimation field represents the direction of the value to be realized the next day. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.229 | http://emaj.pitt.edu financial instrument forecast with artificial intelligence page |10| emerging markets journal table 1: one week sample usd/try data set date value estimation 02.01.2019 5,30 buying 03.01.2019 5,35 buying 04.01.2019 5,48 buying 07.01.2019 5,43 selling 08.01.2019 5,38 selling source: authors’ own compilation within the scope of the study, the life cycle of one-day data is provided below. the processing steps of one-day data are provided in table 1. some variables are added case by case for each one-day raw data. after these variables are added, data are processed for each algorithm. then, the information is obtained by applying the boosting method, which is one of the ensemble methods. figure 1. data life cycle source: authors’ own compilation recurrent neural network rnn has short-term memory and cannot process long-term data dependencies (hochreiter, and schmidhuber, 1997). neural networks are designed according to the data they process. the difference between the rnn model and other models is that it is designed to process time series and sequence data. it has many application areas such as sound processing, image processing, video images, financial data analysis, natural language processing, weather forecast, dna data, medication data, sentiment analysis, and movie recommendations. time-series estimation is defined as the method of estimating future data by looking at past data. rnn can estimate and classify future data by remembering the past data. it does this by remembering important data from past data. accurate estimates are possible since it estimates by finding important points. traditional recurrent neural networks (rnns) remember the past by establishing recurrent links between past and current computations (bengio, y., courville a., goodfellow, 2016). figure 2 provides the architectural structure of the rnn algorithm. the inputs are handled in connection with each other in the rnn algorithm. the nodes in the hidden layer have temporal lobes that feed themselves. it has its own small memory. it nourishes itself thanks to these temporal lobes. although it outputs an input it receives, it does not forget the input. it remembers when it moves on to the next layer. each layer receives both the input data and the past data. figure 2. basic rnn design source: authors’ own compilation long short term memory long short term memory (lstm) is a specialized version of rnn. recurrent neural networks (rnns) are used to learn the sequential patterns in time series data (yu et. al., 2021). lstm is a typical rnn type and can learn for a longer period compared to a simple rnn (hochreiter and schmidhuber, 1996). unlike rnn, lstm has long-term memory. its most important feature is remembering long-term data. it is possible to forget or keep the information in the memory while the lstm algorithm runs. it has a forget gate, an input gate, and an output gate. in forget gate, decisions on forgetting the past are made. in the input gate, decisions on which information will be kept in memory are made. in the output gate, decisions on which information will be output are made (olah, 2015). in brief, lstm is a special type of rnn that can keep information in long-term memory. within the scope of this study, financial instrument analysis is made by creating a network compromising an lstm layer and an rnn output layer. convolutional neural networks convolutional neural network (cnn) is an artificial intelligence that is now widely used in image processing (lecun, huang and bottou, 2004). generally, the cnn algorithm is used in image processing. to date, the cnn algorithm has become a technique that has been successfully used in many fields such as text sensitivity classification (wang and mahadevan, 2011), human activity classification (harel and mannor, 2011), image information boost fk estimation analyzed data lstm-rnn lstm-cnn arima specialized data time value trend ... raw data time (daily) value (financial instrument value) a x0 y0 one cell a x1 y1 can be used over a x3 y3 and over https://medium.com/@tuncerergin/convolutional-neural-network-convnet-yada-cnn-nedir-nasil-calisir-97a0f5d34cad https://medium.com/@tuncerergin/convolutional-neural-network-convnet-yada-cnn-nedir-nasil-calisir-97a0f5d34cad volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.229 | http://emaj.pitt.edu furkan kayım, atınç yılmaz emerging markets journal | p a g e |11 classification (kulis, saenko and darell, 2011; duan, xu and tsang, 2012) and multilingual text classification (prettenhofer and stein, 2010; li et.al., 2020). if the cnn algorithm operation is to be told using a handwritten letter recognition sample, there is a handwritten letter as input. while the cnn algorithm is run, it tries to find the distinctive features of this letter. a filter is required in order to find the distinctive feature of the letter in the input picture from other letters. this filter should distinguish this letter from the other letters. this part is the convolutional layer part. after finding the distinguishing features in the pooling layer, the resolution, which is its distinguishing feature, is reduced. at this stage, orientation is ensured. in other words, the distinguishing feature is found independently from directions such as right, up or down. in short, after filtering, screening is carried out, these processes are repeated, then comes the smoothing and the classification (sharif et. al., 2020). in this study, financial instrument estimation is made by using the lstm and cnn algorithms in a hybrid manner. autoregressive integrated moving average autoregressive integrated moving average will be referred to as arima for short. it is also known as the box-jenkins model as it was first found by box and jenkins. arima models, which are the most known and commonly used among time series models, assume a linear relationship between the data constituting the time series and can model this linear relationship. they can also be successfully applied to time series that are steady or stabilized by various statistical methods (kaynar and taştan, 2009). among the time series models, arima stands out as a successful model in linear estimation (yao, ma and wang, 2021). it is a time series model used in univariate time series. in fact, it is an integrated model where autoregressive and moving average methods are used together. it consists of 3 parameters, which are ar(p), i(d), and ma(q). the abbreviations in figure 3 and their explanations are provided below: p: the degree of autoregression d: the degree of difference q: the moving average degree figure 3. arima model source: authors’ own compilation for example, (1,1,0) means that the autoregression degree has only 1 time difference and no moving average is made. within the scope of this study, financial instrument estimation is made using the arima model and the results are compared with the results of other models. ensemble classification boosting ensemble classification methods aim to get more successful results by running multiple classification algorithms simultaneously. it is desired to obtain a more successful result than the success rates of the classification algorithms used together. ensemble classification methods have been identified as one of the most effective developments in the data mining field in the last decade (seni and elder, 2010). ensemble classification is defined as a new method created by using multiple data mining algorithms together, as it can be understood from the name of ensemble classification. combining multiple methods aims to estimate the most accurate result. it is desired to create a general method with better performance by using multiple methods together in ensemble classification. bagging, boosting and random forest are examples of ensemble classification. the main purpose of ensemble classification is to combine the results previously obtained using different classification algorithms and to obtain a result better than the best of these results (kılınç et.al., 2015). for example, assuming that you have collected estimations from 10 experts, the ensemble classification will strategically combine the estimations of these 10 experts to obtain a more accurate and robust estimation than the estimation made by each expert. as will be discussed later in this section, there are several different methods for creating a ensemble classification. this section will explain how the ensemble classification works and provides basic information on why it is typically recognized to achieve good generalization performance. based on the explanation of the ensemble classification in figure 4, ensemble classification desires to obtain more accurate estimation by using multiple classification algorithms together. these classification algorithms are different algorithms such as decision trees, support vector and logistic regression. for example, assuming that the s1 algorithm has a 60% estimation rate and the s2 algorithm has a 70%, it is aimed to make an estimation above 70% by using the ensemble classification method. according to this example, estimation above 70% is possible using the ensemble classification method. arima autoregressive (p) integrated (d) moving average(q) volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.229 | http://emaj.pitt.edu financial instrument forecast with artificial intelligence page |12| emerging markets journal figure 4. ensemble classification working mechanism source: authors’ own compilation boosting boosting method checks the results of multiple classification algorithms. it obtains a new result by focusing on the results of the classification algorithms. it is aimed to obtain a result that is stronger than the results of other classification algorithms. the term "boosting" refers to the algorithm family that can transform weak classification algorithms into strong algorithms (zhou, 2012). in the boosting algorithm, the results of multiple classification algorithms are assessed and a new result is obtained. to obtain this result, the results of the classification algorithms used are weighed. the weights given to these results are determined based on the previous success of the classification algorithms. these weights are updated with new results. the boosting method works as a regenerative procedure, focusing more on previously misclassified records. here is an example of the boosting method. let's assume that a patient has certain symptoms. multiple doctors are consulted, and a certain weight is given to assessments of each doctor. these weight will be given based on their previous diagnosis. the final diagnosis is the result of the new diagnoses created by the weights given (han, kamber and pei, 2012). within the scope of this study, the algorithm results are observed to be more successful using the boosting method. iii. findings an application has been developed to conduct studies and test the results. the chosen application development programming language is java. netbeans is preferred for application development and database creation. the libraries used to develop the application are deeplearning4j, java, maven, primefaces, spring, apache tomcat, derby client, netbeans, apache poi, hibernate, wekadeeplearning4j and timeseries-forecast. in order to apply the proposed solution, some of the data mining algorithms should be run and the results should be observed. to explain the boost functional clustering algorithm flowchart in figure 5, firstly, the trend is determined. after determining the trend, the success of each algorithm is determined according to the current trend. after the successes are determined, the algorithms are weighted parallel to the success rate. estimation results are summed based on the weighted results. after summing the estimation results, the largest result is considered as the result of the boost functional clustering algorithm. figure 5. boost functional clustering algorithm flowchart source: authors’ own compilation the success rates of the algorithms in the horizontal trend are checked. 98 days are in the horizontal trend within the 2019 usd/try exchange rate in total. lstm has 32 days of unsuccessful estimation and 66 days of successful estimation within the horizontal trend. table 2 provides the estimation results of the algorithms according to the horizontal trend. the order based on these results is lstm, cnn and arima. the weight points can be provided in this order. table 2: 2019 usd/try exchange rate results of horizontal trend algorithms successful unsuccessful lstm 66 32 cnn 63 35 arima 51 47 source: authors’ own compilation lstm:1.1, cnn:1 , arima:0.9 table 3 contains the weighting results of the one-day boost functional clustering algorithm for 28.01.2020. the result is obtained by summing all in groups. 2.1 buying is compared to .0.8 selling. since 2.1 is greater, the result of the boost functional clustering algorithm will be buying. table 3: boost functional cluster weighting for usd/try exchange rate on 28.01.2020 algorithms estimation results weight ratios weight estimation products lstm buying 1.1 1.1 buying cnn buying 1 1 buying arima selling 0.9 0.8 selling source: authors’ own compilation volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.229 | http://emaj.pitt.edu furkan kayım, atınç yılmaz emerging markets journal | p a g e |13 pseudo code is a text draft of the software design. main transactions are written as descriptive expressions organized as functional blocks. structure and order are represented by the appropriate indents of the blocks since they are high-level languages. the pseudo code steps are provided below:  trend setting (date now)  while (algorithms)  set weight  calculate estimation results  find the highest estimation result firstly, the data of a financial instrument should be uploaded into the system in order to test the application. after this, the data will become estimable. this section contains the test results of usd/try and ounce gold data on the application. the test results of the application can be compared with different financial instruments and time ranges. the movements of medium-term security with a 1-year usd/try exchange rate are analyzed. table 4 contains the 2019 usd/try exchange rate application test results. it has been observed that the proposed solution, which is the boost fk algorithm, provides more successful results. table 4: 2019 usd/try application test results source: authors’ own compilation the movements of a long-term security with a 17-year usd/try exchange rate are analyzed. table 5 provides that if the 17-year (2003-2020) usd/try exchange rate is run on the application, it gives different results compared to the 1-year data. a total of 4293 days from this rime range were analyzed. the success rate has decreased compared to one-year results. table 5: 2003-2020 2019 usd/try application test results source: authors’ own compilation the movements of medium-term security with a 1-year ounce gold exchange rate are analyzed. table 6 contains the 250-day ounce gold data test results. unlike the usd-try exchange rate, ounce gold has less volatility. table 6: 2007 ounce gold application test results source: authors’ own compilation within the scope of the study, a network consisting of rnn and lstm was created. however, parallel to the creation of a hybrid model from cnn and lstm, the arima algorithm was also run simultaneously and the results obtained were presented with the boosting method, which is one of the ensemble classification methods. thanks to these, unlike the previous studies in the literature, a much more accurate estimation result will be obtained by using multiple algorithms simultaneously and presenting them collectively. the financial instruments which were estimated were determined to be usd/try and ounce gold, since they are the most traded financial instruments in turkey. thanks to the outputs, a more inclusive perspective on financial instrument estimation was provided to the literature, and it is expected to create added value for financial literacy. alternative investment time ranges and instruments were provided with different time ranges and different financial instruments. iv. conclusion this study is on increasing financial literacy and how financial instrument estimation can be made more successful. within this context, studies were carried out on usd/try and ounce gold data using the lstm, cnn, arima algorithms. during these studies, a network consisting of an lstm layer and an rnn output layer was created. besides, lstm and cnn algorithms were used in a hybrid manner. a solution was proposed to improve the estimation results by using these algorithms. this solution is applying the ensemble classification boosting method to the algorithm results. an application was developed to apply this solution, observe the results and compete them with the results of other algorithms. finally, using the developed application, the proposed solution and algorithms were tested with different time ranges and training data. based on the test results, it was observed that the proposed solution boost fk algorithm is more successful with 67% in ounce gold tests, 66% in 1-year usd/try exchange rate and 64% in 17-year usd/try exchange rate. it has been concluded volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.229 | http://emaj.pitt.edu financial instrument forecast with artificial intelligence page |14| emerging markets journal that, the ounce gold test results are more estimable compared to the usd/try exchange rate. applying boosting method based on the performance evaluation results of the artificial intelligence algorithms using these findings made the results more successful. references ahmed, s., hassan, s-ul, aljohani, n.r., nawaz, r. (2020). flf-lstm: a novel prediction system using forex loss function. applied soft computing. volume 97, part b, december 2020, 106780. bengio, y., courville a., goodfellow, i. (2016). deep learning book. http://www.deeplearningbook.org., ed., 2016. bui, l.t., vu, v.t., dinh, t.t.h. (2018). a novel evolutionary multi-objective ensemble learning approach for forecasting currency exchange rates. data & knowledge engineering. volume 114, march 2018, 40-66. chowdhury, r., rahman, a., rahman, m. s., mahdy, m.r.c., (2020). an approach to predict and forecast the price of constituents and index of cryptocurrency using machine learning,. physica a: statistical mechanics and its applications. volume 551, 1 august 2020, 124569. duan, l., xu d., tsang i.w. (2012). learning with augmented features for heterogeneous domain adaptation.. ieee trans pattern anal mach intell. 2., 36(6), 1134-1148. gümüş, u. t., pailer, m. k. (2019). öğrencilerin finans dersi alma durumunun finansal okur yazarlık seviyesine etkisi: bir nazilli örneği. opus uluslararası toplum araştırmaları dergisi. 11 (18), 1494-1516. han, j. kamber m., pei, j. (2012). data mining concepts an techniques. morgan kaufmann. harel m., mannor, s. (2011). learning from multiple outlooks. proceedings of the 28th international conference on machine learning, 9. hochreiter, s., schmidhuber, j. (1996). lstm can solve hard long time lag problems. advances in neural information processing system. nips'96: proceedings of the 9th international conference on neural information processing systems, december 1996, 473-479. hochreiter, s., schmidhuber, j. (1997). techniche üniversiti münchen, münchen germany. 9 (8), 1735-1780. kaynar, o., taştan, s. (2009). zaman serileri tahmininde arima-mlp melez modeli. atatürk üniversitesi i̇ktisadi ve i̇dari bilimler dergisi, 23(3), 141-149. kılınç, d., borandağ e., yücalar f., özçift a., bozyiğit, f.. (2015). yazılım hata kestiriminde kolektif sınıflandırma modellerinin etkisi. ulusal yazılım mühendisliği sempozyumu (uyms), i̇zmir. korkmaz, ş., bakkal, s. (2011). yapılandırılmış finansal araçlar ve aracı kuruluşların kaldıraçlı hisse senedi piyasaları. hiperlink yayınları, i̇stanbul. kulis, b., saenko k., darrell t. (2011). what you saw is not what you get: domain adaptation using asymmetric kernel transforms. ieee 2011 conference on computer vision and pattern recognition, 1785-1792. lecun, y., huang, f.j., bottou, l. (2004). learning methods for generic object recognition with invariance to pose and lighting. proceedings of the 2004 ieee computer society conference on computer vision and pattern recognition, 98. li, c., zhe, j., zhao, y.q., li, r.g., wang, e.d., zhang, x., zhao, k. (2020). state key laboratory of high-end server & storage technology, beijing, china, 2. nagpure, a.r. (2019). prediction of multi-currency exchange rates usig deep learning. international journal of innovative technology and exploring engineering. 8 (6), april 2019, 316322. olah, c. (2015). understanding lstm networks. christopher olah website. http://colah.github.io/posts/2015-08understanding-lstms/., august 27, 2015. prettenhofer p., stein, b. (2010). cross-language text classification using structural correspondence learning. proceedings of the 48th annual meeting of the association for computational linguistics, 1118. qi, l., khushi, m., poon, j. (2020). event-driven lstm for forex price prediction. ieee asia-pacific conference on computer science and data engineering (csde), gold coast, qld, australia, 16-18 december 2020. safiullin, m.r., elshin, l.a., nikiforova, e.g., prygunova, m.i. (2016). management of environmental load factors on the territory of the socio-economic well-being of the population. academy of strategic management journal. 15(1), 104-113. seni, g., elder, j. (2010). ensemble methods in data mining: improving accuracy through combining predictions. morgan & claypool. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.229 | http://emaj.pitt.edu furkan kayım, atınç yılmaz emerging markets journal | p a g e |15 sharif, k., varshini, c.s., sreekanth, g., sharif, g.h.s.k. (2020). sign language recognition. international journal of engineering research & technology (ijert). https://www.ijert.org/, 9 (5),, may-2020, 1133. turkiye cumhuriyet merkez bankası tcmb (2019). central bank of the republic of turkey. may 2019. [online]. https://evds2.tcmb.gov.tr/index.php?/evds/serie market/#collapse_2 wang c., mahadevan, s. (2011). heterogeneous domain adaptation using manifold alignment. proceedings of the 22nd international joint conference on artificial intelligence, 47. yao, l., ma, r., wang, h. (2021). baidu index-based forecast of daily tourist arrivals through rescaled range analysis, support vectorregression, and autoregressive integrated moving average, alexandria engineering journal, 60(1), 365-372. yavilioğlu, c., delice, g. (2006). tezgah üstü türev piyasalar: bir değerlendirme. maliye dergisi. (151), 53-84. yu, m., fangcao, x., hu, w., sun, j., cervone, g. (2021). using long short-term memory (lstm) and internet of things for localized surface temperature forecasting in an urban environment. arxiv:2102.02892 zhou, z-h. (2012). ensemble methods: foundations and algorithms. chapman and hall/crc. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the roles of the organization of turkic states (ots) in international trade, logistics and european union’s (eu) energy supply security yavuz toraman nisantasi university, turkey | e-mail: yavuztrmn@gmail.com abstract while new trade routes may have been discovered, the political, economic, and commercial relations among countries may lead to a desire to reactivate old routes or increase their capacity for active use over time. in the aftermath of the russiaukraine war, which is one of the most significant events happening worldwide, the impact of the organization of turkic states (ots) on global trade, economic, and logistical activities has been examined. in the current research, the qualitative method was employed to conduct an in-depth examination of the role of the ots in global trade, transportation corridors, and the eu's energy supply security. for this study, secondary sources such as databases, scientific journals, books, national and international news, etc., were utilized. the research particularly highlights the quest for alternative routes in global trade, especially in recent times. in this context, it is noteworthy that türkiye and the ots are among the most significant partners. the presence of ots is evident in almost all north-south and east-west oriented developed trade corridors, which supports this situation qualitatively. additionally, the presence of ots member countries with abundant underground resources enables the optimization of both logistics and supply elements together. this study emphasizes the significance of the ots in the global economy and commercial activities. particularly, it highlights the crucial role of türkiye and ots as a bridge between east and west, especially after the ukraine-russia war. the implications for the future underscore the strengths of ots and its importance in the times to come. keywords: organization of turkic states (ots), international trade, logistics, energy supply security, bri new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu the roles of the organization of turkic states (ots) in international trade, logistics and european union’s (eu) energy supply security page |2| emerging markets journal the roles of the organization of turkic states (ots) in international trade, logistics and european union’s (eu) energy supply security yavuz toraman i. introduction geographical differences, climate conditions, and varying levels of technological advancement have been reasons for the occurrence of commercial activities in different countries. societies have been closely involved in commercial activities since the beginning of human history (krugman, 1994). no society lives in isolation, leading to the development of political, social, and economic relations between societies. particularly after geographical discoveries, new alternative transportation corridors emerged, and with the industrial revolution, the products used diversified. this situation has further facilitated the development of economic and political relations among countries (seyidoğlu, 2003). furthermore, with the advancement of technology, both the products involved in buying and selling, the trade corridors, and the logistics processes have undergone changes (üzümcü and akdeniz, 2014; toraman and öz 2023). while new trade routes may have been discovered, due to the political relations between countries, there is a desire to revitalize old routes or increase their capacity for active use (aoyama, 2016). in this context, china's projects to revive the ancient silk road are of great importance. the ultimate form of this project is known as the one belt one road (obor) initiative (napang et al., 2019). obor aims to create trade transportation corridors and undertake infrastructure projects to promote global economic activity (foo et al., 2020). within the scope of obor, the goal is to make the corridors established in europe, africa, and asia functional, thus creating an efficient transportation infrastructure (yang et al., 2021). in this context, ots holds significant geographical importance, particularly in the context of obor and other routes in asia, africa, and europe. the presence of the ots on important routes will contribute to the increase of economic activities and support economic growth. besides obor, the ots has proven to be a significant stakeholder in projects such as traceca (transport corridor europe-caucasus-asia), paneuropean corridor, trans-european transport network (ten-t), north-south transport corridor, zengezur corridor, central asia regional economic cooperation (carec) transport corridor, middle corridor, crossroads of peace india-middle east-europe economic corridor (imec) and india-iran-türkiye-europe economic corridor (iitec). new trade routes have not been limited to just land and sea routes. various pipeline projects have been developed to supply the energy needs of countries. particularly within the scope of eu's energy supply security, different pipeline projects have been developed (napang et al., 2019). russia is one of the most significant energy suppliers to the eu. to reduce dependence on russia for a substantial portion of its natural gas and oil supply, the eu has undertaken projects with different stakeholders (bp, 2022). norway, azerbaijan, and algeria already provide energy supply to the eu through pipelines. however, in february 2022, following russia's invasion of ukraine, an embargo was imposed on russia (toraman, 2022). this situation once again emphasized the importance of energy security for the eu. the role of the ots in the energy supply security of the eu is of great significance. ots plays an essential role as an active supplier of gas from azerbaijan, an alternative source of energy supply with turkmenistan's gas and kazakhstan's oil, and as a crucial stakeholder in transporting mediterranean gas to the eu through türkiye. additionally, ots has proven to be an indispensable partner in delivering and securing the supply of kazakhstan's oil, turkmenistan's gas, and azerbaijan's oil and gas to the eu. in the context of international trade, logistics, and the eu's energy supply security, the role of the member and observer states of the ots, especially türkiye, is of great importance in europe, africa, and asia. this importance has become even more evident after the russia-ukraine conflict. in the future, the bloc in which ots will be situated and the measures it takes will have a significant impact on the global economy. states that do not want to remain dependent on china for production are likely to view türkiye as a potential country. türkiye stands out as one of the countries where competitive production can be achieved, thanks to its energy resources, proximity to markets, and suitable workforce. the other sections of the research have touched upon the ots and its general overview. subsequently, transportation corridors, which play a crucial role in global trade, have been examined. furthermore, the eu's energy supply security has been discussed. lastly, the current study has been completed with the research methodology, discussion, and conclusion sections. ii. organization of turkic states (ots) the member countries of the organization of turkic states (ots) can be listed as türkiye, kazakhstan, uzbekistan, azerbaijan, and kyrgyzstan, while the observer countries include hungary, turkmenistan, and the northern cyprus. the inception of ots is considered to be the summit of turkish speaking states in 1992 (ots, 2023). the foundation of ots was officially laid with the nakhchivan declaration signed by azerbaijan, kyrgyzstan, kazakhstan, and türkiye in 2009. in the nakhchivan declaration, the envisioned unity was defined as the 'council of cooperation of turkish speaking volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu yavuz toraman emerging markets journal page |3| countries.' the declaration aimed to strengthen regional peace, contribute jointly to security and stability, and develop the friendship between the countries through cooperation in various fields, unleashing their potential (nahçıvan agreement, 2009). subsequently, the first summit of turkish speaking countries cooperation council was held in almaty between the dates of october 20th and 21st. following 2011, these summits have been held regularly every year (ots, 2023). the cooperation areas of ots are as follows (ots, 2023):  political cooperation  economic cooperation  customs cooperation  transport cooperation  tourism cooperation  education cooperation  information and media cooperation  youth and sports cooperation  diaspora cooperation  cooperation in information and communication technologies (ict)  energy cooperation  health cooperation  migration cooperation  agricultural cooperation  cooperation on justice  cooperation on humanitarian issues and development  cooperation in the field of human resources  cooperation among muslim religious institutions  cooperation with international organizations the geographic area, population, and economic data for the year 2022 of the ots are provided in figure 1. despite being rich in underground resources, production activities have not developed to the desired level within ots. figure 1. ots’nin puplic and economics statistics source: turkic economics outlook (2023) table 1: macroeconomic indicators (januarymarch 2023) * million dolar, ** 2020-2021. source: turkic economics outlook (2023) kazakhstan is a country rich in underground resources, constituting 1/5 of the gdp and accounting for 57% of the country's income (kaiser and pulsipher, 2007). when looking at the revenues generated, industrial production income is higher compared to agriculture. in 2020, the growth in agriculture was 5,6%, while the growth in the industry was 1,6%. on the other hand, there was a decline of-5,6% in the service sector (yüce and keleş, 2022). the decline in the service sector could be attributed to the covid-19 pandemic. additionally, having exports exceeding imports indicates a trade surplus (darke et al., 2022). due to the russia-ukraine conflict, kazakhstan's exports of petroleum products through the caspian pipeline consortium (cpc) via russia may face disruptions. therefore, to achieve sustainable growth, kazakhstan needs to increase the share of industrial products in its production activities. krgyzstan is a small state in terms of population and land area in central asia. it is also a country poor in underground resources. therefore, it needs to shift its production towards more industrial-intensive products. however, limited capital hinders its growth. in the future, with the initiation of ots's economic cooperation efforts, krgyzstan is expected to enhance the efficiency of its production activities (denizci and marangoz, 2019). uzbekistan is one of the rare landlocked countries in central asia. it has recently been exporting its significant underground resource, natural gas, to neighboring countries. additionally, uzbekistan is an important cotton producer. in this context, the uzbekistan government aims to increase its revenues by taking strategic measures in cotton production (demirci, 2022). as a founding member of ots, türkiye holds the largest share in terms of economy and population. due to its geographical proximity to the eu, türkiye has developed strong trade relations with european countries (kramer, 2019). despite being poor in underground resources, türkiye has experienced positive developments in recent years. however, its largest import item is energy (toraman, 2022). therefore, diversifying energy suppliers is crucial for energy supply security. türkiye has the advantage of its geographical location (töngür et al., 2020). it has access to energy supplies from various neighboring countries. türkiye also has more production capabilities compared to other union states. however, the rise in energy prices has led to a loss of its competitive position in international markets (turkic economics outlook, 2023). turkmenistan, hungary, and northern cyprus make up the observer countries of ots. turkmenistan is a country rich in underground resources with a coastline volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu the roles of the organization of turkic states (ots) in international trade, logistics and european union’s (eu) energy supply security page |4| emerging markets journal on the caspian sea. there is limited data available on turkmenistan, with only a growth rate of 6,2% reported (turkic economics outlook, 2023). natural gas reserves constitute a significant portion of the country's income. after the russia-ukraine conflict, the focus has been on turkmenistan's ability to export natural gas to europe via the tanap and tap pipelines (raimondi, 2019). hungary is a central european country that is a member of nato, oecd, and the eu. hungary is considered among the rising economies according to imf reports (naimoğlu et al., 2022). when examining hungary's export and import figures, it does not have a trade deficit. in this regard, hungary has the potential for sustainable growth. northern cyprus is an island country located in the mediterranean. although it ranks last in terms of economic size among ots member countries, it holds critical importance due to its geographical location. northern cyprus is of geopolitical and geostrategic significance, making it an important partner within ots (turkic economics outlook, 2023). when considering ots countries individually, their economic sizes are relatively limited. however, when viewed as a whole, ots maintains its significant role in transportation corridors, international trade, and regional economy. furthermore, the importance of the transit transportation corridor between asia and europe, as well as energy supply security, has become evident after the russia-ukraine crisis. the agreement signed between türkiye and libya for the transfer of mediterranean gas to the eu by ots members has become a highly crucial matter (toraman, 2022). these recent significant events demonstrate that ots is an influential force both regionally and globally. international trade (transport) corridors commercial activities have been conducted from the past to the present. when societies cannot meet their wants and needs with their own resources and capabilities, they engage in commercial activities with different countries to fulfill those gaps. however, the most crucial aspect of completing this process is the transportation and logistics infrastructure of the countries (qadir and dosmagambet, 2020). in this context, countries have participated in developing both their own transportation networks and regional and global infrastructure improvement activities. among these, the ones that are particularly important within the scope of the current topic are turkic economics outlook (2023).  one belt one road (obor), belt and road initiative (bri)  transport corridor europe-caucasus-asia (traceca)  pan-european corridor  trans-eouropean transport network (ten-t)  north-south transport corridor  zengezur corridor  central asia regional economic cooperation (carec) transport corridor  middle corridor  crossroads of peace  india-middle east-europe economic corridor (imec)  india-iran-türkiye-europe economic corridor (iitec)  development road (bae-iraq-türkiyeeurope) the effective transportation corridors in the regions where ots is influential are shown in figure 2. one belt one road (obor) can be described as the most current version of the silk road. obor is an integrated transportation corridor comprising road, sea, rail, and pipeline networks (yılmaz, 2020). obor plays a significant role in facilitating the flow of goods to europe and ensuring china's raw material and energy supply security. it is implemented in three different stages: the northern and central corridors primarily use land and railways, while the southern corridor is more focused on sea routes. additionally, obor could potentially enhance china's economic and financial influence in central asia and make countries dependent on china in terms of production. researchers view obor as china's effort to become a hegemonic power not only in asia but worldwide (napang et al., 2019). therefore, countries in the region may need to collaborate with different unions and organizations in their production and trade activities (chaziza, 2021). in this context, the founding and observer countries of ots in central asia could provide an alternative to china's monopolization. when the integration provided through cooperation in the areas covered by articles 1, 2, 3, 4, and 9 of ots is completed, it will create a new alternative in production as they possess underground energy resources and are situated at the intersection of transportation corridors. traceca is a project aimed at developing transportation networks supported by europe. the project's inception can be traced back to the brussels conference in 1993. initially, the project involved the european union (eu), central asian states (uzbekistan, tajikistan, kyrgyzstan, kazakhstan, and turkmenistan), and caucasian countries (georgia, azerbaijan, and armenia). later, ukraine, moldova, bulgaria, romania, türkiye, and iran also became part of the project (kaw, 2019). traceca serves as both a project developed by the eu to reduce its dependency on russia and a means to shorten travel time and facilitate freight transportation through railways, sea routes, and highways, thereby contributing to economic cooperation among member countries (ibrahimov, 2016). important stakeholders of traceca consist of ots members. therefore, traceca and other transportation corridors need to have close collaboration with ots members. especially after the russia-ukraine conflict, disruptions in the black sea and northern regions might potentially lead to eubound traceca routes being redirected through türkiye. the pan-european corridor and transeuropean transport network (ten-t) projects involve the integration of transportation networks of the eu and neighboring countries (czech, 2021). while the paneuropean project mainly focuses on the eu's internal transportation network, ten-t encompasses transportation connections between the eu and neighboring countries. these projects are essential for completing the transportation integration of eu countries and countries in different regions to facilitate the economic and trade activities of the eu (bezpalov et al., 2022). one of the alternative connections between the eu volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu yavuz toraman emerging markets journal page |5| and asia is through türkiye. especially, after the russiaukraine conflict, disruptions in the black sea and northern routes have increased the importance of türkiye and ots in the eu's connectivity options. figure 2. transport corridors source: turkic economics outlook (2023) the north-south transport corridor (instc) is a transportation network that extends in the north-south direction with a total length of 7,200 km. its main route starts from india and extends through iran and azerbaijan towards russia (sharma, 2021). instc aims to reduce transportation and shipping costs and shorten the transit time between india and russia (sahakyan, 2020). besides providing india with road access to the region, the project plays a crucial role in achieving commercial and economic integration in the region. with the instc project, india's reach will extend up to russia and eastern europe, diversifying the supply process and potentially offering an alternative supplier to china (khan, 2021). azerbaijan's active role in this project further demonstrates the significance of ots's geographical position. the zengezur corridor was established to establish a connection between azerbaijan and the nakhchivan autonomous republic following the azerbaijan-armenia war (aghayev, 2023). the corridor serves as an alternative to the existing railway, road, and pipeline routes between azerbaijan, georgia, and türkiye (gawliczek & iskandarov, 2023). particularly after the russia-ukraine conflict, as the eu seeks alternative routes, the active utilization of the zengezur corridor, as an alternative to türkiye’s central corridor, becomes highly important (valiyev, 2023). türkiye’s role as an indispensable partner in the formation and use of transportation corridors between central asia and europe is once again highlighted through the zengezur corridor. moreover, the zengezur corridor is vital for the integration of transportation, logistics, commercial, and economic activities within ots (toraman, 2022). the central asia regional economic cooperation (carec) transport corridor was established in 2001 to enhance regional cooperation, trade activities, and foster economic growth in the region. integration and development of transportation networks are crucial for the development of regional trade (kalyuzhnova and holzhacker, 2021). this project, which improves the connectivity among the countries in the region, will facilitate the development of regional trade and increase the competitiveness of the region. however, when examining the data, it is observed that carec has positively influenced the region's trade with countries outside the region, rather than boosting the intra-regional economy. additionally, china's trade with distant countries has increased more than with carec countries (kim et al., 2022). the middle corridor is a transportation corridor that extends from türkiye to the asian continent. it passes through türkiye, georgia, and azerbaijan, reaching central asian countries (chaziza, 2021). the middle corridor provides uninterrupted transportation through railway connections from türkiye to china. türkiye, located at the intersection of the east and west, is considered a bridge for global transportation corridors. with its role in connecting asia and europe, the middle corridor holds a significant position among global transportation corridors (çolakoğlu, 2019). in the future, the middle corridor will continue to develop not only through railway connections but also with road and pipeline projects. in this context, it can be said that türkiye, along with ots, is at the center of global trade and economic activities. crossroads of peace is a transportation corridor project. this project ensures the connection of armenia and neighboring countries in the east-west and north-south axes. at the international silk road conference, the crossroads of peace project was presented by nikol pashinyan on october 26, 2023. the crossroads of peace project plans to activate railway and highways at the kayan and sotk points with azerbaijan, at the meghri point with iran, at the angeghakot and yeraskh points with nakhchivan, and finally at the akhurik and margara points with türkiye. additionally, railway construction is planned between agarak and nrnadzor, known as the zangezur corridor. crossroads of peace includes roads, railways, airways, pipelines, cables, and power lines. the india-middle east-europe economic corridor (imec), announced by india at the g20 summit held in india (siddiqa, 2023), is a corridor that starts from india and extends to europe via the united arab emirates, saudi arabia, israel, and greece. the feasibility of the corridor has become controversial due to the unrest in israel. the turmoil in the gulf has affected ship passages through the red sea. therefore, it has brought the evaluation of alternative routes to the agenda. here, türkiye is an indispensable partner for transportation corridors due to its location. finally, the development road will create an alternative route for the imec project, which is likely to be postponed due to the turmoil in israel. india-iran-türkiye-europe economic corridor (iitec), is the one that starts from india and extends to europe via iran, nakhchivan, and türkiye. iitec is of an alternative nature to imec. the incident that started in israel have deeply affected the gulf (toraman, 2023). this situation has prompted the determination of alternative routes for trade ships passing through the red sea. commercial ships have redirected their routes to the cape town, resulting in extended transportation times. furthermore, this situation causes problems in the integration of israel, which is on the route of imec, into the project. due to the problems occurring in the red sea and the gulf, the most suitable route between india and europe is once again compelled to pass through türkiye. the iitec project is only a proposal and is not being worked on by governments. the development road (bae-iraq-türkiye) is the route planned to pass through iraq between bae and türkiye. this road is planned to consist of a highway and a railway (tccb, 2024). the development road is an alternative route for europe, basra to türkiye. towards volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu the roles of the organization of turkic states (ots) in international trade, logistics and european union’s (eu) energy supply security page |6| emerging markets journal the end of 2023 and into 2024, with the disruption of maritime trade through the red sea and the suez canal, alternatives are being considered. additionally, due to the conflict between russia and ukraine, the northern part of the silk road cannot be used. therefore, imec, middle corridor and iitec are among the most important alternatives for crossings to europe. generally, it can be said that türkiye is an indispensable partner of global trade routes. eu's energy supply security with the industrial revolution, the process of mass production began. furthermore, as the population increased and people's desires and needs grew, producers continued their activities by increasing their capacity (yoo & 2006). factories and businesses sought to be close to energy, which is a fundamental input in production, to ensure the sustainability of their operations (hrayshat, 2007). policymakers have also taken significant steps to address the energy needs of their citizens and businesses at a strategic level. countries implement various methods to meet their energy needs based on their underground resources, geographical location, production capabilities, and capacities (fthenakis & kim 2009). these methods include (dincer 2011); • thermal power plants (energy is generated using fossil fuels such as coal, natural gas, or oil) • nuclear power plants (energy is typically produced using radioactive elements like uranium or plutonium) • hydroelectric power plants (energy is converted from water power using dams) • wind turbines (energy is converted from wind power using wind turbines) • solar panels (energy is generated using sunlight) • geothermal energy (energy is produced using underground hot water sources) • biomass energy (energy is produced by processing waste materials) • tidal energy (energy generated from tidal movements in the sea) with the increase in population, the quantity of production has also risen. however, this increase in production has led to environmental pollution. in this context, ensuring energy supply and the use of renewable energy sources have become crucial for meeting daily human needs, as well as for economic development and sustainable growth through the production of businesses (gökgöz and güvercin, 2018). energy security refers to the uninterrupted and affordable availability of energy resources (iea, 2023). energy security also encompasses the sustainable procurement of energy alongside its continuous provision (connolly et al., 2016). energy supply and sustainable energy procurement are critical issues for many countries. in the context of this research, the energy security of the european union (eu) has been considered. according to the energy union's announcement in 2015, the eu's energy policy is based on three main pillars, which are illustrated in figure 3. figure 3. eu energy policy source: energy union (2015) the european council initiated the energy union's first steps in 2015. this union aims to bring together all elements of energy policies and provide an integrated, sustainable, and consistent approach. within this context, it prioritizes energy efficiency (energy efficiency first). the energy union is built on three main pillars and five sub-dimensions of the eu's energy policy. in figure 3, the key factors emphasized by the eu are listed as competitiveness, sustainability, and security of supply (energy union, 2015). figure 4. eu energy policy and supportive dimensions source: energy union (2015) the 5 sub-dimensions supporting the eu's fundamental energy policies are energy security, the internal energy market, energy efficiency, decarbonization of the economy, and research, innovation, and competitiveness (energy union, 2015). energy efficiency is at the core of these dimensions, and it is present throughout all 5 sub-dimensions. particularly, research and innovation play a crucial role in future energy efficiency and diversification. in this context, the european union has placed significant emphasis on renewable energy investments to address energy security, energy supply security, and environmental concerns. •competitiveness •sustainability •security of supply volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu yavuz toraman emerging markets journal page |7| however, despite widespread ideas about shifting energy supply to renewable sources instead of traditional methods in the future, there are still many uncertainties in this regard (mišík, 2022). especially after 2020, there has been a surge in energy prices, and this trend continued post2021 due to factors such as the pandemic, production, and consumption (bp, 2022). this situation has sparked debates on energy security. some experts argue that the investments in renewable energy sources have not yielded the expected gains, while others advocate that investing more in renewable energy can overcome the challenges posed by the price increase (connolly et al., 2016). in light of the rising energy prices, the eu was compelled to take measures. in this context, the european council announced its support for small businesses and citizens in the autumn of 2021 (european council, 2021). the increase in energy prices and the war between russia and ukraine in 2022 have brought different challenges to the eu's energy supply security. post-war, the energy supply security issues for the eu have deepened. initially, the eu applied economic sanctions to russian oligarchs, but later the sanctions began to affect the entire russian federation (mcwilliams et al., 2022). in this context, the eu aims to enhance both energy efficiency and diversify energy supply sources to ensure energy supply security. to achieve this, the eu has signed various agreements to increase the volume of liquefied natural gas (lng) and natural gas imports through existing pipelines (mišík, 2022). before suggesting that the ots could be a solution partner for the eu's energy supply security, it is necessary to examine some statistics. when analyzing bp's "statistical review of world energy" report for 2022, the eu's energy needs can be clearly seen, with a specific focus on natural gas. according to bp's data, the eu's annual natural gas consumption is 341 billion cubic meters (bcm). out of this total consumption, 232.8 bcm is delivered through pipelines, while 108.2 bcm is imported as lng. russia supplies 167 bcm of the eu's total natural gas consumption (bp, 2022). after the recent 10th eu-us energy council meeting held in brussels, the statements made provide important information regarding the eu's energy supply security. particularly, the 13th statement reads as follows: "the council recognized the importance of energy relations and notably the role of gas and renewable energy supplies to the eu from and through regions such as the south caucasus, black sea, eastern mediterranean, and north africa. the pivotal role of reliable energy partners in these regions calls for mutually beneficial cooperation on security of energy supplies as well as enhanced cooperation on critical infrastructure." is as follows. it clearly demonstrates the eu's desire to collaborate with different allies that could serve as alternatives to russian oil and natural gas (europa, 2023). the role of the ots in the energy supply security of the eu has been initially examined through the transfer process of energy resources in the mediterranean to the eu, specifically focusing on türkiye and the northern cyprus. subsequently, the transfer process of kazakhstan oil and turkmenistan gas to the eu has been examined in the context of the anatolian natural gas pipeline (tanap), trans adriatic pipeline (tap), and baku-tbilisi-ceyhan (btc) oil pipeline. the agreement for the transfer of gas from the mediterranean to the eu through the eastmed (eastern mediterranean pipeline) project was signed in 2020 between israel, south cyprus, and greece. the eastmed project was expected to play an important role in the eu's energy supply security (apodaca and greensfelder, 2019). however, the project became controversial after the exclusive economic zone (eez) agreement was signed between türkiye and libya in 2019 (yayci, 2011). according to this agreement, each country was designated as the sole dominant authority in its respective maritime areas. following the eez agreement, the united states changed its views on the feasibility and sustainability of the eastmed project and withdrew its support (jpost, 2022). nevertheless, this did not diminish the significance of gas in the mediterranean for the eu's energy supply security. the important role of mediterranean gas in the eu's energy supply security can be reinforced through the involvement of different actors and may be realized in the future. figure 5. potential routes mediterranean natural gas to europe source: tsakiris (2018) after the realization that the eastmed pipeline project was not feasible, the transfer of gas from the mediterranean to the eu through different projects became a subject of research. for instance, in 2022, a study proposed the tr-med pipeline. the tr-med project aims to connect the natural gas in the mediterranean basin to the tanap and tap projects, enabling the transfer of gas to the eu (toraman, 2022). in this context, it is evident that türkiye and northern cyprus will play a significant role in projects like tr-med, making ots an important stakeholder in the eu's energy supply security. on the other hand, cpc is known as one of the significant energy supply lines for the eu. cpc is a pipeline that allows kazakhstan's oil to be sent to the eu through russia (lee and kalyuzhnova, 2021). kazakhstan holds about 3,3% of the world's oil reserves and 1.7% of the world's natural gas reserves. a large portion of kazakhstan's oil is exported to the global market through cpc. approximately 60% of kazakhstan's total export revenue comes from oil exports, highlighting the importance of oil in its economy (kaiser and pulsipher, 2007). while cpc has actively served to meet a portion of the eu's energy demand until recently, it has faced some disruptions, leading kazakhstan to explore alternative means for its oil exports (cesd, 2022). as shown in figure 4, btc is one of the significant alternatives for kazakhstan's oil exports. btc is a pipeline established in 2006 for the transportation of azerbaijan's oil and is currently in use (mikail et al., 2020). volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu the roles of the organization of turkic states (ots) in international trade, logistics and european union’s (eu) energy supply security page |8| emerging markets journal figure 6. planned new route of kazakhstan's oil soruce: trt world (2023), dw (2023) in an interview with experts, it was revealed that after the united states (u.s.) imposed an embargo on iran, kazakh oil was transported through btc. in fact, between 2018 and 2021, the transportation of kazakh oil through btc tripled (trt world, 2023). it is important to note that the transportation of kazakh oil through btc was not a novel project, it had been considered before. this further emphasizes the role of ots in the transportation of kazakh oil to the eu. another resource-rich country within ots is turkmenistan. it is known to have total reserves of 50 trillion cubic meters (tcm) of natural gas, with an annual production of 75 bcm. currently, turkmenistan's gas is exported to russia and iran. however, for the european union's energy supply security and diversification of energy sources, the transfer of turkmenistan's gas to the eu via türkiye is of significant importance (raimondi, 2019). figure 7. potential routes of the trans-caspian gas pipeline soruce: iene (2023) finally, azerbaijan is one of the significant energy partners of the eu through the tanap, tap, and btc projects. with 7 billion tons of oil and 2,6 tcm of natural gas reserves, azerbaijan contributes to the eu's energy supply as a country with natural energy resources (veliyev, 2022). especially after the russia-ukraine conflict, the eu aimed to diversify its energy supply sources to ensure energy security. in this context, the eu made efforts to increase shipments of natural gas imports, primarily from azerbaijan, norway, and qatar. however, due to the limited production capacity of these countries to fully replace the energy received from russia, a partial capacity increase was agreed upon (bbc, 2022; reuters, 2022). azerbaijan plays a dual role in the world energy market. tt is both a transit country for natural gas and oil through the caspian sea and an exporter with its own natural resources. another research conducted on the eu's energy supply security also presents iran and iraq's natural gas as alternatives alongside ots. however, the conclusion of the research highlights türkiye as the most crucial country in the eu's energy supply. an energy agreement without türkiye is considered unsustainable, mainly due to its geographical location. despite being resource-poor in terms of energy, türkiye’s strategic geographical position makes it an indispensable partner for the eu's energy supply security (jafarzadeh et al., 2021). on the other hand, potential issues related to new pipeline projects for turkmenistan's natural gas and kazakhstan's oil exports through the caspian sea, arising from undefined legal reasons, should not be disregarded. additionally, considering the overall picture, other countries in the region such as iran, iraq, israel, libya, lebanon, and egypt may also play significant roles in the energy supply. however, these countries would need to cooperate with türkiye during the process of exporting natural gas or oil to the eu due to türkiye’s strategic geographical position. implementing an energy pipeline project without türkiye’s involvement would not be feasible. moreover, importing energy from ots member countries is considered more reliable than from other regional countries. in this context, türkiye, as one of the founding members of ots, has been confirmed to be highly important for the eu's energy supply security. iii. research methodology in the current research, a qualitative research method was utilized (yıldırım & şimşek, 1999). the qualitative method is employed to understand complex and independent interactions in a subject matter and to conduct in-depth analysis (dicicco‐bloom & crabtree, 2006; toraman et al., 2023). this method is based on explanatory analytical foundations, which means that the data used in the research is generally obtained from visual, written, and oral secondary sources and explained based on various theories (patton, 2005). in this study, the qualitative method was used to conduct a thorough examination of ots's role in global trade, transportation corridors, and the eu's energy supply security. discussions were carried out to better comprehend the subject matter and to explore the role of ots in the identified topics. various secondary sources such as databases, scientific journals, books, national and international news, etc. were utilized in this study. iv. discussion and conclusion the economic, political, and commercial activities developed by ancient civilizations have continued to the present day. currently, the silk road (obor), which provides transportation and logistics between china and europe, was also used as a trade corridor during the ancient roman era. the geographical explorations and the industrial revolution have diversified transportation corridors and modernized logistics activities with the intensive use of technology. over time, strategic collaborations between countries have led to the establishment of international and regional trade corridors, promoting increased global economic activity. some of the well-known examples of volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu yavuz toraman emerging markets journal page |9| current collaborations include obor, pan-european corridor, ten-t, traceca, and others. on the other hand, conflicts of interest between countries have resulted in changes in the routes of transportation corridors. examples of this can be seen in projects like tanap, btc, and the unrealized eastmed project. furthermore, in the aftermath of the recent russia-ukraine war, countries are investing in transportation infrastructure and developing projects on alternative routes to enhance their trade activities. in this context, the eu is actively seeking alternative energy sources to reduce its dependency on russia for energy supply security. the transfer of kazakhstan's oil and turkmenistan's gas via türkiye is of significant importance in this regard. on the other hand, the eastmed project has become unfeasible due to the eez agreement between türkiye and libya. as a result, discussions have been taking place at the level of the presidents of türkiye and israel regarding the transfer of natural gas from the mediterranean basin via türkiye. additionally, the sustainability of the northern corridor of the obor project is being questioned due to the embargo imposed on russia. in both the north-south and east-west transportation corridors, türkiye, as a member of the ots, holds a crucial position. after the karabakh war between azerbaijan and armenia, the zangezur corridor established between azerbaijan and nakhchivan also serves as an alternative to the transportation corridors created between azerbaijan, georgia, and türkiye. the zangezur corridor can be considered a crucial transportation link in both the middle corridor and the obor integration. geographically, it is a significant intersection point for the members and observers of the ots. the iitec and crossroads of peace projects once again demonstrate that türkiye is at the intersection of international transportation corridors. this situation indicates that türkiye is an indispensable power. although the ots's size in the global economy is limited, its advantage in geographical location and rich energy resources indicates that it will be among the important unions in the future. while the russia-ukraine war continues, the ots plays an important role in diversifying global trade corridors to ensure the eu's energy supply security. in the future, different turkic elements from various regions may be encouraged to join the ots as observer members. this integration would enhance the ots's impact on the global economy. additionally, türkiye’s efforts on the digital turkish lira (dtl) could accelerate economic and trade integration within the ots through the use of dtl or related tokens (toraman, 2019). ultimately, it is evident that the ots is an indispensable partner in global trade, economic, and logistical activities, and it has the potential to increase its effectiveness in collaboration with international organizations in the future. references aghayev, m. (2023). new opportunities and challenges for transportation corridors in the south caucasus in the light of the russian-ukrainian war. available at ssrn 4482389. aghayev, murad (2023). new opportunities and challenges for transportation corridors in the south caucasus in the light of the russianukrainian war, available at ssrn: https://ssrn.com/abstract=4482389 aoyama, r. (2016). one belt, one road: china's new global strategy. journal of contemporary east asia studies, vol. 5, no. 2, pp. 3-22. apodaca, a. j., & greensfelder, j. (2019). pipeline or pipe dream: the potential of peace pipelines as a solution to fragmentation and energy insecurity in the european union. in claremont-uc undergraduate research conference on the european union, vol. 2019, no. 1, pp.1. bbc, (2022). https://www.bbc.com/turkce/haberlerdunya-60263131 access date: 24.06.2023 bezpalov, v., gukasyan, g., & okhrimenko, i. (2022). economic corridors in the context of the development of macroregions. innovative infrastructure solutions, vol. 7, no.4, pp. 275. bp, (2022). https://www.bp.com/content/dam/bp/businessit es/en/global/corporate/pdfs/energyeconomics/statistical-review/bp-stats-review2022-full-report.pdf, access date: 08.06.2023 cesd, (2022). assessment of the role of caspian basin in reducing of eu's oil dependence in the light of russian ukraine war. access date:14.05.2023 chaziza, m. (2021). china’s new silk road strategy and the turkish middle corridor vision. asian journal of middle eastern and islamic studies, vol. 15, no. 1, pp. 34-50. connolly, d., lund, h., & mathiesen, b. v. (2016). smart energy europe: the technical and economic impact of one potential 100% renewable energy scenario for the european union. renewable and sustainable energy reviews, vol. 60, pp. 1634-1653. czech, m. (2021). pan – european transport corridors in the policy of the european union. scientific journal of silesian university of technology. series transport, vol. 112, no.51-62. çolakoğlu, s. (2019). china’s belt and road initiative and türkiye’s middle corridor: a question of compatibility. middle east institute, vol. 29. darke, w., karatayev, m., & lisiakiewicz, r. (2022). sustainable energy security for central asia: exploring the role of china and the united nations. energy reports, vol.8, pp. 1074110750. demirci, o. (2022). özbekistan’ın dönüşüm sürecinde makro ekonomik ve finansal gelişmeler, uluslararası ekonomi siyaset i̇nsan ve toplum bilimleri dergisi, pp. 1-15. volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu the roles of the organization of turkic states (ots) in international trade, logistics and european union’s (eu) energy supply security page |10| emerging markets journal denizci, g. & marangoz, m. (2019). avrasya ekonomik birliği ve avrasya ekonomik birliği üyesi ülkeler ile türkiye’nin dış ticaretinin karşılaştırmalı analizi, avrasya uluslararası araştırmalar dergisi, vol. 7, no.16, pp. 414431. dicicco‐bloom, b., & crabtree, b. f. (2006). the qualitative research interview. medical education, vol. 40, no.4, pp. 314-321. dincer, f. (2011). the analysis on photovoltaic electricity generation status, potential and policies of the leading countries in solar energy. renewable and sustainable energy reviews, vol. 15, no. 1, pp. 713-720. dw, (2023). https://www.dw.com/en/russia-targets-eucutting-off-kazakhstans-oil-exports/a62408644, access date: 19.06.2023 energy union, (2015). https://www.eceee.org/policyareas/energy-union/, access date: 08.06.2023 europa, (2023). https://ec.europa.eu/commission/presscorner/de tail/en/statement_23_2121, access date: 08.07.2023 european council, (2021). https://www.consilium.europa.eu/media/52622/ 20211022-euco-conclusions-en.pdf, access date: 09.05.2023 foo, n., lean, h. h., & salim, r. (2020). the impact of china’s one belt one road initiative on international trade in the asean region. the north american journal of economics and finance, vol. 54, pp. 101089. fthenakis, v., & kim, h. c. (2009). land use and electricity generation: a life-cycle analysis. renewable and sustainable energy reviews, vol. 13, no. (6-7), pp.1465-1474. gawliczek, p., & iskandarov, k. (2023). the zangezur corridor as part of the global transport route (against the backdrop of power games in the south caucasus region). security and defence quarterly, pp. 41. gökgöz, f., & güvercin, m. t. (2018). energy security and renewable energy efficiency in eu. renewable and sustainable energy reviews, vol. 96, pp. 226-239. hrayshat, e. s. (2007). analysis of renewable energy situation in jordan. renewable and sustainable energy reviews, vol. 11, no. 8, pp. 1873-1887. ibrahimov, r. (2016). the development of the transport sector in azerbaijan: the implementation and challenges. human development, vol. 5, no. 1, pp. 45. iea, (2023). https://www.iea.org/about/energy-security access date: 09.04.2023 iene, (2023). https://www.iene.eu/is-the-trans-caspiangas-pipeline-really-important-for-europep4022.html, access date: 19.06.2023 jafarzadeh, a., shakeri, a., ghasemi, a., & javan, a. (2021). possibility of potential coalitions in gas exports from the southern corridor to europe: a cooperative game theory framework. opec energy review, vol. 45, no. 2, pp. 217-239. jpost, (2022). https://www.jpost.com/middle-east/article694617 access date: 15.04.2023. kaiser, m. j., & pulsipher, a. g. (2007). a review of the oil and gas sector in kazakhstan. energy policy, vol. 35, no.2, pp. 1300-1314. kalyuzhnova, y., & holzhacker, h. (2021). enhancing connectivity and trade between central asia regional economic cooperation countries and the world: benefits, risks and policy implication (no. 1271). adbi working paper series. kaw, m. a. (2019). theorizing eu-traceca relationship in eurasian context. strategic analysis, vol. 43, no. 5, pp. 418-434. khan, s. (2021). instc (international north south transport corridor) connecting eurasia and india. euras journal of social sciences, vol. 1, no. 1, pp. 53-76. kim, k., mariano, p., & abesamis, j. (2022). trade impact of reducing time and costs at borders in the central asia regional economic cooperation region. emerging markets finance and trade, vol. 58 no. 9, pp. 2602-2619. kramer, h. (2019). türkiye and the european union: a multi-dimensional relationship with hazy perspectives. in türkiye between east and west (pp. 203-232). routledge press. krugman, p. (1994). rethinking international trade. mit press. lee, j., & kalyuzhnova, y. (2021). trans-caspian transport corridor infrastructure: oil and gas pipelines. unlocking transport connectivity in the trans-caspian corridor, vol. 43, pp.1. mcwilliams, b., sgaravatti, g., tagliapietra, s., & zachmann, g. (2022). preparing for the first winter without russian gas. bruegel blog, pp. 28. mikail, e. h., çora, h., & çora, a. n. (2020). azerbaijan’s energy resources and btc (bakü tbilisi ceyhan is the name given to the pipeline project being built for crude oil transfer) project. open journal of political science, vol. 10, no.02, pp. 163. volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu yavuz toraman emerging markets journal page |11| mišík, m. (2022). the eu needs to improve its external energy security. energy policy, 165, 112930. nahçıvan agreement, (2009). https://turkicstates.org/assets/pdf/temel_belgele r/nahcivan_anlasmasi_turkce_20140417_193 951.pdf, access date: 12.06.2023. naimoğlu, m., sahabi, a. m., & özbek, s. (2022). macaristan ekonomisinde enerji verimliliğini etkileyen faktörlerin fourier adl eşbütünleşme yaklaşımıyla belirlenmesi. sosyoekonomi, vol. 30, no. 53, pp. 487-507. napang, m., nurhasanah, s., & rohman, s. (2019). one belt one road (obor) and the increase of china's global influence. people: international journal of social sciences, vol. 5, no. 2, pp. 53-69. ots, (2023). https://www.turkicstates.org/tr, access date:14.05.2023. patton, m. q. (2005). qualitative research. encyclopedia of statistics in behavioral science. willey & sons. qadir, s., & dosmagambet, y. (2020). carec energy corridor: opportunities, challenges, and impact of regional energy trade integration on carbon emissions and energy access. energy policy, vol. 147, pp. 111427. raimondi, p. p. (2019). central asia oil and gas industrythe external powers’ energy interests in kazakhstan, turkmenistan and uzbekistan. fondazione eni enrico mattei working papers, pp.1265. republic of türkiye ministry of trade, (2020). azerbaycan ülke profili, https://www.perpalife.com/pdf/azerbaycanulke-profili-2020.pdf, access date: 10.05.2023. reuters, (2022). https://www.reuters.com/business/energy/azerb aijan-set-boost-gas-supply-europe-this-yeardouble-capacity-future-2022-02-23/ access date: 09.05.2023. sahakyan, m. d. (2020). rebuilding interconnections: russia, india and the international north-south transport corridor. asiaglobal online. seyidoğlu, h., (2003). uluslararası i̇ktisat teori, politika ve uygulama, 15. baskı, güzem can yayınları, (20). sharma, n. (2021). energy security of india: role of international north-south transport corridor. electronic journal of social and strategic studies, vol. 2, pp. 51-58. siddiqa, a. (2023). corridor politics imec vs. bri: another geopolitical faceoff in us-china rivalry. journal of pakistan-china studies (jpcs), 4(1), 1-22. tccb, (2024). https://www.tccb.gov.tr/en/news/542/144355/we-will-turn-the-development-road-projectinto-the-new-silk-road-of-our-region-, access date: 10.12.2023. toraman, y. (2019). e-para ve tokenler (dijital türk akçesi) ile borçlanma: dijital türk lirası (dtl) üzerine bir çalışma. bilge uluslararası sosyal araştırmalar dergisi, 5(2), 124-134. toraman, y. (2022). türkiye’s role in silk road routes: energy supply security of european union after ukraine–russian war. journal of management marketing and logistics, vol. 9, no.1, pp. 16-26. toraman, y. (2023). https://www.7deniz.net/uluslararasiticarette-ulasim-koridoru-mucadelesi, access date: 27.12.2023. toraman, y., & öz, t. (2023). the use of new technologies in logistics: drone (uav) use in last mile delivery. sosyoekonomi, 31(58), 105-124. toraman, y., merdivenci, f., & tekin, m. (2023). türkiye’de afet lojistiğinde tekrar kullanılabilir yardım malzemelerinin geri kazanım faaliyetleri üzerine bir araştırma: tersine lojistik süreçlerinin kizilay özelinde i̇ncelenmesi. afet ve risk dergisi, 6(2), 391-400. töngür, ü., türkcan, k., & ekmen-özçelik, s. (2020). logistics performance and export variety: evidence from türkiye. central bank review, vol. 20, no. 3, pp. 143-154. trt world, (2023). https://www.trtworld.com/magazine/caneurope-receive-kazakh-oil-through-the-bakutbilisi-ceyhan-pipeline-59779, access date: 10.06.2023. turkic economics outlook, (2023). https://ereforms.gov.az/files/te_review/pdf/en/c 7bfab137abc64a6561424bf41a2d618.pdf, access date: 12.06.2023. üzümcü, a., & akdeniz, s. (2014). yeni ipek yolu: traceca ve bakü-tiflis-kars demiryolu projesi. avrasya etüdleri, vol. 45, no. 1, pp. 11-39. valiyev, j. (2023). the role of the existing middle corridor and the planned zahngazur corridor in the economy of azerbaijan. scientific collection, interconf, vol. 144, pp. 34-42. volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.301 | http://emaj.pitt.edu the roles of the organization of turkic states (ots) in international trade, logistics and european union’s (eu) energy supply security page |12| emerging markets journal veliyev c., (2022). kaynak ve transit ülke olarak küresel enerji güvenliğine azerbaycan’ın katkısı, https://www.ayu.edu.tr//static/kitaplar/kuresel_ enerji_raporu_.pdf, access date: 12.06.2023. yang, b., swe, t., chen, y., zeng, c., shu, h., li, x., ... & sun, l. (2021). energy cooperation between myanmar and china under one belt one road: current state, challenges and perspectives. energy, vol. 215, pp. 119130. yayci, c. (2011). doğu akdeniz’de deniz yetki alanlarının sınırlandırılmasında libya’nın rolü ve etkisi. güvenlik stratejileri dergisi, vol. 7, no. 14, pp. 17-41. yıldırım, a., & simsek, h. (1999). sosyal bilimlerde nitel araştırma yöntemleri (11 baski: 1999-2018). yılmaz, s. (2020). bir kuşak bir yol projesinin azerbaycan, kazakistan ve türkiye’ye etkisi. opus international journal of society researches, vol. 16, no. 32, pp. 5274-5301. yoo, s. h., & kim, y. (2006). electricity generation and economic growth in indonesia. energy, vol. 31, no. 14, pp. 2890-2899. yüce, m., & keleş, d. (2022). kazakistan ekonomik yapısı ve türkiye i̇le ekonomik i̇lişkileri, journal of turkish world academic perspective, vol. 2, no.3, pp. 1-32. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu factors influencing the choice of sophisticated management accounting practices exploratory evidence from an emerging market nikhil chandra shil east west university, bangladesh | e-mail: nikhil@ewubd.edu mahfuzul hoque university of dhaka, bangladesh | e-mail: mahoque@du.ac.bd mahmuda akter university of dhaka, bangladesh | e-mail: mahmuda.akter.du@gmail.com abstract this study attempts to explore the factors that may lead to the choice behind sophisticated management accounting practices (smap) in an emerging economy, bangladesh. a semi-structured questionnaire has been developed to capture the market data and different descriptive and inferential statistical tools have been used to test relevant hypotheses. the findings of the study are helpful for the management accounting practitioners, academics, and researchers to understand the current state of management accounting practices in an emerging market. in addition, the study brings an extension to existing literature by exploring potential causal relationship between sophistication in applying management accounting tools and satisfaction of management accounting practitioners. this study confirms that there is a missing link between practitioners’ satisfaction and smap. it gives a signal to the market that the critical decision-making process is not supported by tactical exercises and market lacks professionalism greatly which may act as an obstacle to develop a competitive business environment. keywords: accounting, management accounting practices, emerging market, exploratory research, sophistication new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu | mailto:nikhil@ewubd.edu mailto:mahoque@du.ac.bd mailto:mahmuda.akter.du@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu factors influencing the choice of sophisticated management accounting practices exploratory evidence from an emerging market page |2| emerging markets journal factors influencing the choice of sophisticated management accounting practices exploratory evidence from an emerging market nikhil chandra shil mahfuzul hoque mahmuda akter i. introduction from its very inception, management accounting, as an offspring of accounting, is serving the decision-making needs of internal management. on its way, management accounting has changed every now and then as a response to changing requirements of the decision makers and thus management accounting practices do not take a particular shape. management accounting practices combine a variety of methods, specially considered for manufacturing businesses to support the organization’s infrastructure and management accounting processes (ittner and larcker, 2002). companies in recent days work in a very highly competitive business environment driven by mostly unknown challenges and changes. deregulation by encouraging private investments through privatization, borderless competition through highly decentralized corporate structure, shortening product life cycle due to rapid change in customers’ tastes and requirements, serious dependency on cost effective information and production technologies, and impact of disruptive technology like data analytics, business analytics, blockchain, artificial and business intelligence, robotics, machine learning etc. have triggered firms from behind to implement sophisticated management accounting systems which may accommodate any level of difficulties with the provision of generating accurate data at desired level. due to this revision in perception which resembles to practices, the job profile of management accountants doesn’t follow traditional bean counter model (rieg, 2018), rather replaced with business partner model, by taking a more active role in the decision making processes of organizations (jørgensen and messner, 2010). research works published in leading business journals give the testimony of innovations and applications of sophisticated management accounting tools supporting this revised role of management accountants. there was a significant downturn in research and eventual diffusion of management accounting practices after 1925 (kaplan, 1984). johnson and kaplan (1987) held management accounting practitioners and researchers responsible for their unknown reluctance in bringing sophisticated tools in the field of management accounting. these criticisms acted as strong motivator which is reflected in the development of innovative tools in the field of management accounting across a range of industries within next few decades. from late 80s, different sophisticated tools have been developed in the field and highly diffused which gives management accounting practitioners a revised role from simple cost focus to forward-looking perspective (fullerton and mcwatters, 2002; haldma and laats, 2002). by the time, international federation of accountants ifac (1998) comes with a discussion on explaining the evolution of management accounting in a framework with four stages. initial focus of management accountants was limited to cost determination whereby the role of management accountants was simply clerical and gradually the focus moves to the creation of values for the customers which leaves the ultimate goal of management accounting as strategic. ittner and larcker (2001), very rightly supported this by arguing that “companies increasingly are integrating various [innovative] practices using a comprehensive ‘value-based management’ ….framework”. innovations and subsequent diffusion of innovative tools in practice requires supportive environment characterized by some sweetener. to explore motivating factors behind the choice of sophisticated tools surrounding management accounting practices, the researchers should be guided by contingency approach (langfield-smith, 1997; chenhall, 2003). this approach assumes that there is no universally accepted modality of practices and every action depends on some internal and external contingent factors. this study has taken a positivistic approach in exploring the factors that may affect the choice of smap in an emerging economy, bangladesh. the researchers are motivated to carry out such research from the postulate of ittner and larker (2002) which is “it is difficult to imagine how research in an applied discipline such as management accounting could evolve without the benefit of detailed examination of actual practice”. to explore the benefit of actual practice of management accounting, this study targets to address the issue of satisfaction of management accountants, level of sophistication achieved in management accounting practices, and possible influence of practitioners’ satisfaction on sophistication. the exploration is done based on a semi-structured questionnaire designed in likert’s scale. practicing management accountants are the targeted respondents in this study. this study puts particular focus on the identification of different contingent factors affecting the choice of management accounting tolls leading to achieve sophistication and also searches for any relationship between the sophistication of management accounting practices with the level of satisfaction of management accountants. management accountants’ contribution in establishing smap targeting to achieve broader corporate goals should not be undermined. thus, the research on identifying the relationship becomes a policy issue in management accounting research. this is surely a value addition to the current state of knowledge. an earnest effort is deployed here to develop management accounting as a separate field in an emerging economy which is gradually becoming an industry led economy. practicing management accounting embedding it with financial accounting which volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu nikhil chandra shil, mahfuzul hoque, mahmuda akter emerging markets journal | p a g e 3 is considered as mainstream in many countries may not give the country a competitive edge. based on the study, the researchers are convinced that the practicing field becomes matured enough to accommodate innovative tools developed so far and management accountants’ satisfaction is very important to achieve sophistication. ii. literature review and hypothesis development the term sophistication is referred as the application of advanced tools used to produce accurate information for internal management of corporate affairs. a handful number of researches have narrowly focused in studying the level of sophistication achieved by firms using activity based costing (abc) as a proxy to sophistication. a study (bjornenak, 1997) on the adoption status of abc used cost structure, product diversity, existing costing system and competition as prime variables where 30 companies were classified as abc adopters and another 23 companies were classified into non-adopter category. another study (booth and giacobbe, 1998) done on 207 australian manufacturing firms identified size, cost structure, competition, and product diversity that influence the decision of adopting abc. in a separate study done on 204 irish manufacturing firms, clarke et al. (1999) classified the respondents into those implementing abc (11.76%), assessing abc (20.59%), rejected abc (12.75%) and having not considered abc (54.90%) which concludes that more than 50% of the firms have never considered abc. malmi (1999) conducted separate surveys for different industries covering a total of 490 organizations and the study resulted an adoption rate of 21% where 104 companies out of 490 had been classified as abc adopters. the study examined few potential organizational determinants of abc adoption, namely, size, competition faced, product diversity, cost structure, production type, and strategy. using logistic regression, gosselin (1997) has conducted another study based on responses collected from 161 manufacturing companies from canada to examine the effect of organizational structure and strategic posture on the adoption of activity management approaches. using data collected from five research sites in australia, abernathy et al. (2001) had conducted a study which is different from others. rather than classifying the cost systems as traditional or abc, they tried to classify cost systems with reference to level of sophistication. however, this study targets to explore the causal relationship between level of sophistication achieved by firms in bangladesh and different factors driving the firms to achieve sophistication. the following factors have been identified to study their influence on the choice of smap.: a) cost composition b) competition c) product diversity d) size e) use of information technology f) decision-making usefulness g) maturity h) satisfaction cost composition one of the important reasons of moving towards sophisticated system is to ensure accuracy in product costing in firms where cost composition is critical, means overhead cost as a percentage of total cost of production is significant. both the traditional and sophisticated product costing systems assign direct costs to costs object through directly tracing the cost with cost objects. however, simplistic costing system fails to assign indirect costs to cost objects accurately generating different level of distortion in product costing. one of the prime objectives of sophistication in product costing is to translate indirect costs into direct conceptually so that the assignment of indirect costs to ultimate cost object becomes meaningful. johnson and kaplan (1987) rightly mentioned that the modification in costing systems is caused by the dramatic change in cost structures over several decades. in recent years, direct labor hour based unsophisticated systems fall into serious criticism for reporting distorted product cost data due to the trend of increased overhead cost as a percentage of total costs (cooper, 1988). brierley et al. (2001) also confirmed a potential change in cost structure based on surveys conducted in firms from europe and united states of america (usa). they concluded that direct material cost is comparatively higher than indirect costs; however, direct labor cost comprises a very small fraction of total costs. the choice of sophisticated system is necessarily guided by the composition in cost structure. the significance of overhead costs in the overall cost structure is an important parameter behind the selection of sophisticated methods for allocating indirect costs to cost objects (brierley et al., 2001). as traditional systems are responsible for distorting product cost through wrongly allocating indirect costs to cost objects, cooper and kaplan (1992) have suggested using abc systems by organizations with high indirect costs. organizations with low indirect cost composition, however, they have supported using traditional unsophisticated systems. thus, the literature supports to implement sophisticated systems to ensure accuracy in product costing for those firms showing significant percentage of indirect costs in total cost structure. based on the above literature, it is confirmed that the design of sophisticated costing system depends on the significance of indirect costs in respective cost structures of firms. based on the discussion above, the following hypothesis has been formed for investigation: h1: there is a positive and significant relationship between the percentage of indirect costs and the level of the sophistication of the costing system. competition competition is the most important external factor for stimulating managers to begin to work on a new cost system (bruns, 1987). companies operating in competitive environments should be encouraged to change their control systems, because proper costing systems and appropriate performance monitoring are fundamental to survival (libby and waterhouse, 1996). market competition generates turbulence, stress, risk, and uncertainty for enterprises, so that they continuously volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu factors influencing the choice of sophisticated management accounting practices exploratory evidence from an emerging market page |4| emerging markets journal adjust their control system in response to the threats and opportunities in the competitive environment (mia and clarke, 1999). the choice of employing relatively sophisticated cost and management accounting systems is caused by the intensity of competition faced by companies in a particular market environment. mia and clarke (1999) tested the relationship between the intensity of market competition and the use of information by managers. they concluded that the increase in the intensity of competition in the market is associated with the increased managerial use of management accounting information. libby and waterhouse (1996) also found a positive relationship between intensity of competition and the design and use of management accounting systems. similarly, al-omiri and drury (2007) found a positive association between the intensity of competition and the sophistication level of the cost system. researchers have also argued that firms operating in a more competitive environment are under the pressure of assigning costs accurately to products, services and customers than others operating in a less competitive environment. this pressure leads them to install more sophisticated cost systems. otherwise, there is a high chance that competitors will take advantages of any errors made in decision making which is caused by inaccurate cost information generated through traditional systems. in line with the discussion above, this study has made the following hypothesis for investigation: h2: there is a positive and significant relationship between competition and the level of the sophistication of the costing system. product diversity product diversity covers different variations in the offerings by a firm which may include support, process and volume diversity. support diversity captures the pattern of services that each product receives from different service rendering units in organizations. process diversity identifies all the required processes relating to design, manufacture and distribution of products with a particular focus of understanding the pattern of resources consumed by different processes. volume diversity arises from the manufacturing variations caused by differences in production in terms of volumes and batches. a sophisticated costing system is demanded seriously to neutralize the impact of all these diversities on costing. researchers, based on studies, have argued that one of the important factors for reporting distorted product costs by traditional costing systems is product diversity (cooper, 1988 and estrin et al., 1994). this product diversity becomes a serious concern when the resources consumed by different products vary significantly. to address these wide variations in resource consumption by different products, the application of more sophisticated costing systems is warranted. in absence of sophisticated costing systems, significantly distorted product costs are likely to be reported due to the inability of simplistic costing systems to adjust the resource consumption pattern by different cost objects. it is commonly accepted and understood that the type of costing system used and the underlying production process are somehow related (malmi, 1999). the choice of costing system should logically be guided by the complexity of the production process. the more complex production process demands sophisticated costing system to capacitate the system for handling extra difficulty. product diversity, sometimes, gives proxy to the prevalence of complexity of production process. as the products are getting more complex in terms of production process, they require more activities to manufacture them. as a result, it demands sophisticated cost accounting systems to measure the resource consumption of different products differently. the foregoing discussion concludes that sophisticated system is important when firms have greater product diversity and thus, the following hypothesis is hereby formed for investigation: h3: there is a positive and significant relationship between product diversity and the level of the sophistication of the costing system. size organizational size, measured in sales, assets or number of employees, have found positively related with the initiative of adopting sophisticated management accounting systems. research has shown that larger firms have more smap as compared with smaller firms. in india, organizational size was found to be an important factor in adopting advanced management accounting practices (joshi, 2001). in the uk, al-omiri and drury (2007) also found a positive relationship between the organization’s size and the level of cost system sophistication. study done by albu and albu (2012) also revealed that size is one of the most important factors for the adoption and use of management accounting techniques. size is an important organizational context variable and it can affect the way in which organizations design and use management systems. the size of firm has been shown to affect the design and scope of management accounting practices (abdel-kader and luther, 2008; albu and albu, 2012). abdel-kader and luther (2008) found that large enterprises in the uk food and drink industry adopted more smap than small ones. behind the choice of more smap by larger firms, a possible reason may be that the larger organizations have greater resources to afford adopting sophisticated systems as compared to their smaller counterparts (haldma and laats, 2002; al-omiri and drury, 2007; and abdelkader and luther, 2008). to confirm a similar relationship, this study also assumes that size is an important factor behind the choice of sophisticated system and formed the following hypothesis for investigation: h4: there is a positive and significant relationship between size and the level of the sophistication of the costing system. use of information technology management accounting system should be compatible with providing critical information at the demand of the decision makers. this information is mostly intuitive in nature and very much situational which is not known previously. this information is very volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu nikhil chandra shil, mahfuzul hoque, mahmuda akter emerging markets journal | p a g e 5 costly due to the decision-making usefulness which will provide competitive edge in the market. thus, information technology used in processing information should be highly integrative, real-time and should allow query based solution. in this era of 4th industrial revolution, technological innovation has changed the language of business data analysis. management accounting systems have undergone significant changes due to the use of blockchain, machine learning, data analytics, business intelligence and other advanced technologies. based on a field study covering management accounting and control systems in south africa, the researchers found that one of the main motivators of change in management accounting and control systems is changes in technology, in particular information systems (waweru et al., 2004). szychta (2002) also agreed that technology is one of driving forces behind the shift in use of management accounting practices in poland. sophisticated system demands such information technology which is intelligent enough to respond to the needs of the decision maker instantly. dependence on information technology in a simplistic system environment is not that much critical. even a simplistic system cannot provide required information real time rather defers it with reference to some future time period. this is due to low investment on information technology, skilled manpower and other infrastructure. to understand the influence of information technology on the choice of sophisticated system, this study investigated the following hypothesis: h5: there is a positive and significant relationship between use of information technology and the level of the sophistication of the costing system. decision-making usefulness business decision making process is essentially being substantiated by cost and other relevant information. product costing system is the center of generating relevant cost data in most of the manufacturing firms. a wrong product costing system brings data sterility through under-costing or overcosting whereby subsidizing a group of customers for another. the scope of product costing system has been expanded considerably in recent times to generate additional information having decision making usefulness. based on relevant information, firms may take only profitable ventures and deal with unprofitable ventures differently. cost information is important to take different operational and strategic decisions like separation of profitable and unprofitable activities, decision on outsourcing and redesign, cost reduction initiatives, pattern of resource consumptions and disparity among the products, product and service mix decisions etc. in summary, a drive to achieve accuracy in product costing guarantees to provide a great deal of information to help the firms taking accurate decision making. wrong decision based on irrelevant and inaccurate data may lead not only to face the litigation but also being unfit in the marketplace to survive and grow. the discussion supports the necessity of accurate cost information for product costing and pricing decisions which necessitate sophisticated system in operation. this study, thus, takes the following hypothesis for investigation: h6: there is a positive and significant relationship between decision making usefulness and the level of the sophistication of the costing system. maturity sophisticated costing system demands different firm specific parameters which are usually related to number of years the firm is under operation. liability of newness gives us an important understanding about the likelihood of survival where younger firms runs the risk of being non-existed than their older counterparts with the meaning that age is associated with the likelihood of survival (hannan and freeman, 1989). and sophisticated costing system supplements the survival issues of firms through providing valuable information timely. ifac (1998) has developed the framework explaining the evolution of management accounting practices where the level of sophistication is defined with reference to a particular timeline. learning accrues from experiences through ages which are very much similar to the process how learning curve operates. this learning about management can be easily converted into improved management control systems (mcs) even though the company is not growing. age may be related to the emergence of management process if mcs facilitate (davila, 2005). this discussion eventually acknowledges that the maturity of firms is a very important factor to design and use sophisticated system to remain relevant and competitive. to explore this reality, the following hypothesis is formed for investigation: h7: there is a positive and significant relationship between maturity and the level of the sophistication of the costing system. satisfaction the study will enrich the scope of management accounting research by bringing management accountants’ satisfaction in explaining sophistication of management accounting practices. current literature is limited to the study of level of sophistication with the identification of contextual factors explaining the level of sophistication without considering any impact of practitioners’ satisfaction on it. the study plans to investigate the potential existence of a relationship between management accountants’ satisfaction and the level of sophistication in management accounting practices. the establishment of this relationship is perceived to be important for the empowerment of management accountants and diffusion of sophisticated management accounting techniques through continuous change and innovations. the following hypothesis is taken for investigation: h8: there is a positive and significant relationship between management accountants’ satisfaction and the level of the sophistication of the costing system. iii. research methodology this study applied quantitative research methodology predominantly where main research instrument was a semi-structured questionnaire. based on volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu factors influencing the choice of sophisticated management accounting practices exploratory evidence from an emerging market page |6| emerging markets journal literature review and research objectives, a draft questionnaire was developed. using snow-ball sampling method, the draft questionnaire was pre-tested where a total of 27 respondents participated until the saturation point was reached. then the draft questionnaire was finalized with little modification to draft questionnaire based on the result of pre-testing and the questionnaire was finalized before commissioning the final study. to bring more objectivity in research methodology, a sample frame is thought of the manufacturing companies where professional management accountants are working. this is done through the scrutiny of membership directory of the institute of cost and management accountants of bangladesh (icmab) for the year 2017. such scrutiny results 200 companies where the members of icmab were working. the study doesn’t consider any service industry and companies operating outside dhaka, the capital city of bangladesh. out of the 200 companies, management accountants from 47 companies expressed their reluctance to participate in the survey. other 153 companies are considered as the sample for the study. however, questionnaires are not received from 28 companies though they have been given remainder in time and 12 of the received questionnaires are rejected due to the missing data. finally, a total of 113 questionnaires are used for data analysis based on which the research draws major conclusions. constructs this study uses different constructs to test relevant hypothesis. these constructs are given below with definitions and related scales: table 1: constructs used in the study constructs definitions scales cost composition overhead cost as a percentage of total cost of production ratio competition composite scale considering price, product and marketing competition 7-point likert product diversity considers physical size, complexity and batch size of production 5-point likert size number of employees ratio use of information technology composite scale covering the use of it across 4 areas 7-point likert decision-making usefulness composite scale covering the usefulness of decision making in 4 areas 7-point likert maturity in terms of age ratio satisfaction covering the dimensions of satisfaction 7-point likert sophistication using multicriteria decision making (mcdm) techniques across four variables ratio source: authors’ own compilation volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu nikhil chandra shil, mahfuzul hoque, mahmuda akter emerging markets journal | p a g e 7 conceptual framework considering the major theme of the study, constructs considered and relationship studied, a conceptual framework of the study is presented below: figure 1: conceptual framework of the study source: authors’ own compilation measurements in this study cost composition covers the significance of indirect costs as compared with total costs in percentage for the respondents’ firm. to understand competition faced by the responding firm, three questions were asked covering product, pricing and marketing areas. respondents were asked to choose values in a 7point likert scale where 1 refers to ‘extremely disagree’ and 7 refers to ‘strongly agree’. in empirical studies, the perceived intensity of competition has been measured differently in different studies. several studies have been based on khandwalla’s (1977) model (libby and waterhouse, 1996; williams and seaman, 2001; hoque, 2008) which consists of five questions rating intensive competition for raw material, technical personnel, selling and distribution, quality and the variety of products and price. on the other hand, mia and clarke (1999) measured the intensity of competition by only one likerttype scale question but taking into account all factors, including number of major competitors, frequency of technological change in the industry, frequency of new product introduction, extent of price manipulations, package deals for customers, access to marketing channels and change in government regulation or policy. product diversity follows a composite scale covering physical size, complexity and batch size. a 5point likert scale is used to capture the feedback where 1 refers to ‘not at all’ and 5 refers to ‘to a very great extent’. size of firm is typically measured by the number of employees working for an organization or its total assets or its total sales. this study uses number of employees to measure size. to measure use of information technology and decision-making usefulness, a composite scale is designed on 7-point likert scale where 1 is used to mean ‘strongly disagree’ and 7 is used to mean ‘strongly agree’. maturity is measured in terms of the age of the company; however, different dimensions of satisfaction is measured using a 7-point likert scale anchoring 1 for ‘very dissatisfied’ and 7 for ‘very satisfied’. to measure the value of sophistication, a weighted multi-criteria method is applied. four different parameters used as criteria in measuring sophistication are pool-driver quantitative, pool-driver qualitative, education and advanced management accounting techniques adoption with their respective weights and sub-weights. the methodology results a value between 1 and 100 for every firms where a value close to 100 means sophisticated system and values close to 1 means unsophisticated system. for the application of logistic regression, the dependent variable sophistication is converted to categorical variables as follows: unsophisticated system = value between 1 and 50 sophisticated system = value between 51 and 100 statistical tools used different descriptive and inferential statistical tools (e.g., regression analysis) are used to test the hypotheses formulated in the study. a correlation between and among the variables is shown for explaining the suitability of each construct in regression analysis. a multiple regression is run to understand the relationship of each construct with the level of sophistication. to run logistic regression, level of sophistication has been made a categorical variable. finally, in a separate regression analysis, the study looks for any relationship between satisfaction and sophistication. iv. analysis and findings this section presents analysis and findings of the study in different sub-sections. initially it begins with explaining the respondents and corporate profile of the study using descriptive form of analysis. then, all the hypotheses formed in literature review section have been tested using regression analysis. findings of the analysis are presented at the end. respondents’ and corporate profile a total of 113 respondents participated in this study. these participants vary in terms of their educational background, years of experience, turnover intention, no of jobs and their position in organizational chain of command. around 41% of the respondents are professional accountants, while other 50% have master’s degree. in terms of years of experience, around 78% of the respondents have more than 5 years of experience. a good percentage of the employees seem to be happy with their job which is reflected in less percentage (18%) of respondents having an intension of switching the job. respondents are not so much job hopper where only few respondents (6%) have switched above 5 jobs where around 78% of the respondents hold positions in either mid level or top level management. like the number of the respondents, a total of 113 firms have participated in this study as 1 respondent has responded from each firm. questionnaire captures the profile of responding firms in terms of total number of years in operation, number of employees, annual turnover and net assets. around 20 firms out of 113 have less than 10 years of operation, and 58% of the firms having less than 1,000 of employees. in terms of volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu factors influencing the choice of sophisticated management accounting practices exploratory evidence from an emerging market page |8| emerging markets journal turnover, 68% of the firms reports more than bangladesh taka (bdt) 100 million while around 78% of responding firms have more than bdt 100 million invested in net assets. correlation coefficient to measure the strength of the relationship between the relative movements of each pair of variables, a correlation matrix is derived. it shows the relationship between alternative measures of cost system sophistication and factors affecting sophistication. use of information technology and competition are positively correlated (p<0.01) with decision making usefulness. competition is also positively correlated (p<0.01) with decision making usefulness. size is positively correlated (p<0.01) with sophistication based on 100-point scale whereas it is negatively correlated (p<0.05) with sophistication classified by two categories. on the other hand, maturity is positively correlated (p<0.05) with size. table 2: spearman correlation coefficients ** correlation is significant at the 0.01 level (2-tailed) * correlation is significant at the 0.05 level (2-tailed) source: spss output multiple regression analysis this study uses regression analysis predominantly as a tool for drawing inferences. correlation coefficients as presented above confirm the use of every construct as a separate one. to test the reliability of scales used, cronbach alpha value is calculated and for all the constructs alpha results exceeded 0.70 which confirms the reliability of scales. based on the research objectives and conceptual framework, a regression model is developed as below: y = b1 + b2costcomp + b3prodva + b4usecost + b5useinfotech + b6comp + b7size + b8age + e where: y = sophistication based on 100 point scale costcomp = cost composition prodva = product diversity usecost = decision-making usefulness useinfotech = use of information technology comp = competition size = size age = maturity in this regression model, sophistication (y) is used as a dependent variable with other seven constructs which may influence achieving sophistication in cost system design and use. as satisfaction is considered separately, this model doesn’t consider satisfaction. anova and model summary of the regression analysis explains the model fitness, significance and explanatory power of all the constructs together on the dependent variable of the model. it results a value of .345 for r which is the multiple correlation coefficient defining the correlation between the observed values of the response variable and the values predicted by the model. its square (r2) gives the proportion of the variability of the response variable accounted for by the explanatory variables. a value of .345 for r indicates a weak correlation and .119 for r2 means only 11.9% of the change in sophistication is accounted for by the explanatory variables collectively. however, the model becomes statistically significant (f (7, 105) = 2.030, p < 0.05), and so concludes that at least one of the explanatory variables is related to the level of sophistication. table 3 below extends regression analysis with the beta coefficients of each construct and multicollinearity diagnostics. we can easily predict the influence of each explanatory variable on the response variable. table 3: regression analysis coefficients source: spss output as per the coefficients presented above, only one construct (maturity) out of seven becomes statistically significant (p<0.05). the beta coefficient becomes .325 (standardized) which means it has a positive relationship with sophistication and around 32% of change in sophistication is explained by age of the firm. product diversity, use of information technology, competition and size show positively related with sophistication, however, not significant. on the other hand, cost composition and decision-making usefulness result negative relationship with sophistication which is also not significant. regression becomes impossible in case of existence of multicollinearity and thus, it is important to confirm that the independent variables are not related to volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu nikhil chandra shil, mahfuzul hoque, mahmuda akter emerging markets journal | p a g e 9 each other. regression analysis results two statistics, e.g., tolerance and vif, to report the status of multicollinearity. as per the values resulted in above table for tolerance and vif, there exists no multicollinearity which may be a concern for regression analysis. binary logistic regression to use binary logistic regression as an extension to the analysis done above, the dependent variable (level of sophistication) of the model has been made binary. as mentioned in methodology section, firms having a value up to 50 in a 100 point scale have been considered as ‘no’ means not using sophisticated system and firms having a value more than 50 have been considered as ‘yes’ means using sophisticated system. the model like multiple regression model tests the influence of all the seven constructs on achieving the level of sophistication of firms. as per the result of the test, the value of chi-square becomes 10.022 on 7 df which is not significant. it gives an indication that the variables added to the model don’t impact the dependant variable significantly. other results of logistic regression analysis are presented below: table 4: logistic regression analysis b s.e. wald sig. exp(b) cost composition .000 .019 .001 .975 .999 product diversity .162 .201 .651 .420 1.176 decision-making usefulness -.196 .303 .419 .517 .822 use of information technology .195 .259 .564 .453 1.215 competition -.106 .238 .199 .656 .899 size .000 .000 .174 .677 1.000 maturity .038 .014 7.234 .007 1.038 constant -1.829 1.263 2.098 .148 .161 chi-square 10.022 cox & snell r square .085 nagelkerke r square .127 -2 log likelihood 114.245 source: spss output the predictability of the model is very poor which is reflected in larger value of -2 log likelihood statistics. cox & snell r square and nagelkerke r square measure the proportion of variance explained by the predictor variables which vary from 8.5% to 12.7% as given in table 9 above. an interesting issue is that the construct ‘maturity’ becomes statistically significant like before. cost composition and size result zero betas showing no influence of sophistication whereas decisionmaking usefulness and competition result a negative relationship with the level of sophistication. using the values of logistic regression analysis, the logit model could be written as: logit (p) = ) 1 ln( p p  = -1.829 + .000(costcomp) + .162(prodva) .196(usecost) + .195(useinfotech) .106 (comp) + .000(size) + .038(age) this model could be used to find out the probability of being sophisticated system by a firm with respective values for all the constructs in the model. a firm with 50% manufacturing overhead costs, degree of product diversity 2, level of use of cost data 5.75, level of use of information technology 6, level of competition 4, number of employees 300 and years in operation 21, the probability can be computed by using the equation as below: logit (p) = -1.829 + .000(50%) + .162(2) .196(5.75) + .195(6) .106 (4) + .000(300) + .038(21) = -1.088 exp-1.088 = 0.33688 let us transform it to obtain the probability as 088.1 088.1 exp1 exp    = 0.25199 one of the important uses of logit value is the computation of odds ratio where odds are computed from two respondents to get a comparative status between, say, two competing firms. for example, let us consider the steps as used above to calculate the odds for a firm with different values for each construct as given in following equation: logit (p) = -1.829 + .000(10%) + .162(3) .196(5.75) + .195(6) .106 (4.333) + .000(18000) + .038(17) = -1.1313 exp-1.1313 = 0.32261 let us transform it to obtain the probability as 1313.1 1313.1 exp1 exp    = 0.2439 thus, the odd ratio will be odd1/odd2, i.e. 0.25199/0.2439 = 103.32. it means the first firm enjoys 103.32 times higher probability of attaining sophistication as compared with the second firm. satisfaction and sophistication based on the conceptual model, a separate regression analysis is done to explore any relationship between satisfaction and sophistication. the model becomes statistically insignificant and the values for r and r2 result .139 and .019 respectively with a very low explanatory power. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu factors influencing the choice of sophisticated management accounting practices exploratory evidence from an emerging market page |10| emerging markets journal table 5: regression results (sophistication and satisfaction) source: spss output none of the beta coefficients becomes statistically significant when three different dimensions of satisfaction are looked into separately, however, the beta coefficients result positive values. this result provides an indication that practitioners’ level of satisfaction doesn’t influence sophistication of firms in terms of adoption of different management accounting practices. v. conclusions attainment of smap by firms is driven by different contingent factors. management accounting practices follow contingency framework as it is not mandated by law and the practices are not standardized like financial accounting. this study, based on the literature review, has identified eight contingent variables with the expectation that these variables may collectively drive the sophistication initiative of manufacturing firms. the analysis comes out with a very worrying picture that mostly all the factors except ‘maturity’ carry no significance in explaining the level of sophistication achieved by the firms. this finding is very important for understanding the business environment in bangladesh. the demand for management accounting information is not that much critical to management and thus, they may not be that much serious with the sophisticated management accounting tools. rather, accounting system is mainly designed based on the mandatory needs of the market and management accounting is embedded within traditional financial accounting and reporting system. the significance of years in operation (age) parameter gives a new dimension to the study of sophistication in a country like bangladesh which is struggling with a mass of first generation firms. as these firms are growing older, they are trying to perform professionally. this may be a good reason why years in operation influence the level of sophistication. other factors which theoretically demand sophisticated management accounting systems have been proved irrelevant in bangladesh. the country still needs more maturity on some internal and external factors as considered in this study to instill sophisticated management accounting systems. very interestingly, practitioners’ satisfaction on the system and job has no impact on sophisticated management accounting systems which demonstrates the application of a peculiar isomorphism theory. the contextualization of isomorphism theory (dimaggio and powell, 1983) in management accounting practice is essentially been shaped by coercive, mimetic, or normative pressures. institutions in a geography, location, sector or industry become more like one another because innovations are broadly diffused (dimaggio and powell, 1983). this study believes that mimetic isomorphism is active in bangladesh in the field of management accounting practices. firms usually follow others while choosing particular management accounting tools and matured firms having enough resources are in a position to afford implementing sophisticated management accounting techniques. however, for the massive diffusion of sophisticated management accounting techniques, coercive and normative isomorphisms are important. for coercive isomorphism, firms operating in a certain area should involve themselves into severe completion which leads them to implement sophisticated techniques to guide them in taking critical decision. at the same time, to encourage normative isomorphism, the role of professional accounting bodies, other regulators, researchers and academics must play strong role which seems to be nonexisted in emerging economy like bangladesh. references abdel-kader, m. and luther, r. (2008), ‘the impact of firm characteristics on management accounting practices: a uk-based empirical analysis’, the british accounting review, vol. 40, no. 1, 2-27. abernethy, m. a., lillis, a. m., brownell, p. and carter, p. (2001), ‘product diversity and costing design: field study evidence’, management accounting research, vol. 12, no. 3, 261-280. albu, n. and albu, c. n. (2012), ‘factors associated with the adoption and use of management accounting techniques in developing countries: the case of romania’, journal of international management & accounting, vol. 23, no. 3, 245276. al-omiri, m. and drury, c. (2007), ‘a survey of factors influencing the choice of product costing systems in uk organizations’, management accounting research, vol. 18, no. 4, 399-424. bjornenak, t. (1997), ‘diffusion and accounting: the case of abc in norway’, management accounting research, vol. 8, no. 1, 3-17. booth, p. and giacobbe, f. (1998), ‘predicting the adoption of activity-based costing in australian manufacturing firms’ paper presented at the 21st annual congress of the european accounting association, antwerp, belgium. april. brierley, j. a., cowton, c. j. and drury, c. (2001), ‘research into product costing practice: a european perspective’, the european accounting review, vol. 10, no. 2, 215-256. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu nikhil chandra shil, mahfuzul hoque, mahmuda akter emerging markets journal | p a g e 1 1 bruns, w. j. jr. (1987), “a field study of an attempt to change and embedded cost accounting system”, bruns, w. j. jr. and kaplan, r. s. (eds.), accounting and management: field study perspectives, harvard business school press, 97118. chenhall, r. h. (2003), ‘management control systems design within its organizational context: findings from contingency-based research and direction for the future’, accounting, organizations and society, vol. 28, no. 2-3, 127168. clarke, p. j., thorley hill, n. and stevens, k. (1999), ‘activity-based costing in ireland: barriers to, and opportunities for change’, critical perspectives in accounting, vol. 10, no. 4, 443468. cooper, r. and kaplan, r. s. (1992), ‘activity-based systems: measuring the costs of resource usage’, accounting horizon, vol. 6, no. 3, 1-13. cooper r. (1988), ‘the rise of activity-based costing part two: when do i need an activitybased cost system?’ journal of cost management, fall, 41-48. davila, t. (2005), ‘an exploratory study on the emergence of management control systems: formalizing human resources in small growing firms’, accounting, organizations and society, vol. 30, no. 1, 223-48. dimaggio, p. j. and powell, w. w. (1983), ‘the iron cage revisited: institutional isomorphism and collective rationality in organizational fields’, american sociological review, vol. 48, no. 2, 147–160. drury, c. and tayles, m. (2005), ‘explicating the design of overhead absorption procedures in uk organizations’, british accounting review, vol. 37, no. 1, 47-84. estrin, t. l., kantor, j. and albers, d. (1994), ‘is abc suitable for your company?’ management accounting, vol. 75, no. 10, 40-45. fullerton, r. r. and mcwatters, c. s. (2002), ‘the role of performance measures and incentive systems in relations to the degree of jit implementation’, accounting, organizations and society, vol. 27, no. 8, 711-735. gosselin, m. (1997), ‘the effect of strategy and organizational structure on the adoption and implementation of activity-based costing’, accounting, organizations and society, vol. 22, no. 2, 105-122. haldma, t. and lääts, k. (2002), ‘contingencies influencing the management accounting practices of estonian manufacturing companies’, management accounting research, vol. 13, no. 2, 379-400. hannan, m. t. and freeman, j. (1989), organizational ecology, harvard university press, cambridge, ma. hoque, z. (2008). predicting change in management accounting and control systems: additional evidence from australia (july 15, 2008). social science research network, available at https://ssrn.com/abstract=1160125 international federation of accountants (ifac) (1998), international management accounting practice statement: management accounting concepts, new york. ittner, c. d. and larcker, d. f. (2001), ‘assessing empirical research in managerial accounting: a value-based management perspective’, journal of accounting and economics, vol. 32, no. 1– 3, 349-410. ittner, c. d. and larcker, d. f. (2002), ‘empirical managerial accounting research: are we just describing management accounting practice?’ european accounting review, vol. 11, no. 4, 787 -794. johnson, h. t. and kaplan, r. s. (1987), relevance lost: the rise and fall of management accounting, harvard business school press. jørgensen, b. and messner, m. (2010), ‘accounting and strategizing: a case study from new product development’, accounting, organizations and society, vol. 35, no. 2, 184-204. joshi, p. l. (2001), ‘the international diffusion of new management accounting practices: the case of india’, journal of international accounting, auditing and taxation, vol. 10, no. 1, 85-109. kaplan, r. s. (1984), ‘the evolution of management accounting’, the accounting review, vol. 59, no. 3, 390-418. khandwalla, p. n. (1977), the design of organizations, harcourt brace jovanovich, new york, ny. langfield-smith, k. (1997), ‘management control systems and strategy: a critical review’, accounting, organization and society, vol. 22, no. 2, pp. 207-232. integration, rev. edn, boston, ma: harvard business school press. libby, t. and waterhouse, j. h. (1996), ‘predicting change in management accounting systems’, journal of management accounting research, vol. 8, no. 1, 137-150. malmi, t. (1999), ‘activity-based costing diffusion across organizations: an exploratory empirical analysis of finnish firms’, accounting, organizations and society, vol. 24, no. 8, 649672. https://www.sciencedirect.com/science/article/abs/pii/s016541010100026x#! https://www.sciencedirect.com/science/article/abs/pii/s016541010100026x#! volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.211 | http://emaj.pitt.edu factors influencing the choice of sophisticated management accounting practices exploratory evidence from an emerging market page |12| emerging markets journal mia, l. and clarke, b. (1999), ‘market competition, management accounting systems and business unit performance’, management accounting research, vol. 10, no. 2, 137-158. rieg, r. (2018), ‘tasks, interaction and role perception of management accountants: evidence from germany’, journal of management control, vol. 29, no. 2, 183–220. szychta, a. (2002), ‘the scope of application of management accounting methods in polish enterprises’, management accounting research, vol. 13, no. 4, 401-418. waweru, n. m., hoque, z. and uliana, e. (2004), ‘management accounting change in south africa case studies from retail services’, accounting, auditing & accountability journal, vol. 17, no. 5, 675-704. williams, j. j. and seaman, a. e. (2001), ‘predicting change in management accounting systems: national culture and industry effects’, accounting, organizations and society, vol. 26, no. 4-5, 443460. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu foreign capital, real sector financing and excessive leverage in turkey: what went wrong? bahadır karakoç muş alparslan university, turkey | bahadir.karakoc@hotmail.com abstract recently, large swings in inflation and exchange rates revealed that non-financial sector is heavily geared and extremely vulnerable. therefore, a study trying to identify the contributing factors is needed. separating firms into groups, based on size and stock market trading status; changes in financing patterns are investigated via panel data methodology. the study aims at fulfilling the need for analyzing the consequences of foreign capital flow at firm level and documenting its significance in addition to assessing the efficacy of contemporary monetary policy. economic conditions significantly facilitated lending process, strengthening corporate access to credit, and resulted in excessive borrowing both in the form of foreign and domestic currency. with such heavy burden of debt, non-financial sector has been facing both exchange rate and the liquidity risks. the more severely a firm was previously challenged by financing limitations, the more it borrowed once the limitations are relaxed, contributing to excessive debt burden of the economy in proportion to its previous financing challenges. keywords: financial liquidity; financing constraint; foreign capital inflow; small firm financing; excessive leverage new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.190 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.190 | http://emaj.pitt.edu bahadır karakoç emerging markets journal | p a g e |31 foreign capital, real sector financing and excessive leverage in turkey: what went wrong? bahadır karakoç i. introduction recently, drastic shifts in major macro indicators such as inflation and interest rates, ensuing exchange rate fluctuations revealed that non-financial sector has been exposed to liquidity and exchange rate related risks. from mid-2018 to end of 2018, value of united states (u.s.) dollar hit historical highs against turkish lira and economic conditions led to hundreds of firms going to court for concordat. particularly, the sensitivity toward the fluctuations in exchange rate motivates this study to investigate the effect of international capital movements on real sector’s financing. therefore, the main goal of the study is formed as to document the effect of foreign capital (fc) on real sector’s financing decisions while assessing the efficacy of contemporary monetary policy choices. the main hypothesis investigated is whether fc inflow and contemporary monetary policy have created a suitable environment for excessive borrowing. what are some risks to real sector accompanying fc? did financing challenges, an important aspect to firms financing policies, make any difference in leverage decisions? what are the major monetary policy dimensions, deployed to accommodate capital movements? has the monetary policy been effective enough to mitigate potential risks or has it simply facilitated borrowing process and allowed real sector’s debt burden to grow? answers to these questions can provide insight into real sources of weaknesses embedded in the economy, which also makes it vulnerable to foreign monetary policy shocks. they may assist with identifying the needs of non-financial sector and creating relevant policies. the findings may also contribute to developing more effective policy responses as to reap the benefits of fc while avoiding the negative consequences associated with it. present study contributes to the literature by comparatively examining leverage decision of private smes and public firms and documenting how they are affected from expansionary state of the economy. it also offers useful findings regarding the benefits and risks associated with foreign capital inflow to an emerging economy such as turkey. to the best of my knowledge, there has not been such a study focusing on the impact generated by recent fc inflow and the contemporary monetary policy decisions on real sectors financing choices in turkey, and the current study may fill the void. to achieve the stated objectives, the effect of monetary policy and fc inflow is investigated using corporate data collected by the turkish central bank (cbrt). the data set includes more than 30.000 firms in various size and ownership structure, presenting opportunity to test the hypothesis on firms with different degrees of access to external funding. firms are separated into groups in accordance with their financial strength. commonly used measures such as dividend payment (fazzari et al., 1988), or credit rating (korajczy & levy, 2003) are not available in case of private firms, hence firstly, asset size1 is used to classify firms, since size can be a valid proxy for a firm’s ability to access to external capital (petersen and rajan, 1997). the reasoning is very simple but intuitive that smaller firms are more likely to be dependent on bank credit and discriminated in loan applications because of severe agency cost (blasio, 2003). theoretical ground for the limited access of financially constrained small firms have been covered at length by bernanke et al.(1996); gertler and gilchrist (1994); kashyap et al.(1993). common theme hypothesized in those studies is that severe agency cost arising from informational asymmetry between banks and bank-dependent small firms leads to constraints in the form of higher cost of external financing, limited or complete denial of access to funds. however, their access can be enhanced or impaired by the stance of monetary policy. bernanke et al. (1996) argue that, during monetary contractions limited credit supply will be directed largely toward financially solid firms, i.e. an episode of “flight to quality” will take place. since our primary objective is to document the effect of fc and monetary policy on borrowing decision, the choice of criterion by which firms are separated seems to serve well to the goal of the study. secondly, stock listing status is used to group firms. being listed on a stock market may allow firms to gain access to less costly equity financing, which may reduce their reliance on debt financing (brav, 2009). it can also provide better access to external funding at a cheaper cost and for a longer term (abdulla et al, 2016), reducing the severity of financing challenges. our reasoning relies on the assumption that private firms tend to be more illiquid (asker et al., 2015) and in need of external funding. moreover, public firms suffer relatively less from asymmetric information, and financial constraints are less binding (brav, 2009; schenone, 2010). empirical findings from previous studies are in support of these arguments that public firms tend to have stronger access to credit lines (demiroğlu et al., 2012; farre-mensa and ljungqvist, 2016). thus, the discussion leads to a question whether public and private firms are affected 1hadlock & pierce (2010), after studying various measures, suggest that size and age are strong predictors of financing constraint. gertler & gilchrist (1994) use size to proxy for access to external funding. findings in beck et al. (2005) emphasize the importance of size and demonstrate how small firms are the ones that are most affected by legal and financial structure. bernanke et al. (1996) argue that small firms have to deal with agency cost in borrowing relations, which make them vulnerable to the changes in the state of monetary policy. thus, size can be a valid proxy for access to external funding. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.190 | http://emaj.pitt.edu foreign capital, real sector financing and excessive leverage in turkey: what went wrong? page |32| emerging markets journal differently or similarly by the recent financial conditions. the analysis produces convincing evidence that both monetary policy and fc facilitated borrowing process contributed to excessive leverage. smes appear to be highly sensitive to monetary policy and fc inflow, since the marginal effects of both variables are relatively greater. considering that previously these firms were likely to be credit constraint, they seem to have taken advantage of abundance of liquidity. patterns in aggregate data are in support of this conclusion, which is also consistent with findings in similar studies such as bougheas et al. (2006); korajczy & levy (2003). they find that, bank-dependent small firms tend to increase leverage in favorable economic conditions. leary (2009) finds similar patterns among small bank-dependent and large, less bank-dependent firms. he argues that those bank dependent small firms’ leverage rise with the credit supply and decline with contraction, whereas less bankdependent large firms may have substitute funding sources on which they can rely on in contractionary times, thus they maintain a relatively more stable capital structure. financial constraints, to a considerable degree, become irrelevant during expansionary times and seem to matter particularly in contractionary state of the economy, forcing smes to maintain capital structure highly sensitive to monetary conditions. such sensitivity fits the description provided in “flight to quality” of bernanke et al. (1996), which argues that small firms that suffer from agency cost in a borrowing relationship should reduce (increase) the economic activity in contractionary (expansionary) times. however, their theory is silent as to why small firms may engage in excessive borrowing in times of high credit supply. one likely explanation is that, they had suffered from the lack of external borrowing during early 2000s and had to put on hold viable investment opportunities till external funding is available again. now that the credit conditions are admissible, they take advantage of the situation while window of opportunity still permits. on the other hand, publicly traded and large private firms display little sensitivity; only the coefficient for lagged fc indicates positive influence on their leverage decision while monetary policy has no statistically significant effect. the results may be summarized as following: both monetary policy and fc variables positively affected borrowing decision of smes and ultimately led to excessive leverage, resulting in hundreds of firms going to the court for either concordat, or to restructure and/or postpone overdue debt payments2. on the other hand, the relation between monetary conditions and the leverage decision of financially strong firms, i.e., publicly traded and large private firms is relatively weak, possibly due to availability of alternatives as suggested in leary (2009) 2 in late 2018, the value of dollar hit all-time high against turkish lira and 979 firms went to court for concordat as announced by trade minister ruhsar pekcan on december 27, 2018. in 2019, the banks association of turkey announced a restructuring program in order to provide assistance to troubled firms and their lenders. such as stable access to external funding and internal revenue stream. in the next section, to further motivate the goal of the study, the recent trends in corporate borrowing are discussed, in section iii, monetary policy measures in times of high fc inflow are examined. in section iv, data and methodology is discussed. in section v, a brief conclusion is presented. ii. recent trends in corporate leverage in turkey figure 1 presents the debt stock of nonfinancial sector in turkey, in comparison to the average of other emerging economies3. starting from early 2000s, debt to gdp ratio has been growing almost non-stop. it goes up to 67 percent of gdp in 2016 from 30 percent in 2007, a year before the mortgage crisis. figure 1. real sector’s debt as a percent of gdp in comparison with other ems data source: imf international statistics, 2018 figure 2 presents average financial debt (bank loans and debt securities) to assets ratios of 27.872 firms, between 1996 and 2016. general trend suggests that macroeconomic shocks do affect smes more significantly than the large firms and they do maintain higher leverage, as suggested in the literature4. their debt ratios declined from 42 percent of total assets in 1997 to 18 percent at end of 2001, and rose back up to 42 percent in 2014, indicating more than 130 percent increase in percentage wise. once the turkish economy has left the bad memories of early 2000s behind, smes seemed to have been inclined to take advantage of favorable financial conditions in the second half of the last decade. while medium sized firms demonstrate a similar but relatively softer pattern, debt ratios of large private and public firms fluctuate considerably less. 3south africa, mexico, peru, romania, pakistan, argentina, kazakhstan, nicaragua, morocco, india, czech republic, indonesia, brazil, poland and russia. 4see for example bougheas et al. (2006); ang (1992); cole (2013), and goyal et al. (2011). https://www.tbb.org.tr/en/home https://www.tbb.org.tr/en/home https://www.tbb.org.tr/en/home volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.190 | http://emaj.pitt.edu bahadır karakoç emerging markets journal | p a g e |33 figure 2. non-financial firms’ financial debt ratios source: cbrt, 2018 the distinct pattern in aggregate data suggests that firms contributed to the excessive debt stock inversely proportional to their size or directly proportional to their previous financing constraints. fluctuations in early and late 2000s support this conclusion. the firms with the weakest access have the highest amount of leverage and the ones with presumably strongest access have the lowest leverage. a likely reason for the presence of such a pattern is because illiquid smes may not be able to obtain the amount of credit they need in a timely manner because of the major weaknesses in their balance sheets and have to put spending decisions on hold due to the lack of funding. once the credit conditions are improved, they borrow more to take up all positive npv projects that were previously kept aside. furthermore, sales rises fueled by the expansionary monetary regime may also encourage them to exploit the window of opportunity today, resulting in higher leverage. the findings are similar to korajczyk & levy (2003) and leary (2009) and consistent with theoretical ground established by bernanke et al. (1996) and others that financially constrained firms’ debt decisions are procyclical and that of unconstrained firms’ is countercyclical. since expansionary monetary policies are usually accompanied by lowered cost of financing, increased credit supply and rise in economic activity, it is reasonable to expect that those who have been previously denied funding would desire to take advantage of eased credit conditions, compared to those who have credit resources within their reach at all times. figure 3 shows non-financial firms’ foreign currency denominated assets and liabilities (bank loans, debt securities and trade credits), presenting the severity of exchange rate exposure. the gap between the series seems to have become particularly wider after 2010, in the midst of a period of expansionary monetary policies. as of 2018, total assets equal to only 30 percent of liabilities, which give rise to vulnerabilities to future monetary policies of advanced countries (avdjiev et al., 2012) particularly, in the events such as sudden stops and/or reverse flows as suggested in calvo (1998). a noteworthy decline in the value of domestic currency would translate into a noteworthy rise in the debt burden if the income is denominated in a currency other than the debt. figure 3. non-financial sector foreign currency position source: cbrt, 2018 from 2015 to 20185, value of u.s. dollar appreciated more than 160 percent against turkish lira. in other words, the value of debt in domestic currency almost tripled. a sudden stop in fc flow or a reverse flow, which would potentially trigger depreciation in currency value, and consequent rises in interest rates, leading to a cut in public spending, may reduce the profitability of real sector, even if the borrowed funds are channeled toward efficient investments, as experienced very recently. iii. monetary policy and capital flow common theme emphasized in existing studies is that capital flow leads to expansionary policy responses, and their combination with increased global liquidity is the major driver of credit booms (calderon & kubota, 2012; mendoza & terrones, 2012). although, the expansion in credit supply may demand contractionary polices to be confined through a rise in policy rate, it feeds the possibility of attracting more capital (blanchard et al., 2015), because the primary reason motivating borrowing from abroad is positive interest rate differential between domestic rate and the rate charged on foreign funds (ahmed & zlate, 2014; carabarin et al., 2017). as the domestic sources continue to be a more costly option, both banks and large corporations with access to international capital markets draw foreign funds into the local system. accordingly, most emes have responded fc movements with expansionary monetary policy measures, particularly reducing their interest rates (anaya et al., 2017). consistently, as fc comes in cbrt embraces an expansionary strategy and constantly lowers the rates, as shown in figure 4. starting early 2000s, policy rate follows a downward trend until 2014, at a time the fed announces first interest rate increase6. 5at the end of 2014, $1=2.3870₺ and late 2018s $1= 6,2143₺ by cbrt’s exchange rates. 6this is not to argue that the only reason for declining interest rates is fc inflow since during this period the economy has made significant progress, which is reflected in various economic indicators such as inflation, employment, etc., all of which may primarily contribute to determining policy rates. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.190 | http://emaj.pitt.edu foreign capital, real sector financing and excessive leverage in turkey: what went wrong? page |34| emerging markets journal figure 4. representative interest rates (annually) source: cbrt, 2018 another monetary action taken by central banks in emes as a response to recent capital movements was to resort to purchase of foreign currency, aiming to mitigate upward pressure on exchange rates (ahmed & zlate, 2012; reinhart & reinhart, 2009) and possibly create an insurance for future economic shocks (alberola, erce & serena, 2016; gosh et al., 2012). after bearing the cost of economic crisis of last decades, many ems have adopted monetary policies aiming to maintain certain level of exchange rate flexibility and monetary independence. sustainability of such policy required accumulation of foreign currency reserves, which leads to flexible but still managed exchange rate policy, allowing conducting relatively independent monetary policies, and leaving room for financial integration (aizenman & glick, 2009). despite favored nature of foreign currency accumulation program, empirical findings suggest that it actually encourages borrowing from abroad, the effect it has been designed to mitigate. this is best described in montiel and reinhart (1999) who sterilized that intervention7 attracts more capital by offering relatively higher return and stable exchange rates, both of which motivate each party, the lender and the borrower, giving rise to borrowing in foreign currency. validity of this point is empirically documented by alberola et al. (2017). they examine gross capital inflow to 63 countries, and find that hoarding of foreign currency reserves positively and significantly increases capital inflow. furthermore, foreign currency reserves reduce currency mismatch risk in the eyes of both international capital suppliers and em borrowers, strengthening the lending/borrowing relation between the parties (chui et al., 2016). similar conclusions have been reported by gosh et al. (2012) and magud et al. (2012). the evidence they demonstrate suggests that less flexible exchange rates, mostly sustained by foreign currency reserve accumulation, make borrowing from abroad sources attractive, building expectations about stability of the exchange rates in the future. it must have created an illusion that, every time exchange rates fluctuate too much, the central bank will step in and reset the rates by deploying foreign currency reserve, thus they will not be exposed. the information on cbrt website clarifies that, currency reserves are to be used in implementing 7it is called sterilized intervention if the central bank completely mops up the expansion in money supply as a result of foreign currency purchase and leaves the money supply unchanged after the purchase. predetermined monetary policy and exchange rate regime. accordingly, as the fc inflow gained magnitude, the cbrt, as part of monetary policy, increased the stock of foreign currency in order to restrict the rises in the value of tl, to prevent trade account balance from worsening and to prepare for future economic shocks when global liquidity fades away (aysan, fendoğlu & kılınç, 2014). the reserves are constantly increased from 2002 to 20118, in times of high fc inflow, implicitly encouraging borrowing in foreign currency. last but not least, an economic variable representative of active monetary policy is money supply (m2) and its growth rate. it indicates that, from 2001 to 2014, money supply grew at an average rate of about 30 percent annually9. it would be fairly reasonable to argue that, global liquidity has also contributed to such expansion. although on the central bank’s website price stability is stated as the main goal of monetary policy, as a response to increasing global liquidity it seems to have welcomed capital flow, accordingly taken expansionary monetary policy measures in response and conducted a relatively managed exchange rate regime. thus, low interest rates, combined with high liquidity fueled via fc inflow and domestic money supply have been the major drivers of the rise in credit supply and excessive leverage of non-financial sector. iv. data and methodology the study uses unique data set of cbrt that includes balance sheet and income statements of more than 30.000 firms. after eliminating implausible values such as negative total and tangible assets, the data left available has 151.072 observations belonging to 27.522 firms. it covers non-financial sectors, and it is collected from firms via annual surveys. firms have been split into groups based on asset size (large, medium and small). firms whose asset sizes falling into top ten percentile are classified as large,10 and the rest is divided equally as small and medium. table 1: descriptive statistics for financial debt analysis 9m2 data is available at https://fred.stlouisfed.org/search/?st=m2%20for%20turk ey 10cbrt’s own classification of firm size considers firms which have more than 500 workers as the large firm, between 250-500 medium and less than 250 small. our classification of large firms is approximately the same as that of cbrt. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.190 | http://emaj.pitt.edu bahadır karakoç emerging markets journal | p a g e |35 firm size11 is determined as the main criterion to classify firms based on the strength of their access to external funding, as explained in section i. firms are also separated based on ownership structure12, public and privates firms. table 1 presents descriptive statistics of the data used in the analysis. it includes a wide range of firms from various sectors, and descriptive statistics document that variation, which considerably contributes to the efficiency of analysis. the data set is 21 years of annual data, from 1996 to 2016, during which time turkish economy has suffered both 2001 currency crisis and 2008 mortgage crisis and hosted large volume of fc. starting from 2004, monetary authorities implemented expansionary monetary policy (mp), which is accounted via a dummy variable. the estimation period is long enough to draw reliable conclusions. periods subsequent to crisis are important, because those are the times cbrt adopted loose mp to empower the recovery. in fact, capital flow and monetary expansion have softened the credit conditions and caused the borrowing to rise. panel data study will be able to successfully capture that influence. clearly, the trends in aggregate data (in figure 2) suggest high level of dependence on prevailing economic conditions. documenting such dependence next to other firm-specific variables is an essential goal of this study, only then significance of fc may be revealed and appropriate policy measures can be taken for future episodes. with this objective in mind, the hypothesis presented in this study will be tested via unit fixed effect regression analysis constructed as following. 𝐷𝑒𝑏𝑡𝑖𝑡 = 𝛼𝑖 + 𝛽1𝑙𝑖𝑞𝑢𝑖𝑑𝑖𝑡 + 𝛽2𝑅𝑂𝐴𝑖𝑡 + 𝛽3𝑡𝑎𝑛𝑔𝑖𝑡 + 𝛽4𝐶𝐸𝑖𝑡 + 𝛽5𝑠𝑖𝑧𝑒𝑖𝑡 + 𝛽6𝑔𝑟𝑡 + 𝛽7𝑖𝑛𝑓𝑡 + 𝛽8𝑓𝑐𝑡 +𝛽9 𝐷𝑡 +ɛit where 𝐷𝑒𝑏𝑡𝑖𝑡 represents bank loans and debt securities, 𝑙𝑖𝑞𝑢𝑖𝑑𝑖𝑡 is cash plus short term investment plus accounts receivable, 𝑅𝑂𝐴𝑖𝑡 is the operating profit, 𝑡𝑎𝑛𝑔𝑖𝑡 is tangible assets, 𝐶𝐸𝑖𝑡 is common equity, all firm specific variables are scaled by total assets and size is logarithm of total assets. 𝑔𝑟𝑡 represents yearly growth in real gdp, 𝑖𝑛𝑓𝑡 stands for inflation and 𝑓𝑐𝑡 𝑖𝑠 fc minus direct corporate borrowing divided by gdp. 𝐷𝑡 is the dummy variable for mp and constructed as following. 𝐷 = 0, 𝑖𝑓 𝑡 = 1996-2004, 2008-2009 and 20152016=0; 𝐷 = 1 𝑖𝑓 𝑡 =2005-2014 dummy variable takes reporting periods into consideration. for instance the mortgage crisis took place in 2008; however its effect on balance sheets is observable in the next reporting period, in 2009. figure 2 for aggregate data supports this insight. similarly, 2005 is assumed to be the starting date of monetary expansion. expansionary policy has been disrupted after 2014 because of increases in interest rates following fluctuations in exchange rates. since the rise in capital inflow coincides with these dates, it will also 11see for example bernanke et al. (1996); gertler & gilchrist (1994); kashyap et al. (1993). 12also see abdulla et al. (2016); schenone, (2010) ;demiroğlu et al. (2012); farre-mensa & ljungqvist, (2016). serve to isolate the influence of mp and document true impact of fc on borrowing activity. real gdp growth and inflation are included to make sure that main variable of interest is not picking up their effect. fc data are obtained from cbrt international investment position data, values of direct corporate borrowings are excluded from total fc and final sum divided by gdp. thus it is composed of foreign direct investment plus foreign portfolio investment plus other investment minus direct corporate borrowings (loans and debt securities) and divided by gdp. empirical findings tables 2, 3 and 4 below present the results from firm fixed effect panel data estimations. all standard errors are robust to heteroscedasticity and autocorrelation, and p-values are in parentheses. one of the goals of the study is to examine the effect of rising fc inflow since early 2000s; therefore estimations are conducted for various periods such as 1996-2016, 19962002, and 2003-2016. table 2, left and right hand sides present the results for small and medium sized firms, respectively. the coefficients for fc in case of both groups are significant for the first and third periods and insignificant for 1996-2003, pointing to the positive effect of fc on borrowing at the time of its rising when considering full period, both fc and mp are positively and significantly related to borrowing decision, in other words they contribute to borrowing process of financially challenged smes. the estimation for 2003-2016 repeated 3 times to include one year lagged fc and in the second estimation fc is excluded to isolate the effect of mp. it shows that both present and one year lagged fc is significantly and positively influencing leverage decision of smes. the estimation without fc yields negligible differences in marginal effect of mp. previous studies, mentioned above, offer an explanation that eased borrowing process may be achieved via rising credit supply fueled with fc and supported by expansionary domestic mp. assessing the findings in tables 2 together with aggregate patterns in borrowing (in figure 2) suggests that, previous financing constraints may also be motivating excess borrowing. once the access is restored in period of 2004-2014 smes, following a severe downturn in the economy, on average, increase their debt ratio more than the rest. due to smes’ weak financial position, they are vulnerable to monetary cycle. hence once the access is restored in period of 2004-2014 smes, following a severe downturn in the economy, they increase leverage more than the rest. comparing table 2 with table 3 and 4, it is noticeable that the immediate effect of fc on smes is significant whereas only lagged coefficient for fc is significant for large and stock listed firms, suggesting relatively higher sensitivity of smes toward monetary conditions, which is compatible with arguments in bernanke et al. (1996); gertler & gilchrist (1994); kashyap et al. (1993). evidently, advanced country monetary policies have implications at firm level, for financing decisions of non-financial sector in turkey and volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.190 | http://emaj.pitt.edu foreign capital, real sector financing and excessive leverage in turkey: what went wrong? page |36| emerging markets journal large presence of smes magnifies that influence. on the other hand, the effect of mp on large private and public firms is limited, although the coefficient is positive, but statistically insignificant. internal cash flows, trade credits and/or their current access to financing channels must allow them to operate optimally, thus their sensitivity to monetary conditions are reduced. consistent with it, similar lack of sensitivity between large private and public firms as well as fc is observable; only lagged fc seems to positively influence their leverage decision. as for the control variables, in accordance with prior studies, liquidity variable is highly significant, with differing impact based on size. debt ratios of smes are positively affected by liquidity, while larger firms are negatively affected by liquidity. a result, which may be explained by financial strength of firms, it presents an ability to repay the debt and an indication of financial solvency in case of small firms. on the other hand, negative coefficient indicates availability of internal resources and an alternative funding to finance operations for financially stronger larger firms. the more liquidity a firm has, the less need for additional debt financing may exist. unlike findings in previous studies (frank & goyal, 2009; harris & raviv, 1991; rajan & zingales, 1995), no statistically significant relationship between profitability and borrowing exists in any of the sub-groups. the only exception for public firms where the relationship is negative and significant, is where preference toward internal sources for financing over external funds is observed. on the other hand, size variable significantly and positively affects debt ratios, as documented by the above cited studies, which point to the importance of debt capacity attached to it. it is argued that, tangible assets positively affect borrowing since they are used as collateral to secure loans (frank & goyal, 2009; harris & raviv, 1991; rajan & zingales, 1995). consistent with previous studies, it is highly significant in determining debt ratios of all groups. real gdp growth and inflation variables are included both to control the effect of general economic conditions and to account for their effect on corporate borrowing decision. however, the coefficient for gdp growth is negative and in some cases highly significant (table 4, columns 3 through 8). but unfortunately it is unstable, i.e., adding or subtracting a variable causes a change in the sign of the coefficient. similar issue with inflation is present where the sign of the coefficient alters with the addition and subtraction of other variables. therefore, it may be wiser to avoid interpreting the coefficient for the both of the variables and rely on their role to account for general economic conditions in estimations. table 2: fixed effect analysis on financial debt small and medium firms table 3: fixed effect analysis on financial debtlarge firms table 4: fixed effect analysis on financial debt public and private firms robustness analysis two sets of robustness analysis are conducted. the first part involves adding potentially relevant variables to the base model. in the second part, firms are re-grouped based on net trade credit (tc) balance. the results show that, early findings are robust to adding relevant macro variables and reclassification of the firms proves to be useful, as well. to avoid repetition, please refer to section iv for variable description and methodology. in the first part, the results are in table 5. macro variables such as representative interest rate13, 13interbank borrowing rate is used in the analysis. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.190 | http://emaj.pitt.edu bahadır karakoç emerging markets journal | p a g e |37 currency growth14 and liquid liabilities to gdp ratio are added to the analysis. the significance of these variables is that, they would have a cause and effect relation with fc, and it is necessary to ensure that the effect observed between borrowing and fc is not due to them. international finance research has documented that changes in exchange rates, interest rates and monetary expansion are the immediate results accompanying capital inflow. therefore, mentioned variables are included to validate the intuition established earlier. particularly, representative rate appears to be highly significant, and it reduces the marginal effect of fc in half. inflation and gdp growth change sign as the variables are added, and in some cases they become insignificant, supporting the early approach not to ascribe special meaning to their relation with firm leverage. although the magnitude of the coefficient for fc seems to be declining, it survives the test and at the end it is still highly significant and maintains its positive affect on borrowing decision. other variables; currency growth and m3 to gdp don’t seem to absorb influence of fc and either their coefficient change sign or they lose significance. therefore, it is more intuitive to focus on the behavior of fc in the presence of other macro variables than how they influence leverage because of high correlation among them and accordingly the reader is advised to be cautious in drawing any conclusion. next, the data are re-divided using net tc balance: firms with average net positive tc (received tc minus supplied tc) and firms with average net negative tc. financial aspect of tc and its importance for small firms have been documented by early studies (long, malitz & ravid., 1993; petersen & rajan, 1997). hence, net balance of tc is used to re-classify firms with the objective that financial aspect of it may offer valuable insight into the leverage decisions. the average of net tc balance over 21 years is used to separate the firms ,because year to year changes may not provide reliable information about their financial position. however, the average of 21 years is more likely to lead to conclusive results. thus, their borrowing reaction to capital flow and expansionary mp would not only contribute to better understanding of the financing patterns, but also help to improve efficiency of the analysis. the results are presented in table 6. findings in previous studies suggest that, offering more tc requires more liquidity and consequently negative tc (since they supply more tc than they receive) firms are financially stronger and might be less sensitive to general credit conditions. despite that expectation, negative tc firms appear to be more sensitive to monetary conditions. the reason is that, marginal effect of both mp and fc is greater, pointing to a possibility that these financially challenged smes finance tc supply by borrowing from conventional sources. both fc and mp are highly significant and positive for negative tc firms. on the other hand, positive tc firms demonstrate similar sensitivity toward mp. but for fc, only lagged coefficient is significant, as is the case with larger and publicly traded firms. thus, they are less sensitive to 14currency growth variable is calculated using currency basket, consists of 50 percent usd/tl plus 50 percent eur/tl exchange rate. fc’s entrance to the economy. marginal effect of mp for negative tc firms is 1.5 times greater than it is on positive tc firms. the lack of competitive edge and the goal of creating larger costumer base among smes may be encouraging them to supply more tc, which may be financed via borrowed funds. the interpretation of the findings is consistent with studies focusing on tc such as long et al., (1993); kim and choi, 2003)15. however, in order to stay within the scope of the study, this point is not further pursued. in sum both coefficients, mp and fc, indicate positive and significant effect on leverage decision of both groups. table 5: fixed effect analysis on financial debt with additional macro variables table 6: fixed effect analysis on financial debtbased on tc balance v. conclusion the data and the empirical findings reveal the importance of foreign savings by demonstrating that it contributes to financing non-financial sector. however, excess supply of credit can result in excessive leverage and the related vulnerabilities, as experienced recently. since the cbrt has no influence on foreign mp choices, it implies that as the real sector’s dependence on foreign capital for financing continues, business operations such as borrowing and investment, and naturally growth may be vulnerable to foreign country policy shocks. 15they find that small firms offer more tc to increase sales and stay competitive. long et al., (1993) argues that small firms lack the reputation, which large firms have built over time, therefore their product quality is subject to verification and requires extra tc offering. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.190 | http://emaj.pitt.edu foreign capital, real sector financing and excessive leverage in turkey: what went wrong? page |38| emerging markets journal foreign capital though seems to have benefited the real sector by providing financing. but, it can lead to a credit boom which may end with a bust. therefore, it is necessary for monetary authorities to take cautionary steps aiming at providing long term solutions to financing issues of smes; hence they are not tempted to take advantage of loose monetary conditions. most firms, borrowing in a foreign currency have little revenue denominated in the same foreign currency, which significantly increases their exposure. therefore, real sector’s leverage decision should be regulated and monitored. this is particularly true for borrowing in a foreign currency, while allowing reasonable financial flexibility to maintain a healthy growth level is a must. references abdulla, y., dang, v. a., & arif, k. (2017). stock market listing and the use of trade credit: evidence from public and private firms. journal of corporate finance, 46(3),391-410. ahmed, s. & zlate, a. (2014). capital flows to emerging economies: a brave new world? journal of international money and finance, 48(4),221-1228. aizenman, r. & glick. r. (2009). sterilization, monetary policy, and global financial integration. review of international economics, 17(4), 777–801. alberolla, e., erce,a., & serena, j. (2016). international reserves and gross capital flow dynamics. journal of international money and finance, 60,151-171. anaya, p., hachula, m., & offermanns, c. j. (2017). spillovers of u.s. unconventional monetary policy to emerging markets: the role of capital flows. journal of international money and finance, 73(1), 275–295. ang, j. (1992). on the theory of finance for privately held firms, the journal of entrepreneurial finance, 3(1). asker, j., ferra-mensa, j., & ljungqvist, a. (2015) corporate investment and stock market listing: a puzzle? the review of financial studies, 28(2),342-390. avdjiev, s., mccauley, r., & mcguire, p. (2012). rapid credit growth and international credit: challenges for asia (bis working papers no. 377). retrieved from https://www.bis.org/publ/work377.htm aysan, a. f., fendoğlu, s., & mustafa, k. (2014).macroprudential policies as buffer against volatile cross-border capital flows. (cbrt working paper no. 14/04). retrieved from http://www.tcmb.gov.tr/wps/wcm/connect/en/ tcmb+en/main+menu/publications/researc h/working+paperss/2014/14-04 bernanke, b., gertler, m., & gilchrist, s. (1996). the financial accelerator and the flight to quality. the review of economics and statistics, 78(1), 1–15. blasio, g. (2003). does trade credit substitute for bank credit? evidence from firm-level data. economic notes, 34(1), 85-112. blanchard, o., ostry, j. d., ghosh, a., & chamon, m. (2015). are capital inflows expansionary or contractionary? theory, policy implications, and some evidence, (nber working paper no. 21619) retrieved from https://www.nber.org/papers/w21619. brav, o. (2009). access to capital, capital structure and the funding of the firm. j. financ. 64, 263–308. calderon, c., & kubota, m. (2012), gross capital inflows, credit booms and crises, world bank policy research working paper no. wps6270. calvo, g. a. (1998). capital flows and capital-market crises: the simple economics of sudden stops. journal of applied economics, 1(1), 35-54. carabarin, m., garza, a., & moreno, o. (2015). global liquidity and corporate financing in mexico. banco de mexico working paper. chui, m., kuruc, e., & philip, t. (2016). a new dimension to currency mismatches in the emerging markets: nonfinancial companies (bis working paper no. 550).retrieved from https://www.bis.org/publ/work550.htm cole, r. (2013). what do we know about the capital structure of privately held us firms. financial management, 42(4), 777-813. demiroğlu, c., christopher, j., & kızılaslan, a. (2012). bank lending standards and access to lines. journal of money credit and banking, 44(6), 1063-1089. fazarri, s., m., hubbard, r. g., & petersen, b., c. (1988). financing constraints and corporate investment brookings papers on economic activity. farre-mensa, j., ljungqvist, a., (2016). do measures of financial constraints measure financial constraints? rev. financ. stud. 29, 271–308. javascript:; https://ideas.repec.org/s/bis/biswps.html https://www.bis.org/publ/work377.htm https://www.nber.org/papers/w21619 https://www.bis.org/publ/work550.htm volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.190 | http://emaj.pitt.edu bahadır karakoç emerging markets journal | p a g e |39 frank, m. & goyal, v. (2009). capital structure decisions: which factors are reliably important? financial management, 38, 1–37. gertler, m. & gilchrist, s. (1994). monetary policy, business cycles, and the behavior of small manufacturing firms. the quarterly journal of economics 109(2), 309–340. ghosh, a., kim, m., qureshi, j., & zalduendo, m. (2012). surges (imf working paper no. wp/12/22). retrieved from http://www.sciencedirect.com/science/article/pi i/s002219961300144x goyal, v., a., nova, &l., zanetti, (2011). capital market access and financing of private firms. international review of finance, 11(2). 155– 179. harris, m. & raviv, a. (1991). the theory of capital structure. journal of finance, 46(1), 297–356. hadlock, c. j. & pierce, j. r. (2010). new evidence on measuring financial constraints: moving beyond the kz index. the review of financial studies, 23(5), 1909–1940. kashyap, a., k., stein, j., & wilcox, d. w. (1993). monetary policy and credit conditions: evidence from the composition of external finance. the american economic review, 83(1), 78-98. kim, k. & choi, w., g.( 2003). trade credit and the effect of macro-financial shocks; evidence from u.s. panel data, imf working papers 03/127, international monetary fund. korajczyk, r., & levy, a. (2003). capital structure choice: macroeconomic conditions and financial constraints. journal of financial economics, 68(1), 75–109. long, m. s., malitz, i. b., & ravid, s. a. (1993). trade credit, quality guarantees, and product marketability. financial management, 22(4), 117-127. magud, n.e., reinhart, c., & vesperoni, e. r. (2012). capital inflows, exchange rate flexibility, and credit booms. review of development economics, 18(3), 415-430. mendoza, e. g. & terrones, m. e. (2012). an anatomy of credit boom and their demise (nber working paper no.18379). retrieved from https://www.nber.org/papers/w18379 montiel, p., & reinhart, c. (1999). do capital controls and macroeconomic policies influence the volume and composition of capital flows? evidence from the 1990s. journal of international money and finance, 18(4), 619– 635. petersen, m. & rajan, r. (1997). trade credit: theories and evidence. review of financial studies 10(3), 661–691. rajan, r. & zingales, l. (1995). what do we know about capital structure: some evidence from international data. journal of finance, 50(5), 1421–1460. reinhart, c. m. & reinhart, v. (2009), capital flow bonanzas: an encompassing view of the past and present (nber working paper no. 14321). retrieved from https://www.nber.org/papers/w14321 schenone, c. (2010). lending relationships and information rents: do banks exploit their information advantages? rev. financ. stud. 23, 1149–1199. beck, t., demirgüç-kunt, a., & maximovic, v. (2005). financial and legal constraints to growth: does firm size matter? journal of finance, 60 (1), 137-177. javascript:; javascript:; https://ideas.repec.org/p/imf/imfwpa/03-127.html https://ideas.repec.org/p/imf/imfwpa/03-127.html https://ideas.repec.org/p/imf/imfwpa/03-127.html https://ideas.repec.org/s/imf/imfwpa.html https://ideas.repec.org/s/imf/imfwpa.html https://www.nber.org/papers/w18379 https://www.nber.org/papers/w14321 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu sustainability in career development: the impact of career development culture and career support of senior management on career satisfaction widana pathiranage richard wickramaratne university of peradeniya sri lanka | wp_richard@yahoo.com abstract the study examined whether career development culture and career support of senior management impact employee career satisfaction. this study validated two new questionnaires: career development culture and career support of senior management. based on the extended model of social cognitive career theory, the study proposed that these two variables positively impact on employee career satisfaction. private sector employees (n=196) representing a range of manufacturing and service sector firms from the private sector in sri lanka participated in a survey. it is found that, career development culture and the career support of senior management positively impact on career satisfaction. the current findings provide implications to the extended model of social cognitive career theory by testing the hypothesized relationships with a cross sectional study. the current findings propose that an organization should develop a career development culture and the senior management should support employees‟ career development in such a way that increases their career satisfaction. the study is subject to common method and common source bias, since this is a cross sectional study with a survey. future research could be conducted with the representation of broader category of employees and industries, which promotes the generalizability of findings. keywords: business, management and organization, career development culture, career support of senior management, career satisfaction new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.194 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:wp_richard@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.194 | http://emaj.pitt.edu sustainability in career development: the impact of career development culture and career support of senior management on career satisfaction page |2| emerging markets journal sustainability in career development: the impact of career development culture and career support of senior management on career satisfaction widana pathiranage richard wickramaratne i. introduction scholars who are in the areas of management and vocational/organizational psychology have a strong interest on the notion of a protean career orientation (pco), which describes individuals who are responsible for their own career development instead of the organizations‟ career development responsibility (hirschi, jaensch, and herrmann, 2016). however, individuals do not develop or define themselves in a contextual vacuum, and alongside this focus on identity, many authors highlight the pivotal role that environment plays in identity formation and career development. thus, other people play a significant part in an individual‟s career development and many theories acknowledge the inevitable and often valuable role that other people play in career decisions (yates, 2020). therefore, despite the growing emphasis of career self-management, contemporary organizations play an integral role in developing the careers of their employees. this dual responsibility of career development is partly linked to the notion of sustainable careers. sustainable careers consist of work experiences across one's lifespan that also intersect multiple life domains such as work, social, and family (van der heijden & de vos, 2015). accordingly, fundamental to the sustainable career concept, there is a shared responsibility between employers and employees for developing employee careers (van der heijden, 2005; veld, semeijn, & van vuuren, 2015). in terms of sustainability concept, organizations make use of their career development programs as a creative way of meeting the challenges of attraction, retention and motivation of their employees (erdogan et al., 2004; heslin, 2005). one way that organizations may meet this challenge is to support employees to develop their own careers and increase their career satisfaction (barnett and bradley, 2007; baruch, 2006). organizational support for career development (oscd) is also called “organizational career management” or “organizational sponsorship” and refers to the programs, processes and assistance provided by organizations to support and enhance their employees‟ career success (ng et al., 2005; orpen, 1994). oscd comprises formal strategies (including career planning, training and assessment centres) and informal support such as providing mentoring, coaching and networking opportunities (hall, 2002; london, 1988; sturges, guest, conway, and davey, 2002). the extended model of social cognitive career theory (lent & brown, 2006), suggests that the organizational support for career development such as organizational career development opportunities and career oriented perceived organizational support belong to a class of environmental support and resource variables that are specifically relevant to the pursuit of an individual‟s career goals. therefore, the organizational support for career development provide social and material support for one‟s personal goals and so are likely to be significant predictors of employee outcomes such as, career satisfaction (barnett & bradley, 2007; lent & brown, 2006, ng et al; 2005). in sum, the extant literature support the fact that organizational career development support factors such as career planning, training & assessment centres, mentoring, coaching, networking opportunities as well as employee perceptions of organizational career support, have a positive impact on career satisfaction. however, no prior empirical studies are found, which have tapped career development culture and senior management career support as organizational support factors in this relationship. therefore, the overarching research problem of this study is to investigate whether career development culture and senior management career support positively impact employee career satisfaction. the findings of this research are expected to provide implications to the extended model of social cognitive career theory (lent and brown, 2006) and to provide policy implications to have sustainable careers at work place, which benefit both employers and employees. the conceptual framework that guide this study is provided in figure 1. figure 1. conceptual framework source: developed by the author ii. key model elements and hypotheses career satisfaction traditional career studies focused mainly on objective measures of career satisfaction (gattiker and larwood, 1988) such as status, promotions and salary (seibert and kraimer, 2001). however, having achieved objective career satisfaction does not necessarily mean that people are satisfied with their career (hall, 2002) and some objective career satisfaction measures are likely to be less relevant today, since organizations are more controlled in providing these opportunities (heslin, 2005). therefore, this study relies on subjective career satisfaction which measures in terms of the extent to which individuals believe their career progress is consistent with their own goals, values and preferences (erdoganet al., 2004; heslin, 2003; seibert and kraimer, 2001). volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.194 | http://emaj.pitt.edu widana pathiranage richard wickramaratne emerging markets journal | p a g e 3 career development culture to explain the role of culture in hrm, „the model of culture fit‟ was proposed by kanungo and his associates (aycan et al., 1999; mendonca & kanungo, 1994). this model assessed culture at two levels: societal and organizational. organisational culture consists of beliefs, values, and assumptions that are commonly shared by members of an organization, and these values influence the behavior of organizational members since people rely on these values to guide their decisions and behaviors (schein, 1985). in other words, the organizational culture consists of managerial beliefs and assumptions about tasks and employees. managerial assumptions relating to tasks deal with the nature of the task and how it must be best achieved, while managerial assumptions relating to employees deal with the nature and behaviorr of employees (aycan, 2005). employee related assumptions are also influenced by the characteristics of the socio-cultural context via the mediation of internal work culture (aycan, 2005). for example, in career management, career behaviorr such as initiatives and interventions to shape future careers is less common in high power distance cultures (claes & ruizquintanilla, 1998). similarly, in paternalistic cultures career decisions are influenced significantly by others such as family, friends and superiors (aycan & fikretpasa, 2003). consequently, in high power distance and paternalistic cultures, employees seek and accept guidance of their superiors, who are perceived to be aware of what is good for employees‟ professional development (aycan, 2005). in relation to career development, kotter and heskett (1992) propose that the organizational culture has two levels namely, deeper and less visible level and the more visible level. according to them, at the deeper and less visible level, culture refers to values shared by the organizational members which constitute the driving force for a development culture. at the more visible level, culture represents behavior patterns or style of an organization and these behaviors may need to be changed in building a development culture. development culture is one in which individuals grow in ways needed by the organization. in a development culture, employees are expected to grow, supported in their efforts to do so, and are rewarded for success as measured by their contributions (simonsen, 1997, p. 4). there are some main characteristics of a development culture. they are; trust, openness, collaboration, managed conflict, risk taking, systems aligned with messages, and learning organization (simonsen, 1997). trust is the most important ingredient in any corporate change process (laabs, 1996). openness can be achieved by keeping the organizational structures as open as possible, encouraging participation and role exchange among employees (gottlieb & conkling, 1995). similarly, both formal and informal communication systems must be open in order for employees to develop. consequently, organizational leaders must define strategic direction of the firm and both suggestions and complaints must be encouraged (simonsen, 1997). career development is not about beating out the competition for a promotion, but about successful collaboration/teamwork so that everyone is adding value through the achievement of team goals and organizational success (simonsen, 1997). in a development culture, conflict is managed rather than avoided and everyone has and uses skills to move from argument to planning for solutions. consequently, the outcome of conflict situations becomes problem solving rather than ongoing disagreement (simonsen, 1997). a development culture encourages risk taking. risk taking is rewarded, not punished and innovation as a result of risk taking is celebrated (simonsen, 1997). compensation systems reward employees based on the actual contribution rather than tenure or position; intrinsic rewards such as respect and acknowledgement, and showing employees that their work are valued. if employees are expected to be selfdirected, then decision making systems allow and support that behaviour (simonsen, 1997). prior studies provide some clues about the impact of development (learning) culture on some career related outcomes such as career satisfaction and organizational commitment (joo & park, 2010). similarly, japanese overseas subsidiaries reflected greater influences of parent company culture on their career counselling and planning activities (yuen & kee, 1993). conversely, when employees don‟t feel that they fit with the culture of their organization, it may also be perceived as a barrier to their career advancement (briggs, jaramillo, & weeks, 2011). career support of senior management generally, it is well accepted that there is an involvement of hr at corporate level (huselid., 1995; schuler & jackson, 1987). particularly, senior management support is an essential element of every comprehensive and integrated career development systems. in relation to career, it‟s well recognized that, career development is a tool for strategic control and development (evans, 1987). consequently, career planning and management have a huge impact on whether organizations can attain corporate goals and individuals can meet their personal aspirations. therefore, to successfully manage careers, a strategy is required aimed at having a comprehensive framework for attracting, developing, and retaining employees in accordance with business objectives (mayo, 1991; walters, 1992). therefore, active support from senior management is vital to a comprehensive and sustainable career development process (simonsen, 1997). in support of this argument, a survey conducted in canadian context revealed that career development programs need considerable co-ordination within a company, particularly from the support and direction of senior management (portis, 1978). for example, senior management can pilot the career development process, participate in career discussions, and set their own development goals (simonsen, 1997). furthermore, senior management needs to pay greatest attention to career planning activities such as periodic progress reviews of managers and identification of strengths, weaknesses and training needs (portis, 1978). prior literature provide evidence that the senior management support for career development is related to some career variables such as career development and employee career opportunities (kraimer, seibert, et al., 2011). prior research outcomes of the positive relationship between organizational support for career development and career satisfaction (allen, eby, poteet, lentz, & lima, 2004; barnett & bradley, 2007; guan et al., 2015; guan et al., 2014; lent & brown, 2006; ng et volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.194 | http://emaj.pitt.edu sustainability in career development: the impact of career development culture and career support of senior management on career satisfaction page |4| emerging markets journal al., 2005; orpen, 1994; pazy, 1988; price & reichert, 2017) and the prediction of the extended model of social cognitive career theory (lent, 2004, 2005; lent and brown, 2006) led to the study‟s two hypotheses: hypothesis 1career development culture has a positive impact on career satisfaction of employees hypothesis 2senior management support has a positive impact on career satisfaction of employees iii. method sample this research is an explanatory study with a quantitative data collection approach. an online survey was distributedto 400 employees representing a range of manufacturing and service sector firms from the private sector in sri lanka. out of total responses of 196, 60% of respondents were managerial employees whereas 40 of employees were in the administrative and technical capacities. of the total responses received, 62% were female. the majority of respondents were aged between 36 and 45 years (69 per cent), with 20 percent under 36 years and 11 percent aged over 45 years. most of the respondents (47 percent) were employed with their current organization between 5-10 years, with 10 percent having organizational tenure of less than 5 years and 43 percent over 11 years. educational level was at a high level with 72 percent of respondents having completed either undergraduate or postgraduate qualification. measures all the study variables were measured on a five-point scale, which ranged from strongly agree (5) to strongly disagree (1). all the scale items were averaged to obtain an overall measure for each of the variables. career development culturethe career development culture is defined merely for the purpose of this current study as „career development culture is one in which individuals progress in their careers in ways needed by the organization and the individuals, with the organization‟s support in terms of systems, management support as well as rewards in their efforts to do so‟. the measures and scales for the career development culture is based on measures and scales developed by simonsen (1997) for development culture. however, as shown in table 1, these measures and scales were modified to make them more appropriate for a career development culture. table 1: scale of career development culture measures questionnaire items extent of use of organizational systems that support career development 1. our organization values managers those who support to develop careers of their employees. 2. we have systems such as job posting and position descriptions that provide information about career opportunities in the organization. 3. we have open communications so employees can gain information about career opportunities in the organization 4. managers and employees‟ responsibilities for career development are clearly identified and stated. 5. our organization does not provide access to career assessment and planning tools/materials for employees (r). 6. our organization provides career development for managers and employees. extent of managers, contributions to the career development of employees 7. our supervisors are skilled and comfortable coaching for employees‟ career development. 8. our supervisors know how to help marginal employees. 9. our supervisors work with employees to enrich their jobs. 10. our supervisors use performance appraisals as a career development activity . 11. our supervisors help employees to explore career goals. 12. our supervisors know how to reward and keep top performers motivated. 13. our supervisors give employees frequent, candid, feedback on performance. extent of employees needs and awareness of responsibility for their own career development 14. our employees do not seek feedback about their performance from their supervisors (r). 15. employees here initiate new work procedures, activities and responsibilities that helps their careers. 16. employees have written career development plans. 17. our new supervisors are trained in supporting the career development of subordinates. 18. employees like to work, and develop their careers as demonstrated by high morale. 19. our professional/technical employees can develop their own careers without moving to managerial positions. career support of senior managementcareer support of senior management is defined solely for this study as „senior managers‟ contribution to the career development of employees in terms of leadership, encouragements, active participation, and effective communication‟. simonsen‟s (1997) measures and scales for the senior management‟s support for development were modified to identify the measures and scale items of career support of senior management which are given in table 2. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.194 | http://emaj.pitt.edu widana pathiranage richard wickramaratne emerging markets journal | p a g e 5 table 2: scale of career support of senior management measures questionnaire items career leadership 1. senior managers provide leadership for career development culture change. encouragement and participation 2. senior managers do not provide role models to get their people to change in terms of career development (r). 3. senior managers provide continued encouragement for participation in career development. 4. senior managers participate in training to discuss differences on the assessment as part of career discussion. top management communication 5. senior managers communicate the importance for everyone to be involved in the career development process. 6. we receive communications from top management promoting the career development program purposes, need for changes, and expressing high level expectations. career satisfactioncareer satisfaction was measured using the five-item career satisfaction scale developed by greenhaus et al. (1990), which has demonstrated an internal consistency correlation of 0.86. a sample questionnaire item is “i am satisfied with the progress i have made toward meeting my overall career goals”. control variablesrespondents‟ demographic information was collected with single item questions for gender, age, highest level of education completed, organizational tenure and work type (technical, professional, managerial). procedure this study is conducted based on five best work places in sri lanka identified by the lmd business magazine (2019). these firms were identified randomly, which covers industries such as insurance, fast food, textile, consumer durables and telecommunication. thirty online surveys were distributed to each firm with the assistance of the hr department. each of the hr department was advised to distribute the online survey links among a randomly selected sample of managerial, administrative and technical level employees. iv. results the data analysis was conducted in two stages using the version 24 of the spss software: validating the career development culture and senior management‟s career support questionnaires and testing the hypotheses. the questionnaire validation was done with three stages. first, the face validity of questionnaires were tested with five senior hr executives, who are from the sample organizations and did some modifications to the questionnaires based on their responses. second, a pilot test was conducted with a total number of 15 respondents by selecting 3 managerial, technical and administrative level employees from each of the sample organizations. the purpose of the pilot test is to refine the questionnaires to assure that the respondents do not have any problems in responding to the survey as well as there are no any issues in recording the data. some modifications were done to the questionnaires based on these responses. third, exploratory factor analysis technique was used to reduce data to variables and to explore the underlying theoretical structure of the phenomena. the factor extraction was done with the principle component analysis (pca) method, whereas factor rotation method was varimax with kaiser normalization. as shown in the following table, the kmo test score is close to 0.5 and the bartlett‟s test of sphericity is significant (p.05). therefore, this data set is considered to be suitable for the factor analysis. table 3: kaiser-meyer-olkin measure of sampling adequacy and bartlett’s test of sphericity kaiser-meyer-olkin measure of sampling adequacy .527 bartlett‟s test of sphericity approx.chi-square 2438.970 df 1220 sig. .000 source: survey data as suggested by hair et al. (2010), all loadings above ± .40 were considered as factor loadings with practical significance. consequently, the factor solution is given in table 4.2. two factors with eigenvalues greater than 1 were identified. after extracting factors, the innernal consistency the reliability of each factor was checked with cronbach‟s alpha values which are provided in table 4. these values were high, which ranged from 0.81-0.89. the factors indicated in this table were named based on underlying conceptual dimensions. after the factor analysis, the calculation of summated scales was done by averaging the original scale responses. table 4: rotated factor loading matrix questionnaire items cronbach‟s alpha cdc cssm our organization values managers those who support to develop careers of their employees. .81 .769 we have systems such as job posting and position descriptions that provide information about career opportunities in the organization. .84 .682 we have open communications so employees can gain information about career opportunities in the organization. .80 .722 volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.194 | http://emaj.pitt.edu sustainability in career development: the impact of career development culture and career support of senior management on career satisfaction page |6| emerging markets journal managers and employees‟ responsibilities for career development are clearly identified and stated. .83 .785 our organization do not provide access to career assessment and planning tools/materials for employees (r). .81 .710 our supervisors are skilled and comfortable coaching for employees‟ career development. .85 .711 our supervisors know how to help marginal employees. .88 .702 our supervisors work with employees to enrich their jobs. .81 .695 our supervisors use performance appraisals as a career development activity. .83 .684 our supervisors help employees to explore career goals. .88 .720 supervisors know how to reward and keep top performers motivated. .80 .832 our supervisors give employees frequent, candid, feedback on performance. .89 .683 our employees do not seek feedback about their performance from their supervisors (r). .86 .754 employees here initiate new work procedures, activities and responsibilities that helps their careers. .83 .521 employees have written career development plans. .80 .603 employees like to work, and develop their careers as demonstrated by high morale. .87 .801 senior managers provide leadership for career development culture change. .86 .453 senior managers do not provide role models to get their people to change in terms of career development (r). .89 .590 senior managers provide continued encouragement to employees for .88 .606 participation in career development. senior managers participate in training to discuss differences on the assessment as part of career discussion. .85 .505 we receive communications from top management promoting the career development program purposes, need for changes, and expressing high level expectations. .80 .596 notes: factor loadings <.4 are suppressed cdc= career development culture cssm= career support of senior management source: survey data. testing hypotheses correlations (table 5) and hierarchical multiple regression analysis were used to test the hypothesized relationships. cronbach‟s alpha values shown in the diagonal of the correlations table are above 0.70. therefore, all three scales used in this study are considered as reliable. the main three variables of the study are positively correlated with demographic variables. therefore, multiple hierarchical regression analysis allowed control of the effects of demographic variables such as age, gender, and tenure on the hypothesized relationships. table 5: correlation matrix of variables the results of multiple hierarchical regression analysis shown in table 6 indicate that, career satisfaction has significant positive associations with career development culture (β= .502, p < .05) and career support of senior management (β= .477, p < .05). as shown in this table, the r squared values have been increased significantly from step one to step three when the predictor variables of career development culture and career support of senior management is added respectively to the regression equation. therefore, these results indicate that, the two hypotheses of the study are accepted indicating that the career development culture and the career support of senior management are determinants of the career satisfaction of employees. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.194 | http://emaj.pitt.edu widana pathiranage richard wickramaratne emerging markets journal | p a g e 7 table 6: hierarchical regression examining the impact of career development culture and career support of senior management on career satisfaction career satisfaction predictors (beta coefficients): step 1 step 2 step 3 age .211* .195* .175* gender .533* .477* .399* tenure .751* .672* .478* career development culture .741* .502* career support of senior management .477* f 6.618* 6.629* 6.544 adj. r-squared .303* .371* .396* r-squared change .187 .227 .306 note:*=p<.05 v. discussion and conclusion the findings of this study propose that, the organizations should support their employees in terms of creation of a career development culture and providing career support by the senior management, the outcome of which is the increased career satisfaction. therefore, these outcomes support the notion of sustainability in career development. the study validated two scales, namely „career development culture scale‟ and the „career support of senior management scale‟, which is also a major contribution of this study. the current findings provide implications to the extended model of social cognitive career theory (lent, 2004, 2005; lent and brown, 2006), which states that the cognitive, behavioral, personality and environmental factors jointly impact work satisfaction. thus, this study contributes to the existing literature by exploring how environmental aspects such as career development culture and senior managers support for career development impact career satisfaction. moreover, the findings support the prior research outcomes of the positive relationship between organizational support for career development and career satisfaction (allen, eby, poteet, lentz, & lima, 2004; barnett & bradley, 2007; guan et al., 2015; guan et al., 2014; lent & brown, 2006; ng et al., 2005; orpen, 1994; pazy, 1988; price & reichert, 2017) and the prediction of the extended model of social cognitive career theory (lent, 2004, 2005; lent and brown, 2006). these are unique findings, since none of the prior empirical studies are found that have investigated career development culture and senior management career support as support factors in this relationship. the current findings that career development culture and senior management support for career development positively impact on employee career satisfaction suggests us two strategies. first, in order to align organizational career development efforts with business strategy and finally for gaining sustainable competitive advantage, an organization should develop a career development culture and the senior management should support employees‟ career development in such a way that increase their career satisfaction. the second strategy involves enhancing the employee perception of being supported by developing a career development culture and providing senior management career support acceptable to the employees. promoting employees to take responsibility and actively involved in career development programs would benefit them to experience higher career satisfaction. the study is subject to common method and common source bias, since this is a cross sectional study with a survey. the sample of employees do not represent all employee categories which limits the generalizability of findings. there may be more important criteria other than satisfaction with income and progress towards achieving career goals that determine employee career satisfaction, which are not included in the career satisfaction scale developed by greenhaus et al. (1990). future research could be conducted with the representation of broader category of employees and industries, which promotes the generalizability of findings. the replication of the same study on a longitudinal basis is worthwhile to enhance our understanding of the relationships between study variables. future research could also explore whether career development culture and senior management career support generate other behavioral and attitudinal outcomes such as job satisfaction, commitment and organizational citizenship behavior. as suggested by the extended model of social cognitive career theory (lent and brown, 2006), organizational support for career development indirectly affects career satisfaction via context specific proactive behaviors (career management behaviors). therefore, future studies should investigate whether career development culture and the career support of the senior management influence career satisfaction via career management behaviors. this study suggested that an organization is likely to attract, motivate and retain employees by supporting their employees‟ career development in terms of building a conductive career development culture and providing career development support by the senior management. the results of the study suggest that, the career development culture and the senior management support for career development build employee career satisfaction. references allen, t.d., eby, l.t., poteet, m.l., lentz, e., & lima, l. (2004). career benefits associated with mentoring for proteges: a meta-analysis.journal of applied psychology, 89, 127-135. aycan, z., & fikret-pasa, s. (2003). career choices, job selection criteria, and leadership preferences in a transitional nation: the case of turkey. journal of career development, 30(2), 129144. aycan, z., kanungo, r. n., & sinha, j. b. (1999). organizational culture and human resource management practices: the model of culture fit. journal of cross-cultural psychology, 30(4), 501-526. barnett, b.r., & bradley, l. (2007). the impact of organisational support for career development on career satisfaction. career development international, 12(7), 617-636. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.194 | http://emaj.pitt.edu sustainability in career development: the impact of career development culture and career support of senior management on career satisfaction page |8| emerging markets journal baruch, y. (2006). career development in organizations and beyond: balancing traditional and contemporary viewpoints. human resource management review, 16, 125-138. briggs, e., jaramillo, f., & weeks, w. (2011). perceived barriers to career advancement and organizational commitment in sales. journal of business research, 65, 937-943. claes, r., & ruiz-quintanilla, s. a. (1998). influences of early career experiences, occupational group, and national culture on proactive career behavior. journal of vocational behavior, 52(3), 357-378. erdogan, b., kraimer, m.l. and liden, r.c. (2004), “work value congruence and intrinsic careersuccess: the compensatory roles of leader-member exchange and perceived organizationalsupport”,personnel psychology, vol. 57 no. 2, pp. 305-32. erdogan, b., kraimer, m.l., & liden, r.c. (2004). work value congruence and intrinsic career success: the compensatory roles of leader-member exchange and perceived organizational support. personnel psychology, 57(2), 305-332. evans, p. (1987). managing career development journal of career development, 7(6), 5-13. gottlieb, m.r., & conkling, l. (1995). managing the workplace survivors: organizational downsizing and the commitment gap. westport, ct: quorum books. greenhaus, j.h., parasuraman, s., & wormley, w. (1990). effects of race on organizational experiences, job performance evaluations, and career outcomes. academy of management journal, 33(1), 64-86. gattiker, u.e., & larwood, l. (1988). predictors for managers‟ career mobility, success, and satisfaction. human relations, 41(6), 569-591. guan, y., chen, s. x., levin, n., bond, m. h., luo, n., xu, j., ... & zhang, j. (2015). differences in career decision-making profiles between american and chinese university students: the relative strength of mediating mechanisms across cultures. journal of cross-cultural psychology, 46(6), 856-872. heslin, p.a. (2005), “conceptualizing and evaluating career success”,journal of organizationalbehavior, vol. 26 no. 2, pp. 113-36. hair, j. f., black, w. c., babin, b. j., anderson, r. e., & tatham, r. l. (2010). multivariate data analysis, 7th ed. hirschi, a., jaensch, v. k., & herrmann, a. (2016).protean career orientation, vocational identity, and self-efficacy: an empirical clarification of their relationship.european journal of work and organizational psychology,26(2), 208-220. pp. 1-13. doi: 10.1080/1359432x.2016.1242481. heslin, p.a. (2005). conceptualizing and evaluating career success. journal of organizational behavior, 26(2), 113-136. heslin, p.a. (2003). selfand other-referent criteria of career success. journal of career assessment, 11(3), 262-286. hall, d. t. (2002). careers in and out of organizations. thousand oaks, ca.: sage. huselid. (1995). the impact of human resource management practices on turnover, productivity, and corporate financial performance. academy of management journal, 38, 635-672. joo, b.k., & park, s. (2010). career satisfaction, organizational commitment, and turnover intention: the effects of goal orientation, organizational, learning culture and developmental feedback. leadership & organization development journal, 31(6), 482500. kotter, j.p., & heskett, j.l. (1992). corporate culture and performance. new york: free press. kraimer, m.l., seibert, s.e., wayne, s.j., liden, r.c., & bravo, j. (2011). antecedents and outcomes of organizational support for development: the critical role of career opportunities. journal of applied psychology, 96(3), 485-500. laabs, j.j. (1996). expert advice on how to move forward with change. personnel journal. london, m. (1983). toward a theory of career motivation. academy of management review, 8, 620-630. lent, r.w., & brown, s.d. (2006). integrating person and situation perspectives on work satisfaction: a social-cognitive view. journal of vocational behavior, 69, 236-247. lent, r.w., singley, d., sheu, h. b., gainor, k.a., brenner, b.r. , & treistman, d. . (2005). social cognitive predictors of domain and life satisfaction: exploring the theoretical precursors of subjective well-being. journal of counseling psychology, 52(3), 429-442. mendonca, m., & kanungo, r. n. (1994). managing human resources: the issue of cultural fit. journal of management inquiry, 3(2), 189-205. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.194 | http://emaj.pitt.edu widana pathiranage richard wickramaratne emerging markets journal | p a g e 9 mayo, a. (1991). managing careers. london: ipm. moorman, c., & miner, a.s. . (1998). organizational improvisation and organizational memory. academy of management review, 23(4), 698-723. mendonca, m., & kanungo, r. n. (1994). managing human resources: the issue of cultural fit. journal of management inquiry, 3(2), 189-205. ng, t.w.h., eby, l.t., sorensen, k.l. , & feldman, d.c. (2005). predictors of objective and subjective career success: a meta-analysis. personnel psychology, 58, 367-408. orpen, c. (1994). the effects of organizational and individual career management on career success. international journal of manpower, 15(1), 27-37. pazy, a. (1988). joint responsibility: the relationships between organizational and individualcareer management and the effectiveness of careers. group and organization studies, 13(3), 311331. portis, b. (1978). career development requires senior executive involvement/management initiatives. business quarterly, 43(3), 9-11. price, s., & reichert, c. (2017). the importance of continuing professional development to career satisfaction and patient care: meeting the needs of novice to mid-to late-career nurses throughout their career span. administrative sciences, 7(2), 17. simonsen, p. (1997). promoting a development culture in your organization: using career development as a change agent (1 ed. vol. 1). palo alto, california: davies-black publishing. schein, e. h. (1985). defining organizational culture. classics of organization theory, 3(1), 490-502. schuler, r.s., & jackson, s.e. (1987). linking competitive strategies with human resource management practices. academy of management executive, 1, 207-219. sturges, j., guest, d., conway, n., & davey, k.m. (2002). a longitudinal study of the relationship between career management and organizational commitment among graduates in the first ten years at work. journal of organizational behavior, 23, 731-748. seibert, s.e., & kraimer, m.l. (2001). the five-factor model of personality and career success. journal of vocational behavior, 58, 1-21. yates, j. (2020). career development: an integrated analysis. in: robertson, p., mccash, p. and hooley, t. (eds.), the oxford handbook of career development. . oxford, uk: oxford university press. isbn 9780367222994. yuen, e.c., & kee, h.t. (1993). headquarters, host culture and organizational influences on hrm policies and practices. management international review, 33(4), 361-383. van der heijden, b., de vos, a., akkermans, j., spurk, d., semeijn, j., van der velde, m., & fugate, m. (2020). sustainable careers across the lifespan: moving the field forward. journal of vocational behavior. van der heijden, b. i., & de vos, a. (2015). sustainable careers: introductory chapter. in handbook of research on sustainable careers. edward elgar publishing. van der heijden, b. i. (2005). no one has ever promised you a rose garden. uitgeverij van gorcum. veld, m., semeijn, j., & van vuuren, t. (2015). enhancing perceived employability. personnel review. walters, m. (1992). career management: current thinking and practice. topics, 54, 10-14. https://lmd.lk/bestworkplacesinsrilanka/ volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu mobile phone companies increasing market share through innovations, r&d spending and patents sanjeev singh mit adt university, india | e-mail: sanjeevrajput@aim.com rahul more mit adt university, india | e-mail: rahul.more@mituniversity.edu.in abstract this study aims to analyze the market share of four leading mobile phone companies in the context of their spending on r&d and the number of filed patents. the study aims to identify whether the companies that invest the most in r&d and file more patents have a competitive edge and increased market share compared to others. the adoption and advancement of technologies throughout the documented history of humankind have revealed how employing specific devices has cultivated the power for people and society to communicate. moreover, innovations in travelling have increased prospects for real-time communication, and innovations in virtual real-time communication like mobile phones and the internet have become a part of everyday life. following innovations, many companies emerged from nowhere with unique mobile phone devices and continued the business. but, few of them were wiped out from the market because their mobile phone offering was inferior to other competitors. this paper explores the innovation journey of mobile phone companies. in addition, it focuses on four leading brand names and corresponding success failures as well as the role of r&d expense and patents regarding innovations. usually, innovation is considered as the engine of economic growth that serves customers better products and services and stays relevant in the market. measuring innovation is not easy, but focusing on r&d and the quantifiable patent indicates that individual companies consistently serve customers with newer and better products. keywords: innovations, r&d spending, patents, market share, mobile phone new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.251 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.251 | http://emaj.pitt.edu sanjeev singh, rahul more emerging markets journal | p a g e |77 mobile phone companies increasing market share through innovations, r&d spending and patents sanjeev singh rahul more i. introduction the mobile phone marketplace is incredibly competitive, and the market has numerous mobile phone brands with lucrative offerings. according to gadgets 360, there are 170 mobile phone manufacturing companies (gadget360, 2022). the droid.com website lists 237 mobile manufacturing companies and suggests 7576 different models from different companies (droidchart.com, 2022). according to the gsmarena website, there are 117 mobile companies and 11197 models globally (gsmarena, 2021). not necessarily all mobile companies, and the mobile phone model still exists. at the same time, many companies are still present and producing various mobile phone models. the mobile phone market is perhaps the most volatile, challenging, and constantly in the race of competition among brands. nevertheless, mobile companies deal with continuous technological change, and product innovation is astonishing. since 1973, mobile phones have emerged from a luxury to a mass consumer market with many value-added services. figure 1 has a list of a few mobile phones since 1973 that indicates consistent innovations by various mobile companies (križanović, 2020; mobikyo, 2014; uswitch, 2021). figure 1. mobile phone brands from 1973 until 2020 source: (križanović, 2020; mobikyo, 2014; uswitch, 2021) ii. r&d, patents and innovations in general, an innovation endeavor is a complex process and is commonly described as the generation, implementation, and acceptance of new ideas, products, services, or techniques (ferreira et. al., 2020). innovation capability can be stated as the expertise and ability to enrich present products and technologies as well as creating something new by translating expertise into products and processes (romijn & albaladejo, 2002). innovation capability signifies a company's capability to build innovative tools & products to accomplish exceptional financial performance (rangone, 1999). in addition, it encompasses the continuous enhancement of the resources and capabilities that a company holds and utilizes to exploit opportunities for developing new innovative outputs (koc, 2007). the company's intangible property is essential in making such a development. using this property is also an integral component of innovation capability (saunila & ukko, 2012). innovation aids companies in dealing with the trouble triggered by external factors; hence it is an essential element contributing to the overall business success, primarily in a volatile market (darroch & mcnaughton, 2002; keiningham et. al., 2020). in the connected global ecosystem, the market is highly competitive and unpredictable. innovation is the means to meet such market demand, hence innovation volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.251 | http://emaj.pitt.edu mobile phone companies increasing market share through innovations, r&d spending and patents page |78| emerging markets journal capabilities are the key factor for the competitive advantage (rajapathirana & hui, 2018). innovation capability requires significant spending on r&d, and it signifies an organization's capability to build innovative tools & products to accomplish exceptional financial performance (rangone, 1999). in addition, it encompasses the continuous enhancement of the resources and capabilities that a company holds and utilizes to exploit opportunities for developing new innovative outputs (koc, 2007). the organization's intangible property is the essential factor in making such development. using this property is also an integral component of innovation capability (saunila & ukko, 2012). innovation aids companies in dealing with the trouble triggered by external factors, hence it is an essential element contributing to the overall business success, primarily in a volatile market (darroch & mcnaughton, 2002; keiningham et. al., 2020). the concept of innovation capability (ic) has been approached from multiple perspectives and can be considered as a multi-faceted construct (saunila, 2016). broadly, the ic is classified as radical innovation and incremental innovation (pascual-fernández et. al., 2021; quintane et. al., 2011). radical innovation refers to developing entirely new expertise and building something that doesn't exist; or introducing disruption to an existing technical path that enables current products/services to become obsolete (damanpour, 1991; mendoza-silva, 2020). on the other hand, incremental innovation refers to enhancing the effectiveness of present products by utilizing the insights from the end-users and creating better and more attractive solutions full of novelty, leading to significant profits (acemoglu et. al., 2020; lee, 2011; mendoza-silva, 2020). the dual-core innovation theory lists innovation into two components, i.e., management innovation and technical innovation (kalay, 2016). technological innovation pertains to innovation in organizations' products, services, or processes corresponding to production, whereas administrative innovation relates to business processes beyond production (kalay, 2016; lee, 2011). administrative innovations indirectly boost technical innovations; hence, both management and technological innovation are essential and complement each other (damanpour, 1991). a study suggests five components of ic: product innovation (create or enhance existing products through modification), market innovation (approaches for advertisement and promotion of products through identification of new market opportunities), service innovation (usefulness of service processes), process innovation (expansion or enhancement of a production or delivery technique) and organizational innovation (creation of a new organizational technique related to everyday tasks, work environment, or possible external relations) (mendozasilva, 2021). the creation of patents by companies indicates that such companies are somewhat profoundly investing in innovations. also, such companies are spending some money on research and development. according to gautam & curba, innovation refers to the commercialization of solutions (ahuja & lampert, 2001). therefore, in general, r&d expenses and patents are considered innovation indicators (kleinknecht et. al., 2002). the reason is that, through r&d activities, one reaches the stage of applying for a patent. the patent documents contain factual information about the innovation process evaluated by a patent office of a government organization (kang & motohashi, 2014). of course, patents could not be the absolute indicator of innovation. but companies spending on research and development as well as the number of patent filings signify somewhat the overall innovation. according to john adams, former executive vice president of honda america manufacturing, few companies delay filing patents about new ideas or solutions, so the world does not know what the company is doing (heller, 2022). table 1 signifies various companies' rapid launch of the new mobile handset from 1973 until 2020. these companies spend time and money on research & development (r&d) activities as well as filing patents. as a result, each company launched one of the best mobile phones in the past and continued its innovation journey. in this innovation journey, many products created a wow moment for customers and significant business growth in the overall business. unfortunately, when the product was not welcomed by customers, then losing the market share was observed. ii. literature review regarding r&d, patents and potential impacts on innovation table 1: literature review summary volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.251 | http://emaj.pitt.edu sanjeev singh, rahul more emerging markets journal | p a g e |79 source: authors’ own compilation iv. research hypothesis the paper assumes that the innovative activities corresponding to r&d expenses and patents of mobile companies have a positive effect on the market share. hence, the following research hypotheses and variables are proposed: table 2: research hypotheses and variables research hypotheses variables h1: there exists a positive correlation between r&d expenses and increased patent filings with the market share of mobile companies. % market share, number of patents, and r&d expenses h0: there is no positive correlation between r&d expenses and increased patent filings with the market share of mobile companies. % market share, number of patents, and r&d expenses source: authors’ own compilation v. analysis method the study applies the correlation technique to analyze the data, highlighting the nature of the relationship between the market share and innovation through r&d expense and the number of patents. the correlation between two variables is +ve when the variables change in an identical direction. for example, when one variable surges, the other also surges, and the further declines when one declines. the correlation between two variables is -ve when mutually the variables change in the contrary direction. for example, when one variable surges, the other declines, and when one declines, the other surges. the correlation computes the forte and nature of the affinity amid the two-dimension variable quantity that ranges between -1 to +1 (pennstate, n.d.; sayantika b, 2022). in this study, the correlation result is positive, which signifies that the variable is positively related to the market share. in contrast, the negative correlation is negatively associated with the market share. the correlation matrix is prepared with the help of the "corr function" in the microsoft excel tool. furthermore, the descriptive statistics like mean, max, min, and stddev are prepared using descriptive statistics in the microsoft excel tool. finally, the correlation is used to identify the strength and direction of the linear relationship between the continuous variables, i.e. market share, patents, r&d expenses for distinct brands such as apple, samsung, nokia and blackberry). after conducting correlation analyses between the two variables using the below formula, this paper shows the matrix for distinct brands: rxy = ∑(𝑥i �̅�)(𝑦i-�̅�)/√ ∑(𝑥i �̅�)^2∑(𝑦i-�̅�)^2 where; rxy correlation coefficient of linear relationship between variables x and y xi values of the x-variable in the sample x̅ mean of values of x-variable yi values of y-variable in the sample ȳ mean of values of y-variable volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.251 | http://emaj.pitt.edu mobile phone companies increasing market share through innovations, r&d spending and patents page |80| emerging markets journal vi. analysis of four significant mobile companies this paper considers four well-known phone brands to understand their competitiveness with ten years of data sets regarding market share, patents and r&d expenses (federica laricchia, 2022b, 2022a; greyb, 2022c, 2022a, 2022b; justina alexandra sava, 2022; nils-gerrit wunsch, 2021; statcounter globalstats, 2022; thomas alsop, 2022). nokia nokia is a finnish company founded by fredrik idestam in 1865. the name nokia originates from a town called nokia and the nokianvirta river in finland (borhanuddin et al., 2016). traditionally, nokia business units were paper, cables, rubber, televisions, telecom networks, phones, etc., that have transitioned and transformed into mobile telecommunication infrastructure and mobile handsets (aspara et al., 2011). however, after numerous years of spectacular success and rising market share in the mobile phone market space, nokia failed for the transition stage in terms of new era of phones to satisfy customers and keep them loyal to the brand (doz & kosonen, 2008). table 3: nokia ten years data (2010-2019) year % market share r&d spending (in million us dollars) no. of patents 2010 37,02 75 6.250 2011 38,23 71 6.470 2012 29,91 61 7.471 2013 21,43 33 6.794 2014 13,70 20 5.988 2015 9,24 24 4.497 2016 5,54 53 3.745 2017 2,53 60 3.913 2018 1,47 52 3.883 2019 1,08 50 3.078 source: authors’ own compilation **nokia % market share month-wise data is transformed to annually table 4: nokia descriptive statistics % market share r&d spending (in million us dollars) no. of patents mean 16,01 49,90 5.208 std 14,66 18,75 1.547 min 1,08 20,00 3.078 max 38,23 75,00 7.471 source: spss software output table 5: nokia correlations of variables % market share r&d spending (in million us dollars) no. of patents % market share 1,00 r&d spending (in million us dollars) 0,45 1,00 no. of patents 0,87 0,10 1,00 source: spss software output samsung lee byung-chul started a grocery trading store named samsung trading co. in taegu, korea, in 1938, primarily involved in trading noodles and other items produced in the city and neighborhoods and exporting them to china regions (peter bondarenko, 2021). samsung marked a footprint in the electronics industry in the 1960s. later, the telecommunications hardware industry in 1980 and the phone market in 1998 with a phone sph-1300 (matthew burris, 2020; samsung newsroom, 2013) reflected samsun’s dominance in the market. samsung remains one of the largest microprocessor manufacturers globally in the late 20th and early 21st centuries, which signifies that it is a significant player in the mobile phone domain (bondarenko, 2021). table 6: samsung ten years data (2010-2019) year % market share r&d spending (in million us dollars) no. of patents 2010 4,31 8.460 7.646 2011 10,64 9.260 7.100 2012 18,42 11.060 8.706 2013 25,26 13.750 11.151 2014 32,07 14.260 10.884 2015 31,94 13.810 10.096 2016 32,33 13.750 8.498 2017 32,97 15.620 7.202 2018 30,68 17.340 8.348 2019 31,60 17.500 2.840 source: authors’ own compilation **samsung % market share month-wise data is transformed to annually volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.251 | http://emaj.pitt.edu sanjeev singh, rahul more emerging markets journal | p a g e |81 table 7: samsung descriptive statistics % market share r&d spending (in million us dollars) no. of patents mean 25,02 13.481 8.247 std 10,37 3.079 2.382 min 4,31 8.460 2.840 max 32,97 17.500 11.151 source: spss software output table 8: samsun correlations of variables % market share r&d spending (in million us dollars) no. of patents % market share 1,00 r&d spending (in million us dollars) 0,89 1,00 patents 0,07 0,20 1,00 source: spss software output rim (blackberry) mike lazaridis and douglas fregin started a company, research in motion (rim), widely known as blackberry, a canadian-based multinational company, in 1984 (mcgrath, 2013). blackberry predominantly provides software and hardware platforms as well as solutions to instant messaging, e-mails, browsing, internet, intranet-based applications, etc. (youssef, 2013). before apple's phone entered the phone business in 2007, it was a time when almost the entire corporate working people wanted blackberry because of its unique e-mail features, ease of use, and excellent security (trivedi, 2017). however, later 2007 onwards, blackberry could not catch up with the leading innovation appearing in the market, primarily apple, followed by google android (sarno, 2010). blackberry tried to tantalize the market in january 2013 with new smartphone models, z10 and q10, but it seems it was not enough compared to competitors like apple and android phones (timmer, 2021; hill, 2013). as a result, blackberry's phone business collapsed significantly, and the company decided to sell patent assets (amadeo, 2022). table 9: blackberry ten years data (2010-2019) year %mar ket share r&d spending (in million us dollars) no. of patents 2010 19,40 965 4.337 2011 14,72 1.351 4.916 2012 5,48 1.556 4.633 2013 3,63 1.509 2.565 2014 1,97 1.286 1.002 2015 1,25 711 725 2016 0,81 469 725 2017 0,32 306 624 2018 0,11 239 603 2019 0,04 219 545 source: authors’ own compilation **blackberry % market share month-wise data is transformed to annually. table 10: blackberry descriptive statistics % market share r&d spending (in million us dollars) no. of patents mean 4,77 861 2.067 std 6,79 539 1.867 min 0,04 219 545 max 19,40 1.556 4.916 source: spss software output table 11: blackberry correlations of variables % market share r&d spending no. of patents % market share 1,00 r&d spending 0,47 1,00 no. of patents 0,84 0,74 1,00 source: spss software output apple the apple computer company was founded by steve jobs and steven wozniak in 1976. their first computer circuit board was ready with sales orders for 200 units in two months of working in their garage (oldcomputers, 2022). apple was an established brand long before making smartphones. the company started with computers and followed up with ipods, and in the first quarter of 2007 company sold over 21 million ipods, corresponding to 48% of its revenues (apple newsroom, 2007). steve jobs presented the first iphone in january 2007, which proved a revolutionary product because it combined the functionalities of the ipod into a small volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.251 | http://emaj.pitt.edu mobile phone companies increasing market share through innovations, r&d spending and patents page |82| emerging markets journal mobile phone with a touch screen, and it was able to access the internet like a computer (merchant, 2017). the company launched the iphone in 2007 as the most advanced "smartphone," featuring many features and capabilities that were many years ahead of its competitors, creating excitement among customers, and becoming a formidable force among competitors (rarick, 2011). table 12: apple ten years data (2010-2019) year % market share r&d spending (in million us dollars) no. of patents 2010 29,32 1.780 4.171 2011 27,75 2.430 4.519 2012 24,71 3.380 6.424 2013 24,39 4.480 6.095 2014 23,86 6.040 5.562 2015 20,30 8.070 6.080 2016 19,32 10.050 5.812 2017 19,66 11.580 4.814 2018 20,58 14.240 5.233 2019 22,70 16.220 4.727 source: authors’ own compilation **apple % market share month-wise data is transformed to annually. table 13: apple descriptive statistics % market share r&d spending (in million us dollars) no. of patents mean 23,26 7.827 5.343 std 3,42 5.060 765 min 19,32 1.780 4.171 max 29,32 16.220 6.424 source: spss software output table 14: apple correlations of variables % market share r&d spending (in million us dollars) no. of patents % market share 1,00 r&d spending 0,75 1,00 no. of patents 0,41 0,08 1,00 source: spss software output vii. conclusion and recommendations the correlation matrix for the companies nokia, samsung, and rim (blackberry) indicates that r&d spending and patents are correlated positively with the % market share. at the same time, the correlation matrix for the company apple shows that r&d spending and patents are correlated negatively with the % market share. out of all four companies, three have a positive correlation, hence both hypotheses tend to be valid. mobile phones have transformed considerably from simple to smart for becoming information and communication pivots essential to modern-day life (tigermobiles, 2019). in the last 30 years, almost all mobile phone companies have launched phones with unique features to entice the end-users and gain market share. as a result, companies have a race to compete and increase their market share by servicing customers with the best phone features, and the race continues (križanović, 2020; zaman, 2020). moreover, spending money on research, development and patents signifies that companies are working towards innovations to build new products and services. also, such companies have the potential to stay ahead of their competitors and maintain a competitive edge. further research considering more than ten years of data and more than four mobile brands shall show a more precise correlation of market share with r&d spending and patents. references acemoglu, d., akcigit u., celik, m. a. (2020). radical and incremental innovation: the roles of firms, managers, and innovators. american economic journal: macroeconomics. 14(3), 199-249. ahuja, g., & lampert, c. m. (2001). entrepreneurship in the large corporation: a longitudinal study of how established firms create breakthrough inventions. strategic management journal, 22(6–7),521-543. https://doi.org/10.1002/smj.176 alsop, t. (2022). nokia r&d spending 1999-2020 | statista. https://www.statista.com/statistics/267821/noki as-expenditure-on-research-and-developmentsince-1999/ amadeo, r. (2022). blackberry sells mobile and messaging patents for $600 million | ars technica.arstechnica. https://arstechnica.com/gadgets/2022/01/blackb erry-sells-mobile-and-messaging-patents-for600-million/ apple newsroom. (2007). apple reports first quarter results apple. apple newsroom. https://www.apple.com/newsroom/2007/01/17 apple-reports-first-quarter-results/ aspara, j., lamberg, j. a., laukia, a., & tikkanen, h. (2011). strategic management of business model transformation: lessons from nokia. management decision, 49(4), 622–647. https://doi.org/10.1108/00251741111126521 bondarenko, p. (2021). samsung | history & facts | britannica. encyclopedia britannica. https://www.britannica.com/topic/samsungelectronics volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.251 | http://emaj.pitt.edu sanjeev singh, rahul more emerging markets journal | p a g e |83 borhanuddin, b., iqbal, a., borhanuddin, b., & iqbal, a. (2016). nokia: an historical case study switch-side chain-chess mobile game (prgs grant) view project an investigation into the perceptual differences between men and women to encourage equal participation in intellectual sports: a chess case study view project nokia: an historical case study. in journal of computer science and information technology (ejcsit) (vol. 6, issue1). https://www.researchgate.net/publication/3114 93358 brian merchant. (2017). the secret origin story of the iphone the verge. theverge. https://www.theverge.com/2017/6/13/1578220 0/one-device-secret-history-iphone-brianmerchant-book-excerpt burris, m. (2020). the history of samsung (1938present).lifewire. https://www.lifewire.com/history-of-samsung818809 damanpour, f. (1991). organizational innovation: a meta-analysis of effects of determinants and moderators author(s): fariborz damanpour reviewed work. the academy of management journal. https://doi.org/https://doi.org/10.2307/256406 dang, j., & motohashi, k. (2015a). patent statistics: a good indicator for innovation in china? patent subsidy program impacts on patent quality. china economic review, 35, 137-155. https://doi.org/10.1016/j.chieco.2015.03.012 dang, j., & motohashi, k. (2015b). patent statistics: a good indicator for innovation in china? patent subsidy program impacts on patent quality. china economic review, 35, 137-155. https://doi.org/10.1016/j.chieco.2015.03.012 darroch, j., & mcnaughton, r. (2002). examining the link between knowledge management practices and types of innovation. journal of intellectual capital,3(3),210–222. https://doi.org/10.1108/14691930210435570 doz, y., & kosonen, m. (2008). the dynamics of strategic agility: nokia's rollercoaster experience. in source: california management review. 50(3), 95-118. droidchart.com. (2022). home news brands comparisons.droidchart.com. https://droidchart.com/en/brands ferreira, j., coelho, a., & moutinho, l. (2020). dynamic capabilities, creativity and innovation capability and their impact on competitive advantage and firm performance: the moderating role of entrepreneurial orientation. technovation,92-93. https://doi.org/10.1016/j.technovation.2018.11. 004 gadget360. (2022). gadget 360 170 mobile phone companies.gadget360. https://gadgets.ndtv.com/mobiles/10-or-phones greyb. (2022a). apple patents key insights and stats insights;gate.greyb. https://insights.greyb.com/apple-patents/ greyb. (2022b). blackberry patents key insights and stats-insights;gate.greyb. https://insights.greyb.com/blackberry-patents/ greyb. (2022c). nokia patents key insights & stats insights;gate.greyb. https://insights.greyb.com/nokia-patents/ gsmarena. (2021). list of all mobile phone brands gsmarena.com 117 companies. gsmarena. https://www.gsmarena.com/makers.php3 hagedoorn, j., & cloodt, m. (2003). measuring innovative performance: is there an advantage in using multiple indicators? in research policy (vol. 32). heller, s. (2022). innovations needed — but patents decline: auto industry's number of awards ...: ebscohost.ebscohost. https://web.s.ebscohost.com/ehost/detail/detail? vid=0&sid=cce044ed-1ad5-4ff7-b024d964d1d94a81%40redis&bdata=jnnpdgu9z whvc3qtbgl2zq%3d%3d#an=154925788& db=bft hill, s. (2013). the 11 moments that defined blackberry's rise and fall | techradar. techradar. https://www.techradar.com/in/news/phoneand-communications/mobile-phones/the-10moments-that-defined-blackberry-s-rise-andfall-1175428 kalay, f. (2016). the impact of organizational structure on management innovation: an empirical research in turkey. pressacademia, 5(1), 125125. https://doi.org/10.17261/pressacademia.201611 6656 kang, b. (2015). the innovation process of huawei and zte: patent data analysis. china economic review,36,378-393. https://doi.org/10.1016/j.chieco.2014.12.003 volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.251 | http://emaj.pitt.edu mobile phone companies increasing market share through innovations, r&d spending and patents page |84| emerging markets journal kang, b., & motohashi, k. (2014). the role of essential patents as knowledge input for future r&d. world patent information, 38, 33–41. https://doi.org/10.1016/j.wpi.2014.05.001 keiningham, t., aksoy, l., bruce, h. l., cadet, f., clennell, n., hodgkinson, i. r., & kearney, t. (2020). customer experience driven business model innovation. journal of business research,116,431-440. https://doi.org/10.1016/j.jbusres.2019.08.003 kessler, j., & sperling, d. (2016). tracking u.s. biofuel innovation through patents. energy policy, 98, 97-107. https://doi.org/10.1016/j.enpol.2016.08.021 kleinknecht, a., van montfort, k., & brouwer, e. (2002). the non-trivial choice between innovation indicators. economics of innovation and new technology, 11(2), 109121. https://doi.org/10.1080/10438590210899 koc, t. (2007). organizational determinants of innovation capacity in software companies. computers and industrial engineering, 53(3), 373-385. https://doi.org/10.1016/j.cie.2007.05.003 križanović, i. (2020). cell phone history: from the first phone to today's smartphone wonders join us as we take a journey through cell phone history and learn all about the evolution of the mobile phone! https://versus.com/en/news/cell-phonehistory lambert, t. e. (2020). monopoly capital and innovation: an exploratory assessment of r&d effectiveness. international review of applied economics,34(1),36-49. https://doi.org/10.1080/02692171.2019.162070 3 laricchia, f. (2022a). apple's research and development expenditure 2007-2021 | statista. statista. https://www.statista.com/statistics/273006/appl e-expenses-for-research-and-development/ laricchia, f. (2022b). samsung electronics: research & development expenditure 2021 | statista. https://www.statista.com/statistics/236924/sam sung-electronics-research-and-developmentexpenditure/ lee, j. y. (2011). incremental innovation and radical innovation: the impacts of human, structural, social and relational capital elements. university of michigan operations and sourcing management ph.d. thesis. mcgrath, m. (2013). blackberry cofounder lazaridis considering buyout bid. forbes. https://www.forbes.com/sites/maggiemcgrath/2 013/10/10/blackberry-co-founder-lazaridisconsidering-buyout-bid/?sh=1fcf8f331618 mendoza-silva, a. (2020). innovation capability: a systematic literature review. in european journal of innovation management. 24(3), 707734. emerald group holdings ltd. https://doi.org/10.1108/ejim-09-2019-0263 mendoza-silva, a. (2021). innovation capability: a sociometric approach. social networks, 64, 72–82. https://doi.org/10.1016/j.socnet.2020.08.004 mobikyo, k.k. (2014). world first camera phone the kyoceravp-210. http://wirelesswatch.jp/2014/07/09/world-firstcamera-phone-the-kyocera-vp-210/ nils-gerrit wunsch. (2021). global: number of samsung patent filings by legal status 1999-2019 | statista. https://www.statista.com/statistics/1034067/nu mber-of-samsung-patents-by-filing-year-andstatus-worldwide/ oldcomputers. (2022). apple 1 computer. oldcomputers.netwebsite. http://www.oldcomputers.net/applei.html park, j. h., lee, b., moon, y. h., kim, g. s., & kwon, l. n. (2018). relation of r & d expense to turnover and number of listed companies in all industrial fields. springer open, 4(1). https://doi.org/10.1186/s40852-018-0093-4 pascual-fernández, p., santos-vijande, m. l., lópezsánchez, j. á., & molina, a. (2021). key drivers of innovation capability in hotels: implications on performance. international journal of hospitality management, 94. https://doi.org/10.1016/j.ijhm.2020.102825 pennstate. (n.d.). 5.2 correlation & significance | stat 100. pennstate eberly college of science. retrieved may 2, 2022, from https://online.stat.psu.edu/stat100/lesson/5/5.2 quintane, e., casselman, r. m., reiche, b. s., & nylund, p. a. (2011). innovation as a knowledge-based outcome. in journal of knowledge management. 15(6), 928-947. https://doi.org/10.1108/13673271111179299 rajapathirana, r. p. j., & hui, y. (2018). relationship between innovation capability, innovation type, and firm performance. journal of innovation and knowledge, 3(1), 44–55. https://doi.org/10.1016/j.jik.2017.06.002 rangone, a. (1999). a resource-based approach to strategy analysis in small-medium sized enterprises. kluwer academic publishers. https://doi.org/https://doi.org/10.1023/a:10080 46917465 rarick, c. (2011). apple ii case. journal of the international academy for case studies. international academy for case studies, 17(7). volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.251 | http://emaj.pitt.edu sanjeev singh, rahul more emerging markets journal | p a g e |85 rijanto, a. (2018). innovation driven enterprise, sustainable business and firm financial performance. the asian journal of technology management,11(1),10-25. https://doi.org/10.12695/ajtm.2018.11.1.2 romijn, h., & albaladejo, m. (2002). determinants of innovation capability in small electronics and software firms in southeast england. in research policy (vol. 31). samsung newsroom. (2013). [infographic] history of samsung mobile phones: evolution of display – samsung global newsroom. samsung newsroom. https://news.samsung.com/global/infographichistory-of-samsung-mobile-phones-evolutionof-display sarno, d. (2010). sales of google's android beating iphone in 2010, nielsen says. los angeles times. https://latimesblogs.latimes.com/technology/20 10/08/google-android-apple-iphone-salesmobile-att-verizon.html saunila, m. (2016). performance measurement approach for innovation capability in smes. international journal of productivity and performance management, 65(2), 162-176. https://doi.org/10.1108/ijppm-08-2014-0123 saunila, m., & ukko, j. (2012). a conceptual framework for the measurement of innovation capability and its effects. baltic journal of management, 7(4),355-375. https://doi.org/10.1108/17465261211272139 sava, j. a. (2022). blackberry r&d spending 2021 | statista. https://www.statista.com/statistics/221671/rese arch-and-development-expenses-of-rim-since2009/ sayantika, b. (2022). correlation: significance, types and measures | statistics. micro economics notes. https://www.microeconomicsnotes.com/statisti cs/correlation/correlation-significance-typesand-measures-statistics/15249 statcounter globalstats. (2022). mobile vendor market share worldwide | statcounter global stats. statcounter globalstats. https://gs.statcounter.com/vendor-marketshare/mobile/worldwide/#yearly-2010-2022bar tigermobiles. (2019). evolution of the mobile phone tigermobiles.com. tigermobiles. https://www.tigermobiles.com/evolution/#foote r timmer, j. (2021). end of the line finally coming for blackberry devices | ars technica. https://arstechnica.com/informationtechnology/2021/12/end-of-the-line-finallycoming-for-blackberry-devices/ traore, m. (2020). assessing the status of autonomous vehicles innovation using assessing the status of autonomous vehicles innovation using patent data patent data [rochester instituteoftechnology]. https://scholarworks.rit.edu/theses trivedi, p. d. (2017). consumer dictates the market: lesson from blackberry. journal of management research and analysis, 4(4), 183. https://doi.org/10.18231/2394-2770.2017.0026 uswitch. (2021). uswitch mobiles history of mobile phones and the first mobile phone. https://www.uswitch.com/mobiles/guides/histo ry-of-mobile-phones/ youssef, m. h. (2013). westminsterresearch strategic tensions within the smartphones industry: the case of blackberry. westminsterresearch. http://www.westminster.ac.uk/research/westmi nsterresearch zaman, r. (2020). evolution of smartphone the waves. the waves. https://www.thewaves.org/2020/09/22/evolution-ofsmartphone-as-disruptive-innovation/ volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu moonlighting and organizational performance in the nigerian banking sector moruff sanjo oladimeji olabisi onabanjo university, nigeria | e-mail: moruff.oladimeji@oouagoiwoye.edu.ng atinuke oluwatoyin ayobalogun the federal polytechnic ilaro, nigeria | e-mail: atinuke.ayobalogun@federalpolyilaro.edu.ng henry adewale odunayo lagos state university of education, nigeria | e-mail: waleodunayo2002@yahoo.com abstract this study examined the effect of moonlighting on organizational performance in the nigerian banking sector. it adopted a survey design that allowed the researcher to collect only cross-sectional data from the respondents. the questionnaire was administered to the staff of five (5) different banks in lagos and ogun states to seek their opinions. the responses were analyzed using regression analysis. the results revealed that, most of the respondents had heard and experienced moonlighting at various points of their career in the banking sector and that moonlighting negatively impacts firm performance in terms of employees’ productivity, profitability, and dividend payment. the study recommends the need for policies to be put in place. terms of policies must be incorporated in the employment contract for employees to know the consequences of breaching the contract. finally, disciplinary action should be taken on the affected staff to serve as deterrent to others. keywords: moonlighting, organization, performance, banking, employee new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.294 | http://emaj.pitt.edu | mailto:moruff.oladimeji@oouagoiwoye.edu.ng mailto:atinuke.ayobalogun@federalpolyilaro.edu.ng mailto:waleodunayo2002@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.294 | http://emaj.pitt.edu moonlighting and organizational performance in the nigerian banking sector page |14| emerging markets journal moonlighting and organizational performance in the nigerian banking sector moruff sanjo oladimeji atinuke oluwatoyin ayobalogun henry adewale odunayo i. introduction people taking up another job aside from their primary job is widely observed. some employees are moonlighting without the consent of their employers while some are moonlighting with their employers' consent. approval is generally provided that such a second job will not affect their primary job (geyh, 2022). moonlighting is seen as an organizational issue in many private and public developed, developing and undeveloped countries. the number of bankers taking on additional occupations has been steadily rising over the last several years in a developing countries like nigeria (bakare, 2021). moonlighting is a frequent term for this practice, in which workers take on additional work outside of their core duties (dames, 2022). the worker decides to pursue entrepreneurial endeavors while preserving the financial security provided by their principal employment, which is reflected in moonlighting, according to mars (2019). moonlighting arises when individuals have more than one job at the same time. moonlighting or double-job holding is a long-old practice in developed and developing economies (skourou et al., 2019). most employees moonlight for financial benefits, but nonfinancial priorities arise through the modern lifestyle, also coax a person towards it (bates & hertig, 2020). as a result, several workers in the banking institutions in nigeria supplement their pay by working outside of the system when delivering services during office hours (tayo-garbson et al., 2020). adebisi and olawale (2019) opine that, the financial sector services could be affected mainly because the workers are engaged in second jobs to supplement their salaries. akinde, micah and ademola (2020) opine that, workers in the banking sector seem to routinely moonlight to fulfil their monthly financial commitments, although moonlighting has not been adequately addressed in the sector. the general saying surrounding bankers covers many beliefs that bankers cannot engage in two jobs, which leads to poor performance (ofodum & onyia, 2021). the banking sector is one of the most competitive and profitable sectors in driving economic growth and expansion, and this is because the service sector is the most growing and regulating sector in the world. the sector's achievements can be traced to individual employee efforts to meet the organization’s targets (worimegbe, abosede & oladimeji, 2022). each banker's strategies ensure that the organization’s productivity is achieved as desired by the organization’s stakeholders. the productivity of each of these individuals at the end of the day is recorded as the organization’s profitability, making them relevant in the sector (bernard azolibe, 2021). an increase in moonlighting recently and specifically in the banking industry has become necessary as a research phenomenon because of the work-life balance initiatives this industry provides to its workforce (ashwini, mirthula & preetha, 2017). oladimeji & akingbade (2012) observed that employees will be willing to stay overtime to finish their jobs when they found out that their performance had increased. based on this, they will also be more loyal to the organization management and business operations. to a more significant extent, moonlighting has increased employees' morale in achieving or taking care of their needs, affecting their performance towards their primary duties and reducing organizational productivity (akinde, 2018). however, the degree to which such moonlighting activities affect the organization's performance, especially in deposit money banks, is an issue of debate in the extant literature (adebowale, 2015; adebisi & olawale, 2019; akinde et al., 2020; bakare, 2021). this study investigates the effect of moonlighting and performance in the banking industry. banking sector is the main focus of this study, because it is a significant driver of the nigerian economy and one of the major employers of labor (worimegbe et al., 2022). specific objectives of the study are listed below: i. examining the effect of moonlighting on service delivery in the banking sector. ii. investigating the impact of moonlighting on employees' productivity in the banking sector. iii. evaluating the influence of moonlighting on the performance of banks in nigeria. ii. literature review the concept of moonlighting is defined by several authors depending on the context of the study and the opinion of the society they exist. serajul (2009) referred to moonlighting as working at a second job or working for another job in addition to the employee's fulltime job. betts (2011) stated that moonlighting comprises work that is outdoor to employees' work, which means having two or more other jobs in addition to the primary work. this usually occurs to employees who have a more pronounced career and which acts as a principal occupation. according to banerjee (2012), moonlighting is when an employee holds a second job while in the employer's service, which can also be referred to as double jobbing. moonlighting refers to employees taking up more than their primary job alongside. the main reason for workers who engage in moonlighting is mainly to increase their standards of living, and this situation is commonly known as 'moonlighting', which is defined as having an extra job (chao, 2018). however, bakare (2021) opined that moonlighting or a second job holding parallel to an employee's primary job is an important characteristic that moves from blue to full moonlighting. understanding the transition of the blue moon to the full moon and its effect on the organization will help to know the extent of volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.294 | http://emaj.pitt.edu moruff sanjo oladimeji, atinuke oluwatoyin ayobalogun, henry adewale odunayo emerging markets journal page |15| moonlighters. management may cave into employee demands during performance evaluations and raise compensation as well as perks. however, some employees may not be pleased with the benefits and seek second jobs to supplement their income. however, their efforts may be fruitless owing to the absence of skills. blue moonlighting is a term used to describe this sort of disillusionment in one's efforts (dames, 2022). quarter moonlighting is when an employee is dissatisfied with their current income, making him/her search for a part-time job in which they work after a regular job for additional money. quarter moonlighting may only satisfy daily necessities or cover additional costs (dan-jumbo & nwuche, 2020). when they are not working, many people spend more money than they make. they enjoy a high standard of living and wish to put aside some money for the future. after that, individuals spend half of their free time generating more revenue to acquire a sizable sum (o'rourke, 2020). during full moonlighting, workers in various professions find the additional time or employees believe that their pay is not equal to their expectations or friends are making more money than them and co-workers with weaker credentials are enjoying higher standing than them (bawalla, 2021). during rough times, these employees may start their own company or industrial unit while still performing their normal job. however, a second job is what determines their financial and social standing. full moonlighting is the term at that point (chao, 2018). on the other hand, pine (2020) posits that to keep up with the rising costs, some people choose to work two jobs at the same time, while cornell and sundell (2020) claim that there are various reasons why some individuals work asides making more money, from increasing their expertise in a new field to coping with boredom. moonlighting is exhausting for a variety of reasons. workers' unhappiness with their current wages leads to the practice of moonlighting. however, bawalla (2021) opined that employees feel disheartened by their employer because of the increased revenue, and this is because employee moonlighting affects all aspects of human resources management. gehy (2021) emphasized that, dealing with employees who moonlight may be challenging, as it can negatively impact productivity. performance is an umbrella word for all aspects related to the success of a company and its operations, as defined by rehman khan et al. (2021). an activity's actual outcomes/outputs, how it is carried out, or the capacity to reach those results are all examples of performance. performance, as defined by nani and safitri (2021), refers to the attainment of results which ensure that a firm's stakeholders get desired outcomes. organizations that record-high returns and identify performance drivers at all levels of the business are more likely to succeed (alsyouf et al., 2021). chatterjee et al. (2021) describe performance assessment as an instrument that assists organizations in tracking performance, identifying improvement areas, enhancing motivation, improving communication, and increasing responsibility (garavan et al., 2021). the classic 3es (effectiveness, efficiency and economy) are a good analogy for performance (amhalhal et al., 2021). according to nani and safitri (2021), organizational performance is defined as the capacity of an organization to achieve its objectives by using its resources efficiently and effectively. the capacity of an organization to fulfil its aims and objectives is referred to as its performance. employee productivity, customers, internal and innovative procedures are all part of the definitions of success by liu et al. (2022). profit margin, asset turnover, leverage, cash flow, and working capital are some of the most critical financial drivers for improving performance, according to the financial viewpoint (widianto et al., 2021). service delivery, customer happiness, brand image, customer retention, and customer profitability are all part of what is referred to as organizational performance (garavan et al., 2021). according to supramaniam and singaravelloo (2021), financial success is the sole metric that matters to shareholders, executives, and the market. this metric may measure organizational performance and sustainability, since it is the driving force behind a company's existence. however, according to liu et al. (2021), a firm's success should not just be judged by its financial results, but also by its operational and market indicators. as a result of their greater alignment with the entire business strategy, non-financial indicators are more successful in driving management performance. employee productivity is the amount and quality of work completed concerning the resources consumed (nani and safitri, 2021). having a competitive edge depends on an organization's ability to produce more. this is due to the effectiveness with which the available resources were put to use. rehman khan et al. (2021) add that, in most cases, the employee's final and particular outputs are what the employer is most interested in. financial successes, community effect, and so on are all outcomes that may be measured in terms of cost, quality, quantity or time. measuring productivity entails figuring out how long it takes an average worker to produce a certain amount of output. hence, this study utilizes service delivery, employee productivity and financial performance as the measures of bank performance. efforts to fulfil a need are a motivational factor in need-based theories. the manager's role is to identify the requirements of his or her employees and then design the work environment to meet those demands. physiological, social, self-esteem, and safety are at the top of maslow's list of fundamental human needs. as one need is met below another, it acts as a catalyst for fulfilling higher-level needs. according to the erg hypothesis, maslow's hierarchy of requirements may be reworked into three subcategories (existence, relatedness, and growth). the concept acknowledges that workers will regress if they get irritated while trying to meet higher-level requirements. factors that make individuals unsatisfied at work (hygiene factors) are separated from those that drive workers (the two-factor hypothesis) (motivators). on the other hand, the acquired-needs argument contends that people have a steady and dominating desire to realize their potential, gain power, or join forces with others. the dominating need will drive behavior. each of these ideas outlines certain aspects of the work environment to encourage workers. these ideas opened the way for theories based on processes that detail workers' mental calculations when deciding how to act inside the company (georges & safary, 2017). different studies have examined moonlighting in one way or the other for instance, the effect of moonlighting on organizational commitment and entrepreneurial motivation (sena & sachdeva, 2020), moonlighting practices on smes performance (khatri & khushboo, 2014), the effect of employee moonlighting ( banerjee, 2017), moonlighting and financial motivation (block & landgraf, 2016), moonlighting and job volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.294 | http://emaj.pitt.edu moonlighting and organizational performance in the nigerian banking sector page |16| emerging markets journal satisfaction (seema, choudhary &saini, 2021), moonlighting as coping strategy for irregular payment of salaries (akinde, micha, & ademola, 2020) and moonlighting as an alternative for better resource management (betts, 2011). there is a dearth of literature on how moonlighting affects organizational performance, particularly in respect to financial performance. oladimeji and udosen (2019) examined the effect of a diversification strategy on an organization’s performance in the manufacturing sector. the study concluded that diversification is a strategic tool for achieving strategic relevance and spontaneous performance the majority of the prior studies were conducted on the education sector, and most findings showed that any effort directed at improving the performance of lecturers in the university must be rooted in identifying the appropriate educational policies that will help to achieve the desired goal of lecturers' performance in the area of research, teaching and community services. more so, any effort that ignores the human resource management implications of moonlighting among bankers may miss critical issues in understanding the forces underpinning the performance of bank employees in nigeria. iii. research methodology the study implemented a survey design that allowed the researcher to collect only cross-sectional data from the respondents. this design is considered suitable, because it helps the researcher to collect the primary data concerning the study variable without having personal contact with the research participant or manipulating them at any point. therefore, the collected data were analyzed, understanding the effect between moonlighting and performance in the banking sector. the study population is the deposit money banks of nigeria. however, based on their financial performance, the first five most significant banks are chosen as the basis for this study. according to startcredits (2019), zenith bank plc, guaranty trust banks, first bank of nigeria, united bank for africa, and access bank are nigeria's most financially successful banks. based on the study area, lagos and ogun states, the total population of the selected bank staff is four hundred and twenty-one (421). sampling is concerned with choosing a subgroup of individuals from the target population to enable the estimation of the characteristics of the entire population. it is vital to use an adequate number of subjects to ensure a higher probability that the study results will be more generalizable and interpretable. the sample size was calculated using the raosoft sample size in estimating the sample size, a 5 percent margin of error (confidence interval) and 95 percent confidence level were used, and the sample size was two hundred and five (205). the questionnaire was used to elicit information from the selected banks in lagos and ogun states. the questionnaire was based on a 5-point likert scale ranging from strongly agree, agree, undecided, disagree and strongly disagree. the instrument was a subject for validation and reliability tests. this was to ensure that good and quality data were obtained from the respondents. the test included face and content validity by the researcher. in order to analyze the data collected from primary sources, ordinary lease square (ols) method using the spss version 26 was adopted to assess the effect of moonlighting on organizational performance. a total of one hundred and twenty (120) responses were retrieved and considered reliable for the analysis. parallel to the research objectives and the gaps in the existing literature, the following hypotheses were articulated: ho1: moonlighting does not significantly affect service delivery in the banking sector. ho2: moonlighting does not significantly impact employees' productivity in the banking sector. ho3: moonlighting does not significantly influence banks' performance in nigeria. iv. results and discussion hypothesis testing hypothesis 1 ho1: moonlighting does not significantly affect service delivery in the banking sector. table 1: moonlighting and its effect on service delivery in the banking sector source: authors’ compilation (2022) table 1 shows the variation and relationship between moonlighting and the service delivery of deposit money banks. the result reveals a moderate relationship (r=.231) between moonlighting and service delivery. the result also indicates that a 23.3% variation in service delivery of deposit money banks is explained by moonlighting, while 76.7% is accounted for by other factors not indicated in the study. the sum of squares, the degrees of freedom for the regression, and the residual; therefore, the result indicates that the model of moonlighting is a significant driver in service delivery. the mean square is given for the regression, the residual, and the f-value (f=17.798); hence, the associated p-value (p=.000) is displayed. these results indicate that the regression model is statistically significant at the .05 alpha level. the table provides the unstandardized coefficients for the regression equation (beta= .483) and the standard error (s.e= .073.). the result reveals that there is a moderate relationship between moonlighting and service delivery. this implies that as moonlighting increases, the service delivery of the firm increases. the t-value (tc=43.375, p=.000) shows that moonlighting is statistically significant in explaining service delivery in deposit money banks. hence the null hypothesis is rejected while the alternative hypothesis is accepted. hypothesis testing hypothesis 2 ho2: moonlighting does not significantly impact employees' productivity in the banking sector. volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.294 | http://emaj.pitt.edu moruff sanjo oladimeji, atinuke oluwatoyin ayobalogun, henry adewale odunayo emerging markets journal page |17| table 2: moonlighting and its impact on employees' productivity in the banking sector source: authors compilation (2022) table 2 shows the variation and relationship between moonlighting and the employees' productivity in deposit money banks. the result reveals a weak relationship (r=.231) between moonlighting and profit. the result also indicates that a 5.3% variation in employees’ productivity in deposit money banks is explained by moonlighting, while 94.7% is accounted for by other factors not indicated in the study. the table gives the sum of squares and the degrees of freedom for the regression, the residual and the total. the mean square is given for the regression and the residual, and the f-value (f=4.094) and the associated p-value (p=.000) is displayed. these results indicate that the regression model is statistically significant at the .05 alpha level. that is, moonlighting is a good fit in explaining the employees’ productivity of deposit money banks. the table provides the unstandardized coefficients for the regression equation (beta=-.231) and the standard error (s.e= .128). the result reveals an inverse effect between employees’ productivity and moonlighting. this implies that as moonlighting increases, the employees’ productivity of deposit money banks reduces. the t-value (tc=1.107, p=.295) shows that moonlighting is not statistically significant in explaining employees’ productivity in deposit money banks. hence the null hypothesis is accepted. hypothesis testing hypothesis 3 ho3: moonlighting does not significantly influence banks' profitability in nigeria. table 3: moonlighting and its influence on banks' profitability in nigeria source: authors compilation (2022) table 3 shows the variation and relationship between moonlighting and the profit of deposit money banks. the result reveals that there is a weak relationship (r=.183) between moonlighting and profit. the result also indicates that 3.4% variation in profit of deposit money banks is explained by moonlighting, while 96.6% is accounted for by other factors not indicated in the study. also, table 3 shows the sum of squares and degrees of freedom for the regression, the residual, and the total. the mean square is provided for the regression, the residual, and the f-value (f=4.094); therefore, the associated p-value (p=.000) is displayed. these results indicate that the regression model is statistically significant at the .05 alpha level. moonlighting may be a good way to explain profit within deposit money banks. the table provides the unstandardised coefficients for the regression equation (beta=-.183) and the standard error (s. e= .173.). the result reveals an inverse effect between profitability and service delivery. this implies that as moonlighting increases, the profit of deposit money banks reduces. the t-value (tc=1.107, p=.295) shows that moonlighting is not statistically significant in explaining profitability in deposit money banks. hence the null hypothesis is accepted. v. discussion of findings the study examined the effect of moonlighting on selected deposit money banks performance. the findings revealed that, most of the respondents sampled had heard and experienced moonlighting at various points of their career in the banking sector. the findings corroborate ara and akbar (2016), who emphasized that moonlighting is a common sight in virtually all organizations irrespective of their size, geographical location, and industry. hypothesis one shows that moonlighting significantly affects the performance of deposit money banks in terms of increasing service delivery. that is, irrespective of who takes part in the act of moonlighting in deposit money banks, it could still positively impact the market capabilities and opportunities to increase the size of the bank operations. the result corroborates ashwini, mirthula and preetha's (2017) assertions that moonlighting is a significant driver of firm performance in emerging economies, although it could adversely affect the developed economies. in general, it appears that dual jobholders can perform as adequately as their single job-holding counterparts. the results also indicate a contrary report in explaining h02 and h03. the result indicates that moonlighting negatively impacts firm performance in terms of employees ‘productivity, profitability, and dividend payment. that is, the more employees in the banking sector engage in moonlighting activities, the more the capacity of the deposit money banks decreases in generating more profit, dividend payment and its employees’ productivity. the reason for this is that, it could be presumed that more employees would be found wanting their position of primary assignments, thereby affecting their productivity, efficiency and capacity to positively improve the performance of the firm in terms of profit generation, employees’ productivity and dividend payments. the result is consistent with the findings of sangwan (2014) that when employees are engaged in two or more jobs, their performance hampers because of the lack of focus on the current job. so their productivity decreases which leads to the incompletion of task. vi. conclusion and recommendations the study investigated the effect of moonlighting on the performance of selected deposit money banks in nigeria. the research concludes that many employers are not concerned with moonlighting volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.294 | http://emaj.pitt.edu moonlighting and organizational performance in the nigerian banking sector page |18| emerging markets journal practices and indeed, there can be many benefits to allowing it. on the other hand, few employers feel negative due to the loss of business privacy, competition threats, and other productivity-related issues. in terms of the first objective, which investigates the interaction between moonlighting and the service delivery of deposit money banks, the study establishes and concludes that moonlighting significantly influences the service delivery of deposit money banks. the study adds to the existing literature by emphasizing that employers should find better ways to handle it rather than banning it. in terms of the second objective, which examined the effect of moonlighting on the return of deposit money banks, the study concludes that moonlighting negatively affects employees’ productivity, although the impact is insignificant. hence, it is advised that managers should have a clear moonlighting policy. in ascertaining the effect of moonlighting on deposit money banks' profitability, the study concludes that moonlighting negatively affects profitability. the study ascertains that the policy of deposit banks must specify the organization’s rules and regulations regarding moonlighting. the study ascertains that human resource management plays a strategic role in managing people and the workplace environment. an impartial hr policy can accomplish both management and employee goals together. more efforts could be directed towards improving the performance of the employee engaged in moonlighting. appropriate policies must be framed to overcome the effects of moonlighting and maintaining a harmonious relationship between employer and employees. based on the findings of the study, the subsequent are recommended to the deposit money banks: first, policies must be put in place, and their terms must be incorporated within the employment agreement for workers to understand and appreciate the results of breaching them. second, since moonlighting negatively affects the employee's performance, a disciplinary course of action should be followed so as to reduce poor work performance. third, in order to stop uncertainties, moonlighting must be regulated and controlled. references adebisi, o. s. (2019). a comparative study of the prevalence of moonlighting in the private and public sectors of ekiti state, nigeria. global journal of human resource management, 7(4), 16-38. akinde s.i., micah d.j. & ademola a.a. (2020). moonlighting as coping strategy for irregular payment of salaries in nigeria: evidence from ekiti state. asian journal of social science and management technology 2(4), 79-92. adebowale, f.a. (2015). teacher motivation: a factor for classroom experience and school improvement in nigerian. retrieved january 30, 2021 from http://.finarticles.com/1/articles.com /p/articles/ mi.college student journal, 38(1) 14. ahmad, y. (2017). self-efficacy and job performance among female staff at klang. journal of mnagement science2(1), 100–107. akinde, m.a. (2018). deposit service delivery. retrieved 29 january, 2021 from https://en.wikipedia.org/wiki/deposit_market_ share. akinde, m., micah, d. ademola.a. a. (2020). moonlighting as 'coping strategy' for irregular payment of salaries in nigeria: evidence from ekiti state. asian journal of social science and management technology, 2(4), 79-91. alsyouf, i., alsuwaidi, m., hamdan, s., & shamsuzzaman, m. (2021). impact of iso 55000 on organisational performance: evidence from certified uae firms. total quality management & business excellence, 32(1-2), 134-152. aluko, m. a. (2003). the impact of culture on organisational performance in selected textile firms. nigeria.nordic journal of african studies, 12(2), 164-179. amhalhal, a., anchor, j., tipi, n. s., & elgazzar, s. (2021). the impact of contingency fit on organisational performance: an empirical study. international journal of productivity and performance management. ara k & akbar a (2016). a study of impact of. moonlighting practices on job satisfaction of the university teachers, bulletin of education and research 38(1), 154-167. ashwini, g.mirthula , o &preetha, s (2017). moonlighting intentions of middle level employees of selected it companies‖, international journal of pure and applied mathematics, 114 no. 12, 213-223. bakare, k.a. (2021). bureaucracy and corporate practice in nigerian universities. a paper published in global journal of human resource management, by europeanamerican journals, ecrtd-uk. print issn: 2053-5686. 9(1), 2036. banerjee, s. (2012). effect of employee moonlighting:a challenging task for managers and. international journal of management research and business strategy, 1(2). bell, b. a., ferron, j. m., & kromrey, j. d. (2008). cluster size in multilevel models: the impact of sparse data structures on point and interval estimates in two-level models. in jsm proceedings: survey research methods section , 1122-1129. bernard azolibe, c. (2021). banking sector intermediation development and economic growth: evidence from nigeria. journal of african business, 1-18. volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.294 | http://emaj.pitt.edu moruff sanjo oladimeji, atinuke oluwatoyin ayobalogun, henry adewale odunayo emerging markets journal page |19| betts, stephen c. (2011). gender differences in multiple jobholding: moonlighting among teachers. journal of business & economics research (jber), 2(8). brumbach,g.b. (1988). some ideas, issues and predictions about performance management. public personnel managemnt, winter. casacuberta, t. e. & gandelman, g. (2016). hr practices and their impact on the psychological contracts of temporary and permanent workers. the international journal of human resource management, 24, 285-307. doi:10.1080/09585192.2012.677462 chao, m. (2018). intentions-based reciprocity to monetary and non-monetary gifts. games, 9(4), 74. chatterjee, s., rana, n. p., & dwivedi, y. k. (2021). how does business analytics contribute to organisational performance and business value? a resource-based view. information technology & people. chin, w. w., peterson, r. a., & brown, s. p. (2008). structural equation modelling in marketing: some practical reminders. journal of marketing theory and practice, 16(4), 287-298. consolota, m. (2015). teachers moonlighting and its impact on their job performance in dars es salaam region secondary school. published dissertation in the department of education in open university of tanzania. cornell, a., & sundell, a. (2020). money matters: the role of public sector wages in corruption prevention. public administration, 98(1), 244260. dale, a. (2016). enhancing capacity building in educational sciences in nigerian universities: how higher education managers can help. european journal of educational studies, 1(1), 5-9. dames, c. (2020). how the law supports the whistleblower. farmer’s weekly, 2020(20005), 29-29. dan-jumbo, c. t., & nwuche, c. a. (2018). age-based discrimination and employee job outcomes: evidence from the nigerian civil service. age, 4(5). garavan, t., mccarthy, a., lai, y., murphy, k., sheehan, m., & carbery, r. (2021). training and organisational performance: a meta‐analysis of temporal, institutional and organisational context moderators. human resource management journal, 31(1), 93-119. george, h. & safary, d. (2017). moonlighting as a growing phenomenon. international journal of management studies, 1(4). 56-67. geyh, c. g. (2022). the architecture of judicial ethics. university of pennsylvania journal of constitutional law, 23(6), 2289. gonzalez (2004). multiple job holding. job attitudes of workers with two jobs. journal of vocational behavior, 64, 222-235. doi:10.1016/s00018791(03)00047-2 hdfc (2021). analysis-on-the-bank-performance-ofnigerian-banks.php . retrieved 29 january, 2021 from https://ukdiss.com/examples/ analysis-on-the-bank-performance-of-nigerianbanks.php herzberg, f. (1968). work and nature of man. london: staples press. hirsch, b. t., husain, m. m., & winters, j. v. (2016). multiple job holding, local labor markets, and the business cycle. iza journal of labor economics,5(1). https://doi.org/10.1186/s40172-016-0044 hubbard.g. (2006), measuring organisational performance: beyond the triple bottom line, journal of social sciences, business strategy and environment, 1469-1473. ilo. (2004). conditions of work and employment programme | multiple job-holding. ilo, august, 2. http://www.tba.co.nz/frst_projects/agrifoods 2003.pdf khatri, p., & khushboo, a. (2014). study of organizational commitment and moonlighting practices of sme employees in delhi-ncr. global journal of finance and management, 6(6), 535-544. kisumano, g. m., & wa-mbaleka, s. (2017). moonlighting as a growing phenomenon: a case study of a congolese christian university.journal of business management, 4 (2) 149-156. kreitner, a., & kinicki, m. (2006). the use of the psychological contract to explain turnover intentions in the hospitality industry: a research study on the impact of gender on the turnover intentions of highly educated employees. the international journal of human resource management, 21, 144-162. doi:10.1080/09585190903466954 liu, g., tsui, e., & kianto, a. (2022). revealing deeper relationships between knowledge management leadership and organisational performance: a meta-analytic study. knowledge management research & practice, 20(2), 251-265. mars, g. (2019). cheats at work: an anthropology of workplace crime. routledge. volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.294 | http://emaj.pitt.edu moonlighting and organizational performance in the nigerian banking sector page |20| emerging markets journal mohd, a., aliza, d., & yarina, r. (2017). psychological contract development during organisational socialisation: adaptation to reality and the role of reciprocity. journal of organizational behavior, 24, 537-559. doi:10.1002/job.205 mugenda, p. & mugenda, h. (2003). when can group level clustering be ignored. multilevel models versus single-level models with sparse data. journal of epidemiology and community health,62,752-758. doi:10.1136/jech.2007.060798 nani, d. a., & safitri, v. a. d. (2021). exploring the relationship between formal management control systems, organisational performance and innovation: the role of leadership characteristics. asian journal of business and accounting, 14(1), 207-224. nosa, v. (2016). profiling the desirable psychological contract for different groups of employees: evidence from greece. the international journal of human resource management, 20, 810-830. doi:10.1080/09585190902770711 oladimeji, m.s & akingbade, w. a (2012), determinants of organizational effectiveness in the nigerian communication sector, european journal of business and management 4(13), 68-76. oladimeji, m.s & udosen, i (2019) the effect of diversification strategy on organizational performance, journal of competitiveness, publication of tomas bata university in zlín, faculty of management and economics, zlín, czech republic, 11(4) 120 – 131 issn 1804171x (print), issn 1804-1728. o’rourke, j. e. (2020). patrol principles. in the professional protection officer (pp. 87-104). butterworth-heinemann. ofodum, c. c., & onyia, c. c. (2021). effect of electronic banking on performance of banking sector in nigeria. advance journal of banking, finance and investment, 5(5). ologunde, a. o., akindele, r. i., & akande, w. o. (2013). moonlighting among university lecturers and their performance in the southwestern nigeria. journal of management and sustainability,3(4),92–102. https://doi.org/10.5539/jms.v3n4p92 panos, g. a., pouliakas, k., & zangelidis, a. (2014). multiple job holding, skill diversification, and mobility. industrial relations, 53, 223-272. doi:10.1111/irel.12055 pine, f. (2020). dealing with money: złotys, dollars and other currencies in the polish highlands. in markets and moralities, 75-97, routledge. rehman khan, s. a., yu, z., sarwat, s., godil, d. i., amin, s., & shujaat, s. (2022). the role of block chain technology in circular economy practices to improve organisational performance. international journal of logistics research and applications, 25(4-5), 605-622. serajul, l. (2009). moonlighting by public university teachers. journal of management and sustainability, 3(4), 92-95. setkar, m. j. & gyang, t. (2019). job attitudes of workers with two jobs. journal of vocational behavior, 64,222-235. doi:10.1016/s0001-8791(03)00047-2 shisko, j. & rostker, l. a. (2017). influences of trait negative affect and situational similarity on correlation and convergence of work attitudes and job stress perceptions across two jobs. journal of management, 24, 553-576. doi:10.1177/014920639802400405 shodhganga (2014). theses website. retrieved 29 january, 2021 from https://shodhganga. inflibnet.ac.in/bitstream/10603/21909/3/chapte r%20four.pdf skourou, c., sherouse, g. w., bahar, n., bauer, l. a., fairobent, l., freedman, d. j., ... & wilson, m. l. (2019). code of ethics for the american association of physicists in medicine (revised): report of task group 109. medical physics, 46(4), e79-e93. stephen .b. (2015). hr management & compliance . retrieved 28 january, 2021 from https://yourstory.com/2016/08/why-youremployees-moonlightutm_pageloadtype=scroll 29-1-2021 supramaniam, s., & singaravelloo, k. (2021). impact of emotional intelligence on organisational performance: an analysis in the malaysian public administration. administrative sciences, 11(3), 76. tayo-garbson, s. u., odionyenma, c. u., okoro, j. o., etenge-martins, c., & nnorom, g. c. (2021). code of ethics and self regulation in mass media organization: a study of selected radio and newspapers in imo state. walbe, setka g.; gyang, (2019), lecturers' moonlighting and job effectiveness in public universities in north-central nigeria. kiu journal of humanities, 4(4) 395-405. wasdani, k. p., vijaygopal, a., manimala, m. j., & verghese, a. k. (2021). impact of corporate governance on organisational performance of indian firms. indian journal of corporate governance, 14(2), 180-208. https://hrdailyadvisor.blr.com/category/hr-management-compliance/ https://yourstory.com/2016/08/why-your-employees-moonlightutm_pageloadtype=scroll https://yourstory.com/2016/08/why-your-employees-moonlightutm_pageloadtype=scroll volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.294 | http://emaj.pitt.edu moruff sanjo oladimeji, atinuke oluwatoyin ayobalogun, henry adewale odunayo emerging markets journal page |21| widianto, s., lestari, y. d., adna, b. e., sukoco, b. m., & nasih, m. (2021). dynamic managerial capabilities, organisational capacity for change and organisational performance: the moderating effect of attitude towards change in a public service organisation. journal of organizational effectiveness: people and performance. worimegbe, p.m., abosede,a.j., oladimeji, m.s. (2022) cultural typology, service quality and firm competitiveness, humanities, arts and social sciences studies 22(2) 359-370. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu antecedents and consequences of trust in public sector websites and social media hüseyin i̇nce gebze technical university, turkey | h.ince@gtu.edu.tr salih zeki i̇mamoğlu gebze technical university, turkey | imamoglu@gtu.edu.tr hülya türkcan gebze technical university, turkey | hturkcan@gtu.edu.tr gülsüm akca gebze technical university, turkey | gulsum.akca37@gmail.com abstract rapidly developing information and communication technologies have an influence on the whole world and have become an ordinary part of everyday life. not only people, but businesses and governments are affected by these changes. in this respect, governments use several online media platforms as their own digital face and thus keep pace with the developing technology. considering the lacks in previous researches, the aim of this paper is to investigate the critical factors influencing the citizens' trust in public sector websites and social media and also the relationship among trust in the public sector, citizen satisfaction and trust in public sector websites and social media. by studying 607 citizens who are users of the website or social media service belonging to the municipalities in turkey, we found that: (i) perceived quality, perceived usefulness, and facilitation conditions are the factors that affect the citizens' trust in public sector websites and social media, (ii) trust in the public sector websites and social media affects trust in the public sector and, (iii) trust in the public sector affects citizen satisfaction. keywords: public sector social media, public sector website, trusting factors, trust; citizen satisfaction new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.182 | http://emaj.pitt.edu | mailto:imamoglu@gtu.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.182 | http://emaj.pitt.edu antecedents and consequences of trust in public sector websites and social media page |22| emerging markets journal antecedents and consequences of trust in public sector websites and social media hüseyin i̇nce salih zeki i̇mamoğlu hülya türkcan gülsüm akca i. introduction until the 2000s, by using the internet, it was only possible to read the posts on the websites, watch videos and listen to the sound recordings, while with the emergence of web 2.0 and coming into our daily lives, the internet has become interactive and created an online world (obar & wildman, 2015). people have adapted to these changes easily and quickly. because it provides that world at users’ fingertips. the development and spread of information as well as communication technologies (icts) have also a significant impact on the development of nations (kassen, 2014). therefore, public administrations and governments have adopted and used icts such as social media increasingly (criado, sandovalalmazan & gil-garcia, 2013). web 2.0 tools are used by the government both for external affairs, which are public relations and the announcement of the news and for internal affairs, which are intelligence services and public consultation (osimo, 2008). at the present time, both local and national governments around the world exist on the world wide web (www). the reason is that, taking place in the online world is not just an option today for governments. it is a requirement because of the necessity to provide both information and services effectively. governments use official websites, e-government websites, and social media tools for this purpose. both websites and social media give information, but in different ways. social media give information shorter, for example, sharing updates, whereas websites present detailed information (porumbescu, 2016). all of the online channels used by governments and public sector aforementioned, provide many advantages to not only governments, but also to citizens. there is an increasing amount of research on the issue that government and also public sector use websites and social media tools, because this usage enables both sides which are government and citizens, to be advantageous. in few studies citizen trust model for online channels examined, but there is no empirical research handling this issue in more detail, well addressed and comprehensively. hence, literature about citizen trust model for online channels is poor to determine critical factors influencing the citizens' trust in public sector websites and social media. additionally, while there are studies evaluating citizens' trust in the government according to the use of and attitude toward the government's social media and websites (parent, vandebeek & gemino, 2005; tolbert & mossberger, 2006), the relationship between trust in government and trust in government's online services as well as websites has been largely neglected. moreover, in the literature, trust in the government is not clear in relation to citizen satisfaction, since there are studies showing that both affect each other (yoon, 2002; welch, hinnant & moon, 2004). this paper intends to contribute the literature by providing comprehensive research aiming to fill in the gap of related literature addressed. in this respect, it is aimed to present comprehensive and overall research, since there is a need to determine the factors affecting trust in public sector websites and social media and explain the relationships among trust in the public sector, citizen satisfaction and trust in public sector websites and social media. the paper is structured as follows. first literature review, theoretical background and hypothesis development are presented. next, research methodology and analysis results are reported. in the end, conclusion and discussion are summarized. ii. literature review, theoretical background and hypothesis development the public sector’s use of social media and websites in the 1980s, when personal computer usage became widespread, every public administrator met information technology and it usage of governments were initiated (yıldız, 2007). in 2000, president clinton presented to the public the first web address and a number of new e-government initiatives, one of which was firstgov.gov offered by the federal state that is a government portal provided citizens with access to government information and services (moon, 2002). since then, the importance and necessity of online media for the government have been increasing and becoming widespread rapidly. although it has a short history as mentioned, it has shown significant improvement and in recent years, the government uses online media effectively. these media enable the government to make information known publicly and facilitate citizen investigations, whereas they allow the government to receive feedback from the public (hong, 2013). the aim of the government to use online media as a communication channel is to promote democratic values and ensure public trust in government (hong, 2013). social media which uses web 2.0 technology is inevitably everywhere now (baccarella, wagner, kietzmann & mccarthy, 2018) and also it creates an area for knowledge sharing and expression of thoughts (dong, liang & he, 2017). social media is defined as an internetbased application that enables to create and exchange content which is user-generated (kaplan & haenlein, 2010). its tools include social networking sites such as facebook and instagram, as well as applications that enable the information exchange such as blogs and wikis (bhimani, mention & barlatier, 2018). by using mobile and web technologies, social media provides interactive platforms that enable both individuals and communities to share, reconstruct, hash out and make a modification to volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.182 | http://emaj.pitt.edu hüseyin i̇nce, salih zeki i̇mamoğlu, hülya türkcan, gülsüm akca emerging markets journal | p a g e 2 3 contents (kietzmann, hermkens, mccarthy & silvestre 2011). the importance of social media for governments has attracted a great deal of attention and this has become a topic that has been addressed by various researchers (criado et al., 2013). because developments in icts are seen as a technological revolution and this affects the economy, culture and even politics to a great extent (kassen, 2014). in recent years, public enterprises have adopted various social media tools such as social networking, blogs, and crowdsourcing and usage of them have modified the landscape of public administrations (criado et al., 2013). now municipalities also pay attention to online communication and use various social media channels in order to communicate with citizens (guillamón, ríos, gesuele & metallo, 2016). this is because online media such as public sector websites provides communication and interaction between citizen and government, since it offers a communication space (hong, 2013). as a result of this, public enterprises which use and promote web 2.0 as well as social media tools are more conscious, innovative and even citizen-centric generally (bonsón, torres, royo & flores, 2012). the factors influencing citizens' trust in public sector websites and social media to examine the determining factors affecting citizens' trust in public sector websites and social media, a framework was developed based on the relevant literature. in this context, it was seen that several basic theories explaining the adoption and acceptance of technology and information systems have come to the fore. hence, in this study, a holistic approach was adopted from a comprehensive perspective and the effects of factors based on the models which are technology acceptance theory (tam), theory of reasoned action (tra), and theory of acceptance and use of technology (utaut) on citizens' trust in public sector websites and social media were investigated. tam explains that intention to use is affected by attitudes, and also perceived usefulness and perceived ease of use are the determinants of attitude (davis, bagozzi & warshaw, 1989). tra is a basic model, which predicts intention to use. based on the model, attitude toward behavior and subjective norm are affecting it (fishbein & ajzen, 1975). utaut explains that performance expectancy, effort expectancy, social influence, and facilitating conditions are the determinants (venkatesh, morris, davis & davis, 2003). based on these theories, propensity to trust, perceived quality, perceived usefulness, facilitating conditions, privacy factors and perceived risk are examined as determinants of citizens' trust in public sector websites and social media with the intent of better understanding of its key determinants. the propensity to trust the propensity to trust can be defined as eagerness to trust (cheung & to, 2017) and considered as a personal property (mayer, davis & schoorman, 1995). it is an important premise of trust (mayer et al., 1995; bélanger & carter, 2008; colesca, 2009). generally, it is of great importance in the early days of the relationships (mcknight, kacmar & choudhury, 2004). the effect of propensity to trust on trust to applications and web tools, which is being used rapidly by masses, is crucial especially due to the fact that although its useful aspects are known, there are also aspects which are black box yet (bélanger & carter, 2008). the reason is that, it stimulates positive perceptions and makes it easy to trust (mcknight et al., 2004). hence, we hypothesized that: h1. the propensity to trust is positively related to trust in the public sector websites and social media. perceived quality quality attributes in websites are 3 types: information, system and service quality (teo, srivastava & jiang, 2008). information quality is about the information offering by online services (sá, rocha & cota, 2016). system quality is about ease of handling and the reliability in technics of websites (teo et al., 2008). services quality is about the properties, which affect the online services directly (sá et al., 2016). in this respect, the degree of meeting expectations of citizens determines the level of their perceived quality and it affects the citizen's attitude toward the public sector websites and social media and also e-government services (aladwani, 2014). if the citizens encounter a high-quality website, social media, and e-government service, they think that it is adequate and useful, want to use it again and their confidence in them increases (colesca, 2009). hence, we hypothesized that: h2. perceived quality is positively related to trust in the public sector websites and social media. perceived usefulness perceived usefulness is the level of conceiving that e-government enhances their own value for citizens (liu & zhou, 2010). therefore, it facilities internet adoption generally (warkentin, gefen, pavlou & rose, 2002). because citizens attach great importance to their own benefit, when online services provide benefits to the citizens and present useful information, the citizens increase the frequency of usage and trusts. also, more citizens tend to use it (chatzoglou, chatzoudes & symeonidis, 2015). briefly stated, perceived usefulness of website and social media services are decisive in terms of trust in the public sector websites and social media. therefore, perceived usefulness enables to take an attitude toward them positively (hung, chang & yu, 2006; horst, kuttschreuter & gutteling, 2007). it also provides citizen’s satisfaction (liu & zhou, 2010), increases intention to use (chatzoglou et al., 2015) and is seen as a fundamental determinant of trust (horst et al., 2007; colesca, 2009; chatzoglou et al., 2015). hence, we hypothesized that: h3. perceived usefulness is positively related to trust in the public sector websites and social media. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.182 | http://emaj.pitt.edu antecedents and consequences of trust in public sector websites and social media page |24| emerging markets journal facilitating conditions facilitating conditions is defined as a degree of belief that there is a sufficient infrastructure to enable the use of a system (gupta, singh & bhaskar, 2016). it is also related to the perception about whether the technology following own lifestyle or not, especially for the web services (alawadhi & morris, 2008). if users can get fast support in solving various system and technical problems, their usage and trust will increase. these conditions remove the obstacles in the system, make it easy to use and increase the usage (venkatesh et al., 2003). furthermore, if users can get fast support in solving various system and technical problems, their usage and trust will increase. the reason is that, they can conceive it also as a foul-weather friend. this is an important point to make. from this point of view, facilitating conditions improve adaption and usage of the website as well as social media (alawadhi & morris, 2008). additionally, because facilitating conditions offer better experiences on the system and reduce the risks, it develops trust (ratnasingam, 2004). as a consequence, it can deduce that facilitating conditions are the motivators of trust in online media. hence, we hypothesized that: h4. facilitating conditions is positively related to trust in the public sector websites and social media. privacy factors privacy is about that person being able to control and know how their personal information is shared with whom and what (al-jamal & abu-shanab, 2015). in this respect, privacy is a concern for all people. with the internet taking its place in everyday life, people began to have a particular concern about online privacy when they realized that their personal information could be collected outside their control (dhillon, oliveira & syed, 2018). therefore, the security and privacy provided by that website or an online application play an important role for people to use and trust a website (ayyash, ahmad & singh, 2013). the reason is that, it is important whether people's expectations about privacy are met or not (martin, 2018). the security of personal data and privacy of citizens are also ethical issues for the government (gajendra, xi & wang, 2012). the government must ensure usage and trust (colesca, 2009; abu-shanab, 2014; al-jamal & abu-shanab, 2015). hence, we hypothesized that: h5. privacy factors are positively related to trust in the public sector websites and social media. perceived risk perceived risk is related to uncertainty resulting from potential adverse outcomes (featherman & pavlou, 2003). the online environment contains within itself a huge uncertainty. namely, it is normal for online environments to have a high risk (ranaweera, 2016). the following are the risks users may face when using an eservice or e-application: performance, financial, time, psychological, social, privacy and overall risks (featherman & pavlou, 2003). with respect to these risks, it is quite obvious that risk is closely associated with trust (liu & zhou, 2010). people stay away from what they think is highly risky. since people are not prone to risktaking, the desire to use online services such as social media decreases as long as the perceived risk increases (warkentin et al., 2002). hence, we hypothesized that: h6. perceived risk is negatively related to trust in the public sector websites and social media. trust in public sector websites and social media and trust in the public sector thanks to online media, increased transparency and efficiency that can increase trust by positively affecting the government's image (tolbert & mossberger, 2006). factors leading to trust are: ability (skills and competencies in a specific area), benevolence (believing that the trustee is not selfish and take into account the interests of others), and integrity (a perception that trustee sticks to generally accepted principles) (mayer et al., 1995). when considered from this point of view, citizens can trust in government and public sector, if it is equipped with abilities in the expected areas, act according to the interests of citizens and have integrity and honesty. citizens trust in the online services of the public sector when they perceive it as beneficial, quality, confidential and nonhazardous (colesca, 2009). they meet the three factors mentioned above. in terms of psychological distance, especially the government's use of social media increases citizens' positive feelings and thoughts about the government (porumbescu, 2016). additionally, considering that the government websites, social media accounts, and e-government are the digital faces of the government, it can be said that trust in them enhance trust in the government. the reason is that, getting easy access to the government by means of the online access provided by the e-government, websites and social media can be seen as a reason for trust in the government (tolbert & mossberger, 2006). this also hinders the information asymmetry between government and citizens, thus it is possible to avoid prejudiced attitudes and ideas and promote trust in the government and public sector (welch et al., 2004). hence, we hypothesized that: h7. trust in the public sector websites and social media is positively related to trust in the public sector. trust in the public sector and citizen satisfaction satisfaction can be considered as an antecedent of trust. as a result of this, satisfaction and trust are interrelated constructs (yoon, 2002; welch et al., 2004; teo et al., 2008). for instance, a person deciding whether to get a service or not depends on his/her own trust. at this stage, the trust may stem from his/her personal characteristics, perceived benefits, the degree of potential risks and convenience. after getting a service, the person volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.182 | http://emaj.pitt.edu hüseyin i̇nce, salih zeki i̇mamoğlu, hülya türkcan, gülsüm akca emerging markets journal | p a g e 2 5 compares the process and outcomes of using this service with own expectations. if the service meets his/her expectations, this person is satisfied. after the experience of getting service, the more he/she is satisfied, the more he/she trusts. in this context, it can be said that satisfaction is the antecedent of trust if this experience isn't the first. when considered in terms of getting a service or buying a product, it can be assumed that this cycle may continue. but here the relationship between trust in the public sector and citizen satisfaction is discussed. at this point, because the risks and cost may be higher, the citizen may refuse to associate with the public sector as far as possible if the citizen does not trust in the public sector. therefore, satisfaction in citizens may not occur at all. also, xu, cenfetelli, and aquino (2016) stated that benevolence and integrity, which are components of trust, increase satisfaction. hence, we hypothesized that: h8. trust in the public sector is positively related to citizen satisfaction. figure 1. proposed research model iii. research method and analysis measures and sampling to test the hypotheses, multi-item scales were adapted from previous studies and we used a 5-point likert scale. we adapted bélanger and carter (2008)’s items to assess propensity to trust and perceived risk. perceived quality, trust in the public sector social media and trust in the public sector websites scales were adapted from teo et al. (2008). the scales for perceived usefulness and facilitating conditions were adapted from venkatesh et al. (2003). for privacy factors, the scale was adapted from ho and li (2011). finally, the scales to assess trust in the public sector and citizen satisfaction were adapted from porumbescu (2016). the survey method was used for collecting data. to be sure that all the items which constitute the questionnaire are translated truthfully, the parallel translation was done. therefore, all the items were translated into turkish and then translated into english again. thus, the accuracy of translation could prove out. after making sure of it, a pilot study was undertaken by getting across 40 respondents and their comments were received in order to have a clear and understandable final version of the questionnaire. then, 750 surveys were distributed and 607 of them returned (80.9% response rate). the respondents are people using website and/or social media services of municipalities in turkey. besides, concerning our sample, 65% are female, 50% are between 31-45 years old and 55% have a university degree. measure validity and reliability first of all, exploratory factor analysis is applied to test the construct validity of measures. for the exploratory factor analysis, principal components extraction with varimax rotation is performed. besides, the kaiser-meyer-olkin (kmo) measure which shows the sample adequacy and bartlett’s test of sphericity are used. the kmo index is .969, and bartlett's test of sphericity yields a statistically significant level of 0.00. (x2=24938.115, p=.00). these results justified the carrying out of exploratory factor analysis. the results of the exploratory factor analysis are shown in table 1. of 59 items, 17 items which are loaded into more than one factor, loaded on one factor alone or not being charged to any factor are eliminated. 42 items remained and these were loaded into 8 factors. privacy factors and perceived risk are excluded, because no factors were loaded on them. it is also seen that although the perceived quality variable is composed of three dimensions as information, service and system quality, it is observed that the information and service quality are loaded on the same factor and system quality is loaded on a factor. as a result, it is structured in 2 dimensions. in addition, trust in the municipality's website and trust in the municipality's social media which are considered as separate factors are loaded on the same factor. obtained 8 factors explain 77.10% of the variance. table 1: the results of the exploratory factor analysis volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.182 | http://emaj.pitt.edu antecedents and consequences of trust in public sector websites and social media page |26| emerging markets journal table 2 presents the calculated means and standard deviations, cronbach’s alphas for obtained factors and also correlation coefficients. the values of cronbach’s alpha which is used to assess reliability, are ranging from .72 to .98. since 0,7 is a threshold that determines whether the scales are reliable according to nunnally (1978), it is considered that all the measurement scales are internally reliable. table 2: factor correlations, cronbach’s alphas, means and standard deviations hypothesis testing to test our hypotheses, we handled regression analyses. table 3 reveals the results of regression analyses. regression analysis results indicate that perceived information and service quality (β =.54, p< .01), perceived system quality (β =.06, p< .05), perceived usefulness (β =.15, p< .01) and facilitating conditions (β =.17, p< .01) are positively associated with trust in the public sector websites and social media. however, there is no relationship between propensity to trust and trust in the public sector websites and social media (β =.03, p > .05). therefore, h2, h3, and h4 are supported whereas h1 is not supported. as seen in table 3, trust in the public sector social media and websites is associated with trust in the public sector (β =.93, p< .01), supporting h7. finally, when the association between trust in the public sector and citizen satisfaction is investigated, it is seen that they are related significantly (β =1.08, p< .01). hence, h8 is supported. table 3: the results of the regression analyses iv. discussion and conclusion this paper contributes to the literature by clarifying the relationship among trust in the public sector, citizen satisfaction, trust in public sector websites and social media. also, the research reveals critical factors influencing the citizens' trust in public sector websites and social media. the findings show that perceived quality, perceived usefulness and facilitating conditions are the factors influencing the trust in the public sector websites and social media. previous research shows that perceived quality (e.g. colesca, 2009; alsaghier, ford, nguyen & hexel, 2011), perceived usefulness (e.g. colesca, 2009; chatzoglou et al., 2015) and facilitating conditions (e.g. alawadhi & morris, 2008) affect the citizen usage of government online services such as websites, social media accounts and e-government services as well as trust in them. in this context, our results empirically promoted the previous research. it is also found that, there is no relationship between propensity trust and trust in the public sector websites as well as social media. mcknight, cummings, and chervany (1998) indicate that propensity trust affects the initial trust of people. therefore, this finding stems from the fact that our participants are familiar with public sector websites and social media. it implies that, the expectations of citizens about online services should be learned and websites and social media accounts should be structured as regards the information about these expectations in order to meet them by public institutions. furthermore, they should be easy for citizens to use, benefit them and facilitate their relations with the public sector. second, this study reveals the effect of trust in the public sector websites and social media on trust in the public sector. tolbert, and mossberger (2006) and welch et al. (2004) found that trust in e-government affects trust in government. also, park, choi, kim, and rho (2015) shows that trust in the government’s social media services affects trust in government. namely, our result is consistent with the previous studies. it can be stated that, online services are an issue that the public sector needs to consider important. because, online services are the easiest meeting point for citizens and public institutions in today’s information age. transparent and up-to-date volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.182 | http://emaj.pitt.edu hüseyin i̇nce, salih zeki i̇mamoğlu, hülya türkcan, gülsüm akca emerging markets journal | p a g e 2 7 interaction with citizens through the website and social media can significantly increase trust in the public sector. third, this research demonstrated the effect of trust in the public sector on citizen satisfaction. some studies handled these construct as interrelated (yoon, 2002; welch et al., 2004) before. van ryzin (2007) found that, the outcome of overall citizen satisfaction influences trust in government. our finding shows that trust in government affects citizen satisfaction. this brought a new perspective to the relevant literature. according to our findings, public institutions should have competence, benevolence, and honesty since they win the trust of citizen (xu et al., 2016). thus, it will be possible to ensure citizen satisfaction. like all empirical researches, this study is subject to some limitations. first, this research was conducted with users of the website or social media service belonging to the municipalities in turkey. so generalizability of our results is a limitation. however, further studies can enlarge or differentiate the sample through shedding light on this research. secondly, this study is prone to common method bias. this study is expected to be forefoot for new studies that will contribute to the development of relevant literature. researchers can examine the citizen’s habit of usage for online services in general and its effects can be analysed as well. this model can also be tested by conducting with users of other public institutions. references abu-shanab, e. (2014). antecedents of trust in egovernment services: an empirical test in jordan. transforming government: people, process and policy, 8(4), 480-499. aladwani, a. m. (2014). cognitive beliefs about and the positive psychological tendency towards egovernment quality. procedia-social and behavioral sciences, 127, 570-574. alawadhi, s., & morris, a. (2008). the use of the utaut model in the adoption of egovernment services in kuwait. proceedings of the 41st annual hawaii international conference on system sciences, 1-11. al-jamal, m., & abu-shanab, e. (2015). privacy policy of e-government websites and the effect on users’ privacy. the 7th international conference on information technology, 338344. alsaghier, h., ford, m., nguyen, a., & hexel, r. (2011). conceptualising citizen’s trust in e-government: application of q methodology. leading issues in e-government, 1, 204-230. ayyash, m. m., ahmad, k., & singh, d. (2013). investigating the effect of information systems factors on trust in e-government initiative adoption in palestinian public sector. research journal of applied sciences, engineering and technology, 5(15), 3865-3875. baccarella, c. v., wagner, t. f., kietzmann, j. h., & mccarthy, i. p. (2018). social media? it's serious! understanding the dark side of social media. european management journal, 36(4), 431-438. bélanger, f., & carter, l. (2008). trust and risk in egovernment adoption. the journal of strategic information systems, 17(2), 165-176. bhimani, h., mention, a. l., & barlatier, p. j. (2018). social media and innovation: a systematic literature review and future research directions. technological forecasting and social change, in press. bonsón, e., torres, l., royo, s., & flores, f. (2012). local e-government 2.0: social media and corporate transparency in municipalities. government information quarterly, 29(2), 123132. chatzoglou, p., chatzoudes, d., & symeonidis, s. (2015, september). factors affecting the intention to use e-government services. federated conference on computer science and information systems, 1489-1498. cheung, m. f., & to, w. m. (2017). the influence of the propensity to trust on mobile users' attitudes toward in-app advertisements: an extension of the theory of planned behavior. computers in human behavior, 76, 102-111. colesca, s. e. (2009). understanding trust in egovernment. engineering economics, 63(4), 715. criado, j. i., sandoval-almazan, r., & gil-garcia, j. r. (2013). government innovation through social media. government information quarterly, 30(4), 319-326. davis, f. d., bagozzi, r. p., & warshaw, p. r. (1989). user acceptance of computer technology: a comparison of two theoretical models. management science, 35(8), 982-1003. dhillon, g., oliveira, t., & syed, r. (2018). value-based information privacy objectives for internet commerce. computers in human behavior, 87, 292-307. dong, t., liang, c., & he, x. (2017). social media and internet public events. telematics and informatics, 34(3), 726-739. featherman, m. s., & pavlou, p. a. (2003). predicting eservices adoption: a perceived risk facets perspective. international journal of humancomputer studies, 59(4), 451-474. fishbein, m., & ajzen, i. (1975). belief, attitude, intention and behavior: an introduction to theory and research. reading, ma: addison-wesley. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.182 | http://emaj.pitt.edu antecedents and consequences of trust in public sector websites and social media page |28| emerging markets journal gajendra, s., xi, b., & wang, q. (2012). e-government: public participation and ethical issues. journal of e-governance, 35(4), 195-204. guillamón, m. d., ríos, a. m., gesuele, b., & metallo, c. (2016). factors influencing social media use in local governments: the case of italy and spain. government information quarterly, 33(3), 460-471. gupta, k. p., singh, s., & bhaskar, p. (2016). citizen adoption of e-government: a literature review and conceptual framework. electronic government, an international journal, 12(2), 160-185. ho, k. t., & li, c. (2011). from privacy concern to uses of social network sites: a cultural comparison via user survey. proceedings 2011 ieee international conference on privacy, security, risk and trust and ieee international conference on social computing, 457–464. hong, h. (2013). government websites and social media's influence on government-public relationships. public relations review, 39(4), 346-356. horst, m., kuttschreuter, m., & gutteling, j. m. (2007). perceived usefulness, personal experiences, risk perception and trust as determinants of adoption of e-government services in the netherlands. computers in human behavior, 23(4), 18381852. hung, s. y., chang, c. m., & yu, t. j. (2006). determinants of user acceptance of the egovernment services: the case of online tax filing and payment system. government information quarterly, 23(1), 97-122. kaplan, a. m., & haenlein, m. (2010). users of the world, unite! the challenges and opportunities of social media. business horizons, 53(1), 59-68. kassen, m. (2014). globalization of e-government: open government as a global agenda; benefits, limitations and ways forward. information development, 30(1), 51-58. kietzmann, j. h., hermkens, k., mccarthy, i. p., & silvestre, b. s. (2011). social media? get serious! understanding the functional building blocks of social media. business horizons, 54(3), 241-251. liu, y., & zhou, c. (2010). a citizen trust model for egovernment. ieee international conference on software engineering and service sciences, 751-754. martin, k. (2018). the penalty for privacy violations: how privacy violations impact trust online. journal of business research, 82, 103-116. mayer, r. c., davis, j. h., & schoorman, f. d. (1995). an integrative model of organizational trust. academy of management review, 20(3), 709734. mcknight, d. h., cummings, l. l., & chervany, n. l. (1998). initial trust formation in new organizational relationships. academy of management review, 23(3), 473-490. mcknight, d. h., kacmar, c. j., & choudhury, v. (2004). dispositional trust and distrust distinctions in predicting high-and low-risk internet expert advice site perceptions. e-service, 3(2), 35-58. moon, m. j. (2002). the evolution of e‐government among municipalities: rhetoric or reality?. public administration review, 62(4), 424-433. nunnally, j. c. (1978). psychometric theory (2nd ed.), new york, mcgraw-hill. obar, j. a., & wildman, s. s. (2015). social media definition and the governance challenge-an introduction to the special issue. telecommunications policy, 39, 745–750. osimo, d. (2008). web 2.0 in government: why and how. institute for prospectice technological studies (ipts), jrc, european commission, eur, 23358. parent, m., vandebeek, c. a., & gemino, a. c. (2005). building citizen trust through e-government. government information quarterly, 22(4), 720736. park, m. j., choi, h., kim, s. k., & rho, j. j. (2015). trust in government’s social media service and citizen’s patronage behavior. telematics and informatics, 32(4), 629-641. porumbescu, g. a. (2016). linking public sector social media and e-government website use to trust in government. government information quarterly, 33(2), 291-304. ranaweera, h. m. b. p. (2016). perspective of trust towards e-government initiatives in sri lanka. springerplus, 5(22), 1-11. ratnasingam, p. (2004). the role of facilitating conditions in developing trust for successful electronic marketplace participation. journal of internet commerce, 3(3), 95-110. sá, f., rocha, á., & cota, m. p. (2016). potential dimensions for a local e-government services quality model. telematics and informatics, 33(2), 270-276. teo, t. s., srivastava, s. c., & jiang, l. (2008). trust and electronic government success: an empirical study. journal of management information systems, 25(3), 99-132. volume 10 no 1 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.182 | http://emaj.pitt.edu hüseyin i̇nce, salih zeki i̇mamoğlu, hülya türkcan, gülsüm akca emerging markets journal | p a g e 2 9 tolbert, c. j., & mossberger, k. (2006). the effects of e‐ government on trust and confidence in government. public administration review, 66(3), 354-369. van ryzin, g. g. (2007). pieces of a puzzle: linking government performance, citizen satisfaction, and trust. public performance & management review, 30(4), 521-535. venkatesh, v., morris, m. g., davis, g. b., & davis, f. d. (2003). user acceptance of information technology: toward a unified view. mis quarterly, 27(3), 425-478. warkentin, m., gefen, d., pavlou, p. a., & rose, g. m. (2002). encouraging citizen adoption of egovernment by building trust. electronic markets, 12(3), 157-162. welch, e. w., hinnant, c. c., & moon, m. j. (2004). linking citizen satisfaction with e-government and trust in government. journal of public administration research and theory, 15(3), 371391. xu, j. d., cenfetelli, r. t., & aquino, k. (2016). do different kinds of trust matter? an examination of the three trusting beliefs on satisfaction and purchase behavior in the buyer–seller context. the journal of strategic information systems, 25(1), 15-31. yildiz, m. (2007). e-government research: reviewing the literature, limitations, and ways forward. government information quarterly, 24(3), 646665. yoon, s. j. (2002). the antecedents and consequences of trust in online‐purchase decisions. journal of interactive marketing, 16(2), 47-63. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu evaluation of gender equality criteria related to social sustainability in ports özlem sanrı faculty of economics and administrative sciences, university of yeditepe, turkey | e-mail: ozlem.sanri@yeditepe.edu.tr abstract ports are developing sustainability frameworks in order to cope with latest requirements from the stakeholders. economic, environmental and social dimensions of sustainability are the three pillars of the topic. although economic and environmental aspects of sustainability in ports are widely researched in the literature, the social dimension of gender equality research is scarce. to fill the gap, it is important to identify the most important efforts for improving gender equality in ports. the aim of this study is to evaluate the gender equality criterias by port executives in terms of social sustainability. for this purpose, one of the multi-criteria decision making (mcdm) methods, step-wise weight assessment ratio analysis (swara) was used to evaluate the priority weights of five criterias in turkey. the results show that recruitment policy is the most important criteria in the field. therefore, some suggestions are made to port industry to become more socially sustainable by minimizing the gender gap. keywords: ports, gender equality, social sustainability, mcdm, swara new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.256 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.256 | http://emaj.pitt.edu özlem sanrı emerging markets journal | p a g e |87 evaluation of gender equality criteria related to social sustainability in ports özlem sanrı i. introduction elimination of all forms of discrimination against women constitutes the basis of sustainable development. sustainable development on the other hand, is defined as: “meets the needs of the present without compromising the ability of future generations to meet their own needs” in bruntland report (1987). social sustainability, one of the third pillar of sustainable development, mainly deals with the effect of the organization has on the social systems within which it operates (jung, 2017). human side of sustainability is the main area of this concept. it is suggested that an organization capable of investing in social sustainability can improve stakeholder satisfaction and the firm's image, thus enhancing supply chain performance and rising competitive advantage (jung, 2017). with gender equality, which is the fifth of the united nations sustainable development goals (unsdg), it is aimed to eliminate inequalities in the labor market, to reach equal job opportunities for women, and to eliminate sexual violence and abuse. gender refers to the social, behavioral and cultural characteristics, expectations and norms associated with being a male or female. gender equality refers to how these elements determine the relationship between men and women and the resulting power differences between the two genders (the world bank, 2011). according to world bank (2022), labor force participation rate among females in the world was 47,76% in 2019 whilst the rate in turkey was 34,3% for the same year. especially concerning the labor force in male dominated sectors, the gender gap is much higher. for example, the proportion of women working in the transport sector in the european union is only 22% compared to the 46% share of working women overall (united nations, 2021). in addition, in the maritime sector, which is characterized as a male-dominated sector, the women employee representation is %2 of the total maritime workforce (international labour organization, 2019; the international transport workers' federation, 2020). regarding global women participation in the port operations between 2014-2018, the rate is not satisfactory with 12,10%, although there is a more encouraging picture at management level (34%) (figure 1). in cargo handling operations, women workforce rate is %5,1, which is the lowest representation among departments. according to the regional analysis, while asia ranked first in port operations, in cargo handling operations europe was the leader for 2020 (international association of ports and harbors, 2020). figure 1. the ratio of women participation in ports (2014-2018) source: international association of ports and harbors, 2020 in the port sector, there are significant initiatives to increase the gender equality. international association of ports and harbors have applied 17 united nations sustainable development goals into port sector. the fifth goal which is gender equality is transformed as follows: (1) gender-neutral recruitment and compensation policies. (2) promotion of females to leadership positions; training and recruiting more females for operational positions in the field (for example forklift operators). (3) equalization of man/woman proportion of port workers for operational and managerial jobs. (4) turning port working environment into a more appealing locations for females (international association of ports and harbors, 2020). port of barcelona, with women comprising 32% of the workforce, have initiated four equality plans since 2010 (port de barcelona, 2021). dp world yarımca, is a port located in marmara region of turkey, have carried out “female leadership” program on a global scale in 2021. it is announced that in port operations and port management, their women employee rate is 15% of the total workforce. in 2020, the port has initiated “womenlead” program to create female leaders within the company. the aim of the program is to ensure that talented women employees reach their career goals. women heritage programme is another initiative to boost the philosophy of gender equality. the program suggests that gender equality brings greater innovation, competitiveness and growth opportunites (dp world, 2021). a fund was allocated to develop a program called “women in ports mentoring” by the board of the international association of ports and harbors (iaph) to increase the share of women in port industry (wpsp, 2019). although there are efforts to increase the women workforce share in the port industry, it is found out that the literature is not satisfactory in terms of gender eqaulity. thus, in order to fill the gap in the field, it is aimed to rank and evaluate the gender equality criterias in the port industry. the findings shed light on volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.256 | http://emaj.pitt.edu evaluation of gender equality criteria related to social sustainability in ports page |88| emerging markets journal the efforts by means that port industry can eliminate the gender gap. thus, decision makers may increase the efforts to raise the women workforce in terms of social sustainability initiatives. the remainder of the study is organized into the following sections: in the second section, a literature review is carried out with a special focus on the logistics industry. the following section explains the research methodology used in the study. the fourth section provides the findings. the managerial implications for port authorities are discussed in the final section. ii. literature review there are numerous studies in the liteature focusing on gender equality in the logistics sector. above all, most of the studies underlined that the amount of women working in logistics sector was low (nigam, 2010; united nations, 2021). larson (2019), by using the world bank logistics performance index, transparency international’s corruption perceptions index and the united nations development programme gender inequality index, underlined the gender inequality had a negative effect on logistics performance. it is also found out that gender inequality mediated corruption and logistics performance. shakil et al. (2022) revealed that in the transportation and logistics sector, the gender diversity balance of the board is better for aligning the firm's environmental performance with financial performance. but the results didn’t support the moderating effect of boards gender diversity on the relationship between social and financial performance. nigam (2010) suggested diversity management programs to motivate women employees in logistics sector. it was also suggested to create women forums and women networks at companies so that women employees interest and concerns can be taken. in the maritime industry a body of sparse literature was reached focusing on gender equality. for example, lares (2017) analyzed world maritime university’s policies on gender equality and women enpowerment. according to the results, the university had increased its female graduates from 2,85% to 19,7% and a significant improvement had been found in the gender balance of academics. dragomir (2019), had proposed the term “gendering shipping” as a contemporary trend for comparing shipping organizations in order to promote gender equality both on board and the shore. it is also suggested to apply gender-friendly human resource policies to increase awareness. key performance indicators (kpi) metrics is proposed to shipping companies for measuring their gender policies. kim et. al. (2019) researched the impact of automation technology implementation on women employees in the shipping industry by using qualitative methods. the results identified possible opportunities in terms of gender equality in the future. a research was conducted among turkish maritime students focusing on gender discrimination. the findings revealed that the perception of gender discrimination is higher among female students than male. the discrimination perception was also analyzed according to the majors of the students. underwater technology students’ perceptions of gender discrimination was the highest (fidan et. al., 2020). the literature focusing of gender equality in the port indusrty is actually scarce. only two studies was reached in the literature review. the other studies were analysing the issue in terms of historical perspective which is not scope of this research. barreiro-gen et al. (2021) identified how ports have been directing gender equality. five stages had been identified respectively which are gender segragation, compliance with national laws and regulations, gender equity, gender equality and more sustainable ports. esser et. al. (2020) examined the technological innovations in port of antwerp. they determined that only one in six workforce at the port is female. they also identified that gender and age had a correlation which means that the majority of the male employees age is in the old category. it is suggested that if young women in the port industry can survive, the industry’s gender gap will be decreased. in the study, it also found that wages differentiate according to the gender. male workers earn higher wages than females employees. iii. methodology theoretical framework the study uses a three-step approach to reach the research aim. after having a comprehensive literature review to determine the gender equality criterias in shipping industry as a first step, swara method was applied to prioritize the weights. in the third step, the rankings were evaluated to identify and demonstrate the general framework for the port sector. the gender equity criterias in relation to port industry were determined after a detailed literature review. barrerio-gen et al. (2021) dimensions were used in the study as gender equity criterias. the criterias that were used in the study are shown in table 1 below. table 1: gender equality criterias criteria description criteria code c1recruitment policy recruiting both genders rp c2-work-life balance efforts keeping balance in terms of work-life (flexibility) w-lbe c3gender equality teams a group that tracks gender equality get c4internal and external policies a strategy to deal more equality iep c5-communication campaigns and networks com source: barreiro-gen et. al., 2021 the necessary approvement was taken from yeditepe university human and social research ethics committee. the number of approvement is e.50532705604.02-4664. a total of 8 port executives in turkey were included to the research. 5 out of 8 responded positively to the invitation and inclusion to research. due to pandemic conditions while the research was conducted and heavy workload of the executives, the data were collected through online channels. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.256 | http://emaj.pitt.edu özlem sanrı emerging markets journal | p a g e |89 step-wise weight assessment ratio analysis (swara) there are different kinds of multiple criteria decision making (mcdm) methods in the literature which can be explained as a sum of the decision-making techniques (alinezhad and khalili, 2019). among these methods, the simple multi-attribute rating technique (smart), the regime method, the vikor method, the superiority and inferiority ranking (sir) method, the evaluation of mixed data (evamix) method, analytical hierarchy process (ahp), analytical network process (anp) and the swara method are the some of the commonly used ones in the literature. the swara method is introduced by keršuliene, zavadskas & turskis (2010), which is applied to high level decision-making and can also be used for policy making (zavadskas, stevic, tanackov, & prentkovskis, 2018). it enables experts to assess the weight values of criteria. there are some benefits of this method when it is compared to other mcdm techniques. firstly, it is based on estimating the opinions of experts about the importance of the criteria in the weighting phase. secondly, it is suitable for collecting data from experts and coordinating research. thirdly, as it can be seen in figure 2 below, it can be used in conjunction with other methods (alinezhad & khalili, 2019). fourthly it is easy to use which can be evaluated as userfriendly and uncomplicated (zolfani, yazdani, & zavadskas, 2018). figure 2. the framework of swara method source: alinezhad & khalili, 2019 over the last few years, this method has been used in several fields including social sciences, mathematics, engineering and computer sciences. some of the recent research that applied swara method are shown in table 2 below. table 2: researches using swara method year author(s) context 2022 xiang, et. al. the index weights of coal transportation companies were identified. 2022 garg, et. al. the criteria weights for enterprise resource planning (erp) were evaluated. 2022 jafari-sadeghi, et. al. the relationship among factors of knowledge was discussed. 2022 kazançoğlu et. al. circular supply chain success factors using the internet of things (iots) for the dairy supply chain were evaluated. 2022 sivageerthi et. al. coal supply chain management risks were evaluated. 2021 elden-ürgüp the priority weights of the firm performance criteria were computed. 2021 ayyıldız et. al. the wastewater treatment plants input parameters were determined. 2018 radovic and stević key performance indicators (kpi) in transport sector were selected. 2015 stanujkic et. al. choosing the suitable packaging design is proposed for wine bottles. 2013 zolfani and saparauskas energy system sustainability indicators were evaluated. source: author’s own compilation based on the study conducted by kersuliene et al. (2010), the following steps of swara were applied as shown in figure 3 below. figure 3. the framework of determining criteria weights using swara source: kersuliene and turskis, 2014 volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.256 | http://emaj.pitt.edu evaluation of gender equality criteria related to social sustainability in ports page |90| emerging markets journal step 1. determine the set of the relevant prioritization criteria and sort them in descending order, based on their expected significances (by port executives in this case). step 2. starting from the second criterion, the respondents determine the relative importance (sj) of the criterion j according to the previous (j-1) criterion, and do so for each criteria. with respect to kersuliene et al. (2010), this ratio is defined as the comparative importance of average value, sj. step 3. identify the coefficient kj as shown below: 𝑘𝑗 = { 1 𝑗 = 1 𝑠𝑗 + 1 𝑗 > 1 (1) step 4. determine the recalculated weight qj as shown below: qj=1, if j=1 qj= (qj – 1)/kj, if j >1 (2) step 5. determine the relative weights wj of the evaluation criteria as shown below: (3) 𝑊𝑗 = 𝑞𝑗/ ∑ 𝑞𝑘 𝑛 𝑘−1 iv. findings and discussion the gender eqaulity evaluation process at ports begins with the determination of the criterion weighting coefficients based on the swara method. for this purpose, first of all, the opinions of five decision makers (dm) who have been working as directors or managers in the port sector for a long time were sought and the criteria were ranked from the most important to the least important. then, the importance level sj of the criteria was calculated for each dm. using equations (1), (2) and (3), kj, qj and wj values were found, respectively, and the results of these operations are shown in tables 3, 4, 5, 6 and 7. then, as seen in table 8, the final swara weight results were obtained by taking the geometric mean. table 3: swara weighting results for dm 1 criteria ranking sj kj qj wj c1rp 1 1 1 0.291 c3get 2 0.25 1.25 0.8 0.232 c2-wlbe 3 0.3 1.3 0.615385 0.179 c5 -com 4 0.1 1.1 0.559441 0.163 c4iep 5 0.2 1.2 0.4662 0.135 source: author’s own compilation according to table 3, the dm 1 ranked the gender equality efforts in ports as recruitment policy, gender equality teams, work-life balence efforts, communication and internal and external polices respectively. table 4: swara weighting results for dm 2 criteria ranking sj kj qj wj c1rp 1 1 1 0.242 c2-wlbe 2 0.1 1.1 0.909091 0.220 c4iep 3 0.05 1.05 0.865801 0.210 c5 com 4 0.1 1.1 0.787092 0.191 c3 get 5 0.4 1.4 0.562208 0.136 source: author’s own compilation dm 2 has evaluated the criteria as recruitment policy, work-life balance efforts, internal and external policies, communication and gender eqaulity teams respectively (table 4). table 5. swara weighting results for dm 3 criteria ranking sj kj qj wj c1rp 1 1 1 0.296 c2-wlbe 2 0.1 1.1 0.909091 0.269 c3-get 3 0.5 1.5 0.606061 0.179 c4iep 4 0.2 1.2 0.505051 0.149 c5 com 5 0.4 1.4 0.36075 0.107 source: author’s own compilation in table 5, dm 3 considered the gender equality in order of recruitment policy, work-life balance efforts, gender equality teams, internal and external policies and communication. table 6: swara weighting results for dm 4 criteria ranking sj kj qj wj c2wlbe 1 1 1 0.410 c1-rp 2 0.9 1.9 0.526316 0.216 c4-iep 3 0.6 1.6 0.328947 0.135 c5com 4 0.1 1.1 0.299043 0.123 c3-get 5 0.05 1.05 0.284803 0.117 source: author’s own compilation the dm 4 gave special attention to work-life balance efforts followed by recruitment policy, internal and external policies, communication and gender equality teams (table 6). volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.256 | http://emaj.pitt.edu özlem sanrı emerging markets journal | p a g e |91 table 7: swara weighting results for dm 5 criteria ranking sj kj qj wj c1rp 1 1 1 0.476 c2-wlbe 2 0.99 1.99 0.502513 0.239 c5com 3 0.75 1.75 0.28715 0.137 c3-get 4 0.75 1.75 0.164086 0.078 c4-iep 5 0.1 1.1 0.149169 0.071 source: author’s own compilation as seen from table 7, the last dm has ranked the criteria as recruitment policy, work-life balance efforts, communication, gender equality teams, internal and external policies respectively. table 8: final swara weighting results source: author’s own compilation as a result of the comparison of the criterias according to the dms, the final weights of the criteria were calculated by taking the geometric mean of the weights of the criteria determined according to the swara method. these weights are provided in table 8. v. conclusion and recommendations sustainable development has three pillars, which are economic, environmental and social. there are numerous studies in the literature that conducted a research on social sustainablity in the various sectors. in this study, the gender equality issue in ports as one of the important aspects of social sustainability is addressed. ports, are the gateways of international trade, which take a critical role in the international supply chains. in order to satisfy its stakeholders and gain competitive advantage, portsincreased their sustainability efforts. as a male-dominated industry, ensuring gender equality is a significant factor for their success. thus, many ports throughout the world have launched gender equality programs to attract more women employees. although the industry have risen its effort to change the malefemale proportion, it is found out that the academic literature is scarce. esser et al (2020) identified that, only one in six employess at the port of antwerp is women. their findings suggested that if young females in the ports can survive, the gender gap will be decreased in the future. barreiro-gen et al. (2021) suggested five stages to develop gender equality in ports, which are gender segragation, compilance with national laws and regulations, gender equity; gender equality and more sustainable ports. in this study by using barreiro-gen et al. (2021) gender equality criteria, it is aimed to evaluate this them with the opinions of port executives. five port executivesparticipated in the research. they were asked to rank five criteria namely: recruitment policy, worklife balance efforts, gender equality teams, internal and external policies and communication. by using swara method which is one of the multiple criteria decision making technique, comparative importance of average value, sj was identified first, followed by determining the coefficient kj and recalculation weight qj and as a last step, the relative weights wj of the criterias were calculated for each port executive. as a final stage, geometric mean of the weights of the criterias were calculated according to the swara method. in the findings, port experts ranked the gender equality criteria at port respectively: (1) recruitment policy, (2) work-life balance efforts, (3) gender equality teams, (4) internal and external polices and (5) communication. the results of this study may help port authorities to arrange their gender equality efforts. since it is characterized as a male-dominated sector, the port experts may benefit from the results to improve the malefemale proportion at the ports. as recruitment policy was identified as the most important criteria, it is suggested to give special attention to human resource function, which utilize all other resources effectively to achieve the organization goals. as it is stated in sustainable transport report (united nations, 2021), without taking into consideration of the gender specific needs of women, the human resources policies would never be family-friendy. thus recruitment policy is suggested to be transparent and have to be planned in such a way that encourages female employees to apply for a job in the ports. the future studies can handle the issue by case studies, or making interviews with female emloyees to identify the motivation factors and barriers in the port industry. references alinezhad, a., & khalili, j. (2019). new methods and applications in multiple attribute decision making (madm). cham: springer nature. ayyıldız, e., yildiz, a., taskin gumus, a., & ozkan, c. (2021). an integrated methodology using extended swara and dea for the performance analysis of wastewater treatment plants: turkey case. environmental management, 67, 449-467. barreiro-gen, m., lozano, r., temel, m., & carpenter, a. (2021). gender equality for sustainability in ports: developing a framework. marine policy, 131, 104593. dp world. (2021). women who carry the trade. retrieved from dp world: https://www.dpworld.com/en/yarimca/news/lat est-news/ticaret-sirtlayan-kadinlar volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.256 | http://emaj.pitt.edu evaluation of gender equality criteria related to social sustainability in ports page |92| emerging markets journal dragomir, c. (2019). gender in postmodernism maritime transport. postmodern openings, 10(1), 182-192. elden ürgüp, s. (2021). firma performansı ile pay senedi getirisi arasındaki i̇lişkinin swaramarcos modeliyle analizi: bi̇st tekstil, giyim eşyası ve deri sektörünün örneği. journal of economics and financial researches, 3(2), 91-109. esser, a., sys, c., vanelslander, t., & verhetsel, a. (2020). the labour market for the port of the future. a case study for the port of antwerp. case studies on transport policy, 8, 349-360. fidan, v., günay, e., akpınar, g., & atacan, c. (2020). gender discrimination perception among maritime students in turkey. journal of eta maritime science, 8(3), 162-176. garg, h., vimala, j., rajareega, s., preethi, d., & perezdominguez, l. (2022). complex intuitionistic fuzzy soft swara copras approach: an application of erp software selection. mathematics, 5895-5909. international association of ports and harbors. (2020). world ports sustainability report 2020. retrieved from sustainable world ports: https://sustainableworldports.org/wpcontent/uploads/world-portssustainability-report-2020-fin.pdf international labour organization. (2019). recruitment and retention of seafarers and the promotion of opportunities for women seafarers. geneva: international labour organization. jafari-sadeghi, v., mahdiraj, h., devalle, a., & pellicelli , a. (2022). somebody is hiding something: disentangling interpersonal level drivers nd consequences of knowledge and hiding in international entrepreneurial firms. journal of business research, 139, 383-396. kazançoğlu, y., ozbiltekin pala, m., sezer, m., kumar, a., & luthra, s. (2022). circular dairy supply chain management through internet of things enabled technologies. environmental science and pollution research. doi:https://doi.org/10.1007/s11356-021-176978 keršuliene, v., zavadskas , e. k., & turskis, z. (2010). selection of rational dispute resolution method by applying new step‐wise weight assessment ratio analysis (swara). journal of business economics and management, 243-258. kersuliene, v., & turskis, z. (2014). an integrated multi-criteria group decision making process:selection of the chief accountant. procedia – social and behavioral sciences, 110, 897-904. kim, t.-e., sharma, a., gausdal, a., & chae, c.-j. (2019). impact of automation technology on gender parity in maritime industry. wmu journal of maritime affairs, 18, 579-593. lares, m. (2017). a case study on gender equality and women´s empowerment policies developed by the world maritime university for the maritime transport sector. the international journal on marine navigation and safety of sea transportation, 11(4), 583-587. larson, p. (2019). corruption, gender inequality and logistics performance. the international journal of logistics management, 31(2), 381397. nigam, s. (2010). breaking the barriers: women in logistics. retrieved from ssrn: https://papers.ssrn.com/sol3/papers.cfm?abstra ct_id=2428088 port de barcelona. (2021). the sea is also for women: searching for equality in the port environment. retrieved from pier next innovation by port de barcelona: https://piernext.portdebarcelona.cat/en/governa nce/the-sea-is-also-for-women-searching-forequality-in-the-portenvironment/#:~:text=it%20has%20been%20m ore%20than,total%20of%201.2%20million%2 0workers. shakil, m., munim, z., zamore, s., & tasnia, m. (2022). sustainability and financial performance of transport and logistics firms: does board gender diversity matter? journal of sustainable finance & investment, 1-16. doi:10.1080/20430795.2022.2039998 sivageerthi, t., bathrinath, s., uthayakumar, m., & bhalaji, r. (2022). a swara method to analyze the risks in coal supply chain management. materials today: proceedings, 50, 935-940. the international transport workers' federation. (2020). retrieved from itf seafarers: https://www.itfseafarers.org/en/issues/womenseafarers the world bank. (2011). gender equality and development. washington dc: the world bank. the world bank. (2022). the world bank data. retrieved from the world bank: https://data.worldbank.org/indicator/sl.tlf.c act.fe.zs united nations. (2021). sustainable transport, sustainable development. interagency report for second global sustainable transport conference. united nations. retrieved from https://sdgs.un.org/sites/default/files/202110/transportation%20report%202021_fullre port_digital.pdf volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.256 | http://emaj.pitt.edu özlem sanrı emerging markets journal | p a g e |93 world commission on environment and development. (1987). our common future. oxford: oxford university press. wpsp. (2019). women in ports mentoring program launched by iaph women’s forum. retrieved from world ports sustainability program: https://sustainableworldports.org/women-inports-mentoring-program-launched-by-iaphwomens-forum/ xiang, z., naseem, m. h., & yang, j. (2022). selection of coal transportation company based on fuzzy swara-copras approach. logistics, 6(7), 1-15. zavadskas, e. k., stevic, ž., tanackov, i., & prentkovskis, o. (2018). a novel multicriteria approach – rough step-wise weight assessment ratio analysis method (rswara) and its application in logistics. studies in informatics and control, 27(1), 97106. zolfani, s. h., yazdani, m., & zavadskas, e. k. (2018). an extended stepwise weight assessment ratio analysis (swara) method for improving criteria prioritization. soft computing, 22, 7399–7405. doi:https://doi.org/10.1007/s00500-018-30922. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention ebru onurlubaş trakya university, turkey | ebruonurlubas@trakya.edu.tr abstract environmental pollution, increasing damages in the nature and deformation of ecosytem have started to worry consumers and the environemental concern has formed in time. consumers who have environmental concern and wish to lend a healthy and clean environment to next generations, then started to consider the damages of their products to the nature in a higher degree. thus, consumers with environmental concern have placed more importance to green products, which do not pollute the nature, use natural resources less, enable recycling, but are environmental friendly. the aim of this study is to investigate the impact of environmental concern on green product purchase intention, and to also investigate the mediating role of environmental attitude on the mentioned impact. research data were gathered from 410 individuals residing in i̇zmir city using the face-to-face questionnaire method. then, the data were tested with crobach alpha method, test of normality, exploratory factor analysis, confirmatory factor analysis, structural equation modeling and sobel test. based on research findings, it is observed that environmental attitude has a mediating role on the impact of environmental concern on green product purchasing intention. it is also determined that, environmental concern has a meaningful impact on environmental attitude and green product purchasing intention, and environmental attitude has a meaningful impact on green product purchasing intention. keywords: environmental concern, environmental attitude, green product, purchase intention towards green products new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:ebruonurlubas@trakya.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |5 the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention ebru onurlubaş 1. introduction one of the most important issues causing environmental problems is that; wishes, needs and consuption habits of humankind do differ every day with globalization. in time, the environmental problems have climbed and natural resources have decreased, which led these issues to have more coverage in the media. as a result, activities on this subject have raised awareness among consumers and enabled them to be more careful about the products they use. in other words, the sensitivity of consumers towards the environmental problems have increased and consumers are observed to use environmetal friendly products, which are sensitive to the nature through all product phases. as the environmental focus and concentration have increased step by step on consumption, the firms giving importance to this issue are now taking care of consumers by satisfying their demands and needs. so, the number of firms choosing the green path for the products they manufacture has increased by time. since the consumers now have environmental concern, the concepts such as green product, green consumer, green marketing and environmental attitude have become significant subjects that should be focused (kalafatis et al. 1999:441; laroche et al. 2001: 515). green or environmental friendly products are the ones which do not pollute the nature, don’t consume natural resources, that are re-cyclable and protectable (turhan et al. 2015). green consumers do reflect environmental concerns more to their purchases and consuptions, compared to other consumers. additionally, green consumers are also interested in the production, shortage of consumed resources and post-usage processes of products (zinkhan ve carlson, 1995:2). green marketing is a marketing approach, which can be applied to consuption products, industrial products and services. green marketing also includes various activities such as making changes in production process, modifying the product, changing the packaging strategy and improving advertsing plans (alnıaçık, 2009). attitude is described as a positive or negative reaction tendency of an individual, when faced with a stimulant (oppenheim, 1992). if an individual has a postive attitude towards an object, he will behave and act positively to that object. also, this individual will have a tendency to get closer, support and assist the mentioned object. on the other hand, an individual which has a negative attitude towards a particular object, will have a tendency to be uninterested about that object. also, this individual will have a tendency to get away, criticize or even damage the mentioned object (aydın, 2000). by the way, environmental aittude is described as positive or negative feelings towards specific elements of the environment as well as aims concerned with the environment (hines et al. 1987: 4). the aim of this study is to investigate the impact of environmental concern on green product purchase intention, and to also investigate the mediating role of environmental attitude on the mentioned impact. 2. conceptual framework of the research and hypotheses green product green product is generally described as the environmetal friendly product. also, green product is expressed as the product, which assists the recycling and termination of waste, protecting and enlarging the environment by limited use of energy resources (ottman et al. 2006). parallel to another description, the green product protects the environment and aims to recycle the resources of nature as well as eliminating cease of resources (shamdasani et al. 1993: 488). moreover, the green product is stated as products, which don’t have any negative effect on the environment, eliminate air pollution and similar negativenesses by preserving energy and resources even in the business life (çabuk et al. 2008: 87). the basic criteria in the green product are satisfaction of consumers’ demands and needs, sustainability of energy resources, harmlessness of product towards the environment and human health as well as the renewability of product (uysal, 2006: 89-90). if the green product concept should be explained with the 4s formula in literature, we should state that these are environmental friendly products, which are able to (satisfy) the demands and needs of consumers, reflect (sustainability) for the continuity of resources, have (social acceptibility) in global context for not harming the environment and livings, and focus on (safety) in terms of consumer health (erbaslar, 2007). a product should have particular features, so that it can qualify as a green product. these features are indicated below: (moisander, 2007:2);  it should not affect human and animal health,  it should not harm the environment before and after its usage,  it should consume energy and other resources adequately,  it should eliminate the usage of materials that can harm the environment,  it should not cause unnecessary waste as a result of excessive packaging and short life cycle. consumers in fact experience difficulties in differenting green products from the others. as a solution to this complexity in the mind of consumers, eco labels and stickers are now used which is equivalent to some kind of confirmation. eco labels and stickers have easy to understand signs, which emphasize that a product’s environmental impact is lower than that of other products in similar categories (morris, 1997: 11). volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention page |6| emerging markets journal green consumer according to elkington (1994), the green consumer avoids using products, which risk the health of consumers and others, have potential to significantly harm environment through production, usage and postusage, consume energy extensively, cause uncessary waste, endanger species and the environment, require unncessary usage, cause treating animals mercilessly and affect other countries negatively. based on another definition, green consumer is the individual, who is interested in new products, runs research on information and shares his opinions with others concerning the products. thus, green consumers are considered as opinion leaders and word-of-mouth advertisers (information providers). also, green consumers are careful shoppers and they are not inclined to purchase without consideration. the green consumers give priority to the needs of environment and they run research about the products without any brand loyalty (shrum et al. 1995:80). green consumers can affect the environment with their purchasing decisions. the consuming decisions of green consumers reflecting the social responsibility include specific components. these cover specific research, which can be listed as checking the manufacturers of purchased products, production operations and implementations, and the impact of raw materials on the environment through usage and post usage (karaca, 2013). green consumers present various consuming behaviors aimed at protecting the natural environment by using different methods such as purchasing green products, considering recycling and making savings on energy (paço et al. 2013). green consumers believe that, personal consumption is an effective method to protect the environment they also believe that, the environmental protection is a personal (individual) issue and it should not be solely left to the hands of government, environmentalists and scientists. furthermore, green consumers are open minded and they are tolerant to new products as well as new ideas (boztepe, 2012). based on the research of iisd (international institute for sustainable development), general characteristics of green consumers are as follows (boztepe, 2012): exaggregating green behaviors, making environmental protection easy and being inclined to not trust the environmental arguements of corporations. green marketing today, green marketing is a set of activities, which include all environmetal and natural friendship efforts in order to match the demands and needs of consumers. it is aimed to harm the environment in a minimum degree while these demands and needs are matched. green marketing is also called and known as a reaction towards the goods and services used for design, production, packaging and labelling (onurlubaş ve dinçer, 2016: 26). the green marketing approach can be investigated under four different phases (erbaşlar, 2012: 96); in the first phase, green products are designed for environmentalist consumers. ecocredential products and automobiles working with alternative fuel technology can be shown as examples at this point. we can name this first phase as the green targeting. in the second phase, green strategies are developed. as an example, environmentalist measures such as increasing the energy efficiency and producing less waste within the business can be mentioned here. in the third phase, the manufacturing of nongreen products, in other words non-environmental friendly products are halted and only green products are manufactured. however, it is not enough to be green or environmentalist in the fourth phase. the firm has reached to the social responsibility awareness by all means here. when the organizations reach green marketing awareness, this is generally based on the organizational culture and environmental elements. environmental concern the most important purpose of the humankind through history has been searching for ways to find resources (food, clothes, shelter, energy and other materialistic needs) from various ecosystems, in other words from the environment, which will let him to sustain his life. also, the humankind has benefited from the resources of the nature for thousands of years without any concern. these resources have been used extensively to satisfy basic needs and in some cases, generating profits. despite that, the nature has always renewed itself in a great extent and presented its resources over and over for the humankind’s welfare. the fact that this cycle continued for a very long time without any problem has caused an incorrect perception as if the natural resources were limitless (biner, 2014). however the population increase, higher usage of natural resources, limited environmental richness and the emergence of environmental problems in time have created a concern among people in terms of a healthy life and landing a good environment to next generations. the environmental concern is an indicator that, individuals are showing an effort for raising awareness in terms of environmental sensitivity (akehurst, 2012: 977). the term environmental concern is used to state the concern of individuals about environmenral changes today or in the future (ay and ecevit, 2005: 246). the term environmental concern is used to state the concern of individuals about environmenral changes today or in the future. it is pointed out that, environmental concern is reflected to the behaviors of various consumers. also, it is understood that environmental concern has an impact on product selection, informative research and behaviors concerned with receycling and diversity (minton ve rose, 1997: 44). volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |7 in the literature, there are many studies which have determined that environmental concern has a meaningful impact on green product purchasing intention. some of these studies are kim and choi (2005); khaola et. al. (2014); mostafa (2009); lizawati aman, a.h. (2011); kamonthip et al. (2017); maichum et al. (2016) and paul et al. (2016). also, several studies have detected that, environmental concern has a meaningful impact on purchase intention towards green products. examples of such studies are kim and choi (2005); khaola et al. (2014); mostafa (2009) ; lizawati aman, a.h. (2011); kamonthip et al. (2017); maichum et al. (2016) and paul et al. (2016). based on mentioned findings, the hypotheses below are developed and presented; h1: environmental concern has a meaningful (significant) impact on environmental attitude. h2: environmental concern has a meaningful (significanr) impact on purchase intention towards green products. environmental attitude generally speaking, attitude is a preliminary tendency of reaction that a particular individual has towards any subject around his environment. also, attitude is a regular act and behavior pattern of individuals towards specific objects as a result of former experiences. individual patterns are formed as a result of an individual’s upbringing and life-long experiences, which differentiates that particular person from others (akdemir, 2008: 83). attitude is an organized mental, emotional and behavioral preliminary tendency of reaction, which is developed based on experience, knowledge, emotion and motivation, and that is against the individual himself or against any object, social subject or incident around the individual (i̇ncelioğlu, 2010: 13). in general terms, attitude is a positive or negative emotion that is developed towards an individual, object or situation. this is related with the belief that, it is formed by the knowledge of an individual about another individual, object or condition (newhouse, 1990). environmental attitude is the sum of beliefs, emotions and environmental intentions of an individual about the environmental activities and issues (schultz et al. 2004: 31), as well as the attitude and behavior patterns of an individual related with environmental feelings and thoughts. at this point, it will be wise to put forward that, if the individual will have a positive attitude towards the environmental, he will try to protect and recover it. however, if the individual will have a negative attitude towards the environment, he will be insensitive towards it, and in some cases may even have a tendency to harm it (sabuncu, 2017). kim (2011) pointed out that, consumers with high environmental attitude have an intention to buy products that are considered environmental friendly. alwitt & pitts (1996) presented that, environmental attitude indirectly affects the purchase intention of environmental friendly products. kim & chung (2011: 43-44) did run a research on attitude of consumers towards organic personal care products. as a result of this research, it was found that, attitudes were a meaningful (significanr) variable affecting purchase intention. cowan & kinley (2014) stated that, there existed a strong relationship between postive attitudes towards environmental friendly textile products and the purchase intention. yadav and pathak (2016) reported that, the environmental attitude had direct effects on their intention to purchase green products. based on mentioned findings, the hypothesis below is developed and presented; h3: environmental attitude has a meaningful (significant) impact on purchase intention towards green products. green product purchasing intention attitude is in a key position concerning the relationship between intention and behavior. if we should interpret the intention concept from the perspective of consumer and client, it will not be wrong to state that the intention occurs somewhere between evaluating purchasing alternatives and the realization of purchase. purchase intention is described as the perceptional opinion (belief) level of a client towards buying a specific product or service (bergeron, 2004: 117). also, purchase intention represents the planning and purchasing willingness of consumers to buy a specific product in the future (wu et.al.., 2011: 32). concerning the purchase intention, evaluations and attitudes of consumers related to products or services ae important. when the consumers believe that a particular product or service is worth to buy, they do purchase that specific product or service (madahi ve sukati, 2012). evaluations on purchase intention do reflect the purchasing behaviors in the future (grewal et.al., 1998). purchase intention of consumers is considered to a subjective tendency for a specific product and it can also be an important index to estimate and foresee consumer behaviors (fishbein ve ajzen, 1975). engel et. al. (1995) argue that, purchase intention can be categorized such as unplanned purchase, partially planned purchase and entirely planned purchase. unplanned purchases are generally known as the purchases, which occur with a sudden emergence of stiumulation, not based on any plan. partially planned purchases mean that, the consumer has made a decision only on a single product category or a specific object before buying a product, but he will make a decision on brands and types later in the store. entirely planned purchases stand for a situation when the consumer has made a decision on a specific product and brand before visiting the store. the fact that environmetal problems are taking a part in the media continuously and with an increasing pace have led to environental concern in individuals. thus, consumers are observed to purchase green products while leaving non-green products on the shelf (davis, 1993). in the recent years, the consciousness level of consumers is much higher and they are more inclined to purchase green products, which do not harm the environment or that harm the environment lower than other products. green product purchasing intention of consumers determine their planning or purchasing will when buying a green product in the future. green product purchasing intention is described as a consumer’s plan to volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention page |8| emerging markets journal buy a particular green product through a specific period and the consumer’s will to buy a particular good or service. the literatüre does not include many studies, which investigate the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention. thus, it is considered that this research may contribute to the literature and accordingly, the h4 hypothesis is presented below in this context. h4: envrionmental attitude has a mediating role (effect) on the impact of environmental concern on green product purchasing intention. 3. methodology 3.1. aim of the study the ever increasing population leads to the drain of natural resources and the drain of natural resources unconsciously causes natural devastation. consumers who are aware of this fact and have environmental concern, have started to prefer recyclable products, which are environmentally sensitive that do not harm the nature in order to ensure the healthy life of themselves and future generations. the green product and green marketing have become more important as the environmental concern of consumers has increased in the recent years. thus, some firms have developed marketing strategies accordingly and have concentrated on environmental activities for enabling their sustainability. green product purchasing by cosumers who have environmental concern can let green products remain in the market and cause non-green products to decrease in numbers. this issue can help businesses to manufacture green products by focusing on environmental activities. because of this fact, it is significant to investigate the environmental concern of consumers as well as factors directing consumers to improve their environmental attitude and green product purchasing intention. thus, this study aims to investigate the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention. moreover, this study aims to investigate the effect of environmental concern on environmental attitude and green product purchasing intention, as well as the impact of environmental attitude on green product purchasing intention. 3.2. scope, limitations and sample of the research research was limited with individuals who are living in the city of i̇zmir and are informed of green products. one of the non-random sampling methods, convenience sampling method was used for the face-toface questionnaires distributed to 410 individuals who were subject to this study. the most important limitation of the research is that, the study was only run in i̇zmir city center because of time and monetary scarcities. based on the data of tüi̇k (turkish statistical institute), population of i̇zmir city was 4.279.677 in 2017 (tüik, 2018). after the universe was determined, the following formula was used to detect the sample volme (arıkan, 2007): z= statistical value (1.96, 95% confidence interval) qptnd qptn n ..)1.( ... 22 2   n= universe (4 279 677) p=0,5, q=0,5 d=(e/z)2 (0, 0484/1,96)2 d= error rate (0,000554) z= statistical value (1.96, %95 confidence interval) n=410 using the formula above, the sufficient sample size was determined as 410 with 0,0484% error rate and 95% confidence interval. one of the non-random sampling methods, convenience sampling method was used for the face-to-face questionnaires. by the help of convenience sampling method, data can be collected from the universe with the easist, fastest and most economic way possible (aaker et. al., 2007). 3.3. research model and hypotheses figure 1: research model this research includes the three variables of environmental concern, environmental attitude and green product purchasing intention. the research model is presented in figure 1 considering the fact that environmental concern has an impact on green product purchasing intention, and environmental attitude has a mediating role on the mentioned impact. h1: environmental concern has a meaningful (significant) impact on environmetal attitude h2: environmental concern has a meaningful (significant) impact on green product purchasing intention h3: environmental attitude has a meaningful (significant) impact on green product purchasing intention environmental attitude environmental concern purchase intention volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |9 h4: environmental attitude has a mediating role (effect) on the impact of environmental concern on green product purchasing intention 3.4. data collection research data were collected with face-to-face questionnaires. questionnaires were distributed to consumers who are living in i̇zmir city and are informed of the green product. the questionnaire form was composed of two sections. the first section included 6 demographical items (questions). the second section included 6 items (questions) on environmental concern, 5 items (questions) on environmental attitude and 5 items (questions) on green product purchasing intention. concerning the items (questions) on second section of research, studies of maichum et al. (2016); yadav and pathak (2016); mostafa (2009); straughan and roberts (1999); kamonthip et al. (2017) were taken as a reference for preparing the environmental concern scale, studies of kim and han (2010); maichum et al. (2016); mark and law, (2015) were taken as a reference for preparing the environmental attitude scale, studies of guanghui et al., (2018), berens et al. (2005); dodds ve et al. (1991); petroshius et al. (1987) kanchanapibul et al. (2014); kim et al. (2013); mark and law, (2015) were taken as a reference for preparing the green product purchasing intention scale. the research also benefited from the 5 likert scale for questionnaire. the coding for 5 likert scale was as follows; (1) definitely disagree, (2) disagree, (3) indecisive, (4) agree, (5) definitely agree. the researcher received feedback from two experts on the internal validity of scales and the scale items were translated to turkish. then, a pilot study was run on 40 respondents in order to eliminate future potential errors and determining the clarity of questions. it was detected that all items were completely understood and perceived by respondents, so the final version of questionnaire was prepared. reliability of scales was tested by the cronbach alpha coefficient. according to özdamar (1999), a cronbach alpha value of 0,80-0,90 is equivalent to high reliability and a cronbach alpha value of 0,90-1,00 is equivalent to very high reliability. as a result of the relaibility analysis, cronbach alpha value of environmental concern scale was determined as 0,820, so the reliability of environmental concern was high. cronbach alpha value of environmental attitude scale was 0,817, so the reliability of environmental attitude was high. cronbach alpha value of green product purchasing intention scale was 0,726, so the reliability of green product purchasing intention was normal. according to sipahi et. al. (2008:89), cronbach alpha coefficient is accepted to be reliable when the value is 0,70 and above. in this context, all the scales of research are reliable. 3.5. data analysis data analysis of the research were run by spss 22 and amos 20 software. the relaibility of scales was calculated via cronbach alpha. also, normality test was run after the reliability test, to see if data had a normal distribution. in regards to normality test, kurtosis and skewness values of data groups were analzyed. it is accepted that data groups with kurtosis and skewness values between +2 and -2 have normal distribution (george & mallery, 2003). environmental concern had a skewness of -0,063 and kurtosis of -0,359. environmental attitude had a skewness of 0,205 and kurtosis of -0,373. green product purchasing intention had a skewness of -0,36 and kurtosis of -0,264. in this context, it can be accepted that all dimensions of the research have normal distribution. exploratory factor analysis was run to test the construct validity of all scales used in the study. also, confirmatory factor analysis was run to validiate the dimensions after running exploratory factor analysis. researcher can define models defending an important feature, arrange factors and test the sutiability of data for models with confirmatory factor analysis (hoyle, 1995). the research investigated the relationship among variables to analyze the mediating role (effect) of environmental attitude, and to study the impact of environmental concern on green product purchasing intention. then, the interaction between variables was tested with structural equation modelling in order to analyze the interaction among variables. in this context, environmental concern was determined as indepedent variable, green product purchasing intention was determined as dependent variable and environmental attitude was determined as mediating variable. environmental concern, environmental attitude and green product purchasing intention which are included in the theoretical model to be tested are known as theoretical structures, latent variables or factors, since their structures can not be tested directly and because they are considered to be existent theoretically in social sciences (byrne, 2010:4). although structural equation modelling is known as asimultaneous equation modelling with latent variables, its foundations are based on both factor analysis and path analysis. also, structural equation modelling helps to retrieve findings which can not be presented with other popular techniques, since it can be used for direct, indirect and total impact estimations via mediating and moderator variables (kelly, 2011: 12). structural equation modelling was used in this study in order to determine the mediating role (effect) of environental attitude on the impact of environmental concern on green product purchasing intention. first, relationship among variables were investigated and second, interaction among variables were analyzed using structural equation modelling. structural equation modelling was also used to test other hypotheses. structural equation modelling is a detailed statistical approach used to test the causal interrelation among latent variables factors. structural equation modelling can also be described as a series of statistical methods, which present hypothesis test approach to the multivariable analysis of structural theory (timm, 2002; tomer, 2003). 4. research and findings cronbach alpha was calculated and exploratory factor analysis was run for relability and avilability determination of measurement scales. based on the realibility analysis results, cronbach alpha for “environmental concern scale” is α=0,812, while it is α=0,877 and α=0,716 for “environmental attitude scale” and “purchasing intention scale” respectively. it is determined that, all scales are reliable. then, normality test was run. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention page |10| emerging markets journal according to the results of normality test, environmental concern had a skewness of -0,063 and kurtosis of -0,359. environmental attitude had a skewness of 0,205 and kurtosis of -0,373.green product purchasing intention had a skewness of -0,36 and kurtosis of -0,264. it is accepted that data groups with kurtosis and skewness values between +2 and -2 have normal distribution (george & mallery, 2003). in this context, it can be accepted that all dimensions of the research have normal distribution. also, kaiser meyer olkin and bartlett test results were considered to decide whether factor analysis results are interpretable. for the construct validity study, following results were retrieved: kaiser meyer olkin=0,820 and bartlett (p<0,01) for environmental concern scale, kaiser meyer olkin=0,817 and bartlett (p<0,01) for environmental attitude scale, kaiser meyer olkin=0,726 and bartlett (p<0,01) for green product purchasing intention. it was revealed that, exploratory factor analysis could be run with these test analysis results. test method by rotation was not used for the research’s factor analysis. the reason is that, when all scales are assessed and tested via factor analysis separately, they can be listed under one single dimension (scale). when the demographics of questionnaire respondents are analyzed, it is observed that 49,0% are males, and 51,0% are females. also, when the ages of respondents are investigated, it is seen that, 13,2% of respondents are between 18-23, 12,7% are between 2429, 16,6% are between 30-35, 13,9% are between 36-41, 14,8% are between 42-47, 14,4% are between 48-53, 9,0% are between 54-59, and 5,4% are 60 and above. in terms of marital status of respondents, 43,2% are married, 52,4% are single and 4,4% are divorced (table 1). concerning the education levels of respondents, 8,5% have elementry school, 10,5% have middle school, 29,3% have vocational school, 39,5% have undergraduate, 7,8% have master’s and 4,4% have doctorate (ph.d.) diplomas (table 1). in regards to monthly average income levels of families that are subject to the research, it is determined that 4,1% have a monthly average income of 1000 tl and below, 7,6% have a monthly average income between 1001-1500tl, 6,3% have a monthly average income between 1501-2000tl, 19,8% have a monthly average income between 2001-2500tl, 15,1% have a monthly average income between 2501-3000tl, 12,0% have a monthly average income between 3001-3500tl, 20,7% have a monthly average income between 35014000tl, and 14,4% have a monthly average income of 4001tl and above. when occupations of respondents are taken into consideration, it is observed that, 3,7% are retired, 25,5% are government officials, 32,0% are private sector employees, 13,4% are housewives, 10,0% are regular employees (blue-collar workers), 9,5% are self employed and 5,9% are students (table 1). table 1. demographics of consumers table 2. exploratory factor analysis results when table 2 is considered, it is observed that environmental concern dimension is composed of 6 items (questions) and factor loads vary between 0,526 and 0,852. environmental concern dimension explains 54,447% of the variance. environmental attitude dimension is composed of 5 items (questions) and factor loads vary between 0,788 and 0,842. environmental attitude dimension explains 67,285% of the variance. green product purchasing intention dimension is composed of 5 items (questions) and factor loads vary between 0,477 and 0,822. green product purchasing intention dimension explains 50,443% of the variance. in practice, generally a value of 0,45 and above is volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |11 considered to be a good rate for factor load coefficients, which explain the relationship between items (questions) and the related factors (büyüköztürk, 2002: 118). in this context, since factor loads of all dimensios were above 0,45, none of them were removed from the scale. confirmatory factor analysis is presented in table 3. confirmatory factor analysis is a more advanced and detailed technique, which is used to test the latent variables and related theories (tabachnick and fidell, 2014). so, confirmatory factor analysis is more like a model testing theories, rather than being a model presenting theories (henson and roberts, 2006; stevens, 2002). table 3. means, standard deviations and correlation values for the variables when the correlation results are considered among variables, it is seen that all the three variables have a meaningful relationship (correlation) with each other. a postive and weak correlation is detected between environmental attitude and green product purchasing intention (r=0,210 p<0,01), a positive and moderate correlation is detected between environmental attitude and environmetal concern (r=0,391 p<0,01), a positive and weak correlation is detected between purchasing intention and environmental concern (r=0,168 p<0,01) (table 3). in line with the relationships (correlations) gathered as a result of analysis, structural equation modelling to determine the mediating role (effect) of environmental attitude on the impact of environmental concern on green product purchasing intention is presented in figure 2. table 4. confirmatory factor analysis resource: meydan, c. h., şeşen, h. (2011). yapısal eşitlik modellemesi amos uygulamaları (1 ed.). ankara: detay yayınevi (adaptive scales). confirmatory factor analysis was run separately for each scale. the retrieved adaptive values for environmental concern scale are calculated as follows as a result of the confirmatory factor analysis; cmindf: 6,860, gfi: 0,952, cfi: 0,942, rmsea: 0,120, nfi: 0,933, rmr: 0,61. the values are cmindf:20,306, gfi: 0,909, cfi: 0,910, rmsea: 0,217, nfi: 0,906, rmr: 0,60 for the environmental attitude scale and they are cmindf: 9,439, gfi: 0,957 , cfi: 0,909, rmsea: 0,144 , nfi: 0,900, rmr: 0,55 for the purchasing intention scale. these values do not stand for good or acceptable adaptive volumes. thus, items (questions) with low beta values were removed from the model and covariance relationship was established to ensure adaptive values of the model. covariance relationship was established between e1-e5 error terms for the environmental concern scale and q8.3 item (question) was removed. after the final version of the model, confirmatory factor analysis was run and the good adaptive values of scale was analyzed. the moderated adaptive values of environmental concern scale was calculated as cmindf: 1,358, gfi: 0,997, cfi: 0,999, rmsea: 0,030, nfi: 0,997 and rmr: 0,015. as observed in table 3, all adaptive values indicate a “good adaptation”. model is acceptable at its current condition. covariance relationship was estabished between “e1-e5”, “e5-e3” and “e5-e4” error terms and no items (questions) were removed for the environmental attitude scale. moderated adaptive values of the environmental attitude scale was calculated as cmindf: 2,882, gfi: 0,995, cfi: 0,996, rmsea: 0,068, nfi: 0,995 and rmr: 0,017. as seen in table 3, rmsea indicates an acceptable adaptation, while all other adaptive values indicate a “good adaptation”. model is acceptable at its current condition. covariance relationship was estabished between “e3-e5” and “e5-e4” error terms and no items (questions) were removed for green product purchasing intention scale. moderated adaptive values of the green product purchasing intention was calculated as cmindf: 2,997, gfi: 0,991, cfi: 0,987, rmsea: 0,070, nfi: 0,981 and rmr: 0,022. based on table 3, rmsea indicates an acceptable adaptation, while all other adaptive values indicate a “good adaptation”. when table 3 above is taken into consideration, results of the moderated confirmatory factor analysis adaptive scale values (cmindf, rmsea, gfi, cfi, rmr, nfi) show that, model is in line with data and there exists a valid and reliable scale. structural equation modelling results the relationship among observed variables and their implicit variables are desribed as the measurement model, and the relationship among implicit variables is defined as the structural model in structural equation modelling (dilalla, 200: 440). a two phase model where the measurement model is tested first and the structural model is tested later is accepted more in structural equation modelling compared to a single phase approach where measurement model and structural model are analyzed simultaneously (kline, 2005: 216). path analysis adaptive values belonging to the research model formed to determine the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention is indicated in table 5. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention page |12| emerging markets journal table 5. model adaptive values table 5 indicates values such as χ2: ki square (cmin) df (degrees of freedom): 3,018; rmsea (root mean square error of approximation); 0,70; cfi (comparative fit index):935; gfi (goodness of fit index): 0,925; rmr (root mean square residual): 0,70. based on these values, all adaptive scales are within acceptable limits considering the goodness of fit indexes. figure 2. : the mediating role of environmental attitude on the effect of environmental concern on green product purchasing intention figure 2, results of the moderated confirmatory factor analysis adaptive scale values (cmindf, rmsea, gfi, cfi, rmr, nfi) show that, model is in line with data and there exists a valid and reliable scale. table 6. the formed structural model related to the aim and hypotheses of research. table 6 presents the formed structural model related to the aim and hypotheses of research. based on the findings in table 2, standardized regression coefficient is β= 0,365, t=6,389, p=0,000 and p significance level is p<0,001 between environmental concern and environmental attitude dimensions. based on this finding, h1 hypothesis is accepted. also, environmental concern has a moderate level of significance on environmental attitude towards the green product. standardized regression coefficient is β= 0,148, t= 2,490, p=0,013 and p significance level is p<0,001 between environmental concern and green product purhcasing intention dimensions. based on this finding, h2 hypothesis is accepted. also, environmental concern has a weak and significant impact on green product purchasing intention. standardized regression coefficient is β=0,170, t= 2,769, p=0,06 and p significance level is p<0,05 between environmental attitude and green product purchasing intention dimensions. based on this finding, h3 hypothesis is accepted. environmental attitude has a weak and significant impact on green product purchasing intention. in order to analyze the mediating impact, independent variable should have an effect on mediating variable and dependent variable. also, mediating variable should have an effect on the dependent variable. a partial mediating effect exists if there is a meaningful (significant) decrease on the impact of independent variable on the dependent variable when mediating variable is included to the model with the independent variable. a complete (full) mediating effect exists if the impact of independent variable on the dependent variable is eliminated when mediating variable is included to the model with the independent variable (baron and kenny, 1986: 1175). when a detailed analysis is run on the model with this purpose and motivation, both direct and indirect effects can be determined. the indirect impact of a variable on the other variable is possible wih a mediating variable, and thus a more detailed information is gathered about the impact of an independent variable on the dependent variable (çetin gürkan and demiralay, 2017: 80). this study presents direct, indirect and total impacts about variables that are put forward. table 7. total, direct and indirect effects environmental attitude has a direct impact on green product purchasing intention. also, environmental concern has a direct impact on environmental attitude, and it has a both direct and indirect impact on green product purchasing intention. thus, environmental attitude has a partial mediating impact on the effect of volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |13 environmental concern on green product purchasing intention. h4: the hypothesis stating that environmental attitude has a mediating impact on the effect of environmental concern on green product purchasing intention is partially accepted. moreover, some specific tests are used to evaluate whether the indirect impact of independent variable on the dependent variable is meaningful (significant) or not. the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention is evaluated with the sobel test. the mentioned test is calculated via using the moderated regression coefficients and standard deviation values of related variables. based on the sobel test results (z=2,277, p<0,05), the mediating role of environmental concern’s impact on green product puchasing intention is meaningful (significant). also, the partial mediaing impact is verified. thus, research hypotheses are partially accepted. 5. conclusion this study aimed to analyze the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention. because of this reason, the effect of environmental concern on environmental attitude and green product purchasing intention was investiaged. the effect of environmental attitude on green product purchasing intention was investigated as well. in this context, exploratory factor analysis was run to ensure the validity of measurement tool and confirmatory factor analysis was run to test the dimensions. then, structural equation modelling was used to test the hypothesis. based on the strutctural equation modelling of research; environmental attitude has a direct impact on green product purchasing intention. also, environmental concern has a direct impact on environmental attitude, and it has a both direct and indirect impact on green product purchasing intention. thus, environmental attitude has a partial mediating impact on the effect of environmental concern on green product purchasing intention. the research found out that, environmental concern has a meaningul (significant) impact on green product purchasing intention. this is parallel to the findings of former literature such as kim and choi (2005); khaola et al. (2014); mostafa (2009) ; lizawati aman, a.h. (2011); kamonthip et al. (2017); maichum et al. (2016); paul et al. (2016). findings of the study reveal that, consumers with environmental concern have intention to purchase green products to ensure the healthy life of themselves and future generations. thus, businesses targeting green consumers or the marketing managers should position themselves as environmental friendly in order to retain consumers whose environmental concerns and consciousness levels are incresing every day. firms should keep a close eye on all operations starting from the design of products and ending with post-purchasing experience. research findings indicate that, environmental attitude has a meaningful (significant) impact on green product purchasing intention. this finding is parallel with former studies such as kim (2011); alwitt & pitts (1996); kim and chung (2011); cowan and kinley (2014); yadav and pathak (2016); kamonthip et al. (2017) and coşkun (2015). it is observed that, environmental consciousness of consumers have increased over time and they are also demonstrating environmental sensitivity. consumers with increased environmentl sensitivity live in harmony with the nature and they prefer environmental friendly products. thus, firms will be able to increase the green product purchasing intention of consumers if they can manufacture products not harming the nature. that will eventually attract consumers and will lead to profit generation on the business side. it is determined that, environmental concern has a meaningful (significant) impact on environmental attitude. this finding of the research is parallel to former literature such as mostafa (2009) ; kamonthip et al. (2017); maichum et al. (2016) and paul et al. (2016). businesses should have social awareness and responsibility in order to stand strong and remain competitive, and for satisfying the demands of consumers with increasing environmental concern and attitude. future studies can include environmental consciousness (awareness) or environmental sensitivity variables to the analysis in order to investigate the mediating role of environmental concern’s impact on green product purchasing intention. when research findings are analyzed, it is observed that environmental concern has a weak and meaningful (significant) impact on green product purchasing intention, and environmental attitude has a weak and meaningful (significant) impact on green product purchasing intention. since the impacts of variables on green product purchasing intention are weak, it is recommended that impacts of other factors on green product purchasing intention are better included in future research. this research contributes to the literature and guides future researchers, since the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention is not adequately studied in the turkish literature. future research can work with a bigger sample size, select specific products (organic products, green toys), focus on different regions of turkey or compare two different countries in order to have a separate viewpoint and determine the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention. finally, the rapid increasing consumer consciousness (awareness) as a result of environmental volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention page |14| emerging markets journal concern did lead some environmentally sensitive consumers to tend towards green products. it is estimated that, most of consumers will tend towards green products over time. thus, it is believed that firms implementing environmental friendly strategies will stand strong under fierce competition and will attract consumers who reflect environmental concern, environmental attitude and increasing consciousness (awareness) over time. thus, the mentioned firms will higher their profit ratios and survive in the market. furthermore, when the firms will manufacture green products, environmental damages will decrease, consumption of natural resources will go down and a healthy life will be transferred to the next generations. references aaker, d.a., kumar,v., day, g.s. (2007). marketing research. 9. edition, john wiley & sons, danvers. akdemir, g. (2008). tüketicilerin kurumsal sosyal sorumluluk uygulamalarını yürüten i̇şletmelere karşı tutumları ve gsm sektörü üzerinde bir araştırma, yüksek lisans tezi, i̇stanbul üniversitesi sosyal bilimler enstitüsü. akehurst, g., afonso, c. ve gonçalves, h. m. (2012). “re-examining green purchase behaviour and the green consumer profile: new evidences” management decision, 50 (5): 972988. alnıaçık, ü. (2009). “tüketicilerin çevreye duyarlılığı ve reklamlardaki çevreci i̇ddialar”, kocaeli üniversitesi sosyal bilimler enstitüsü dergisi, (18), 48-79. alwitt, l. f., & pitts, r. e. (1996). predicting purchase intentions for an environmentally sensitive product. journal of consumer psychology, 5 (1), 49–64. arıkan, r. (2007). araştırma teknikleri ve rapor hazırlama, 6.baskı, isbn:9758784-35-8, ankara. ay, c. ve ecevit, z. (2005). “çevre bilinçli tüketiciler”, akdeniz i̇.i̇.b.f. dergisi, 10, 238-263. aydın. o. (2000). davranış bilimlerine giriş. eskişehir: anadolu üniversitesi yayınları no: 1027.332. baron, r. m. ve kenny, d. a. (1986). “the moderator-mediator variable distinction in social psychological research: conceptual, strategic, and statistical considerations”, journal of personality and social psychology, 51(6), 1173-1182. berens, g., cees b.m., van riel., gerrit h. and van bruggen (2005). “corporate associations and consumer product responses: the moderating role of corporate brand dominance,” jm, 69, 35-48. bergeron, j. (2004). antecedents and consequences of salesperson listening effectiveness in buyer-seller relationships. the john molson school of business, canada, doktora tezi. biner, n. (2014). tüketicilerin yeşil ürün satın alma davranışlarının i̇ncelenmesi, trakya üniversitesi sosyal bilimler enstitüsü, i̇şletme anabilim dalı yüksek lisans tezi. boztepe, a. (2012). “green marketing and its impact on consumer buying behavior”s european journal of economic and political studies, 5 (1), 5-21. büyüköztürk, ş. (2002). sosyal bilimler için veri analizi el kitabı. 2. baskı. ankara: pegem yayıncılık. byrne, b. m. (2010). structural equation modeling with amos: basic concepts, applications, and programming, 2nd ed., taylor and francis group, isbn 978-080586372-7 (hardcover: alk. paper) ,isbn 978-0-8058-6373-4. coşkun, a. (2015). yeşil satın alma niyetini belirleyen psikografik faktörler: düşük i̇lgilenimli ürün örneği, selçuk üniversitesi sosyal bilimler enstitüsü i̇şletme anabilim dalı. cowan, k. and kinley, t. (2014). green spirit: consumer empathies for green apparel. international journal of consumer studies, 38 (5), 493–499. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |15 çabuk, s., nakıboğlu, b. ve keleş, c. (2008). tüketicilerin satın alma davranışlarının sosyo-demografik değişkenler açısından i̇ncelenmesi. ç.ü. sosyal bilimler enstitüsü dergisi, 17(1), 85-102. çetin gürkan, g. ve demiralay, t. (2017). bireysel yenilikçiliğin çalışanın yenilikçi davranışı üzerindeki etkisinde i̇çsel motivasyonun aracılık rolü: türkiye’de cerrahlar örneği, girişimcilik ve i̇novasyon yönetimi dergisi, 6 (1). dilalla, lisabeth f. (2000) structural equation modeling: uses and issues. in h. e. a. tinsley and s. d. brown (eds.), handbook of applied multivariate statistics and mathematical modeling, 439-464. san diego: academic press. dodds, w.b., kent b. monroe, and dhruv g. (1991). “the effects of price, brand, and store information on buyers' product evaluations,” jmr, 28 (august), 307-319. elkington, j. (1994). “toward the sustainable corporation:win -win –win business strategies for sustainable develpoment”, california management review, 36, 90100. engel, j. f. blackwell, r. d., & miniard, p. w. (1995). consumer behavior ( 8th ed.) new york: dryden press. erbaşlar g. (2007). "yeşil pazarlama". paradoks ekonomi, sosyoloji ve politika dergisi. 3(1). farr, a. and hollis, n. (1997). what do you want your brand to be when it grows up? big and strong? journal of advertising research, 37(6), 23-36. fishbein, m. and ajzen, i. (1975). belief, attitude, intention, and behavior: an introduction to theory andresearch. reading. ma: addison-wesley. george, d. ve mallery, p.(2003). spss for windows step by step: a simple guide and reference 11.0 update. pearson education, inc, united states of america. grewal d., krishnan r., baker j., borin n. (1998). “the effect of store name, brand name and price discounts on consumers’ evaluations and purchase intentions”, journal of retailing, 74 (3), 331-352. guanghui ma, pei-luen patrick rau and zhi g. (2018). the effects of environmental awareness and consumption value on green makeup product purchase intentions, psychology, 9, 1898-1916. hines, j. m., hungerford, h. r., & tomera, a. n. (1987). analysis and synthesis o f research on responsible environmental behavior: a metaanalysis. the journal of environmental education, 18(2), 1–8. henson, r. k. ve roberts, j. k. (2006). exploratory factor analysis in published research: common errors and some comment on improved practice. educational and psychological measurement, 66(3), 393-416. hoyle, r. h. (1995). structural equation modeling: concepts, issues and applications. sage publication inc. london. i̇ncelioğlu, m. (2010). tutum algı i̇letişim, beykent üniversitesi yayınları, i̇stanbul. kalafatis, s. p., pollard, m., east, r., & tsogas, m. h. (1999). green marketing and ajzen’s theory of planned behaviour: a cross-market examination. journal of consumer marketing, 16(5), 441-460. kamonthip, m., surakiat, p. ve ke-chung, p. (2017). the influence of environmental concern and environmental attitude on purchase intention towards green products: a case study of young consumers in thailand, international journal of business marketing and management (ijbmm), 2 (3): 1-8. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention page |16| emerging markets journal kanchanapibul, m., lacka, e., wang, x. and chan, h. k. (2014). an empirical investigation of green purchase behaviour among the young generation. journal of cleaner production, 66, 528536. karaca, ş. (2013). “tüketicilerin yeşil ürünlere i̇lişkin tutumlarının i̇ncelenmesine yönelik bir araştırma”, ege academic review”, 13(1). kelly, s. (2011), “do homes that are more energy efficient consume less energy? a structural equation model for england’s residential sector”, electricity policy research group, university of cambridge, eprg working paper 1117, cambridge working paper in economics 1139. khaola, p.p., potıane, b. and mokhethı, m. (2014). envıronmental concern, attıtude towards green products and green purchase intentıons of consumers in lesotho, ethiopian journal of environmental studies & management 7(4): 361 – 370, kim, y. and han, h. (2010). intention to pay conventional-hotel prices at a green hotel–a modification of the theory of planned behavior. journal of sustainable tourism, 18 (8), 997-1014. kim, h. y., & chung, j.-e. (2011). consumer purchase intention for organic personal care products. journal of consumer marketing, 28 (1), 40–47. kim, y. (2011). understanding green purchase : the influence of collectivism , personal values and environmental attitudes , and the moderating effect of perceived consumer effectiveness. seoul journal of business, 17 (1), 65–92. kim, y. j., njite, d. and hancer, m. (2013). anticipated emotion in consumers’ intentions to select eco-friendly restaurants: augmenting the theory of planned behavior. international journal of hospitality management, 34, 255262. kline, rex. b. (2005) principles and practice of structural equation modeling. new york: the guilford press. laroche, m., bergeron, j. and barbaro-forleo, g. (2001). targeting consumers who are willing to pay more for environmentally friendly products. journal of consumer marketing, 18( 6), 503-520. lizawati aman, a.h. (2011). the influence of environmental knowledge and concern on green purchase intention. the role of attitude as mediating variable. masters thesis, universiti malaysia sabah. madahi, a. ve sukati, i. (2012). the effect of external factors on purchase intention amongst young generation in malaysia, international business research, 5(8), 153-159. maichum, k., parichatnon, s. and peng, k.c. (2016). application of the extended theory of planned behavior model to investigate purchase intention of green products among thai consumers. sustainability, 8(10), 1077. mark, n. and law, m. (2015). encouraging green purchase behaviours of hong kong consumers. asian journal of business research issn, 5(2), 2015. meydan, c. h. ve şeşen, h. (2011). yapısal eşitlik modellemesi amos uygulamaları (1 ed.). ankara: detay yayınevi. minton, a. p. ve rose, r. l. (1997). “the effects of environmental concern on environmentally friendly consumer behavior: an exploratory study”, journal of business research, 40 (1): 37-48. moisander, j. (2007). motivational complexity of green consumerism, international journal of consumer studies, 31:404409. morris, j. (1997). green goods? consumers, product labels and the environment. london: uk: iea environment unit. volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu ebru onurlubaş emerging markets journal | p a g e |17 mostafa, m. m. (2009). shades of green: a psychographic segmentation of the green consumer in kuwait using selforganizing maps. expert systems with applications, 36 (8), 11030-11038. newhouse, n. (1990). implications of attitude and behavior research for environmental conservation, the journal of environmental education, 22 (1): 26-32. onurlubaş, e. ve dinçer, d. (2016). yeşil pazarlama tüketici algısı üzerine bir araştırma, i̇stanbul: beta. oppenheim an. (1992). questionnaire design, interviewing and attitude measurement. new edition. new york: printer publishers, ottman, j., stafford, e. r. ve hartman, c. i. (2006). “avoiding green marketing myopia: ways to improve consumer appeal for environmentally preferable products”. environment, 48(5). özdamar, k. (1999). paket programlar ile istatistiksel veri analizi. eskişehir: kaan kitabevi. paço, a., alves, h., shiel, c. ve filho, w. l. (2013), development of a green consumer behaviour model‟ international journal of consumer studies, 37 (4), 414-421. paul, j., modi, a., and patel, j. (2016). predicting green product consumption using theory of planned behavior and reasoned action. journal of retailing and consumer services, 29, 123-134. petroshius, s.m. and kent b. m. (1987), “effect of product-line pricing characteristics on product evaluations,” jcr, 13 (march), 511519. sabuncu, r.g. (2017). anadolu üniversitesi i̇şletme fakültesi öğrencilerinin girişimcilik niyetleri ve çevresel tutumlarını ölçmeye yönelik bir araştırma, anadolu üniversitesi, sosyal bilimler enstitüsü, yüksek lisans tezi. schultz, p. w., shriver, c., tabanico, j. j. and khazian, a. m. (2004). implicit connections with nature. journal of environmental psychology, 24(1), 31– 42. shamdasani, p., ong chon-lin, g. and richmond, d. (1993). exploring green consumers in an oriental culture: role of personal and marketing mix factors. advances in consumer research (20), s. 488-493. shrum, l.j., john a. mccarty and tina m. l. (1995), “buyer characteristics of the green consumer and their implıcation for advertising strategy”, journal of advertising, 24 (2), 71-81. sipahi b., yurtkoru, e.s. ve çinko m. (2008). sosyal bilimlerde spss ile veri analizi, i̇stanbul: beta yayınları. stevens, j. p. (2002). applied multivariate statistics for the social sciences. new jersey: lawrance erlbaum association, inc. straughan, r. d. ve roberts, j. a. (1999). environmental segmentation alternatives: a look at green consumer behavior in the new millennium. journal of consumer marketing, 16 (6): 558-575. tabachnick, b. g. ve fidel, l. s. (2014). using multivariate statistics. usa: pearson education limited timm, h. n. (2002). applied multivariate analysis. springer – verlag new york. tomer, a. (2003). a short history of structural equation models, structural equation modeling: applications in ecological and evolutionary biology. b. pugesek (ed.), cambridge university press, 85-12. turhan, e., gültekin, ö.. özdemir, y. (2015). yeşil ergonomiye genel bakış, süleyman demirel üniversitesi mühendislik bilimleri ve tasarım dergisi, 3 (3): 559–565. tüi̇k, (2018). http://www.tuik.gov.tr volume 8 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.158 | http://emaj.pitt.edu the mediating role of environmental attitude on the impact of environmental concern on green product purchasing intention page |18| emerging markets journal uysal, o.u. (2006). yeşil ürünlerde konumlandırma ile i̇lgili uygulama, yüksek lisans tezi, marmara üniversitesi sosyal bilimler enstitüsü, i̇stanbul. wu p.c.s, yeh g.y.y. and hsiao c.r. (2011). “the effect of store i̇mage and service quality on brand i̇mage and purchase i̇ntention for private label brands”, australasian marketing journal, 19, 3039. yadav, r. and pathak, g. s. (2016). young consumers' intention towards buying green products in a developing nation: extending the theory of planned behavior. journal of cleaner production, 135, 732-739. zinkhan, g.m. ve les c. (1995), “green advertising and the reluctant consumer”, journal of advertising, 24 (2): 1-6. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu book review of “india’s recent inward foreign direct investment: an assessment” beena pl centre for development studies, india | beena@cds.edu abstract this book is focused on analysing the limitation of the existing foreign direct investment (fdi) statistics in india. the trends, composition and quality of fdi inflows in india after the initiation of ‘make in india’ (mii) policy are critically analysed. this is done with a comparative perspective on the nature and quality of fdi since 1990. keywords: india; foreign direct investments; foreign portfolio investments; corporate sector; business new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.176 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:beena@cds.edu http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.176 | http://emaj.pitt.edu beena pl emerging markets journal | p a g e |117 book review of “india’s recent inward foreign direct investment: an assessment” beena pl reviewed publication details: k.s. chalapati rao and biswajit dhar. (2018). “india’s recent inward foreign direct investment: an assessment”, isid, new delhi, india. review: the book is timely as it critically analyses foreign direct investment (fdi) policy reforms across various sectors and response to it till 2017. this is an extended project of a similar kind that was published by isid during 2011. this book is mainly focused on analysing the limitation of the existing fdi statistics in india. the trends, composition and quality of fdi inflows in india after the initiation of ‘make in india’ (mii) policy are critically analysed. this is done with a comparative perspective on the nature and quality of fdi since 1990. the book is divided into 7 sections/chapters. the first chapter (chapter i) sets forth the objective of the book by highlighting the issues concerned with the concepts, definition and measurement problems of fdi inflows in india. chapter ii focused more on the fdi policy changes that took place since 2014 i.e., after the new initiative of ‘make in india’ (mii) policy. chapter iii looked at the trends and characteristics of the reported fdi inflows across sectors before and after the initiation of mii. chapter iv highlights the complexity of the reported data on fdi inflows in terms of duplicate reporting, non-reporting and delayed reporting. chapter v narrates the extent of distortions and integrity of fdi data at aggregate level as well as at the sectoral levels. this is done by matching the inflows reported in the department of industrial policy and promotion’s (dipp) sectoral achievement report, disclosures in the secretariat of industrial assistance (sia) newsletter, and the recipient companies’ filings with the ministry of company affairs (mca). chapter vi traces the changes in the reporting requirements of fdi inflows and its effectiveness based on a sample of firms. chapter vii summarises the major findings of the study. the discussion on fdi policy in chapter 2 focused on twenty-five sectors including 12 nonmanufacturing sectors such as tourism, hospitality, wellness, media and entertainment, defence, security services, services sectors, civil aviation, single brand retail trade, broadcasting carriage services and other sectors such as pharma, medical services, agriculture and animal husbandry. according to the new fdi policy, approval from government is not required for securing an ownership beyond 74% for airports. foreign airlines have been permitted to hold 49% equity stake in india’s airline industry through automatic route and 100% through the approval route. nris can invest up to 100% with a condition that chairman and two-third of the board members of such airline should be indian citizens. similarly, new policy initiated in january 2018 has allowed 100% fdi in the single brand retail trade (sbrt) through the automatic route. the policy in june 2016 has relaxed local sourcing norms up to 3 years for products having state of the art and cutting-edge technology. fdi entry into food processing sector and the storage & infrastructure created by foreign traders (online, wholesale and retail) is expected to help the indian farmers. now, there is a pressure from foreign retail traders for allowing them to sell non-food items along with food items manufactured in india. the condition on companies developing genetically modified seeds were removed in the fdi policy of june 2016. several sub-sectors and animal husbandry were opened up for 100% foreign participation. security agencies and broadcasting carriage services are all opened up for foreign participation. 100 % fdi was also permitted during 2016 in financial services through automatic route. authors have further argued how the new fdi policy in 2016 can influence the ownership of pharmaceutical and medical services industries and therefore those industries would be dominated by global leaders. for instance, shanghai-based fosun pharmaceutical group of china acquired 74% of gland pharma in october 2017 and that was possible only because of the shift to new fdi policy in 2016 which has raised the limit for brownfield fdi in pharma from 49% to 74%, and up to 100% in medical devices. it should be noted that, the major sources of finance to the industrial sector have been corporate bonds and commercial paper, which have led to an increase in external borrowings (beena, 2018). major chunk of fdi, which has come to india through cbm&as is nothing but the replacement of the existing assets and that do not create any additional employment (beena, 2018). further, it is argued that financial liberalization has only helped non-financial corporate sector in holding relatively large share of financial assets as compared to physical assets. such investment decision made by the non-financial corporate sector failed to contribute to aggregate assets and profitability in the economy (sen and dasgupta, 2018). similar kind of argument could be further established based on many empirical examples discussed in chapter ii. for instance, the sell-offs by many indian companies have been associated with the involvement of private equity investors (e.g. mylan laboratories, paras pharma, international tractors). total fdi inflows during mii period was $ 99.7 billion, which has increased from the level of $48.4 billion. however, analysis in chapter iii observed that net fdi flows into india fell by 33.2% during post-mii period (2014-17) and capital outflows on account of repatriations/disinvestments rose by 33.8% during this regime. beena (2018) observed that, the repatriation/disinvestments made by indian firms volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.176 | http://emaj.pitt.edu book review of “india’s recent inward foreign direct investment: an assessment” page |118| emerging markets journal operating abroad have tremendously increased since 2009 and this could be attributed to the financial crisis and the crash in global demand. manufacturing sector received relatively less share of fdi during post-mii period, while service sector received the maximum share of fdi inflows during 2014-17 which accounted for 64.3% as compared to 44.1% during 2012-14. the study has further observed that the share of acquisition-related inflows into the manufacturing sector was substantially low during the post-mii period. one of the major components of fdi inflows during the post-mii regime has been reinvested earnings, which accounted for 21.8%. interestingly, this study noted that out of the total fdi flows into india during 2014-17, real foreign direct investments (rfdi) accounted for only 58% while foreign portfolio investments accounted for 27%. the rest is contributed by india-related investors directly or together with foreign private equity investors. similarly, in the case of retail trade including e-commerce, only 29.3% accounted for rfdi. rfdi share in sezs, technology ports, etc were very minimal accounting for only 1.2%. rfdi share in microfinance was only 8%, while business services received 70% rfdi. rfdi share in restaurants, eating places, etc was 64%; in solar power, it was 52%; in other renewable energy, it was 60%; in healthcare (67%); mining and quarrying (89%), education (97%), agriculture, hunting and forestry (66%). companies are bringing more of non-rfdi during post-mii period as compared to the pre-mii period. more than 50% of the portfolio investment went into the retail trading, web portal, cab aggregators and construction. most of these investments came from mauritius (46.9%) and singapore (40.8%) in order to avail tax benefits under the double tax avoidance agreement that these countries have with india. authors further caution the policy makers the importance for carrying out disaggregate-level analysis on fdi statistics in order to get a clarity on how mncs have responded to the policy changes and the complexity regarding the reporting system. it highlights underreporting, duplicate reporting and non-reporting of fdi data by citing many examples. for instance, electronics industry has received $5.5 billion worth shares by vodafone india ltd during september 2016 though it was not mentioned in the list on fdi inflows till june 2017 (p.65; chapter iv). in chapter v, the study noted that much of the investments received by automatic route during post-mii period had actually come before 2014 though it was reported after 2014 due to the delay in reporting. the list on fdi includes all types of investments such as private equity and other portfolio investments. list on fdi companies reported by the brochure refers to rfdi. the study further discussed about the complexity of clubbing e-commerce-related companies such as amazon, flipkaart, snapdeal, etc. the major industries which have received more than $1 billion fdi during 2016-17 were electrical equipment, cement, and gypsum; automobile industry ($1.6 billion), metallurgical industries ($1.4 billion); chemicals ($1.4 billion) . mode of entry of rfdi in medical devices was predominantly of the nonacquisition type and such investment did not go into the manufacturing sector. majority of them went into the trading sector. the authors further discuss the mismatch between different data sources regarding fdi inflows at length in chapter vi and suggested to devise a mechanism similar to the special sworn employee program of us bureau of economic analysis (bea) which enabled qualified researchers to analyse data as unpaid employees of the bea. thus, this book mentions various policy changes initiated by government of india, including mii, removal of entry barriers of foreign investment in order to tap more foreign savings and better technology which is expected to transform indian economy into a manufacturing hub. the book has also made an effort to understand the response from mncs during pre and postmii regime. given their focus on data issues in this book, the authors have avoided an analysis of the developmental implications of fdi inflows and the theoretical developments associated. however, they do recognise the importance of detailed micro level analysis in order to measure the quality of fdi flows and their contribution to national economic development in terms of technological spill overs, employment generation, foreign exchange earrings, product diversification and competitiveness. the research by r nagaraj and arvind subramanian about gdp estimation had given rise to a controversy. this is another welcome addition to the literature on estimation issues in the indian economy. authors have also undertaken a painstaking exercise to establish the problems regarding fdi statistics, which is quite convincing and we would strongly recommend this book to the policy makers and scholars who plan to work on the developmental implications of fdi inflows in the indian corporate sector. references beena pl (2018). outward fdi and cross-border m&as by indian firms: a host country-level analysis, working paper no.479, cds, trivandrum. beena pl (2018). mergers and acquisitions: india under globalisation, routledge, south asia edition, new delhi, london, new york, 292 pages, hardbound: reprint, isbn 978-1-138-349490. sen, s. and dasgupta, z. (2018). financialisation and corporate investments: the indian case, review of keynesian economics, vol 6, no.1, spring 2018, pp.96-113. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu barriers to adopting electronic commerce for small and medium-sized enterprises in emerging economies muhammad arsalan nazir bahria university islamabad campus, pakistan | marsalan.buic@bahria.edu.pk muhammad azam roomi prince mohammad bin salman college of bus. & entr. (mbsc), saudi arabia | roomima@gmail.com abstract with the availability of the internet as an information and communication technology (ict) tool, electronic commerce (ecommerce) has received much attention in many western and developed countries. however, it has been given little attention in emerging economies, and therefore e-commerce adoption has been particularly difficult for small and mediumsized enterprises (smes). the purpose of this review paper is to explore several types of barriers that influence the adoption of e-commerce by smes in emerging economies. an exhaustive review of the literature was conducted on the subject. it further evaluates and extends tornatzky and fleischer‟s (1990) technology-organization-environment (toe) framework by adding a micro-level context that of the „entrepreneurial (individual) characteristics of owner-managers‟ to examine various contextual challenges smes face in adopting e-commerce in emerging economies. the paper examines a number of new dynamic and contextual barriers identified in the study, grouping them into four themes: technological, organizational, environmental and extended „entrepreneurial (individual) characteristics of owner-managers‟. the paper sets up a new conceptual framework and has established a holistic view of contextual barrier themes for the coming years. in addition, this theoretical model provides us with the new barriers related to „entrepreneurial (individual) characteristics of owners/managers‟ and „local business institutions in supporting e-commerce‟ that influences the adoption of e-commerce by smes in emerging economies. based on this extended framework, future areas of research can be determined, and owner-managers of smes, new entrepreneurs and government authorities in emerging economies will be able to identify emerging concepts in e-commerce. keywords: smes, entrepreneurship, e-commerce, technology, emerging economies new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ mailto:marsalan.buic@bahria.edu.pk mailto:roomima@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu barriers to adopting electronic commerce for small and medium-sized enterprises in emerging economies page |44| emerging markets journal barriers to adopting electronic commerce for small and medium-sized enterprises in emerging economies muhammad arsalan nazir muhammad azam roomi i. introduction the internet is now regarded as one of the most crucial networking tools and techniques. it contributes to the dissemination of knowledge globally and it is necessary for the sharing of experiences and knowledge, the dissemination of culture and the creation of communication bridges between emerging and developed economies. the internet is a vital tool for many smes and large companies, especially in developed economies. the web has played an essential role in the successful dissemination of new technologies and the implementation of the modern method of internet commerce. with the improvement and growth of internet technology over several decades, e-commerce, conducted via the internet, has become an essential channel for many businesses (turban et al., 2018). as observed in many economies around the world, e-commerce is an indispensable business tool in the field of ict. technology companies and businesses in the modern world appreciate the transition to e-commerce and have become essential pillars in the growth of many economies. as a result of this progress, companies seek to maximize the growth of e-commerce at their level and to take full advantage of technology that will help increase e-commerce efficiency and improve business processes, performance and productivity. the general belief is that, in this century, e-commerce via the internet will create more opportunities for organizations and individuals to conduct online transactions worldwide. however, kshetri (2007) and mainardes et al. (2019) says that most smes, in the context of emerging economies, are still not aware of the benefits of ecommerce. according to the latest report (2018) of the united nations conference on trade and development (unctad) established in 1964 as a permanent intergovernmental body emerging economies should adopt e-commerce as a new technology without reservations because this new technology will improve their business, economic, social and human development. in turn, this will lead to higher business productivity, reduce business operating costs, and improve the level of integration with international markets. the report further shows that these emerging economies generally had low rates of basic internet usage, but the growth rate was high. in an earlier report (2005), unctad stated that between 2000 and 2005, emerging economies experienced an increase in the internet user population of around 400 million, which corresponds to a growth rate of 300%. international participation of online users had increased from 25% to 40%. internet bandwidth followed a similar trend, the increase in bandwidth in emerging economies doubled, compared to developed economies. although these statistics can be extrapolated to a corresponding rise in e-commerce adoption in emerging economies, many local issues still present barriers for these emerging economies in their pursuit of economic and business prosperity through e-commerce (molla and heeks, 2007). furthermore, the uneven adoption and diffusion of various ict resources, goods and services between emerging and developed economies and between urban and rural smes similarly show how ecommerce is valued and how it functions in organizations (kurnia et al., 2015). many researchers have further concluded that, the accessibility of e-commerce resources in developed economies has contributed significantly to e-commerce adoption and its integration as an innovation in the business processes of those organizations (alqirim, 2007; macgregor and kartiwi, 2010). they also found, however, that emerging economies experience a challenge in obtaining e-commerce resources and using them successfully, and the overall cost of acquiring ecommerce projects is very high. this has been found to be the case for many smes in emerging economies (kartiwi et al., 2018). the failure of many e-commerce projects in emerging economies has been attributed to problems of “poor understanding of the context”, and has led to the closure of e-commerce businesses (duncombe and heeks, 2002). these concerns are relevant to the adoption of e-commerce and, therefore, need particular investigation. the purpose of this paper is to examine the various barriers that hinder smes‟ adoption of ecommerce in emerging economies. it seems that developed economies have used internet resources and provided technical services to their local businesses because of the essential role they play in their economies. however, emerging economies are still in their infancy and have tried to launch campaigns for smes and individuals to expand the opportunities offered by ecommerce via the internet at different economic levels. ii. emerging economies a diverse context emerging economies, also known as emerging or developing market economies, are often said to be at the forefront of scientific and technological development, particularly in the fields of information technology (it), social and economic industrialization, and advances in military technology. in this paper, „emerging economies‟ refers to the emerging and postcolonial economies of the african, asian, south american, and pacific regions, generally called „third world economies‟ or „less developed economies‟ (ldes). recently, third world economies can be defined as those with high poverty rates, economic instability, and lack of basic human resources compared with the rest of the world. on the other hand, ldes are a list of developing countries which, according to the united nations, have the lowest socio-economic development and human development (hdi) scores of all countries in the world. ldes have volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu muhammad arsalan nazir, muhammad azam roomi emerging markets journal | p a g e 4 5 weaknesses in areas such as nutrition and education (higher illiteracy rates), and have economic vulnerabilities and widespread poverty. these emerging economies are countries that are on their way to becoming developed, and are generally headed for mixed or free markets. emerging markets are countries that do not constitute „capitalist democracies‟, such as those in europe and north america. emerging economies include countries in the asia-pacific, africa and latin america regions that share common (often negative) structural and historical characteristics such as colonial experience, weak defence, and declining economic growth. these are countries where the army intervenes in response to specific situations or catalysts for particular political crises; there are national insurgency movements, civil wars and, in extreme circumstances, „state collapse‟. there are, however, a few exclusions: certain so-called developing or emerging economies, including china, india, and brazil, which are catching up and developing their known stereotypes (lawrence and tar, 2010). previous studies have argued that, unlike most western and developed societies, which are largely „homogeneous‟ for example in europe, where most people share the same type of cultural values, language, ethnicity and religious system the emerging world is phenomenally „heterogeneous‟ in terms of political systems, economy, ideology, demography, culture, and race. each country has a unique situation that requires culturally appropriate strategies and specific adoption of the trade (lawrence and tar, 2010; nazir and zhu, 2018, 2019). for example, the emerging economies of asia differ from other economies and ldes in the region in terms of their geographic, social and cultural context. in terms of political systems, emerging economies have adopted a wide range of systems for example: autocracy (russia, saudi arabia and jordan); democracy (india, japan, south korea and taiwan); and socialism (china, cuba, vietnam and north korea). in demographic terms, there is also a strong disparity for example, between china, with a population of 1.43 billion, and pakistan, with a population of only 220 million. despite these dramatic differences, however, the emerging world shares some common complex challenges: to improve education; to promote competition; and to establish regulations to develop a high value-added service for the sme business sector. this paper, therefore, contributes to the knowledge of e-commerce and of emerging economies, by highlighting the barriers associated with smes‟ adoption of e-commerce in businesses, in emerging economies, since it is believed that the emerging world has economic deficiency, technological deficit, and both chaos and potential (lawrence and tar, 2010). iii. literature review it has already been established that ecommerce can potentially offer many unprecedented opportunities through new technological advances, with its positive impact on trade, investment, business transactions and market penetration (singh and kota, 2017). the findings of many studies, of both emerging and developed countries who sought these benefits, have been disappointing overall. various studies of ecommerce issues have indicated, however, that the problems faced by many smes in emerging economies might be entirely different from those faced in developed economies. smes that embrace ict and e-commerce in emerging economies have unique challenges, and challenges that are more pronounced than in developed economies (kartiwi et al., 2018). emerging economies face many barriers that seriously hamper the growth of their e-commerce sector (ghobakhloo and tang, 2013). molla and heeks (2007) noted that most smes did not appear to have benefited from e-commerce, whether by expanding their market access, improving their reach, improving their relationships with their customers and suppliers, reducing their costs, or improving their efficiency. researchers have identified the barriers to the adoption of e-commerce by smes, especially those in developing countries. barriers can be broadly categorized as being internal or external (khouja and liu, 2020). internal barriers exist within an organization and can also be resolved in the organization's environment as they are under its control. they typically include: organizational culture; lack of resources; attitudes towards e-commerce; and the level of employee training. external barriers, which are beyond the immediate control of the organization, include: a lack of telecommunications infrastructure; poor internet connectivity; the lack of fixed telephone lines for dial-up access; and weak internet service provider (isp) infrastructure. such barriers were identified in sri-lanka by kapurubandara and lawson (2008), and in nigeria by white et al. (2014), as significant challenges to smes‟ e-commerce adoption. a recent study by nazir and zhu (2018, 2019) and rahayu and day (2017) further revealed that high dependence on email services, lack of government support, lack of ict specialists and lack of financial resources were all obstacles to the low adoption of ecommerce services by smes in pakistan and indonesia – both emerging economies. salehi (2013) also argued that economic and cultural poverty, and low awareness of information technology hinder the adoption of ecommerce in iran's emerging economy. in line with the findings of other studies, santhosh (2019) studied smes in emerging economies and found several obstacles and difficulties in adopting technology, internationalisation and financial performance. financial systems of emerging economies were seen as significant hurdles for smes and need to be restructured to allow for online payment mechanisms and credit facilities. in this respect, emerging economies lag behind, with the exception of south korea, where the government actively supports commerce, and benefits from it. in studies undertaken twelve years apart, awiagah et al. (2016) and zhu and kraemer (2009) identified regulatory conditions that also play a crucial role in stimulating smes and have a more significant impact on the adoption of e-commerce in emerging economies than in developed economies. these studies show inadequate infrastructure to be a significant barrier to e-business adoption by smes in emerging economies, and this situation is drawing the attention of many parties including researchers given the critical role that smes play in improving economies through job creation and poverty reduction. the development of e-commerce technologies for smes in any country would have a positive influence on the commercial and economic progress of the country (makiwa and steyn, 2019; rahayu and day, 2015, 2017). volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu barriers to adopting electronic commerce for small and medium-sized enterprises in emerging economies page |46| emerging markets journal after examining the existing literature, it is found that many studies have conducted on the use, impact, adoption and diffusion of e-commerce by smes. in addition, some researchers have attempted to uncover the factors that influence the adoption of e-commerce in smes. however, there has been very little research on combined issues conceding to the adoption of ecommerce in smes in “emerging economies” refers to the emerging and postcolonial economies of the african, asian, south american, and pacific regions, generally called „third world economies‟ or „less developed economies‟ (ldes). an examination of the barriers to the adoption of e-commerce in smes shows that the obstacles identified affect smes differently, depending on the socio-technical context. although extant theories including the technology acceptance model (tam) (davis, 1989) and the unified theory of acceptance and use of technology (utaut) (venkatesh et al., 2003) models have been proposed by researchers in seeking to explain e-commerce acceptance and use, this study adopted and applied the technology-organizationenvironment (toe) framework developed by tornatzky and fleischer (1990). it comprises three distinct but intersecting, interlinked contextual dimensions: technological, organizational, and environmental barriers. very few literature studies have applied the tornatzky and fleischer‟s (1990) (toe) framework and identified the barriers linked to the adoption of ecommerce in emerging economies in three original dimensions, notably technological (describes internal and external technologies relevant to smes), organizational (refers to the scope, size, financial constraints and overall strategy of sme e-commerce adoption) and environmental (indicates the situation in which smes run the business in a local environment). however, this means numerous studies have largely ignored individual factors related to the „entrepreneurial (individual) characteristics of owner-managers, managers and other employees‟ at different levels. therefore, barriers related to the role of owner-managers and the characteristics of management employees need to be considered in the context of the toe framework (ghobakhloo and tang, 2013) as they have not been studied earlier in the context of emerging economies. iv. research strategy and framework to achieve the research objectives of this paper, it relies heavily on a comprehensive review of the literature on e-commerce barriers found in various studies. our literature review was conducted based on what we believe to be a representative sample of most of the research cited on this topic. a critical analysis was performed to determine the similarities and differences, if any, between the barriers reported in the literature. this paper further evaluates and extends tornatzky and fleischer‟s (1990) technology-organizationenvironment (toe) framework by adding a micro-level context that of the „entrepreneurial (individual) characteristics of owner-managers, managers and other employees at different levels‟ to examine various contextual challenges smes face in adopting ecommerce in emerging economies refers to the emerging and postcolonial economies of the african, asian, south american, and pacific regions, generally called „third world economies‟ or „less developed economies‟ (ldes). important socio-economic contextual barriers and new dynamics have also been identified in order to develop a new conceptual framework for the study. the toe framework is adopted in this paper and then extended with the addition of fourth dimension; „entrepreneurial (individual) characteristics of the ownermanagers‟ as a theoretical basis for the research. this study extended the toe model to include the individual context, given that the adoption of e-commerce is highly dependent on the individual decision of owner-managers and other executives of smes in emerging economies. this study identified various barriers in four dimensions technological, organizational, environmental, and individual barriers all of which hinder smes‟ successful adoption of e-commerce in emerging economies. v. findings and discussion the hidden barriers associated with the adoption and development of e-commerce in smes in emerging economies are summarized in figure 1, and then discussed further. figure 1. barriers for smes to adopt e-commerce in emerging economies a framework source: authors‟ compilation „technological barriers‟ refer to the adoption of e-commerce using different ict units and other related network technologies in the sme environment (teo and pian, 2004). the technological context represents the pool of technologies that smes can adopt (scupola, 2009), whether technologies available on the market, or the current ict equipment of an organization. this study identified several technological barriers that hinder the adoption of e-commerce in emerging economies: availability and quality of latest ict infrastructure (hardware and software) units; national evolume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu muhammad arsalan nazir, muhammad azam roomi emerging markets journal | p a g e 4 7 readiness; the slow speed of the available internet connection; power outages; and online payment security and data privacy. for the successful adoption of e-commerce technologies, we found it crucial that smes in emerging economies adopt the latest ict devices that support ecommerce projects. „availability and quality of current ict infrastructure‟ refers to technologies (hardware and software) that enable smes to develop their e-commerce processes (chatzoglou and chatzoudes, 2016). in considering quality, this study found that, due to the smaller size and horizontal structure of the smes, ict units were not fully developed. compared with developed countries, smes in emerging economies did not have the latest ict devices available to support ecommerce projects; they used outdated ict equipment that needed to be updated for e-commerce to succeed. although hardware devices were available in each organization to handle day-to-day activities, they were outdated, controlled by owner-managers, and had no ict support within the business. in contrast, in developed countries, ict infrastructure in smes is of relatively good quality. most smes have well-structured ict units, with high-speed internet connections, scanners, laser printers, fifth generation computers and laptops, and efficient ecommerce and online software. in addition an important distinction they have a business-friendly environment with the necessary facilities and inter-office coordination. this study, therefore, proves that it is imperative for every business to have available the latest ict infrastructure in order to embrace e-commerce fully in all departments. the study highlights that to date, smes in emerging economies, as well as their counterparts in most third world countries, do not have sufficient infrastructure, especially when compared with developed economies. in preparing smes for the adoption of ecommerce, the country's overall ict infrastructure needs to be optimal. we observed that, in emerging economies, ict systems are not fully developed, and broadband internet and other related tools networks are not available in most places especially in rural areas. the cost of the latest computers and other ict accessories is also huge and it is difficult to justify the investment (syed and shaikh, 2012). it is evident in the literature that the high cost of the latest ict infrastructure devices in many emerging economies restricts the ability of smes to adopt new technologies and therefore influences the growth (or lack of) of e-commerce (ghobakhloo and ching, 2019). this study indicated that overall national readiness of emerging economies was a determining factor in their e-commerce adoption process. according to unctad (2003), the country's electronic preparedness is essentially a measure of its online business environment a combination of factors that indicate how open a market is to the opportunities offered by the internet. we further found that private isps, public institutions and banks which hold the monopoly on providing facilities and services to national consumers and the commercial sector do not have adequate infrastructure and facilities. the general weakness of the national infrastructure means that smes generally only allow a limited transaction using a particular credit card, which makes it even more challenging to use credit cards for daily purchases. this study highlighted that this is due to the current weaknesses of the national banking network and its structure. as a result, an emerging country's infrastructure is not powerful enough to help local businesses adopt cutting-edge technologies, including e-commerce and its applications via the internet. this is also a significant barrier to smes‟ adoption of e-commerce. therefore, general deficiencies in the infrastructure of emerging economies require improvement and support from the government. emerging economies are confronted with a slow-paced internet also a barrier for smes to the development of e-commerce services. this study highlights the slowness of the internet as delaying a firm‟s progression towards e-commerce and as a barrier to e-commerce adoption. this lack of speed was a particular problem for small enterprises, but also for medium-sized enterprises. due to the slow speed of the internet, the majority of smes use internet applications solely for communication purposes sending and receiving e-mails and promoting products and services on social media pages. for e-commerce applications, however, a high-speed internet connection is required. nazir and zhu (2019) reported that with the limited speed of internet services and network devices, most smes in emerging economies preferred to utilise only the email aspect of e-commerce. this study found that, in terms of managing an online business, the speed of the internet in emerging economies is very slow compared with developed economies. power outages (shortage of electricity) seem to present a barrier for all smes in emerging economies compared with developed countries. the energy crisis is the most severe problem facing the world today, especially in emerging economies and ldes. this study identified electricity shortage as a determining barrier in the e-commerce adoption process. emerging economy states have faced an unprecedented energy crisis for many years. the problem worsens in summer and causes daily electricity shortages 8-10 hours in urban areas and 12-14 hours in rural areas. shortages seriously affect industries, commerce and people's daily lives as well as the daily activities of smes (hyder and lussier, 2016). without a continuous supply of electricity, smes cannot use ict equipment that supports e-commerce and other related technological tools. it is found that, in the event of power failure, smes in emerging economies use generators and backup devices to operate computer systems. when outages occur, however, they can only afford to use diesel generators for a short time, which hinders the continued operation of technological devices and their processes. it is confirmed, therefore, that in emerging economies power outages prevent many smes especially those in remote regions from adopting ecommerce. the problem of power supply has negatively affected the business environment, and companies are now relocating to neighbouring countries where infrastructure is more readily available. emerging economies face severe problems with regard to online payment security and protection of consumer data confidentiality during online shopping experiences. these concerns were found to be further barriers preventing smes in emerging economies from fully adopting e-commerce services. online and mobile payments are those payments made using mobile devices or computers connected to the internet through existing online personal accounts usually a bank account, a volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu barriers to adopting electronic commerce for small and medium-sized enterprises in emerging economies page |48| emerging markets journal credit/debit card or a payment service provider to perform transactions on the internet. with technological advances, the use of mobile devices by consumers in emerging economies in online payment transactions has increased (unctad, 2017). however, this study highlights some of the problems associated with online and mobile payment systems presented to online consumers. the study revealed that smes customers are at risk of a security issue when buying online and making online payments. consumers were concerned that unauthorised third parties, including marketing and promotion companies, could access their personal data, without their knowledge or consent. in addition, they felt that they might be at higher risk when shopping online if there were no secure payment mechanism available on the company‟s website. however, the study also suggests that an excellent web security system and user privacy would help improve online users‟ confidence and increase the rate of adoption of e-commerce in smes in emerging economies, and also in developed countries. due to insufficient security of online payments and data privacy, the rate of receiving payments via the e-commerce channel is very low. customers of smes were also reluctant to use e-commerce services online as they felt it constituted a breach of consumer confidentiality. this study shows that internet security is becoming a major problem in emerging economies. as a result, smes‟ customers in emerging economies viewed the internet as an insecure way for transactions and prefer to do offline transactions to avoid the risk of internet fraud. hence, this study argues that consumers fear they risk their identities being stolen, and that this fear threatens their trust in e-commerce and undermines its growth. „organizational barriers‟ refer to an organization‟s internal issues, which influence the adoption and implementation of e-commerce. this study identified several organizational barriers that hinder the adoption of e-commerce in emerging economies. they include: the size and structure of the firm; inadequate financial resources and skilled human resources (hr); and the absence of a website and ordering and payment facility. this study found that the size and structure of the sme represented an essential barrier and demonstrated the organization's ability to provide the necessary resources human and financial to adopt the e-commerce technology standards. in emerging economies, medium-sized smes have greater ability to provide specific resources to their business than smaller smes. as a result, medium-sized smes are more likely to adopt e-commerce. small smes had flatter structures where decision-making power was in the hands of owner-managers. as noted previously, this has an impact on the implementation of the ict technologies that support e-commerce projects. small smes do not have adequate management structures, resources or ict departments to facilitate e-commerce projects all of which have a positive influence on the adoption of ecommerce. this study revealed that size and structure are decisive barriers in a company‟s decisions and involvement with regard to adoption of e-commerce in emerging economies (dholakia and kshetri, 2004; iacovou et al., 1995; jeyaraj et al., 2006; lertwongsatien and wongpinunwatana, 2003; martins et al., 2015; scupola, 2009). the barriers that most affect smes are the limitation of their financial budgets and lack of qualified staff. in smes, the adoption and development of ecommerce have often failed due to problems related to the financial capacity of owner-managers and the ict skills of employees (sun et al., 2018). this study mentioned that in emerging economies, small smes expressed limitations in relation to their financial capacity to set up new ict infrastructure bases or upgrade existing ict infrastructure units. this also extended to their ability (or lack of) to develop and manage an e-commerce website, compared with medium-sized smes. in most smes it was found that, due to their limited ict budgets, they did not want to update the network communication channel by installing the latest network devices. in terms of website development, smes did not have an experienced web developers able to develop and manage the website daily. due to the cost, smes were not able to use web services from external ict providers. therefore, for smaller smes in particular, it is complicated to develop a commercial website for e-commerce transactions, and to recruit qualified ict staff for webpage development, maintenance of ict units and execution of e-commerce activities on a daily basis. the number of ict staff in emerging economies is limited, and those that are employed usually work for large organizations; smes cannot afford to hire their expensive services or pay a high salary (syed and shaikh, 2012). therefore, it is argued that smes in emerging economies have been severely affected by the maintenance costs of ict devices, and that an individual sme‟s human and financial resource constraints have a significant impact on its adoption of e-commerce. to facilitate e-commerce projects and online transactions (and thus receive orders online), a company needs an active website with an online payment system that allows e-commerce payment by different methods. where these are in place, it is easy for potential customers to access the company‟s online products and services. as this study highlights, the lack of a website offering an adequate payment mechanism is a barrier that prevents many smes in emerging economies from offering e-commerce services and receiving transactions through the e-commerce channel. also, many smes have only simple websites, such as static sites or interactive websites, for the marketing of products and services, and some of them use only email for communication. we suggested that a lack of financial resources was probably the main reason for not having an adequate website with payment functions that support e-commerce services in emerging economies. as a result, this study revealed that, for most smes, a website is only a marketing tool, and that the complete e-commerce transaction system is, to a greater extent, not available to them. the „environmental factor‟ refers to the area in which an organization establishes its activities (tornatzky and fleischer, 1990) or, in other words, it concerns the external environment (scupola, 2009) and the explanation of how barriers influence the adoption of e-commerce (teo and pian, 2004). this study identified several environmental barriers that hinder the adoption of e-commerce in emerging economies. they include: volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu muhammad arsalan nazir, muhammad azam roomi emerging markets journal | p a g e 4 9 traditional business selling methods; lack of consumer trust in e-commerce; consumer preference for cash payments on delivery; technological awareness and education in society; absence of legal regulation of online payments; unstable political and governmental conditions; corruption and favouritism of national business institutions; and lack of government support in the adoption of e-commerce by smes. another critical factor for smes in the development of e-commerce is the traditional method of selling: combining relationship-based selling, personal contact between owners and clients, and the use of word of mouth as a marketing tool. this barrier is common to all smes, and this study found that traditional methods of selling negatively affected companies‟ adoption of ecommerce technology in emerging economies. smes rely primarily on sales-based relationships and personal owner-managers‟ contacts to conduct business transactions. it is the preferred sales method in the business environment of emerging economies and is adopted by many organizations in those states. the use of personal sales techniques, in physical visits and communication with customers in the field, is widespread method of selling products and services, and most transactions are achieved as a result of personal contacts. sales are relationship-based and owners‟ methods of managing personal contacts impede the adoption of e-commerce at different stages. although some smes have e-commerce magento software and erp tools, because of the traditional culture of emerging economies, company management is also required to use traditional sales methods. these include the use of telephone or mobile devices, fax and email for communication. another barrier for all smes is the lack of consumer confidence in completing online purchases. in emerging economies, especially in south asia, buying is an outdoor pleasure, and urban consumers prefer to combine outdoor shopping with family meals at restaurants. this study showed that, unlike in western consumer culture, where there is little time to go to commercial markets to visit physical stores and buy, south asian consumers enjoy this type of shopping by making it a family event and, therefore, prefer to visit stores instead of relying on online purchases (nasimi et al., 2018). the study also suggests one of the most common reasons for not buying online and using ecommerce services, however, is the lack of consumer confidence in e-commerce and its services. in emerging markets there is a culture of fraud and misrepresentation, in which sellers hide the weaknesses of their products. a visit to markets and stores is therefore perceived as necessary, so that consumers can verify the quality and quantity of the desired products something that is not possible online. this study argues that the generally perceived culture of fraudulent business practices in emerging companies has also affected the level of consumer confidence in ecommerce. this barrier is considered a significant obstacle to receiving e-commerce transactions; in emerging economies customers do not trust online purchases and prefer to pay via offline channels. this study identified traditional offline payment methods, such as cash on delivery (cod), as a determining barrier to the e-commerce adoption process. it is reported that in emerging economies, the majority of transactions were made offline, involving a physical exchange of cash. for smes who have an online capacity, this involves only the ordering element of the transaction; payment is subsequently made in the form of cash on delivery of the goods (cod). for e-commerce services, appropriate credit/debit cards or digital payment methods are required to conduct transactions. however, in emerging economies it is noted that due to the low rate of use of such payment methods, consumers perpetuate a preference for cod. the results of this study also revealed that most emerging economies for example, bangladesh, north korea, pakistan, afghanistan, ghana, central african republic, and iran do not have active paypal services to receive and send money globally. as noted above, this lack of confidence in electronic payments could partly explain the low participation of consumers and smes in e-commerce. lack of confidence in the use of credit/debit cards or other online payment methods is probably one of the critical issues emerging economies must overcome for the successful and widespread adoption of e-commerce by the public. physical cash payments continue to dominate the business market in these economies, and this impedes the adoption of e-commerce and the move towards a reliance on electronic transactions. previous studies suggested that a lack of awareness of the potential uses and benefits of ict could also hinder the growth of e-commerce (kapurubandara and lawson, 2008; molla and licker, 2005). in some emerging economies, the population are only aware of limited internet applications such as chat, email, and internet browsing, including facebook (rahayu and day, 2017). as a result, organizations have not considered taking advantage of the potential of e-commerce to improve their business operations. this study cited limited knowledge of e-commerce and computer training among sme clients as a barrier to the adoption of ecommerce. we found that sme clients were uneducated, and did not know about the technology used to place orders online or how to use digital payment methods; neither could they understand the web content and the english language. this is, therefore, a significant obstacle to the use of e-commerce services. this study revealed that, in emerging economies, most citizens are not very well trained in the use of ict services and various online tools. this limited technical knowledge is mainly due to country's low technological literacy rate. we felt that governments have tried to improve this, but it takes time to see the effects. teaching programs have been integrated into various colleges and universities, and training centres have been established albeit only in large cities. however, it will also take time for the workforce to be ready to take up the challenge of e-commerce. this study, therefore, confirmed that computer training and ecommerce awareness are essential to building a positive and more adaptive culture of e-commerce in society. the study indicated that a lack of regulation, or an online payment policy to guide e-commerce transactions, was a determining factor in the process of ecommerce adoption. the formulation of e-commerce regulations in emerging economies has been slow, and many public and private sector companies, as well as individual home users, do not have an adequate ecommerce framework to guide their e-commerce transactions. at present, in most of the emerging volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu barriers to adopting electronic commerce for small and medium-sized enterprises in emerging economies page |50| emerging markets journal economies, there is no legislation, regulation or payment mechanism for e-commerce that requires smes to participate in a secure way. this study further revealed that the lack of a legal and payment framework for e-commerce has hampered the development of e-commerce within smes and argued that there are inadequate regulations for online payment in emerging south asian economies. despite the growth of e-commerce worldwide, the proportion of post-paid cash payment transactions is still around 80-95% (asian development bank abd, 2018). it is believed that political and governmental conditions are a critical barrier to the successful development and implementation of technologies in any economy. in an emerging country where the political situation is unstable, it is unlikely that public authorities will pay sufficient attention to technological developments such as the development of e-commerce or even the implementation of the latest ict equipment for the local business market. political and governmental stability is essential for all activities undertaken by smes, including the adoption of e-commerce. this study showed that the unstable political and governmental situation in many emerging economies affected decisions made by smes with regard to the implementation of the latest ict units that support ecommerce. for example, whenever there is a change of government in emerging or third world economies, sme policies and interest rates also change, due to a lack of political stability in the relevant emerging country. newly elected governments have also imposed new ict taxes and regulations, which sometimes create problems for smes that want to change a decision to adopt ecommerce as technology. political and government instability also affects the costs of technology products used in the e-commerce process. most technology suppliers and dealers process quotations in usd and when a government modifies its tariffs, the cost of stateof-the-art equipment increases, forcing many smes in the specific emerging country to use affordable ict tools that support e-commerce. it is further noted that the political situation in emerging economies remains unstable and this affects the business environment for future investment, research and development. as a result, with low-profit margins for smes, new entrepreneurs are reluctant to invest in modernising traditional business units in favour of ecommerce. to improve the overall e-commerce structure in an emerging country, its government needs to introduce a long-term technology policy for smes, as well as to reduce import taxes on the latest ict equipment. this action is only likely to be taken by a stable and reliable government. therefore, in an unstable political climate, smes in emerging economies are thinking twice before investing or adopting new technologies. this study confirmed that the corruption and favouritism in governmental and local business institutes is another significant barrier that affects smes in emerging economies. it highlights corruption as one of the crucial factors limiting the successful implementation of ict equipment that would help in the adoption and further development of new technologies, including ecommerce. in most south asian economies, the problem is the routine deviation from established standards and norms by public officials and the parties with whom they interact. corruption is accepted in various ways: bribery and kickbacks in public procurement; the sale of public property by government officials; and the misuse of government funds (reinikka and svensson, 2005). this is particularly problematic for smes, as they cannot compete with larger companies in terms of technological resources and, as a result, are likely to be last in line when the „favours‟ are handed out. in this study we indicated that the government ministries and local financial institutions were held responsible for the spread of corruption in emerging economies, as these local bodies control and allocate the country‟s public resources. the government plays a crucial role in promoting new technologies in any country, due to the favouritism it shows towards large organizations, and the corruption (bribery) in many ministries particularly in the trade and commerce sector. as a result, smes still lag behind in the implementation of the latest ict infrastructure that supports the adoption of e-commerce. the results of this study further showed that obtaining infrastructure loans from commercial banks, in order to upgrade ict infrastructure, is another hurdle for smes. this study confirmed this, claiming that local and provincial governments offer ict infrastructure loans to smes, with the collaboration of financial institutions, including local, national and commercial banks, to improve basic ict systems that support e-commerce. however, government officials and financial institutions prefer larger organizations because they can better afford to pay back their loans. it is also noted that the country's local business institutions do not play an active role in improving smes and developing e-commerce. this study argued that many smes had never contacted local business institutions or support agencies and were not affiliated with any industry. they believed that local business institutions were primarily focused on larger organizations, were only looking out for their own welfare, and had no interest in facilitating the development of smes. some private organizations and associations are working in emerging economies to improve smes, but their membership is not yet affordable for smes. previous findings showed that in economies where e-commerce technologies have been successfully adopted, the government had taken initial steps to promote and support e-commerce at various levels (gibbs and kraemer, 2004; lawrence and tar, 2010; molla and licker, 2005). in this study, however, we found that inadequate government technology support for e-commerce and a lack of availability of legal and regulatory e-commerce framework by government affected smes in their development of e-commerce applications, in the commercial context of emerging economies. although the government plays a vital role in the development of e-commerce technology policies for the wellbeing of businesses in the emerging economies, its offer of support is still far from being accepted by many smes. in this study, government support proved to be the most critical factor in the adoption of e-commerce. we discussed various issues, including: the improvement of infrastructure; laws and regulations; financial support; volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu muhammad arsalan nazir, muhammad azam roomi emerging markets journal | p a g e 5 1 the tax system; the education program; and the promotion of ict use. scupola (2009) found that government intervention has always had a decisive influence on creating economic growth and promoting the diffusion of technological innovations. however, the results of this study revealed that the government had shown little interest in supporting smes, as discussed in previous sections; it focused only on strengthening the infrastructure of larger organizations and even imposing more taxes on smes. the sme sector is, therefore, not a priority for government or financial institutions, or for other ministries in emerging economies. as noted in the previous sections, trust is one of the significant problems in emerging economies. this is particularly true for consumers in south asia, where there is low penetration of e-commerce services in smes. therefore, it is essential that governments take action to make e-commerce an economic tool for improving the economy and the local business market, and that they establish an adequate legal and regulatory framework to strengthen online activities in the country. in this study we suggested that the formulation of such legal and regulatory frameworks for e-commerce in emerging economies has been slow and that smes and individual users did not have adequate policies to guide e-commerce transactions. further, there is no developed legal regulation and e-commerce system that facilitates ecommerce transactions in the smes of emerging economies. there were government attempts to pass a law on e-commerce to encourage safe and secure ecommerce commercial payments but, unfortunately, they were unsuccessful. such a law could have an impact on the use of e-commerce applications by smes, as currently there is no legal framework that smes can use as a point of reference in their day-to-day business operations. it could also promote e-commerce in the country, and create a regulated legal environment for doing business via the internet, which, in turn could influence the adoption of e-commerce by local smes. therefore, this study shows that in emerging economies, the role of governments in the implementation of ict and e-business policies is still questionable, and this has an impact on the successful adoption of e-commerce by smes. in addition to the three contextual barriers faced by smes in emerging economies (as described above) we also found new barriers related to „entrepreneurial (individual) owner-managers‟. they were: individual adoption characteristics of owner-managers; ownermanager innovativeness; knowledge of ict (computer skills) by managers/executives and employees; and awareness of e-commerce. these are also considered key determinants of smes‟ e-commerce adoption in emerging economies, because:  most smes in emerging economies are sole proprietor businesses. therefore, there is a need to understand the role of the owner-managers in embracing e-commerce as a business tool (hyder and lussier, 2016; raza et al., 2018).  ramdani et al. (2011) and shemi and procter (2018) have argued that staff members occupying managerial positions perform different tasks, and most sme tasks are controlled by the ownermanagers of the organization. their roles should, therefore, be considered in order to analyze ecommerce adoption in the context of emerging economies. we considered individual characteristics of the owner-managers to be another important barrier in relation to the adoption of e-commerce. in this study, it was found that the presence of e-commerce had a correlation with the presence of enthusiastic ownermanagers and other senior staff. the individual factor, therefore, highlighted the importance of the ownermanager's role in the development of e-commerce. in addition, individual characteristics of other senior executives were also shown to be crucial in smes‟ ecommerce adoption scenario in emerging economies. in this study, innovativeness refers to the ability of owner-managers to adopt innovative technologies including e-commerce faster than others. previous findings indicated that owner-managers who participated fully in the decision-making process also controlled dayto-day management activities and administrative tasks (santhosh, 2019). in this study, owner-managers controlled their organization's finances and hr, and participated fully in administrative and financial activities. the innovative capacity of owner-managers was quite obvious with regard to the introduction of various technologies internally, including e-commerce. many owner-managers were familiar with e-commerce technologies and were motivated by their interest in technology. they dealt with the troubleshooting of the software and other technical problems related to the electronic system. despite this, there have been delays to the adoption of any technological change as ownermanagers advised staff to rely on the manual system and traditional sales methods. in other emerging economies, although owner-managers controlled the financial activities, the lack of e-commerce knowledge was considered a major barrier to the rapid adoption of ecommerce in the country. this study revealed that the top management of these companies felt that if e-commerce were adopted as an innovation, their control over business decisions would become limited. this was because they were not aware of the benefits of modern innovative technologies and did not encourage the idea of e-commerce in the organization and, therefore, continued to rely on conventional methods. previous findings suggest that the technical knowledge of owner-managers (and other staff) was another barrier in the adoption of e-commerce in smes (kartiwi et al., 2018). to develop e-commerce applications fully, with the implementation of the latest ict infrastructure, staff in smes must have a practical and reasonable knowledge of new technologies. this will only be possible if they have adequate computer skills (ict skills) to make their organizations aware of the technologies. this study has shown that in emerging economies, owner-managers and other staff particularly senior executives (who are more likely to be older) of the smaller smes are not well trained in computer applications. therefore they do not have enough knowledge to use and exploit the technological devices that support e-commerce, which affects their commercial volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu barriers to adopting electronic commerce for small and medium-sized enterprises in emerging economies page |52| emerging markets journal capacity. in terms of education and awareness, when compared to those in medium-sized smes, leaders in small smes do not have well-developed ict skills, and have only limited knowledge of e-commerce technology. this is because these tend to be traditionally operated family businesses, in which employees are generally less educated than perhaps they should be. we further examined the views and attitudes of employees, and demonstrated a strong link between knowledge and training of senior management and the adoption of e-commerce. it seems that if owner-managers could be better informed about the functions and benefits of e-commerce applications for their businesses, they might be more willing to adopt such technologies (ghobakhloo and tang, 2013). we support this claim by stating that the lack of staff training in ict was the result of the lack of e-commerce awareness and computer experience among owner-managers. instead of adapting to technological change, in order to improve their organization, they are reluctant to adopt new technologies, or even to use computers, preferring to work by hand. this reluctance to accept new technologies and that fact that traditional methods are effective, result in a significant problem for smes in their development of e-commerce. vi. conclusion and recommendations although many studies have identified barriers to the adoption of e-commerce, few studies have tested these barriers on smes in the three original dimensions (technological, organizational, environmental) of the toe framework. this study is one of the first to examine the adoption of e-commerce in emerging economies referring to the emerging and postcolonial economies of the african, asian, south american, and pacific regions, generally called „third world economies‟ or „less developed economies‟ (ldes) smes using an extended toe framework. therefore, the main contribution of this study is to extend the original toe framework to examine the barriers that influence the adoption of ecommerce among smes. the results showed that the toe model is really a robust tool for the adoption of ecommerce in smes. in addition, this theoretical model provides us with the new barriers related to „entrepreneurial (individual) characteristics of owners/managers‟ and „local business institutions in supporting e-commerce‟ that influence the adoption of ecommerce by smes in emerging economies. important socio-economic contextual barriers and new dynamics have also been identified in order to develop a new conceptual framework for the study. if these barriers have a significant effect, smes in emerging economies will be more willing to adopt e-commerce. in this study we examined several types of barriers: technological, organizational, environmental, and individual barriers related to owner-managers and management. in summary, it was shown that the availability of the internet, and websites, is considered a determining driver for smes in emerging economies, but there was no e-commerce activity via online payment facilities available on businesses‟ web pages. instead, email communication, via internet applications, defined the e-commerce of the smes in this study. the study then addressed the different new roles and actions of the government and other local business institutions in supporting e-commerce by smes and other businesses, in the traditional local context of emerging economies. this study also demonstrates that, in order to overcome barriers to adopting e-commerce in emerging economies, it is also necessary to understand cultural factors for example, perceptions of purchasing behaviour, society‟s awareness of e-commerce, and the penetration rate of digital payments as well as specific individual characteristics of owner managers in smes. therefore, in this paper, we present and discuss the major barriers that are impeding smes‟ adoption of ecommerce in emerging economies. the study also pointed out that the greater the focus on the adoption of e-commerce, the greater the benefits and capabilities acquired by a business. it further suggests that the greater the investment in technological and organizational capacity and resources including technical, human and financial the greater the benefits for the business. this paper discussion has shown that the various barriers to e-commerce adoption both motivate and dissuade many smes in emerging economies from making e-commerce an innovation. it is concluded that the future of e-commerce is promising in many emerging economies, despite current barriers with regard to existing and available infrastructure, and other problems related to organizational, environmental and individual conditions. the findings of this study can be used to formulate ecommerce policies and strategies aimed at increasing the uptake of e-commerce among smes in emerging economies. in addition to identifying some of the major barriers to the successful adoption and implementation of e-commerce adoption in emerging economies, we have suggested ways to facilitate owners/managers‟ understanding of how they should approach e-commerce and overcome challenges while adopting new innovations in their businesses. some barriers can be resolved with the support of government and national (local) institutional support agencies for businesses in emerging economies, as it can be seen that they have the power to remove the barriers that currently impede largescale adoption of e-commerce. this study suggests that governments in emerging economies should create national technology resource and incubation centers to further educate owner-managers, new entrepreneurs and executives about the potential of new technologies, including e-commerce. this can still be done if local and provisional governments organize technology conferences or workshops with the collaboration of higher education institutions (heis) and other stakeholders to improve the knowledge of urban and rural sme owners as well as managers in emerging economies. references al-qirim, n. (2007), “e-commerce adoption in small businesses: cases from new zealand”, journal of information technology case and application research, vol. 9 no. 2, pp. 28-57. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu muhammad arsalan nazir, muhammad azam roomi emerging markets journal | p a g e 5 3 awiagah, r. kang, j. and lim, j.i. (2016), “factors affecting e-commerce adoption among smes in ghana”, information development, vol. 32 no. 4, pp. 815-836. adb. (2018), “embracing the e-commerce revolution in asia and the pacific”, available at: https://www.unescap.org/sites/default/files/em bracing%20e-commerce_0.pdf (accessed on 21 march 2020) chatzoglou, p.d. and chatzoudes, d. (2016), “factors affecting e-business adoption in smes: an empirical research”, journal of enterprise information management, vol. 29 no. 3, pp. 327-358. davis, f.d. (1989), “perceived usefulness, perceived ease of use, and user acceptance of information technology”, mis quarterly, vol. 13 no. 3, pp. 319-340. dholakia, r.r. and kshetri, n. (2004), “factors impacting the adoption of the internet among smes”, small business economics, vol. 23 no. 4, pp. 311-322. duncombe, r. and molla, a. (2009), “formalisation of information systems in sub-saharan african small and medium enterprises: case of botswana”, the african journal of information systems, vol. 1 no. 2, pp. 1-29. ghobakhloo, m. and tang, s.h. (2013), “the role of owner/manager in adoption of electronic commerce in small businesses: the case of developing countries”, journal of small business and enterprise development, vol. 20 no. 4, pp. 754-787. ghobakhloo, m. and ching, n.g. (2019), “adoption of digital technologies of smart manufacturing in smes”, journal of industrial information integration, 16: 100107. gibbs, j.l. and kraemer, k.l. (2004), “a cross-country investigation of the determinants of scope of ecommerce use: an institutional approach”, electronic markets, vol. 14 no. 2, pp. 124137. hyder, s. and lussier, r.n. (2016), “why businesses succeed or fail: a study on small businesses in pakistan”, journal of entrepreneurship in emerging economies, vol. 8 no. 1, pp. 82100. iacovou, c.l. benbasat, i. and dexter, a.s. (1995), “electronic data interchange and small organizations: adoption and impact of technology”, mis quarterly, vol. 19 no. 4, pp. 465-485. jeyaraj, a. rottman, j. and lacity, m.j. (2006), “a review of the predictors, linkages, and biases in it innovation adoption research”, journal of information technology, vol. 21 no. 1, pp. 1-23. kapurubandara, m. and lawson, r. (2008), “availability of e-commerce support for smes in developing countries”, the international journal on advances in ict for emerging regions, vol. 1 no. 1, pp. 3-11. kartiwi, m. hussin, h. and suhaimi, m.a. (2018), “impact of external factors on determining ecommerce benefits among smes in malaysia”, journal of global entrepreneurship research, vol. 8 no. 18. khouja, m. and liu, x. (2020), “a retailer‟s decision to join a promotional event of an e-commerce platform”, international journal of electronic commerce, vol. 24 no. 2, pp. 184-210. kshetri, n. (2007), “barriers to e-commerce and competitive business models in developing countries: a case study”, electronic commerce research and applications, vol. 6 no. 4, pp. 443-452. kurnia, s., choudrie, j. mahbubur, r.m. and alzougool, b. (2015), “e-commerce technology adoption: a malaysian grocery sme retail sector study”, journal of business research, vol. 68 no. 9, pp. 1906-1918. lawrence, j. and tar, u. (2010), “barriers to ecommerce in developing countries”, information, society and justice, vol. 3 no. 1, pp. 23-35. lertwongsatien, c. and wongpinunwatana, n. (2003), “e-commerce adoption in thailand: an empirical study of small and medium enterprises (smes)”, journal of global information technology management, vol. 6 no. 3, pp. 67-83. macgregor, r.c. and kartiwi, m. (2010), “perception of barriers to e-commerce adoption in smes in a developed and developing country: a comparison between australia and indonesia”, journal of electronic commerce in organizations, vol. 8 no. 1, pp. 61-82. mainardes, e.w. marcio de almeida, c. and deoliveira, m. (2019). “e-commerce: an analysis of the factors that antecede purchase intentions in an emerging market”, journal of international consumer marketing, vol. 31 no. 5, pp. 447-468. http://researchprofiles.herts.ac.uk/portal/en/persons/jyoti-choudrie(7c6db230-0b6f-4f5b-848b-6f63e05915cc).html http://researchprofiles.herts.ac.uk/portal/en/publications/ecommerce-technology-adoption-a-malaysian-grocery-sme-retail-sector-study(b6087305-520c-44e7-a25b-2bf9a90c18be).html http://researchprofiles.herts.ac.uk/portal/en/publications/ecommerce-technology-adoption-a-malaysian-grocery-sme-retail-sector-study(b6087305-520c-44e7-a25b-2bf9a90c18be).html http://researchprofiles.herts.ac.uk/portal/en/publications/ecommerce-technology-adoption-a-malaysian-grocery-sme-retail-sector-study(b6087305-520c-44e7-a25b-2bf9a90c18be).html http://researchprofiles.herts.ac.uk/portal/en/journals/journal-of-business-research(20308a7a-1b9f-4293-9847-29c82df83765).html volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu barriers to adopting electronic commerce for small and medium-sized enterprises in emerging economies page |54| emerging markets journal makiwa, p. and steyn, r. (2019), “an investigation of the government-related factors that inhibit small to medium enterprises‟ adoption and effective use of information and communication technology in developing countries: the case of zimbabwe”, communications in computer and information science, 933: 3-16. martins, r. oliveira, t. and thomas, m.a. (2015), “assessing organizational adoption of information systems outsourcing”, journal of organizational computing and electronic commerce, vol. 25 no. 4, pp. 360-378. molla, a. and licker, p.s. (2005), “e-commerce adoption in developing countries: a model and instrument”, journal of information and management, vol. 42 no. 6, pp. 877-899. nasimi, a.n, nasimi, r.n. and basit, r.a. (2018), “factors affecting e-commerce customer loyalty in pakistan”, journal of marketing and consumer research, vol. 49 no. 4, pp. 17-30. nazir, m. and zhu, x. (2018), “e-commerce adoption factors affecting the smes: a case study investigation of a developing economy pakistan”, in the proceedings of british academy of management (bam) conference, in bristol, 2018, united kingdom. nazir, m. and zhu, x. (2019), “factors affecting ecommerce adoption among smes. a case study investigation of a developing economy pakistan” (unpublished phd thesis). teesside university, uk. rahayu, r. and day, j. (2017), “e-commerce adoption by smes in developing countries: evidence from indonesia”, eurasian business review, vol. 7 no. 1, pp. 25-41. rahayu, r. and day, j. (2015), “determinant factors of e-commerce adoption by smes in developing countries: evidence from indonesia”, procedia social and behavioral sciences, vol. 195, pp. 142-150. ramdani, b. chevers, d. and williams, d.a. (2013), “smes' adoption of business applications: a technology-organisation-environment model”, journal of small business and enterprise development, vol. 20 no. 4, pp. 735-753. raza, s. minai, m.s. zain, a.y.a. tariq, t.a. and khuwaja, f.m. (2018), “dissection of small businesses in pakistan: issues and directions”, international journal of entrepreneurship vol. 22 no. 4, pp. 1-13. reinikka, r. and svensson, j. (2005), “fighting corruption to improve schooling: evidence from a newspaper campaign in uganda”, journal of the european economic association, mit press, vol. 3 no. 2/3, pp. 259–267. salehi, a. (2013), “barriers and challenges of ecommerce in iran”, advances in environmental biology, vol. 7 no. 8, pp. 1776–1781. santhosh, c. (2019), “earliness of sme internationalization and performance: analyzing the role of ceo attributes”, journal of entrepreneurship in emerging economies, vol. 11 no. 4, pp. 537549. https://doi.org/10.1108/jeee-11-20180132 scupola, a. (2009), “smes‟ e-commerce adoption: perspectives from denmark and australia”, journal of business information management, vol. 22 no. 1/2, pp. 152-166. shemi, a.p. and procter, c.t. (2018), “e-commerce and entrepreneurship in smes: case of mybot”, journal of small business and enterprise development, vol. 25 no. 3, pp. 501-520. singh, r. and kota, h.b. (2017), “a resource dependency framework for innovation and internationalization of family businesses: evidence from india”, journal of entrepreneurship in emerging economies, vol. 9 no. 2, pp. 207-231. sun, s., cegielski, c.g. jia, l. and hall, d.j. (2018), “understanding the factors affecting the organizational adoption of big data”, journal of computer information systems, vol. 58 no. 3, pp. 193-203. syed, a.a. and shaikh, f.m. (2012), “barriers in implementation of e-business technologies in small and medium enterprises (smes) in pakistan”, romanian statistical review, vol. 60 no. 4, pp. 65-72. teo, t.s.h. and pian, y. (2004), “a model for web adoption”, information & management, vol. 41 no. 4, pp. 457–468. tornatzky, l.g. and fleischer, m. (1990), “the processes of technological innovation”, lexington books, lanham, md. turban, e. outland, j. and king, d. (2018), “electronic commerce 2018: a managerial and social networks perspective”, springer international publishers, switzerland. https://www.emerald.com/insight/search?q=channappa%20santhosh https://www.emerald.com/insight/publication/issn/2053-4604 https://www.emerald.com/insight/publication/issn/2053-4604 https://doi.org/10.1108/jeee-11-2018-0132 https://doi.org/10.1108/jeee-11-2018-0132 https://ideas.repec.org/a/rsr/journl/v60y2012i4p65-72.html https://ideas.repec.org/a/rsr/journl/v60y2012i4p65-72.html https://ideas.repec.org/a/rsr/journl/v60y2012i4p65-72.html https://ideas.repec.org/a/rsr/journl/v60y2012i4p65-72.html volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.203 | http://emaj.pitt.edu muhammad arsalan nazir, muhammad azam roomi emerging markets journal | p a g e 5 5 unctad. (2018), “trade and development report”, available at: https://unctad.org/en/publicationslibrary/tdr20 18_en.pdf (accessed 19 november 2019) unctad. (2005), “trade and development report”, available at: https://unctad.org/en/docs/tdr2005_en.pdf (accessed 12 november 2019) unctad. (2003), “e-commerce and development report 2003”, available at: https://unctad.org/en/docs/ecdr2003_en.pdf (accessed 18 october 2019) unctad. (2017), “information economy report”, available at: https://unctad.org/en/publicationslibrary/ier20 17_en.pdf (accessed 01 january 2020) venkatesh, v. morris, m.g. davis, f.d. and davis, g.b. (2003), “user acceptance of information technology: toward a unified view”, mis quarterly, vol. 27 no. 3, pp. 425-478. white, g. afolayan, a. and plant, e. (2014), “challenges to the adoption of e-commerce technology for supply chain management in a developing economy: a focus on nigerian smes”, lacka, e. chan, h. and yip, n. (ed), e-commerce platform acceptance: suppliers, retailers and consumers, springer, pp. 22–39. zhu, k. and kraemer, k.l. (2005), “post‐adoption variations in usage and value of e‐business by organizations: cross‐country evidence from the retail industry”, information systems research, vol. 16 no. 1, pp. 61-84. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu business process reengineering and the performance of insurance firms in nigeria benneth uchenna eze hallmark university, nigeria | beneze7@gmail.com saidi adedeji adelekan mountain top university, nigeria | saadelekan@mtu.edu.ng emmanuel kanayo nwaba olabisi onabanjo university, nigeria | nwabakanayo@gmail.com abstract this study investigated the effect of business process reengineering on the performance of insurance firms in nigeria, by employing two components of business process reengineering. survey research design was adopted, through the administration of structured questionnaires on some selected staff of insurance companies at their head offices in lagos, nigeria. the research instrument was validated through content validity index (cvi), while the reliability of the research instrument was tested through test-retest method. the findings revealed that, the two components of business process reengineering adopted for this study have individual positive significant effect on insurance firms’ performance and adoption of new process. the f-statistics revealed that the two components of business process reengineering adopted for this study have positive significant combined effect on insurance firms’ performance in nigeria. the adjusted coefficient of determination implied that, change in insurance firms’ performance is explained by the combined business process reengineering components. it is therefore concluded that, business process reengineering components are important drivers of insurance firms’ performance. it is recommended that, insurance firms should introduce new technology that will aid insurance penetration, especially information communication technology (ict). the deployment of ict tends to make it easier for existing and new customers to pick-up insurance policies through their smart phones or personal computers. furthermore, insurance firms should equally come up with reengineered processes. the process of serving their customers should be enhanced. keywords: business process reengineering, insurance firms, performance, new technology, new process new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.163 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:beneze7@gmail.com mailto:saadelekan@mtu.edu.ng mailto:nwabakanayo@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.163 | http://emaj.pitt.edu benneth uchenna eze, saidi adedeji adelekan, emmanuel kanayo nwaba emerging markets journal | p a g e |45 business process reengineering and the performance of insurance firms in nigeria benneth uchenna eze saidi adedeji adelekan emmanuel kanayo nwaba i. introduction organizational performance has become a major determinant of firms’ corporate existence. as a result, there are unavoidable pressures for organizations to reengineer their business processes for greater effectiveness and efficiency. the goal of business process reengineering is to redesign and change the existing business practices or process to achieve dramatic improvement in organizational performance. in a highly competitive globalized world, organizations enhance competitive advantage through business process reengineering (bpr) by redesigning selected processes. sharma (2006) posited that, business process reengineering implies transformed processes that together form a component of a larger system aimed at enabling organization to empower themselves with contemporary technologically-based business solutions and innovations. according to klun and trkman (2018), business processes are simply a set of activities that transform a set of inputs into a set of outputs (goods or services) for another person or process using people and equipments. business process entails a set of logically related tasks performed to achieve a defined business output or outcome. it involves a wide spectrum of activities procurement, order fulfillment, product development, customer service and sales (okafor & okeke-ezeanyanwu, 2018; sharma, 2006). thus, business process reengineering becomes an offshoot of business process. hammer and champy (1993) argued that, the fundamental reconsideration and radical redesign of organizational process in order to achieve drastic improvement of current performance in cost, service and speed enjoy a fair measure of consensus. in nigeria, the changing dynamics of insurance market has forced players at all levels to reengineer their business process. the insurance operations and functions were redesigned to meet emerging challenges of contemporary insurance activities. scholars (okafor & okeke-ezeanyanwu, 2018; kabiru, mohamed & norlena, 2012; kemal, yasin, & zafer, 2011) established that, business process reengineering is positively related to firm performance. however, studies examining the effect of business process reengineering on insurance firms’ performance are sparse. in addressing this research gap, this study examines the effect of business process reengineering (measured by adoption of new technology and adoption of new process) on insurance firms’ performance. in line with the research objectives, the following hypotheses were formulated: h01 : adoption of new technology does not significantly affect insurance firms’ performance. h02 : adoption of new process does not significantly affect insurance firms’ performance. h03 : business process reengineering components do not have significant effect on insurance firms’ performance. ii. literature review business process reengineering (bpr) is a means by which an organization can achieve radical change in performance, by application of a variety of tools and techniques that focus on the business as a set of related customer-related core business processes. according to jacob (2014), brp is a solution that is an informed and participative process resulting in new ways of doing business that position a firm for success, both in the short and the long term. hammer (1990) posits that, brp is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvement in important contemporary measures of performance such as cost, service quality and speed. tor and wendi (1996) are of the opinion that business process reengineering was founded on the premise that significant corporate performance improvement requires continuous improvement, breaking away from the outdated rules and fundamental assumptions that underlie operations. bpr has gained a considerable attention in the world of change management during the past years. today, more and more organizations are embracing the bpr trend (okafor & okekeezeanyanwu, 2018; kabiru, mohamed & norlena, 2012; klun & trkman, 2018). bpr portrays the adoption of new technology and processes in business operations. challenges in business environment and competitiveness have called for immediate redesign of business processes to achieve dramatic improvement in cost of business operations, service quality, revenue and profitability. this involves removing outdated processes and using modern information technology to manage business organizations. hammer and stanton (2013) opine that, dynamic business environment has called for innovation which is regarded as crucial to the sustainment of competitive advantage. changing processes and creating new ones is essential for adapting to technological change and competitive pressures. the essence of new technology adoption is to ensure efficiency and effectiveness in operations management within an organization to maximize value and profitability through competitive performance (okafor & okeke-ezeanyanwu, 2018). the reengineering process deals with replacing the manual processes with automation and eliminating unnecessary bureaucracy as well as providing right information at the right time to the right people, eliminating unnecessary work, reducing volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.163 | http://emaj.pitt.edu business process reengineering and the performance of insurance firms in nigeria page |46| emerging markets journal unnecessary control, empowering every employee and getting it right the first time. moreover, automation of key processes can improve the performance of business activities and productivity, increase profitability and enable the enterprise-wide monitoring and coordination. automated process in certain key areas of production process will lead to reduction in cost of production and achievement of better quality products as well as enhanced revenue (okafor & okeke-ezeanyanwu, 2018). simon (1994) identified value adding as a concept of bpr. the concept of value adding, which was originally developed by porter (1984) postulates that every firm is a collection of activities that are performed to design, produce, market, deliver and support its product. all these activities can be represented using a value chain. value chains can be understood in the context of the business unit. in the classical value chain, an organization's activities form a linear flow from the supplier(s) to the customer(s). the value chain includes firstly the "primary activities", that is, the activities the company has to perform in order to justify its right to exist. these activities are adding direct customer value to the product or service and the effective link of these activities has a major impact on the overall performance of the organization. the "secondary activities" are supporting the former, in order to ensure organizational and managerial control, coordination among primary activities, as well as for developing and maintaining a corporate culture within the organization, and a corporate image towards the environment. their value-adding effect is indirect and can only be realizable through the results of primary activities. simon (1994) also equally examined the application of bpr on organizational structures, processes and tasks, as well as their location of individuals and changes of work descriptions, positions and titles. the challenge of organizational analysis, design and change has been a concern for almost any theorist within the area of organization in its narrow, as well as wider sense. kemal, yasin, & zafer (2011) studied the effects of bpr on productivity and performance by conducting firm level analysis. the objective of the study was to empirically examine the effect of bpr on firm productivity and performance. data was used spanning between 1987-2008. the findings showed that, return-on-assets drop significantly during the project initiation year. moreover, it was found out that, performance and productivity measures improve in a decreasing manner after project initiation, suggesting that bpr positively affects firms’ performance. islam & mohamed bin (2011) conducted a study on the impact of organizational innovation on firm performance drawing evidence from malaysian-based ict firms. the study investigated the effect of organizational innovation on firms’ performance. data for the study were collected through an electronic survey conducted on 115 small and medium enterprises operating in the ict industry in malaysia. the findings from the study revealed that, organizational performance has a significant effect on firms’ performance. kabiru, mohamed & norlena (2012) studied the critical success factors for business process management for small and medium banks in nigeria, conducting a questionnaire on banks. the finding from the study showed that, there is a significant relationship among information technology investment, personnel commitment, volume financial activities and overall organizational performance. mura, nilgun & fulya (2013) conducted a study on the relationship between innovation and firm performance by using evidence from turkish automotive supplier industry. the purpose of the study was to examine the relationship between innovation and firm performance. the authors employed survey research design, through the administration of structured questionnaire on top level managers from 113 firms operating in the automotive supplier industries in turkey in 2011. the study used regression analysis with the aid of spss. the findings from the study revealed that, technological innovation such as product and process innovation have positive and significant impact on firms’ performance. okafor & okeke-ezeanyanwu (2018) investigated the effect of business process reengineering on organizational performance of rice production firms in south-east nigeria, using the survey research design. authors employed multiple regression analysis and found that, the adoption of new technology and processes have positive significant effect on the performance of rice producing firms in south-east, while presence of process owners at production interfaces have negative significant effect. based on the findings, the study concluded that, if rice production firms in south east nigeria want to improve performance, attention should be given to the business process reengineering technique. iii. methodology the survey research design was employed for this study. the exact employees of insurance companies in nigeria (population of the study) could not be ascertained; as such the exact population of the study could not be determined. however, kothari and garg (2014) posit that, if the population of a study is not available, the researcher should employ a population of 20,000. this is because, most sample determination formula designers assign a relatively similar sample size for a population in the range of 20 thousands to 50 million. the study employed raosoft sample estimation technique at the 95% confidence level in arriving at a sample size of 377 from the population of 20,000 employees of insurance companies. a 30% non-response rate was assumed, which gives an aggregate sample size of 490. purposive sampling method was used to select a sample of 490 staff of some insurance companies (mutual benefit assurance plc, aiico insurance plc and standard alliance insurance plc). the study employed a close ended questionnaire to obtain data. well-structured questionnaire on a seven-point likert scale ranging from 1 (minimum) to 7 (maximum) was administered on some selected employees of insurance firms in nigeria. the instrument (questionnaire) was validated using content validity index (cvi), through the evaluation of four independent evaluators (two academics and two top executives of insurance firms), that evaluated the instrument on a two-scale (relevant and not relevant). volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.163 | http://emaj.pitt.edu benneth uchenna eze, saidi adedeji adelekan, emmanuel kanayo nwaba emerging markets journal | p a g e |47 the cvi formula: n/n was used. where; n= number of questions rated as relevant n= total number of questions a cvi of 0.786 was obtained, which indicated that the instrument is valid. the reliability of the instrument was tested using test-retest method. a pilot study was conducted, whereby the instrument was administered twice to twenty employees of mansard insurance in lagos state, nigeria within an interval of fourteen days. the result of first pilot study was correlated with that of the second, which gave a value of 0.809, 0.702 and 0.749 for adoption of new technology, new process and performance respectively. this implied that, the instrument is consistent. the data were analyzed using multiple regression analysis with the aid of stata version 14 at the 5% level of significance. model specification perf= f(ant & anp) perf= β0+β1(ant) +β2(anp) +µi where; perf= performance ant= adoption of new technology anp= adoption of new process β 0 is the constant term β1, β2, β3 are the coefficient estimators β1, β2, β3, > 0 where is error term a priori expectation based on the study by okafor and okekeezeanyanwu (2018), the two components of business process reengineering (adoption of new technology and new process) are expected to exhibit positive relationship with insurance firms performance. hence, there will be a direct relationship between adoption of new technology and new process as well as insurance firms’ performance. the research instrument (questionnaire) was administered on 490 staff members of three insurance companies in lagos, nigeria (mutual benefit assurance plc, aiico insurance plc and standard alliance insurance plc). however, only 381 copies of the questionnaire were returned and found useable, which gave a response rate of 77.7%. regression analysis was employed in analyzing the data with the aid of stata version14. iv. findings and discussion this sub-section aggregates the indicators of business process reengineering (adoption of new technology and new process). it estimate the combined effect of these variables on insurance firms’ performance as well as ascertaining the individual effect of the variables (through the t-statistics). the model addresses the main objective of the study, which is to examine the effect of business process reengineering on the performance of insurance firms in nigeria. table 1: result summary (dependent variable performance) variable(s) coefficient t p-value adoption of new technology 0.959* 7.892 0.000 adoption of new process 0.874* 5.098 0.000 f-statistics = 38.981 (0.0000) n.b:*: significant at 5 percent level r-square =0.838 adj r-square= 0.786 source: authors’ computation from field survey (2019) and stata 14. concerning the summary of results on table 1, it was revealed that business process reengineering components (adoption of new technology and new process) have a positive significant combined effect on the performance of insurance firms’ in nigeria (fstatistics= 38.981 < 0.05). the adjusted coefficient of determination (adjusted r2) suggested that, 78.6% variation in insurance firms’ performance is accounted for by the combined business process reengineering components. the t-statistics revealed that, both adoption of new technology and new process have a positive significant individual effect on insurance firms’ performance in nigeria. the findings from the study revealed that, the two components of business process reengineering adopted for this study have an individual positive significant effect on insurance firms’ performance with coefficients and probability values of: adoption of new technology (0.959, p-value<0.05) and adoption of new process (0.874, p-value<0.05). this is consistent with the study by okafor and okeke-ezeanyanwu (2018), which found that the adoptions of new technology and new processes have positive significant effect on the performance of rice producing firms in south-east, nigeria. the f-statistics revealed that, the two components of business process reengineering (adoption of new technology and new process) adopted for this study have a positive significant combined effect on insurance firms’ performance in nigeria (f-statistics= 38.981 < 0.05). the coefficient of determination (r2) provided a value of 0.838. but since there are more than one independent variable (multiple regression), it will therefore be appropriate to use the adjusted coefficient of determination (adjusted r2) value, which is: adj rsquare= 0.786. this implies that, 78.6% change in insurance firms’ performance is explained by the combined business process reengineering components (adoption of new technology and new process). volume 9 no 1 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.163 | http://emaj.pitt.edu business process reengineering and the performance of insurance firms in nigeria page |48| emerging markets journal v. conclusion and recommendation the study investigated the effect of business process reengineering on the performance of insurance firms in nigeria, by employing two components of business process reengineering (adoption of new technology and new process). survey research design was adopted, through the administration of structured questionnaires on some selected staff of insurance companies at their head office in lagos, nigeria. the findings revealed that, adoption of new technology and new process has a positive significant individual effect on insurance firms’ performance. furthermore, it was also discovered that, business process reengineering components (adoption of new technology and new process) have a positive significant combined effect on insurance firms’ performance in nigeria. it is therefore concluded that, business process reengineering components (adoption of new technology and new process) are important drivers of insurance firms’ performance. it is recommended that, insurance firms should introduce new technology that will aid insurance penetration, especially information communication technology (ict). the deployment of ict tends to make it easier for existing and new customers to pick-up insurance policies through their smart phones or personal computers. furthermore, insurance firms should equally come up with reengineered processes. also, the process of serving their customers should be enhanced. as an example, some insurance companies have partnered with some banks, whereby, banks branches are used as centers where insurance policies can be picked-up, and this should be encouraged. the development of online application (android, iphone and windows apps) for insurance companies should be encouraged. references hammer, m. (1990). reengineering work: don’t automatic obliterate. harvard business review. hammer m., & champy, j. (1993). reengineering the corporation: a manifesto for business revolution. harper business. hammer, m., & stanton, s. (2013). how process enterprises really works. harvard business review, 77 (6), 108-118. islam, m., & mohamed, b. (2011). impact of organizational innovation on firm performance: evidence from malaysian-based ict companies. retrieved from http:// www.researchgate.net. jacob, r. (2014). the relationship between enterprises architecture, business complexity and business performance. twente. deloitte. kabiru, a., mohamed, a., & norlena, a. (2012). effect of critical success factors for business process management on the organizational performance of small and medium banks in nigeria. https://pdfs.semanticscholar.org. kemal, a. yasin, o., & zafer, a. (2011). productivity and performance effects of business process reengineering: a firm level analysis. journal of management information systems, 27, (4). klun, m., & trkman, p. (2018). business process management at the crossroads. business process management journal, 24(3), 786813, https://doi.org/10.1108/bpmj-11-20160226. kothari, c.r., & garg, g. (2014). research methodology, third edition. new age international publishers, new delhi. mura, a., nilgun, a., & fulya, s. (2013). the relationship between innovation and firm performance: empirical evidence from turkish automotive supplier industry. procedia-social and behavioural sciences, 75, 226-235. okafor, p.a., & okeke-ezeanyanwu, j.a. (2018). business process reengineering and organizational performance of rice production firms: evidence from south-east, nigeria. journal of arts, management and social science, 3(1), 180-188. porter, m. (1984). competitive advantage. free press. sharma m. (2006). business process reengineering: a tool to further bank strategic goals. journal of management information systems 12: 1. simon, k.a. (1994). towards a theoretical framework for business process reengineering. retrieved from www.citeseerx.ist.psu.edu/viewdoc/ download?doi:10.1.1.115.6439&rep. tor, g., & wendi. (1996). empirically assessing the impact of business process reengineering on manufacturing firms. cooke ville, tennessee. gestao & producao. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu business innovation and competitive advantage in nigerian manufacturing sector moruff sanjo oladimeji olabisi onabanjo university, nigeria | moruff.oladimeji@oouagoiwoye.edu.ng olasunkanmi akeem amida olabisi onabanjo university, nigeria | sunkanmi.amida@gmail.com ekong akpan essien olabisi onabanjo university, nigeria | essien.ekong@oouagoiwoye.edu.ng abstract the study examined the impact of business innovation on competitive advantage in the nigerian manufacturing sector. the study was anchored on the theory of the resource-based theory and the dynamic capabilities theory. the descriptive survey design was employed. the population for the study comprised 496 staff of nestle nigeria plc, ogun state. a sample size of 217 respondents was selected through stratified sampling and a simple random sampling procedure. the questionnaire was administered to the respondents, out of which 207 were retrieved and subjected to further analysis. the stated hypotheses were tested using ordinal regression. the results showed that business innovation has a significant effect on the cost of the product (r2=0.729, f=11.237; p<.05), the sales of the product (r2=0.643, f=3.408; p<.05) and the quality of the product (r=0.845, r2=0.714, f=10.903; p<.05). the study recommended that multinational companies should pay more attention to customer satisfaction by increasing product quality. emphasis should also be placed on innovation in order to cut a competitive edge. keywords: business innovation, quality, product, competitive advantage, manufacturing sector new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.188 | http://emaj.pitt.edu | mailto:sunkanmi.amida@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.188 | http://emaj.pitt.edu moruff sanjo oladimeji, olasunkanmi akeem amida, ekong akpan essien emerging markets journal | p a g e |37 business innovation and competitive advantage in nigerian manufacturing sector moruff sanjo oladimeji olasunkanmi akeem amida ekong akpan essien 1. introduction businesses in the twenty-first century, irrespective of their sizes, are an integral part of the global community in which activities affect and are being influenced by events’ social change and decisions from around the world. this is so because of the dynamic business environment characterized by discontinuous and highly competitive activities. in recent times, a radical change has been observed in the relationship between society and business organizations. the major drivers of this change are increased influence and size of organizations, globalization of trade, change in style of government, and the increase in the knowledge of the importance of stakeholders, most notably the customers (matsa, 2009). the competitive business environment has created complexity and sophistication in the business decision-making process, which requires strategic management. managing various and multi-faceted internal activities is only part of the modern executive’s responsibilities. the firm’s immediate external environment poses another set of challenges. in order to effectively cope with the challenges that affect the ability of a company to grow profitably, top management design processes that are capable of facilitating the optimal positioning of the firm are significant. the strategic processes allow more accurate anticipation of environmental changes and improved preparedness for reacting to unexpected internal and competitive demands. innovation is a mental process that leads to the creation of a new phenomenon; this phenomenon may be new material, new services, or new techniques. innovation is the integration of vital components or ideas which lead to creating new thinking and concepts that were not previously available (kao, 2011). innovation is seen as a pivotal factor that stimulates value creation and sustains firms' competitiveness in today's highly dynamic and complex environment (ranjit, 2004). firms respond to changes by constantly creating new capabilities, which helps them to optimize resources and achieve better performance (montes, moreno & fernandez, 2004). according to tellis, prabhu, and chandy (2009), innovation is a tool that managers can employ in creating and sustaining competitive advantage. innovation can be viewed from the perspectives of product innovation, changes in the product a firm makes, the service offered by the firm, and process innovation. (tushman and nadler, 2010). porter (1985) argues that, competitive advantage grows out of the value a firm is capable of creating for its buyers that exceed the firm's cost of creating it. customers are willing to pay for value, and superior value is created when firms offer the best prices compared to their competitors. competitiveness is a tool for sustained performance, which should be treated as a dependent variable (anthony & shapiro, 2002). clark, hayes, and wheelwright (2008) posit that organizations compete in the marketplace by virtue of possessing one or more competitive priorities such as flexibility, lower cost, quality, and time. various scholars have shown that technological innovation could create positive impacts and improve the competitiveness of a firm (evans, 1993; bernard, 2001; forster, 2006). however, to the best of the researchers' knowledge, there is skewness in literature as it relates to the extent to which innovation influences competitiveness and the need for a greater understanding of the most significant measure of innovation affecting firms' competitiveness. there is a need to address the paucity of innovation as it affects firms' competitiveness in developing countries such as nigeria and particularly in the manufacturing sector. it is against this background that this study tends to examine business innovation and competitive advantage in nigerian manufacturing sector with emphasis on the following specific objectives: volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.188 | http://emaj.pitt.edu business innovation and competitive advantage in nigerian manufacturing sector page |38| emerging markets journal examine the effect of business innovation on the cost of the product, determine the effect of business innovation on sales of the product, ascertain the effect of business innovation on quality of the product. this study aims at finding the answer to certain questions which include: i. what is the effect of business innovation on the cost of the product? ii. what is the effect of business innovation on sales of the product? iii. what is the effect of business innovation on the quality of the product? 2. literature review innovation was a term first coined at the beginning of the 20th century by schumpeter (1934). according to schumpeter, innovation does not originate from scientific recovery, but can be seen in process, product, and changes in organizational activities. zizlavsky (2011) is of the opinion that, innovation may arise from the integrating of already existing technologies and their application in a new context. innovation could also be gained from research and development. (bernard, 2001). therefore, innovation can be seen as not been limited to technical and technological improvement but also in the practical application of knowledge, which particularly originates from human capital and creative research work. zemplinerova (2010) suggests that research and development, and human capital are important determinants of innovation. the concept of competitive advantage evolved from the classical theory of comparative advantage postulated by david ricardo, which has its primary focus on primary production assets. porter (1985) established the concept of a competitive advantage that focuses on cost leadership and differentiation in the product. however, treacy and wiersema (1995) established a generic framework for achieving competitive advantage. they opine that competitive advantage is gained through customer intimacy, operational excellence, and product leadership. competition has also emerged between traditional commercial banks and other financial institutions. the development and globalization of financial markets have intensified the need for modifying the current structure and condition of the financial system. porter (1985) opined that competitiveness of an organization has become the source of success in the market and that value adding strategies in the value chain and resource capabilities in a firm’s internal environment account for its core competencies which can invariably lead to competitive advantage. this according to porter (1985) can arise from the following sources: i) differentiation strategy ii) low cost strategy iii) capability iv) positive reputation v) learning organization competitive advantage dimensions according evans (1993), crosby (1995), knoll and jarvenpaa (1994), forster (2006) includes: i) time ii) quality iii) cost iv) flexibility. these dimensions according to them play a significant role in determining the competitive advantages of one firm over the others. various studies have looked into how businesses can create and sustain competitive advantage barney (1991) lists four (4) essential requirements for a resource or skill to be a source of sustainable competitive advantage. according to barney (1991), for resources or skills to constitute a source of sustainable competitive advantage, they must possess the following characteristics; they must be valuable, they must be rare among a firm's current and potential competitors, they must be imperfectly imitable, and finally, there must not be any strategically equivalent substitutes for the resource or skill. business innovation is when an organization introduces new processes, services, or products to affect positive change in their business. business innovation can be explicitly seen as the adoption of new behavior or ideas by an organization that has the capacity to facilitate volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.188 | http://emaj.pitt.edu moruff sanjo oladimeji, olasunkanmi akeem amida, ekong akpan essien emerging markets journal | p a g e |39 better performance. damanpour (1996) is of the view that innovation can be seen from the perspective of new technologies, modified processes, new products or services, evolving organizational structures or systems and creation to new programs which can facilitate better performance in employees. it could also be noticed that the following factors can be of assistance when making innovation as part of strategies: i) choose your goals, ii) build processes iii) measure systematically iv) put the right tools in place. chuang (2005) opined that organizational innovation can be divided into two distinctive types: i) technical or technological innovation; and ii) administrative innovation. it was also observed that innovation offers companies the following benefits: i) getting ahead of potential disruption ii) increased efficiency iii) talent attraction and retention iv) brand perception the following type of business innovation were also identified: i)product innovation ii) process innovation iii) business model innovation iv) delivery innovation. these types of business innovation gave rise to a more efficient, forward-thinking, and led to greater profitable. it also led to practical steps to jump-start innovation, thereby leading to renovation of offices, internal innovation programs implementations and execution of new ideas. the linkage between innovation and competition has been of importance to various scholars (schmutzler, 2013). changing structures and potential competitors have been seen as critical factors influencing research and development. firms that engaging in research and development to improve innovation and increase competitiveness are few due to the cost of such research (gilbert, 2006). porter (1985) proposes a competitive strategy comprising a two-part process. the first process consists of deciding on the product-market scope of the company, which includes the services and product that the organization will provide and the market segments in which they will be provided. the second process involves devising a competitive strategy relating to achieving a competitive advantage. the dynamic capabilities theory updates the resource-based theory. this theory emphasizes the integration, protection, and deployment of a firm's competences and resources (teece, 1997). organizational processes and tools are the determinants of the dynamic capabilities of a firm that are embedded in the organization's resources, and the unique paths the organization adopts and inherits. the dynamic capabilities theory establishes that, firms should best use their resources based on the current market dynamics and evolving business environment. that is, as the business environment evolves, the internal resources must be employed and optimized in relation to the evolving business environment. the different resources (tangible and intangible) at the disposal of the firm determines how the firm reacts to changes (collis, 1991). douglas and craig (1989) posit that firms should take proactive steps to expand their operations through innovation. the resource-based theory of the firm is very useful when dealing with competitiveness among firms. the competitive advantage and organization performance is determined by its unique capabilities (johnson, scholes and whittington, 2008). wernerfelt (1984); rumelt (1984); penrose (1959); and wernerfelt (1995) observed that, the resource-based view (rbv) as a basis for the competitive advantage of a firm lies basically on the application of the available resources be it tangible or intangible. the key to a resources based approach to strategy formulation understands the relationships between resources, capabilities, competitive advantage and performance. according to barney (1999), rbv explained that a firm’s sustainable competitive advantage is reached by virtue of unique resources being rare, valuable, inimitable, non-tradable, and non-substitutable, as well as firm specific. resource based approach to sustainable competitive advantage focuses on the internal analysis of a firm. a firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage which can either be tangible or intangible. https://www.wework.com/ideas/innovation-quotes https://www.wework.com/ideas/innovation-quotes volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.188 | http://emaj.pitt.edu business innovation and competitive advantage in nigerian manufacturing sector page |40| emerging markets journal 3. methodology the survey research design was employed in this study. the adoption of this type of research design involves the use of the questionnaire, which was used in eliciting information for this study. furthermore, the questionnaires were designed in such a way that the questions asked would provide useful answers to the research questions as well as test the hypotheses of the study. the targeted population of this study consists of four hundred and ninety-six (496) items. the sample size for this research work was determined using krejice and morgan (1970) sample size determinant table. the total population is within the range of 500, and therefore two hundred and seventeen (217) was used as sample size as recommended krejice and morgan (1970). table 1: table for determining sample size of a known population source: krejcie, r.v., & morgan, d.w. (1970). determining sample size for research activities. educational and psychological measurement, 30, 607610. * n is population size, s is sample size in order to representatively select the two hundred and seventeen (217) respondents, stratified random sampling and simple random technique were used. the research instrument adopted is questionnaire. the questionnaire was divided into two sections. section a and b. section a of the questionnaire consisted of the demographic characteristics of the respondents, while section b of the questionnaire was centered on the impact of business innovation on competitive advantage in nigerian manufacturing sector, which was designed based on the research objectives. the face and content validity of the research instruments was established through the expert judgment in the department of business administration, olabisi onabanjo university, ogun state. in order to establish the degree of reliability, consistency, stability, and accuracy of the instrument, cronbach's alpha test measuring the credibility and consistency of the standard measures/scale was used. the reliability test result shows 0.75 co-efficient. this revealed that the research instrument measures accurately what it was designed to measure. research hypotheses ho1: there is no significant effect of business innovation on the cost of the product ho2: business innovation does not have a significant effect on the sales of the product ho3: business innovation does not have a significant effect on the quality of the product 4. results and discussion hypothesis one there is no significant effect of business innovation on the cost of the product. table 2: summary of hypothesis 1 result source: authors' computation volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.188 | http://emaj.pitt.edu moruff sanjo oladimeji, olasunkanmi akeem amida, ekong akpan essien emerging markets journal | p a g e |41 the result reveals that, business innovation independently accounts for 72.9% of the variation in the cost of the product. 27.3% variation in the cost of the product is caused by other factors. the t-value (t=2.757, p=0.000) reveals that, business innovation is a significant predictor of the cost of the product. the f-statistics (f=11.237, p= 0.000), the model, is significant in explaining the effect of business innovation on the cost of the product. hence, it is established that business innovation has a significant effect on the cost of the product. the alternative hypothesis is accepted. the findings corroborate the submission of oirere, (2015). hypothesis two business innovation does not have a significant effect on the sales of the product. table 3: summary of hypothesis 2 result source: authors' computation the result reveals the relationship between business innovation and sales of the product. this reveals that a 62.9% variation in sales of the product is determined by business innovation. 37.1% variation in sales of the product is determined by other factors. the standardized beta (β) reveals that, there is a direct relationship between business innovation and sales of the product. the ß shows the direction of the relationship to be strong at 0.496. the t-statistics value (t=6.124, p=0.000) reveals that, the predictor is significant in explaining sales of the product. the f-statistics result reveal the value f=3.408**, p=0.003. this reveals that, business innovation is a significant and reliable model in explaining sales of the product. therefore, the null hypothesis is rejected, and the alternative accepted. thus, it is established that business innovation has a significant effect on sales of the product. hypothesis three business innovation does not have a significant effect on the quality of the product. table 4: summary of hypothesis 3 result source: author's computation the result reveals the relationship between the business innovation and the quality of the product. this reveals that a 70.1% variation in the quality of the product is determined by business innovation. 29.9% variation in the quality of the product is determined by other factors. the standardized beta (β) reveals that, there is a direct relationship between business innovation and sales of the product. the ß shows the direction of the relationship to be strong at 0.633. the t-statistics value (t=2.522, p=0.000) reveals that, business innovation is significant in explaining the quality of the product. the f-statistics result reveal the value f=10.903**, p=0.003. this reveals that, business innovation is a significant and reliable model in explaining the quality of the product. therefore, the null hypothesis is rejected, and the alternative accepted. thus, it is established that business innovation has a significant effect on the quality of the product. 5. discussion of findings it was evident from the study conducted that, business innovation has a significant effect on the cost of the product. business innovation has a significant effect on the sales of the product, and the study also revealed that, business innovation has a significant effect on the quality of the product. the submission of oirere (2015) corroborated this finding, that innovation provides organizations with a means of adapting to the changing and competitive environment and often is critical for firm volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.188 | http://emaj.pitt.edu business innovation and competitive advantage in nigerian manufacturing sector page |42| emerging markets journal survival. firms with greater innovativeness will be more successful in responding to competitiveness in business environments. the findings from this study conform with the view of mccarthy and perreault (1999), which establish product innovation as a key driver of consistent patronage by existing and potential customers. these assertions were corroborated by kotler (2004), who is of the opinion that to develop to keep customers coming, create and sustain competitiveness, an organization must create and deliver products that are of superior value at the best market price as perceived by the customers. 6. conclusion and recommendations the study conducted shows clearly that, business innovation has a significant effect on competitive advantage in nestle nigeria plc, ogun state. hence, nestle nigeria plc, ogun state, should, through consistent market survey, identify the needs and expectations of the existing and potential consumers, who are the live wires of any business, because, without consumers, their businesses will cease to exist. an organization's long term run is related to its ability to create new products/services and modify existing products in order to satisfy the customers. organizations should endeavor to adopt product innovation and provide a favorable environment through encouraging research and development, providing financial sources to support new innovations, putting efficient programs and policies, and motivating innovators. it is recommended that top management should invest in research and development, as this will stimulate innovation and better product offerings and in order to sustain competitive advantage, firms should focus on product innovation first before any other type of innovation. finally, as globalization grows and competition intensifies in developing economies, it is essential for multinational companies to understand local consumers’ perceptions about their level of innovations and product development. multinational companies should also be aware of the level of customer satisfaction derived from local products and also the level of customer loyalty. although managers may exert considerable effort, gaining accurate local marketing knowledge of the level of product development innovation, customer satisfaction, and loyalty level remain a huge challenge for any multinational in developing economies. multinationals may increase their knowledge on the product development and innovation process, from the local level, and thus help by setting clear organizational goals. references anthony, m.t., & shapiro, a. r. (2002). product development: success through product and cycletime excellence, stoneham, ma. butterworthheienhmann. barney j.b. (1991). firm resources and sustained competitive advantage. journal of management: 17:99-120. bernard, a.c. (2001). science and knowledge flow: evidence from the french case. research policy, 30(7), 1069-1078.http://dx.doi.org/10.1016/s00487333(00)00131-1 clark k. b., hayes r. h., and wheelwright s. c. (2008). dynamic manufacturing. new york, ny: the free press. crosby, p. b. (1995). philip crosby's reflections on quality: 295 inspirations from the world's foremost quality guru. new york: mcgraw-hill. evans, j.r. (1993). applied production and operations management. west publishing co. the usa. forster, f. (2006). the idea behind business process improvement: towards a business process improvement pattern framework. bptrends. http://www.bptrends.com. volume 9 no 2 (2019) | issn 2158-8708 (online) | doi 10.5195/emaj.2019.188 | http://emaj.pitt.edu moruff sanjo oladimeji, olasunkanmi akeem amida, ekong akpan essien emerging markets journal | p a g e |43 johnson, j. l., & scholes a.o & whittington, w. (2008). ideal and actual product adaptation in us exporting firms: market-related determinants and impact on performance. international marketing review, 12(3), 31-46. kao, j. j. (2011). entrepreneurship, creativity, and organization: text, cases and readings, prentice hall, new jersey. knoll, k., &jarvenpaa, s., l. (2014). information technology alignment or “fit” in highly turbulent environments: the concept of flexibility. paper presented at the computer personnel research conference on reinventing. alexandria, virginia, usa. matsa, d. a. (2009).competition and product quality in the supermarket industry. http://are.berkeley.edu/documents/seminar/matsacompetition090706.pdf montes, f. j., moreno, a. r., fernandez, l. m. (2004).assessing the organizational climate and contractual relationship for perceptions of support for innovation. international journal manpower, 25(2), 167-80. porter, m.e. (1985). competitive advantage. new york, ny: free press. ranjit, b. (2004). knowledge management metrics.industrial management & data systems, 104(6), 457-68. tellis, g.j., prabhu, j.c., and chandy, r.k. (2009). radical innovation across nations: the preeminence of corporate culture. journal of marketing, 73(1), 3-23. tushman, m. & nadler, d. (2010).organizing for innovation. california management review, 28(3), 74-92. http://dx.doi.org/10.2307/41165203 zemplinerová, a. (2010). inovačníaktivitafirem a konkurence.politickáekonomie, 58(6)747-760. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu company maturity matrix olga eckardt independent researcher, germany | olga@wavefusion.de this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. abstract the paper presents a company maturity matrix as the possible interaction between two critical variables in management science: “anti-fragile” introduced by nasim taleb and measurement of cumulative experience as ability to manage company effectiveness and efficiency. the approach is to develop and represent a model as matrix coming from boston group matrix. both of variables are known and widely discussed, but the “anti-fragile” concept after its introduction has been isolated from other approaches, tools and measurements as a single research field. the aim of this research is to develop a simple framework (model) that could help to deeply understand the maturity level of a company, and use this matrix as the tool to develop different aspects of management in the company. on the next step, this theoretical framework can be used in empirical validation, which will lead to the building of a company life-cycle management. keywords: anti-fragile, company maturity matrix, sustainable business, model development, company life-cycle new articles in this journal are licensed under a creative commons attribution 3.0 united states license. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.148 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ mailto:olga@wavefusion.de http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.148 | http://emaj.pitt.edu company maturity matrix page |28| emerging markets journal company maturity matrix olga eckardt 1. introduction since the software engineering institute has launched the capability maturity model (cmm) more than twenty-five years ago (paulk, 1993), several maturity models have been proposed by researchers and practitioners across multiple application domains. some notable examples are “supply chain management process maturity model” by lockamy and mccormack (2004), “project management maturity model” by crawford (2006), “business process management maturity model” by bruin, and rosemann (2005) and “risk maturity model” by hillson (1997). basic purpose of such models is to represent stage-based evolution and describe stages as well as maturation paths. in this research, “company maturity” is viewed as strength of the relationship between cumulative experience of the company as ability to take right decisions and anti-fragile as ability to react on uncertainty. in the current managerial literature, these two dimensions are not cross-fertilizing. “experience” is observed typically from human capital perspective and not cross-influenced with other dimensions. anti-fragile as a concept appeared in 2010 and was developed in more detail through 2012-2014 by nasim taleb, and it is still not used very widely. application of this is mainly shown in financial sphere (aven 2015, white 2013). nevertheless, usage of the concept as a tool, even isolated, in strategical decision taking (derbyshire & wright 2014) or engineering (jones, 2014, monperrus, 2017) starts to take place more and more. usage of this as one of dimensions for better understanding of multifactor models will come in general practice in nearest future. 2. research methodology and design any model development is going on the direction from one-factor dependencies to multi factor. one of the special cases of multi-factor models is 2-factor model represented as matrix. this type of model representation is well known and widely used for example by boston consulting group matrix (henderson. 1979), balanced score card (norton, kaplan 2001), swot (pickton, wright,1998) or ansoff matrix (ansoff, 1957). these examples show a model evolution direction that is widely used in economical science and prove the concept that matrix tools can be extremely useful in management analyses. general design principles for maturity models is described based on an extensive review of maturity model-related literature by pöppelbu and röglinger (2011). this article changes analysing and developing of maturity models from “descriptive, prescriptive, and comparative” to “basic, descriptive, prescriptive” for the purpose of use. taking into account the previously mentioned principal as basement of maturity model development, the author is presenting the company maturity matrix and its‟ development in the next section. 3. model description to make a representation of company maturity matrix, the author has defined a specific coordinate system. keeping in mind previously described approaches, where one was “anti-fragile” – is the ability from company side to react on the previously un-known treats, when something happens suddenly. on the other hand, “experience” – is ability of company to have a standard solution for the standard situation. “experience” in this case can come not only from own company history, but as well from external sources or internal persons. the author is focused on developing a matrix. further application of this matrix will be described and presented separately. as a result of the previously mentioned approach, the author built a matrix where on one axe “anti-fragile” is positioned and on the other axe “experience (proficiency)” is positioned. roughly classifying “antifragile” to low and high, and “experience (proficiency)” to low and high, we get a 4 square matrix, as shown in table 1 below. table 1: company maturity matrix experience (cumulative value) antifragile teen-ager high anti-fragile – low experience (proficiency) adult (age as biggest efficiency) – high anti-fragile – high experience (proficiency) baby low anti-fragile – low experience (proficiency) old-man low anti-fragile – high experience (proficiency) resource: developed by the author each square will be described below as a separated state of company where the author is referring to a human organism life cycle. to make this reference as transparent as possible, names for squares are used correspondingly. baby the starting point of the analyses will be the low left corner with the box “baby– low anti-fragile – low experience (proficiency)”. looking from the perspective of experience, as for the real small baby, we consider that there is a staff/company culture, which has no big experience. it is important to clarify one point – start-up companies or new established companies are not necessarily in this position. the experience of the volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.148 | http://emaj.pitt.edu olga eckardt emerging markets journal | p a g e |29 company can come with experienced staff from other companies, good mentoring, professional and experienced managers, and owners with big experience who are deeply involved in the processes. on the other hand weak corporate culture, unmotivated staff, big staff rotation could be a factor that leads to low experience. parallel to this issue, a company would not be able to survive under spontaneous changes in its surrounding. here, survival buffer is too low and the company is in the area of “baby”. the outcome of the situation is that, the company has no possibility to react quickly on environmental changes; even critical fluctuations could be detected too late. “low experience” – means in case of threats to have no pull of standard solution, this will be automatically implemented. this lack of experience or not enough deep situation understanding leads to giving fast reactions on the situation to avert danger. teen-ager this is the area where experience is still low as in the previous case, but anti-fragility is much higher. this could be achieved by higher speed and flexibility of reaction on any changes. what is more important in this case is that, information flow has no barriers. all valid (and probably non-valid as well) information is rapidly and transparently reaching to decision makers. in such a situation even with less experience, the time for taking a decision could be enough. however this requests that, all deals are going on the fingertips of company leaders. “low experience” as the degree on this axe means no availability of standard solution that will be automatically implemented in case threat is known, or understood well enough. but the situation will appear as if every new challenge is really new, and indeed needs to be investigated, even if a good and stable solution is existing in the industry or cross industry, but unknown in the particular company. this way of dealing with threats and opportunities might cause problems such as noneffective spending of resources to look after a wellknown problem-solution, similar to reinventing the wheel. adult the “adult” is an “ideal” area of company life. "experience" as a result of internally achieved and shared intelligence, challenged and extended with external knowledge from merging and acquisition, leads to a huge portfolio of standard reactions in demanding situations, which can be freely accessed as the intellectual capital of company. getting on board the "right" people, motivating the staff to interact and share information actively, providing transparent decisions, playing as a team instead of fighting for power in groups with political games are critical issues at this point. ability to have pull of a standard answer on possible changes and situations based on diverse team experience, freedom of offering ways and solutions to be heard are all classified as characteristics of intellectual capital. this leads to high speed and flexibility to react. all deals are going on the fingertips of company leaders. experience is enough to solve problems and detect them on the earliest step. old-man there is a huge amount of experience here, not only because of the history, but as well resulting from a lot of experienced personnel who are working in the company. nevertheless, possibilities to react on the threats and opportunities are limited. most recent information coming to the head of the company is quite slow. this is because, existing corporate culture and common routines (best practices) start to counteract to the changes. system tries to come back in the last stable state. analytics is developed perfectly. but until it is reaching to the decision-maker, analytics already needs to be renewed. 4. conclusion and discussions a general framework of possible influences between cumulative company experience and antifragility has been presented, in order to better understand a life cycle of company and apply this as a tool to standard managerial practices. talking about company strategies, right or wrong steps, controlling systems or management styles, we need to keep in mind that each company has its own life cycle as shown in the matrix. each phase has its own challenges and risks, different levels of stability and different reactions on practice. this tool intends to help stakeholders to understand that, key factors for a positive development of company are different in different phases. this research motivates for further research to find different possibilities of managing a company in these different phases. it intends to change the point of view on management of the company from “looking best solution for all time being” to “understanding on which maturity level the company is, and choosing appropriate management solutions accordingly to the situation”. this close look to the situation changes company management approaches from static to dynamic, and allows accepting that “good” or “bad” decision is not only a matter of environmental condition, bus as well a matter of internal maturity. references ansoff, h. i. (1957). strategies for diversification. harvard business review, 35(5), 113-124. aven, t. (2015). the concept of antifragility and its implications for the practice of risk analysis. risk analysis, 35(3), 476-483. corbin, j. m. and strauss, a. (1990). grounded theory research: procedures, canons, and evaluative criteria. qualitative sociology, 13(1), 3-21. volume 8 no 1 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.148 | http://emaj.pitt.edu company maturity matrix page |30| emerging markets journal crawford, j. k. (2006). project management maturity model. auerbach publications. de bruin, t. and rosemann, m. (2005). towards a business process management maturity model. derbyshire, j. and wright, g. (2014). preparing for the future: development of an „antifragile‟methodology that complements scenario planning by omitting causation. technological forecasting and social change, 82, 215-225. henderson, b. d. (1979). the product portfolio: growth share matrix of the boston consulting group. the strategy process: concepts, contexts, cases, 678-680. hillson, d. a. (1997). towards a risk maturity model. the international journal of project & business risk management, 1(1), 35-45. jones, k. h. (2014). engineering antifragile systems: a change in design philosophy. procedia computer science, 32, 870-875. kaplan, r. s. and norton, d. p. (2001). the strategyfocused organization: how balanced scorecard companies thrive in the new business environment. harvard business press. lockamy iii, a., and mccormack, k. (2004). the development of a supply chain management process maturity model using the concepts of business process orientation. supply chain management: an international journal, 9(4), 272-278. monperrus, m. (2017, april). principles of antifragile software. in companion to the first international conference on the art, science and engineering of programming (p. 32). acm. paulk, m. (1993). capability maturity model for software. encyclopedia of software engineering. pickton, d. w. and wright, s. (1998). what's swot in strategic analysis?. strategic change, 7(2), 101109. pöppelbuß, j. and röglinger, m. (2011, june). what makes a useful maturity model? a framework of general design principles for maturity models and its demonstration in business process management. in ecis (p. 28). strauss, a. and corbin, j. m. (1990). basics of qualitative research: grounded theory procedures and techniques. sage publications, inc. taleb, n. n. (2012). antifragile: how to live in a world we don't understand (vol. 3). london: allen lane. taleb, n. n. and douady, r. (2013). mathematical definition, mapping, and detection of (anti) fragility. quantitative finance, 13(11), 16771689. white, l. h. (2013). antifragile banking and monetary systems. cato j., 33, 471. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the hybrid structure of emerging market economies: a political economy vision in the context of india, china and russian federation arkady martynov institute of economics (russian academy of sciences), russian federation | e-mail: socpolma1@mail.ru abstract this article analyzes the present and future development of national economies belonging to emerging markets (eme). manuscript presents an interpretation of the phenomenon of system transformational shift in eme with a hybrid institutional-agency structure. to develop the arguments, this phenomenon has been considered in relation to the three largest eme india, china and russian federation. the discussion section is devoted to the issue of transition in relation to existing emerging national economies. paper draws a conclusion about the reproduction of a hybrid structure of emerging market economies, which remains different from the structures of advanced western economies. therefore, the still widespread treatment of institutions that play a key role in self-sufficient eme as obviously imperfect does not correspond to current realities. these liberal and non-liberal institutions present the vital elements of the established hybrid structure of the economies in post-developing and after socialist countries, characterized by the absence of a clear institutional hierarchy and the relative independence of various institutional orders and agency components. keywords: emerging markets, hybrid structure, india, china, russian federation new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.344 | http://emaj.pitt.edu | mailto:socpolma1@mail.ru http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://creativecommons.org/licenses/by/3.0/us/ volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.344| http://emaj.pitt.edu arkady martynov emerging markets journal page |19| the hybrid structure of emerging market economies: a political economy vision in the context of india, china and russian federation arkady martynov i. introduction in the studies by a number of authors, a fundamental feature of the transformation of eme in the present period has been identified with sufficient analytical completeness (hoskisson et. al., 2013; musacchio & lazzarini, 2014; marquis & raynard, 2015; kurlantzick, 2016; nolke, 2018; casanova & miroux, 2020; schedelik et. al., 2021; write et. al., 2021). it consists of a dynamic change in resource proportions and organizational structures, coupled with non-stationary processes of change in the state of most markets. particularly high volatility is inherent in labor markets and innovation markets. according to the obtained results of the mentioned studies, along with traditional economic factors, institutional innovations are of great importance for explaining the dynamics of business activity and changes in the competitive environment in the national economies under consideration. these innovations clearly have manifested in the improvement of corporate governance and in the expansion of national corporations into foreign markets. as a result, an accelerated progressive development of consumer and other domestic markets with the parallel formation of a broad wealthy mass of consumers has taken place. however, essentially political economy aspect of transformational changes in eme for a specific time prospect remains insufficiently studied. this paper has attempted to at least partially fill this gap. if the fundamental change concerning the formation of the postdeveloping world in the second half of the last century is considered in the first step, this process covered a large number of countries, primarily new industrialized countries. the transformational transition from an underdeveloped economy to an emerging market economy takes a very long historical period of time (casanova & miroux 2020). it is marked by profound changes in the industrial structure, reform of agriculture, reorientation of a number of established sectors of the national economy to foreign markets along with the attraction of foreign investors upon achieving an acceptable exchange rate, as well as the balance of payments. on the other hand, the initially diverse appearance of the economies of the former developing, and mostly post-colonial countries, preserved itself. this conclusion was supported by the reproduction of traditional craft sectors, the patriarchal family economy and a number of other segments of economic activity (including illegal business). the establishment of agents and institutions of the emerging single national market, associated with partial economic liberalization and equally partial privatization of enterprises in the state sector, had a deliberately limited impact on their functioning. in addition, it is worth taking into account the barely noticeable change in the national elite and the status structure of society in the countries under consideration, as well as, especially, their institutional cultural framework. the next novel concerns the formation of an economy with emerging markets in the former socialist countries (becker, 2013). the still widespread idea of the former total dominance of the socialist non-market system in the enclave of these countries appears clearly unfounded. thus, it is impossible to deny the coexistence of the predominant socialist economy with the traditional craft industry and the patriarchal family economy, especially in agricultural regions, as well as with the shadow, and to a large extent criminal, business. the transition to the market did not fundamentally change the multi-structured, or more precisely hybrid, configuration of the former socialist economies. in the leading of post socialist countries, the implanted liberal institutions did not turn into dominant free market institutions in accordance with the original plan. the institutions of public (state) regulation and the informal institutions of the former socialist economy associated with them underwent modification significantly, but did not disappear. besides, in parallel with the spontaneous transformation of some seemingly uncompleted liberal institutions into institutions of corporate ownership and corporate regulation, there was a successful market adaptation of the shadow economy. apparently, as a result of market transformations, the weight of traditional sectors and sectors of the family economy decreased. nevertheless, they retained themselves, especially within the boundaries of individual territorial enclaves. generally, in accordance with widely accepted opinion, a common grandiose enclave of former developing and socialist countries with emerging market economies were established at the beginning of 21st century. subsequently, during the zeroes and tens, a stunning global growth of emerging markets existing in various countries (mckinsey global institute, 2018; oecd, 2020) had occurred. many of these markets had enormous growth potential, far from saturation in demand. in turn, the supply factor was characterized by the presence of cheap resources and relatively low wages. as a result, the advantage of the markets under consideration in the form of high current profitability and return on investment had fully manifested itself. in the present realities, a significant number of national economies with emerging markets possess a powerful development potential. their critical dependence on mature western economies, as well as on the state of global financial and other external markets, has long been a history. in the context of above, the evidence in favor of the establishment of the brics coalition represented by the largest countries with emerging markets on the global economic arena looks convincing (kirton & larionova, 2022). but at the same time, the often declared prediction about the upcoming unification of non-western countries under the auspices of brics (the so called imperative brics+) seems dubious. a crucially important argument: the first foreign economic volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.344 | http://emaj.pitt.edu the hybrid structure of emerging market economies: a political economy vision in the context of india, china and russian federation page |20| emerging markets journal priority for most post developing and developing countries remains purely regional integration (maloney et. al., 2023; asian economic integration report, 2024). therefore, the reckless sub global integration under brics does not correspond to the sovereign interests of these countries. in conceptual terms, the problem of economies with emerging markets is connected with the phenomenon of the ongoing formation of state capitalism (new statism), different from its previous forms (bremmer, 2010; kurlantzick, 2016; alami & dixon, 2020; ricz, 2021; babic, 2023). it acts as the preeminent institutional order on the economic field in a vast enclave of non-western countries (martynov, 2022). in economies with emerging markets, state capitalism distinguishes by a fundamentally new feature: the direct participation of state agents in economic activity as market consumers, suppliers of resources to markets and owner-investors in capital markets (bremmer, 2010; musacchio & lazzarini, 2014; kurlantzick, 2016; write et. al., 2021). market expansion of state capital is still playing a crucial role in the economic development of post developing and after socialist countries, making it possible to compensate for the objective incompleteness and insufficiency of jointstock corporate market and, in general, private capital markets in all their diversity. it is widely accepted that to ensure the positive dynamics of many non-western national economies, direct government participation in large-scale infrastructure programs and projects has a crucial value. the achieved external positive effects cover more than the costs caused by possible redundant budget financing. the advantageous growth factors of eme compared to advanced western economies (ae) still remain in effect. among them, lower resource costs and free, inexpensive labor are primarily important (oecd, 2023). these competitive advantages are evidently displayed in the steady increase concerning exports of labor-intensive manufactured products created in emerging markets. currently, many eme are experiencing rapid growth in consumer markets, especially real estate and financial services markets, in major cities, along with the spread of other attributes of 21st century urbanization, apparently, to a decisive extent due to the ongoing demographic tide or migration influx (international monetary fund, 2024; world bank, 2024). in parallel, a tremendous increase in the new human capital with modern education resulted in orderly increases in productivity in conventional industrial and service sectors, as well as in steady shifts towards an increase in the share of gdp of the digital and green economies with the growth of trained qualified personnel. no less significant presents eme’s probable adaptation as resilience to processes of dramatic, timecompressed changes. thus, in the context of deepening digitalization and decarbonization, emerging consumer markets will be able to successfully adapt to the expected stagnation or even decline in real wages for the majority of employees while their numbers continue to increase. these trends will display themselves in a worldwide steady increase in demand specifically for inexpensive goods and services. one can expect a multiplier effect from the growth of domestic and external demand for these consumer goods. the experience of a number of asian countries provides first-hand evidence in favor of this supposed trend (world bank, 2024). also, apparently, the forecasted effect of cheaper products due to digitalization and other technological innovations will not take producers in the emerging markets of intermediate and investment goods by surprise. they will be able to maintain their market positions by constantly increasing productivity in the event of reproduction of the relatively low resource costs and wages by world standards. the article is structured as follows: second part reveals the phenomenon of system transformational shift in eme with a hybrid structure. in the subsequent part, the study of this phenomenon is presented referring to the example of three largest eme: india, china and russian federation. this section is followed by the discussion. finally, the conclusion section takes place in the article. ii. the phenomenon of system transformational shift in eme with a hybrid structure as mentioned earlier, the rapidly transforming national economies under consideration are distinguished by a specific hybrid structure. its integral attribute concludes in the divergence of internal institutional orders, which is accompanied by a variety of structures in which different economic agents operate. the most significant components of such a hybrid institutionalagency structure include both private entrepreneurial structures (independent, corporate) and structures with the presence of state capital. based on the results of numerous studies, it can be argued that the inalienable feature of modern national economy in the 21st century concludes as a deep divergence of institutional orders and the coexistence of significant as well as distinct agent components in principal contrast to simplified holism. the patterns of formation of institutions of one specific type cannot determine the mechanism of functioning of the entire modern national economic system, as reflected below: figure 1. misunderstanding of the modern national economic system source: composed by author note that the formation of a hybrid eme’s structure is usually recognized in a connection with the establishment of a new state capitalism (kurlantzick, 2016; alami e.t al., 2021). however, it would be bearing in mind the fundamental circumstance concerning historical retrospect: a hybrid combination of institutionally different types of economic activity had been still observed in ancient societies (yang, 2000). subsequently, throughout world history, in the clear majority of countries, in particular in india, china and russia, market institutions coexisted with other institutions, including predominantly socialized ones. in the course of intra system societal shifts, the hybrid structure of eme is self-reproducing, when the volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.344 | http://emaj.pitt.edu arkady martynov emerging markets journal page |21| absent of obviously dominant institutional order and agency component remains. indeed, spontaneous and incremental intra-system shifts are mainly expressed in inertial changes, taking in a view the vital effect of institutional dependence on the past. along with this, possible discrete shifts do not lead to an important change in the structural proportions of output and distribution, moreover, in the institutional design and agent components of the national economy. self-reproduction of the hybrid structure also doesn't stop happening as a result of exogenous changes and supranational societal shifts. as noted above, selfsufficient emes are able to adapt to them. the national elite and, moreover, ordinary social groups are objectively not interested in the transition to a dominant one polar institutional-agent structure of the traditional capitalist economy. due to the current global processes, it would be associated with the probable loss of the achieved selfsufficiency of the emerging national economy, meaning a radical reducing of the rental flaws to the elite and an inevitable decrease for a long time in the well-being of whole population with accompanying social cataclysms. equally unacceptable for self-sufficient emes seems the assertion of the state-capitalist order as an absolutely dominant one. the main argument is obvious: the induced inevitable decline in the competitiveness of the national economy will entail irreparable losses for the national elite and for all other citizens, especially those involved in medium and small businesses. of fundamental importance is the question of what political institutions complement economic institutional orders and agency components. in non-western countries, the hybrid economic structure organically corresponds with a hybrid institutional political regime, combining authoritarian and democratic institutions (mufti, 2018; ademmer et. al., 2020). this regime involves a targeted limitation of the opportunities for political activity that is significant in its effect for the majority of citizens and their voluntary associations. it can, without any doubt, be classified as a limited access order (lao) according to its widely known interpretation (north et. al., 2007, 2009). a substantial attribute of lao on the political field presents the reliance of power to a decisive extent on the national elite, taking in a view all the originality of its appearance in different countries (north et. al., 2013). on the one hand, members of the elite with their superior financial savings have ample opportunities to extract capitalized income in liberalized sectors, especially in the open stock market. on the other hand, the functioning of a powerful sector with state participation, complemented by an active government regulation of markets, brings guaranteed rent to the elite, primarily the ruling elite. in many countries with eme, the remaining ruling elites, whose wealth and social position have nonmarket origins, play the exclusive political role (acemoglu & robinson, 2012). according to the conducted research, this situation has largely explained by the preservation and adaptive modification of patrimonial relations that arose in the remount past (schlumberger, 2008; bach, 2011). it is also worth bearing in mind the influence on the actions of economic agents and political actors of informal institutions inherited from preceding epochs and dependent on historically cultural-national dominants. until now, they remain quite far from the institutional patterns prevailing in the western world. in principle, a change in the structure of national economic system can be accompanied exclusively by gradualist reforms, carried out in a decisive degree through targeted microscopic solutions. development examples from the countries such as switzerland and finland confirm this possibility. however, proceeding from contemporary world experience, an unequivocal conclusion follows: the reproduction of virtually all emes does not correspond with smooth trajectories of structural changes at all (casanova & miroux, 2020). until now, an inclusive feature of eme concludes in the dynamic change in structural resource proportions, coupled with non-stationary processes of changes in the state of most markets. during the development of these national economies, fundamental “breaks in gradualism” occurred in the form of cardinal system transformation shifts compressed in time. they are inevitably associated with a change to one degree or another in the economic government course, which in turn manifests itself in significant changes in the root institutions of ownership and coordination, structure-forming resource proportions, and the ranking of leading economic agents. why a system transformation shift, expressed in a fundamental change in the equilibrium parameters of national economic systems of the type under consideration, has taken place? the fundamental reason concludes in the presence of significant unsatisfied needs of economic agents, both entrepreneurs and consumers, manifested in structural deformations in the distribution of resources and income, goods and services. at the macro level, they are most visibly reflected by imbalances or gaps between savings and investments, borrowed and own funds, external debt and gdp. along with this, structural deformations of distribution are represented by a diverse range of well-known indicators. among them, indicators of differentiation of income and wealth (gini, palma), assessment of the corruption canopy and so on. conceivably, a potentially oppositional social force has been formed in the person of a large part of economic agents. besides, the new groups that have joined the national elite and usual social strata with increasing status objectively gain in the event of overcoming system structural breaks. the principal possibility lies in early prepared structural reforms “from above” in the economic field, as in other fields of social action. in this way, it is possible to overcome, to one degree or another, structural deformations that act as barriers to the positive transformation of the national economy in accordance with established demands. however, in many countries, a long-term formation of structural flaws of systemic significance is observed. it is worth emphasizing a fundamental circumstance: flaws in the institutional structure and accompanying structural resource gaps can occur in the course of inertial and other structural changes with the continued reproduction of a stable, albeit inefficient market equilibrium in its traditional interpretation. as a rule, this collision corresponds to the interest of the ruling elite in preserving existing inertial development trends. based on the imperative of progress (often interpreted as a criterion for pareto improvement), a need to change the government course has emerged. it is becoming likely that a political force will appear in order to move to a reformist agenda. due to the lao on the political field, this transition is initiated exclusively within the national elite and is realized through official voting or volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.344 | http://emaj.pitt.edu the hybrid structure of emerging market economies: a political economy vision in the context of india, china and russian federation page |22| emerging markets journal through informal, publicly unspoken transposition on the power olympus. a necessary condition for entry into power by the elite opposition supposes the formation of sufficient resource potential. the total capital (economic, social and political) of the opposition must be at least comparable to the total capital of the ruling elite. equally necessary is the condition for the effective use of the resource potential of contenders for power, which presupposes the implementation of a winning political strategy from the point of view of public choice in a specific space-time context. this strategy should respond to the needs (leaving aside the question of their positivity) of social groups that collectively have the greatest social weight. now let us turn to the question of the outcomes of system economic transformational shifts. they entail irreversible perturbations at all levels of the economic system. almost immediately or with some delay, the proportions of sector market output in the national economy change, as well as the relative value of existing organization structures. at the same time, the economic system remains in a stable state: current prices and related institutions continue to ensure market equilibrium. it is worth especially emphasizing: this kind of system transformational shift is substantially different from the pure revolutionary cataclysm projected on the development of the national economy. as a result of the system shift under consideration, an ordinal change in the hybrid structure of eme occurs. it has nothing to do with the transition to normatively target institutional orders, especially those identical to those existing in the economic systems of individual western countries. however, it seems quite achievable to bring the structure of hybrid emes as close as possible to the structure of a number of advanced economies (ae). based on ‘varieties of capitalism’ (voc) framework (hall & soskice, 2001; schedelik et. al., 2021), this supposition precisely concerns the national economies of coordinated capitalism, characterized by a consistent interaction of market institutions/agencies and institutions/agencies in the zone of social regulation. iii. newest history: system transformational shifts in the largest emes first of all, to develop the presented arguments, the system transformational changes that have occurred in the three largest eme india, china and russia needs attention and concentration. indian metamorphosis in 2014, the country experienced a transfer of power from the indian national congress (inc) party and its allies to the opposition people's party (bjp), led by a truly charismatic leader narendra modi. the main reason for this outcome is quite well known it lies in the dissatisfaction of the needs of many social groups and, in general, in slow national progress (khandekar, 2014). in fact, most indians were simply tired of the “eternal” rule of the inc against the backdrop of corruption scandals for many decades. the strategic decisions taken by the new indian government were displayed in further deregulation of domestic markets (chellaney, 2016). it particularly affected the programming, telecommunications, pharmaceuticals and financial services industries. as a result, a huge influx of foreign direct investment, including in sectors with state participation, occurred. besides, in line with market liberalization, institutional reform of the real estate market and banking sector took place. over time, it was expressed in the tremendous growth of the relevant sectors and the total gdp. one cannot ignore the controversial reform of labor markets (india employment, 2024). their needed transformations were extremely difficult in the context of ongoing demographic growth and the incredible scale of informal employment in traditional sectors inherited from the past, and dependent on caste restrictions. however, tough decisions to liberalize labor relations, associated with obvious initial social damage, yielded positive economic results. real employment and earnings of the many millions of indians, especially young people, increased, although they remain quite far from desired levels. from the very beginning, the new economic policy in india was carried out with a focus on the regions, more precisely on the regional elite. this strategy was clearly reflected in the rapid replacement of the planning commission by the national institute for transforming india (niti aayog), in which the leaders of all indian states participate. at the same time, it would be a mistake to overestimate the scale of the accomplished liberalization. the country’s economy continues to rely on a powerful state-capitalist structure and extensive government intervention in economic transformation (shamsi et. al., 2013; chandra & chatterjee, 2021). stateowned enterprises (soes) maintain a leading position throughout the energy and mining sectors. huge public investment fuels soe, especially for expansion into foreign markets. state control of banking activities, which made it possible to avoid the devastating consequences of the global financial crisis in 2008-2009, also remains. it is reasonable to highlight the emergence of a new state capitalism with indian specifics. apparently, it manifests itself most significantly in the investment activity of the state. it acts as a key participant in numerous large-scale investment projects, in particular, on the development of water and road infrastructure. in sum, the spread of liberal economic relations in india is combined with powerful public regulation of market processes. therefore, the hybrid feature of the indian economy has not changed as a result of the system shift that occurred a decade ago. thanks to relatively successful liberal reforms and active government participation in economic transformations. the benefits of emerging, permanently growing markets are being realized. maintaining a very high growth rate of the national economy has a positive impact on the entire global economy. regarding the foreseeable future prospects of the indian economy, optimistic forecasts prevail (india, 2024), especially after the last victory of the bjp party at the parliamentary elections. the world's second-largest emerging market economy is expected to emerge, with a unique combination of high growth potential, an improved legal environment and an enabling environment for effective innovation. as further reforms and accompanying active government policies continue, indian economy actually the leader in growth among the world's largest economies will represent a tasty morsel for global investors seeking long-term progress. volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.344 | http://emaj.pitt.edu arkady martynov emerging markets journal page |23| rebuilding of china the system shift that occurred in china in 20122013 was more than visibly marked by the transition from collective leadership to individual leadership in the person of xi jinping. he began to possess exclusive might of power (the china renaissance, 2013). certainly, at the turn of zeroes and tens, china's economic progress became questionable. the trend of slowing economic growth strengthened as its extensive factors, including the demographic dividend, had been reduced. this trend was accompanied by a threatening deepening of structural resource imbalances and gaps in the level of development of various regions. despite the rapid development of individual markets and the increase in the incomes of their participants, the level of well-being of many chinese remained unacceptably low. the urgent need to change the development strategy for the sake of new high-quality economic growth and simultaneously increase the material well-being of all citizens became the basis for a change in national leadership. at the same time, it is necessary to emphasize that the system shift in china was no less due to noneconomic reasons. the priorities of purely social transformations, the preservation and enhancement of the natural environment, as well as the improvement of accumulated human capital on the basis of the latest education and the implementation of training and retraining programs have become equally important in relation to market priorities. diversified strategic development goals are purposefully coordinated with the strengthening of the political and ideological hegemony by the chinese communist party (ccp) (angang et. al., 2021; naughton & boland, 2023). the influence of ccp on economic life has increased dramatically. the conductors of this influence directly include the heads of party committees of enterprises, including those with mixed ownership, who actively intervene in strategic decision-making. yet in 2013, the government initiated a leisurely institutional reform of the corporate soe sector, which dominates in terms of economic power and this continues to this day. it displays in a significant influx of private investors into the mentioned sector and the spread of mixed forms of ownership with positive economic consequences (naughton & boland, 2023, p.10-13). thanks to the active policy of the cpc, by all indications. china has taken an intent move towards strengthening the socialist principle of distribution based on the results of labor (angang et. al., 2021). it prevails in the huge soes sector and the equally huge municipal enterprise sector (tvse). the positive results of the updated government policy in china in terms of improving the social wellbeing of citizens seem unarguable. the average per capita disposable income of the population doubled. based on the available information, the demands of the financially strengthened middle class are largely satisfied. besides, with the advent of the new leadership, targeted social policy sharply intensified. suffice it to say that in a short period of time, approximately 100 million rural residents were lifted out of poverty. flexible employment policies also make a major contribution to improving well-being (wei & xueyu, 2024). thus, as an outcome of the observed system shift, china retained a unique hybrid structure of the national economy. according to the widespread opinion of researchers, its primary compound remains party-state capitalism (zhang, 2023; xiong, 2023). along with this, the role of socialist distribution institutions operating within the main market and non-market sectors clearly increased. on contrary, judging at least by the well-known statistical indicators, the importance of private entrepreneurial activity noticeably decreased over the past decade. definitely, the prospect of economic transformation in china should be considered based on the dream of the great revival of the nation, long proclaimed by the current leadership of china, which has become the subject of a truly innumerable number of publications. the goal has been set to transform china into a leading world power in terms of the level of development of the manufacturing industry, transport, space exploration and network technologies, as well as in general in terms of total national power and international influence (jinping, 2022). approaching the identified imperatives has been relatively successfully taking place up to the present time. in all likelihood, tremendous economic expansion abroad will continue, complemented by an active foreign policy, especially on the asian continent. undoubtedly, the implementation of the belt and road mega project provides an over-acceleration of economic transformation in many developing countries and affects the entire non-western world. at the same time, due to the exclusive dominance of the established party-state capitalist structure in the economic field, a very significant threat of loss of national competitiveness in many dynamically progressing world markets remains. equally great is the threat of further increasing social inequality beyond a threshold level that calls into question the very supremacy of the cpc. besides, one cannot ignore the increasingly urgent problem concerning unsatisfied demands of the younger chinese. the issue of weakening the dictates of the cpc over the activities of market and non-market agents becomes on the agenda. the case of russian federation as known, the immediate cause of the system transformational shift that happened in russian federation at the crossroad of the nineties and zeros concluded in the devastating financial crisis in august 1998, expressed in an enormous increase in non-repayment of loans and failure to fulfill other debt obligations. it was necessary to abandon obligations on public debts and to devaluate the ruble in an unprecedented scale, which caused the bankruptcy of many banks. in general, a drop in trust to the government to an unacceptable level took place. a return to authoritarian rule became a way out for the russian elite. the establishment of a new authoritarian power in the economic field in its initial phase accompanied by organizational and personnel changes as well as tightening of the internal corporate control. the most resonant force decision was the actual liquidation of the largest non-state corporation yukos and the appropriation of its assets. in this way, the authorities achieved the complete loyalty of large domestic companies. the activities of oil and other raw materials oligopolies (monopolies) became the object of strict supervision by the new government. as a result, a redistribution of extremely high rental income from volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.344 | http://emaj.pitt.edu the hybrid structure of emerging market economies: a political economy vision in the context of india, china and russian federation page |24| emerging markets journal capital in the raw materials sector in favor of the state had occurred. the federal and regional banks with state capital began to dominate the main money and credit markets. subsequently, a banking-type financial system gradually established itself in russian federation to replace the initially implanted anglo-american type system. the well-known, usually called keynesian, instruments of market regulation extremely became to use. among them, stimulating economic activity through the investment of state capital plays the primary role up to this day. in relation to russian federation, it is appropriate to note the long-term reproduction of a unique hybrid institutional structure a combination of free market institutions and illiberal institutions with an advantage in favor of the latter. this configuration can be assessed as an accomplished compromise between the liberal institutions initially implanted for total expansion and the former “quasi-market” institutions of the soviet economy in the last period of its existence. there was also an update and approval of the hybrid agency structure. until now the leading position is undoubtedly occupied by the corporations with state participation, in direct or indirect form. apparently, considering the specific studies conducted, one can talk about the long-term dominance of political authoritarianism and the stable position of the ruling elite in russian federation (laruelle, 2016; yakovlev, 2021). a kind of “right-flank” political lao has emerged here for a long time. it is superimposed on the order of patrimonialism historically inherited from the feudal era (note, in russian federation, the old testament term paternalism is used). the state semi-officially serves the role of a “caring” parent over its citizens (becker & vasileva, 2017). the wealthy emerging markets gradually became established just during the post-liberal period from the late nineties, when the designated hybrid structure of the domestic national economy was formed. as a result, a steadily reproducible balance of the national economic system was achieved, adequate to the dominant interest of the main part of the russian elite in preserving the property and financial accumulations of the nineties (becker, 2013). apparently, the greatest contribution of achieving such a balance comes from non-liberal, so called “intermediate” institutions that provide state protection for large corporations, federal budgetary support for the economy of russian regions and, although to a lesser extent, financing the economy of large cities and other agglomerations. in addition, one should take in a view the powerful stabilizing effect of the limiting areas of financial liberalization along with the parallel introduction of prudential banking control and the mentioned transition to a banking-type financial system. russian federation is also fully affected by the spreading of state capitalism in its contemporary form (djankov, 2015; russia country, 2024). during the period under review, the establishment of a preeminent statecapitalist institutional order took place. definitely, the backbone of the russian economy was made up of large corporate holdings. they turned out to be the heirs of the largest industrial production and technological complexes, especially in the energy, mining, engineering and militaryindustrial sectors of the socialist epoch. it was on the production base of the socialist period that almost all large russian corporations were formed. their controlling stakes are in the hands of a limited number of large owners and appointed top-level managers, officially acting as representatives of the state. based on the results of the country’s economic development over the entire more than 20-year period after the system transformation shift occurred, a logical conclusion can be drawn. the established hybrid institutional-agency structure turned out to be adequate to the operating conditions of emerging and, for the large part, growing markets in the long term. the state-capitalist institutions that prevail in terms of their weight do not hinder entrepreneurial initiative. thanks to these institutions, significant tax, credit and investment support is provided to independent, small and medium-sized businesses in various market segments. the strong expansion of independent business activity that occurred has become the most important driver of general economic stabilization in the context of sanctions from western countries that followed the outbreak of hostilities in ukraine. at the same time, one cannot ignore the persistent economic and social imbalances in russian federation. they are visibly manifested in the unfair distribution of income (novokmet et. al., 2018). this situation does not satisfy the most russians. thus, according to surveys, the main desired imperative for the country’s future development concludes in moving closer to a justice society. in turn, the primary tasks on this path, according to respondents, include curbing corruption and reducing social inequality (andreev & andreev, 2021). obviously, the economic losses caused by the militaristic political course look incredible. nevertheless, at least in the non-long term, the development of the russian economy while maintaining its existing institutional and agency framework seems encouraging. extraordinary positive changes associated with deepening digitalization, the spread of the green economy and other attributes of sustainable development may be quite achieved. iv. discussion for an enduring time, emerging national economies were treated as transitional (myant & drahokoupil, 2011). this interpretation has long been out of touch with reality. the memorable washington consensus (wc) in its two temporary versions should be mentioned at this point. as is known, the first wc version proclaimed the possibility of establishing patterns of western capitalism in post-developing and former socialist countries in the shortest possible time (williamson, 1994). the neoliberal market reform of the "big impact" type elaborated in the imf was aimed at achieving this goal. according to the neoliberal arguments, mass privatization would get rid of burden state interference and lead to the rapid formation of a favorable business environment. however, in reality, this expectation was not justified due to the functioning of the previous informal institutions, which led to the emergence of a corrupt and simply criminal overhang over the privatization process. subsequently, wc in its second version was significantly adjusted in relation to a number of key areas of national development of countries that had transitioned to a market economy. areas such as corporate governance, anti-corruption policy, the formation of flexible labor markets, smooth regulation of inflation and exchange rates as well as targeted poverty reduction were included volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.344 | http://emaj.pitt.edu arkady martynov emerging markets journal page |25| (fischer, 1999). however, as rightly substantiated in the exceptionally resonant publication of dani rodrik (rodric, 2006), purely universal institutional reforms along the patterns of the wc, which are focused on the ensuring property rights, do not bring an economic “miracle”. institutional transformations are intended to be specified as much as possible in relation to the specific national economy and the relevant society. in comparison with wc, the gradualist concept of transitive economics looks much more balanced. it was shared by adherents of the paradigm of institutional evolution (roland, 2000, 2002; berglöf & bolton, 2002; streeck & telen, 2006). they relied on the new institutional economic theory, based at fundamental contribution of douglas north (north, 1981, 1990). it would be wrong to question the realism of the initial premises of this renovated transitive concept. at the same time, it seems obviously limited. to confirm what has been said, at least three extremely important collisions can be emphasized. first, the framework gradualist model of contracting, which supposes the obligation to compensate for damage caused or compensation for benefits brought, is not directly applicable to external effects caused by many non-economic and especially political institutional factors. complete internalization of these effects is, in principle, unattainable, if only because of the objective independence of institutions in different fields of social action (acemoglu & robinson, 2012). in addition, the factor of power continues to play a significant role, determined by the non-economic advantages of some market actors over others (olson, 2000). secondly, in essence, the adherents of evolutionary institutional approach ignored the tremendous influence of autonomous technological changes in the process of becoming a self-sufficient national market economy. the entire world historical experience testifies to the impossibility of resolving the problem of technological modernization through a deliberately liberal policy and, on the contrary, to the need to use instruments of discrete government intervention. thirdly, the evolutionary trajectories of institutional changes are, in principle, inconsistent with non-stationary and often simply shock demographic changes, as well as the migration processes caused by them in countries with eme. it is equally important that, against the backdrop of existing global realities, the desired approach to the imperatives of sustainable development will apparently be associated with an increase in the weight of processes of non-evolutionary changes as well as the associated strengthening of public regulation in the range of countries under consideration (martynov, 2021a, 2021b). v. conclusion long-term reproduced national economies with emerging markets are characterized by a hybrid institutional-agency structure. it remains distinct from the structures of mature western economies. this is clearly supported by the real experience of cardinal shifts associated with changes in government policy in a number of countries. the still widespread interpretation of institutions that play a key role in self-sufficient eme as obviously imperfect clearly does not correspond to current realities. these liberal and non-liberal institutions present the vital components of the established hybrid structure of the economies in post-developing and after socialist countries, characterized by the absence of a clear institutional hierarchy and the relative independence of various institutional orders and agency components. finally, it is necessary to abandon the spreading scholarly interpretation of the dichotomy “west-east”, or more precisely “west-rest of the world”. the long-term imperative for future global economic development is not copying the west, but the mutual complementation of national economies with different social environments. with a high probability, it will become achievable in the event of the deactivation of aggressive political-driven expansionism on the world stage, which presupposes the exhaustion of the existing super duopoly of political and military power the inclusive driver of global confrontation. references ademmer, e., langbein, j., börzel t. (2020). varieties of limited access orders: the nexus between politics and economics in hybrid regimes. governance. 33, 191–208. doi: 10.1111/gove.12414 alami, i., dixon, a. (2020). state capitalism(s) redux? theories, tensions, controversies. competition and change. 24(1), 70–94. https://doi.org/10.1177/1024529419881949 alami, i., dixon, a., mawdsley, e. (2021). state capitalism and the new global d/development regime. antipode. 53(5). doi:10.1111/anti.12725 andreev, a., & andreev, i. (2021). russia-2021: experiencing the present and looking into the future. sotsiologicheskie issledovaniia. 8, 82– 92. doi: 10.31857/s013216250015258-6 angang, h., yilong, y., xiao, t., shenglong l. (2021). 2050 china. becoming a great modern socialist country. springer. https://doi.org/10.1007/978-981-15-9833-3 asian economic integration report (2024). asian development bank. https://trungtamwto.vn/file/22892/asianeconomic-integration-report-2024.pdf babic, m. (2023). state capital in a geoeconomic world: mapping state-led foreign investment in the global political economy. review of international political economy, 30(1), 201228, doi: 10.1080/09692290.2021.1993301 bach, d. (2011). patrimonialism and neopatrimonialism: comparative trajectories and readings. commonwealth & comparative politics. 49(3), 275-294. becker, u. (2013). the brics and emerging economies in comparative perspective. london: routledge. https://doi.org/10.1177/1024529419881949 http://dx.doi.org/10.1111/anti.12725 https://doi.org/10.1007/978-981-15-9833-3 volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.344 | http://emaj.pitt.edu the hybrid structure of emerging market economies: a political economy vision in the context of india, china and russian federation page |26| emerging markets journal becker, u., vasileva a. (2017). russia’s political economy re-conceptualized: a changing hybrid of liberalism, statism and patrimonialism. journal of eurasian studies. 8, p. 83–96. http://dx.doi.org/10.1016/j.euras.2016.11.003 berglöf, e., bolton, p. (2002). the great divide and beyond: financial architecture in transition. journal of economic perspectives. 16(1), 77100. bremmer i. (2010). the end of the free market: who wins the war between states and corporations? new york: portfolio. casanova, l., miroux, a. (2020). emerging market multinationals report 2020: 10 years that changed emerging markets. emerging markets institute, cornell university. available at: https://ecommons.cornell.edu/handle/1813/669 53 chandra, r., & chatterjee, e. (2021). state capitalism in india. in oxford handbook of state capitalism and the firm, wright, m., wood, g., cuervocazurra, a., sun, p., okhmatovskiy, i., & grosman, a. (eds.), oxford: oxford university press. chellaney, b. (2016). the modi phenomenon and the remaking of india. https://www.kas.de/c/document_library/get_fil e?uuid=e3a203e1-03a7-1373-d5cc70e9decd368e&groupid=288143 djankov, s. (2015). russia's economy under putin: from crony capitalism to state capitalism. peterson institute for international economics. number pb 15-18. https://www.piie.com/publications/policybriefs/russias-economy-under-putin-cronycapitalism-state-capitalism fischer, s. (1999). the washington consensus. peterson institute for international economics. https://www.piie.com/publications/chapters_pr eview/6628/02iie6628.pdf hall, p., soskice, d. (2001). varieties of capitalism: the institutional foundations of comparative advantage. oxford: oxford university press. india employment report (2024). youth employment, education and skills. 2024. international labour organization. https://www.ilo.org/sites/default/files/wcmsp5/ groups/public india: the next decade (2024). rbc blue asset management. https://www.rbcbluebay.com/globalassets/docu ments/india-the-next-decade.pdf international monetary fund (2024). world economic outlook steady but slow: resilience amid divergence. washington, dc. april. jinping, x. (2022). xi jinping’s report at the 20th national congress of the chinese communist party. october 16. http://cpc.people.com.cn/20th/n1/2022/1026/c4 48334-32551867.html khandekar, g. (2014). modi’s moment? india’s 2014 elections. https://www.files.ethz.ch/isn/179393/modi%e 2%80%99s%20moment_%20india%e2%80% 99s%202014%20election.pdf kirton, j., & larionova, m. (2022). the first fifteen years of the brics // international organizations research journal. 17(2), 7-30. doi: 10.17323/1996-7845-2022-02-01 kurlantzick, j. (2016). state capitalism: how the return of statism is transforming the world. new york: oxford. university press. laruelle, m. (2016). the izborsky club, or the new conservative avant-garde in russia.” the russian review. 75 (4), 626–644. doi:10.1111/russ.12106 maloney, w., riera-crichton, d., ianchovichina, e., beylis, g., vuletin, g. (2023). the promise of integration: opportunities in a changing global economy. washington, dc: world bank. http://documents.worldbank.org/curated/en/099 051523163088376/p18053700fda5f03d090640 9aaa817514da marquis, c., & raynard, m. (2015). institutional strategies in emerging markets. the academy of management annals. 9 (1), 291–335. http://dx.doi.org/10.1080/19416520.2015.1014 661 martynov, a. (2021a). evolution and sustainability: what is it difference? academic journal of interdisciplinary studies. 10 (6), 135-144. https://doi.org/10.36941/ajis-2021-0160 martynov, a. (2021b). strategy of overall social development: the challenge of sustainability. arts and social sciences journal. 12(2). https://www.hilarispublisher.com/arts-andsocial-sciences-journal/current-issue.html martynov, а. (2022). the phenomenon of hybrid state capitalism in emerging market economies: present and future. emaj emerging markets journal. 12(2), 46-55. doi: 10.5195/emaj.2022.270 mckinsey global institute. (2018). outperformers: highgrowth emerging economies and the companies that propel them. http://www.mckinsey.com/mgi. mufti, m. (2018). what do we know about hybrid regimes. politics and governance. 6 (2), 112-119. doi:10.17645/pag.v6i2.1400 https://www.piie.com/publications/policy-briefs/russias-economy-under-putin-crony-capitalism-state-capitalism https://www.piie.com/publications/policy-briefs/russias-economy-under-putin-crony-capitalism-state-capitalism https://www.piie.com/publications/policy-briefs/russias-economy-under-putin-crony-capitalism-state-capitalism http://dx.doi.org/10.1080/19416520.2015.1014661 http://dx.doi.org/10.1080/19416520.2015.1014661 https://www.hilarispublisher.com/open-access/strategy-of-overall-social-development-the-challenge-of-sustainability.pdf https://www.hilarispublisher.com/open-access/strategy-of-overall-social-development-the-challenge-of-sustainability.pdf https://www.hilarispublisher.com/arts-and-social-sciences-journal/current-issue.html https://www.hilarispublisher.com/arts-and-social-sciences-journal/current-issue.html https://www.researchgate.net/journal/emaj-emerging-markets-journal-2158-8708 https://www.researchgate.net/journal/emaj-emerging-markets-journal-2158-8708 http://dx.doi.org/10.5195/emaj.2022.270 http://dx.doi.org/10.17645/pag.v6i2.1400 volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.344 | http://emaj.pitt.edu arkady martynov emerging markets journal page |27| musacchio, a., lazzarini, s. (2014). reinventing state capitalism: leviathan in business, brazil and beyond. cambridge, ma: harvard university press. myant, m., drahokoupil, j. (2011). transition economies: political economy in russia, eastern europe, and central asia. hoboken, n.j., wiley blackwell. naughton, b., boland, b.( 2023). ccp inc.: the reshaping of china’s state capitalist system. center for strategic and international studies. washington, dc. https://www.csis.org nolke, a. (2018(. dependent versus state-permeated capitalism: two basic options for emerging markets. international journal of management and economics. 54(4), 269-282. https://doi.org/10.2478/ijme-2018-0026 north, d. (1981). structure and change in economic history. n.y., norton. north, d. (1990). institutions, institutional change and economic performance. cambridge university press. north, d., wallis, j., webb, s., weingast, b. (2007). limited access orders in the developing world: a new approach to the problems of development. https://openknowledge.worldbank.org/entities/ publication/ north, d, wallis, j., weingast, b. (2009). violence and social orders: a conceptual framework for interpreting recorded human history. cambridge, uk: cambridge university press. north, d., wallis, j., webb, s., weingast, b. (2013). in the shadow of violence: a new perspective on development. chapter 10, in the shadow of violence: politics, economics and the problems of development. cambridge: cambridge university press. novokmet, f., piketty, t., zucman, g. (2018). from soviets to oligarchs: inequality and property in russia, 1905–2016. national bureau of economic research. working paper 201709. doi: 10.3386/w23712. oecd. (2020). business insights on emerging markets 2020. oecd development centre, paris, http://www.oecd.org › dev oecd. (2023). business insights on emerging markets. oecd development centre, paris, http://www.oecd.org › dev olson, m. (2000). power and prosperity: outgrowing communist and capitalist dictatorships. n.y., basic books. ricz, j. (2021). the anatomy of the newly emerging illiberal model of state capitalism: a developmental dead end? international journal of public administration. doi: 10.1080/01900692.2021.1874984 roland, g. (2000). transition and economics: politics, markets, and firms. the mit press. cambridge, massachusetts. roland, g. (2002). the political economy of transition. journal of economic perspectives. 16 (1), 2950. https://www.aeaweb.org/articles?id=10.1257/0 895330027102 rodrik, d. (2006). goodbye washington consensus, hello washington confusion? journal of economic literature. vol. xliv, p. 973-987. russia country report. (2024). 2024. bti transformation index. bertelsmann stiftung. https://btiproject.org/en/reports/country-report/rus shamsi, i., panhwar, b., khizar, c. (2013). india as an emerging economy. transnational corporations review. 6(1), 15-25. https://www.tnc-online.netinfo@tnconline.net15-25 schedelik, m., nölke, a., mertens, d., may, c. (2021). comparative capitalism, growth models and emerging markets: the development of the field. new political economy, 26(4), 514-526. https://doi.org/10.1080/13563467.2020.180748 7 schlumberger, o. (2008). structural reform, economic order, and development: patrimonial capitalism. review of international political economy. 15(4), 622-649. http://politics.oxfordre.com/view/10.1093/acref ore/9780190228637.001.0001 streeck, w., telen, k. (2006). beyond continuityinstitutional change in advanced political economy. oup catalogue, oxford university press, number 9780199280469. doi:10.1093/oso/9780199280452.001.0001 the chine renaissance. (2013). the rise of xi jinping and the 18th communist party congress. https://worldscientific.com wei, t.,xueyu, w. (2024). new forms of employment and labour protection in china. ilo working paper 103. geneva, ilo. https://doi.org/10.54394/ekjk7740 williamson j. (1994). the washington consensus as policy prescription for development. institute for international economics. https://www.piie.com/sites/default/files/publica tions/papers/williamson0204.pdf http://www.oecd.org/ http://www.oecd.org/ https://bti-project.org/en/reports/country-report/rus https://bti-project.org/en/reports/country-report/rus http://www.tnc-online.net/ mailto:info@tnc-online.net mailto:info@tnc-online.net https://doi.org/10.1080/13563467.2020.1807487 https://doi.org/10.1080/13563467.2020.1807487 https://ideas.repec.org/s/oxp/obooks.html http://dx.doi.org/10.1093/oso/9780199280452.001.0001 https://worldscientific.com/ https://www.piie.com/sites/default/files/publications/papers/williamson0204.pdf https://www.piie.com/sites/default/files/publications/papers/williamson0204.pdf volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.344 | http://emaj.pitt.edu the hybrid structure of emerging market economies: a political economy vision in the context of india, china and russian federation page |28| emerging markets journal world bank. (2024). global economic prospects, june 2024. washington, dc: world bank. doi:10.1596/978-1-4648-2058-8. wright, m., wood, g., musacchio, a., okhmatovskiy, i., grosman,a., doh j. (2021). state capitalism in international context: varieties and variations. journal of world business. 56, 101160. https://doi.org/10.1016/j.jwb.2020.101160 xiong, w. (2023). derisking real estate in china’s hybrid economy. national bureau of economic research. working paper. 31118. doi: 10.3386/w31118 yakovlev, а. (2021). composition of the ruling elite, incentives for productive usage of rents, and prospects for russia’s limited access order. post-soviet affairs. 37(5), 417-434, doi: 10.1080/1060586x.2021.1966988 yang, m. (2000). putting global capitalism in its place: economic hybridity, bataille, and ritual expenditure. current anthropology, 41 (4), 477-509. http://www.jstor.org/stable/10.1086/317380 zhang, x. (2023). is china socialist? theorising the political economy of china, journal of contemporary asia. 53 (5), 810-827, doi: 10.1080/00472336.2023.2235757 https://doi.org/10.1016/j.jwb.2020.101160 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu organizational leadership styles and employees’ performance in nigerian deposit money banks saidi adedeji adelekan dominican university, nigeria | adelekan.s@dui.edu.ng patience erigbe mountain top university, nigeria | perigbe@yahoo.com abstract the concept of organizational leadership has engendered a lot of arguments. this is because the effect of leadership on every human endeavor cannot be over emphasized. this study examines the effect of organizational leadership styles, particularly transformational and servant leadership styles on deposit money banks (dmbs) employees’ performance in nigeria. the study employs survey research design, through the administration of structured questionnaire on some selected employees of guaranty trust bank, united bank for africa and first bank. the research instrument was validated through content validity index, while test-retest method was employed in ascertaining the reliability of the research instrument. the findings revealed that transformational leadership and servant leadership styles have positive and significant combined effect on deposit money banks employees’ performance (f-stat= 58.02 *0.000). the adjusted coefficient of determination (adjusted r2) suggested that, 39.4% variation in employees’ performance is accounted for by transformational leadership and servant leadership styles. the t-value revealed that when the two variables (transformational leadership and servant leadership styles) are combined, they both have positive and significant effect on deposit money banks employees’ performance. therefore, it can be concluded that transformational leadership and servant leadership styles both have individual as well as combined positive and significant effect on deposit money banks employees’ performance. keywords: organizational leadership styles, transformational leadership style, servant leadership style, employees’ performance, deposit money banks new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.202 | http://emaj.pitt.edu | http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ mailto:adelekan.s@dui.edu.ng mailto:perigbe@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ http://creativecommons.org/licenses/by/3.0/us/ volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.202 | http://emaj.pitt.edu saidi adedeji adelekan, patience erigbe emerging markets journal | p a g e |37 organizational leadership styles and employees’ performance in nigerian deposit money banks saidi adedeji adelekan patience erigbe i. introduction the performance of the employees in a highly competitive industry like the banking sector has propelled scholars and practitioners to ascertain the determinants of employees’ performance. some empirical studies have investigated various determinants of employees’ performance. among the various variables examined in extant literature, the leadership style of the top executives has been identified as an important determinant of employees’ performance. in people and service oriented enterprises, such as deposit money banks, employees’ performance and overall organizational success depends on the leadership style of the managers (buil, martínez & matute, 2019). this is because the leadership style of the top executives affect employees’ behaviors, attitudes and emotions as well as their interaction with customers (avolio et al., 2004; buil, martínez & matute, 2019; wallace et al., 2013). prior studies in the organizational leadership domain provide empirical evidence of the existence of positive relationship between some organizational leadership styles and employees’ performance as well as firms’ competitiveness (buil, martínez & matute, 2019; eva, robin, sendjaya, van dierendonck, & liden, 2019; farahnak, ehrhart, torres, & aarons, 2020; giambatista, mckeage & brees, 2020; wu, liden, liao & wayne, 2020; yavuz, 2020). however, further research is needed regarding the specific organizational leadership styles that impact employees’ performance. furthermore, it also becomes necessary to investigate if a combination of organizational leadership style can be employed towards the enhancement of employees’ performance (buil, martínez & matute, 2019; yavuz, 2020). given the premises above, it is pivotal to examine the link between organizational leadership styles and employees’ performance. it is also important to review the essence of transformational and servant leadership styles in the ever-evolving resources constrained environment. the intent of this paper is to ascertain the effect of transformational and servant leadership styles on deposit money banks employees’ performance. in line with the research objective, the following hypotheses were tested: ho1: transformational leadership style does not significantly affect deposit money banks employees’ performance. ho2: servant leadership style does not significantly affect deposit money banks employees’ performance. ho3: transformational leadership and servant leadership styles do not have significant combined effect on deposit money banks employees’ performance. this study is significant in three-fold: firstly, it extends previous studies on organizational leadership styles in general and transformational leadership as well as servant leadership styles in particular. this is through the examination of the combined effect of the two independent variables (transformational leadership and servant leadership styles) on the dependent variable (employees’ performance). secondly, the findings and policy implications of this study will be relevant to the banking sector. finally, the study opens new research vista in transformational leadership and servant leadership styles. this paper is segmented into five segments: the first segment introduces the subject matter as well as providing the statement of problem and hypotheses. the second segment provides a conceptual and theoretical review of literature of the subject matter. the third segment presents the research methodology adopted for this study. the fourth segment presents the findings and discussion. finally, the fifth segment provides the conclusion and recommendations. ii. literature review the effort to conceptualize and ascertain a better leadership approach has spanned centuries and it is still ongoing. the concept of leadership has evolved over the years. at a certain time, it was attributes and inherent qualities, for another it was behavior and the actions made. very recently, leadership depends solely on followership, attributes, and abilities (wu, liden, liao & wayne, 2020). as a leader, if you had an opportunity to undo any wrong decision made, what would it be? which challenges can be solved with a particular approach? what is your leadership style's plausibility? the significance of these theories is that, they provide insight into how to effectively lead the dynamism of leadership and how leaders perform. the adoption of only one leadership style is no longer feasible and current studies seek to understand the attributes and skills required to effectively inspire and lead an organization or society to its stated goals (hunt & fedynich, 2019). udo-akang (2012) notes that early leadership theories have been relegated to the past due to the evolution of the concept of leadership. miska and mendenhall (2018), on the other hand, are of the opinion that contemporary investigations into the concept of leadership comprise transformational, behavioral, situational and servantship leadership styles, among others. however, the acceptance of a universal concept of leadership remains elusive, since the understanding of the concept of leadership constantly evolves. there is no universally accepted methodology on the description and methodology of leadership characteristics since the concept is based on the belief and situations at a point in time (middlehurst, 2008). this study provides an insight into the concept of organizational leadership styles. with volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.202 | http://emaj.pitt.edu organizational leadership styles and employees’ performance in nigerian deposit money banks page |38| emerging markets journal special focus on transformational and servant leadership styles, as it evolves from early times, to the present and the future in an attempt to establish a robust view of the essence of organizational leadership. transformational leadership looks at the symbiotic relationship between leaders and the employees, and how they mutually help each other towards achieving predetermined organizational goals through ethical behavior and increase motivation (miska and mendenhall, 2018). the burden of leadership is rested upon all the actors in the organization, working towards established goals, within the organization (king, 1990). this form of leadership is based on charisma and charismatic qualities (ronay & vugt, 2014). transformational leaders create a conducive working environment and adapt to changes and make the employees stay in line with organizational changes without coercion (farahnak, ehrhart, torres, & aarons, 2020; malakyan, 2014). servant leadership arises from the modern theories. it emphasizes the leader as a servant to the employees and not the other way-round. it depicts a leader who cares for his/her subordinates (northouse, 2015). the leader is more concerned with the needs of the employees and prioritizes such needs. malakyan (2014) suggests that, servant leadership creates the opportunity for the followers to rise to the top. the servant leadership concept in modern era looks at the interchangeability of the leaders and employees’ roles based on situational dictates. this concept is progressing towards leadership as a social construct that connects the different aspects of group dynamics, the non-intangible factors and the environment (middlehurst, 2008). however, a major criticism of servant leadership in the modern era is that, it seems more suitable for a set of individuals, rather than meeting a specific requirement (bryman, 2009). more attention should be paid to key situational elements that could determine if servant leadership abilities could be exhibited at all times and if leaders will actually be more effective in the application of this leadership style. employees’ performance is about the effective and efficient utilization of all resources. resources include time, people, knowledge, finance, information, equipment, land, electricity and raw materials. employees’ performance can be seen from the perspective of employees’ productivity, which is the ratio of output to input. it is a measure of how efficiently and effectively an employee uses inputs such as raw materials and capital to produce outputs such as goods and services and how such employee relates with the customers. an enhancement in performance implies that more goods and services are produced with the same amount of raw material and capital. it is not about cutting costs, but “doing things right” and “doing the right things” to achieve maximum efficiency and value. productivity is the ratio of what is produced to what is required to produce it (gronroos & ojasalo, 2004). the theory underpinning this study is the contingency theory. the theory postulates that, effective leadership is determined by the followers’ or employees’ approval or rejection of the leader. in essence a successful leader does not depend solely on attributes and intellect alone, he also depends on the employees’ abilities and attributes. the contingency theory of leadership concentrate on unique situational variables that can decide which leadership style is most appropriate for a particular work scenario (malakyan, 2014). under this theory, not a single style of leadership is generally acceptable and performance depends on a number of factors, and these include leadership style, characteristics of supporters and situation attributes (cherry, 2012). as a result, a contingency factor is any measure required to be taken into account in designing a company or one of its elements in a relevant environment. contingency theory asserts that effective leadership relies on the level of understanding existing among employees and leadership and an identified situation warrants it (lamb, 2013). house and aditya (1997) posit that, efforts by scholars to establish the very best style of leadership have been inconsistent and insubstantial and this has brought about the contingency theory. the contingency theory of leadership was a progressive step away from the earlier leadership theories. this is because; there was enough data and studies in management and leadership behavior. however, the contingency theory does not consider the roles and effects of subordinates in the leadership process. the theories also ignored the environment in which the leader exists (malakyan, 2014). the contingency theory also lacks clarity, and societies and organizations have become more complex and complicated than the theory can assume. iii. methodology this section presents the methodology adopted to carry out this study. as such, it focused on the methodology employed to ascertain the effect of organizational leadership on employees’ performance in nigerian deposit money banks. this session begins with the research design, and continues to the population for the study, the sample size, research instrument, tests of validity and reliability of instrument, method of data collection, model specification and the method for data analysis. this study employed the survey research design. this is because data on the subject matter is not readily available and survey research design tends to aid the understanding of the phenomenon under investigation. scholars with related objectives equally employed survey research design (buil, martínez & matute, 2019; farahnak, ehrhart, torres, & aarons, 2020; giambatista, mckeage & brees, 2020; wu, liden, liao & wayne, 2020). the population of this study comprise of 30.524 employees of three selected deposit money banks, namely: guaranty trust bank, united bank for africa and first bank. the reason for chosen the three deposit money banks is because they are among the top ten deposit money banks quoted on the nigeria stock exchange. the employees of the three selected banks constituted the element of observation of this study. the number of employees of selected banks is stated below: volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.202 | http://emaj.pitt.edu saidi adedeji adelekan, patience erigbe emerging markets journal | p a g e |39 table 1: the number of employees of selected banks s/n name of company number of employees 1 guaranty trust bank 10. 000 2 united bank for africa 12.908 3 first bank 7,.616 total 30.524 source: authors’ compilation the study employed stratified and simple random sampling technique. the population was divided into three strata based on the three banks and a simple random sampling was carried out in each stratum. the sample size of the study was determined using raosoft sample size determination method, at 95% confidence level and 5% confidence interval, which gave a sample size of 379. a non-response rate of 20% was assumed, which increased the sample size to 454 (379+75). the sample allocated to each selected bank is stated below: table 2: the sample allocated to each selected bank s/n name of company number of employees 1 guaranty trust bank 151 2 united bank for africa 152 3 first bank 151 total 454 source: authors’ compilation the study employed a likert scale questionnaire, rated as follows: (1) sd: strongly disagree, (2) d: disagree, (3) u: undecided (4) a: agree, (5) sa: strongly agree. the questionnaire consisted of four sections. section a obtained demographic information and section b, c & d addressed the research objectives. both construct validity and content validity were met by the instrument. for construct validity, the questionnaires were divided into four sections to ensure that each section assess information for a specific objective, and also ensure that the same was closely tied to the conceptual framework for this study. the content validity of the instrument was tested using content validity index (cvi), by using eight independent assessors, who are academics. each of the independent assessors rated the questionnaire items on a two-point rating scale of relevant (r) and not relevant (nr). the content validity index was obtained by employing the cvi formula: cvi = n/n where; n= total number of items in the instrument, while n= numbers of items rated as relevant. the cvi gave a value of 0.901, which according to ngoma et al, (2017), indicated that the instrument is highly relevant. therefore, the instrument is valid. to test the reliability of the instrument (questionnaire), the test-retest method was employed. the instrument was administered on thirty employees access bank (a non-participating bank). this was done twice within an interval of fourteen days. thereafter, the outcomes of the first and second pilot study were correlated and the following values were obtained: 0.8921 (transformational leadership), 0.7384 (servant leadership) and 0.7875(employees’ performance). model specification the model aggregates the elements of organizational leadership (transformational and servant leadership). it examined how these elements individually and jointly affect the employees’ performance of the selected deposit money banks (guaranty trust bank, united bank for africa and first bank). the model addresses the main objective of the study, which is to examine the effect of organizational leadership on the employees’ performance of the selected deposit money banks. the model specification is stated below: the theory underpinning this study is the contingency theory of leadership. model 1 the model specification for hypothesis one is stated below: ) ep where; ep represents employees’ performance tl represents transformational leadership β 0 is the constant term β1 is the coefficient of the estimator. β1> 0 is the error term based on the apriori expectation, it is expected that transformational leadership will have a positive impact on deposit money banks employees’ performance. hence, the parameter of transformational leadership should have a positive sign. model 2 the model specification for hypothesis two is stated below: ) ep where: ep represents employees’ performance sl represents servant leadership β 0 is the constant term β1 is the coefficient of the estimator. β1> 0 is the error term based on the apriori expectation, it is expected that servant leadership will have a positive impact on deposit money banks employees’ performance. hence, volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.202 | http://emaj.pitt.edu organizational leadership styles and employees’ performance in nigerian deposit money banks page |40| emerging markets journal the parameter of servant leadership should have a positive sign. model 3 the model specification for hypothesis three is stated below: ) ep where: ep represents employees’ performance tl represents transformational leadership sl represents servant leadership β 0 is the constant term β1, β2, are the coefficient of the estimator. β1, β2> 0 is the error term based on the apriori expectation, it is expected that transformational leadership and servant leadership will both have a positive impact on employees’ performance. hence, the parameters of transformational leadership and servant leadership should both have a positive sign. the ordinary least square (ols) method of regression analysis was employed to estimate the regression models for all the hypotheses. the ols was employed in order to examine if the independent variables (transformational leadership and servant leadership) affect the dependent variable (employees’ performance). the benchmark for accepting or rejecting the null hypothesis was a level of significance of five percent (0.05). stata version 14 software was used for the analysis. iv. results and discussions 454 copies of the structured questionnaires were administered on selected employees of the three deposit money banks. however, only 391 copies were returned and found useable, which represent 86% response rate. thus, the analysis was based on the returned 391 copies of the instrument. figure 1. indicating respondents work experience source: authors’ compilation figure 1 revealed that most of the respondents (32.9%) are working in their bank between 6-10 years, while 28.1% are working in their bank for over 15 years. also, 24.6% of respondents are working in their bank between 11-15 years, while 14.4% are working for 1-5 years. this implies that, most respondents are conversant with their bank’s organizational leadership style. hypotheses testing hypothesis one (transformational leadership style does not significantly affect deposit money banks employees’ performance) table 3: summary of hypothesis 1 result (dependent variable – employees’ performance) variable(s) coefficient tstatistics pvalue c 11.69531 7.99 0.0000 transformational leadership 0.4216876 6.79 0.0000 f-statistics 55.28 (0.0000) r-square= 0.2101 source: authors’ computation from stata 14 the results on table 3 above revealed a positive and significant relationship between transformation leadership style and employees performance (coefficient= 0.4216876, t= 6.79, p-value =0.000). this indicates that the better the transformational leadership style of the deposit money banks, the higher the level of employees’ performance of the banks. the coefficient of determination (r2) suggested that 21% variation in employees’ performance is explained by transformational leadership style, while the f-statistics suggest that the model is reliable for decision and policy making. hypothesis two (servant leadership style does not significantly affect deposit money banks employees’ performance) table 4: summary of hypothesis 2 result (dependent variable – employees’ performance) variable(s) coefficient tstatistics p-value c 7.085674 5.87 0.0000 servant leadership 0.629763 9.89 0.0000 f-statistics = 94.92 (0.0000) r-square =0.3375 source: authors’ computation from stata 14 it is evident from the result above (table 4) that servant leadership style, positively and significantly affect employees’ performance (coefficient= 0.629763, t= 9.89, p-value =0.000). therefore, an improvement in the servant leadership style will enhance employees’ performance. the coefficient of determination (r2) suggested that 33.7% variation in employees’ performance is accounted for by servant leadership style, while the f-statistics suggest that the model is reliable for decision and policy making. volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.202 | http://emaj.pitt.edu saidi adedeji adelekan, patience erigbe emerging markets journal | p a g e |41 hypothesis three (transformational leadership and servant leadership styles do not have significant combined effect on deposit money banks employees’ performance) table 5: summary of hypothesis 3 result (dependent variable – employees’ performance) variable(s) coefficient tstatistics pvalue c 3.435672 6.39 0.000 transformational leadership .1503511 3.05 0.003 servant leadership .2608626 4.06 0.000 f-statistics = 58.02 (0.0000) r-square =0.415, adj-r-square= 0.394 source: authors’ computation from stata 14 the result summary on table 5 above revealed that transformational leadership and servant leadership styles have positive and significant combined effect on deposit money banks employees’ performance (f-stat= 58.02 *0.000). the adjusted coefficient of determination (adjusted r2) suggested that, 39.4% variation in employees’ performance is accounted for by transformational leadership and servant leadership styles. the t-value revealed that when the two variables (transformational leadership and servant leadership styles) are combined, they both have positive and significant effect on deposit money banks employees’ performance. v. conclusion and recommendations the empirical findings of this study provide evidence that, transformational leadership and servant leadership styles play important roles in deposit money banks employees’ performance. therefore, it can be concluded that transformational leadership and servant leadership styles both have individual and combined positive as well as significant effect on deposit money banks employees’ performance. in line with the findings of this study, the following recommendations are made: nigerian deposit money banks should employ transformational leadership and servant leadership styles towards the enhancement of their employees’ performance. also, the central bank of nigeria (cbn) should encourage the adoption of transformational leadership and servant leadership styles by banks, so as to enhance their employees’ performance, which tends to positively affect their overall performance. finally, the board of directors of deposit money banks should encourage the formulation of transformational leadership and servant leadership styles policy. references avolio, b.j., gardner, w.l., walumbwa, f.o., luthans, f., may, d.r., 2004. unlocking the mask: a look at the process by which authentic leaders impact follower attitudes and behaviors. leadersh. q. 15 (6), 801–823. buil, i., martínez, e., & matute, j. (2019). transformational leadership and employee performance: the role of identification, engagement and proactive personality. international journal of hospitality management, 77, 64-75. cherry, k. (2012). leadership theories major leadership theories. available from: http: //psychology. about.com/od/leadership/p/leadtheories.htm.[a ccessed: 12 december 2019] eva, n., robin, m., sendjaya, s., van dierendonck, d., & liden, r. c. (2019). servant leadership: a systematic review and call for future research. the leadership quarterly, 30(1), 111-132. farahnak, l. r., ehrhart, m. g., torres, e. m., & aarons, g. a. (2020). the influence of transformational leadership and leader attitudes on subordinate attitudes and implementation success. journal of leadership & organizational studies, 27(1), 98-111. giambatista, r., mckeage, r., & brees, j. (2020). cultures of servant leadership and their impact. the journal of values-based leadership, 13(1), 12. grönroos, c., & ojasalo, k. (2004). service productivity: towards a conceptualization of the transformation of inputs into economic results in services. journal of business research, 57(4), 414–423. hunt, a., & fedynich, a (2019). leader, past, present and future: an evolution of an idea’. journals of art and humanities, 8(2), 56-73. king, a.s. (1990). evolution of leadership theory. vikalpa. the journal of decision makers, 15(2), 43-54. lamb, r. (2013). how can managers use participative leadership effectively? retrieved from http://www.task.fm/participative-leadership. [accessed: 17 march 2019] volume 10 no 2 (2020) | issn 2158-8708 (online) | doi 10.5195/emaj.2020.202 | http://emaj.pitt.edu organizational leadership styles and employees’ performance in nigerian deposit money banks page |42| emerging markets journal malakyan, p.g. (2014). followership in leadership studies. journal of leadership studies, 7(4), 622. miska, c., & mendenhall, m.e. (2018). responsible leadership: a mapping of extant research and future directions’. journal of business ethics, 148(1), 117-134. northouse, p. (2015). leadership: theory and practice. new york: sage publication. ronay, r., &vugt, m.v. (2014). the evolutionary psychology of leadership: theory, review, and roadmap. organizational psychology review, 4(1), 74-95. udo-akang, d. (2012). theoretical constructs, concepts, and applications. american international journal of contemporary research, 2(9), 8997. wallace, e., de chernatony, l., buil, i., 2013. building bank brands: how leadership behavior influences employee commitment. j. bus. res. 66 (2), 165–171. wu, j., liden, r. c., liao, c., & wayne, s. j. (2020). does manager servant leadership lead to follower serving behaviors? it depends on follower self-interest. journal of applied psychology. yavuz, m. (2020). transformational leadership and authentic leadership as practical implications of positive organizational psychology. in handbook of research on positive organizational behavior for improved workplace performance (pp.122-139). igi global. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu unveiling the potential and significance of marketing research in the nigerian banking industry oshireku vincent onivefu university of benin, nigeria | e-mail: vincent4ng@gmail.com omuya stephen onivefu university of benin, nigeria | e-mail: stephenonivefu@gmail.com adaviriku john onivefu ambrose alli university, nigeria | e-mail: johnezmy@gmail.com zainab oyioza onivefu osun state polytechnic, nigeria | e-mail: oyioza9@gmail.com oziofu blessing onivefu delta state polytechnic, nigeria | e-mail: oziofulessing@gmail.com abosede mary latinwo university of ibadan, nigeria | e-mail: patuwa@live.com abstract this research aims to assess the significance of marketing research within the nigerian banking sector. the study pursues the following objectives: first, to appraise the potential of marketing research as a gauge for a firm's advancement; second, to examine if marketing research contributes to a firm's economic viability; and third, to ascertain the extent of customer satisfaction achievable through marketing research. the research employed a combined descriptive and explanatory design. data were collected through questionnaires and supplemented by library research. both primary and secondary data sources were utilized, and data analysis employed the chi-square statistical method at a 5% significance level. the results were presented in frequency tables and percentages. the participants in the study consisted of 67 employees from the union bank of nigeria benin branch. the central focus of this research was to highlight the significance of marketing research within the nigerian banking sector. the findings of the study revealed that the disregard for marketing research has precipitated the premature closure of banks in the industry. moreover, the study demonstrated that marketing research holds the potential to enhance and cultivate the banking sector. in light of these findings, it is recommended that banks should proactively engage in marketing research to foster the growth and development of the banking industry. keywords: marketing, marketing research, banking products, customer satisfaction, nigeria new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.303 | http://emaj.pitt.edu | mailto:vincent4ng@gmail.com mailto:oziofulessing@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.303 | http://emaj.pitt.edu unveiling the potential and significance of marketing research in the nigerian banking industry page |2| emerging markets journal unveiling the potential and significance of marketing research in the nigerian banking industry oshireku vincent onivefu omuya stephen onivefu adaviriku john onivefu zainab oyioza onivefu oziofu blessing onivefu abosede mary latinwo i. introduction background of the study marketing research involves a methodical process of gathering, analyzing and interpreting pertinent data about customers, markets and competitive landscapes to inform decisions on product offerings, customer preferences, communication strategies and overall marketing initiatives. this practice enables banks to gain a deeper understanding of their target audience, customize their services and formulate effective marketing strategies. these strategies are aimed at attracting and retaining customers, optimizing customer satisfaction and improving their competitive stance within the financial sector (lawlane, 2023). the african banking corporation, which established its inaugural branch in lagos in 1892, marked the initial entry into the banking sector. this institution was established by colonial powers primarily to serve their trading interests in british-colonized nigeria. subsequently, additional banks emerged, including the british bank for west africa (now first bank of nigeria plc) in 1894, as well as various branches of barclay’s banks. the dominion colonial and overseas bank (d.c.o), now union bank of nigeria plc, also emerged from this era (lawlane, 2023). the domination of the banking landscape by expatriate banks, especially the british and french establishments from 1949, often exhibited discriminatory practices against indigenous clientele. this bias towards foreign banks fueled the demand for indigenous banks, resulting in initiatives led by nigerian activists in the 1930s-1940s to establish domestic banks that could offer quality services to the local population (uche, 2017). this movement gained momentum in the 1940s, leading to the establishment of numerous banks in nigeria. the significance of the banking sector gained further prominence with the establishment of the central bank of nigeria (cbn) in july 1958, following the enactment of the cbn ordinance. the growth of the banking industry intensified due to the efforts of various regional governments and cooperative movements, which established banks to stimulate economic development at both regional and national levels. notably, the indigenization policy of the early 1970s played a crucial role in expanding the banking landscape. by the end of 1981, nigeria had 27 banks operating 1,213 branches. this growth and sustainability of the banking industry can be attributed to the practice of marketing research. an organized method for addressing contemporary business management challenges is imperative. among management's core functions, decision-making stands out. particularly intricate are marketing decisions, whose repercussions reverberate throughout the business landscape. the vital role of marketing research in providing a framework is underscored by its pivotal contribution to the growth and progress of organizations (uche, 2010; olukayode, 2022). in recent times, recognition of marketing research's influence on product planning and development within banks has surged. notably, the american marketing association (ama) determined that over 73 percent of larger companies possess their own marketing research divisions. this prominence has materialized in the past five years. concurrently, catering to the unique needs of specific customer segments, irrespective of their location, has surged in significance (majumder & habib, 2022; hung et. al., 2020). consequently, structured research is essential for identifying market opportunities. in today's competitive trading environments, both national and international, reliable marketing intelligence is an imperative resource. in the realm of marketing management, marketing research assumes a pivotal role. it acquires and dissects data to proffer managerial recommendations for addressing market predicaments. the key managerial value of marketing research lies in its ability to mitigate uncertainty by providing information that informs decisions regarding marketing strategies and tactics aligned with organizational strategic objectives. formulating and executing marketing strategies encompass the subsequent facets: i. identifying and assessing viable opportunities. ii. analyzing market segments and selecting target markets. iii. devising and implementing a marketing mix to meet customer needs and achieve organizational goals, alongside evaluating market performance. marketing research, as a mechanism for implementing the marketing concept, serves to collect information that elucidates consumer issues and requirements. it bridges the gap between marketing executives and customers. throughout business history, management predominantly focused on overseeing finances, resources, machinery and personnel. correspondingly, attention to the fifth resource information has been relatively limited. numerous nigerian firms are yet to embrace the heightened information prerequisites necessary for effective resource utilization. this transition is integral to expediting the nation's economic progress (martin & ronan, 2017; daniel et. al., 2022). marketing research, characterized by systematic data gathering, recording, and analysis, revolves around matters pertinent to marketing products and services. though often used interchangeably with market research, some experts distinguish between the two, highlighting that market research concerns itself with volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.303 | http://emaj.pitt.edu oshireku vincent onivefu, omuya stephen onivefu, adaviriku john onivefu, zainab oyioza onivefu, oziofu blessing onivefu, abosede mary latinwo emerging markets journal page |3| markets, whereas marketing research is directed at marketing processes. typically, marketing research is categorized in two ways: i. consumer marketing research ii. business-to-business (b2b) marketing research alternatively, it can be categorized by methodology: qualitative marketing research quantitative marketing research consumer marketing research, an applied sociology variant, delves into comprehending consumer preferences, attitudes and behaviors in market-oriented economies. its purpose is to gauge the impact and relative success of marketing campaigns (george, 2023; louis, 2023). the goals of marketing research the goals of marketing research include: i. understanding consumer behavior: to gain insights into how consumers behave as well as their preferences, needs and buying patterns. ii. market analysis: to assess market trends, size, competition and potential opportunities for a product or service. iii. product development: to inform the creation or modification of products/services that better meet customer needs. iv. target audience identification: to identify and define the most relevant and profitable customer segments. v. brand perception: to understand how customers perceive a brand and its offerings, aiding in brand positioning and messaging. vi. marketing effectiveness: to measure the impact of marketing campaigns and strategies, helping optimize future efforts. vii. decision making: to provide data-driven insights that support informed business decisions. viii. competitive advantage: to gain a competitive edge by staying ahead of market trends and customer preferences. ix. risk management: to identify potential risks or challenges in the market and develop strategies to mitigate them. x. roi measurement: to evaluate the return on investment for marketing initiatives and allocate resources more effectively. statement of problem this study examines the relationship between "marketing research" as a factor influencing a firm's (bank’s) economic sustainability and development. it traces the shift from a production-oriented approach in marketing history, where products were made without considering consumer preferences, to the "marketing concept" that emphasizes understanding consumer needs and creating products accordingly. despite this shift, limited attention is given to marketing challenges, including marketing research. this oversight is echoed by peter drucker's observation that marketing is often neglected in some countries. the key question is how firms learn about evolving customer preferences, new competition and distribution methods. the answer lies in establishing a marketing information system and possessing the skills for effective marketing research. marketing's essence lies in producing what can be sold, rather than selling what can be produced. this necessitates assessing customer needs through systematic market research and aligning all activities toward satisfying those needs. identification of consumer needs involves systematic market investigation. today, products are thoroughly explored before large-scale production, often involving dedicated product managers coordinating development and marketing. for sure, developing products, potential competition and changing customer desires must be considered. organizations unfamiliar with marketing research struggle to produce consumer-oriented products, which is the core issue under examination. the study delves into the utility and role of marketing research in the survival and advancement of the banking industry. purpose of the study having outlined the issues pertinent to the research, it becomes imperative that the objectives of this study are logically derived from the identified problems. as such, the objectives are delineated as follows: i. to assess the economic viability of integrating marketing research within a firm. ii. to ascertain the potential of marketing research as a metric for gauging a firm's developmental progress. iii. to gauge the extent to which marketing research can contribute to customer satisfaction. iv. to dissect the practical utility of marketing research for a firm. v. to explore how marketing research can function as a tool for shaping marketing decisions in the context of product development. research questions i. is there a genuine concern within the management of company (union bank of nigeria) regarding customer satisfaction? ii. what specific marketing research initiatives does the company (union bank of nigeria) implement to ensure the contentment of its customers? iii. to what extent are customers content with the products offered by the company (union bank of nigeria)? iv. can the company (union bank of nigeria) effectively leverage marketing research strategies to optimize its profitability? v. is there a discernible connection between the economic survival & advancement of the bank and practice of marketing research? volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.303 | http://emaj.pitt.edu unveiling the potential and significance of marketing research in the nigerian banking industry page |4| emerging markets journal hypothesis statements hypothesis 1 ho:neglect of marketing research led to the premature folding up of some banks in the industry. hi:neglect of marketing research did not lead to the premature folding of some banks in the industry. hypothesis statements hpothesis 2 ho: marketing research have the capability to improve and develop the banking industry. hi: marketing research does not have the capability to improve and develop the banking industry. scope and limitations of the study this study is centered on using marketing research as a gauge for both development and economic sustainability within the union bank of nigeria's benin branch. also, this research is confined to the management and staff of union bank of nigeria's benin branch. it is also conducted within the scope of human limitations, acknowledging that imperfections are inherent in human nature, including the researcher's own fallibility. the challenge of securing returned questionnaires poses an additional constraint. furthermore, limitations arise from time and financial factors. the constrained timeframe for research and the substantial costs associated with conducting it are also influential limitations in this study. ii. implementation research methodology this section outlines the research methodology employed in study. methodology encompasses all processes engaged in collecting the essential data and information necessary for research. this framework ensures comprehension and attainment of the study's designed objectives. the section delves into the preliminary survey conducted to ascertain feasibility, introduces the data collection instrument, elucidates data sources, discusses the questionnaire, sample size determination, outlines the sampling procedure and delineates the techniques employed for data analysis. research design this study adopts a survey (questionnaire) research approach with an exploratory nature. the aim is to comprehensively analyze the comparative costs and benefits of employing marketing research as a metric for both economic survival and developmental assessment within the banking industry. population and sample size the study's target population comprises the marketing personnel of union bank of nigeria. the sample size (pool) is drawn from the marketing staff of union bank of nigeria's branch 1 and 2, located in benin city, edo state. given the research's focus on marketing staff exclusively, a larger respondent count beyond the number of marketers employed within the organization was unnecessary. the distribution of questionnaires was restricted to marketing professionals within the bank. consequently, a sample size of seventy (70) participants was selected using the judgment sampling from different bank branches. method of data collection data for this study are derived from both primary and secondary sources. the questionnaire's design was influenced by the hypotheses being tested. the questionnaire utilized in this research comprised a total of nineteen (19) questions. to ensure comprehensive responses from the participants, a combination of openended and close-ended questions was incorporated in the questionnaire. this approach facilitated the application of statistical techniques to analyze the gathered data. consequently, these statistical methods assisted in evaluating the research hypotheses. data presentation and analysis this section constitutes the core of this research, focusing on the presentation and analysis of data collected from the participants. its objective is to provide a quantifiable insight into the outcomes of marketing research as a determining factor for economic survivsl and developmental assessment within the nigerian banking industry. although seventy (70) questionnaires were initially administered, the final sample size (n) amounted to sixty-seven (67) respondents. the collected data are organized in tabular format and the data analysis is presented in terms of percentages. table 1: age variables respondents percentage below 25 years old 11 16 26-35 years old 27 40 36-45 years old 23 34 46-55 years old 6 10 total 67 100 so source: field survey table 1 above indicates that, respondents’ age below 25 constitutes 16%, age 26-35 constitutes 40% of the sample while age 36-45 constitutes 34% and age 4655 constitutes 10% of the sample of research. table 2: gender variables respondents percentages male 38 57 female 29 43 total 67 100 so source: field survey table 2 above shows that 57% of the sample is dominated by males while females are represented by 43%. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.303 | http://emaj.pitt.edu oshireku vincent onivefu, omuya stephen onivefu, adaviriku john onivefu, zainab oyioza onivefu, oziofu blessing onivefu, abosede mary latinwo emerging markets journal page |5| table 3: educational background variables respondents percentage ordinary national diploma (ond) 33 49 higher national diploma (hnd)/bachelor of science (b.sc) 21 31 master of science (msc)/master of business administration (mba) 13 20 total 67 100 source: field survey based on table 3 above, 49% of the respondents are ordinary national diploma (ond) holders, 31% of the respondents are higher national diploma (hnd)/bachelor of science (b.sc) holders, while 20% are master of science (msc)/master of business administration (mba) holders. table 4: marital status variables respondents percentages single 43 64 married 23 35 divorced 1 1 total 67 100 source: field survey as shown in table 4 above, single employees constitute 64% and married employees constitute 35% of the sample, while only 1% is divorced. table 5: are you aware of what is called marketing research in the industry? response number of respondents percentage yes 65 97 no 2 3 total 67 100 source: field survey table 5 shows that 97% of the respondents are aware and 3% are unaware of marketing research in industry. table 6: do you support the view that companies (banks) can ordinarily determine their demand through marketing research? response number of respondents percentage yes 35 52 no 32 48 total 67 100 source: field survey table 6 above shows that 52% of the respondent believe companies (banks) can determine their demand through marketing research while 48% do not believe that companies (banks) determine their demand through marketing research. table 7: does your company (bank) have any marketing research unit? response number of respondent percentage yes 45 67 no 22 33 total 67 100 source: field survey table 7 shows that 67% of the respondents state there is a marketing research unit in their company (bank), while 33% indicate just the opposite. table 8: does management of union bank of nigeria care about customer satisfaction? response number of respondents percentage yes 67 100 no 0 0 total 67 100 source: field survey table 8 above shows that all (100%) respondents think the management of union bank of nigeria cares about customer satisfaction. table 9: marketing research helps in developing a new product which improves company’s (bank’s) growth and survival? response number of respondent percentage yes 67 100 no 0 0 total 67 100 source: field survey table 9 above shows that marketing research can help in developing a new product which improves company’s (bank’s) growth and survival. all respondents (100%) share the mentioned opinion. table 10: does your company (bank) get the new product idea through market research? response number of respondents percentage yes 67 100 no 0 0 total 67 100 source: field survey s table 10 above shows that all respondents (100%) believe their company (bank) gets the new product idea through market research. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.303 | http://emaj.pitt.edu unveiling the potential and significance of marketing research in the nigerian banking industry page |6| emerging markets journal table 11: as a staff of union bank of nigeria, from experience do you think marketing research can be done remotely within the organization? response number of respondent percentage yes 11 16 no 56 84 total 67 100 source: field survey table 11 above shows that 84% of the respondents said marketing research cannot be done remotely within the organization, while 16% just emphasized the opposite. table 12: neglect of marketing research led to premature folding of banks in the industry? response number of respondents percentage yes 67 100 no 0 0 total 67 100 source: field survey table 12 above shows that 100% of respondents believe neglect of marketing research led to premature folding of banks in the industry. table 13: cordial relationship between the marketing research and another functional department is necessary? response number of respondents percentage yes 67 100 no 0 0 total 67 100 source: field survey table 13 above indicates that, all respondents (100%) believe cordial relationship between marketing research and another functional department is necessary. table 14: are customers satisfied with the products of the company (bank) as they are being offered? response number of respondents percentage yes 36 54 no 31 46 total 67 100 source: field survey table 14 above shows that 54% of the respondents think customers are satisfied with the product of the company (bank) as they are being offered, while 46% do not share the mentioned perspective. table 15: is marketing research the only tool for identifying consumers wants and needs? response number of respondent percentage yes 67 100 no 0 0 total 67 100 source: field survey table 15 above indicates that, according to all respondents (100%), marketing research is the only tool in identifying consumers want and needs. table 16: has your company (bank) developed a new product because the research and development department came up with something new? response number of respondent percentage yes 67 100 no 0 0 total 67 100 source: field survey table 16 above shows that, according to all respondents (100%), their company (bank) has developed a new product because the research and development department came up with something new. table 17: can union bank of nigeria use the marketing research strategy to maximize profit? response number of respondent percentage yes 67 100 no 0 0 total 67 100 source: field survey table 17 above indicates that, from the perspective of all respondents (100%), union bank of nigeria can maximize profit using the marketing research strategy. table 18: is there a relationship between the economic survival & development of bank (union bank of nigeria) and marketing research? response number of respondents percentage yes 67 100 no 0 0 total 67 100 source: field survey table 18 above shows that there exist a relationship between the economic survival & development of bank (union bank of nigeria) and marketing research according to all respondents (100%). volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.303 | http://emaj.pitt.edu oshireku vincent onivefu, omuya stephen onivefu, adaviriku john onivefu, zainab oyioza onivefu, oziofu blessing onivefu, abosede mary latinwo emerging markets journal page |7| table 19: is marketing research vital to company (bank)? response number of respondents percentages yes 67 100 no 0 0 total 67 100 source: field survey table 19 above shows that, from the viewpoint of all respondents (100%), marketing research is vital to company (bank). iii. discussion of findings the age range of 26 to 35 years, encompassing 40% of the respondents, emerged as the most prominent demographic group in this study. notably, the study's participant base was predominantly males. the significance of marketing research for a company's (bank’s) viability and success becomes evident. the recognition and familiarity of marketing research among staff members are of paramount importance. one notable implication is the potential for companies to strategically gauge their market demand through effective marketing research initiatives. additionally, it's imperative to emphasize that ond certificate holders constitute a substantial portion of the respondent population. among the respondents, a majority acknowledged the pivotal role of marketing research in ensuring a company's (bank’s) survival and success. the awareness and comprehension of marketing research by the staff were underscored as crucial factors. an intriguing prospect arises as companies (banks) can leverage marketing research to not only identify their demand, but also to optimize their strategies for profit analysis, thus influencing their economic survival and developmental trajectory. moreover, an interesting correlation emerges in the discussion the correlation between economic survival & development and marketing research. this connection becomes even more noteworthy, suggesting that the two are intertwined. iv. conclusion and recommendations this paper highlights that marketing research is not a mystical process reserved for statisticians; rather, it stands as a management tool empowering marketing managers to enhance their decisions. marketing research enables decisions to be based not solely on instincts, but on objective information. the symbiotic relationship between managers and researchers is pivotal, where managers must comprehend research procedures while researchers must grasp the intricacies of planning, implementing and controlling marketing strategies. incorporating the scientific method becomes vital for marketing researchers, especially when gauging the necessity for new products. this approach is pragmatic due to the constraints often posed by limited time and resources. from this study's findings, it is evident that marketing research is indispensable for creating products that align with customer satisfaction. moreover, the study reinforces the notion that, for consumer-centric products to flourish in the market, a thorough exploration of consumer needs and desires through research is imperative. for union bank of nigeria to achieve performance beyond the average, it's imperative to accord significant attention to the marketing research department within their practices. given the findings highlighting the heightened requirement for marketing research in product development, prioritizing research activities becomes essential for the union bank of nigeria. elevating the performance of marketing researchers necessitates management's vigilant oversight and control over the marketing research department, akin to their handling of other functional units. directing concerted efforts towards generating novel product concepts via marketing research should be a key focus for management. leveraging marketing research applications empowers the union bank of nigeria to design and evolve products capable of thriving within the market. the utilization of marketing research acts as a catalyst for rejuvenating products, effectively extending the mature stage of the product life cycle. having assessed the influence of marketing research on customer satisfaction at the union bank of nigeria, it's crucial to emphasize the reinforcement of purchase decisions driven by products, facilitated through effective market research. union bank of nigeria's management should acknowledge the unique yet intriguing challenges in augmenting its share capital within the financial market. harnessing marketing research applications holds the potential to amplify union bank of nigeria's profit margins. the application of marketing research can usher in growth and development for the union bank of nigeria. recruiting more marketing executives with specialized training is pivotal to ensuring the effective execution of marketing research. ultimately, integrating marketing research and its application in new product development provides the union bank of nigeria with a competitive advantage over rivals. this advantage is harnessed through the insights gleaned from the marketing research department. collaboration between the marketing research department and other functional units in thr union bank of nigeria is paramount, representing the sole pathway for the company's success within the dynamic business landscape. references aghayev, m. (2023). new opportunities and challenges for transportation corridors in the south caucasus in the light of the russian-ukrainian war. available at ssrn 4482389. daniel, c. n., oru, g. u., mbonu, c. h. (2022). marketing research in nigeria: a survival strategy for small and medium scale enterprises in a competitive environment. the melting pot, 6 (2). retrieved from https://journals.aphriapub.com/index.php/tmp/ article/view/1402 volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.303 | http://emaj.pitt.edu unveiling the potential and significance of marketing research in the nigerian banking industry page |8| emerging markets journal george, k. (2023). bank & credit union market research options to consider in 2023, retrieved on 30th august, 2023 from: https://www.driveresearch.com/marketresearch-company-blog/market-researchoptions-for-banks-and-credit-unions/ jui-long hung, wu he, jiancheng shen (2020). big data analytics for supply chain relationship in banking, industrial marketing management, volume 86, 2020, pages 144-153, issn 00198501, https://doi.org/10.1016/j.indmarman.2019.11.0 01 lawlane (2023). historical development of banking in nigeria. retrieved on 30th august, 2023 from https://www.thelawlane.com/historicaldevelopment-of-banking-in-nigeria/ louis, g. (2023). how to do market research in 4 steps: a lean approach to marketing research, retrieved on 30th august, 2023 from: https://www.hotjar.com/blog/market-research/ majumder, m. i., habib, m. m. (2022). supply chain management in the banking industry: a literature review. american journal of industrial and business management, 12, 10-20. https://doi.org/10.4236/ajibm.2022.121002 martin s., ronan o. (2017). supply chain finance: riding the waves, retrieved on 30th august, 2023 from: https://www.oliverwyman.com/content/dam/oli ver-wyman/v2/publications/2017/dec/supplychain-finance-final.pdf olukayode, p. (2022). how bank of industry succeeds in developing nigeria’s industrial sector, retrieved on 30th august, 2023 from: https://internationalbanker.com/banking/howbank-of-industry-succeeds-in-developingnigerias-industrial-sector/ uche, c. (2010). indigenous banks in colonial nigeria; the international journal of african historical studies, 467-487, https://doi.org/10.2307/23046821 uche, c. (2017), chapter 16 indigenous banking enterprises: the rise of nigerian multinational banks. in entrepreneurship in africa. leiden, the netherlands: brill. https://doi.org/10.1163/9789004351615_018 https://doi.org/10.1016/j.indmarman.2019.11.001 https://doi.org/10.1016/j.indmarman.2019.11.001 https://www.thelawlane.com/historical-development-of-banking-in-nigeria/ https://www.thelawlane.com/historical-development-of-banking-in-nigeria/ https://www.hotjar.com/blog/market-research/ https://doi.org/10.4236/ajibm.2022.121002 https://internationalbanker.com/banking/how-bank-of-industry-succeeds-in-developing-nigerias-industrial-sector/ https://internationalbanker.com/banking/how-bank-of-industry-succeeds-in-developing-nigerias-industrial-sector/ https://internationalbanker.com/banking/how-bank-of-industry-succeeds-in-developing-nigerias-industrial-sector/ https://doi.org/10.2307/23046821 https://doi.org/10.1163/9789004351615_018 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu innovation, environmental antecedents and performance outcomes of metropolitan, municipal and district assemblies in ghana collins kankam-kwarteng kumasi techical university, ghana | e-mail: colkann@gmail.com francis osei kumasi techical university, ghana | e-mail: oseifrancis1234@gmail.com george nana agyekum donkor ecowas bank for investment and development (ebid), togo | e-mail: gandonkor@yahoo.com abstract the purpose of the study was to ascertain the effects of innovation types and environmental antecedents on performance outcomes of metropolitan, municipal and district assemblies in ashanti region, ghana. specifically, the study measures the mediating effects of environmental antecedents on the performance outcomes of the mmdas. a total of 280 responses received from interested workers of the mmdas were used for the study. as a result of the covid-19 and its related restrictions, the questionnaire was developed using google forms. data were collected through social media and the responses received were screened and used for the analysis. the questionnaire was based on measurement scales for the key variables (innovation types, environmental antecedent, performance outcomes) understudy. spss and sobel test were used to estimate the mediation effect. the study results revealed that there is a significant but negative relationship between innovation types and performance outcomes at the mmdas. similarly, a significant and positive relationship was found between environmental antecedent and performance outcomes of the mmds. again, the results showed that there is a relationship between innovation types and performance outcomes of the mmdas. finally, the results showed that environmental antecedents mediate the relationship between innovation types and performance outcomes of the mmdas. based on the findings, the study recommends that managers of the mmdas should continue to monitor and control the various environmental (public demands, political demand, regulatory frameworks, competition) forces within the public sector in order to realize the full potential of innovation and its role in facilitating performance outcome. also, the mmdas should embrace the innovation types (process innovation, process innovation, governance innovation, and conceptual innovation) in order to achieve higher performance outcomes (effectiveness, efficiency, citizen involvement and participation and customer satisfaction). keywords: innovation, environmental antecedents, performance outcome new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.265 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.265 | http://emaj.pitt.edu collins kankam-kwarteng, francis osei, george nana agyekum donkor emerging markets journal | p a g e |27 innovation, environmental antecedents and performance outcomes of metropolitan, municipal and district assemblies in ghana collins kankam-kwarteng francis osei george nana agyekum donkor i. introduction the field of public sector innovations has witnessed considerable number of research over the last decade. with the introduction of public sector reforms in ghana, public agencies were to adopt structural and managerial features from the private sector into public institutions (ohemeng, & ayee, 2016; aidoo-buameh, 2014). such adopted attributes include management by objectives, competitive tendering, consumer choice, total quality control and performance management (ohemeng, & akonnor, 2022). the introduction of public sector reforms in ghana has been based on a supposition that private market practices are superior, and should be implemented in the public sector in order to generate successful governmental activities (ayee, 2019). the new public sector reforms include a direction towards output and outcomes, rather than input and processes, quantification and measurement of the public sector services and its management (essumanmensah, 2019). for the ghanaian public sector, like many other economies, the implementation of the reforms has consisted of two elements; management by goal and performance, and institutional operational devolution (owusu, 2006; mackay, & gariba, 2000). with the reforms, decision-making and user satisfaction are highlighted as essential conditions for effective public management (toso, & alem, 2014). compared to other nations, the ghanaian economy has some special attributes. first, the economy has traditionally been heavily grounded on natural resources such as timber, cocoa and gold. with the emergence of oil and gas, the ghanaian economy continues to depend largely on natural resources. second, an appreciable proportion of the expenditure portfolio goes to the public administration, as a result of the large state owned enterprises of the public sector. third, even when revised for industrial alignment, the level of innovations in the ghanaian public sector is lower when compared to other emerging economies. the public sector plays a critical role in the distribution and formation of knowledge in the community (dassah, 2017; greiling, 2005). with a large and comprehensive public sector, it is significant, and in the citizenry best interest, that it is managed in the most effective way. this comprises a constant search and desire to find new and better resolutions to providing wellbeing to the public (teigen, 2007). in order for the ghanaian public sector to meet the challenges it faces, it is essential to advance knowledge on how the working environment can be structured for improved service for both employees and citizens. the ghanaian government has gestured that innovations in the public sector will be a priority for the future, and will attempt to reduce or eradicate obstacles for innovations in the public sector (ohemeng, & kamga, 2020). the obstacles are based on legislative, organizational and technical origin. it must, however, be highlighted that the reduction of these can only be accomplished if they do not compromise other areas of public interests (williams, & yecalo‐tecle, 2020). essentially, cost reduction as a result of innovations in the public sector provides benefits such as improved image of the public sector, increased citizen satisfaction and innovation enhancement in the private sector (alves, 2013). studying innovations in the public sector, therefore, is necessarily significant as it influences multiple phases of the society (alves, 2013). based on the grounds provided by previous research, storey and salaman (2005) argue that innovations are critical to economic growth and national competitiveness, in relation to globalized world with ever-increasing accessibility, and use of information technology resulting in spiraling competition. this paper, therefore, aims at contributing to the field of public sector innovations research by studying the topic through public sector employee perceptual analysis. the purpose of this study is to analyze employees at various levels at the metropolitan, municipalities and district assemblies (mmdas) and evaluate how they understand, as well as create conditions for, innovation in their organizations and how they perceive innovation to influence performance outcomes. ii. literature review conceptual framework a conceptual framework is a hypothesized model that identifies the concepts under study and their relationship. it presents the dependent or outcome variables that are affected by the dependent variables. researchers (varpio et al. 2020; bharti, 2015; simpson, 2002; mcgaghie et al., 2001) describe conceptual framework as an interface of concepts that are generally defined and systematically structured to present, a rationale, a direction and a tool for the incorporation and interpretation of information. according to tamene (2016) and leshem, & trafford (2007), the purpose of a conceptual framework is to aid the reader to rapidly see the projected relationships between the dependent variables and independent variables. systematically, it is placed in the comprehensive model of explicit prepositions, statement of relationships between two or more variables. innovation and public sector performance description of public sector innovations varies from a passive adopter of innovation to a preemptive source of novel concepts and inventions (van acker, & volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.265 | http://emaj.pitt.edu innovation, environmental antecedents and performance outcomes of metropolitan, municipal and district assemblies in ghana page |28| emerging markets journal bouckaert, 2018; de vries et al., 2018). for estimation reasons, kattel et al. (2018) suggest and describe innovations as the application of new or meaningfully enhanced goods and services and by which potential users can have access to them. thus, innovations in this study have been conceptualized as the enhancement of the public services to include communication methods innovations, process innovation, organizational innovation, conceptual innovations and policy innovations with the objective to boost public sector performance. the initiatives to appreciate public sector innovations performance to some point is difficult due to limited theory devoted to public sector innovations (bloch & bugge, 2013; bommert, 2010; mulgan & albury, 2003). notwithstanding that, the understanding from innovations system theory could be appropriate to structure modalities on public sector innovation and performance. innovation systems theory advanced that the actors and procedures involved in innovations could be acknowledged and characterized. innovations from innovation system thought is as a result of interaction between many stakeholders and does not appear in isolation (bloch & bugge, 2013). the theory emphasizes that innovation is the outcome of interface between several pertinent actors that are involved in the innovation process, thus verifying innovations does not occur in isolation (flanagan, uyarra, & laranja, 2011). instead, innovations emerges from complex relationships among stakeholders in the system (waddell et al., 2015). thus, the responding stakeholders could be acknowledged and categorized in terms of their roles, and the processes leading to innovations may be classified (bloch & bugge, 2013). defining phases of the organizational surroundings of the innovative system play key roles in modeling the condition for innovations within the system (bloch & bugge, 2013). innovations in the public sector are codependent with its systemic and wider societal context as countless projects are typically knotted with other institutions and entities including the central agency. therefore, when trying to comprehend innovations performance and how innovations happen in the public sector, the application should not disregard its wider innovations systems (evans et al., 2017). it is imperative to have an appreciable understanding of innovations system. such understandings is valuable for policy makers to classify leverage points which will contribute to enhancing innovations performance and overall competitiveness (oecd, 2008). environmental antecedents and performance outcomes regardless of the existence of differing accounts, the widely available evidence signals an overall significant influence of environmental antecedents on firm performance (molina‐azorín et al. 2009). however, the direction and strength of the relationship are debated to vary across diverse boundary situations and contingent factors (molina‐azorín et al., 2009; klassen and mclaughlin 1996). for example, in frameworks where consumers are subtle to environmental concerns, environmental activities can be an imperative source of distinction from rivals and hence a foundation of competitive gain (weerawardena, & mort, 2012; orsato, 2006). likewise, improved reputation amongst consumers, capability to profit from the financial capital of decent investors, avoiding environmental disasters and reduction of waste that lead to bad publicity could be the bases of a possibly affirmative link between environmental antecedents and firm’s performance (klassen and mclaughlin 1996; galbreth and ghosh 2013). furthermore, jansen et al. (2005) highlight the progressive role of environmental antecedents in service differentiation and innovativeness and resulting in competitiveness. a growing body of pragmatic evidence, therefore, exists for the progressive effects of environmental antecedents on countless performance outcomes increasingly in the public sector (melnyk, sroufe, and calantone 2003; luthra, garg, and haleem 2015; molina‐azorín et al., 2009). it is, however, reasonable to argue that establishments adopting environmental activities may attain performance through market differentiation and focusing niche market areas (galbreth and ghosh 2013). thus, it is expected to see some performance benefits of environmental activities for public institutions, and this fits central orientation of the previous literature. innovation, environmental antecedents and public sector performance public sector performance is a multidimensional paradigm (andrews et al, 2010). principal to the thought is the formation of public value (van dooren, de caluwe & lonti, 2012; moore, 2005). anticipated outcomes are often described in terms of effectiveness, efficiency, future proofing, legitimacy towards stakeholders and quality and responsiveness (yang and panday, 2007; boyne, 2002). public performance can thus be theorized as attaining public goals in an efficient, effective and legitimate manner, conserving present and future quality of public services (verbeeten, 2008). the public sector is confronted with innovation to boost performance (osborne & brown, 2011), and at the same time enhancing current activities in order to boost efficiency and reduce cost (pollitt & bouckaert, 2004). innovation is severally considered as the application of a new (technical, organizational, policy, service or other) thought that transforms and changes the operational and outcomes of the public sector (damanpour et al., 2009; hartley, 2005), thereby generating public value (moore & hartley, 2008; moore, 2005). this thought is perceived as new by people or other elements of adoption (rogers, 1995), and characterizes a discontinuity with the past (osborne & brown, 2011). however, performance outcomes in the public sector can also be boosted by gradual enhancement, in endurance with the past (moore, 2005). it is imperative to differentiate gradual enhancement from innovation, as both procedures require different methodologies (march, 1991). this difference may get indistinct in public sector innovation policies (osborne and brown, 2011) and innovations as well as its enhancement are often presumed to be synonymous (hartley, 2005). innovativeness, however, concerns the implementation of new policies, procedures, services and, technologies in discontinuity with the past, whereas optimization involves the enhancement of existing processes, policies, services and technologies in continuity with the past (osborne & brown, 2011; damanpour et al., 2009). literature concerning the previous studies underscore that both are indispensable for boosting performance (junni, et al., volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.265 | http://emaj.pitt.edu collins kankam-kwarteng, francis osei, george nana agyekum donkor emerging markets journal | p a g e |29 2013; damanpour et al., 2009; jansen et al., 2006; march, 1991). iii. methodology the participants for this study comprise all the employees of the mmdas in ghana. the target population comprises employees of mmdas in ashanti region. the data collection process took into consideration the covid-19. this is because some public institution placed restrictions on the nature of contact employees can have with customers. researchers therefore took advantage of the social media to distribute the questionnaire for interested participants. a questionnaire was designed with information that could be uploaded on google form. the data collection process encouraged respondents to post to other colleagues they knew who work with mmdas in ashanti region. even though the data collection technique adopted for the study was convenience sampling, the use of google forms and the posting of the questionnaire through various whatsapp platforms means that the process also included snowballing or referral sampling. considering the fact that the data collection was basically about convenience sampling, the sample size could only be determined parallel to the number of participants who responded to the google form based questionnaire. a total of 291 responses were received after careful screening of the responses and a sample size of 280 was used for the analysis. the obtained data were first edited and examined to check if the respondents answered the questions genuinely or consistently. a few questionnaires which were not fully completed were however removed. after editing, the data were coded and analyzed. a perceptive approach was used to measure the variables. three principal constructs were used for this work – innovation types, environmental antecedents and performance outcomes. innovation types were measured as four-dimensional constructs. the four (4) dimensions are product innovation, process innovation, governance innovation and conceptual innovation. by the help of initial 9 items, the study finally used 5 items to measure innovation types. the five items were stated in line with process innovation, product innovation, governance innovation and conceptual innovation. the respondents were requested to state their level of agreement to these statements based on a 5-point likert scale. sampled statements include; “introduction of new concepts”, “frames of reference”, “new paradigms that help to reframe the nature of specific problems” and “paradigms aim at possible solutions”. environmental antecedents on the other hand were measured by 4 items. again, respondents were made to state their level of agreement or disagreement to the statements representing their patronage intentions based on the 5-point likert scale. sampled statements for environmental antecedents construct are; “regulatory frameworks influence performance outcomes of the public sector”, “nature of competition faced by public sector agencies influence their performance outcomes”, political demands in the public sector affect performance outcomes” and “public demands of the public sector influence their performance outcomes”. moreover, performance outcomes construct was measured with 4 items. again, respondents were made to state their level of agreement or disagreement to the statements representing their perceptions on the importance of innovation types on performance outcome of the public sector based on the 5-point likert scale. sampled statements for performance outcomes are; “innovation can increase effectiveness in the public sector”, “innovation leads to efficiency in the public sector”, “innovativeness in the public sector may encourage citizen involvement and participation”, “innovativeness of the public sector may improve customer satisfaction” and “public sector innovation may encourage private business partnerships”. the validity and reliability estimates were performed using the spss. iv. results demographic characteristics the demographic summary of the respondents are reported on table 1. as shown on table 1, the majority (67.5%) of the respondents of the study where males whereas 32.5% were females. regarding the age distribution of the surveyed respondents, results suggest that majority of the respondents were between the ages of 30-39 (42.5%). this is followed by those who were between the ages of 40-49 (28.75%); and 20-29 (21.25%). again, from table 1, it is revealed that most of the respondents surveyed have a working experience with the mmdas. the descriptive analysis showed that the majority of the respondents (50%) have about 1-5 years of working experience. this is followed by those who have about 6-10 years of experience; representing about 28.75%. those who had more than 10 years of experience in the public sector (mmdas) were estimated to constitute about 21.25% of the total sample surveyed. table 1: sample characteristics source: spss software output table 1 also reports that, most of the respondents were senior staff members of the mmdas representing 56.25% of the total sample. junior staff members who participated in the study constituted 43.75% of the total participants. focusing on educational background, it is observed that most of the respondents volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.265 | http://emaj.pitt.edu innovation, environmental antecedents and performance outcomes of metropolitan, municipal and district assemblies in ghana page |30| emerging markets journal have first degree education (41.25%) and masters’ education (30%). those who have diploma and higher national diploma education represented 16.25% and 12.5% respectively. validity checks to establish the validity of the data and instruments used to conduct the study analysis, content and convergent validity were examined. content validity was examined by reviewing the items for face validity and calculating the internal consistency of the variables using the cronbach’s alpha scores. factor analysis was also applied to check the convergent validity of the data items. both the exploratory and confirmatory factor analysis were employed as tools in the factor analysis. the factor analysis was used to identify the items that can be considered as similar whilst at the same time explaining a larger percentage of the variance of each key variable used in the survey. in this study, three major variables were of interest. innovation types (initially assessed by 9 items), environmental antecedent (initially assessed by 7 items) and performance outcomes (initially assessed by 7 items). the initial stage of the factor analysis was conducted using the exploratory factor analysis technique with particular focus on the principal component analysis (pca) under direct oblimin rotation. this was conducted to transform the data to a set of coherent subscales useful for regression analysis. the suitability of data for pca was checked using the bartlett’s test of sphericity, kaiser-meyer-olkin measure of sampling adequacy and correlation analysis. pca was conducted separately for each major variable. analysis of the bartlett’s test of sphericity showed that conducting a pca for performance outcome construct was appropriate with a chi square value of 254.51, degrees of freedom = 5, and p-value = 0.000. the same conclusion was also drawn for conducting pca for service characteristics (bartlett’s test of sphericity = 2029.434, degrees of freedom = 36 and p-value = 0.000) and perceived risk of purchase (bartlett’s test of sphericity = 3569.434, degrees of freedom = 38 and p-value = 0.000). further confirmation of the factorability of the dataset using kaiser-meyer-olkin measure of sampling adequacy indicated that the kmo values of 0.883, 0.778 and 0.689 for pca suitability of each variable respectively. all measures and constructs are presented in detail on table 2. table 2: factor analysis source: spss software output this study considered items measured on a 5point likert scale. respondents were asked to assess the innovation and environmental antecedents associated with the services and operations of the mmdas and the resultant performance outcomes. by running a factor analysis (see table 2), the items that loaded more than the absolute value of 0.5 were included in the analysis. each of the key variables revealed that one component was suitable to measure it; as the recorded eigenvalues were above 1 with total explained variance always above 40%. it must however be noted that for effectiveness, all items that loaded on more than one factor were excluded from the analysis. at the end of the exploratory factor analysis, innovation was operationalized with four items explaining approximately 44.5% of the total variance, environmental antecedent was measured with four items explaining 43.6% of the total variance and performance outcome was also measured with four items explaining 75.7% of the total variance as indicated on table 2 above. having conducted the exploratory factor analysis, there was a need to examine the construct validity of the non-overlapping dimensions extracted as well. this stage is what is referred to, in literature, as the measurement of model. the results of the confirmatory factor analysis consistently supported the factor structure for all the key variables as discussed earlier on table 2. it was observed that all the standardized regression weights volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.265 | http://emaj.pitt.edu collins kankam-kwarteng, francis osei, george nana agyekum donkor emerging markets journal | p a g e |31 between each manifest variable and its respective item were significant at less than 1% indicative of strong convergent validity. again the items demonstrated less than significant cross loadings with items of other variables also indicative of excellent discriminant validity. this implies that each item measured exactly what it was supposed to measure (convergent validity) and also did not erroneously capture effects which it was not intended to capture (discriminant validity). thus, the data are excellent for further analysis and hypothesis testing. the result of the confirmatory factor analysis is also shown on table 2. all the variables obtained satisfactory cronbach’s alpha above the generally recommended score of 0.7. this demonstrated that strong internal consistency has also been achieved; further showing that the responses are reliable for analysis. further robustness checks using statistically recommended fit indices demonstrate that all the variables used in this study were measured well (hair et al., 2010). table 3 includes all the mentioned details. table 3: model fitness results note: χ2 =chi-square; df= degree of freedom; rmsea =root mean square error of approximation; nnfi=bentler non-normed fit index; cfi =comparative fit index; srmr=standardized root mean source: spss software output model estimation and results having observed that the data obtained was generally reliable and each variable has been measured excellently, further analysis was conducted to attempt to test the study hypothesis whilst answering the research questions put forward. the first part of this section involved a descriptive and correlation analysis of the key variables of interest. the last part of this section then focused on the regression analysis to examine the empirical relationships. descriptive and correlation results table 4 shows that the performance outcome was moderately high among the respondents surveyed with a mean figure of 5.385. this showed that the sampled public sector workers at the various mmdas were relatively highly sensitive towards performance outcomes of their institutions. the mean result of 4.58 for innovation types also demonstrate that the sampled respondents moderately agreed that the attributes of innovation by the mmdas such as process innovation, product innovation, governance innovation and conceptual innovation when implemented by the mmdas can be very important to the assemblies. table 4 also provides a report that, the level of environmental antecedent as perceived by the respondents is moderate. this result is interesting; given the observation that respondents generally agreed that the innovation types were moderately needed. as part of the analysis, the age of respondents, level of education and number of years working in the mmdas were used as control variables. the descriptive result on these items emphasize that the average age of the respondents was 33. meanwhile, it is also demonstrated that on average the sampled respondents surveyed had received some secondary or technical education. the implication is that all things being equal, respondents would be more knowledgeable, and attempt to understand as well as appreciate the relevance of implementing innovations and the role of environmental factors in the ghanaian public sector. the report also showed that, the average respondent was a senior staff. table 4: descriptive statistics min max mean sd age 28 66 33.66 7.848 level of education 1 4 3.487 1.067 staff position 1 3 2.112 .355 innovations 1 7 4.58 .8947 environmental antecedent 1 7 4.295 .944 performance outcomes 1 7 5.385 .5354 source: spss software output table 5 on the other hand presents the results of correlational analysis. it is showed that there is a negative correlation between performance outcomes and innovation types of the public sector. the correlation statistic of -0.294 significant at 1% indicates that any significant one point upgrade in the sophistication in innovations is associated with a significant point downgrade in performance outcomes. furthermore, the correlation outcome indicates that there is a negative relationship between environmental antecedent and performance outcome. a correlation score of -0.2935 (p<.01) was obtained. this designates that any substantial enhancement in the environmental factors in the mmdas is related to a substantial reduction in performance outcomes. pertaining to the linkage between environmental antecedents and innovations, the result indicates that there is a positive correlation between the two. the correlation statistic of 0.764 (p<.01) signifies that as the innovations are implemented and environmental antecedents also heightens accordingly. perhaps this is why there is a negative relationship between the innovation and performance outcome. what this correlation analysis fails to explain is the extent of impact these variables have on each other. to identify this, there is the need to perform a regression analysis. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.265 | http://emaj.pitt.edu innovation, environmental antecedents and performance outcomes of metropolitan, municipal and district assemblies in ghana page |32| emerging markets journal table 5: correlational analysis note: *p < .05 (2-tailed test); **p < .01 (2-tailed test) source: spss software output regression analysis the ordinary least square (ols) regression method was employed for estimating the conceptual framework of the study. bearing in mind the outcome variable (public sector performance), 4 separate models were estimated. in the case of each, hierarchical models were estimated. pertaining to model 1 and model 2, the study sought to investigate the determinants of environmental antecedent. in model 1 only the control variables of age of respondent, staff position and educational background were used as the independent variables. in model 2, innovation was added to the already included control variables and its effect was investigated. this assisted the researcher to investigate the real impact of innovation while controlling for some specific individual effects. evidence of good-fit of the model 2 is provided by the diagnostic result of the model 2 of the table 6. the result of the adjusted r2 of 0.828 shows that 82.8% of the differences in the environmental antecedents are attributed to the independent variables or the predictors. the difference between the adjusted r2 of model 1 and 2 (0.828 – 0.236 = 0.592) shows that innovation alone explains about 59.2% of the changes in performance outcome. the predictors’ variance inflation factors of the model are also all below 10 indicating the lower level of collinearity among the predictors of the model. pertaining to model 3 and model 4, the attempt was to explore the factors that explain changes in performance outcome. again, this investigation was hierarchically modelled with model 3 capturing only the effect of the control variables: age of the respondent, educational background and staff position. in model 4, the key variables of innovation and environmental antecedent were introduced to the modelling and their effects were examined. diagnostically the model 4 result of the table 6 shows good-fit. the value of the adjusted r2 of 0.597 indicates that 59.7% of the variations in the differences in performance outcome are attributed to the predictors of the model. the differences in adjusted r2 between model 3 and model 4 (0.597 – 0.350 = 0.247) shows that 24.7% of the variation in the outcome variable (performance outcome) is influenced by both environmental antecedent and innovation. focusing on the hypothesis testing at this juncture, the multiple regression result of the model 4 of the table 6 indicates that innovation has a negative effect on performance outcome (β = -.441, p<.01). this therefore indicates that any significant unit complication in the nature of innovation leads to a significant reduction in performance outcomes of mmdas. evidence is therefore provided by this result of the study for the rejection of hypothesis (h2) which states that there is positive relationship between the nature of innovation and performance outcomes. model 2 result further revealed that innovation has a positive linkage with environmental antecedent after controlling for individual effects (β=.961, p<.01). this consequently designates that any important unit enhancement in innovation is related to 0.961 unit increases in environment forces in the mmdas. this result also give strong empirical support for hypothesis (h1) which indicates that there is a positive relationship between innovation and the environment antecedents. focusing on the relationship between environmental forces and performance outcome, the results of model 4 on the table 6 indicate that the environmental forces have a negative relationship with the performance outcome of the mmdas (β = -.385, p<.10). this, therefore, gives adequate support to the proposition that higher environmental antecedents have a detrimental influence on the performance outcomes of the public sector. hypothesis (h3) which designates that environmental antecedent has a negative influence on performance outcome is therefore supported. pertaining the mediation test, it is shown on table 7 that environmental antecedent strongly mediates the relationship between innovation and performance outcome. the sobel test statistic shows that innovation has a strong indirect effect on performance outcome (stt= 1.877*) through environmental antecedent. hypothesis (h4) which states that environmental antecedent mediates the relationship between innovation and performance outcome was partially supported. examining the form of mediation effect, it is realized that environmental antecedent is a partial mediator. this is because apart from the indirect linkage between innovation and performance outcome, a strong direct relationship was also found between innovation and performance outcome. according to baron and kenny (1985), this condition implies that the mediated role of environmental antecedent is partial. table 6: ols regression analysis results note: t-values are in the parenthesis; *p < .05; **p < .01 source: spss software output volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.265 | http://emaj.pitt.edu collins kankam-kwarteng, francis osei, george nana agyekum donkor emerging markets journal | p a g e |33 table 7: mediation analysis (direct and indirect effects assessment) note: * mediation significant at 10% it = innovation types; ea = environmental antecedent; po = performance outcome source: spss software output it is revealed that out of the 4 study hypotheses, 3 were supported. the results confirmed that there is strong positive linkage between innovation and environmental antecedents. however, the nature of innovation has a negative influence on performance outcomes. similar findings were observed between environmental antecedent and performance outcomes. regarding whether there is mediation or not, the findings of the study confirmed the hypothesis that environmental antecedent partially mediated the path linking innovation and performance outcome. v. discussion of results the purpose of this study was to investigate the relationships among innovation types, environmental antecedents and performance outcomes of the metropolitan, municipal and district assemblies (mmdas). the underlining objective was to examine if environmental antecedents performs a mediation role on the path between innovation types and performance outcomes. the study employed a quantitative research design with the use of survey instruments administered to a convenient sample of 280 employees of the various mmdas in ashanti region. the research was motivated by the fact that the ghanaian public sector have received a lot of criticism in relations to their efficiency and effectiveness in delivering services to the citizens. citizens have concerns regarding the various methods and the structures within which the mmdas operate. people believe that there are certain environmental factors that affect the performance framework of the mmdas. notably, among the factors nature of political demand is also included. public sector researchers conclude that the posture of the political regime in power determines the outcome of the operations of the mmdas. also there is general lack of understanding concerning how performance in the public sector should measure vis-à-vis the public sector. again, whether, private sector innovations can be introduced in the public sector and the nature of effect it will have in the public sector. the current study therefore focused on the public sector, especially on the mmdas in the ashanti region in order to contribute to the growing concern of the citizens towards measuring performance in the ghanaian public sector. the multiple linear regression technique was used to analyze the data and hypothesis were tested. based on the study results, it can be concluded that performance outcomes in the ghanaian public sector can be influenced by the nature of innovations. the implementation of process innovation, product innovation, governance innovation and conceptual innovation are more likely to improve the indicators of performance outcome in the mmdas. this is probably because such facilitations and improvements in systems and process in the public offices can motive citizens to participate in programs aimed at improving the public sector. the nature of environmental antecedents associated with the mmdas is relatively critical to the operations of the public sector. indeed, the study results show that environmental antecedents is positively associated with the nature of innovations in the public sector. this demonstrates that the implementation of innovations are associated with heighten environmental forces; whereas increases in the environmental pressures have consequences on the performance outcome of the mmdas. furthermore, it can be concluded that environmental antecedents partially mediates the relationship between the innovation types and performance outcomes of the mmdas. the implication is that nation of innovations have both a direct and indirect relationship with performance outcomes. that is environmental antecedents can directly explain customers’ performance outcomes of the mmdas in the ghanaian public sector. vi. conclusion based on the relationship between innovations types and performance outcomes of the mmdas; it is generally recommended that mmdas can use various innovation types as a guide to predict performance outcomes and consequently to model a framework for improved effectiveness and improved efficiency; thereby increasing citizen readiness and willingness to participate in programs organized by the mmdas. it is also advised that since citizens are more likely to question the efficiency of the mmdas and contest some of their actions, the operations of the mmdas can be improved and tailored to suit the demands of the general public. managers of the mmdas should apply the regulations as defined by the local government to benefit the citizens. such controlled environmental force can create a favorable platform for measuring performance outcomes in relation to innovations. moreover, mmdas should specifically embark on a program aimed at innovation relating to process and procedures. mmdas should also appreciate the nature of competition in the public sector. as an environmental antecedent that can determine performance outcomes, it is important that managers of the mmdas assess the category of competition. the competitiveness of the public sector has also been questioned by the citizens. the competition can also be observed with the private businesses when the type of services will be accessible by the private sector. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.265 | http://emaj.pitt.edu innovation, environmental antecedents and performance outcomes of metropolitan, municipal and district assemblies in ghana page |34| emerging markets journal references aidoo-buameh, j. (2014). political willingness to implement public sector financial management reforms in ghana-accrual basis of accounting. accounting and finance research, 3(1), 96105. ayee, j. r. (2019). six decades of the public sector in ghana. politics, governance and development in ghana, 167-190. alves, h. (2013). co-creation and innovation in public services. the service industries journal, 33(7-8), 671-682. bloch, c., & bugge, m. m. (2013). public sector innovation—from theory to measurement. structural change and economic dynamics, 27, 133-145. bharti, k., agrawal, r., & sharma, v. (2015). literature review and proposed conceptual framework. international journal of market research, 57(4), 571-604. bommert, b. (2010). collaborative innovation in the public sector. international public management review, 11(1), 15-33. dassah, m. o. (2017). new public management issues in ghana. in new public management in africa (pp. 91-125). routledge. de vries, h., tummers, l., & bekkers, v. (2018). the diffusion and adoption of public sector innovations: a meta-synthesis of the literature. perspectives on public management and governance, 1(3), 159-176. evans, s., vladimirova, d., holgado, m., van fossen, k., yang, m., silva, e. a., & barlow, c. y. (2017). business model innovation for sustainability: towards a unified perspective for creation of sustainable business models. business strategy and the environment, 26(5), 597-608. essuman-mensah, d. (2019). a study of the performance of reform institutions: focusing on the evolution of public sector reforms in ghana. journal of international development cooperation, 14(2), 99-130. flanagan, k., uyarra, e., & laranja, m. (2011). reconceptualising the ‘policy mix’for innovation. research policy, 40(5), 702-713. galbreth, m. r., & ghosh, b. (2013). competition and sustainability: the impact of consumer awareness. decision sciences, 44(1), 127-159. greiling, d. (2005). performance measurement in the public sector: the german experience. international journal of productivity and performance management.vol. 54 no. 7, 551567. hartley, j. (2013). public and private features of innovation.in s. p. osborne & l. brown (eds.), handbook of innovation in public services (pp. 44-59). northampton, ma: edward elgar publishing. jansen, j. j., van den bosch, f. a., & volberda, h. w. (2005). exploratory innovation, exploitative innovation, and ambidexterity: the impact of environmental and organizational antecedents. schmalenbach business review, 57(4), 351363. kattel, r., cepilovs, a., lember, v., & tõnurist, p. (2018). indicators for public sector innovations: theoretical frameworks and practical applications. halduskultuur (administrative culture), 19(1), 77-104. klassen, r. d., & mclaughlin, c. p. (1996). the impact of environmental management on firm performance. management science, 42(8), 1199-1214. leshem, s., & trafford, v. (2007). overlooking the conceptual framework. innovations in education and teaching international, 44(1), 93-105. luthra, s., garg, d., & haleem, a. (2015). critical success factors of green supply chain management for achieving sustainability in indian automobile industry. production planning & control, 26(5), 339-362. mackay, k., & gariba, s. (2000). the role of civil society in assessing public sector performance in ghana. world bank, operations evaluation department: washington dc. mcgaghie, w. c., bordage, g., & shea, j. a. (2001). problem statement, conceptual framework, and research question. academic medicine, 76(9), 923-924. melnyk, s. a., sroufe, r. p., & calantone, r. (2003). assessing the impact of environmental management systems on corporate and environmental performance. journal of operations management, 21(3), 329-351. molina‐azorín, j. f., tarí, j. j., claver‐cortés, e., & lópez‐gamero, m. d. (2009). quality management, environmental management and firm performance: a review of empirical studies and issues of integration. international journal of management reviews, 11(2), 197-222. mulgan, g., & albury, d. (2003). innovation in the public sector. strategy unit, cabinet office, 1(1), 40. ohemeng, f. l., & ayee, j. r. (2016). the ‘new approach’to public sector reforms in ghana: a case of politics as usual or a genuine attempt at reform?. development policy review, 34(2), 277-300. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.265 | http://emaj.pitt.edu collins kankam-kwarteng, francis osei, george nana agyekum donkor emerging markets journal | p a g e |35 ohemeng, f. l., & akonnor, a. (2022). the new public sector reform strategy in ghana: creating a new path for a better public service?. public organization review, 1-17. orsato, r. j. (2006). competitive environmental strategies: when does it pay to be green?. california management review, 48(2), 127-143. owusu, f. (2006). differences in the performance of public organisations in ghana: implications for public‐sector reform policy. development policy review, 24(6), 693-705. osborne, s. p., & brown, l. (2011). innovation in public services: engaging with risk. public money & management, 31(1), 4-6. ohemeng, f. l., & kamga, o. (2020). administrative leaders as institutional entrepreneurs in developing countries: a study of the development and institutionalization of performance management in ghana's public service. public administration and development, 40(1), 87-100. simpson, d. d. (2002). a conceptual framework for transferring research to practice. journal of substance abuse treatment, 22(4), 171-182. storey, j., salaman, g., & platman, k. (2005). living with enterprise in an enterprise economy: freelance and contract workers in the media. human relations, 58(8), 1033-1054. tamene, e. h. (2016). theorizing conceptual framework. asian journal of educational research vol, 4(2), 50-56. toso, e. a. v., & alem, d. (2014). effective location models for sorting recyclables in public management. european journal of operational research, 234(3), 839-860. van acker, w., & bouckaert, g. (2018). what makes public sector innovations survive? an exploratory study of the influence of feedback, accountability and learning. international review of administrative sciences, 84(2), 249268. varpio, l., paradis, e., uijtdehaage, s., & young, m. (2020). the distinctions between theory, theoretical framework, and conceptual framework. academic medicine, 95(7), 989994. waddell, s., waddock, s., cornell, s., dentoni, d., mclachlan, m., & meszoely, g. (2015). large systems change: an emerging field of transformation and transitions. journal of corporate citizenship, (58), 5-30. walker, r. m. (2014). internal and external antecedents of process innovation: a review and extension.public management review, 16(1), 21-44. weerawardena, j., & mort, g. s. (2012). competitive strategy in socially entrepreneurial nonprofit organizations: innovation and differentiation. journal of public policy & marketing, 31(1), 91-101. williams, c. (2007). research methods. journal of business & economics research (jber), 5(3). williams, m. j., & yecalo‐tecle, l. (2020). innovation, voice, and hierarchy in the public sector: evidence from ghana's civil service. governance, 33(4), 789-807. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu hosting major international sports events in a country: a socioeconomic impact girish karunakaran nair stenden university of applied sciences, qatar | e-mail: gknair75@gmail.com abstract this research focuses on the impact of sponsoring major sports events concerned with the socioeconomic aspects of qatar. context is the hosting of fifa 2022 in qatar. a questionnaire has been developed based on the underpinning theory, which included seven dimensions of measuring socioeconomic impact that covered micro, meso, macroeconomic, employment, quality of life, social cohesion and environmental aspects. questionnaire survey was conducted for a sample size of 126, which included the managers from tourism industry and sponsoring of sports events. the research methodology involved descriptive statistics calculations using ms excel and spss. the response score was collected on a 5-point likert scale for quantitative measures and the mean, standard deviation, kurtosis, skewness and frequency distributions were computed for seven dimensions. the responses were later categorized into degrees of agreement with a priori scale to understand the relative impact of sponsoring sports events concerned with socioeconomic aspects. the results have indicated that, the highest impact would be on the creation of environmental consciousness among the citizens of qatar followed by the impact on the micro, meso and macroeconomic aspects of the country. these revelations have led providing suggestions to policy makers, which would be useful particularly in the present situation where qatar is planning for fifa 2022. keywords: sports event, tourism, socio-economic impact, fifa 2022, qatar new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.207 | http://emaj.pitt.edu | mailto:gknair75@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.207 | http://emaj.pitt.edu hosting major international sports events in a country: a socioeconomic impact page |14| emerging markets journal hosting major international sports events in a country: a socioeconomic impact girish karunakaran nair i. introduction hosting the fifa world cup 2022 is going to be a mega event to be listed in the history of qatar as it is going to be the center of attraction in the world. with a population of just 2 million people, qatar is going to be the first arab state to bring the world cup to the arab world. it is not just a credit to qatar, but to the entire arab league as it is through the collaboration of the member states. so, while the event brings collaboration between the arab world and the west, it also builds a higher level of teamwork between the arab states. the event is not just a sport, but has an advanced technology to back-up the event. the modern solar technology will be used to maintain a temperature of 200c (280f) in the twelve stadiums in seven host cities, which are the venues for sport activities. this event would develop healthy international relations between the neighboring countries. one of the major considerations in bidding to host this event is the potential for the game to generate a wide range of benefits for the population of qatar. the obvious benefits will be anticipated in addition to gaining international importance and developing local pride. the event would also provide improvements in employment, develop the economy of the country, improve housing facilities, provide better environment for business and promote sports at a much higher level. all these benefits can ultimately lead the socioeconomic development of the country. thus, it is obvious that there is a need to conduct a systematic research on the study of the socioeconomic impact of sponsoring sports at the national and international level. the aim of this research is to investigate the impact of sponsoring a major sports event, considering the socioeconomic aspects of qatar. to accomplish this aim, the following objectives were developed: identifying the dimensions of socioeconomic impact in the context of sponsoring a sports event with a specific reference to qatar, determining the impact of sponsoring a sports event on the dimensions of socioeconomic aspects and making suggestions to the managers and the policy makers to draw upon the dimensions, which favorably impact the socioeconomic aspects of the country. ii. literature review there are a number of studies which have attempted to build theories on how the hosting of games might influence the socioeconomic impact of the country (mccartney, 2010). there are another set of studies which have considered the likelihood of benefits which may arise through sponsoring major sports events, and the relative cost has also been examined (brown & massey, 2001). also, a number of studies has considered the impact of sponsoring sports events on host populations (home, 2007). the strengths, weaknesses, opportunities and threats (swot) analysis of hosting a sports event indicated that, the opportunities included evolution of the tourism industry, business expansions, rise in the quality of life, the usage of legacies post-event as well as the enhancement and improvement of infrastructures. major threats were the financial burden of the event, increased pollution, dependence on the event to revive the economy, and the dislocation of residents (karadakis, et al., 2010). while there are not many studies undertaken in the context of qatar with reference to the specific issues, very little has been done particularly to study the socioeconomic impact of hosting the major sports events and a systematic approach to arrive at a suggestion which would allow the decision maker to make an improved judgement on the basis of the known effects and on areas of uncertainty. thus, the major focus of this research is to concentrate on these issues. this study specifically focuses on the seven socioeconomic dimensions, which are micro, meso, macro-economic, employment, quality of life, social cohesion and security aspects as well as the environmental aspects (georghiou et al., 2002). micro-economic aspects include firm-based capacities and efficiencies in connection to product and process improvements (stoneman, 1995; klette et al., 2000; stabler & sinclair, 2010). microeconomic aspects mainly focus on the action of individual buyers and sellers responding to the signals sent by price to set production and distribution of effort (dopfer et al., 2004). this research is run to study the impact in the context of sponsoring a major sports event. the microeconomic aspects may include the capital market based on venture capitalists, the high level of information and communication infrastructure, qualified professionals, technology to support the design, good transportation infrastructure, ability in training graduates, good administration, developed human capital, diversified economy, good collaboration between clusters, government investments in advanced technology products and services as well as very demanding regulatory standards (georghiou et al., 2002). meso-economic aspects refer to the aspects which are within the networks of innovation and it is a bridge between the two extreme paradigms of economics. mesoeconomics basically look for the structure which is not reflected in the supply demand curves, gross domestic product (gdp), inflation and unemployment rate (mamalakis, 1996). meso-econometric studies have recently been carried out in order to relate ‘innovation’ to ‘firm’s performance’. a positive association has been indicated between these two variables. today's world of business is mainly centered on innovation activity undertaken by a firm. tourism is an activity which can immensely benefit through innovation (cefis, 2001). sponsoring a sport event such as fifa 2022 would mainly contribute to the tourism industry on mesoeconomic terms. the meso-economic measures include political economy, institutional economics, information theory and distribution of incentives among the sectors of the economy. macro-economic aspects is the study of entire economy in terms of total amount of goods and services produced, total income earned, the level of employment of productive resources, and the general behaviour of volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.207 | http://emaj.pitt.edu girish karunakaran nair emerging markets journal | p a g e 1 5 prices. macroeconomics can be used to analyze how best to influence policy goals such as economic growth, price stability, full employment and the attainment of a sustainable balance of payments. this includes market and economy level increases in capacity and efficiencies, and the improvements to the stock of knowledge. the macroeconomic aspects consider wider issues such as employee compensation, proprietor’s income, rental income, corporate profits, net interest, labour share, and capital share (andolfatto, 2005). employment (emp) is a very important component of socioeconomic aspect. any progressive country should provide ample job opportunities for the job seekers. sponsoring a sport event could lead to create more employment to hotels, catering and tourism (wto, 2010). these three sectors are highly labour intensive. employment through these three sectors could be both directly through jobs in the sector, and indirectly through supportive sourcing industries such as construction, agriculture, fishing, food processing, furniture, handicrafts, transport, utilities, arts and other services. hosting of sports events demands skill assessments to identify the present and future needs, investment in education, vocational training, training upgrades and human resource development. these activities are vital for the operational efficiency enhancement to maintain international standards during the hosting of event to meet the expectations of international tourists visiting during the event. this would lead to the creation of employment opportunities. based on quality of life (qol), andereck et al. (2007) state that in general the impact studies are quantitative analyses based on the agreement or disagreement of the respondents. but when it comes to qol, it should aim to understand how these impacts are internalised and influence individual’s overall life satisfaction. researchers have identified several dimensions of qol which include standard of living, health, safety, community connectedness, achievement, relationships and spirituality (uysal,et al., 2012). the existing literature also indicates that, there can be substantial impacts on the quality of life of residents after the event. the observation was that, before the event the influence of political impacts, psychological impacts and social benefits on perceived qol was significant and after the event, the economic impacts were significant (kaplanidou, et al., 2013). sports events generate interaction between the local culture and the global culture. this interaction will lead to an understanding ability of the locals to be more open to foreign cultures in order to build business relationship (meethan, 2001). in this process, culture becomes more quantifiable so that clear estimation can be obtained for the similarity and differences between the local culture and the global culture (smith, 2001). ma & kaplanidou (2017) found that, the support provided to event is strongly influenced by quality of life of residents. therefore, to improve event, support to legacies that improve qol should be improved. the events and experiences during the sports events make the people develop an everlasting experience in their minds (carr, 2002). a sort of homogenization between the local and global culture will take place. all these changes make the local citizens redefine their quality of life. thus, there will be an impact produced by sponsoring a sports event in the country. one of the areas which may be influenced by a sports event is social cohesion and security (soc). the event as such makes the citizens develop a sense of pride and the entire country will develop cohesion when they encounter multicultural environment on the occasion of the sport event. soc refers to the connectedness and relatedness between the societal units such as individuals, groups, associations and territorial units (berger-schmitt, 2000). it basically refers to interdependence among the members of the society, shared loyalty and solidarity. it is often reflected through the strength of social relations, shared values, communities of practice, common identity, sense of belongingness and trust among the members. jenson (1998) has identified five extreme dimensions to soc which include belonging-isolation, inclusion-exclusion, participation-non-participation, recognition-rejection and legitimacy-illegitimacy. many authors have made attempts to relate soc and qol (berger-schmitt, 2000). the literature also provides evidence for adequate understanding of the role of cognitive and affective components in forming perceptions (papadimitriou, et al., 2015). the sports events increase the ‘feel good factor’, though the effect might be short lived (gibson, et al., 2014). the argument is that, the social cohesion must consider the attitude and behaviour of members. soc is also based on social capital, which in turn is created by social relations. soc involves aspects which are part of individual life situations and in this sense it becomes a part of qol. in regards to environmental aspects (env), there are several tourist-related issues which have bearing on environment of the country, which include transportation, tourist-related development, tourist activities, direct impacts of the lodging and cruise industries (davies & cahill, 2000). there have been many efforts to minimize the impact of tourism on environmental degradation among which ecotourism trips play a dominant role. ecotourism targets social, cultural and physical environment. ecotourism facilitates tourism in an environmentally responsible manner. it promotes recreational programs that demonstrate a greater awareness and appreciation of nature, and a mode of travel that is sensitive to the host community (yee, 1992). the world travel and tourism council (wttc) have initiated the green globe concept and it is committed to improvements in the environmental practice. the organization has programmes to educate the tourism agencies for promoting the eco-friendly tourism. areas of high-value natural resources like oceans, lakes, waterfalls, mountains, unique flora and fauna, as well as great scenic beauty need to be protected by the country at any cost. it has to be noted that sponsoring of sport events and attracting a large number of visitors to the country can damage these environmental treasures of a country. there is a need to preserve the environment for the future generations. this calls for a detailed study related to the impact of sponsoring sports events on environment. the above seven dimensions describe the socioeconomic aspects of a country in general. this study is focused towards understanding the impact of sponsoring sports events that can have relations with these dimensions of socioeconomic aspects. the literature review indicates that, there are no specific studies which have been undertaken to study this impact as such in the context of qatar and this research attempts to quantitatively study the impact on these dimensions. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.207 | http://emaj.pitt.edu hosting major international sports events in a country: a socioeconomic impact page |16| emerging markets journal iii. methodology this research is based on a questionnaire survey with a sample size of 126 respondents. the respondents have been actively involved in organization of various sports events in qatar. the events in which the respondents were involved include 2006 asian games, 2008 asian youth wrestling championships, 2009 fivb club world championships, 2010 iaaf world indoor championships, 2011 asian football cup, 2012 asian shooting championships and the 2015 ihf handball world championships. the respondents were from the tourism industry and had experience as sports event managers, hotel managers, tourism advisors and leisure management professionals. the questionnaire development followed the usual procedure of screening the indicators of various dimensions of study and formulating the indicators of measurement. the questionnaire had two distinct components. the first collected data pertaining to the demographic details of respondents and the second part collected data for the quantitative analysis through a 5-point likert’s scale (appendix i). the inclusion criterion of respondents was the experience in sponsoring sports events and tourism industry. the respondents were spread across the tourism industry and included sports event managers, hotel managers, tourism advisors and leisure management professionals. a total of 300 questionnaires were distributed to the respondents. 132 were returned (return rate 44%). however, after discarding the incomplete questionnaires, only 126 could be used for analysis. the research was mainly restricted to descriptive statistics. the analysis was done using microsoft excel and spss. it included the calculation of mean, standard deviation, skewness, kurtosis and percentage distribution. the normality was tested using the skewness and kurtosis. the scores were averaged and classified into bad, poor, average, good and very good for the values ranging from 1 to 5 respectively. thus, the percentage scores under each of these categories were determined. for each of the indicator of measurements, a classification of five categories was composed. the results were then plotted as histograms for graphical presentation. the radar diagram was developed based on the average score under each dimension for the overall representation of seven dimensions. the perceptions of professionals involved in sponsoring the event and those in the tourism industry have been subjected to descriptive statistics to study the impact of sponsoring sports events on the seven dimensions of socioeconomic aspects of qatar. the demographic distribution indicated that 68% of the respondents were male and 32% were female. 45% were in the age group of 25-35 years, 18% were in the age group of 36-45 years and 16% were in the age group of 46-55 years. 6% were above 55 years old and the remaining in less than 25 years old. considering the monthly income, 48% were in the range of 10k-20k qatari riyal (qar), 18% were in 20 -30k qar, 22% were in 5k-10k qar, 4% were above 30k qar and the remaining were in the category of below 5k qar. 56% had 6-10 years of experience, 22% had 2-5 years of experience and 12% had less than 2 years of experience. the remaining had more than 10 years of experience. thus, there was a fair distribution of respondents in various demographic categories and the response was from the cross-section of the chosen category of managers. following sections describe and summarize the results. table 1: micro-economic aspects source: spss output micro-economic aspects majority of respondents have perceived this dimension on the overall basis as good (31.6 percent) followed by very good (24.8 percent) and average (24.8 percent). relatively lesser percentage of respondents have expressed that the impact of sponsoring an international event on micro-economic aspects as poor (12.3 percent) or bad (6.5 percent). with reference to the specific variables of study, the best perceived variable is “information & communication technologies (ict) will improve” (mean = 3.9; sd=1.2). the weakest responses were observed as “the product efficiencies will improve” and “the process efficiencies will improve” (mean = 3.3; sd = 1.2, 1.3). the results thus indicate that, the impact of sponsoring the sports events would be the highest on the improvement of ict infrastructure. however, the impact on improvement in product and process efficiencies would relatively be lower. table 2: meso-economic aspects source: spss output volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.207 | http://emaj.pitt.edu girish karunakaran nair emerging markets journal | p a g e 1 7 meso-economic aspects majority of respondents have perceived this dimension on the overall basis as good (30.3 percent) followed by very good (26.1 percent) and average (23.7 percent). relatively lesser percentage of respondents have expressed that the impact of sponsoring an international event on meso-economic aspects as poor (13.2 percent) and bad (6.6 percent). with reference to the specific variables of study, the best perceived variable is ‘the performance of the services and products will improve’ (mean = 4.0; sd=1.1). the weakest response was observed on the item ‘creative workforce is the driver of business’ (mean = 3.2; sd = 1.3). table 3: macro-economic aspects source: spss output macro-economic aspects majority of respondents have perceived this dimension on the overall basis as good (31 percent) followed by very good (26.8 percent) and average (23.5 percent). relatively lesser percentage of respondents have expressed that the impact of sponsoring an international event on macro-economic aspects as poor (10.8 percent) and bad (7.9 percent). with reference to the specific variables of study, the best perceived variables is “the sponsoring of sport event would improve the total amount of goods produced” (mean = 3.8; sd=1.3). the weakest responses were observed on the items “the sponsoring of sports event would provide price stability”, “the sponsoring of sports event would reduce unemployment” and “the sponsoring of sport event would improve the total amount of services produced” (mean = 3.5; sd = 1.1, 1.2, 1.3). table 4: employment source: spss output employment majority of respondents have perceived this dimension on the overall basis as good (31.5 percent) followed by very good (19.5 percent) and average (27.6 percent). relatively lesser percentage of respondents have expressed that the impact of sponsoring an international event on employment creation as poor (13.7 percent) and bad (7.7 percent). with reference to the specific variables of study, the best perceived variables is “professional services requirement will be higher when hosting a sports event” (mean = 3.6; sd=1.1). the weakest response was observed on the item “sports event will create a wide range of employments” (mean = 3.2; sd = 1.3). table 5: quality of life source: spss output volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.207 | http://emaj.pitt.edu hosting major international sports events in a country: a socioeconomic impact page |18| emerging markets journal quality of life majority of respondents have perceived this dimension on the overall basis as good (28.4 percent) followed by very good (18.2 percent) and average (27.3 percent). relatively lesser percentage of respondents have expressed that the impact of sponsoring an international event on quality of life as poor (13.9 percent) and bad (12.3 percent). with reference to the specific variables of study, the best perceived variables is “the sponsoring of sports event will improve the achievement of individual goals of citizens” (mean = 3.6; sd=1.2). the weakest response was observed on the item “hosting sports events will improve qol” (mean = 3.0; sd = 1.2). table 6: social cohension source: spss output social cohesion majority of respondents have perceived this dimension on the overall basis as good (32.6 percent) followed by very good (18.9 percent) and average (26.3 percent). relatively lesser percentage of respondents have expressed that the impact of sponsoring an international event on social cohesion as poor (14.2 percent) and bad (8.1 percent). with reference to the specific variables of study, the best perceived variable is “citizens will be more sociable through sponsoring of sports event” (mean = 3.6; sd=1.1). the weakest response was observed on the item “a sense of belongingness to the country will improve through sponsoring sports event” (mean = 3.2; sd = 1.2). table 7: environmental aspects source: spss output environmental aspects majority of respondents have perceived this dimension on the overall basis as good (33.7 percent) followed by very good (30.6 percent) and average (22.4 percent). relatively lesser percentage of respondents have expressed that the impact of sponsoring an international event on environmental aspects as poor (8.9 percent) and bad (4.4 percent). with reference to the specific variables of study, the best perceived variable is “environmental protection issues get highlighted during the sponsoring of sports events” (mean = 4.1; sd=0.9). the weakest response was observed on the item “the countries which have sponsored sports events have been environmentally conscious” (mean = 3.5; sd = 1.3). the overall socioeconomic impact the study reveals the fact that, the highest impact of sponsoring the sports event would be observed on the environmental aspects (figure 1). the expectation is that, there would be awareness among the citizens about the importance of environmental protection (mean = 3.8). it was interesting to observe that, the second largest impact was on micro, meso and macro-economic aspects of qatari economy (mean = 3.6). this was followed by social cohesion and employment aspects (mean = 3.4). finally, the least impact of sponsoring a sports event was on the improvement in quality of life (mean = 3.3). these revelations can be very well justified because already environmental protection issues have been considered seriously and measures are in place to ensure sustainable growth of economy. so, sponsoring sports events can increase environmental awareness among the public. also, there will be an immense opportunity to promote business, thus an opportunity of volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.207 | http://emaj.pitt.edu girish karunakaran nair emerging markets journal | p a g e 1 9 gaining international recognition. also, it is justifiable that social cohesion of the country would improve and employment will also be strengthened due to the creation of many job opportunities owing to the magnitude of preparation and the products as well as the services which are required for hosting the event. as revealed through the study, among the seven dimensions of interest, the quality of life has the least significant impact as one sports event cannot produce any observable change in the qol of the citizens of country. figure 1. overall socioeconomic impact source: authors’ own compilation iv. findings and suggestions the findings of this research are based on the perceptions and expectations of managers in the tourism industry and do not represent the actual socioeconomic impact of hosting the sports events. as the respondents are in the sports industry since the past several years and have observed the trends and the socioeconomic impacts, they would be in a position to comment on the dimensions of study much better than the rest of members of society. the findings indicate that, sponsoring sport events will support ict growth which is a positive impact on the microeconomic aspects. the performance of the services and products is expected to improve, which is a positive impact on the meso-economic aspects. sponsoring sports events would improve the total amount of goods produced, which is a positive impact on the macroeconomic aspects of the country. thus, the country would benefit as a whole by sponsoring the sports events. professional services requirement is expected to be higher when hosting an international sports event, and thus, there is a positive impact on the employment opportunity. the improvement in professional services would expand business and there is a possibility to contribute to the country’s gdp. the sponsoring of sports event is expected to improve the achievement of individual goals of the citizens, thus producing a positive impact on the quality of life of citizens. this is quite an encouraging expectation and again the purpose of sponsoring the sports event is met with regard to the improvement in qol too. the policy makers of the sports event may bid for higher numbers of such events to make use of its positive impact on the qol. citizens are expected to be more sociable through sponsoring of the sports event as per the study and this is a positive impact on the social cohesion aspect. for any economy to grow, it is important for the citizens to develop social cohesion so that there would be a sense of solidarity and political stability in the country. so, again sponsoring the sports event is worth the effort. environmental protection issues get highlighted during the sponsoring of sports events and this has a positive impact on maintaining the flora and fauna of the country. a country like qatar has always been particular about environmental protection and sustainable growth. so, sponsoring the sports event would contribute to this national objective. v. conclusions the sponsoring of sports events on a large scale is definitely a major responsibility that has to be taken by the hosting country. this is because the whole country will be in the limelight during the happening of sports, particularly of the magnitude of fifa world cup. as qatar is preparing itself for fifa world cup 2022, it has to consider seriously the impact of sponsoring the sports event on the socioeconomic aspects. having realised this fact, the paper has highlighted the outcome of a research with specific reference to seven dimensions of socioeconomic interest. the study results were based on sample size of 126. it is imperative that no inferences or generalizations can be made based on this study, but there are certain key revelations which could be useful for the policy makers in the context of the impact of sponsoring sports events. the research has indicated that, the highest positive impact of sponsoring sports events is expected to be on the environmental aspects. however, sponsoring of the sports events may not have a relatively high impact on improving the quality of life of the citizens, but it is expected to impact the micro, meso and macroeconomic aspects of the country. as qatar is geared towards sponsoring the fifa event, this research is timely and could be of use to the policy makers. the research indicates that, the sponsoring would create a positive impact on the socioeconomic aspects of qatar. references andereck, k, valentine, k.m, vogt, c.m, and knopf, r.c. (2007) a cross-cultural analysis of quality of life perceptions. journal of sustainable tourism 15 (5), 483-502. andolfatto, d. (2005). macroeconomic theory and policy, london: simon fraser university. berger-schmitt, r. (2000). social cohesion as an aspect of the quality of the societies: concept and measurement, tser project report of european commission, mannheim. brown, a,, & massey, j. (2001). literature review: the impact of major sporting events. manchester institute for popular culture, manchester metropolitan university. carr, n. (2002). the tourism leisure behavioural continuum. annals of tourism research, vol., 29, no. 4, 972-986. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.207 | http://emaj.pitt.edu hosting major international sports events in a country: a socioeconomic impact page |20| emerging markets journal cefis e., (2001). innovative activities, profitability and heterogeneity, the 8th international j.a. schumpeter society conference at esrc manchester, 2000. davies, t. & cahill, s. (2000). environmental implications of the tourism industry, discussion paper, resources for the future, retrieved on 6th december, 2014 from: http://www.rff.org dopfer, k., foster, j. and potts, j. (2004). "micro-mesomacro." journal of evolutionary economics, 263279. fifa, (2010), "2022 fifa world cup bid evaluation report: qatar". retrieved on 10th october, 2014, from http://www.fifa.com/mm/document/tournaments fifa, (2016). fifa world cup 2022 stadiums. [online] available: http://www.qatar.to/stadiums/worldcup-2022-stadiums.php [accessed 25 july 2017]. georghiou, l., rigby, j., & cameron, h. (2002). assessing the socio-economic impacts of the framework programme (asif), university of manchester, london: prest. gibson, h. j., walker, m., thapa, b. & coetzee, w., (2014). psychic income and social capital among host nation residents: a pre–post analysis of the 2010 fifa world cup in south africa. tourism management, volume 44, 113122. horne j. (2007). the four “knowns” of sports megaevents. leisure studies, london: oxford press. jenson, j. (1998). mapping social cohesion: canadian policy research network, proceedings of policy research secretariat conference, ottawa. kaplanidou, k., karadakis, k., gibson, h. thapa, b., walker, m., geldenhuys, s. & coetzee, w. (2013). quality of life, event impacts and mega event support among south african residents before and after the event: the case of the fifa 2010 world cup. journal of travel research, 52(5), 631-645. karadakis, k., kaplanidou, k. & karlis, g. (2010). event leveraging of mega sport events: a swot analysis approach. international journal of festival and event management, 1(3), 170-185. klette t.j., møen j., griliches z., (2000). do subsidies to commercial r&d reduce market failures? microeconometric evaluation studies, research policy 29, 1157-1163. ma, s. c. & kaplanidou, k. k., 2017. legacy perceptions among host tour de taiwan residents: the mediating effect of quality of life. leisure studies, 36(3), 423-437. mamalakis, m. j. (1996). poverty and inequality in latin america: meso-economic dimensions of justice and entitlements, journal of interamerican studies and world affairs 38, no. 2/3, 181-199. meethan, k. (2001) tourism in global society. places, culture, consumption. new york: palgrave. papadimitriou, d. kaplanidou, k. apostolopoulou, a. (online 2015). destination image components and word-of-mouth intentions in urban tourism: a multi-group approach. journal of hospitality tourism and research. doi: 1096348015584443 smith, v.l. (2001). tourism change and impacts. in. v.l smith & brent, m. (eds.), hosts and guests revis ited: tourism issues for the 21st century. new yo rk: cognizant communication corporation. stabler, m. j., p., a., & sinclair, m. t. (2010). the economics of tourism (2nd ed.). abingdon: routledge. stoneman p. (ed)., (1995). handbook of the economics of innovation and technological change”, blackwell handbooks in economics, oxford uk and cambridge usa. uysal, m., perdue, r. & sirgy j. (eds.), (2012). handbook of tourism and quality-of-life research: enhancing the lives of tourists and residents of host communities. new york: springer publishers. wto (2010). questionnaire on tourism and employment: overview of results, 2nd t.20 ministers meeting – republic of korea, retrieved on december 5, 2014 from: http://t20.unwto.org/sites/all/files/docpdf/unwtoe mployment.pdf yee, j. g. (1992). ecotourism market survey: a survey of north american ecotourism operators. san francisco: the intelligence centre, pacific asia travel association. http://www.qatar.to/stadiums/world-cup-2022-stadiums.php http://www.qatar.to/stadiums/world-cup-2022-stadiums.php volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu role of career oriented perceived organizational support in determining subjective career success of supervisory level managers in manufacturing firms widana pathiranage richard wickramaratne university of peradeniya, sri lanka | e-mail: wp_richard@yahoo.com abstract the purpose of this study was to examine whether the career oriented perceived organizational support (pos-career) is positively related to the employee subjective career success. an online survey was distributed among a random sample of 150 supervisory level managers in 15 large scale manufacturing firms in sri lanka. with a response rate of 59%, 88 managers responded to the survey. the results of multiple hierarchical regression analysis reported that the pos-career is positively associated with the subjective career success of supervisory level managers. this finding implies that employees believe their career progress is consistent with their own goals, values and preferences when they have developed a perception about the organization’s caring of their career needs. the study made a methodological contribution by validating a questionnaire for pos-career. since, there is scant amount of literature that has examined this relationship, the current study made an empirical contribution by undertaking a study in a developing country context. also, this study made implications to the existing theories such as, perceived organizational support, psychological contract, and social exchange as well as to the extended model of social cognitive career theory. in terms of policy implications, an organization should develop a career development culture by providing employees with a range of career development opportunities, senior management’s leadership for career development programs and developing a climate for employees to involve in career self-management by engaging with networking and visibility behaviors. in response, they develop a belief that their career progress is consistent with their own goals, values and preferences. the limitations of the study and directions for future research are also discussed. keywords: career oriented perceived organizational support, subjective career success, developing country, emerging markets, sri lanka new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.214 | http://emaj.pitt.edu | mailto:wp_richard@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.214 | http://emaj.pitt.edu role of career oriented perceived organizational support in determining subjective career success of supervisory level managers in manufacturing firms page |22| emerging markets journal role of career oriented perceived organizational support in determining subjective career success of supervisory level managers in manufacturing firms widana pathiranage richard wickramaratne i. introduction changes in the socio-economic environment over the past few decades have noticeably influenced the concept of career in relation to career management. the contemporary concept of career is different from the traditional concept, in that the responsibility for managing careers has shifted from the employer to the employee and to a greater focus on career selfmanagement (arthur et al., 2005; de vos et al., 2009; stickland, 1996; sullivan, 1999). in spite of the growing importance of career self-management, organizational career management still remains an integral responsibility of firms, since it forms the context in which career development takes place (baruch, 1999; eby, allen, & brinley, 2005). to date, there is no single conceptualisation of what constitutes organizational support for career development. varied conceptualisations have been used depending on the purposes and outcomes of interest in particular studies, making the implementation of supportcentred practices non-uniform (bambacas & bordia, 2009; barnett & bradley, 2007; ng et al., 2005; orpen, 1994; dubin, 1977; kaufman, 1974; kozlowski & hults, 1987). among various conceptualizations for career support, vast majority of studies have operationalized organisational support as general organizational support and used the organizational support scale developed by eisenberger et al. (1986). these studies have revealed that the perceived organizational support influences affective outcomes and career satisfaction perceptions. however, kraimer, seibert, wayne, liden, & bravo (2011) argued that the use of a general organizational support measure to report on career-related organisational support may not be sufficiently fine grained. in a review of more than 70 studies, rhoades and eisenberger (2002) and a review of 558 studies by kurtessi and eisenberger (2017) reported that no studies specifically addressed how career related perceived organizational support relates to subjective career success of employees. therefore, the aim of this study was to determine whether career oriented perceived organizational support is related to the subjective career success of employees. thus, the purpose of this study was to investigate whether the career oriented perceived organizational support is positively associated with subjective career satisfaction of employees. by addressing the overarching problem, the current study has made three main significant contributions. first, a new scale for career oriented perceived organizational support (pos-career) was developed and validated. second, a significant contribution was made to the career development literature by conducting this study in a developing country context since only a scant amount of literature is available in this area of interest. finally, this study has made implications to the theories such as social exchange (blau, 1964), psychological contract (argyris, 1960; rousseau, 1989), perceived organizational support (eisenberger et al.,1986) and the extended model of social cognitive career theory (lent and brown, 2006). ii. literature review much of the research in this area is based on the premise of psychological contract and social exchange theories. the psychological contract introduced by argyris (1960) suggests that the employment relationship goes beyond the formal economic employment contract. the psychological contract is defined by rousseau (1990, p.390) as “an individual’s beliefs regarding reciprocal obligations set in the context of the employer/employee relationship.” the psychological contract emerges when the employee believes that “a promise has been made and a consideration offered in exchange for it, binding the parties to some set of reciprocal obligations” (rousseau 1989, p. 123). as explained by blau (1964), social exchanges involve unspecified obligations: when one person does another a favour, there is an expectation of some future return. employees tend to take a long-term approach to social exchange relationships at work, with the pattern of reciprocity over time determining the perceived balance in exchanges (blau, 1964; rousseau 1989). psychological mechanisms explain the potential consequences of perceived organisational support. based on the reciprocity norm, perceived organisational support produces a felt obligation in individuals to care about the organisation’s welfare and to help the organisation reach its objectives (eisenberger et al., 1986). the caring, approval, and respect connoted by perceived organizational support fulfils socio-emotional needs, leading individuals to incorporate organisational membership and role status into their social identity. perceived organisational support strengthens employee beliefs that the organisation recognises, and rewards increased performance, thereby reinforcing performancereward expectancies. together, these psychological processes result in favourable outcomes for both employees (i.e. increased job satisfaction, and heightened positive mood) and the organisation (i.e. increased affective commitment and performance; reduced turnover) (ahmed et al., 2015; rhoades & eisenberger, 2002). one way that career success was operationalized by previous researchers was based on the variables that measure subjective or intrinsic career success (e.g., judge et al., 1995). such variables capture individuals’ subjective judgments about their career attainments, such as job and career satisfaction (e.g., burke, 2001; judge et al., 1999). prior studies have interchangeably used the volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.214 | http://emaj.pitt.edu widana pathiranage richard wickramaratne emerging markets journal | p a g e 2 3 terms subjective career success and subjective career satisfaction to define the employees’ belief about their career progress is consistent with their own goals, values and preferences (erdogan et al., 2004; heslin, 2003; seibert & kraimer, 2001). according to the predictions of the extended model of social cognitive career theory (lent & brown, 2006), goal-specific environmental support, such as poscareer, which provides for social support in achieving employee personal goals, is likely to be a predictor of career satisfaction. when employees perceive that the management of the firm is unsupportive, employees appear to view their jobs as displeasing and experience job dissatisfaction (susskind, borchgrevink, kacmar, & brymer, 2000). such employee perceptions demonstrate that the organisation does not care about employee wellbeing and does not provide adequate support, whenever needed, to carry out job related tasks effectively (rhoades & eisenberger, 2002). therefore, empirical studies suggest that perceived organisational support is a strong predictor of career satisfaction because it facilitates the achievement of individual career goals (allen et al., 2003; armstrong-stassen & ursel, 2009; cable & derue, 2002; erdogan et al., 2004; karatepe, 2012). from data gathered from frontline hotel employees and their immediate supervisors in turkey, karatepe (2012) found that perceived organizational support is positively related to the career satisfaction of employees. this study employed the career satisfaction scale of greenhaus et al. (1990) to measure the career satisfaction of employees. armstrong-stassen & ursel (2009) conducted two surveys in canada, first of which consisted of 239 managerial and professional employees while the second consisted of 421 registered nurses. this research found that perceived organizational support is positively associated with career satisfaction of older workers. similarly, cable and derue (2002), based on a longitudinal survey of 187 managerial employees of a telecommunication company in usa, found that perceived organizational support was significantly and positively related to career satisfaction. this study used the career satisfaction scale of judge et al. (1995) to measure career satisfaction. erdogan, kraimer, and liden (2004), based on a survey of 520 teachers from 30 high schools in turkey, found that perceived organizational support was a significant predictor of career satisfaction. this study also used the career satisfaction scale of greenhaus et al. (1990) to measure the career satisfaction of employees. the studies reviewed above have operationalized “perceived organisational support” based on the definition from einseberger et al. (1986), which states that perceived organizational support is the extent to which an organisation cares about employee wellbeing. examples of the organizational support scale items developed by eisenberger et al. (1986) are: “the organisation values my contribution to its wellbeing” and “the organization really cares about my wellbeing.” none of these studies have reported on research that has explored how career oriented perceived organizational support/pos-career (the extent to which organisations care specifically about employee career needs) is related to the career satisfaction. however, a recent study (cao & deller, 2014) based on expatriate employees in germany has found that career oriented perceived organizational support is significantly and positively related to the career satisfaction of employees. the perceived organizational support (pos) of this study was assessed with the pos questionnaire of kraimer and wayne (2004) which includes both “adjustment pos” (extent to which the organization cares about the employee’s adjustment) and “career pos” (extent to which the organization cares about the employee’s career needs). this study has employed the subjective career satisfaction (subjective career success) questionnaire developed by greenhaus et al., (1990). based on these theoretical justifications and empirical findings, it was hypothesised that the career oriented perceived organizational support (pos-career) has a positive relationship with subjective career success of employees. more recent studies also provide the empirical support for a positive relationship between perceived organizational support and subjective career satisfaction (lee and lee, 2019; jung and takeuchi, 2018; ulhussami et al., 2018; joo & lee, 2017). for example, jung and takeuchi (2018), based on a sample of 364 japanese employees, found that the employees were satisfied with their careers when they had higher perceived organizational support. a study conducted based on the 1627 korean women managers, lee and lee (2019) revealed that the perceived organizational support is positively associated with subjective career satisfaction. perceived organizational support of this study was operationalized in terms of supervisor support. iii. methodology sample and the data collection procedure the study was conducted in 15 large scale manufacturing firms in sri lanka. the selected firms consisted of a range of manufacturing firms which include consumer goods, ready to wear garments, agriculture and durable goods. a random sample of 10 supervisory level managers were selected from each firm to have a total sample of 150 managers. human resource management department of each firm was contacted and web-links for an online survey was sent with the request of sending them to the selected sample of managers. measures career oriented perceived organisational support: to conduct this study, career oriented perceived organizational support was defined as the “extent to which the organization cares about its employees’ career needs” (kraimer & wayne, 2004, p. 218). a 5 item poscareer scale was devised for this study by combining the pos-career scale proposed by kraimer et al. (2011) with some items in the perceived organizational support scale proposed by the eisenberger et al. (2002) following some modifications to the original questions. the scale included items such as “my organization cares about my career development” and “my organization strongly considers my career goals when making career decisions.” the scale was a five-point likert scale which ranged from ‘strongly agree’ to strongly disagree. subjective career success: subjective career success was operationally defined as the extent to which individuals believe that their career progress is consistent with their own goals, values and preferences (erdogan et al., 2004; heslin, 2003; seibert & kraimer, 2001). most prior volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.214 | http://emaj.pitt.edu role of career oriented perceived organizational support in determining subjective career success of supervisory level managers in manufacturing firms page |24| emerging markets journal studies have used the scale developed and validated by greenhaus et al. (1990) to measure the subjective career success. this scale was used in this study. the scale included items such as: “i am satisfied with the success i have achieved in my career,” and “i am satisfied with the progress i have made towards meeting my overall career goals.” this scale was also a five-point likert scale which ranged from “strongly agree” to “strongly disagree”. control variables respondents’ demographic information such as age, gender, tenure and highest level of education completed were collected with single item questions. iv. results only 88 respondents completed the survey which resulted in a response rate of 59%. a principal component analysis (pca) was conducted only for the career oriented perceived organizational support scale since it has been devised solely for the purpose of this study which required validation. the results of kmo and bartlett’s test are given in the table-1. since the kaisermeyer-olkin measure of sampling adequacy (kmo) value is close to 1, and the significance value is less than .05, the sample is considered as adequate for the factor analysis. the total amount of variance accounted for in the construct by factors with eigenvalues above 1.0 was 72.98%. table 1: kmo and bartlett's test for pos-career questionnaire source: survey data results of the factor analysis the study employed the confirmatory factor analysis (cfa) by following the measures which were proposed by hair et al., (2018):  visual inspection of correlations in the componet correlation matrix shows that the factors are interrelated to some degree. the fact that these correlations exist tell us that the constructs measured are interrelated.  bartlett’s test of sphericity was used to test the presence of correlations among variables. a statistically significant bartlett’s test of sphericity (sig.<.05) indicates that sufficient correlations exist among variables. the overall measure of sampling adequacy (msa) for the set of variables included in the analysis was 0.946 which exceeds the minimum requirement of 0.50 for overall msa. probability associated with bartlett’s test of sphericity was <0.001which was less than 0.05. therefore, the overall measure of sampling adequacy is acceptable. using a cfa with oblique rotation (costello & osborne, 2005; hair et al., 2018; tabachnick & fidell, 2013), two factors with eigenvalues greater than 1 were identified. the cummulative proportion of variance criteria met with two components to satisfy the criterion of explaining 60% or more of the total variance. a two components solution explained 66.71% of the total variance. the communality value for each variable was higher than 0.50. consequently, all of the items were retained in the analysis, since factor solutions represent a significant proportion of variance in the original variables. as suggested by hair et al. (2018) all loadings above ± .40 were considered as factor loadings with practical significance. the strong conceptual foundation for the anticipated structure and its rationale provided the basis for interpretation of the factor structure (hair et al., 2018). the factor solution is given in table 2. the factors indicated in this table were named based on underlying conceptual dimensions and results from previous studies. table 2: rotated factor loading matrix items posc cs my organization values my career progress .767 my organization cares about my career development. .805 my organization strongly considers my career goals when making career decisions. .755 my organization keeps me informed about available career development opportunities .714 my organization has created a conducive environment for me to develop my career .817 i am satisfied with the success i have achieved in my career. .592 i am satisfied with the progress i have made towards meeting my overall career goals. .779 i am satisfied with the progress i have made towards achieving my income target. .816 i am satisfied with the progress i have made towards meeting my goals for career advancement. .854 i am satisfied with the progress i have made towards meeting my goals for the development of new skills. .501 notes: extraction method: principal component analysis rotation method: oblimin with kaiser normalization factor loadings <.4 are suppressed pos-c= career oriented perceived organizational support cs= career satisfaction source: survey data volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.214 | http://emaj.pitt.edu widana pathiranage richard wickramaratne emerging markets journal | p a g e 2 5 means, standard deviations and inter-item correlations are shown in table 3. the diagonal of this table presents cronbach’s alpha values which indicate that all measures demonstrated adequate levels of reliability. many managers were male (65%). mean and standard deviation statistics relating to these demographic variables are presented. the mean age of respondents was 44 and the average organizational tenure was 8 years. the inter-item correlation coefficients indicate that there are significant positive correlations between study variables. table 3: correlation matrix of variables notes: *p<0.05; **p<0.01 hypotheses testing the multiple hierarchical regression analysis was employed to test the proposed hypothesized relationships by controlling the effects of demographic variables such as age, gender, and tenure since correlation coefficients indicated that the demographic variables have significant relations with subjective career success. for example, as shown in table 4, the demographic factors such as age (416, p<.01), gender (.328, p<.01) and tenure (-.552, p<.01) are correlated with the subjective career success. table 4 presents the results of multiple hierarchical regression analysis. this study hypothesized that the career oriented perceived support is positively related to the subjective career success. after controlling the effects of age, gender and tenure, the results indicated that the career oriented perceived organizational support is positively related to the subjective career success of employees (β= .598, p <. 05). therefore, the hypothesized relationship proposed by this study is accepted. table 4: hierarchical regressions for pos-career and subjective career success relationship predictors (beta): step 1 step 2 step 1: age -.416* gender .328* tenure .552* step 2: age -.322* gender .339* tenure .472* pos-career .598* f statistic 11.729* 16.925* adj. r-sq. .164* .296* r-sq. change .395 .136 note: *= p<.05 v. discussion this study revealed that the pos-career has a positive relationship with subjective career success of supervisory level managers of production firms in sri lanka. this finding implies that employees believe their career progress is consistent with their own goals, values, and preferences when they have developed a perception about the organization’s caring of their career needs. the finding of the study provides implications to the psychological contract theory (argyris, 1960), social exchange theory (blau, 1964; rosseau, 1989) and the perceived organizational support theory (eisenberger et al., 1986). that is, employees’ belief about the organization’s caring of their career needs will build a reciprocal obligation in them and in turn they reciprocate with demonstrated career success. based on the reciprocity norm, perceived organizational support produces a felt obligation in individuals to care about the organization’s welfare and to help the organization reach its objectives (eisenberger et al., 1986). moreover, the findings provide implications to the extended model of social cognitive career theory (lent and brown, 2006) which states that the goal-specific environmental support, such as pos-career, which provides for social support in achieving employee personal goals, is likely to be a predictor of their subjective career success. an organization should develop a career development culture by providing employees with a range of career development opportunities, senior management’s leadership for career development programs, and developing a climate for employees to involve in career self-management by engaging with networking and visibility behaviors. in response, they develop a belief that their career progress is consistent with their own goals, values, and preferences. also, the employees would feel a reciprocal obligation (rousseau, volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.214 | http://emaj.pitt.edu role of career oriented perceived organizational support in determining subjective career success of supervisory level managers in manufacturing firms page |26| emerging markets journal 1989) towards the organization as a result of receiving these types of support. that is, motivationally focused organizational actions such as career oriented organizational support, will enhance employees’ willingness to fully invest themselves physically, cognitively, and emotionally into their work roles (employee engagement) (barrick et al., 2015). overall, policy makers can learn from the study that they should build reciprocal obligations in employees by considering employee career goals in making career decisions and by regularly informing employees of all available career development opportunities within the organization so that the employees will have reasons to believe that the organization cares about their career needs. this felt obligation will lead employees to further their careers with the organization instead of engaging with externally oriented mobility behavior. consequently, organizations may expect affective attachment and a felt obligation to stay with the organization. in terms of hr practices, if employees believe that the organization cares about their career needs and goals, the employees are likely to engage with career development activities and programs such as career training, provision of personal career development plans, provision of performance feedback by supervisors, career advice, provision of work that enhances skills for the future, and mentoring (sturges et al., 2005; sturges et al., 2000). in spite of significant contributions of the study to the theory and practice of career development, it has some minor limitations. the selected sample of employees consisted mainly of supervisory level managers of manufacturing firms in sri lanka. therefore, the study findings may to be generalizable to other managerial and non-managerial employee categories and other industries. similarly, these outcomes may not be the case for different country contexts since prior studies have shown that there are differences between countries in terms of attitudes and behaviors (kickul, scott, & belgio, 2004; yu & egri, 2005). therefore, findings may not be generalized to other countries. the research was limited to a cross-sectional study. therefore, as with all cross-sectional studies, no causality between variables is implied by this study. future studies could be conducted with a greater representation of different levels of employees in an organizational hierarchy to improve the generalizability of findings. in addition, to increase the generalizability, more studies in various industries representing diverse employee groups are needed. moreover, similar studies should be conducted in other cultural contexts to further strengthen the knowledge in this research area. that is, some cross-cultural studies have identified differences between cultures in behavior and attitudes (kickul et al., 2004; yu & egri, 2005). moreover, a qualitative study is worthwhile to provide further support for the findings of this study and to identify whether the found relationships are explained by national cultural dimensions. furthermore, future studies could consider cultural factors such as beliefs, values and attitudes as moderating variables in the relationship between pos-career and the subjective career success. the reason for the relationship between pos-career and the subjective career success may be explained by the theory of perceived organizational support (eisenberger et al., 1986). therefore, future studies could be conducted to investigate whether the perceived organizational support is a mediator of the relationship between pos-career and the subjective career success. vi. conclusion by providing implications to the extended model of social cognitive career theory (lent and brown, 2006), perceived organizational support theory (eisenberger et al., 1986), psychological contract theory (argyris, 1960), and the social exchange theory (blau, 1964), this study proposed that the employees believe their career progress is consistent with their own goals, values, and preferences when they have developed a perception about the organization’s caring of their career needs. in addition to this theoretical contribution, the study made a methodological contribution by validating a career oriented perceived organizational support scale. since there is a scant amount of literature that has investigated this relationship, this current study made a significant empirical contribution by conducting a study in a developing country context. the study proposes policy makers to develop a caring culture of career development by offering various career development programs for their employees. references ahmed, i., nawaz, m. m., ali, g., & islam, t. (2015). perceived organizational support and its outcomes: a meta-analysis of latest available literature. management research review, 38(6), 627-639. allen, d.g., shore, l. m., & griffeth, r. w. (2003). the role of perceived organizational supportand supportive human resource practices in the turnover process. journal of management, 29, 99-118. al-hussami, m., hammad, s., & alsoleihat, f. (2018). the influence of leadership behavior, organizational commitment, organizational support, subjective career success on organizational readiness for change in healthcare organizations. leadership in health services. argyris, c. p. (1960). personality and organization. hospital administration, 5(1), 6-32. armstrong-stassen, m., & ursel, n.d. (2009). perceived organizational support, career satisfaction, and retention of older workers. journal of occupational and organizational psychology, 82, 201-220. arthur, m. b., khapova, s. n., & wilderom, c. p. m. (2005). career success in a boundaryless career world. journal of organizational behavior, 26, 177-202. bambacas, m., & bordia, p. (2009). predicting different commitment components: the relative effects of how career development hrm practices are perceived. journal of management & organization, 15, 224-240. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.214 | http://emaj.pitt.edu widana pathiranage richard wickramaratne emerging markets journal | p a g e 2 7 barnett, b.r., & bradley, l. (2007). the impact of organisational support for career development on career satisfaction. career development international, 12(7), 617-636. barrick, m. r., thurgood, g. r., smith, t. a., & courtright, s. h. (2015). collective organizational engagement: linking motivational antecedents, strategic implementation, and firm performance. academy of management journal, 58(1), 111135. baruch, y. (1999). integrated career systems for the 2000s. international journal of manpower, 20(7), 432-457. blau, p. (1964). exchange and power in social life.new york: john wiley. burke, l. a. , & hutchins, h. m. (2007). training transfer: an integrative literature review. human resource development review, 6, 263-296. cable, d.m., & derue, d.s. (2002). the convergence and discriminant validity of subjective fit perceptions journal of applied psychology, 87, 875-884. cao, l., hirschi, a., & deller, j. (2014). the positive effects of a protean career attitude for selfinitiated expatriates: cultural adjustment as a mediator. career development international, 18(1), 56-77. devos, a., dewettinck, k., & buyens, d. (2009). the professional career on the right track: a study on the interaction between career selfmanagement and organizational career management in explaining employee outcomes. european journal of work and organizational psychology, 18(1), 55-80. dubin, s. s. (1977). a learning model for updating older technical and professional persons. paper presented at the annual meeting of the american psychological association. san francisco, ca. eby, l. t., allen, t. d., & brinley, a. (2005). a crosslevel investigation of the relationship between career management practices and career-related attitudes. group and organization management, 30(6), 565-596. eisenberger, r., huntington, r., hutchison, s., & sowa, d. (1986). perceived organizational support. journal of applied psychology, 71, 500-507. eisenberger, r., stinglhamber, f., vandenberghe, c., sucharski, i, & rhoades, l. (2002). perceived supervisor support : contributions to perceived organizational support and employee retention. journal of applied psychology, 87, 565-573. erdogan, b., kraimer, m.l., & liden, r.c. (2004). work value congruence and intrinsic career success: the compensatory roles of leader-member exchange and perceived organizational support. personnel psychology, 57(2), 305-332. greenhaus, j.h., parasuraman, s., & wormley, w. (1990). effects of race on organizational experiences, job performance evaluations, and career outcomes. academy of management journal, 33(1), 64-86. hair, j.f., black, w.c., babin, b.j., & anderson, r.l., (2018). multivariate data analysis, 8th ed. new jersey: prentice-hall. heslin, p.a. (2003). selfand other-referent criteria of career success. journal of career assessment, 11(3), 262-286. joo, b. k., & lee, i. (2017, august). workplace happiness: work engagement, career satisfaction, and subjective well-being. in evidence-based hrm: a global forum for empirical scholarship. emerald publishing limited. judge, t.a., cable, d.m., boudreau, j.w., & bretz, r.d. (1995). an empirical investigation of the predictors of executive career success. personnel psychology, 48(3), 485-519. jung, y., & takeuchi, n. (2018). a lifespan perspective for understanding career self-management and satisfaction: the role of developmental human resource practices and organizational support. human relations, 71(1), 73-102. karatepe, o.m. (2012). perceived organisational support, career satisfaction, and performance outcomes. international journal of contemporary hospitality management, 24(5), 735-752. kaufman, h. g. (1974). obsolescence and professional career development. new york, ny: amacom. kickul, j., scott, w., & belgio, e. (2004). attitudinal and behavioral outcomes of psychological contract breach: a cross cultural comparision of the united states and hong kong chinese. international journal of cross cultural management, 4(2), 229-252. kozlowski, s. w., & hults, b. m. (1987). an exploration of climates for technical updating and performance. personnel psychology, 40, 539563. kraimer, m. l., &wayne, s. j. (2004). an examination of perceived organizational support as a multidimensional construct in the context of an expatriate assignment. journal of management, 30, 209-237. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.214 | http://emaj.pitt.edu role of career oriented perceived organizational support in determining subjective career success of supervisory level managers in manufacturing firms page |28| emerging markets journal kraimer, m.l. , seibert, s.e., wayne, s.j. , liden, r.c., & bravo, j. (2011). antecedents and outcomes of organizational support for development: the critical role of career opportunities. journal of applied psychology, 96(3), 485-500. kurtessis, j. n., eisenberger, r., ford, m. t., buffardi, l. c., stewart, k. a., & adis, c. s. (2017). perceived organizational support: a metaanalytic evaluation of organizational support theory. journal of management, 43(6), 18541884. lee, y., & lee, j. y. (2019). mediating effects of the meaningfulness of work between organizational support and subjective career success. international journal for educational and vocational guidance, 19(1), 151-172. lent, r.w., & brown, s.d. (2006). integrating person and situation perspectives on work satisfaction: a social-cognitive view. journal of vocational behavior, 69(2), 236247. https://doi.org/10.1016/j.jvb.2006.02.006 ng, t.w.h., eby, l.t., sorensen, k.l. , & feldman, d.c. (2005). predictors of objective and subjective career success: a meta-analysis. personnel psychology, 58, 367-408. orpen, c. (1994). the effects of organizational and individual career management on career success. international journal of manpower, 15(1), 27-37. rhoades, l., & eisenberger, r. (2002). perceived organizational support: a review of the literature. journal of applied psychology, 87, 698-714. rousseau , d. (1995). psychological contracts in organizations: thousand oaks, ca:sage. rousseau , d. m. (1989). psychological and implied contracts in organizations employee responsibilities and rights journal 2, 121-139. seibert, s.e., & kraimer, m.l. (2001). the five-factor model of personality and career success. journal of vocational behavior, 58(1), 1– 21. https://doi.org/10.1006/jvbe.2000.1757 stickland, r. (1996). career self-management–can we live without it? . european journal of work and organizational psychology, 5, 583-596. sturges, j., conway, n., guest, d., & liefooghe, a. (2005). managing the career deal: the psychological contract as a framework for understanding career management, organizational commitment and work behavior.journal of organizational behavior, 26, 821-838. sturges, j., guest, d., & mackenzie davey, k. (2000). who is in charge? graduates attitudes to and experiences of career management and their relationship with organizational commitment. european journal of work and organizational psychology, 9(3), 351-370. sullivan, s. e. (1999). the changing nature of careers: a review and research agenda. journal of management,, 25(3), 457-484. susskind, a.m., borchgrevink, c.p., kacmar, k.m., & brymer, r.a. (2000). customer service employees'behavirol intentions and attitudes: an examination of construct validity and path model. international journal of hospitality management, 19(1), 53-77. yu, b.b., & egri, c.p. (2005). human resource management practices and affective organizational commitment: a comparision of chinese employees in a state-owned enterprise and a joint venture asia pacific journal of human resources, 43(3), 332-360. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the analysis of the relationship between key audit matters (kam) and firm characteristics: the case of turkey elif güneren genç istanbul commerce university, turkey | e-mail: elifg@ticaret.edu.tr başak erdem istanbul commerce university, turkey | e-mail: berdem@ticaret.edu.tr abstract the role of audit profession and the implementation of new audit standards are aimed to improve the quality of audit reports and one of the recent improvements is the inclusion of key audit matters (kam) as a separate section in the auditor’s report. the aim of introducing kams is to give information about the areas of higher risk and the effect of most significant events. this study aims to contribute to the current literature by determining the matters which should be included as kams and the factors affecting kam disclosure. it also examines the relationship between the total number of kams and firm level characteristics for the turkish market. our findings reveal that some of the firm level characteristics have a significant impact on kam disclosures. keywords: key audit matters (kams), firm characteristics, audit report, bist, turkey new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.219 | http://emaj.pitt.edu | mailto:elifg@ticaret.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.219 | http://emaj.pitt.edu elif güneren genç, başak erdem emerging markets journal | p a g e |61 the analysis of the relationship between key audit matters (kam) and firm characteristics: the case of turkey elif güneren genç başak erdem i. introduction financial scandals are repeated throughout history and the increased frequency of these scandals in the last couple of decades has brought much attention to the accounting and audit profession. auditor communications with company stakeholders have attracted considerable interest from regulators and standard setters. there has been a growing criticism toward the traditional pass/fail model for audit reports by regulators (church, davis, & mccracken, 2008; pinto and morais, 2019). the main goals of audit report regulations can be listed as reduction of information asymmetry and rise in audit quality as well as financial reporting. cordos & fulpa (2015) examined the reduction of information asymmetry between auditors and users in their paper by extending the audit reporting information content. international auditing and assurance standards board (iaasb) has lauched the “new auditor reporting project” in 2011 to build trust in audit reports and to make the auditor reports more insightful and transparent for different stakeholders of the firms. the review of the international standards on auditing about the composition and content of the audit report can be presented as the initiation point. on january 2015, the iaasb discussions about auditor reports resulted in six revised and one new standard. these revisions have been decided to be implemented for periods ending on or after december 15, 2016. the most important change is made on the new standard isa 701 communicating key audit matters in the independent auditor’s report. turkey followed the isa 701 (bds 701) "communicating key audit matters in the independent auditor’s report" regulations in the field of key audit matters (kams) in 2017 by the public oversight, accounting and auditing standards authority. the main purposes of including additional key audit matter sections in audit reports can be listed as the increase in transparency of audit reports and the presentation of the auditor’s own perception to stakeholders about most important matters. kam section conveys auditor’s perspective about challenging audit matters to users. key audit matters (kams) are explained under four headings: i) determining kams, ii) communicating kams, iii) communication with those charged with governance, iv) documentation. according to isa/bds 701, key audit matters section should determine and disclose the most important issues in the audit of financial statements according to auditor’s professional judgment. kams are not standard texts. the content of kams may vary from company to company and for different subject matters. there are a number standards that regulate whether an audit matter should be considered as a kam, but there is a limited amount of information about the number of kams that needs to be reported. sirois (2018) states which and how many kams should be reported is an issue of professional judgment. although iaasb (2015, a59) and pcaob (2017,37) proposed that at least one kam should be reported, regulators warn that ‘‘lengthy lists of key audit matters may be contrary to the notion of such matters being those of most significance in the audit’’ (iaasb 2015, a30). according to codos & fulop (2015), two to seven issues should be reported as kams. the decisionmaking process is sophisticated and includes diverse elements, sub-processes and tasks. the kams in the audit reports are susceptible to certain influence from auditors and entities being audited. the examination of these factors enables us to determine the quality of audit (ferreira and morais, 2019). isa/bds 701 states that kam numbers are affected by the size and complexity of the entity, the nature and conditions of its business, and “the facts and circumstances of the audit engagement” (isa 701, p. a10; bds 701, p. a30). from an auditor’s perspective, there is a conflict of interest. this is on one hand, being exposed to litigation and loss of reputation and on the other hand the possible loss of a client. the relation between the auditor and the company being audited plays an important role for the number of kams being disclosed (ferreira and morais, 2019). this study aims to contribute to the current literature by determining the matters which should be included as kams and the factors affecting kam disclosure. it also examines the relationship between total number of kams and firm level characteristics for the turkish market. the sample is composed of financial data on 30 turkish companies listed on borsa istanbul (bist) between the years of 2017-2019. as a first step, the number of kams in audit reports are analyzed. the kam independent variables and other variables that may have an effect were analyzed by considering the independent variable. the remaining sections of this paper are organized as follows: the next section provides the related literature review about the topic. the third section is the empirical study, which includes data and methodology description and findings. the last section is the conclusion, which summarizes the overall findings and explains the limitations of study for further research. ii. literature review the implementation of kams in audit reports is a relatively new standard. although the topic is a recent subject in academic studies, it has been extensively studied for different fields. the relationship between kam and different topics can be classified by the following topics; (i) investors’ decisions and capital volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.219 | http://emaj.pitt.edu the analysis of the relationship between key audit matters (kam) and firm characteristics: the case of turkey page |62| emerging markets journal market reactions (christensen et al.,2014; boolaky & quick, 2016; bédard et al., 2018; gutierrez et al., 2018; lennox et al.,2019; sirois et al.,2018; rapley et al., 2018; köhler et al.,2020) (ii) auditor liability (brasel et al., 2016; gimbar et al., 2016; vinson et al., 2019; segal, 2019; pratoomsuwan & yolrabil 2020), (iii) auditor judgment (asbahr & ruhnke, 2019; ratzinger-sakel & theis, 2019,) and (iv) firm and auditor characteristics (sierra et al.,2019, ferreira & morais 2019, pinto & morais, 2019). prior literature supports that firm characteristics are one of the main factors affecting the auditor's judgement with respect to kam (defond & zhang, 2014; wu et al., 2016; velte, 2018; sierra et al., 2019). when the literature about kams are analyzed for the turkish market, it is observed that most of the studies are focused on the results of 2017 audit reports. the findings of these studies report that the kam types concentrate on revenue, trade receivables, fixed assets, tangible assets and inventories (ertan & kızık, 2019; ciğer et al., 2019b; çağıran & varıcı, 2019; akdoğan & bülbül, 2019; gökgöz, 2018; uzay & köylü, 2018; kavut & güngör 2018). research by sarisoy & kepçe (2019) differs from other studies by examining the expectation gap among different firm stakeholders and financial statement users. a questionnaire was used as an empirical analysis technique in this study. it has been determined that there are expectations among independent audit interest groups in key audit matters. sierra at al., conducted a study for 400 companies included in the ftse-100 (united kingdom) for the years 2013-2016 in 2019. in this study, they emphasized that the number of auditors and the number of kam are determined according to the characteristics of customer, and the number of auditors and the type of kams are determined according to the characteristics of the customer while establishing the hypotheses. in the results, it was determined that the characteristics of auditor and the client are explanatory in the number and type of kams. pinto & morais, in their study in 2019 wanted to generalize for european countries by determining the factors affecting the number of kam. for this purpose, they obtained the aex25 (netherlands), ftse-100 (united kingdom) and cac40 (france) indexes in 2016. it has been determined that a positive relationship between the number of kam and the audit fee of the studies, a negative relationship between the number of kam and the banks, and the more kam numbers lead to a more complex and sharper accounting standard. ferreira and morais (2019) applied the ols analysis using 2016 audit reports and consolidated financial statements for 447 brazilian companies participating in bm & fbovespa in their study. in their study investigating whether the characteristics of the companies audited affect the volume of kams, they determined that there is a positive relationship between these factors. in addition, they found a negative relationship between auditor fee and kams, and a positive relationship between firm size and kams in bm & fbovespa companies. in the view of prior literature on number of key audit matters, their determinants and relationship with firm characteristic, i. e. size, industry included, complexity, financial condition and auditor relationships will be examined. iii. empirical study this study aims to contribute to the current literature by determining the matters which should be included as kams and the factors affecting kam disclosure. the relationship between firm level characteristics and total number of kams disclosed are examined for the turkish stock market. non-financial firms of the bist 30 index are included in the analyses. the data were collected through two main sources. the kam data are obtained from publicly available audit reports released by the companies. the financial data are collected from thomson reuters eikon database and from the audited financial statements provided on each company's website. the study sample consists of turkish companies listed in bist30 index between 2017, the year in which communication of kams was first introduced in the audit reports, and 2019. the initial sample started with 30 companies. due to their distinctive operating and regulatory nature, 6 companies operating in the financial sector are excluded. furthermore, companies that are not listed in all observation years are not included in the analysis. therefore, the final sample consists of only 18 companies. the list of these companies is provided in table 1. table 1: list of companies arcelik koza madencilik turkcell aselsan kardemir (d) turk hava yolları bim mağazalar petkim tekfen holding doğan holding pegasus tofas oto. fab. ereğli demir çelik sişe cam turk telekom koza altın tav havalimanları tupraş source: authors’ own compilation table 2 provides the definitions and measurement of the variables used in this study. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.219 | http://emaj.pitt.edu elif güneren genç, başak erdem emerging markets journal | p a g e |63 table 2: variable definitions source: authors’ own compilation the dependent variable kam is the total number of matters mentioned in the kam section of the audit report. to investigate the influence of firm characteristics on kam number; auditor, industry, revenues, size, roaa, leverage, current ratio, loss, inventories, ppe and switch are used as independent variables. in order to avoid problems of scale; revenues, size, inventories and ppe variables are measured as the natural logarithm of the corresponding financial statement caption. the classification of the companies by industry and kam disclosure numbers are presented in table 3. thomson reuters` industry classification methodology is used. table 3: industry classification of companies source: authors’ own compilation the most represented industries in the final sample are metals and mining with 4 companies as well as passenger transportation services and transport infrastructure industry with 3 companies. when the mean number of kam disclosures are examined, chemicals industry shows the lowest mean kam disclosure value of 1 and telecommunication services presents the highest mean kam disclosures with a value of 4,83. table 3 shows statistical description of each variable including mean, median, minimum, maximum and standard deviation. since auditor (aud) is a categorical variable and switch (swi) and industry (ind) are dummy variables, they are not included in table 4. table 4: descriptive statistics source: authors’ own compilation table 4 shows that, the mean kam disclosure number for 2017 is 3,05 and decreases to 2,722 in 2018 and 2,388 in 2019. the mean kam disclosure is decreasing throughout the years. the highest number of mean kam disclosure is observed in 2017, which is the beginning year for kam disclosure regulation. the standard deviation of kam is 1,210, 1,274 and 1,036 respectively, implying a decreasing variation existing across firms through the recent years. the distribution ranges from 1 to 6 for 2017 and 2018, and 1 to 5 for 2019. with regard to the financial variables, the firms in the sample have an average roaa of 0,092 for 2017, 0,124 for 2018 and 0,933 for 2019. the mean lev is increasing slightly throughout the observation period from 0,277, 0,290 and 0,301. table 5: the results of regression model source: authors’ own compilation notes: figures next to the estimated coefficients in parenthesis are standard errors. ***, **,* indicates significance at 1%, 5% and 10% statistical levels respectively. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.219 | http://emaj.pitt.edu the analysis of the relationship between key audit matters (kam) and firm characteristics: the case of turkey page |64| emerging markets journal table 5 presents model results for 2017, 2018 and 2019. the independent variables that were found significant are respectively: lsize, lint, lppe, swi, ind and roaa. the insignificant variables of auditor, revenue, leverage, current ratio and loss are removed from the model. company size has a negative and significant effect on kam number for all three years. the inventory level of firms has a positive and significant effect on kam number. property plant and equipment is positively related to kam. the coefficients for lsize and lint are lower in more recent years. the effect of auditor switch shows a positive relation with kam only in 2017 and similarly industry is positively related to kam only in 2018. roaa presents a significant positive relationship only in 2019. iv. conclusion the paper explains the relationship between firm characteristics and kam matters by using an empirical model between the years of 2017 and 2019. the findings in our model show a negative relationship between company size and kam matters disclosed in audit reports. our findings are in line with the previous literature and confirm that large firms have more power to negotiate with auditors in terms of audit fees and they can put more pressure on the auditors to disclose less kam. 2017 is the year in which communication of kams was first introduced. when we analyze the data, we can observe that number of disclosed kam matters for large firms show a decreasing trend throughout the years. inventory is one of the challenging areas to audit, therefore have a higher probability of error and requires specialized audit procedures. the previous literature supports that firms with extensive inventory increase the inherent risk (simunic, 1980; stice, 1991). firms with a large amount of inventory stock are considered as complex situations in terms of kam matters by auditors. this causes an increase in the inherent risk and number of kam disclosure matters. an adverse effect on number of kam disclosure can be observed since the inventory related matters are considered by firms and as a result are not disclosed by auditors as kam. this argument is supported by our results, which show a decreasing number of kam disclosures throughout the years. plant, property and equipment (ppe) investments are very common in telecommunication, industrial conglomerates and household goods industries. the high amount of ppe figures causes an increased amount of kam disclosure matters. our results confirm this positive significant relation between ppe and kam. the profitability is reflected by roa in our analysis and shows how much profit a company is able to generate from its assets. the results show significant positive relationship between profitability and kam disclosure for 2019. auditor switch shows a positive significant effect on kam disclosure result only for 2017. the majority of bist30 companies are audited by big4 audit firms. we can conclude that, the change among big4 audit firms does not present a significant effect on the number of kam disclosures. this shows a unified audit judgment among big4 audit firms. however, we believe that the effectiveness and integrity of big4 audit firms should be analyzed separately in future studies to prevent systemic problems in audit matters. in future studies some limitations of this study can be extended by: 1) including all the companies in borsa istanbul (bist) and 2) analyzing topic-wise classification of kam disclosure matters. the kam disclosure requirement started on 2017 in turkey. in the following years, it would be possible to improve the study as the number of observation period increases. references akdoğan, n., & bülbül, s. (2019). the evaluation of the initial results with respect to the key audit matters stated in the independent auditors’ reports issued for the companies listed in bist 100 index. accounting & auditing review, 18(56), 1-24. annette köhler, nicole ratzinger-sakel & jochen theis (2020). the effects of key audit matters on the auditor’s report’s communicative value: experimental evidence from investment professionals and non-professional investors, accounting in europe, 17(2), 105-128. asbahr, k., & ruhnke, k. (2019). real effects of reporting key audit matters on auditors’ judgment and choice of action. international journal of auditing, 23(2), 165-180. boolaky, p. k., & quick, r. (2016). bank directors' perceptions of expanded auditor's reports. international journal of auditing, 20(2), 158174. brasel, k., doxey, m., grenier, j. h., & reffett, a. (2016). risk disclosure preceding negative outcomes: the effects of reporting critical audit matters on judgment of auditor liability. the accounting review, 91(5), 1345-1362. christensen, b. e., glover, s. m., & wolfe, c. j. (2014). do critical audit matter paragraphs in the audit report change nonprofessional investors, auditing a journal of practice & theory, 33 (4), 71-93. church, b., davis, s., & mccracken, s. (2008). the auditor’s reporting model: a literature overview and research synthesis. accounting horizons, 22(1), 69-90. çiğer, a., vardar, g. c., & kınay, b. (2019a). key audit matters: a research on listed firms in cee countries and turkey. business and economic horizons (beh), 15(1232-2020-354), 393-422. çiğer, u. a., vardar, g. c., & kinay, b. (2019b). the analysis of key audit matters in independent auditors' reports: the case of borsa istanbul. mali cozum dergisi/financial analysis, 29 (153), 109-148. https://www.researchgate.net/journal/auditing-a-journal-of-practice-theory-1558-7991 volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.219 | http://emaj.pitt.edu elif güneren genç, başak erdem emerging markets journal | p a g e |65 cordos, g.-s. and fulop, m.-t. (2015), understanding audit reporting changes: introduction of key audit matters, journal of accounting and management information systems, 14, 128152. defond, m., & zhang, j. (2014). a review of archival auditing research. journal of accounting and economics, 58(2-3), 275-326. ertan, y., & kızık, e. (2019). key audit matters: investigation of bist manufacturing companies 2017 audit reports. journal of accounting & finance, special issues, 263268. ferreira, c., & morais, a. i. (2019). analysis of the relationship between company characteristics and key audit matters disclosed. revista contabilidade & financas, 31(83), 262-274. gimbar, c., hansen, b., & ozlanski, m. e. (2016). the effect of critical audit matter paragraphs and accounting standard precision on auditor liability. the accouting review, 91(6), 16291646. gold, a., heilmann, m., pott, c., & rematzki, j. (2020). do key audit matters impact financial reporting behavior? international journal of auditing, 24 (2), 232-244. gökgöz, a. (2018). reporting key audit matters within the independent audit’s report and a study on the companies listed in istanbul stock exchange. journal of accounting, finance and auditing studies, 4 (2), 92-105. gutierrez, e., minutti-meza, m., tatum, k. w., & vulcheva, m. (2018). consequences of adopting an expanded auditor's report in the united kingdom. review of accounting studies, 23(4), 1543-1587. kalıpcı çağıran, f., & varıcı, i. (2019). key audit matters within the framework of isa 701: an analysis on audit reports of companies listed in bist manufacturing industry. international journal of economic and administrative studies, 22, 193-208. kavut, f. l. & güngör, n. (2018). key audit matters in independent audit: an analysis on firm listed in the bist-100 in 2017. journal of accounting institute. 16 (59), 59-70. kim, kwang yoon, han soo kim, and sung jin park. (2016). the effect of implementation of the new and revised international auditor’s reporting standards on korea’s audit environment. accounting information review, 34, 509-31. lennox, c. s., schmidt, j. j., & thompson, a. (2019). are expanded audit reports informative to investors? evidence from the u.k, ssrn electronic journal. working paper. pinto, i, & morais a.i. (2019). what matters in disclosures of key audit matters: evidence from europe. journal of international financial management & accounting, 30, 145-62. pratoomsuwan, t., & yolrabil, o. (2020). key audit matter and auditor liability: evidence from auditor evaluators in thailand. journal of applied accounting research, 21(4), 741-762. rapley, e. t., robertson, j. c., & smith, j. l. (2018). the effects of disclosing critical audit matters and auditor tenure on investors’ judgments. available at ssrn 3294340. ratzinger-sakel, n. v. s., & thei, j. c. (2019). does considering key audit matters affect auditor judgment performance? corporate ownership & control, 17(special issue), 196-210. sarısoy, o., & kepçe, n. (2019). communicating key audit matters in the independent auditor’s report and expectation gap, mali cozum dergisi/financial analysis, 29 (153), 39-66. segal, m. (2019). key audit matters: insight from audit experts. meditari accountancy research. 27(3), 474-494. sierra-garcía, l., gambetta, n., garcía-benau, m. a., & orta-pérez, m. (2019). understanding the determinants of the magnitude of entity-level risk and account-level risk key audit matters: the case of the united kingdom. the british accounting review, 51(3), 227-240. sirois, l.-p., bédard, j., & bera, p. (2018). the informational value of key audit matters in the auditor's report: evidence from an eye-tracking study. accounting horizons, 32(2), 141-162. uzay, s. & koylu, c. (2018). key audit matters: a research on borsa istanbul. erciyes university journal of faculty of economics and administrative sciences, 52, 47-70. velte, p. (2018). does gender diversity in the audit committee influence key audit matters' readability in the audit report? uk evidence. corporate social responsibility and environmental management, 25(5), 748-755. vinson, j. m., robertson, j. c., & cockrell, r. c. (2019). the effects of critical audit matter removal and duration on jurors’ assessments of auditor negligence. auditing: a journal of practice & theory, 38(3), 183-202. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.219 | http://emaj.pitt.edu the analysis of the relationship between key audit matters (kam) and firm characteristics: the case of turkey page |66| emerging markets journal wu, c. y. h., hsu, h. h., & haslam, j. (2016). audit committees, non-audit services, and auditor reporting decisions prior to failure. the british accounting review, 48(2), 240-256. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu interest-free finance model by using blockchain-based company tokens: research on digital turkish lira (dtl) and borsa istanbul with technology acceptance model (tam) yavuz toraman nisantasi university, turkey | e-mail: yavuztrmn@gmail.com abstract since technology benefits people in many areas, its effectiveness is increasing day by day. for this reason, many products and services have been digitized and made available to people. especially in the last period, with the development of blockchain technology, there has been a significant change in the financial sector. blockchain technology, which offers a decentralized transaction network, has contributed significantly to the development of digital currencies. in this context, the central bank of the republic of turkey (cbrt) started to work on digital turkish lira (dtl) in 2021. in this context, it will enable the company tokens, which are proposed to be issued as a sub-unit of dtl, which is planned to use blockchain technology in its infrastructure, to be used in the financing of businesses, while also allowing investors to invest in turkish lira assets. in the research, it has been suggested that the company tokens to be issued under dtl can be traded on the borsa istanbul (bist) and invested, as well as the relevant tokens can be traded. the proposed model has been examined within the scope of the technology acceptance model (tam), which is frequently used in the research of technological innovations. the analysis process of the research was carried out with structural equation modeling (sem). the analysis of the research was carried out with the smartpls 3 package program. hypotheses h3, h5, and h8 were rejected and other hypotheses were accepted. when the results of the research were analyzed, it was determined that the factors affecting the intention to use the proposed company tokens were parallel to the literature. as a result of the analysis, it has been reached that the attitude and intention towards the use of company tokens in the proposed model are positive. keywords: borsa istanbul, covid-19, blockchain, digital turkish lira (dtl), technology acceptance model (tam) new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.275 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.275 | http://emaj.pitt.edu yavuz toraman page |57| emerging markets journal interest-free finance model by using blockchain-based company tokens: research on digital turkish lira (dtl) and borsa istanbul with technology acceptance model (tam) yavuz toraman i. introduction the technology that has developed in the last period is adding different products or services to human life every day. while some of these innovations are accepted and used by people, some are not used and terminate their activities. technological innovations accelerated digitalization and caused radical changes in the industry and agriculture sectors, especially in the service sector. in the present study, blockchain technology, which has changed the perspective of the service sector, has been examined. blockchain is used in the fields of education, health, information technologies, logistics and especially in the finance sector (frizzobarker et al., 2020; berdik et al., 2021). since blockchain technology is a new technology for 10 years, its use in the first period was limited to businesses. however, with the development of the related technology, it is thought that its use will spread to the base in the future. for example, ethereum's technology differs from bitcoin's technology with smart contracts. smart contracts changed the future of blockchain technology (nakamoto, 2008; balcerzak et al., 2022). blockchain technology is already used in the financial sector in the production of cryptocurrencies, interpersonal money transfers and payments. however, due to the lack of legal regulation, it does not have an active and healthy use. in the first process, cryptocurrencies were used in illegal processes thanks to its decentralized structure. subsequently, the use of cryptocurrencies became widespread and secondary exchanges were established for cryptocurrencies. cryptocurrency has turned into an investment tool with the subject of trading. especially with the low interest policy of the usa, the abundant money in the market has turned to cryptocurrencies as in every field. as of 14.11.2022, the market value of bitcoin is estimated to be $321 billion, and the total value of crypto assets is estimated at $1.7 trillion (coinmarketcap, 2022). while the cryptocurrency market volume has increased so much, countries first intervened with legal regulations and then started to contribute to the crypto ecosystem by working on blockchain-based digital assets. in this context, countries such as sweden, china, uruguay, and turkey are known to have started working on blockchain-based cryptocurrencies (mancini-griffol et al., 2018; toraman, 2022; bordo and levin 2017). with the development of technology, the content and methods of debt instruments change. for example, fan tokens, cryptocurrencies and metaverse coins are the leading ones. however, people with interest sensitivities have had different searches, especially in muslim societies. in this context, the fact that cryptocurrency has become an investment tool has contributed to the formation of the model proposed in the current study. in the proposed model, company borrowings can be made through company tokens (akçe) to be created using blockchain technology. businesses are realized by using private sector bonds, bills or deposit/lease certificates in the debt markets. however, people with interest sensitivities have had different searches, especially in muslim societies. participation banking provides the opportunity to borrow sukuk interest-free, which was created in this context. this situation offered an alternative to countries where private sector bonds or bills were not in demand. after the first process, it has received a lot of demand. sukuk, which were introduced as financial instruments, were first introduced in the 1990s. its use has become widespread day by day and continues to be used. in general, sukuk have a share of around 20% from the islamic finance sector. in this context, the volume of sukuk as of 2019 was around 470 billion dollars (comec, 2020). in turkey, the islamic financial system is called participation banking and continues to develop. in turkey, albaraka turk participation bank, kuveyt turk participation bank, turkey emlak katılım participation bank, türkiye finans participation bank, vakıf participation bank and ziraat participation bank can be listed as examples of participation banking. the size of the assets of participation banks has exceeded 1 trillion turkish lira by 2022. the share of participation banking in the sector is 8.26% (tkbb, 2022). the fact that it has a share of around 10% in the banking sector in turkey is an indication that the volume of participation banking will increase with new instruments in the future. within the scope of the research, the interest-free financing model, which is close to islamic sensitivity, has been studied. the said interest-free financing model is built on the digital turkish lira (dtl), which is expected to contribute to the turkish economy with the use of blockchain technology. the proposed model will enable individuals to invest and companies to find financing through blockchain-based dtl-affiliated company tokens. individuals will form partnerships by taking the shares of the companies. the companies will provide financing with an interest-free public offering. in the next parts of the research, literature, research methodology, analysis and results will be covered. ii. literature review interest can be defined as the rental price, fee or price of money. the fee charged for the use of the capital for a certain period of time and for its use is called interest. since the capital input is not a raw material used in the production of products or services and is a cost element, it does not comply with islamic procedures. this situation causes those with islamic sensitivities to approach the volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.275 | http://emaj.pitt.edu interest-free finance model by using blockchain-based company tokens: research on digital turkish lira (dtl) and borsa istanbul with technology acceptance model (tam) page |58| emerging markets journal issue of interest at a distance. many studies have been carried out to include interest-sensitive individuals in the economic system. as a result of these studies, interest-free finance applications have been developed for interestsensitive segments (smith 2005; wilson, 2004). examples for some of the mentioned applications are discussed in the following paragraphs of study. mudaraba can be defined as the partnership established by the owner of the capital and the person who reveals his knowledge, skills and experience. in this partnership, the proportion of the shares held by the parties is certain. finally, profit sharing is made according to the agreement rate. (bayindir, 2005). musharaka has aspect that differs from mudaraba. it allows more people to be involved in the partnership. in addition, partners can include both capital and knowledge, skills and experience in the partnership. profit sharing is realized in line with the rates determined in the contract made in partnership with musharaka (yılmaz, 2012). murabaha is a bank or intermediary institution that makes the purchase with a certain profit rate in addition to the cost of the goods. it is then to give the goods to the original buyer in return for the amount and maturity specified in the contract. institutions and organizations that allow individuals in turkey to buy houses or cars in installments can be cited as examples of such businesses (tok, 2009; türker, 2010; buyukakin and onyilmaz, 2012). tawarruq is related to companies buying goods on a deferred basis in order to be able to borrow, and the deferred goods must be sold to someone other than the seller. the goods in question are sold at a lower price than the purchase price. the opposite is also possible. goods purchased in chas can be sold on futures (buyukakin and onyilmaz, 2012; türker, 2010). sukuk is known as a lease certificate in turkey. sukuk, which are similar to private corporate bonds, have no interest. also, there is no fixed income. it offers the investor a share of the income from the invested asset. in this way, companies can borrow money. sukuk offers its investors the right of partnership of that company (wilson, 2004; tok, 2009). ijarah is a fixed income interest free leasing transaction. the financial institution that performs the leasing process buys the goods on behalf of the requesting company and adds a profit share and performs the leasing process for a certain period of time. companies use this route to purchase high-priced machinery and equipment (bayindir, 2005; buyukakin and onyilmaz, 2012). salam is concerned with the process while the seller receives the price of the goods in advance and the delivery of the goods is made in the future determined process. there are sub-contracts related to the salam contract (ersin and duran, 2017). takaful can be briefly defined as an interest-free insurance system. it is a certain community that comes together to try to protect itself. it is also known as cooperative insurance. the community, which comes together with a certain contract, invests the money they collect in non-interest-bearing instruments and divides the risk among them (yildirim, 2014). the first examples of interest-free finance worldwide were observed in malaysia in 1940 and pakistan in 1950. but no successful result was obtained. in the following period, bank islam malaysia berhad (bimb) was launched in malaysia in 1983, and an important breakthrough was made in this field. while malaysia is an important country in the asian continent, bahrain, kuwait, qatar, saudi arabia and united arab emirates are also important players in the middle east as well as africa. on the other hand, many financial institutions such as citi bank, societé generale goldman sachs, bank of america and hsbc have started their activities in this field due to the increasing volume in the islamic finance sector, whose volume has increased since its inception (bayindir, 2008; tok, 2009; yılmaz, 2012). the volume in this area, on the other hand, exceeds 3 trillion billion dollars. this situation can be easily understood from figure 1. the 2023 growth of global islamic finance total asset (us$ billion) estimate of experts is approximately 4 trillion dollars (ece, 2011). figure 1. the 2023 growth of global islamic finance total asset (us$ billion) estimate of experts source: (comec, 2020) in turkey, the islamic financial system is called participation banking and continues to develop. in turkey, albaraka turk participation bank, kuveyt turk participation bank, turkey emlak katılım participation bank, türkiye finans participation bank, vakıf participation bank and ziraat participation bank can be listed as examples of participation banks operating in this field. as can be seen in figure 2, the asset size of participation banks has exceeded 1 trillion turkish liras in turkey. considering the size of the turkish banking sector, the share of participation banking in the sector is 8.26% (tkbb, 2022). figure 2. development of participation banking assets in turkey source: (tkbb, 2022) volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.275 | http://emaj.pitt.edu yavuz toraman emerging markets journal | p a g e 5 9 participation banking in turkey has been developing rapidly in the last period. in turkey's future projection, it is aimed to increase the share of participation banking to 15%. in addition, one of the important goals of the international financial center project in istanbul is to increase turkey's share in the world's participation banking sector. in this context, the central advisory board (cab), which was established as a private institution under the participation banks association of turkey (tkbb) in 2018, and the regulations in the 2020 annual program of the presidency can be shown among the studies supporting the development of participation banking (comec, 2020). the model proposed in the current research allows both the future growth of the sector and the possibility of interest sensitive investors to invest in turkish assets. interest-free finance is shaped around participation banking in turkey. however, with the blockchain technology, a different investment path has been exposed and forms the basis of the model proposed in the current research. blockchain technology allows users who are included in the system to transfer data to each other without a centralized administration. since the data transfer process is encrypted and recorded as irreversible, it is considered reliable by the users (elghaish et al., 2021; yaqoob et al., 2022). blockchain technology can be called as a distributed system of digital ledger. thanks to its distributed system, transactions can be carried out on a 24/7 basis, without being connected to any center. although blockchain technology was used in the field of finance in the first period, it has started to be used actively in many sectors day by day (kshetri, 2021). blockchain is used in fields such as education, logistics, health, tourism and information technologies. blockchain technology has been included in the financial sector with bitcoin, the cryptocurrency invented by satoshi. along with this, cryptocurrency sub-units have also started to be produced (nakamoto, 2008). for example, a different cryptocurrency was created using the same blockchain infrastructure. these cryptocurrencies are called tokens. tokens do not have independent blockchain networks. however, while cryptocurrencies are found to be risk-free thanks to their decentralized structure, their active use has not been realized immediately since there is no official (public) formation behind them. as the process progressed, the use of cryptocurrencies became widespread (sunyaev et al., 2021). today, cryptocurrencies using blockchain technology can be traded on exchanges. however, cryptocurrencies or tokens do not have a specific use for interest-free financing. a proposed model has been developed for both sustainable finance and interestsensitive investors. the research model proposal is visualized in figure 3 and figure 4. in the proposed model, it is aimed to enable companies to borrow with tokens linked to digital turkish lira (dtl), which is planned to be created on a blockchain basis, or with a separate blockchain infrastructure. figure 3 depicts the initial public offering, while figure 4 shows that the shares of companies which become crypto assets are subject to daily purchases and trading in secondary exchanges. the proposed model proposes to be able to borrow by performing public offering activities with institutions such as the capital markets board (cmb) and borsa istanbul, as opposed to companies borrowing without being tied to any central authority such as fan tokens. figure 3 shows the borrowing (public offering) processes of investors and companies. public offering can be explained as the first-hand sharing of securities owned by companies with the rest of society for the first time (açikgöz and gökkaya 2017; avcı et al., 2020). in addition, takasbank and the banks association of turkey, which operate together with borsa istanbul, will be able to examine the transactions as observers in these transactions. public offerings in turkey are made with the permission of the cmb and through borsa istanbul. for this reason, the names of official institutions are used in figure 3. figure 3. proposal model section 1 source: author’s own compilation with the public offering, companies will be able to maintain their assets in a new index to be opened on borsa istanbul and borrow at more affordable costs. investors will be able to trade the stocks they own on borsa istanbul. in addition, due to the fact that stocks are cryptocurrencies, they can be used by investors or people who buy them after the initial public offering in daily life for goods and services. while cryptocurrencies cannot be the subject of purchase, sale and intermediation at the moment, it is assumed that the law regarding the launch of dtl, whose pilot studies will start as of 2023, will be regulated. in this context, it may be possible in the future for company tokens affiliated with dtl to be subject to purchase, sale or intermediation. figure 4. proposal model section 2 source: author’s own compilation in the proposed model, companies can borrow through public offering, while investors will form a partnership with the public offering company without any interest. at the end of the year, they will receive their share volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.275 | http://emaj.pitt.edu interest-free finance model by using blockchain-based company tokens: research on digital turkish lira (dtl) and borsa istanbul with technology acceptance model (tam) page |60| emerging markets journal of the company's profits. investors and company token holders will be able to sell their stocks on secondary exchanges or shop with company tokens, which are dtl's tokens. the fact that dtl is a token will both facilitate usage in shopping and increase investment in turkish lira assets. in the proposed model, in order to protect investors and users, the public offering company will leave 30% of its revenue as collateral to company tokens in state banks (e.g. ziraat bank and vakıf bank). thus, the lowest level at which company tokens will fall after the initial public offering will be predetermined. another issue is that short selling transactions will not be carried out in the index to be established for tokens in borsa istanbul. projected benefits of the proposed model: as the company tokens to be used in trading are tied to dtl, the informal economy can be prevented. tax injustice will be prevented in the system, as tax will be collected from the entire society by preventing the informal economy. transactions with tokens will not be blocked and there is only monitoring as it will use the infrastructure of dtl. cryptocurrency flow will be monitored. if the infrastructure of dtl is created with a smart contract system, notary transactions can also be performed. the decrease in the use of cash in the post-covid-19 period will create an alternative to the increased use of digital payment methods. monetary expansion will be possible without increasing the monetary supply of the turkish lira. the seigniorage revenues will increase. iii. methodology the model proposed in the study is of interest to anyone who can invest in its environment. however, since the proposal includes a technological innovation, individuals using smart devices (phones, tablets, etc.) were included in the study. in addition, the population of the research consists of individuals over the age of 18 who live in turkey and have financial freedom. the research is limited to individuals living in istanbul, turkey. the convenience sampling method, which can only be achieved by including the people who can be reached in the research, was used in this research. (kurtuluş, 2010; büyüköztürk et al., 2008). due to covid-19, the data of the study were collected by online survey method. the data of the research were collected through google forms between 10.07.2022 and 10.08.2022. the questionnaire the research was sent to 395 people and 275 responses were received. when the data were organized before the analysis of the research, a usable data set of 219 people were obtained. while creating the conceptual model, the technology acceptance model (tam), which has been used in the acceptance of new technologies in the literature, and the independent variables were used. conceptual model (davis and venkatesh, 1996) is shown in figure 5. figure 5. conceptual model at: attitude towards use, ec: environment concern, i: intention, peou: perceived ease of use, pu: perceived usefulness, r: risk, t: trust source: (davis and venkatesh, 1996) the conceptual model was created based on the tam. tam has been frequently used by researchers in the acceptance processes of new technologies. it has undergone a complete change according to the changing demands and needs during the process (venkatesh and bala, 2008). by transforming the model, it has been tried to understand the usage processes of technological innovations more clearly. in this context, unified theory of acceptance and use of technology (utaut), tam-2 and tam-3 have been developed. tam lists the factors that affect the adoption of new technologies as perceived usefulness, perceived ease of use and attitude (oyman et al., 2022). tam consists of perceived ease of use (peou), perceived usefulness (pu), attitude towards use (at) and intention (i). furthermore, depending on the content of the study, researchers can add different exogenous variables to tam. in this research, trust (t), risk (r) and environment concern (ec) variables are added in addition to tam. with the existing variables, a total of 9 hypotheses were established in the conceptual model. intention is the most important factor affecting actual use. it consists of positive, negative or different thoughts of the users towards the system. intention is an important factor in understanding the future use of the model proposed in the research. the h1 hypothesis was created by making use of the tam literature. (venkatesh, 2000; yuen et al., 2021). hypotheses h1: attitude towards use (at) positively affects intention (i) it is assumed that the attitudes of users towards using a particular technology are an important determinant of their thoughts towards the innovation in question. attitude is related to the time interval before users start using a particular technology. it is assumed that the attitude is an important determinant of their thoughts towards the innovation in question. at is an important factor in understanding the future use of the model proposed in the research. the h2 hypothesis was created by making use of the tam literature (ajzen, 1991; hagger et al., 2022). volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.275 | http://emaj.pitt.edu yavuz toraman emerging markets journal | p a g e 6 1 h2: perceived usefulness (pu) positively affects attitude towards use (at) perceived usefulness refers to the degree to which people believe that their performance at work will increase when a new technology is used. perceived ease of use indicates the degree to which people believe that their performance will increase when a new technology is used. it is the degree to which users believe that they will make less effort to complete transactions. pu and peou are important factors in understanding the future use of the model proposed in the research. the h3 and h4 hypotheses were created by making use of the tam literature (mao et al., 2020; tao, et al., 2022). h3: perceived ease of use (peou) positively affects attitude towards use (at) h4: perceived ease of use (peou) positively affects perceived usefulness (pu) perceived usefulness refers to the degree to which people believe that their performance at work will increase when a new technology is used. perceived ease of use indicates the degree to which people trust (t), as one of the determinants of perceived usefulness, especially in online environments. this is because the situation will cause users to get the expected benefit from new technologies as their perception of the infrastructure of the technology in question and the people who manage the application. t is an important factor in understanding the future use of the model proposed in the research. h5 and h6 hypotheses were created by making use of the tam literature (pavlou and gefen 2004 ;su et al., 2022). h5: trust (t) positively affects perceived usefulness (pu) h6: trust (t) positively affects perceived ease of use (peou) environmental or green values have become an important issue that people should consider in their decisions and behaviors to respect the environment. the number of individuals who are aware of environmental problems and try to act on these problems are constantly increasing. in this context, new technologies that do not harm the environment will affect the attitude of users. ec is an important factor in understanding the future use of the model proposed in the research. h7 hypothesis was created by making use of the tam literature (fraj and martinez 2006; belanche et al., 2012). h7: environment concern (ec) positively affects perceived usefulness (pu) risk (r) is the degree to which users believe they will incur a loss to achieve the desired result. risk describes users' expectations of potential losses due to the possibility that the system may engage in opportunistic behavior during the transaction. reducing the associated risk for the technology in question will positively affect the perception, attitude and intention of users. r is an important factor in understanding the future use of the model proposed in the research. the h8 and h9 hypotheses were created by making use of the tam literature. (pavlou, 2002; jarvenpaa and leidner 1999; khoza, et al., 2021; habib and hamadneh 2021). h8: risk (r), positively affects perceived usefulness (pu) h9: risk (r), positively affects perceived ease of use (peou) finally, the structural equation model (sem) was used in the analysis process of research. in sem, the relationships between more than one independent variable and dependent variable are examined. afterwards, the mediation effects between the variables are examined. in studies examining the relationships between more than one variable, sem has generally been used in the literature (hair et al., 2010). in the present study, smart pls 3 program was used in the analysis of structural equation models. in the analysis part of the current study, firstly, the reliability and validity of the data obtained from the variables were checked (hair et al., 2017). table 1: results of the measurement model items outer loadings cronbach's alpha composite reliability average variance extracted (ave) at1 0.842 0.882 0.928 0.811 at2 0.919 at3 0.937 ec2 0.681 0.641 0.801 0.576 ec3 0.874 ec4 0.707 i1 0.953 0.932 0.957 0.880 i2 0.945 i3 0.916 peou1 0.887 0.921 0.944 0.808 peou2 0.922 peou3 0.908 peou4 0.879 pu1 0.873 0.903 0.932 0.775 pu2 0.926 pu3 0.877 pu4 0.843 r1 0.900 0.901 0.938 0.834 r2 0.933 r3 0.907 t1 0.726 0.877 0.915 0.731 t2 0.891 t3 0.912 t4 0.879 at: attitude towards use, ec: environment concern, i: intention, peou: perceived ease of use, pu: perceived usefulness, r: risk, t: trust source: smartpls 3 software output items were measured on a 5-point likert scale (1= strongly disagree; 5= strongly agree); ave: average variance extracted; cr: composite reliability. in analysis, attitude towards use, environment concern, intention, perceived ease of use, perceived usefulness, risk and trust cronbach's alpha’s composite reliability should be higher than 0.70. ave values should be higher than 0.50. the results are shown in table 2. the factor load of the ec variable was found to be 0.436. ec was excluded from the model because the factor loading of the variable was less than 0.70 (hair et al., 2014). volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.275 | http://emaj.pitt.edu interest-free finance model by using blockchain-based company tokens: research on digital turkish lira (dtl) and borsa istanbul with technology acceptance model (tam) page |62| emerging markets journal iv. findings finally, the structural equation model (sem) was used in the analysis process of research. in sem, the relationships between more than one independent variable and dependent variable are examined. first of all, the normality analysis of the research data was carried out. in this context, the skewness and kurtosis values of the data were examined. the skewness and kurtosis values of the research data were found between -1.5 and +1.5. it shows that the data of the research has a normal distribution (hair et al., 2010; hair et al., 2014; tabachnick et al. 2007). concerning the multicollinearity of the research, when the variance inflation factors (vif) values are examined briefly in terms of multiple connections, values were found to be between 1-5. vif values between 1 and 5 are accepted in the literature (hair et al., 2011; hair et al., 2016; daoud, 2017). table 2: discriminant validity analysis based on fornell-larcker criterion at: attitude towards use, ec: environment concern, i: intention, peou: perceived ease of use, pu: perceived usefulness, r: risk, t: trust source: smartpls 3 software output the correlation between the variables is shown in table 2. correlation analysis, also known as the fornell-larcker criteria table, is obtained by taking the square root of ave values (hair et al., 2017). when table 2 is examined, it is observed that there exists a positive relationship among the data. these results are in parallel with other studies in the literature. there is a positive relationship among variables in the literature as well (davis et al., 1989; khoza, et al., 2021). table 3: hypotheses results p<0,05, at: attitude towards use, ec: environment concern, i: intention, peou: perceived ease of use, pu: perceived usefulness, r: risk, t: trust source: smartpls 3 software output the hypotheses results are shown in table 3. the hypothesized model was estimated based on bootstrapping with 1000 subsamples in the smart pls 3. hypotheses 1, 2, 4, 6, 7 and 9 were supported while hypotheses 3, 5 and 8 were not supported. of the 9 relationships tested, 6 were found to be significant at p < 0.5. firstly, attitude towards use had a positive effect on intention (β = 0.812, p < 0.5). perceived usefulness had a positive effect on attitude towards use (β = 0.607, p < 0.5). perceived ease of use had a positive effect on perceived usefulness (β = 0.785, p < 0.5). trust had a positive effect on perceived ease of use (β = 0.509, p < 0.5). environment concern had a positive effect on perceived usefulness (β = 0.147, p < 0.5). risk had a positive effect on perceived ease of use (β = 0.316, p < 0.5). as a result, the hypotheses, constructed according to tam showed similar results to the literature. however, perceived ease of use had no influence on attitude towards use (β = 0.285, p > 0.5). trust had no influence on perceived usefulness (β = -0.045, p > 0.5). risk had no influence on perceived usefulness (β = 0.134, p > 0.5). even though these three hypotheses have been denied, they will still be analyzed on indirect and total effects since this study includes the mediator effect. table 4: specific indirect effects path original sample t statistics p values result tpeoupu 0.400 4.400 0.000 supported rpeoupu 0.248 2.419 0.016 supported peoupuat 0.477 3.488 0.001 supported p<0,05, at: attitude towards use, ec: environment concern, peou: perceived ease of use, pu: perceived usefulness, r: risk, t: trust source: smartpls 3 software output table 4 indicates the indirect effect, as the study has a mediation effect. when the specific indirect effects in the research model are examined, full mediation effect is seen in all of the rejected hypotheses. in this context, a positive and significant effect can be mentioned in all hypotheses in the conceptual model (hair et al., 2017). table 5: results of r² and r² adjusted items r² radj² at 0.758 0.753 i 0.660 0.657 peou 0.577 0.569 pu 0.823 0.816 at: attitude towards use, i: intention, peou: perceived ease of use, pu: perceived usefulness, source: smartpls 3 software output the r² values and radj² values of research are shown in table 5. the r² value of the intention to use the dependent variable of research was found to be 0.660, and volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.275 | http://emaj.pitt.edu yavuz toraman emerging markets journal | p a g e 6 3 the radj² value was found to be 0.657. r² value of the attitude towards use was found as 0.758, and the radj² value was found to be 0.753. attitude towards use, which is the leading indicator of intent, is very important. r² value of the perceived usefulness was detected as 0.823, and the radj² value was found to be 0.816. in this context, it can be said that a significant part of the factors that affect people's acceptance of their motivation do use the proposal model (hair et al., 2016; agustina, 2019). figure 6. path analysis of research source: smartpls 3 software output figure 6 shows the model of research. all the research applications have been conducted accordingly to the shown figure. the figure shows the factor loadings, r² value and original sample of model. v. conclusion technology continues to develop and spread to a wide base. new technologies are used in a different field every day. the version of technologies used in the past is updated. every technological device that comes into use accelerates the digitalization process of human life. one of the most important innovations that have entered human life in the last period is digital / cryptocurrencies created using blockchain technology and its infrastructure. in this research, the subject of interestfree financing with the digital turkish lira (dtl) to be created with the blockchain infrastructure and the company tokens to be issued due to it is discussed. interest-free financing will both enable companies to borrow at more affordable costs and encourage people to invest in turkish lira assets. since the interest-free financing model with company tokens using the blockchain infrastructure proposed in the research is a technological product, the technological acceptance model (tam), which is frequently used in the literature, was created using the theoretical infrastructure. tam research topic, which is frequently used in the acceptance of new technologies in the literature, plays an important role in determining the factors affecting the active use of technology or innovation and determining its degree (davis and venkatesh 1996; su et al., 2022; ajzen, 1991). according to tam, intention and attitude are important factors in people's actual use of the relevant technology. acceptance of the h1 hypothesis shows that intention and attitude are positively and significantly affected. this is very important in terms of the use of the technology in question (venkatesh and bala 2008). the relationship of attitude, which is an important determinant of intention, with perceived usefulness and perceived ease of use is very important. the positive and significant effect of pu on attitude, the acceptance of the h2 hypothesis, and the indirect effect of peou are among the important results of the present study (venkatesh, 2000). in the relations of r, ec and t, which are the external factors of the research, exhibit results parallel to the literature. the rejections of h5 and h8 show that the proposed model, which indirectly affects pu, is reliable and risk-free (toraman, 2021). in previous studies, it was determined that while cryptocurrencies such as bitcoin and ethereum were found to be risk-free, they were not actually reliable. the lack of a strong structure behind the determinations was seen as the most important reason. however, in the research conducted on cryptocurrencies such as dtl, which is the state behind it, it has been seen that there is no trust problem (toraman, 2022a; toraman, 2022b). likewise, the model proposed in the current study is seen as reliable and risk-free. here, the inclusion of state institutions in the system is the most important factor. finally, the proposed model allows interest-free financing. with istanbul international finance center project, which is in progress, funds will be transferred to turkey from muslim countries with interest sensitivity. in addition, turkey, which is in the middle of europe, asia and africa, will become an important trade center in the environment of the recent ukraine-russia war,, the civil war and confusion in the middle east. the company tokens to be issued based on dtl, which will be launched on the blockchain-based market, will enable easier money transfer between turkey and the countries of the region in this process. references akarli, a., clemens, p., magdalena, lund-jensen, kasper, m., andrew, m. (2012). recent financial loosening could provide upside to growth. goldmansachs ceemea economics analyst, no 12/03 arregui n., elekdag f., gelos g., lafarguette r. and seneviratne d. (2018). can countries manage their financial conditions amid globalization? imf working paper, monetary and capital markets department, january 2018. açikgöz, ş., & gökkaya, v. (2017). türkiye’de i̇lk halka arz getirilerinin değişkenliği. ege akademik bakış, 17(1), 33-58. agustina, d. (2019). extension of technology acceptance model (etam): adoption of cryptocurrency online trading technology. jurnal ekonomi, 24(2), 272-287. ajzen, i. (1991). the theory of planned behavior. organizational behavior and human decision processes, 50(2), 179-211. avcı, s.b., akdoğu, e. & şimşir, ş.a. (2020). borsa i̇stanbul i̇lk halka arz piyasa dinamikleri ve düşük fiyatlama. center of excellence in finance araştırma raporu, sabancı üniversitesi. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.275 | http://emaj.pitt.edu interest-free finance model by using blockchain-based company tokens: research on digital turkish lira (dtl) and borsa istanbul with technology acceptance model (tam) page |64| emerging markets journal balcerzak, a. p., nica, e., rogalska, e., poliak, m., klieštik, t., & sabie, o. m. (2022). blockchain technology and smart contracts in decentralized governance systems. administrative sciences, 12(3), 96. bayindir, a. (2008). faizsiz sistemde ödemeyi geciktiren borçluya uygulanacak maddi ceza. journal of istanbul university faculty of theology, (3). bayindir, s. (2005). islam hukuku penceresinden faizsiz bankacilik. ragbet yayinlari, istanbul: turkey. belanche, d., casaló, l. v., & flavián, c. (2012). integrating trust and personal values into the technology acceptance model: the case of egovernment services adoption. cuadernos de economía y dirección de la empresa, 15(4), 192-204. berdik, d., otoum, s., schmidt, n., porter, d., & jararweh, y. (2021). a survey on blockchain for information systems management and security. information processing & management, 58(1), 102397. bordo, m. d., & levin, a. t. (2017). central bank digital currency and the future of monetary policy (no. w23711). national bureau of economic research. büyükakin, f., & önyilmaz, o. (2012). faizsiz finansman bonosu sukuk ve türkiye uygulamalari. finansal araştırmalar ve çalışmalar dergisi, 4(7), 1-16. büyüköztürk, ş., kılıç-çakmak, e., akgün, ö., karadeniz, ş., and demirel, f. (2008). bilimsel araştırma yöntemleri. comec, (2020). standing committee for economic and commercial cooperation of the organization of islamic cooperation (comcec), improving shariah governance framework in islamic finance, 2020. http://ebook.comcec.org/kutuphane/icerik/5da 9134b-2438-4ee5-890c-d78ad3669d41.pdf, 29.10.2022 coinmarketcap. (2022). https://coinmarketcap.com/ access date: 14.11.2022 davis, f. d., and venkatesh, v. (1996). a critical assessment of potential measurement biases in the technology acceptance model: three experiments. international journal of humancomputer studies, 45(1), 19-45. davis, f. d., bagozzi, r. p., & warshaw, p. r. (1989). user acceptance of computer technology: a comparison of two theoretical models. management science, 35(8), 982-1003. daoud, j. i. (2017). multicollinearity and regression analysis. in journal of physics: conference series (vol. 949, no. 1, p. 012009). iop publishing. ece, n. (2011). dünya’da ve türk bankacılık sektöründe islam bankalarının gelişimi. akademik bakış dergisi, 25, 1-17. elghaish, f., hosseini, m. r., matarneh, s., talebi, s., wu, s., martek, i., ... & ghodrati, n. (2021). blockchain and the ‘internet of things' for the construction industry: research trends and opportunities. automation in construction, 132, 103942. ersin, i̇., & duran, s. (2017). faizsiz finans döngüsünü oluşturma açısından adil ekonomik düzen söyleminin kredileşme ilkeleri ve uygulanabilirliğinin değerlendirilmesi. turkish studies (elektronik), 12(8), 109-132. fraj, e., & martinez, e. (2006). environmental values and lifestyles as determining factors of ecological consumer behaviour: an empirical analysis. journal of consumer marketing, 23(3), 133-144. frizzo-barker, j., chow-white, p. a., adams, p. r., mentanko, j., ha, d., & green, s. (2020). blockchain as a disruptive technology for business: a systematic review. international journal of information management, 51, 102029. habib, s., & hamadneh, n. n. (2021). impact of perceived risk on consumers technology acceptance in online grocery adoption amid covid-19 pandemic. sustainability, 13(18), 10221. hagger, m. s., cheung, m. w. l., ajzen, i., & hamilton, k. (2022). perceived behavioral control moderating effects in the theory of planned behavior: a meta-analysis. health psychology. hair, j. f., william c. b., barry j. b. and rolph e. a (2010). multivariate data analysis. 7th ed. pearson education.(2010). hair, j.f. et al. (2011), “pls-sem: indeed a silver bullet”, journal of marketing theory and practice, 19(2), 139-152. hair, j. f., black, w. c., babin, b. j., & anderson, r. e. (2014). multivariate data analysis, 7th ed. harlow.2. hair, j.f. et al. (2016), a primer on partial least squares structural equation modeling (pls-sem), sage publications. hair, j. f., hult, g. t., ringle, c. m. and sarstedt, m. (2017). a primer on partial least squares structural equation modelling (pls-sem). los angeles: sage publication. second edition (2017). volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.275 | http://emaj.pitt.edu yavuz toraman emerging markets journal | p a g e 6 5 jarvenpaa, s. l., & leidner, d. e. (1999). communication and trust in global virtual teams. organization science, 10(6), 791-815. khoza, s., de beer, l. t., van niekerk, d., & nemakonde, l. (2021). a gender-differentiated analysis of climate-smart agriculture adoption by smallholder farmers: application of the extended technology acceptance model. gender, technology and development, 25(1), 1-21. kshetri, n. (2021). blockchain and sustainable supply chain management in developing countries. international journal of information management, 60, 102376. kurtuluş, k. (2010). araştırma yöntemleri. türkmen kitabevi. mancini-griffoli, t., peria, m. s. m., agur, i., ari, a., kiff, j., popescu, a., & rochon, c. (2018). casting light on central bank digital currency. imf staff discussion note, 8(18), 1-39. mao, c. m., & hovick, s. r. (2022). adding affordances and communication efficacy to the technology acceptance model to study the messaging features of online patient portals among young adults. health communication, 37(3), 307-315. nakamoto, s. (2008). bitcoin: a peer-to-peer electronic cash system. decentralized business review, 21260. oyman, m., bal, d., & ozer, s. (2022). extending the technology acceptance model to explain how perceived augmented reality affects consumers' perceptions. computers in human behavior, 128, 107127. pavlou, p. a., & gefen, d. (2004). building effective online marketplaces with institution-based trust. information systems research, 15(1), 37-59. pavlou, p. a. (2002). what drives electronic commerce? a theory of planned behavior perspective. academy of management proceedings, 1(1), a1-a6. smith, a. (2005). the wealth of nations. university of chicago bookstore. su, d. n., nguyen, n. a. n., nguyen, l. n. t., luu, t. t., & nguyen-phuoc, d. q. (2022). modeling consumers’ trust in mobile food delivery apps: perspectives of technology acceptance model, mobile service quality and personalizationprivacy theory. journal of hospitality marketing & management, 1-35. sunyaev, a., kannengießer, n., beck, r., treiblmaier, h., lacity, m., kranz, j., luckow, a. (2021). token economy. business & information systems engineering, 63(4), 457-478. tabachnick, b. g., fidell, l. s., & ullman, j. b. (2007). using multivariate statistics. pearson. 5th edition. boston, ma, 481-198. tao, d., fu, p., wang, y., zhang, t., & qu, x. (2022). key characteristics in designing massive open online courses (moocs) for user acceptance: an application of the extended technology acceptance model. interactive learning environments, 30(5), 882-895. tkbb (türkiye katılım bankaları birliği), (2022). https://tkbb.org.tr/veri/istatistikler, access date: 29.04.2018. tok, a. (2009). i̇slami finans sistemi çerçevesinde sukuk (i̇slami tahvil) uygulamaları. katılım bankaları ve türkiye açısından değerlendirmeler, spk yeterlilik etüdü, ankara. toraman, y. (2022a). dijital türk lirasının (dtl) kullanım kabulü: teknoloji kabul modeli (tkm) ve planlı davranış teorisi (pdt) çerçevesinde i̇ncelenmesi. sosyoekonomi, 30(54), 357-376. toraman, y. (2022b). user acceptance of metaverse: insights from technology acceptance model (tam) and planned behavior theory (pbt). emaj: emerging markets journal, 12(1), 67-75. toraman, y. (2021). blokzincir teknolojisinin benimsenmesinin teknoloji kabul modeli çerçevesinde i̇ncelenmesi: kripto (dijital) paralar üzerine bir araştırma. journal of social, humanities and administrative sciences, 7(45), 1841-1856. türket, h.(2010). i̇slami finans sisteminde finansal aracılık (yeterlilik etüdü), sermaye piyasası kurulu aracılık faaliyetleri dairesi, ankara. venkatesh, v., & davis, f. d. (2000). a theoretical extension of the technology acceptance model: four longitudinal field studies. management science, 46(2), 186-204. venkatesh, v. (2000). determinants of perceived ease of use: integrating control, intrinsic motivation, and emotion into the technology acceptance model. information systems research, 11(4), 342-365. venkatesh, v., & bala, h. (2008). technology acceptance model 3 and a research agenda on interventions. decision sciences, 39(2), 273-315. wilson, r. (2004), “overview of the sukuk market”, adam, n. and thomas, a. (edts), islamicbonds: your guide toissuing, structuring and investing in sukuk, (3-17), londra, euromoney books. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.275 | http://emaj.pitt.edu interest-free finance model by using blockchain-based company tokens: research on digital turkish lira (dtl) and borsa istanbul with technology acceptance model (tam) page |66| emerging markets journal yaqoob, i., salah, k., jayaraman, r., & al-hammadi, y. (2022). blockchain for healthcare data management: opportunities, challenges, and future recommendations. neural computing and applications, 34(14), 11475-11490. yildirim, i̇. (2014). tekafül (i̇slami) sigortacılık sisteminin dünyadaki gelişimi ve türkiye’de uygulanabilirliği. organizasyon ve yönetim bilimleri dergisi, 6(2), 49-58. yilmaz, m. k. (2012). türk sermaye piyasasında faizsiz yatırım araçlarının gelişiminin değerlendirilmesi ve geleceğe dönük bir bakış. finans politik ve ekonomik yorumlar, (563), 23-23. yuen, k. f., cai, l., qi, g., & wang, x. (2021). factors influencing autonomous vehicle adoption: an application of the technology acceptance model and innovation diffusion theory. technology analysis & strategic management, 33(5), 505519. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu quality of life and quality of work life as determinants of employee productivity: self-reports of tea harvesters in sri lanka anuruddha gamage kelani valley plantations plc hayleys plantations sector, sri lanka | e-mail: anuruddha.gamage@kvpl.com widana pathiranage richard wickramaratne university of peradeniya, sri lanka | e-mail: wp_richard@yahoo.com abstract tea industry plays a prominent and strategic role in sri lanka due to its significant impact on national output, employment and socio-economic status. therefore, the overall worker productivity in tea industry plays an integral role in terms of national income and foreign exchange earnings. today, the tea industry in sri lanka has been facing the burning issue of declining worker productivity which is the lowest among the tea producing countries in the world. in order to increase the level of worker productivity, simply applying conventional human resource management (hrm) practices is not adequate and a sustainable hrm model is a vital requirement as a strategy for dealing with this crisis and sustains the tea industry in the competitive global marketplace. this research was aimed at proposing human care practices (hcps) and knowledge management practices (kmps) as sustainable human resource management practices (shrmps) for enhancing the worker productivity through quality of work-life (qwls) and quality of life (qls). the study is specifically focusing on the tea industry, since tea is the key contributor for overall performances of the plantation industry. un-structured and one-on-one interviews were used as the qualitative research technique for this study. 100 randomly selected tea harvesters who are working in well performing tea estates in sri lanka reported a list of hcps and kmps that enhance qwl and ql, which in return enhance the worker productivity. the responses of tea harvesters were grouped into pre-defined structure according to comparative importance and then were validated with the findings of previous research studies. the findings were well supported by the premises of psychological contract and social exchange theories. the study also provides some implications for policy decisions and future research directions on identified hcps and kmps as sustainable hr practices, which has a direct relationship on the worker productivity. keywords: sustainable human care practices, knowledge management practices, quality of life, quality of work life, productivity new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.217 | http://emaj.pitt.edu | mailto:anuruddha.gamage@kvpl.com mailto:wp_richard@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.217 | http://emaj.pitt.edu anuruddha gamage, widana pathiranage richard wickramaratne emerging markets journal | p a g e |51 quality of life and quality of work life as determinants of employee productivity: selfreports of tea harvesters in sri lanka anuruddha gamage widana pathiranage richard wickramaratne i. introduction tea is the most consumed beverage in the world apart from water and the demand for consumption of tea will remain unchanged for the near future as well (tea review forbes and walker, 2019). therefore, the plantation industry is undoubtedly a critical context in the socio-economic make up in sri lanka (koththagoda and dissanayake, 2017).the tea industry is found as a major partner for more than a century in sri lanka's economy in terms of foreign exchange earnings, national output and employment. sri lanka’s best opportunity in sustaining the tea sector is strengthening the unique brand of ‘pure ceylon tea’ in order to be competitive in the global market. the global competitiveness in tea will increase with the quality of product and the profitability of suppliers, which is applicable to sri lanka as well. the country can also raise earnings from tea by integrating deeper into the global value chain. this can be achieved by increasing the share of value added tea production and exports. in order to achieve the competitive edge from the global competitiveness in the industry, cost of production is a critical limiting factor. in regards to managing the cost, practical approach is to enhance worker productivity from raw material producer. furthermore, wages account for up to 80% of input costs for the tea industry. labor pricing, combined with lower productivity, is putting sri lankan growers at a disadvantage in the global market (oxford business group, 2016). in terms of worker productivity in tea industry, sri lanka is facing serious issues on declining productivity (munasinghe et al., 2017), which recorded the lowest productivity amongst the tea producing countries (kelegama, 2010, perera, 2017). the ultimate impact of declining productivity in sri lankan tea industry, combined with rising input costs, have led to declining overall profitability (hilal, 2020) and created serious socio-economic challenges interrupting the sustainable growth of industry (gamage and wickremeratne, 2019). it is argued that, lapses in management and higher overhead cost have a significant impact on declining productivity, which resulted in negative consequences on social and environmental aspects (wal, 2018). therefore, sri lanka needs to change traditional land, labor usage and management models applicable specially on respect of regional plantation companies (rpcs), to enable rpcs to solve the current crisis of tea industry, mainly due to declining worker productivity and low yield, which ultimately leads to low profitability in the industry (dishanka and ikemoto , 2014; koththagoda and dissanayake, 2017). low financial performances of the tea industry, created a situation of decreasing investment on providing social and human facilities. dishanka and ikemoto (2014) further stressed the imbalance of bidirectional cycle of social development of tea plantation workers and productivity, which declining productivity will lead to low attention on social development initiatives. on the other hand, findings of mwaura and muku (2007) suggested that in order to improve the labor productivity, the welfare of farmers should be improved in the tea plantation industry. they further elaborated that inadequate human care initiatives, poor socioeconomic condition of workers, non-competitive & traditional work norms, lack of cooperativeness between workers and management have adversely affected the labor productivity. omotoyo (2015) further added that, inadequate attention to knowledge management initiatives will lead to a decline in productivity as well. it has been identified from previous research that, different human resource management approaches aiming at uplifting the workers’ social status and activities related to increase the social well-being of workers, contributed positively in increasing worker productivity levels of tea plantation workers from the present levels (dishanka and ikemoto, 2014; savarimuthu and rachael, 2017; gamage and wickramaratne, 2018; gamage and wickramaratne, 2019). this fact was well supported with the findings of munasinghe et al. (2017) that, worker benefits to increase their reputation, wage structure matches with present living conditions and fair wages and upgrading living facilities will increase worker satisfaction and loyalty. these will eventually result in increased productivity and reduced production costs. in sum, above challenges and issues implies that the existing traditional human resource management (hrm) policies and practices in the tea plantation industry in sri lanka are not sufficient for dealing with the problem of low worker productivity and its negative consequences on socio-economic parameters. therefore, the overarching purpose of this study is to further verify findings of prior study conducted by the authors based on the perceptions of different managerial levels in tea industry. another aim of this research is to identify productivity enhancing human care and knowledge management practices and to propose a productivity enhancing hrm model applicable for sustainable tea plantation industry. study also attempts to further expand the attention of planation companies, even to execute critical decisions to invest on human care and knowledge management practices as sustainable human resource management initiatives in the tea estates, which has an impact on improving the level of quality of life (ql) and quality of work-life (qwl) of workers in the estates. study further validates with the results that uplifting qwl and ql has a direct impact on increasing the level of productivity. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.217 | http://emaj.pitt.edu quality of life and quality of work life as determinants of employee productivity: self-reports of tea harvesters in sri lanka page |52| emerging markets journal ii. literature review traditional agriculture set-up which had been continuing for centuries was replaced by large scale plantation agriculture in the mid-18th century, introducing tea for commercial cultivation in 1876 (tea research institute of sri lanka, 2016). with the introduction of commercial tea cultivation, unique social division was emerged due to migrant workers, especially from south india. since then, the tea sector is socially important as these resident workers have been geographically and socially isolated from the other sectors of the economy for over 150 years (jayawardena, 1984). this social divisions and migrant nature of tea plantation workers have contributed to the economic and social exclusion of tea plantation workers (lahiri, 2000). although the contribution of agriculture sector in to the economy of sri lanka is significant for the last few decades, a sharp decline has been identified over the last few years. currently, the contribution of agriculture in country’s gross domestic product (gdp) is recorded as low as 7.87 % in 2018 (department of census and statisticssri lanka, 2019). it is highlighted that, tea as the main plantation crop in sri lanka has recorded one of the lowest contributions in country’s gdp as it was recorded as 0.78% for 2018 (central bank of sri lanka, 2018). irrespective of the contribution of tea industry towards sri lanka’s economy in terms of gdp, industry continues to occupy a pivotal position in terms of foreign exchange earnings & employment. tea export earnings, in terms of revenue, realized 184.7 billion rupees recording a growth 2.7 billion rupees compared to 2015 (central bank of sri lanka, 2018). in terms of employment, 2 million people were employed directly & indirectly which highlights 10% of the population of sri lanka depending on the industry (department of census and statistics, 2019). also, sri lanka is one of the top four tea producers in the world, ranking at the top with india, china and kenya, which all are much larger countries (silva, 2018). although sri lanka is one of the major tea producing countries in the world, unlike other major producers, approximately 90% of the tea production is exported to world markets (hilal, 2020). it expressed that, tea is a desired commodity by its very nature, crosses international boundaries, hence act as one of the main contributor for socio-economic performance of sri lanka irrespective of various challenges (gamage and wickremaratne, 2019). the tea industry also helps sri lanka’s economy by contributing about 15% of foreign exchange earnings (central bank of sri lanka, 2018). it explains criticality of the contribution that, any change in the steadiness of performance of the industry can seriously affect the health of sri lankan economy. quality of life could be defined as an individual’s satisfaction with his or her life dimensions compared to his or her ideal life. quality of life is influenced by an individual’s physical and mental health, the degree of independency, the social relationship with the environment, and other factors (ruzevicius, 2012). unique feature in plantation human resource management framework compared to other industries is that, it is a blend of conceptual human resource management and best human care practices, not only for direct work-force, but inclusive of wider plantation community (gamage and wickramaratne, 2019). therefore, improving quality of life in entire plantation community has a significant impact on overall performances of the tea estate, since the work-force is totally residential in nature. the findings of dishanka and ikemoto (2014) witnessed that, poor socio-economic conditions of workers and lack of living facilities provided for workers as well as their families have adversely affected the labor productivity. according to the research findings, quality of living conditions of the estate population are wellbelow the conditions attained even by the rural population in sri lanka as a result of low household income. the findings further elaborated that, because of low level of health and nutrition, facilities such as housing, sanitation and lack of awareness on household expenditure management of plantation community including workforce, resulted with low household income which in turn negatively affects the worker productivity in the sector (department of census and statistics, 2019). further studies witnessed the above fact that, care and attention for basic human needs in plantation community played a significant role in building up a productive long-term relationship between management and work-force as major partners in working community within the plantation sector (gamage and wickramaratne, 2018). they further stated that, physical quality of life such as health conditions, consumption patterns, working facilities and living conditions, focuses on people’s welfare, their living and working conditions which will have direct impact of their attitudes towards work and recreation. kurihara (2007) argued that, conventional plantation management model is not equipped for serving the basic social needs and it does not respond to improve the level of quality of life in plantation community. on the other hand, there is no possibility for tea plantation workers to improve their living conditions through their ineffective trade unions, that they are not really representing the actual needs of work-force due to uncontrollable political pressure (yogaratnam, 2010). in sum, improving the level of quality of life of plantation community has a great impact on improving worker productivity. roloff (1987) illustrated that, when individuals receive a benefit, they may experience a state of discomfort due to a sense of indebtedness and thus, force them to reciprocate the benefit in order to restore the equilibrium of the interpersonal relationship. this was further emphasized by redmond (2015) and rajadurai (2015) that, more investment towards development of socioeconomic status of the plantation community and rewards, increases the level of individual’s commitment to the employer-employee relationship and ultimately highers productivity. quality of work life is a multidimensional approach that is explained by different variables which are related to employment security and satisfaction. according to swamy et al. (2015), quality of work life (qwl) can be defined as an extent to which an employee is satisfied with personal and working needs through participating in the workplace while achieving the goals of the organization. there are so many drivers which can elaborate and explain the quality of work-life such as volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.217 | http://emaj.pitt.edu anuruddha gamage, widana pathiranage richard wickramaratne emerging markets journal | p a g e |53 rewards, job security, and career growth opportunities (lau, wong, chan and law, 2001), healthy and secure work environment, salary and benefits, job security, autonomy at work, providing the basis for skills education, and determining the job development direction (talebi et. al., 2012), a few to mention. however, there are many other critical factors which contribute to qwl, including physical, physiological and social factors (swamy et al., 2015). tea plantations are not merely economic and commercial production units, but rather complete and total social institutions. it is clearly executed that, workers and their lives are bound with the work-life and the management responsibility on providing the living facilities (international tea committee-itc, 2015). going beyond, employees are expecting favorable worklife environment from the management such as transparent way of goal setting and performance evaluation, benefits, rewards and recognition, job security, training opportunities, transformation of new knowledge and sharing facilities, career development and succession, as key components (gamage and wickramaratne, 2018; gamage and wickramaratne, 2019). this was well supported with the research findings of rose et al. (2006) that, favorable working environment which gives employees a fair and transparent succession, career growth and advancement as well as career satisfaction will have a significant impact on the quality of work-life and ultimately increases the worker performance. further research findings of elamparuthi (2014) stressed that training and development, knowledge transformation and employment opportunities linked with skills and employee motivation by way of performance based rewards have comparatively a higher impact on enhancing the level of quality of work-life. this was well supported with the findings of anwar et al., 2013; reddy and reddy, 2014; swamy et al., 2015 that, human capacity development opportunities, health and safety work environment, career planning and well-being initiatives of employees will lead to enhance the status of qwl. with the higher level of qwl, employee satisfaction will increase while motivated employees will produce more outputs and greater performance. swamy et al. 2015 stressed that, focusing on improving qwl to increase the contentment and satisfaction of employees can result in various advantages for both employees and organization. they further added that, higher level of qwl ensures the full usage of a worker’s potential by assuring greater involvement which makes the work more effective and efficient while end up with higher level of productivity. higher levels of employee productivity provide various advantages for the organizations as well as for the employees such as higher profitability and maximize organizational competitive advantage by reducing cost of production and in other way round by improving the quality of output (baily et al., 2005; hill, jones and schilling, 2014). this fundamental argument is almost applicable to tea plantation industry as well. perera (2017) stressed that, level of productivity in tea plantations can be improved by reducing the cost or increasing output. the labor cost is the highest cost component in tea plantations, which represents approximately 67-70% of total production cost (perera, 2017; central bank of sri lanka, 2018; gamage and wickramaratne, 2019). in order to sustain the tea industry positively to gain competitive advantage in the global market, cost of worker has to be reduced. there are several approaches to achieve this goal, but most practical way forward is by increasing the productivity level of workers. previous research findings supported the fact that, increasing the level of qwl will increase the level of worker productivity. iii. research methodology method and procedure of data aollection the study adopted a qualitative approach, which depends on responses of one-on-one un-structured interviews with operational level workers by the use of an interpreter for better communication while avoiding barriers on the native language of tea plantation workers. qualitative research methodology was adopted to get a better understanding through actual conversations and to identify trends and opinions related to selected research topic. ultimate focus of interviews was to identify and cluster the best human care practices and knowledge management practices as sustainable human resource management practices. the sample included 100 operational workers who are presently working in tea plantations as tea harvesters belonging to three reputed regional plantation companies in sri lanka. the selection was based on simple random sampling and three companies were selected according to the comparative performance of regional plantations company (rpc) ranking by ceylon tea traders association (ctta). the selection process for tea harvesters was purely based on their experience in the tea industry. the reliability of the information was assured by repeating the questions for same information on different patterns and collected information was supported with the findings from multiple sources such as industry related research papers, publications, articles and participatory observations. average duration of each interview was 30 minutes including time allocation for their further clarifications and open views. in order to conduct the interviews for 100 tea harvesters allocating 30 minutes per participant, ten human development officers working in tea plantations with fluent native language were selected and they were initially trained as interviewers to assist on conducting the interviews. the questionnaire was divided in to two main sections, part one for general and biographical information about the participants such as their age, number of years’ experience in plantations and experience in current estate and designation. the questions in part two were based on to elaborate their views on best human care and knowledge management practices, relationship of these human care and knowledge management practices towards quality of life (ql) and quality of work-life (qwl) as well as towards enhancing the worker productivity in tea plantation industry. the participants were asked to prioritize human care and knowledge management practices according to the relative importance. such human care practices were clustered during questionnaire development stage on the pre-determined categories by considering practical applications in the industry and by considering the authors’ previous research findings (gamage and volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.217 | http://emaj.pitt.edu quality of life and quality of work life as determinants of employee productivity: self-reports of tea harvesters in sri lanka page |54| emerging markets journal wickramaratne, 2018; gamage and wickramaratne, 2019). also, knowledge management practices were grouped considering the core steps in knowledge management cycle (evans et. al., 2014). the current study on operational workforce is purely to further verify, prioritize and validate the identified best human care and knowledge management practices. theoretical framework the worker productivity level in tea industry has direct relationship between human care best practices and knowledge management practices as sustainable hr practices. the foundation of the proposed human resource management model in tea plantation industry is based on two pillars:  smooth execution of the process of enhancing the worker productivity is based on the best human care practices.  continuation of the process of sustaining higher level of worker productivity is based on the best knowledge management practices. global tea market is estimated to be approximately us $ 73.13 in 2024 (hilal, 2020) and the other hand competitiveness of the sri lanka’s tea is declining in the global market (gamage and wickramaratne, 2019). the issue related to competitiveness of sri lanka’s tea is mainly because of the productivity parameters whereas low productivity and high cost of production in sri lanka’s tea is key features identified, compared to other global competitors such as kenya, china and india (perera, 2017; silva, 2018). competitive advantage achieved compared to sri lanka’s potential is far behind and this has created serious issues for sustainability of the industry (gamage and wickramaratne, 2019). therefore, sustainable development of the tea industry should be based on sound and competent human resource base. authors are proposing that, the theoretical model developed is expected to make a unique contribution by incorporating best human care practices and knowledge management practices in enhancing employee productivity. the proposed model is based on the proposition of psychological contract and social exchange theories. psychological contact theory, introduced by argyris (1960) suggests that, the relationship between employer and employee is not mainly for formal contract for economic benefits, but it is beyond the expectations of such benefits and more towards to social relationship. in the context of employee-employer relationship, reciprocal obligations are set in manner as a mutual contact (rousseau, 1989) and reciprocal psychological contract between employer and employee (buunk and schaufeli, 1999). gamage and wickramaratne (2019) further argued that, the notion of psychological contract refers to the expectations held by employees about the nature of their exchange with the organization. the social exchange theory, explained by blau (1964), which involves unspecified obligations such as if one person does another a favor expecting a benefit in future as a return. social exchange theory is one of the most enduring and widely used conceptual frameworks (cropanzano et al., 2017) to explain the social relationship between employer and employee in work environment. the social exchange process begins when a supervisor or coworker treats the individual in a positive or negative manner (eisenberger et al., 2004) and in return, the target, often a subordinate or coworker, may then choose to reciprocate this treatment with good or bad behavior (eisenberger et al., 1987). in organizational context, treating employees in a positive manner will add value to the performance of the organization by increasing their level of productivity. therefore, by applying these two theories, quality of work-life and quality of life of employees in tea plantations will enhance through human care and knowledge management best practices. in return, the employees will develop a sense of obligation to reciprocate by increasing their levels of productivity. research model the research model is indicated below in figure 1. sustainable human resources (hr) practices including human care practices and knowledge management practices, quality of work-life, quality of life and worker productive are listed as the factors in figure 1. figure 1. research model source: authors’ own compilation iv. data analysis the best human care and knowledge management practices identified and clustered according to authors’ previous studies (gamage and wickramaratne, 2018; gamage and wickrameaatne, 2019) have been checked for further validation on industry applicability in operational level work-force, which is a more vital and critical human resource segment in tea plantation industry in terms of overall productivity. the following best human care and knowledge management practices were identified as the most important sustainable hr practices, which have comparatively a higher impact on improving worker productivity in tea plantations. analyzing the feedback received from operational workforce who are working in tea estates under well reputed regional plantation companies elaborated that, the identified best human care and knowledge management practices have a direct impact on enhancing worker productivity levels of tea plantation industry in volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.217 | http://emaj.pitt.edu anuruddha gamage, widana pathiranage richard wickramaratne emerging markets journal | p a g e |55 sri lanka. they further stressed that, employee motivation level will increase by applying these best hr practices which will help to enhance their existing levels of quality of work-life (qwl) and quality of life (ql). the favorable environment developed through higher levels of qwl and ql will help employees to produce more in terms of outputs and enhance their performance. this has a great impact on enhancing worker productivity indicators such as intake per harvester, yield and cost per worker. hrm model proposed for tea industry explained the direct relationship of human care and knowledge management practices as sustainable human care practices with worker productivity. findings further expressed the relationship between best human care and knowledge management practices with qwl and ql. it is revealed that, qwl and ql act as mediators to stimulate and enhance the direct relationship between sustainable hr practices and worker productivity. sustainable human care practices as the perspectives of plantation operational workforce are indicated in table 1. table 1: sustainable human care practices (perspectives of plantation operational workforce) sustainable human care practices 1 living environment proper housing facilities proper and adequate sanitary facilities clean water facilities proper access roads 2 health and nutrition initiatives for minimizing anemic cases / zero anemia programs maternal care practices child care practices periodic medical tests 3 safety and protection adequate safety & protection staff sufficient safety & protection equipment necessary training for safety & protection 4 employee capacity building promoting savings within plantation families providing micro finance facilities for selfemployment opportunities as an additional income source training and awareness of savings and household cash management 5 education and development providing scholarships for needy children to complete their education and higher education moving away from the conventional recruitment process to capture young talent into suitable plantation employment opportunities 6 youth empowerment skills development program for the youth in estates training and guiding youth in plantations for suitable opportunities source: authors’ own compilation table 2: sustainable knowledge management practices (perspectives of plantation operational workforce) sustainable knowledge management practices 1 collection and capturing high tech and information technologies (it) for capturing sensitive data transparent communication tools irrespective of the language promoting formal and informal discussions within employees and groups 2 classifying, organizing and storing use of new technology for data classifying and storing implementing methods of new technology for information central information access 3 sharing and dissemination introducing peer training methods and on the job training (ojt) initiatives it based online systems for knowledge sharing e-leaning facilities in addition to more learning and development opportunities in e-platforms promoting internal training expertise for more training opportunities 4 accession, usage and review introducing digital platforms for easy access to information and knowledge periodic internal reviews system implementation for access to knowledge by experience 5 value creation more training opportunities based on actual needs facility to exchange and get the knowledge from internal training experts within the company reward system linked with knowledge management process within the company recognition and appreciation for innovations and creativity within the estate 6 sustainability promoting advancement and higher education opportunities providing exposure to advancement and new knowledge recruitment process linked to education and talents developing talent pool within the industry and linking them with succession plan source: authors’ own compilation v. findings and discussion the findings of this study were supported with the theories and models developed through various research. referring to the previous research findings, sustainable hr practices such as best human care and knowledge management practices have a direct impact on the worker volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.217 | http://emaj.pitt.edu quality of life and quality of work life as determinants of employee productivity: self-reports of tea harvesters in sri lanka page |56| emerging markets journal productivity, which is clearly elaborated in studies related to psychological contact and social exchange theories. in respect of plantation industry, workforce in plantations receive various benefits such as housing, health and wellbeing facilities, medical care, sanitation and community development programs as human care practices. furthermore, intangible benefits such as training and development programs, skills development, knowledge sharing sessions and capacity building programs as knowledge management practices are critical. in order to reciprocate the benefits they gained, workers will increase their level of performance and produce more outputs. once the workers are experiencing the benefits they gained from these best hr practices, their level of quality of life (ql) and quality of work-life (qwl) will improve. this will again add value to increase the level of performance by increasing employee motivation, commitment and engagement. leitão et. al. (2019) stressed that, quality of life is modulated by a wide range of factors, such as psychosocial parameters, health conditions, well-being in the workplace, the adequacy of working resources and infrastructures. this fact was well supported by the findings of yuh and choi (2017) that, significant productivity improvement can be observed due to subjective components such as trust, commitment and satisfaction of employees. also lodha and pathak (2017) as well as gamage and wickremeratne (2019) revealed the same findings. implementing best hr practices in an organization will increase the level of employee motivation and engagement, which will add value for the level of efficiency and ultimately have impact on the productivity. further studies highlighted the relationship between psychological contract and the employee engagement as well as the impact on worker productivity (irvine, 2009; bal et al, 2013; lodha and pathak, 2017; gamage and wickremeratne, 2019). the above fact on employee commitment and productivity was discussed in studies by meyer and allen (1997) as well as meyer et al. (2002). successful reciprocal exchange between employer and employee may transform the relationship into a high-quality social exchange relationship and people may become affectively committed to organizations for increasing the impact on overall performance. omotayo (2015) elaborated the relationship between knowledge management and worker productivity as a sustainable approach. he further stated that, less care on managing knowledge within an organization will lead to demise of the organization due to poor productivity levels. scholars argue that, knowledge is created and held collectively. people learn and create knowledge through continuous social interaction (nonaka and peltokorp, 2006). in simple, knowledge management process can be used as a social interaction tool within the organization and may finally enhance the performance. in terms of plantations, knowledge management process can be used effectively to increase the interaction among the employees for transferring and having a good blend of new as well as advanced knowledge with experience. finally, this approach will have a higher impact on worker productivity improvements. the research provides some important implications to policy makers in the tea industry considering the research findings. it is with evidence that, to improve the level of productivity in tea plantations, the employees should be facilitated with best human care practices in areas such as living environment, health & nutrients, safety & protection, employee capacity building, education & development and youth empowerment. also, the best knowledge management practices such as capturing, classifing and storing important knowledge, knowledge sharing, knowledge access & usage, knowledge value creation and sustainability should be inculcated within the tea plantations for worker productivity improvement. there is a limitation of generalizing these findings into an entire tea plantation industry. these findings are based on a sample size of 100 operational workers (harvesters) working in tea plantations of sri lanka. the research findings should be further investigated by conducting a survey based on a comparatively larger sample representing large number of tea estates in the country. the same study should be repeated in other tea growing countries to generalize the findings for an entire tea industry in global context. vi. conclusion in the current context of declining worker level and the firm level productivity, the conventional hrm practices do little to turnaround the tea plantation sector in sri lanka. therefore, this qualitative study was conducted with the purpose of proposing human care and knowledge management practices to promote worker productivity. based on the premise of social exchange and psychological contract theories, the study proposed a human resource model aimed at enhancing the worker productivity. the model proposed by this research as a sustainable human resource management model for tea plantation industry stresses that, best human care and knowledge management practices act as sustainable hr practices in tea industry and these factors determine the productivity of tea estate workers. this model will act as a value addition to the contemporary hrm models applied and practiced in various industries. references anwar, a. m., mahmoud, k. a., rusinah, s. and ahmad, s. m. a. (2013). the drivers of quality of working life (qwl): a critical review, australian journal of basic and applied sciences, vol.7(10), 399-402. argyris, c. (1960). understanding organizational behavior. dorsey press, homewood, il. baily, m. n., farrell, d., greenberg, e., henrich, j. d., jinjo, n., jolles, m., and remes, j. (2005). increasing global competition and labor productivity: lessons from the us automotive industry. mckensie global institute. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.217 | http://emaj.pitt.edu anuruddha gamage, widana pathiranage richard wickramaratne emerging markets journal | p a g e |57 bal, p., kooij, d., and dejong, s. (2013). how do developmental and accommodative hrm enhance employee engagement and commitment? the role of psychological contract and soc strategies. journal of management studies, 50(4), 546-572. blau, p.m. (1964). exchange and power in social life. social forces, 44(1), 128-129. retrieved from https://doi.org/10.2307/2574842. buunk, b.p. and schaufeli, w.b. (1993). burnout from a social comparison perspective. in w.b. schaufeli, c. maslach, t. marek (eds). professional burnout: recent developments in theory and research, 53-69. washington: taylor & francis. census of population and housing survey (2019). department of census and statistics, ministry of finance and planning. central bank of sri lanka. (2018). annual report. colombo: central bank of sri lanka. dishanka s. and ikemoto, y. (2014). social development and labour productivity: the problem and a solution for the tea plantation sector of sri lanka, international journal of theory & practice, vol. 05, no. 01, 67-80. elamparuthi, s. j. (2014). significance of quality of work life in small scale industries, employees in cuddalore, european journal of commerce and management, research vol. 3, issue: 1, 17-26. evans, m., dalkir, k., and bidian, c. (2014). a holistic view of the knowledge life cycle: the knowledge management cycle (kmc) model. electronic journal of knowledge management, 12(2), 85-97. eisenberger, r., lynch, p., aselage, j and rohdieck, s. (2004). who takes the most revenge? individual differences in negative reciprocity norm endorsement. personality & social psychology bulletin. 30. 787-99. 10.1177/0146167204264047. eisenberger, r., cotterell, n., and marvel, j. (1987). reciprocation ideology journal of personality and social psychology,53, 743-750. forbes and walker tea review (2019). forbes and walker tea brokers, colombo, sri lanka. gamage, a.t. and wickramaratne, w.p.r. (2018). towards a sustainable hrm model for human productivity in tea industry: an empirical study of tea plantation sector in sri lanka: 13th international research conference on management and finance 2018, university of colombo. gamage, a.t. and wickramaratne, w.p.r. (2019). productivity enhancing sustainable human care and knowledge management practices in sri lankan tea industry: international journal of business and social science, vol. 10, 74-82. no. 8, doi:10.30845/ijbss.v10n8p9. hilal, m.i.m. (2020). sri lanka’s tea economy: issues and strategies, journal of politics and law, vol. 13, no. 1, 1-11. hill, c., jones, g., and schilling, m. (2014). strategic management: theory: an integrated approach. cengage learning. international tea committee (itc) (2015). annual bulletin of statistics. itc, london http://www.fao.org/3/a-i6583e.pdf irvine,d.(2009). bloomberg business week official website. http://www.businessweek.com/bwdaily/dnflash /content/may2009/db2009058_952910.htm jayawardena, k. (1984). the plantation sector in sri lanka: recent changes in the welfare of children and women. world development, 12(3), 317-328. doi:10.1016/0305750x(84)90067-6 kelegama, s. (2010). productivity decline in the tea plantations and a possible way forward. colombo: vijithayapa publications. koththagoda, k.c. and dissanayake,d.m.r. (2017). potential of tea tourism in sri lanka: a review on managerial implications and research directions, equality and management, university of szczecin, poland, 51-68. kurihara, s. (2007). the estate plantation community in nuwaraeliya district of sri lanka: an introductory overview of social issues and poverty among residents living under the conventional plantation system. yokohama journal of social sciences, 15, 123-129. lahiri, s. (2000). bonded labour and the tea plantation economy. revolutionary democracy. 6 (2). retrieved from http://www.revolutionarydemocracy.org/rdv6n 2/tea.htm lau, t., wong, y.h., chan, k.f. and law, m., (2001). information technology and the work environment: does it change the way people interact at work? human systems management, vol. 20(3), 269274. leitão j., pereira d. and gonçalves â., (2019). quality of work life and organizational performance: workers' feelings of contributing, or not, to the organization's productivity. int. j. environ. res. public health., 16(20), 3803. doi:10.3390/ijerph16203803 volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.217 | http://emaj.pitt.edu quality of life and quality of work life as determinants of employee productivity: self-reports of tea harvesters in sri lanka page |58| emerging markets journal lodha, d. and pathak, k. (2017). effect of psychological contract on employee engagement. journal of researchers, 1(1), 6-9. meyer, j. p., stanley, d. j., herscovitch, l. and topolnytsky, l. (2002). affective, continuance, and normative commitment to the organization: a meta-analysis of antecedents, correlates, and consequences. journal of vocational behavior, 61(1), 20–52. https://doi.org/10.1006/jvbe.2001.1842 meyer, j. p. and allen, n. j. (1997). advanced topics in organizational behavior: commitment in the workplace: theory, research, and application thousand oaks, ca: sage publications, inc. doi: 10.4135/9781452231556 munasinghe, m., deraniyagala, y., dassanayake, n., and karunarathna, h. (2017). economic, social and environmental impacts and overall sustainability of the tea sector in sri lanka. sustainable production and consumption, 12, 155-169. mwaura, f. and muku, o. (2007). tea farming enterprise contribution to smallholders’ well being in kenya, tea research foundation of kenya, aaae conference proceedings (2007) 307-313. nonaka, i. and peltokorpi, v. (2006). objectivity and subjectivity in knowledge management: a review of 20 top articles. knowledge and process management. 13. 73-82. omotayo, f.o. (2015). knowledge management as an important tool in organizational management: a review of literature. library philosophy and practice (e-journal). 1238. retrieved from http://digitalcommons.unl.edu/libphilprac/1238 oxford business group (2016). growth prospects for sri lanka’s tea industry. oxford business group. http://www.oxfordbusinessgroup. perera, m. (2017). sri lanka tea plantations: crisis and restructure, business times, the sunday times, january 15, 2017. rajadurai, r. (2015). determinants of annual productivity of female tea harvesters in the mid country regional plantation company estates in sri lanka. peradeniya: post graduate institute of agriculture. reddy, d. m. l. and reddy p, d. m. (2014). comparative analysis of quality of work life among public and private sector bank employees. international journal of organizational behaviour & management perspectives, 2(4), 644-647. redmond, m.v. (2015). face and politeness theories. english technical reports and white papers. 2. retrieved from http://lib.dr.iastate.edu/engl_reports/2 roloff, j. (1987). learning from multi-stakeholder networks: issue-focused stakeholder, management. journal of business ethics, 82(01), 233-250. rose, r. c., beh, l., uli, j. and idris, k. (2006). quality of work life: implications of career dimensions. journal of social sciences, 2(2). rousseau, d. (1989). psychological and implied contracts in organizations. employee responsibilities and rights journal, 2(2), 121139. ruževičius, j. (2014). quality of life and of working life: conceptions and research, 17th toulonverona international conference, liverpool john moores university, england, august 2829, 2014. savarimuthu, a. and rachael, a.j. (2017). psychological contracta conceptual framework. international journal of management, 8 (5), 2017, 101-108. available from: https://www.researchgate.net/publication/3215 74803 silva, g. (2018). targeted policies for production and export diversification sri lankan case study, 10th multi-year expert meeting on commodities and development, united nations conference on trade and development, 25-26 april 2018, geneva. swamy, d.r., nanjundeswaraswamy, t.s. and rashmi, s. (2015). quality of work life: scale development and validation, international journal of caring sciences, may-august 2015, volume 8 issue 2, 281-300. talebi, b., pakdelbonab, m., zemestani, g. and aghdami, n., (2012). investigating the relationship between the employee’s quality of work life (qwl) and their effectiveness in banking. european journal of experimental biology, 2(5): 1840-1841. available from: https://www.researchgate.net/publication/3157 28630 wal, s. v. d. (2008). sustainability issues in the tea sector, a comprehensive analysis of six leading producing countries, centre for research on multinational corporations, amsterdam, netherlands. yogarathnam, n. (2010). economics of scale ineffective in lankan tea business. daily news, 6. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.217 | http://emaj.pitt.edu anuruddha gamage, widana pathiranage richard wickramaratne emerging markets journal | p a g e |59 yuh, j. and choi, s. (2017). sources of social support, job satisfaction, and quality of life among childcare teachers. the social science journal. 54. 10.1016/j.soscij.2017.08.002 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu real-estate entrepreneurship from baumol's productive and unproductive typology: a contestable markets approach hande karadag mef university, turkey | e-mail: hande.karadag@mef.edu.tr berna balcı i̇zgi gaziantep university department of economics, turkey | e-mail: izgi@gantep.edu.tr abstract the role of innovation in economic development has long been a topic of discussion among economists. despite that, the economic pay-off mechanisms which support or hinder innovative entrepreneurial acts, particularly in the emerging economy context are significantly underexplored in academic studies. in this study, we aim to fill this important gap in the literature by taking baumol’s contestable markets theory and the typology of productive and unproductive entrepreneurship. as baumol has advocated, the economies that offer higher pay-offs to productive entrepreneurial acts are more likely to thrive mainly due to the increased capacity of economic growth, while developing and poor economies struggle. in this study, we posit that in the developing and emerging market contexts, formal policies are claimed to prioritize the production of more innovative and productive start-ups and a climate that supports and fosters productive entrepreneurial acts. despite that, there are still major administrative, social and cultural barriers towards creation of innovative start-ups and a productive entrepreneurship ecosystem. here, continuing political, economic and social support towards unproductive entrepreneurship acts, in particular real-estate entrepreneurship emerges as one of the main factors that hinder the flow of funds towards innovation and technology. we thus argue that, being unable to balance the role of these unproductive entrepreneurial acts with productive ones in economy significantly deteriorates the sustainable economic growth and a high standard of living in emerging and developing economy contexts. in the implications section, several precautions and support mechanisms for overcoming the barriers towards productive entrepreneurship are presented and discussed. keywords: entrepreneurship, real-estate entrepreneurship, baumol, baumol's productive and unproductive typology, emerging market new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.241 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.241 | http://emaj.pitt.edu hande karadag, berna balcı i̇zgi emerging markets journal | p a g e |53 real-estate entrepreneurship from baumol's productive and unproductive typology: a contestable markets approach hande karadag berna balcı i̇zgi i. introduction today, although entrepreneurship is increasingly recognized as a more important channel for success, there is still limited knowledge about how entrepreneurship can foster economic growth and development. transformation into sustainable products and processes is gradually turning into a structure that advocates entrepreneurship as a living space. however, the question of how entrepreneurship acts in promoting sustainable development involves many unknowns. the acceleration of digital destruction brought along difficulties for incumbent firms to adapt. top fortune 500 profitability ratios show that today's profitability rates of most firms are higher. it is a fact that newcomers are of course growing very fast. some creative destruction has indeed taken place in technology, media, and retail. other major industries outside of these sectors have not faced similar devastation, thanks to a series of barriers that include high switching costs, economies of scale, trust, and regulation. particularly with covid-19, the notion of productivity began to be discussed rather than whether the entrepreneurial activity was innovative or repetitive, as the pandemic drew higher attention to the importance of institutions on entrepreneurship. this discussion was first brought to the spotlight with the original paper of baumol (1990) and is considered as an important contribution to the entrepreneurial economics literature. after this seminal work, many articles defending this perspective appeared (sobel, 2008). according to baumol, it is assumed that entrepreneurial individuals direct their efforts in different directions depending on the quality of the prevailing economic, political and legal institutions. this institutional structure determines the relative reward for investing entrepreneurial energies in productive market activities versus unproductive political and legal activities (for example, lobbying and litigation). good institutions maintain higher rates of economic growth, directing efforts towards productive entrepreneurship. baumol's productive entrepreneurship is parallel to the schumpeterian definition of entrepreneurship and can be thought of as a broader definition meaning 'realization of new combinations' (baumol, 1990). baumol’s 1990 article, one of the most cited articles in the entrepreneurship literature, focused on the impact of the macroeconomic environment on entrepreneurship. baumol argued that market economies benefit from the innovation that was initially developed. then, the existence of a sufficient number of replicative entrepreneurship which acts as diffusers of innovation comes into play. in the entrepreneurship typology defined by this study, the quality of institutions is associated with the distribution of different types of entrepreneurial activity. the contribution of baumol is accepted as a milestone in the field of economics (minniti, 2016). this unique outlook towards entrepreneurship is in convergence with the living standards and economic development observed in developed countries. however, how the productive and unproductive nature of entrepreneurial acts impact the realization of entrepreneurial policies in developing economies remains to be underexplored in the literature. thus, the main purpose of this study is to argue baumol’s point of view in terms of the rapidly changing financial conditions of today’s global economy, and in particular the growth and development trajectories of emerging market economies. ii. baumol's theory of contestable markets for over 400 years, economists have contributed to the theory of entrepreneurship. cantillon (1755) defined entrepreneurship as taking on the individual financial risk of a business. in 1848, mill defined the entrepreneur as the person who assumes the risk and management of an enterprise and thus makes an implicit contribution to its operation and other business. in 1947, schumpeter linked entrepreneurship with the creation of a novel product or service and defined the role of the entrepreneur as innovation. since the 1960s, many economists have implicitly positioned entrepreneurship under technological innovation. as an exception, baumol defined entrepreneurship as the center of the entrepreneurial market. the socio-economic factors and the features of the entrepreneurial ecosystem in advanced and emerging economy contexts have to be separately explored for understanding the factors which may encourage or hinder entrepreneurial and innovative activities in different contexts. while trying to explain economic growth and productivity, baumol defines productive entrepreneurship in terms of gross domestic product (gdp) per capita as a cornerstone of economic growth. sustainable growth reveals the necessity of technological advances and the use of new products and processes by all companies. innovations are rarely watched in isolation or kept secret, and when there is pressure on firms to innovate, sharing this information enables all firms to benefit more from this larger investment pool (baumol, 2000). he gives the examples of ibm and toshiba, talks volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.241 | http://emaj.pitt.edu real-estate entrepreneurship from baumol's productive and unproductive typology: a contestable markets approach page |54| emerging markets journal about the synergy that comes from being aware of someone's innovation portfolios, and explains their strategizing at the top of their strategic initiatives in contestable markets (baumol,1982). competitive markets, which is an unknown but developing area of economic theory, are defined in the entrepreneurship and management literature as a market with a small number of established firms and at the same time a high degree of competition with short-term potential entries. the main features of this market are an environment where new entrants compete with the established ones, and in fact, this is one of the markets that explains today's markets the most. this market has three features: there are no barriers to entry and exit, no sunk costs, and all companies have equal access to all levels of technology. although today's digital economy offers the opportunity to have no or low costs, new companies that do not have sufficient knowledge and technology face higher average costs and compete more difficult. otherwise, we can say that very few markets are fully competitive. for example, the steel industry in the usa is an example. with the entry of small steel companies and the low-cost carriers and regulations in the seventies and eighties, the airline industry has also become a highly competitive market. therefore, in the contestable market theory, the structure of the industry and the sector is determined endogenously by the strategic decisions of the firms. baumol explains that beyond the industrial organization, pricing and production decisions are completely dependent on the market structure through competition. this logic enables us to better understand the bipolar world under the contestable markets and short-term entrepreneurial rents that innovative entrepreneurs face. another issue on the industrial organization is the cost disease approach. this approach argues that differences in productivity also have implications for strategic entrepreneurship. manufacturing in some industries or sub-sectors while there is potential for sustainable long-term productivity growth in the long run, while in others such as art, it may be difficult to increase productivity significantly. in the long run, this asymmetry reveals that there are industries that fail to increase their productivity. while prices related to surgery procedures increase, automobile prices may not increase, as a result, the demand for output either decreases over time in sectors with low productivity or its share in the total expenditures of the consumer is increasing. the role of the entrepreneur is more important and different for the case of smes. it is very important to understand not only the logic of disruptive innovation but also the fundamentals of the sectoral structure and competitive advantage. in this regard, the paper by carree and others (2002) examined the relationship between business ownership and economic development and found a long-term equilibrium relationship between economic development and business ownership. one of the policy recommendations suggested by this study is to ensure dynamic entrepreneurial competition, to guarantee free entrepreneurial venture in any market, to ensure the existence of single opportunities, and to ensure financial burdens at the exit. the study suggests three perspectives: first business ownership equilibrium ratio is related to which stage of economic development, second what is the speed of convergence to equilibrium, and thirdly, what is the deviation from the equilibrium rate? according to the findings of the study, business ownership in european countries attracts policymakers since limited economic growth and high unemployment rate in the post-war period. on the one hand, it has shifted from the new competitive european union markets to low-cost asian and central and eastern european countries. new inventions in the field of telecommunications and computers were the main reason for this. the capital and knowledge shifted to lower-cost locations around the world (audredtsch & thurik, 2000). the underdeveloped countries' focus on investment for technical efficiency, without taking into account market needs and the building of (dynamic) managerial capabilities, is limited for economic growth and prosperity in development. the capabilities approach has endless consequences in this regard. while the studies analyzing the relationships between innovation, technology, and development are increasing, there is still a need for studies that include a more complete model of the underlying factors, taking into account issues such as firm heterogeneity, the innovative performance of firms and productivity growth in the economy (teece, 2019). iii. baumol’s unproductive and destructive entrepreneurship the role of the entrepreneur has long been discussed within the theory of entrepreneurship (minniti, 2016). for instance, according to say (1803), the main role of the entrepreneur in the economy was value creation through directing resources from unproductive to productive activities. according to schumpeter (1947), an entrepreneur is the source of creative disruption and innovation, making the existing products and markets obsolete. following their footsteps, baumol (1990) in his seminal paper advocated that entrepreneurship is not always productive, but can be unproductive or even destructive (such as criminal acts) under certain circumstances. here, he differentiated between the aggregate supply of entrepreneurs in an economy and the allocation of these individuals regarding their direction towards unproductive and productive activities (minniti, 2016). baumol built his propositions of this differentiation on the historical progress of entrepreneurial activity, holding that the innovativeness of an economy, together with the dissemination of technological innovations are strongly influenced by the productive or unproductive nature of entrepreneurial acts. here, he argued that an entrepreneurial activity that does not contribute to increasing the productive capacity of the economy and wastes the entrepreneurial potential of an individual is unproductive. he also advocated that while entrepreneurial talent exists in every part of the world, whether that talent will be directed towards productive or unproductive, and even destructive activities is largely influenced by the social and economic payoff dynamics (eliasson and henrekson, 2004). bauomol (2010) gave lawsuits and/or takeovers as examples of rent-seeking behavior, combined them with tax evasion, and smart financial operations (eg arbitrage), finally categorized them all together as unproductive entrepreneurship. he discussed that while all these acts are legal, they have zero or very low contribution to the total productive capacity of the volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.241 | http://emaj.pitt.edu hande karadag, berna balcı i̇zgi emerging markets journal | p a g e |55 economy. another main criticism that he mentioned was the wasted entrepreneurial talent diverted to these unproductive activities. what he proposed as solutions to this problem were first, modifying the rewards and relative pay-offs in such a way that they will be productive, serving the society as a whole. according to baumol, since the total supply of entrepreneurs or the propensity of a population for entrepreneurship in different geographical locations can not be changed, the only mechanism to manage the entrepreneurial talent would be changing the pay-off or incentive structure gained from entrepreneurial acts, by the administrators or the society as a whole (minniti, 2016). for example, limiting the legal processes and financial gains from the litigations is one of his proposals, which could potentially discourage the entrepreneur from entering into such an act. his second suggestion was to redefine the entrepreneurial goals towards more productive ones and reallocate the resources and efforts accordingly. iv. real-estate entrepreneurship: productive or unproductive? real estate is an important real asset. in regards to institutional investors, it is a good diversifier and better inflation hedge than most financial assets (illmanen, 2020). within the last decades, private and institutional investors have been investing vast amounts of capital to residential real-estate markets, due to the increasing global housing prices (knoll et al., 2017). from baumol (2010)’s productive and unproductive entrepreneurship perspective, one detrimental factor hindering innovative entrepreneurship, particularly in emerging market economies can be discussed as “realestate entrepreneurship”. housing wealth is the largest component of national capital stock (jorda et al, 2019) as in a typical economy it comprises around one-half of cumulative national wealth (piketty et al., 2014). findings of the studies by jorda et al (2019) for the 18702015 period in 16 advanced economies showed that concerning total returns, the highest total gains have been received from residential real estate both in real and nominal terms, making it “the best long-run investment over the course of modern history”. the rate of returns in the real estate sector has long been attracting the interest of investors not only in advanced economies but emerging markets, as well. although the real estate sector is a fast-growing aspect in terms of high market value and land stock, especially with real estate investment trusts, there are several aspects to be criticized. one of these negativities is regarded as society’s welfare being compromised, as the urgent expropriation decisions, which have become standardized might make many people suffer. although the main purpose seems to be public interest, when the projects implemented by the state with the urgent expropriation method are examined, it is thought that this purpose has deviated when the results of the project are not adequately expressed by the administration to the benefit of the public (soyarat, 2017). real estate entrepreneurship is a special form of venturing (linnemann, 2007). besides being highly capital intensive, residential real estate and construction are traditionally known as low-innovative industries (kung, 2020). while real-estate entrepreneurs can be present in every part of the globe who financially aim to exploit the opportunities present in real-estate markets and benefit from other socio-cultural aspects, the flow of limited savings towards a less risky and potentially more promising investment area can be a major limitation for founding and growing new entrepreneurial ventures, where capital is a requirement both in start-up and growth phases. any individual who has the plan to establish an innovative start-up can be discouraged both by the relatively higher returns of the real-estate sector and the other risk factors in these developing economy settings, negatively impacting the survival of the new venture. studies show that only one in ten new businesses can continue their existence during the first three years of establishment (bednar and tariskova, 2017). thus, having a more guaranteed and less risky investment alternative can cause the extra funds of institutions and individuals to be spent on buying and selling real estate where the historical trend of returns is highest. research studies indicate that the economic returns and the social norms greatly influence the investments flowing towards the real-estate sector, particularly in emerging economies, leaving the innovative new ventures with less and fewer amounts of start-up and growth capital. in unproductive entrepreneurship, the sole focus of the entrepreneur is to develop new forms of rent-seeking (minniti, 2016). thus, analyzed from baumol’s typology, real-estate entrepreneurship can be classified as “unproductive” for any type of economy. as the real-estate sector has very low innovativeness capacity, the opportunity cost of not using these funds for supporting new and promising tech startups is considerably high, particularly for developing and emerging economy contexts. empirical findings support this argument. for instance, li and wu (2014) advocated that in china, “a prosperous real estate market may have a negative impact on entrepreneurship for people who have accumulated certain amount of wealth” and found empirical support for a negative relationship between housing prices and entrepreneurial activity in that context. the researchers found that increasing housing prices rise the attractiveness of house purchases compared to starting a new business, due to both financial and socio-cultural reasons, stating that in china, the societal regard towards having a house or land is very high (li and wu, 2014). similarly, a recent study focusing on the real-estate value increases in turkey has shown that the real-estate sector is the most advantageous sector to invest in, compared to financial markets (bayraktar, 2019). another major advantageous element favoring real-estate investment against other alternatives in turkey is the lack of taxation auditing in the realestate sector. this inadequate and disproportional taxation practice is indicated in the public policy reports, stating that the real-estate sector has the smallest share of tax income in turkey. the society’s approach towards real-estate investments in this context is similar to china, as the public shows great respect towards real-estate ownership. for these reasons, it is a general practice in turkey to invest funds in various real-estate alternatives, such as residential, commercial, and land purchases, rather than other financial alternatives such as bank deposits, stocks, or venture capital. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.241 | http://emaj.pitt.edu real-estate entrepreneurship from baumol's productive and unproductive typology: a contestable markets approach page |56| emerging markets journal v. innovative entrepreneurship: the true path towards economic development while the role of the entrepreneur in the economy has been a topic of discussion among scholars for centuries, schumpeter (1947) was the first to introduce the idea of creative destruction. schumpeter stated that the innovations that emerged in economic life constitute "a balance within the imbalance" in terms of economic balance. thus, entrepreneurship, in his regard, is presenting innovation to the market. it is a phenomenon that activates the industrial dynamics that disrupts the existing balance, challenges existing structures by creating differences. therefore, the basis of schumpeter's analysis of capitalist economic growth dynamics is freedom, money or innovation supply and entrepreneurship and structural competitiveness based on innovation taking place rather than the supply-side consequences of taxation. at this point, due to entrepreneurs who cannot innovate, companies' competitiveness might decrease, thus the process of creative destruction in economic life will cease to exist. at the same time, this modern entrepreneurial state, enacting patent laws, utility models and trademark applications for the success of entrepreneurship and innovation can make significant contributions to economic development (kitapçı, 2019). thus, any potential negative effects of creative destruction from innovation can be reduced. in his seminal book “the microtheory of innovative entrepreneurship”, baumol defined an innovative entrepreneur as an individual generating and realizing new ideas and analyzes the important role of innovative entrepreneurship on the economic growth and development of a society (baumol, 2010). according to baumol, one can differentiate between innovative and replicate entrepreneurship, where the former entails introducing novel products and techniques to the market (minniti, 2016), whereas the latter refers to diffusing the innovative products, services, and processes once they have been created and they are accepted by the markets. he further developed this perspective of the innovative entrepreneur in his contestable markets theory, where he mentioned that entrepreneurs are obliged to keep the flow of unique services and products for maintaining the entrepreneurial rents they are seeking, thus are not some random contributors of new products and service development activities. within this approach, the uncomputable and unplanned nature of innovative entrepreneurship is also highlighted (koppl, 2008). how innovation would affect economic growth has also been a major topic of discussion among economists (hasan and tucci, 2010), and several models are introduced to the literature, showing that industrial innovation practices are major factors influencing economic growth, stemming from their direct role on the process of production and positive externalities (romer, 1990; stokey, 1995). according to baumol (2002), historically, innovative entrepreneurship has been the key driver of industrialization and a free-market economy, leading to economic development and prosperity. recent empirical findings support his view. for instance, in their analysis on 58 countries between 1980 and 2003, hasan and tucci (2010) found that the quantity and quality of innovative activities, in particular patents, are positively linked with economic growth. as the theoretical models backed with empirical findings indicate, innovation has a strong impact on economic development and prosperity. for this reason in every type of economy, policymakers are aiming to foster “innovative entrepreneurship”, which is closely linked with socio-economic development. in baumol’s view, the pressure caused by intense competition in free markets would encourage innovative acts thus would lead to increased productivity, taking an economy’s production possibility frontier further (baumol and mclennan, 1985). increasing the number of activities entailing new/product-service development mainly through advanced technologies thus should be regarded as a priority particularly in emerging and developing economies. baumol himself has highlighted the vital need for increased innovative entrepreneurship activities in poor and developing economies, stating that these economies can only make breakthroughs and change productivity levels and per capita income by innovation and technology (minniti, 2016). while this is the case, in most emerging economies, the pay-off structure of unproductive entrepreneurial and economic acts remains to be positive, generally supported by indirect governmental incentives, such as inadequate controls and taxation mechanisms, backed up with social norms and acceptances. vi. conclusion in today's postmodern global capitalist world, schumpeter's (1947) views on entrepreneurship and innovation come to the fore again. with the modern economies becoming more complex, building appropriate systems for supporting and nurturing the climate for producing more innovative entrepreneurs became the only path to productive and fair economic development. according to schumpeter, the state should not only be a tax-collecting structure but a modern entrepreneurial state that establishes and transforms economic life. following his initial giant steps, baomol carried the role of the government for entrepreneurship further and made a breakthrough with his contestable markets theory and the notions of productive and unproductive entrepreneurship. baumol advocates that underdeveloped and emerging economies can only prosper if the administrators and the society as a whole possess and sustains the pay-off mechanisms that would encourage innovative and productive entrepreneurship and discourage unproductive entrepreneurship. unfortunately, while the advanced economies have succeeded to build both formal and informal support systems for innovators and their start-ups, emerging economies are still struggling in this regard. historically, the trend toward investing in realestate markets due to several economic and socio-cultural benefits is observed throughout the globe. however, while the advanced economies have succeeded in balancing the relatively unproductive entrepreneurial acts, solely targeting economic rents, with productive and innovative new venture foundations, in most emerging economies, most funds are still spent in land and residential real-estate purchases. interestingly, while the public policies developed and announced in these contexts are said to create the flourishing of innovation and technology, there are still underlying administrative mechanisms that help to sustain the majority of investments flowing to the real-estate sector. this study, volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.241 | http://emaj.pitt.edu hande karadag, berna balcı i̇zgi emerging markets journal | p a g e |57 therefore, aims to shed light on this discrepancy between the wishful policy-making and the harsh reality between real-estate and start-up investments, hampering a healthy, strong, and sustainable socio-economic development. references audretsch, d. b., thurik, a. r. (2000). capitalism and democracy in the 21st century: from the managed to the entrepreneurial economy. journal of evolutionary economics, 10(1), 17-34. baumol, w. j. (1990). entrepreneurship: productive, unproductive and destructive, journal of political economy 98(5), 893–921. baumol, w. j. (1996). entrepreneurship: productive, unproductive, and destructive. journal of business venturing, 11(1), 3-22. baumol, w. j. (2010). the micro theory of innovative entrepreneurship. princeton university press. baumol w.j., mclennan k. (1985). productivity growth and u. s. competitiveness. oxford university press: new york. bayraktar, s. (2019). türkiye konut sektörü performans analizi. finans politik ve ekonomik yorumlar dergisi, 56(647), 145-164. bednár, r., tarišková, n. (2017). indicators of startup failure. industry 4.0, 2(5), 238-240. cantillon, r. (1959). essai sur la nature du commerce en general [and other essays]. editing and translation: henry higgs, londra: frank cass. carree, m., van stel, a., thurik, r., wennekers, s. (2002). economic development and business ownership: an analysis using data of 23 oecd countries in the period 1976-1996. small business economics, 19(3), 271-290. eichholtz, p., korevaar, m., lindenthal, t., tallec, r. (2021). the total return and risk to residential real estate, the review of financial studies, 34 (8), 3608-3646. eliasson, g., henrekson, m. (2004). william j. baumol: an entrepreneurial economist on the economics of entrepreneurship. small business economics, 23(1), 1-7. hall, j.k, daneke,g.a., lenox,m.j. (2010). sustainable development and entrepreneurship: past contributions and future directions, journal of business venturing, 25 (5), 439-448. hall, j. k., daneke, g. a., lenox, m. j. (2010). sustainable development and entrepreneurship: past contributions and future directions. journal of business venturing, 25(5), 439-448. ilmanen, antti. (2012).expected returns on major asset classes. cfa institute research foundation 1. kitapcı, i̇. (2019). joseph schumpeter’in girişimcilik ve inovasyon anlayışı: yaratıcı yıkım kavramı ve geçmişten günümüze yansımaları. journal of empirical economics and social sciences, 1 (2), 54-74. knoll, k., schularick, m., steger, t. (2017). no price like home: global house prices, 1870–2012. american economic review, 107 (2), 331-353. kung, e. (2020). innovation and entrepreneurship in housing. in the role of innovation and entrepreneurship in economic growth. university of chicago press. linneman, p. d. (2007). some observations on real estate entrepreneurship. wharton real estate review, 11(2), 44. mill, j.s. (1848). principals of political economy, john w.parker, uk. minniti, m. (2016). the foundational contribution to entrepreneurship research of william j. baumol. strategic entrepreneurship journal, 10(2), 214-228. sobel, r. s. (2008). testing baumol: institutional quality and the productivity of entrepreneurship. journal of business venturing, 23(6), 641-655. soyarat, y. t. (2017). kentsel dönüşüm uygulamalarında yöntem olarak kamulaştırma ve acele kamulaştırma uygulamalarına eleştirel bir bakış: i̇stanbul sulukule ve tarlabaşı örneği. i̇stanbul üniversitesi sbe siyaset bilimi ve kamu yönetimi abd yüksek lisans tezi. piketty, t., zucman, g. (2014). capital is back: wealthincome ratios in rich countries 1700–2010, quarterly journal of economics, 129, 12551310. romer, p.m. (1990). endogenous technological change. journal of political economy, 98 (5), 71-102. say, j.b. (1803). a treatise on political economy: or the production, distribution, and consumption of wealth (1855 english edn). lippincott, grambo & co: philadelphia, pa. schumpeter, j. (1947). capitalism, socialism, and democracy. harper & brothers: new york. stokey, n. l. (1995). r&d and economic growth. review of economic studies, 28 (4), 16611707. teece, d., j. (2019). a capability theory of the firm: an economics and (strategic) management perspective, new zealand economic papers, 53(1), 1-43. https://econpapers.repec.org/article/eeejbvent/ https://econpapers.repec.org/article/eeejbvent/ volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu does brand love last forever? : a study on turkey’s lovemarks ayben ceyhan nişantaşı university, turkey | e-mail: ayben.ceyhan@nisantasi.edu.tr uğur yozgat nişantaşı university, turkey | e-mail: ugur.yozgat@nisantasi.edu.tr abstract brand love has become an important concept in both the academic and business worlds. there are some studies in the literature conducted on consumers regarding the brand love, but no study focuses on brands that consumers are in love with. therefore, to analyze how brand love is created and to identify the components of a sustainable brand love, we conducted a qualitative study on the brands that achieved the lovemark status several times in the survey conducted on the consumers in turkey. we used the categories in the 2019 lovemark survey, a study conducted by ipsos for mediacat magazine every year, as the basis, and we evaluated brands that have been selected as lovemarks in their respective categories at least five times. our study concluded that the brands created brand love through quality in product or service as well as diversity, customer satisfaction, brand trust, innovative products, sincerity, and emotional intimacy, being a solution-oriented brand, as demonstrated in other studies in the literature, and in addition, by creating social responsibility projects, and being accessible. these brands also made brand love sustainable through reliability, service, relevance, stand behind the promise, innovation, brand image, customer satisfaction, a sense of community, customer experience, emotional bond, trust, peopleoriented communication strategy, real-life compatible products and services as well as creation of different experiences. keywords: marketing, consumer, brand love, lovemark, sustainable brand love new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.222 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.222 | http://emaj.pitt.edu ayben ceyhan, uğur yozgat emerging markets journal | p a g e |77 does brand love last forever? : a study on turkey’s lovemarks ayben ceyhan uğur yozgat i. introduction brand love has recently evoked interest among researchers and particularly practitioners because of its potential to increase brand commitment, brand interaction, brand advocacy and brand loyalty (palusuk et al., 2019). today, customer satisfaction alone is not enough to achieve sustainable marketing success because of the changing demands of consumers. marketers need to create a strong emotional bond, such as brand love, between the brand and the customers to drive a strong relationship between them (karjaluoto et al., 2016) because customers who have an emotional bond with the brand and who are in love with the brand can resist alternative brands and contribute to a brand’s sustainability within the market (garg et al., 2016). several studies in the literature have conceptualised the structural similarity between brand love and interpersonal love (shimp and madden, 1988; whang et al., 2004; thomson et al., 2005; carroll and ahuvia, 2006; albert et al., 2008; batra et al., 2012). sternberg’s (1986) theory of love used a triangle metaphor to conceptualise the relationship between the three basic components of love. these are intimacy, passion, and decision/commitment. inspired by this triangular theory of love, shimp and madden (1988) proposed the ‘consumer-object relationship’ model. researchers analyzed consumer-brand love that is based on this paradigm, and they suggested that intimacy, passion, and decision/commitment are also present in consumer-object relationships. saatchi and saatchi ceo kevin roberts (2004) introduced the concept of ‘lovemarks’ to the management literature. roberts suggested that there are three concepts that make brands stand out: mystery, sensuality, and intimacy. according to roberts (2004), consumers fully interact with branded products that are unique to them. roberts’ (2005) definition of lovemark embraces this kind of consumer behavior and conceptualizes it as brand love (maxian et al., 2013). the study conducted by maxian et al. (2013) suggests that consumers show a physiological response toward the brands they fell in love with. this study also supports roberts’ (2004) idea that the consumers show an emotional reaction at an individual level to the brands they love. ahuvia (2005) compared interpersonal love with the love to an object and suggested that they are significantly similar. carroll and ahuvia (2006) also described brand love as the degree of passionate emotional attachment that a satisfied consumer has for a particular brand. thomson et al. (2005) also studied the concept of brand love and suggested a dimensional structure composed of passion, affection and connection. the most common approach is to associate brand love with interpersonal love. this approach received some criticism focusing on the fundamental differences between brand love and interpersonal love and because the consumers do not use the exact word ‘love’ when they describe their feelings toward a brand unless specifically asked by the researchers (kaufmann et al., 2016). batra et al. (2012) found brand love and interpersonal love to be highly similar, but they also suggested that there are two main differences between these two structures. first, although interpersonal love tends to be altruistic and unconditional, this is not true for consumers. second, contrary to interpersonal love, brand love is a situation where reciprocity is not considered mandatory because brands are not expected to show emotions. however, in the digital age of interactive marketing, the marketing, brand and customer relationship managers behind brands respond quickly and empathically to their customers, which can be regarded as reciprocating the consumer’s love (sarkar, 2014). albert et al. (2008) identified 11 dimensions of love for a brand, but indicated that these dimensions do not have to be present simultaneously to achieve a loving consumer-brand relationship. these dimensions are passion, duration of the relationship, congruity between self-image and product image, dreams, memories, pleasure, attraction, uniqueness, beauty, trust, and declaration of affect. batra et al. (2012) proposed a brand love model that includes seven dimensions: positive attitude valence, positive emotional connection, self-brand integration, passion-driven behaviours, long-term relationships and anticipated separation distress (when the brand no longer exists). attitude valence refers to its comparison with a rationally assessed ideal brand. self-brand integration is a rational evaluation of the match between an individual’s own image and the brand image. sarkar (2014) also supported this view by stating that brand love has a cognitive basis. brand love is associated with high emotional perceptions as well as having a rational basis. ‘it can be argued that contrary to interpersonal relationships, brand love has a more rational and utilitarian basis and can emerge for brands that are predominantly perceived as utilitarian’. (schmid and huber, 2019: 315-316). on the basis of their research, langner et al. (2015) also suggested that interpersonal love and brand love are different. they suggested that when consumers fall in love with a brand, they are more influenced by the rational benefits of the brand, whereas the expected benefits in interpersonal relationships tend to be emotional. therefore, interpersonal relationships are more emotional than the relationship with a brand. batra el al. (2012) also noted that love is not only a feeling, but also a relationship. emotions consist of short-term emotional experiences, while relationships can last a lifetime with different emotions (rauschnabel and ahuvia, 2014: 374). conceptual models on interpersonal love show that love between two people depends on the length of the relationship (hatfield and sprecher, 1986). a love that starts with passion leaves its place to a more friendly love volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.222 | http://emaj.pitt.edu does brand love last forever? : a study on turkey’s lovemarks page |78| emerging markets journal when two people frequently spend time together and get familiar with each other (acevedo and aron, 2009; reimann et al., 2012). huber et al. (2015) conducted a consumer-facing study and proved that the utilitarian aspects of a brand become more important in time and that brand love in consumer-brand relationships lasts long. today, it is clear that interpersonal love does not always last forever. however, sometimes, marriages can continue even though love is over. the feeling of love can be replaced by feelings of commitment, responsibility, and habit. this may also be applied to brand love. the consumers might stay with the same brand because of several reasons, such as purchasing habits, failure to find a better brand or the cost of change. in the age of consumption that we live in, we could argue that brand love might not last forever considering the fact that new brands are launched every day and that these brands are in fierce competition. however, it seems that some brands in turkey can retain this love for many years (mediacat, 2019). this study analyzes the components of brand love and sustainable brand love based on the assumption that interpersonal relationships can change over time. this study aims to examine how the top five brands that have been selected as lovemarks in the same category repeatedly (mediacat, 2019) created this love and made it sustainable. in that context, we conducted face-to-face interviews with officials of three of these brands and performed a literature research for information from the other two brands on this subject to determine what methods they employed to become a lovemark and maintain this status. the study first addresses the literature on brand love and then presents information on the study and the results of the study. the literature review did not reveal any studies on both a brand that became a lovemark and on the sustainability of brand love. therefore, we believe that this study will make significant contributions to the literature. ii. brand love brand love was first introduced by shimp and madden (1988), and since then, it has evoked interest from the practitioners. it became increasingly prominent in recent years, particularly in the business world. the literature on the subject has been enriched with recent studies on brand love, and there have been studies investigating the relationship among brand love and other variables such as brand loyalty and word of mouth communication (albert et al., 2008; batra et al., 2012; carroll and ahuvia, 2006; roy et al., 2016; bairrada et al., 2018; ismail and melewar, 2015). fournier (1998) suggested that consumers develop and maintain strong relationships with the brand, that they experience passion, obsession and dependency on particular brands, mirroring a feeling of something is missing when the brand is not used, and that brand love is a longlasting, strong relationship between the brand and the consumer. in parallel to the literature on the love prototype, brand love consists of passion for the brand, commitment to the brand, positive evaluation of the brand, positive emotions in response to the brand and declaration of love for the brand (carroll and ahuvia, 2006: 81). wallace et al. (2014) found that there is a positive correlation between self-expressive brands and brand love. karjaluoto et al. (2016) stated that a self-expressive brand is the main predictor of brand love. therefore, for a brand aiming to be a lovemark, expressing itself accurately to its target audience is believed to be important. marketing communications and brand positioning strategies are also extremely important. in addition, brand love mostly develops for hedonic products. a consumer in love with the brand is willing to take part in brand-related activities as well as to spend time, money and mental energy on the brand (sarkar, 2014). according to hatfield and sprecher (1986), expectations and perceptions become more realistic when this relationship matures. at the beginning of the consumer-brand love relationship, consumers relate to the brand because of its symbolic value, status or another distinctive aspect, not because the brand has a successful performance or function. when this relationship matures, rational benefits become more prominent than emotional perceptions for the consumers who are in love with the brand. because when these relationships mature, the expectations and perceptions become more realistic (schmid and huber, 2019). since commitment is the main component of loyalty (oliver, 1999), brand love requires emotion and passion and it is separated from brand loyalty by the lack of commitment (roy et al., 2013: 3). brand love, which is more effective than consumer satisfaction, is the result of a nurtured consumer-brand relationship (kang, 2015). the literature shows that brand love affects important marketing variables, such as word of mouth communication and purchasing decisions (drennan et al., 2015: 48). customer satisfaction is a strong predictor of brand love. customer satisfaction affects brand trust and brand trust affects brand love. brand reputation also encourages long-term brand love, while brand love has a positive effect on positive word of mouth and brand loyalty (huang and jian, 2015; liu et al., 2018; song et al., 2019; shujaat et al., 2018; maisam and mahsa, 2016; hsu and chen, 2018; carroll and ahuvia, 2006; unal and aydın, 2013; anggraeni and rachmanita, 2015). according to the study conducted by roy et al. (2016), brand love creates brand loyalty and positive word of mouth, and two dimensions of brand personality (excitement and intimacy) also have a direct effect on brand love. the results of another study in the literature support the idea that brand loyalty has a mediating role on the impact of brand love on positive word of mouth (bıçakcıoğlu et al., 2016). according to the results revealed in some studies in brand literature, the experience with the brand has a positive impact on brand love (garg et al., 2016). brand love has a full mediation effect on the relationship between brand experience and brand loyalty (aşkın and i̇pek, 2016). brand love strengthens the consumer’s confidence in the future of the brand and interest in maintaining the relationship (loureiro et al., 2012). albert and merunka (2015) found that there is a strong relationship among brand trust/brand identity and brand love as well brand love and its consequences (brand commitment, positive word of mouth and tendency to pay more for the brand). according to previous evidence, brand identity and the sense of community have a positive impact on brand love (bergkvist and bech-larsen, 2010). brand image is the predictor of brand love, which affects word of mouth volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.222 | http://emaj.pitt.edu ayben ceyhan, uğur yozgat emerging markets journal | p a g e |79 (ismail and spinelli, 2012; maisam and mahsa, 2016). moreover brand image, brand associations, brand trust, brand awareness and perceived quality also have a positive impact on brand love (unal and aydın, 2013; anggraeni and rachmanita, 2015; yıldız and günaydın, 2019). brand love acts as a mediator between brand image and customer commitment (islam and rahman, 2016). aydın’s (2016) study found that, building confidence in the brand and continuously offering brandrelated innovations have a positive impact on evoking brand love in the consumers, and in return, brand love has a positive impact on repurchase intention, brand commitment, and willingness to pay more. furthermore, it has been observed that innovation is more effective than brand trust in building brand love and that brand trust is more effective in creating brand commitment rather than driving brand love. the results of hwang and kandampully’s study (2012), in which they conducted an emotional analysis of the relationships between young consumers and brands, demonstrated that three emotional factors (self-concept connection, emotional attachment and brand love) increase brand loyalty in young consumers. that study also asserts that ‘self-concept connection’, which refers to the degree to which the brand expresses important aspects of the consumer’s self-identity, values, and goals, increases brand love and the emotional commitment to the brand. turkey’s lovemarks research, one of the studies conducted in parallel to the literature, is led by mediacat and conducted by ipsos using the computer-assisted telephone interviewing (cati) method. the aim of the study is to determine the brands that are ‘lovemarks’ in certain categories, in which competition and communication activities are intense or are an object of interest in turkey. categories are determined at the beginning of each year by the parties led by mediacat. the study period is kept wide each year to minimize the effects of seasonality. the study period in 2019 was february-june 2019. the study was suspended during weekly holidays and official holidays. the study was carried out with the participation of 2,000,000 people representative of turkey, with an equal ratio of men and women. the study employed a methodology that was strengthened in 2016, and which calculates lovemark results through four separate questions. since 2016, lovemark calculations have been based on the first brand that comes to mind in each category, closeness to the brand, expectation and the meeting of needs, and finally the statement, ‘this brand is the one i love the most and i will never give up’ (mediacat, 2019). iii. methodology the aim of this study is to identify how brand love is created and to distinguish the components of sustainable brand love. to that end, 2019 categories of the lovemark study conducted by ipsos on behalf of mediacat magazine have been taken as the basis, and the brands that achieved first place in their respective categories five times consecutively were analyzed. the study did not reveal any category-based first-place holders before 2013. only a single brand (arçelik) achieved the first place irrespective of categories. category-based studies began as of 2013. not all categories are included in the study every year. the fuel category was excluded in 2015, and the coffee category was excluded in 2013 and 2014. arçelik is selected as a lovemark seven times from 2013 to 2019. opet is selected as a lovemark five times from 2013 to 2019. nescafé is selected as a lovemark five times from 2015 to 2019. migros is selected as a lovemark five times from 2015 to 2019 and volkswagen is selected as a lovemark seven times from 2013 to 2019 (sharing first place with bmw in 2015. mediacat lovemarks study results in five categories for the period of 2013-2019 are indicated below: table 1: mediacat lovemarks study results in five categories (years) source: composed by authors as a part of the study and based on the 2019 results of the ‘turkey’s lovemarks’ study, which was first conducted by mediacat with the support of millward brown turkey in 2007, and which has continued annually in cooperation with ipsos since 2009 (mediacat, 2019); opet, which has achieved the first place in the ‘gas stations’ category five times since 2013; migros, which has achieved first place in the ‘supermarket’ category five times since 2013; and nescafé, which has achieved first place in the ‘coffee’ category five times since 2015, were asked about how they created brand love and how they kept the love alive for many years. the study also included information retrieved from literature screening for the arçelik and volkswagen brands. a narrowed study population was obtained among the lovemark businesses. long-term lovemarks were chosen as the study investigated the sustainability of the brand love they built in consumers. a qualitative and exploratory study was conducted. because the population was limited, conducting a questionnaire would not have been meaningful. therefore, interviews and literature screening were used. the face-to-face interview technique was used as the study method. interviews were conducted with migros, nescafé and opet, but not with arçelik and volkswagen. therefore, at the direction of the officials of these two companies, their interviews with mediacat were used instead. the officials of migros, nescafé and opet were contacted and an appointment was made with them, and a face-to-face interview was conducted by visiting their companies. ethical approval was obtained from all brands included in the study for the use of brand names in the article. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.222 | http://emaj.pitt.edu does brand love last forever? : a study on turkey’s lovemarks page |80| emerging markets journal the officials were asked the following questions in face-to-face interviews and the answers to the same questions were searched in the literature screening:  how do you create sustainable brand love for your customers?  how do you manage to keep the brand love alive in your customers? (how do you keep the love between you and your customers sustainable?) iv. findings separate evaluations of the businesses in the study are as follows: migros as a part of the study, an interview was conducted with kına demirel, brand communication and crm director of migros. the highlights of the interview were as follows: the most important factors for migros customers are quality, diversity and reliability. it is extremely important for migros to realize these three factors before the loyalty program. according to migros, brand love is to always listen to the customers and to create a reliable and high-quality shopping environment that the customers desire. the components that create sustainable brand love are ‘reliability, service and relevancy’. migros is here for raising healthy generations and it prioritises quality. that is why the reliability is particularly underlined. migros, which has a higher number of training days per capita when compared with the retail sector average, provides a high level of service to its customers with its skilled staff. this way, they leave the world of big data behind and achieve the ability to interact and provide significantly better service to the customers. consumers have a tendency toward brands that are like humans and when you look at those brands, you can see transparency. when migros receives a message from its customers, it provides transparent responses and feedback within 48 hours. the brand also noted that its staff value honesty and sincerity. just like the contagiousness of emotions between humans, the brand’s sincerity transfers to the people. migros keeps itself up-to-date, thanks to the vitality and pioneering perspective they gained through innovative competition. migros continues to touch people’s lives through integration toward pioneering innovations while keeping its technology and store experience up-to-date. opet petrol ofisi is the leading brand in turkey’s fuel market, with a 22.40% market share according to energy market regulatory board’s 2018 industry report for oil market. opet, on the other hand, ranked second with a market share of 17.92% (epdk, 2018). according to this result, it is not possible to say that brand love is directly proportional to market share. the results of the study conducted by avcılar and açar (2017) demonstrate that opet is perceived to be superior to other gas stations based on all factors that affect consumers’ fuel choices (sales promotions, price, payment options, brand, the location of the stations, technical services, quality of service, product engine performance, services, staff, product qualifications and contents, environmental practices, environmental responsibility and transparency, physical assets of the station and environmentfriendliness of the product). factors affecting the fuel station choices of highly environmentally conscious participants were analyzed, and it was seen that opet again was perceived to be superior to other stations. an interview was conducted with opet corporate communication manager ayşenur aydın. the highlights of the interview were as follows: opet was founded in 1992 as a 100% turkish capital brand, and in its 28-yearlong journey, it beat its international competitors and became the industry leader in customer satisfaction. opet has been implementing improvementand developmentoriented projects, with the first of its projects being ‘clean restroom campaign’, which started in 2000, because it aims to find solutions to the problems of the country. opet is a brand that operates almost all over turkey and accommodates a large number of customersone million vehicles-daily. this also allows the brand to reach out to a large number of people as it is also a retail point. one of opet’s important missions is trying to create solutions to any problems they see in turkey. the clean restroom campaign for gas stations in turkey started with opet, but it set an example for the industry and turned into a joint project implemented at every public institution and organization throughout turkey. the fact that the turkish standards institution cooperated with opet in 2012 to set the standards for public and customer restrooms highlights the importance and progress of the project. based on this information, the opet brand builds brand love by creating solutions, developing social responsibility projects and prioritising customer satisfaction. opet also implemented several other projects to offer its customers the service they want and long for and to make their lives easier. the brand employs the ultramarket concept and like the malls, it uses the shop-inshop design at its gas stations to meet many different needs of its customers. furthermore, the kind of service they provide, the way they stand behind their promise and take customer satisfaction to heart, and the way they answer customer questions round the clock with their call centers, along with their unfailing provision of answers to their customers’ problems, their communication campaigns, and the messages they give out, create a holistic effect. based on this information, the opet brand creates sustainable brand love by service, standing behind their promise and innovation. nescafé an interview was conducted with senior brand manager deniz yanık as a part of the study. the interview with yanık revealed that nescafé believes that consumers are the ones who create a lovemark. the most important factor at the heart of the brand is the consumer. a brand needs to know its consumers, meet their needs to be sustainable and follow the trends that are relevant to their expectations to maintain the love. it is necessary to put innovation at the heart of the brand. nescafé’s aim is to provide high-quality coffee that is accessible to everyone. turkey is a tea-consuming country, so coffee does not appeal to people’s palates. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.222 | http://emaj.pitt.edu ayben ceyhan, uğur yozgat emerging markets journal | p a g e |81 besides, adding milk, coffee, and sugar creates stress on the consumer. they cannot get the flavour quite right. therefore, nescafé introduced 3-in-1 coffee in 2002 and it became turkey’s biggest innovation. because it tripled the market after it was released. there are still no innovations that can measure up to that success. nescafé continued to follow trends and even created some of its own, such as pod coffee machines and coffee selections for every palate. nescafé always keeps its finger on the pulse of its consumers and performs 2 million samplings every year. as a brand that supports university students, it has backpack teams in all universities. the nescafé team visits 73 of the 81 provinces each year. based on the estimates, nescafé reaches out to 60 million people in 15 million households. in short, nescafé aims to make highquality coffee available to everyone and does not want to lose them. in 2020, nescafé launched its first social responsibility campaign in turkey in cooperation with the turkish educational foundation. it provides material and nonmaterial education support to young people. currently, 50 nestle employees are mentors for turkish educational foundation scholarship holders. based on this information, the nescafé brand creates brand love through an innovative approach, quality, intimacy, accessibility, knowing the consumer, building sustainable brand love through innovation, brand image, customer satisfaction and a sense of community. arçelik the study used arçelik turkey marketing director mehmet tüfekçi’s interview with mediacat as a resource. arçelik combines the latest technology with the best designs and continues to offer innovative products and services as well as quality of service. arçelik always prioritises service quality through skilled, hardworking and reliable dealers as well as services. in that sense, arçelik creates brand love through its innovative products, services and service quality. arçelik continues to set the industry standards through its new-generation merchandising model that focuses on the customer experience. arçelik attaches great importance to maintaining the emotional connection with its customers and the confidence it provides (türkiye'nin lovemark'ları, 2019). based on this information, the arçelik brand creates sustainable brand love through customer experience, emotional connection and confidence. volkswagen the interview given by doğuş automotive volkswagen passenger car marketing manager tilbe polat to mediacat magazine was used as a source. volkswagen has created a story of commitment with its customers thanks to the emotional brand strategy it carried out in a stable way for years. volkswagen has created longstanding brand love through its emotional brand strategy. the first of the components that make this love sustainable is a human-oriented communication strategy that accurately determines the needs of its customers and cares about their values. volkswagen, whose goal it is to be a brand that brings people together and interacts with them one-on-one, provides real-life compatible products and services to do so and attaches importance to offering customers different experiences. the goal of the brand is to differentiate itself in the industry by bringing the analogue and digital worlds together and offering its customer up-to-date products with the latest technology (türkiye'nin lovemark'ları, 2019). based on this information, other components that create sustainable brand love are real-life compatible products and services, creating different experiences, and innovation. because of the face-to-face interviews and examination of the interviews in the literature, the components in table 2 were identified for creating brand love and making brand love sustainable. table 2: components of brand love brand creating brand love making brand love sustainable migros quality, variation and reliability reliability, service and relevancy opet creating solutions, social responsibility and customer satisfaction service, stand behind the promise and innovation nescafé innovative approach, quality, intimacy, accessibility and getting to know the consumer closely innovation, brand image, customer satisfaction and a sense of community arçelik innovative products, service and service quality customer experience, emotional bond, and trust volkswagen emotional brand strategy human-oriented communication strategy, real-life compatible products and services, creating different experiences and innovation source: composed by authors v. conclusion the interviews reveal that, it was observed that brand love is not built immediately but through a process, which is in line with the results in the literature. this process is a period wherein the brand invests in its consumers by creating various emotions. the literature review revealed that customer satisfaction, brand trust, brand identity, sense of community, experience with the brand, innovation, brand association, brand awareness, brand image, perceived quality and brand identity’s excitement and intimacy dimensions have a positive effect on brand love. according to interviews and interview reviews of brands selected among turkey’s 2019 lovemarks, brands volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.222 | http://emaj.pitt.edu does brand love last forever? : a study on turkey’s lovemarks page |82| emerging markets journal list quality, variation, get to know the consumer closely, reliability and creating solutions as well as social responsibility projects, customer satisfaction, innovative approach, intimacy, accessibility, innovative products/services, service quality and emotional brand strategy. at that point, quality stands out. arçelik’s official said that they always prioritize quality of service with their skilled, reliable dealers and services. the quality component is in line with the results of the study conducted by yıldız and günaydın (2019). opet’s official highlighted ‘creating solutions’ as one of the components of becoming a lovemark, which bears parallels to charter et al.’s (2002) definition of sustainable marketing. trust is one of the 11 dimensions of brand love suggested by albert et al. (2008). it is also in line with other studies in the literature (albert and merunka, 2015; yıldız and günaydın, 2019; aydın, 2016). ‘customer satisfaction’ and ‘brand trust’ are also among the components that build brand love, as indicated by two of the brands. this result is also in line with the literature (huang and jian 2015; liu et al., 2018; song et al., 2019; shujaat et al., 2018; maisam and mahsa, 2016; hsu and chen, 2018; carroll and ahuvia, 2006; unal and aydın, 2013; anggraeni and rachmanita, 2015). the concepts of ‘innovative product’ and ‘innovative approach’ put forward by nescafé and arçelik, respectively, are in line with aydın’s (2016) study. only one brand (volkswagen) suggested the ‘intimacy’ component, which is one of the components of interpersonal love in the literature (sternberg, 1986; shimp and madden, 1988; roberts, 2004; roy et al., 2016). the brand’s official indicated that they use emotional brand strategy to create a ‘positive emotional connection’, which is one of the components of batra et al.’s (2012) seven-dimensional brand love model. this component is also in line with the brand love dimension of ‘emotional intimacy’ proposed by thomson et al. (2005). ‘sensuality’ is also one of the three concepts, which, according to roberts (2004), make the lovemarks stand out. other brand love components that are not mentioned in the literature but are identified by this study are social responsibility projects and accessibility. according to the lovemark brands, the formula to make brand love sustainable is reliability, service, relevancy, standing behind the promise, innovation, sense of community, brand image, customer satisfaction, customer experience, emotional bond, trust, humanoriented communication strategy, real-life compatible products and services, creating different experiences and innovation. trust, innovation, service and relevancy are the components that stand out. arçelik's official said that, they focused on customer experience through a new-generation merchandising model. the literature also mentions that, brand love is positively impacted by experience with the brand (garg et al., 2016). migros’ official said that trust is the most important component for them and gave examples of mothers who bring milk to the stores to keep them in the freezers, consumers who come to the stores when they need boxes to move their apartments, consumers who leave their keys at the stores, and students who come to migros for help when they need to print their homework but their printers are broken. arçelik official also said that they always prioritise quality of service through reliable dealers and services. the volkswagen official stated that they have always earned the trust of their customers with the products and technologies they offer. the opet official said that as with supermarkets, they use the ultra-market concept and the shop-in-shop design at their gas stations and highlighted innovation as another component of sustainable brand love along with trust. the nescafé official said that, the brand’s rising trend started with innovation and that they have been launching innovative products such as nescafé 3-in-1 or pod coffee machines since then. the volkswagen official also said that their brand is passionate about innovation and that they are aiming to differentiate themselves in the industry by offering modern products endowed with the latest technology by bringing the analogue and digital worlds together. the results of aydın’s (2016) study indicate that, constantly offering brand-related innovations has a positive effect on building brand love in consumers. however, there has been no evidence in the literature that bears out innovation as driving the sustainability of brand love. the migros official said that they follow technology, use the data and bring these together with customer services to stay relevant. opet's official said that, the most important element that differentiates them from other gas stations is the holistic nature of their services. the official also added that the way they take customer satisfaction to heart, answer customer questions around the clock with their call centres, always provide an answer to their customers’ problems, tailor their communication campaigns and give out thoughtprovoking messages creates a holistic effect. volkswagen's official also stated that, they remain relevant by offering real-life compatible products and services. the literature does not include any studies on the effect of service and relevancy components on sustainable brand love. the results of this study demonstrate that the components of sustainable brand love are reliability, service, relevancy, standing behind the promise, innovation, brand image, customer satisfaction, sense of community, customer experience, emotional bond, trust, human-oriented communication strategy, real-life compatible products and services as well as creating different experiences. these results are also in line with the literature that demonstrates that brand trust, brand experience, perceived quality, intimacy, customer satisfaction, brand image, and sense of community have a positive effect on brand love. however, there are no studies in the literature regarding sustainable brand love. evaluation of five brands that have been selected as turkey’s lovemarks in their respective categories reveals that this choice made by the consumers is not random, does not stem from price sensitivity, and is not based in habit. it stems from a relationship that is constantly nurtured by the brand and from an ongoing brand love. therefore, sustainable brand love is possible. the studies on brand love in the literature mainly focus on the consumer’s side. this study, on the other hand, offers the academic and business world an evaluation made by lovemark brands on factors that affect the sustainability of this love. we believe that the results of this study will give researchers and practitioners a business-oriented perspective. the limitations of this study are the fact that the study was conducted with five brands, only three of which were interviewed face-to-face and research to be volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.222 | http://emaj.pitt.edu ayben ceyhan, uğur yozgat emerging markets journal | p a g e |83 done in turkey. future studies could be conducted with the consumers of these brands. the components of sustainable brand love may be analyzed through the customers’ perspective. a study could be conducted on other categories of the lovemark study. a qualitative study could be conducted on the second-place holders of the categories in this study. because, in some categories, there have followed an upward trend and risen to the second place. this achievement, meaning building a brand love that grows every year could be investigated. in addition, further studies can be done with lovemarks in different countries. references acevedo, b. p. (2009). does a long-term relationship kill romantic love? review of general psychology, 13(1): 59-65. ahuvia, a. c. (2005). beyond the extended self: loved objects and consumers’ identity. journal of consumer research, 32(1): 171-184. albert, n., and merunka, d. (2015). role of brand love in consumer brand relationships. m. fetscherin , and t. heilmann in consumer brand relationships. london: palgrave macmillan. albert, n., merunka, d., and valette-florence, p. (2008). when consumers love their brands: exploring the concept and its dimensions. journal of business research, 61: 1062-1075. anggraeni, a., and rachmanita. (2015). effects of brand love, personality and image on word of mouth; the case of local fashion brands among young consumers. social and behavioral sciences, 211: 442-447. aşkın, n., and i̇pek, i̇. (2016). marka aşkının marka deneyimi ile marka sadakati arasındaki i̇lişkiye aracılık etkisi. ege akademik bakış, 16(1): 79-94. avcılar, m. y., and açar, m. f. (2017). tüketicilerin akaryakıt i̇stasyonu tercihini etkileyen faktörlerin analitik hiyerarşi prosesi yöntemi i̇le tespitine yönelik ankara i̇linde bir araştırma. hitit üniversitesi sosyal bilimler enstitüsü dergisi, 10(2): 969-992. aydın, h. (2016). marka aşkının değerlendirilmesi: beyaz eşya kullanıcıları üzerine bir araştırma. tüketici ve tüketim araştırmaları dergisi, 8(2): 125-149. bairrada, c. m., coelho, f., and coelho, a. (2018). antecedents and outcomes of brand love: utilitarian and symbolic brand qualities. european journal of marketing, 52(3/4): 656682. batra, r., ahuvia, a., and bagozzi, r. p. (2012). brand love. journal of marketing, 76: 1-16. bergkvist, l., and bech-larsen, t. (2010). two studies of consequences and actionable antecedents of brand love. journal of brand management, 17(7): 504-518. bıçakcıoğlu, n., i̇pek, i̇., and bayraktaroğlu, g. (2016). antecedents and outcomes of brand love: the mediating role of brand loyalty. journal of marketing communications, 24(8): 1-15. carroll, b. a., and ahuvia, a. c. (2006). some antecedents and outcomes of brand love. marketing letters, 17(2): 79-89. drennan, j., bianchi, c., cacho-elizondo, s., and louriero, s. (2015). examining the role of wine brand love on brand loyalty: amulticountry comparison. international journal of hospitality management, 49: 47-55. epdk. (2018). petrol piyasası yıllık sektör raporu listesi. https://www.epdk.org.tr/detay/icerik/3-0107/yillik-sektor-raporu. asp (01.01.2020). fournier, s. (1998). consumers and their brands: developing relationship theory in consumer research. journal of consumer research, 24(4): 343-73. garg, r., mukherjee, j., biswas, s., and kataria, a. (2016). an investigation into the concept of brand love and its proximal and distal covariates. journal of relationship marketing, 15(3): 135-153. hatfield, e., and sprecher, s. (1986). measuring passionate love in intimate relationships. journal of adolescence, 9(4): 383–410. hsu, c.-l., and chen, m.-c. (2018). how gamification marketing activities motivate desirable consumer behaviors: focusing on the role of brand love. computers in human behavior, 88: 121-133. huang, y.-t., and jian, s.-p. (2015). from customer satisfaction to band loyalty: a mediation model of brand trust and brand love. marketing review (xing xiao ping lun), 12(2):161-188. huber, f., meyer, f., and schmid, d. a. (2015). brand love in progress – the interdependence of brand love antecedents in consideration of relationship duration. journal of product and brand management, 24(6): 567-579. hwang, j., and kandampully, j. (2012). the role of emotional aspects in younger. journal of product and brand management, 21(2): 98108. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.222 | http://emaj.pitt.edu does brand love last forever? : a study on turkey’s lovemarks page |84| emerging markets journal islam, j. u., and rahman, z. (2016). examining the effects of brand love and brand image on customer engagement: an empirical study of fashion apparel brands. bridging fashion and marketing, 7(1): 45-59. ismail, a. r., and melewar, t. (2015). binational study of the impact of brand image, brand personality and brand love on word of mouth: the case of fashion brands in uk and switzerland. marketing dynamism and sustainability: things change, things stay the same…: 462-471. ismail, a., and spinelli, g. (2012). effects of brand love, personality and image on word of mouth. journal of fashion marketing and management, 16(4): 386-398. kang, a. (2015). brand love – moving beyond loyalty an empirical investigation of perceived brand love of indian consumer. arab economics and business journal, 10: 90-101. karjaluoto, h., munnukka, j., and kiuru, k. (2016). brand love and positive word of mouth: the moderating effects of experience and price. journal of product and brand management, 25(6): 527-537. kaufmann, h. r., loureiro, s. m., and manarioti, a. (2016). exploring behavioural branding, brand love and brand co-creation. journal of product and brand management, 25(6): 516526. langner, t., schmidt, j., and fischer, a. (624–634). is it really love? a comparative investigation of the emotional nature of brand and interpersonal love. psychology and marketing, 32(6): 2015. liu, c.-r., wang, y.-c., chiu, t.-h., and chen, s.-p. (2018). antecedents and outcomes of lifestyle hotel brand attachment and love: the case of gen y. journal of hospitality marketing and management, 27(3): 281-298. loureiro , s. m., ruediger , k. h., and demetris , v. (2012). brand emotional connection and loyalty. journal of brand management, 20(1): 13-27. maisam, s., and mahsa, r.-d. (2016). positive word of mouth marketing: explaining the roles of value congruity and brand love. journal of competitiveness, 8(1): 19-37. maxian, w., bradley, s. d., wise, w., and toulouse, e. n. (2013). brand love is in the heart: physiological responding to advertised brands. psychology and marketing,, 30(6): 469-478. mediacat. (2019). türkiye'nin lovemark'ları. https://mediacat.com/mediacat-lovemarks2019-tum-liste. asp (12.10.2019). oliver, r. l. (1999). whence consumer loyalty? journal of marketing, 63: 33-44. palusuk, n., koles, b., and hasan, r. (2019). ‘all you need is brand love’: a critical review and comprehensive conceptual framework for brand love. journal of marketing management, 35(1-2): 97-129. rauschnabel, p. a., and ahuvia, a. c. (2014). you’re so lovable: anthropomorphism and brand love. journal of brand management, 21(5): 372– 395. reimann, m., castaño, r., zaichkowsky, j. l., and bechara, a. (2012). how we relate to brands: psychological and neurophysiological insights into consumer-brand relationships. journal of consumer psychology, 22(1): 128-142. roberts, k. (2004). lovemarks: the future beyond brands. new york: power house books. roy, p., khandeparkar, k., and motiani, m. (2016). a lovable personality: the effect of brand personality on brand love. journal of brand management, 23(5): 97-113. roy, s. k., eshghi, a., and sarkar, a. (2013). antecedents and consequences of brand love. journal of brand management, 20(4): 1-8. sarkar, a. (2014). brand love in emerging market: a qualitative investigation. qualitative market research: an international journal, 17(4): 481494. schmid, d. a., and huber, f. (2019). brand love: emotionality and development of its elements across the relationship lifecycle. psychology and marketing, 36(4): 305-320. shimp, t. a., and madden, t. j. (1988). consumerobject relations: a conceptual framework based analogously on sternberg’s triangular theory of love. advances in consumer research, 15(1): 163-168. shujaat, s., durrani, b., abrar, k., and rashid, t. (2018). brand love-some antecedents and consequences: an empirical study of the retail industry. international journal of sales, retailing and marketing, 7(2): 26-38. song, h., wang, j., and han, h. (2019). effect of image, satisfaction, trust, love, and respect on loyalty formation for name-brand coffee shops. international journal of hospitality management, 79: 50-59. sternberg, r. j. (1986). a triangular theory of love. psychological review, 93(2): 119-135. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.222 | http://emaj.pitt.edu ayben ceyhan, uğur yozgat emerging markets journal | p a g e |85 thomson, m., macinnis, d. j., and park, c. w. (2005). the ties that bind: measuring the strength of consumers' emotional attachments to brands. journal of consumer psychology, 15(1): 77-91. unal, s., and aydın, h. (2013). an investigation on the evaluation of the factors affecting brand love. procedia-social and behavioral sciences, 92: 76-85. wallace, e., buil, i., and chernatony, l. (2014). consumer engagement with self-expressive brands: brand love and wom outcomes. journal of product and brand management, 23(1): 33-42. whang, y.-o., allen, j., sahoury, n., and zhang, h. (2004). falling in love with a product: the structure of a romantic consumer-product relationship. advances in consumer research, 31: 320-327. yıldız, e., and günaydın, r. (2019). marka aşkının öncülleri ve sonuçları: doğu karadeniz bölgesinde bir uygulama. optimum ekonomi ve yönetim bilimleri dergisi, 6(2): 323-338. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu anchoring the anchor: spirituality as an entrepreneurial competence gayatri dwivedi indian institure of technology delhi, india | e-mail: gayatri.dwivedi@dms.iitd.ac.in seema sharma indian institure of technology delhi, india | e-mail: seemash@dms.iitd.ac.in abstract spirituality is the fountainhead of many of the required and elemental entrepreneurial competencies, yet it seems to be out of the main stage in entrepreneurial-competence dialogue. spirituality lays the groundwork for entrepreneurial success, as it builds eligibility for the same. it preludes, enables and sustains the phenomenon of entrepreneurship. research confirms a huge overlap and integration between spiritual attributes, psychological capital and character-strengths. these together help entrepreneurial competencies and prospects. spirituality should be accorded appropriate precedence in the scheme of competencies, though the extant literature denies any. also, spiritual attributes give a meaningful and virtuous direction to entrepreneurial behaviors, rendering them beneficial to all holistically. this includes socioeconomic and ecological dimensions. contrary to the misconceived dissonance between entrepreneurial interests and spiritual attributes, the pixiedust of spirituality packs more punch in entrepreneurial pursuits. absenting spirituality and the attributes associated with it in the entrepreneurial discussion will send the world hurtling into endless entropy. keywords: spirituality, entrepreneurship, entrepreneurial competencies, entrepreneurial crossover, psychological capital new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.311 | http://emaj.pitt.edu | mailto:gayatri.dwivedi@dms.iitd.ac.in mailto:seemash@dms.iitd.ac.in http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.311| http://emaj.pitt.edu gayatri dwivedi, seema sharma emerging markets journal page |29| anchoring the anchor: spirituality as an entrepreneurial competence gayatri dwivedi seema sharma i. introduction unraveling the unexplored dimensions of entrepreneurship that deceptively seem distant and detached from axiological tenets, the study foregrounds the pivotal role of spirituality in entrepreneurial scheme of things (rose, 2001; seaward, 2001; ganzin et. al., 2019). of the two prompts for this study, first one is the underrepresentation of role of spirituality in the entrepreneurial competence literature and second is its dire need in the times when the world seems to be in throes of mindless materialism and cut-throatism. we need to “retain and build a collective moral consciousness” that makes for smooth cordiality as we work together on the challenges of the times (schwab, 2016). spirituality gives entrepreneurs the power, vision and discretion to zero in on the purpose, meaning of their life’s strivings (ohoitimur et. al., 2019) with harmonious relations with self, others, their ecosystems and the supreme. furthermore, spirituality provides entrepreneurs the courage and power to keep their head in the game when the going gets tough, which inevitably (milliken, 1987) does, testing their will power to exhaustion. it helps them in future sense making and sense of self-efficacy to accomplish their set goals (ganzin et. al., 2019). its role and cruciality not only need to be acknowledged but also tapped into to inculcate right traits, attributes and behaviors among entrepreneurs to optimize their entrepreneurial potential and at the same time make them into altruistic human beings (raco et. al., 2019; agarwal et. al., 2020). also, riding on quantum technological leaps that happen to be the signature elements of the fourth industrial revolution, humans have grown their powers exponentially. this further underscores the significance of enhanced levels of “emotional intelligence-the ability to process and integrate our emotions and feelings and those of others to remain sensitive to impacts outside our own experience” (schwab, 2016). ironically, many a time these are used for destruction and massannihilation. unbridled consumerism and mindless materialism, wasteful living, unchecked urbanization, international conflicts in many parts of the globe, buttress the fact. precision weapons of mass destruction are a classic case of technological advances gone haywire. rather than using the technological advances for creative purpose that includes social development, ecological preservation and climate action, minimizing hunger and poverty and making lives better, we are making human existence complicated, challenging and inhumane (schwab, 2016). spirituality as a competence gives direction and discretion to the entrepreneurial brilliance, potential and success. it steers entrepreneurial endeavors in the right direction for progress of the society (nandram, 2016; agarwal et. al., 2021). put your finger on any challenge of the time. highly likely one of the root causes is lack of a moral or ethical compass or filters of compassion and empathy. these attributes form the core essentials of spirituality. simply put, spirituality gives the purpose, the internal resources to manifest that then sustain them. entrepreneurs should know and leverage this intensely and infinitely enabling multiplier force. also, spirituality gives entrepreneurs’ power a direction a direction that aligns with people, profits and planet (khari and sinha, 2018), the three great ps of entrepreneurship (ohoitimur et. al., 2019; zsolnai, 2022). a welcome trend shows academia taking cognizance of the significance of spirituality and its attributes. the academy of management has the cohort, management, spirituality, and religion, with membership over 500 (robbins, 2003a). the group added validity and legitimacy to the study of spirituality and is sure to add a fresh dimension to the research objectives in the realm of leadership (academy of management, 2004). similarly, the world health organization's quality of life (whoqol), an established set of rubrics to measure individual's quality of life should be mentioned at this point. in 2006, the whoqol group expanded its purview to include the spiritual, religious, and personal beliefs (srpb) domain (whoqol srpb group 2006). this further validates the growing significance of spirituality in relation to overall well-being and health. spirituality plays a vital role in shaping an individuals’ perception of life, their values, and their coping mechanisms in the face of challenges. it recognizes that for many people, spiritual beliefs and practices can be a source of comfort, hope, and resilience during difficult times. the figure below shows the rising number of research articles in the last two decades (2003-2023) when scopus database was searched for the keywords of entrepreneurship and spirituality in co-occurrence. spirituality has a place in academic literature, but largely in the realms of health, psychology, sociology, theology, religion and similar disciplines. notwithstanding the recent resurgence (howard, 2002; dodd & gotsis, 2007; dana, 2009; balog et. al., 2014; nandram 2016; mauksch, 2017; block et. al., 2020; smith et. al., 2019) in articles relating the two (spirituality and entrepreneurship), the role and cruciality of spirituality needs more spotlight and prominence in entrepreneurial-competence academics, literature and among practitioners, as well (hani & kurniawati, 2018). also, academic research should refrain from any unnecessarily obfuscation of this simple yet worthy concept by intellectualizing it beyond a certain point, to ease its comprehension beyond the academics, among people at large. https://link.springer.com/article/10.1007/s10902-011-9286-2#ref-cr55 volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.311 | http://emaj.pitt.edu anchoring the anchor: spirituality as an entrepreneurial competence page |30| emerging markets journal figure 1. rising number of research articles (20032023) *scopus database was searched for the keywords entrepreneurship and spirituality in co-occurrence source: scopus database entrecomp, known as the european entrepreneurship competence framework describes entrepreneurship as the capability to manifest ideas and opportunities into value-added end products (services/products) by acting upon them and resource mobilization (bacigalupo et. al., 2013). individuals can be trained in these, competencies are learnable with proper training and relevant experience. for the purpose of this paper, we will adhere to this definition of entrepreneurship. the value creation is undeniably. the ultimate goal can be cultural, social, commercial or ecological. most of the other schools of thought seem broadly aligned with the entrecomp concept of entrepreneurship. the next logical question is what the required entrepreneurial competencies are. entrecomp (bacigalupo et. al., 2016) describes entrepreneurship as transversal (universal) competence. transversal skills are transcendental in application-not limited to any specific domain, enabling personal growth, smooth and effective social participation, professional career rejuvenation, and venture creation as well. the ultimate end is value creation-be it cultural, social, or economic. entrepreneurship is not limited to the constructs of venture ownership, profits, capturing new markets, products, or processes. these have applications in diverse situations and work-place ecosystems. (ibe, 2013). these have become venerable for the impact they create. they give an individual a wellrounded personality with smooth edges, making him/her easy to get along without losing focus and compromising on his/her ultimate objectives. this underscores his/her relation with self, others and his/her ecosystem and the various constituents of the same. in fact, this universality applies to spiritual attributes equally. multidimensionality (universality), in the context of spirituality, refers to the idea that spiritual experiences and beliefs can manifest and be understood in multiple dimensions or aspects of an individual's life, it being not limited to a singular dimension/aspect of, but encompassing various facets of human behavior (nandram, 2009). these no doubt make a person more integrated and humane. entrecomp (bacigalupo et. al., 2016) defines entrepreneurship itself as the competence/ability to transform ideas and opportunities into value-added end products (services/products) by identifying the opportunities, relevant resource mobilization and finally acting upon them. it defines entrepreneurial competencies as specific sets of competencies required for successful entrepreneurship. this includes knowledge, skills and personality attributes. mulder et. al. (2007) have a similar description of competencies, describing it as of knowledge, skills and attitudes, taken together, directed towards accomplishing complex specific requirements of the given context. bird (1995) defines competencies as qualities of a person, consisting of both general and specialized knowledge, motivations, characteristics, selfperception, social roles and skills, contributing to the establishment of a business venture. concerning entrecomp, entrepreneurship is a transversal (universal) competence. transversal skills are transcendental in application-not limited to any specific domain, enabling personal growth, smooth and effective social participation, professional career rejuvenation, and venture creation as well. the ultimate end is value creation-be it cultural, social, or economic. entrepreneurship is not limited to the constructs of venture ownership, profits, capturing new markets, products, or processes. these have applications in diverse situations and work-place ecosystems (ibe, 2013). these have become venerable for the impact they create. they give an individual a wellrounded personality with smooth edges, making him/her easy to get along without losing focus and compromising on his ultimate objectives. this underscores his/her relation with self, others and his/her ecosystem and the various constituents of the same. entrecomp divides entrepreneurial competencies into 15 competencies under the heads of ‘ideas and opportunities’, ‘resources’ and ‘into action’, each one further divided into five sub-competencies under them. so altogether, it is a fairly comprehensive clique of 15 competencies. table 1 below captures the entrecomp framework of entrepreneurial competencies. table 1: entrecomp framework of entrepreneurial competencies source: bacigalupo, m., kampylis, p., punie, y., van den brande, g. (2016). entrecomp: the entrepreneurship competence framework. luxembourg: publication office of the european union; eur 27939 en; doi: 10.2791/593884 entrecomp (bacigalupo et. al., 2016) is a wellaccepted, granularly detailed and comprehensive set of entrepreneurial competences. academics and practitioners from some of the leading institutions across the globe use it as a reference to suit a wide variety of training and educational purposes. most of the leading theories on entrepreneurial competencies and frameworks have strong https://journals.sagepub.com/reader/content/17d08ac41d8/10.1177/09504222211018068/format/epub/epub/xhtml/index.xhtml#bibr3-09504222211018068 volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.311 | http://emaj.pitt.edu gayatri dwivedi, seema sharma emerging markets journal page |31| positive relationship with entrecomp. it gives a lot of latitude in terms of distinct levels of competences-like levels for beginners (foundation), intermediate, and advanced. for the purpose of this paper, entrecomp set of competencies are considered. the first two sets of ‘opportunities and ideas’ and ‘resources’ broadly aim at making an individual well rounded, a personality with smooth edges and easy to get along without losing focus or compromising his/her interests. thus, this paves way for entrepreneurial motives and action. beyond that, a balanced personality, endowed with clarity regarding self, meaning and purpose of life pursuits and sense of selfefficacy/conviction gives more agency to an individual to realize his/her goals of life. ii. literature review entrepreneurship and spirituality misleadingly seem antithetical (nandaram, 2016), at two different ends of the business-spectrum. possibly because entrepreneurship is hardcore logic-driven, very empirical, profit-driven and ruthless. in contrast, spirituality is realist yet transcendent, esoteric, extrarational, extra-sensory, soft in approach and subliminal in nature. it is also abstract and ineffable. still the two are neither mutually exclusive nor polarized. rather, the two are mutually supportive and inextricably integrated. spirituality prepares favorable grounds for entrepreneurship and significantly contributes to it success. surprisingly, the two have so much in common and those who believe and have gone through know the power spirituality, yields (milliman et. al., 2003; lari, 2012; kumar & muruganantham, 2015; sunitha and anthuvan, 2015; hani & kurniawati, 2018). empirical study to gain insights into what goes into entrepreneurial cognition and decisionmaking revealed that entrepreneurial faith goes beyond the limits of the rational-scientific environment transcending into a much bigger cosmological belief system (ganzin et. al., 2019) giving them confidence, hope and self-efficacy to take on high levels of risk, uncertainty and ambiguity linked with entrepreneurship. it gives the entrepreneur enhanced agency and a congenial matrix to grow the relevant attributes within themselves, leverage them to manifest their entrepreneurial aspirations magnificently to the advantage of all-self and the stakeholders (krurger, 2000). interconnectedness generates faith, which is a very seminal driver of socioeconomic behaviors (schwab, 2016). entrepreneurship is not for faint hearts. it needs mettle and steely resolve. spirituality is known to enhance character strengths (niemiec & pargament, 2020). entrepreneurship calls for a strong character with elements of self-control, discipline and other positive attributes that are invariably linked with a strong character. character strengths or positive attributes of ones’ personality are universal (peterson & seligman, 2004), and make for an integrated personality. these positively contribute to well-being, relationships, health, a sense of purpose, and achievements. moreover, these also contribute positively to the collective welfare (niemiec, 2018). these character strengths and spirituality are positively and reciprocally integrated, rather the strengths have strong potential to be spiritual attributes (niemiec, russo-netzer, & pargament, 2020) and the best part is that individuals can be trained into these with well deliberated interventions (goldstein, 2007; borghans et. al., 2008; pargament et. al., 2014; hudson & fraley, 2015; roberts et. al., 2017; schutte & malouf, 2018). above all, each of these enables and influences human thoughts, feelings and behaviors (park et.al. 2019). despite all this, not much has been researched on the role of spirituality in building this character and infusing these elements (ganzin et. al., 2019; niemiec et. al., 2020). right from goal-setting, training and learning, resilience, dedication and discipline time and risk management, support system to treating the milestones relevantly, spirituality helps it all (balog, baker & walker, 2014). another empirical study by dierendonck (2012) established spirituality’s positive contribution to good human life. this includes, desirability, moral goodness, relatedness and economic success. but despite this, it seems absent from most of the academic discourse (thomas, sherman, waters, & gilea, 2009). spirituality can be described as leading a conscientious life, guided by one’s inner moral compass, to create harmonious, positive and smoother relations, internally and externally (hawley, 1993; spaniol, 2002). prominent tenets of spirituality are quest for meaning and purpose in life, transcendence and relatedness (connectedness) (hawley, 1993; spaniol, 2002; mayseless & russo-netzer, 2017; ohoitimur, raco, & sobon, 2019; faber, 2020; niemiec et. al., 2020). researchers describe spirituality as individual quest for meaning and purpose in life (cavanagh, 1999; mackinlay, 2006; mitchell et. al., 2010; knapik, martsolf & draucker, 2010; javanmard, 2012). a similar view from pulchalski et. al., (2009) describes spirituality as how humans find and express meaning and purpose, also how they experience relatedness with themselves, others, nature and the supreme (zinnbauer et. al., 1997; mitroff & dentron, 1999; rust & gabriels, 2011; niemiec & pargament, 2020). connectedness refers to one’s connection with a higher being the supreme power, the self and others (spaniol, 2002; wiklund, 2008; pulchalski et. al., 2009; knapik, martsolf & draucker, 2010; penman et. al., 2013; bucher, 2014; rehan et. al., 2019; demmrich, 2019; jaberi et. al., 2019). interconnectedness is integrity, harmony with oneself and others (interconnectedness) and leads to acceptance to diversity, and holistic being (jaberi et. al, 2019). connectedness spurs human pursuits beyond oneself (faver 2004; pruzan, 2008; tomlinson et. al., 2016) including humane and ecological concerns (zsolnai, 2022). spirituality prompts a sense of peace, gratitude and compassion. also, it shapes the vision and understanding of the world. it gives an internal moral compass that not only influences one’s actions and ethical choices, but also controls one’s behavior towards oneself and others (pruzan, 2008; jaberi et. al., 2019; krapik et. al., 2010). the same is required from entrepreneurial pursuits. scholars agree that spirituality does direct entrepreneurs towards creatively configuring solutions to social challenges of their times (kurt et. al., 2020; agarwal et. al., 2022). . transcendence in spirituality alludes to the realization or acceptance of something greater and much beyond what our rational, scientific minds and human senses can perceive (spencer, 2012). it underscores the enabling effect of the communion with the sacred. a similar sentiment by pargament (2002) says the pith of spirituality lies in “the process of discovering, fostering and connecting with the sacred or the ultimate cosmic https://www.frontiersin.org/articles/10.3389/fpsyg.2020.02040/full#ref20 https://www.frontiersin.org/articles/10.3389/fpsyg.2020.02040/full#ref82 https://link.springer.com/article/10.1007/s10902-011-9286-2#ref-cr15 https://link.springer.com/article/10.1007/s10902-011-9286-2#ref-cr15 https://www.frontiersin.org/articles/10.3389/fpsyg.2023.1125826/full#b6 https://www.frontiersin.org/articles/10.3389/fpsyg.2023.1125826/full#b1 https://www.frontiersin.org/articles/10.3389/fpsyg.2023.1125826/full#b1 volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.311 | http://emaj.pitt.edu anchoring the anchor: spirituality as an entrepreneurial competence page |32| emerging markets journal being or power. there exists a sort of unanimity on this version of spirituality (kapuscinski & masters, 2010). it connects and reposes our faith in a bigger and infinitely powerful cosmic system (ganzin et. al., 2019). transcendence alludes to the idea of going beyond the ordinary or material aspects of existence and connecting with something higher, sacred or divine. it involves a sense of moving beyond the limitations of the physical world and experiencing a deeper, more profound reality. the cosmos, universe, the god-whatever name be given to it, is out there to help humans in their pursuits, given a befitting alignment of self with this infinite cosmological force. align yourself and leverage that super power (knapik et. al., 2010). entrepreneurs need to have a strong will to act and manifest their vision of what others can’t conceive or believe in (nandram & borden, 2009). to the theists of the world, this ultimate superpower can be god. non-believers can take it as the ultimate cosmic power. 84 percent of the world believes in something greater than themselves (world economic forum, 2016). the allusion to this indescribable superpower or the ultimate/supreme gives spirituality connects to a much larger cosmological belief system that is ultimate as an enabling force and an infinite reservoir of power. it reposes its faith in a much expansive cosmological belief system transcending the limits of the rational-scientific environment (magical thinking) ganzin et. al., 2019). vaughan (1991, 2002) avers that spirituality significantly stimulates individual growth and healing. it also triggers relevant social and cultural ventures. spirituality significantly contributes towards making of a well put-together personality well aligned with self and others. a project that emmons et. al. (1998) worked analyzed validated spirituality’s decisive role in deciding upon the choices and life-goals that humans foster. in a parallel opinion, by ciarrocchi et. al. (2008), spirituality plays a crucial role in predicting an individual's potential for success, positivity and optimism. its unique influence goes beyond the scope of the big five personality traits, offering a comprehensive perspective on one's outlook and behavior. embracing spirituality can lead to enhanced well-being, improved resilience and a positive mindset that contributes to personal growth and success. spirituality because of its extra-rational and extra-sensory nature seems an elusive, fine, delicate and chimeric concept, more so, when juxtaposed with entrepreneurship, where every move has to stand the test of bloodless numeric calculations and quantitative touchstones. the propositions have to bring in results, primarily monetary gains which are balance-sheeted. as of spirituality, scholars do agree to it being too abstract to be calibrated (moberg, 2010). spirituality is a fluid, abstract, ephemeral and subjective a concept. this happens to be an aspect of the description that may be true, but seem little distal to the entrepreneurial context. that lends it an air of mysticism and making it extra-sensory as well as extra-rational despite being a trait that we learn, acquire and practice even before the verbal stage of humans. even a toddler after pushing the other, when hides behind the curtain, avoiding his mother knows he/she has done something he/she should not. spirituality is all about right behaviors, internal moral compass and filters in one’s behavior with oneself and others. it enables peace, harmony and success. besides, it is very often overshadowed by religiosity, which at the most, is partially true. multidimensionality, in the context of spirituality, refers to the idea that spiritual experiences and beliefs can manifest and be understood in multiple dimensions or aspects of an individual's life, it being not limited to a singular dimension/aspect of but encompassing various facets of human behavior (nandram, 2009). these can be personal, social, economic and religious or even beyond. it influences an individual's inner thoughts, beliefs, values and self-awareness while socially, on how individuals with others, fostering a sense of community, shared values and collective rituals. being transcendental alludes to the realization or acceptance of something greater and much beyond what our rational, scientific minds and human senses can perceive (spencer, 2012). though religiousness and spirituality seem proximal concepts, there exists a subtle yet significant difference (enblem,1992; mitroff & denton, 1999; ganzin et. al., 2019; hill et. al., 2000; emmons & paloutzian 2003; garcia-zamor, 2003; saucier & skrzypinska, 2006). former appears to be more institutional, regimental and asks for confirmatory adherence (or refrain) to certain beliefs and practices (hill et. al.; saucier & skrzypinska, 2006). going beyond citations, religiousness restricts to a subset, spirituality liberates (from any of the subsets), rendering the individual practicing it universal (lapierre, 1994; elkins, 2001). it escalates to a higher level of perspective with a broader, more inclusive understanding of life and existence. it is subliminal, infuses deeper meaning (emmons, 1999). spirituality is closeness with god and feelings of being with one or interconnected with the world and all those who constitute it (enblem, 1992; zinnbauer et. al. 1999). these include meaning and purpose of, experiencing the sacred (giacalone & jurkiewicz, 2003). iii. methodology the article draws upon secondary data for its qualitative narrative and comparative analysis. it uses the european entrepreneurship competence framework (entrecomp) as a referential base for entrepreneurial competencies. of the other valued and listed references, it draws the required skill sets from the future of work report (2023) by the world economic forum, the concept of magical realism from the research paper by ganzin et. al. (2019) and the universal 24 character-strengths from the via classification of character strengths. iv. discussion and analysis having discussed spirituality and entrepreneurship, now we move on to see how the two connect and integrate with each other. spirituality has a positive and invigorating effect on the entrepreneurial process. infused with spiritual principles, beliefs or practices entrepreneurial intentions/designs have enhanced prospects of success and sustainability. above all, a more fulfilling and meaningful impact may not only be valid for the entrepreneur, but also for the society, people, environment and everyone that his/her behavior touches upon. spirituality smoothens and resolves inner and outer conflicts as well as frayed edges. it creates a positive connection with oneself, others and the supreme power, the cosmic power or god for the believers. spiritual attributes broadly include clarity of purpose and vision, https://link.springer.com/article/10.1007/s10902-011-9286-2#ref-cr52 https://link.springer.com/article/10.1007/s10902-011-9286-2#ref-cr13 https://link.springer.com/article/10.1007/s10902-011-9286-2#ref-cr4 https://www.sciencedirect.com/science/article/pii/s1048984305000718#bib59 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc2739880/#r20 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc2739880/#r17 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc2739880/#r17 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc2739880/#r49 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc2739880/#r49 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc2739880/#r49 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc2739880/#r26 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc2739880/#r16 https://www.ncbi.nlm.nih.gov/pmc/articles/pmc2739880/#r16 https://www.sciencedirect.com/science/article/pii/s1048984305000718#bib167 volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.311 | http://emaj.pitt.edu gayatri dwivedi, seema sharma emerging markets journal page |33| self-efficacy and leading to action in the relevant direction. it gives courage to persevere. spirituality prompts a unified view of life. connectedness as explained earlier helps individuals align themselves better with themselves, others and the ecosystems around them into harmonious and meaningful existence (sehra, 2015). spirituality at work, not only creates a strong sense of engagement, but also brings out the best in the workers petchsawang & mclean, 2017). it prompts one to know and work towards ultimate purpose of life, foster and nurture strong bonds with coworkers and other people at work and to have consistency or alignment with organization values, goals and beliefs (mitroff & denton, 1999). a spiritually oriented individual will be cordiallyaligned with self, others, nature and the supreme being. besides, he/she is likely to have an orderly life, build social bonds and seek the meaning as well as purpose of life. spirituality triggers hope, optimism, efficacy and resilience. the four together constitute psychological capital (paul & sahoo, 2017; fox, 2019; sarkar et. al., 2022), leading to a constructive state of mind (luthans et. al., 2007). psychological capital promotes the psychological wellbeing and research explains it as an ‘individual’s positive psychological state of development’ (youssef & luthans, 2007). this conjures up an overall sense of wellbeing, positivity, satisfaction at work (youssef-morgan & luthans, 2015; kawalaya et. al., 2019; lopez-zafra, 2022), promotes innovation (novitasari et. al., 2020) creativity (yu et. al., 2019; lopez-zafra, 2022), and sense of engagement (lifeng, 2007; soni & rastogi, 2019). psychological capital enhances their sense of self-efficacy, faith and courage in their abilities to follow their entrepreneurial aspirations optimally. this positivity is traversal. it enhances not only self-efficacy, but also reflects well on other areas like creativity, innovation, sense of engagement and makes their endeavors more fulfilling in all aspect of behaviors, thus give more agency to entrepreneurs. entrepreneurial intention is the faith of individuals in their capacity to plan and establish their businesses in future (bandura, 1982; denoble, jung & ehrlich, 1999: thompson, 2009). krueger (1993) avers that self-efficacy happens to be one of crucial determinants of entrepreneurial intentions, a major antecedent to entrepreneurial behavior (bird, 1988; krueger et. al., 2000; mannino & faraci, 2017). spirituality helps entrepreneurs not only have that required conviction in their abilities, but also help them find out the realm and purpose (hawley, 1993; zinnbauer et. al.,1997; cavanagh,1999; mitroff & dentron,1999; spaniol,2002; mackinlay, 2006; pulchalski et. al.,2009; mitchell et. al., 2010; rust and gabriels, 2011; knapik, martsolf and draucker, 2010; javanmard, 2012; mayseless et. al., 2017; ohoitimur et. al., 2019; faber, 2020; niemiec et. al., 2020; niemiec & pargament, 2020). the 24 positive character strengths (peterson & seligman, 2004) put under six metastrengths converge with spiritual attributes. these were a result of comprehensive three-year study wherein the scientists studied philosophies and prominent religions of the world (dahlsgaard et. al., 2005) to configure the via classification of strengths. these are universal. the mentioned ones are wisdom (creativity, curiosity, openmindedness, love of learning), courage (honesty, bravery, persistence and zest), humanity (kindness, love and social intelligence), justice (fairness, leadership and teamwork) temperance (forgiveness, modesty, prudence and selfregulation) and finally transcendence (appreciation of beauty, gratitude, hope, humor and religiousness/spirituality). spirituality figures as one of the twenty-four listed strengths, besides the widely prevalent consensus that most of the listed virtues have strong spiritual tenor (saroglou et. al., 2008; davis & hook, 2014). in fact, all the six strengths have their roots in spirituality (niemiec et. al., 2020). about 700 scientific studies have further validated the via‘s classification of character strengths (via institute, 2020). these signature strengths can be used to enhance many of the desired traits and alleviate some of the issues in our personal and professional lives. spirituality is an intrinsic part of leadership (cook-greuter, 2002, sanders et. al., 2003, thompson, 2000, wilber, 2000a). research foregrounds the spiritual aspect in leadership and defines it as one of the crucial elements of integrated leadership concept (cook-greuter, 2002, sanders et al., 2003, thompson, 2000, wilber, 2000a). entrepreneurs draw upon the extra powers that spirituality renders, which go beyond logical explanation. this is so rationally required considering the needed personal commitment, uncertainty, obstacles, particularly the situations that ask for a deep personal commitment in the face of obstacles (mcmullen & shepherd, 2006; mckelvie, haynie, & gustavsson, 2011; balog et. al., 2014). entrepreneurship is about initiative taking, working on it and mobilizing resources such as internal, external, tangible and human ones, in addition to aligning them towards the goals sustainably. leadership has a key role to play. unlike empirical research that links leadership with leadership traits, power dynamics, attributes, skills and situational details, neo-modern research considers it a play of leader’s spiritual belief system (fairholm, 1998), which is also inclusive (drath & palus, 1994). moreover, it is seen as linked with or play of an individual's thought-process, inquisitiveness, perceptions, values and dynamics in a community rather than in individual settings (eggert, 1998). as development unfolds, intuition and inner knowledge also deepen through transcendence wherein our referential framework is connected and integrated with the sacred (cook-greuter, 2002, wilber, 2000a). real progress is when our world views are rooted and driven by higher levels of references, inner thought process and drivers as well as inner belief systems (sanders et. al., 2003). inclusive human growth happens when individuals, community and surroundings are in cordial, harmonious and meaningful alignment. sense making is deciphering past to construct a logically emergent picture of future. such visualization of future from the past is called sense making or futureoriented sense making (gephart et. al., 2010). entrepreneurs’ sense making or ‘cognitive processing of challenges, uncertainty and adversity is optimistically different than ordinary individuals (milliken, 1987; baron & markman, 1999; gatewood, shaver, powers, & gartner, 2002; mckelvie et. al., 2011; ganzin et. al., 2019). it is laced with optimism and positivity to construct a picture that aligns well with their envisaged futures (lipshitz, ron, & popper, 2004; cornelissen & clarke, 2010; gephart et. al., 2010). not only they author their narratives and pathways with the same positivity, hope and conviction, but also communicate these to the world https://www.sciencedirect.com/science/article/pii/s1447677021002011#bib116 https://link.springer.com/article/10.1007/s10902-011-9286-2#ref-cr15 https://www.frontiersin.org/articles/10.3389/fpsyg.2020.02040/full#ref11 https://www.frontiersin.org/articles/10.3389/fpsyg.2020.02040/full#ref11 https://www.frontiersin.org/articles/10.3389/fpsyg.2020.02040/full#ref39 https://www.frontiersin.org/articles/10.3389/fpsyg.2020.02040/full#ref77 https://www.sciencedirect.com/science/article/pii/s1048984305000706#bib32 https://www.sciencedirect.com/science/article/pii/s1048984305000706#bib125 https://www.sciencedirect.com/science/article/pii/s1048984305000706#bib135 https://www.sciencedirect.com/science/article/pii/s1048984305000706#bib135 https://www.sciencedirect.com/science/article/pii/s1048984305000706#bib148 https://www.sciencedirect.com/science/article/pii/s1048984305000706#bib40 https://www.sciencedirect.com/science/article/pii/s1048984305000706#bib40 https://www.sciencedirect.com/science/article/pii/s1048984305000706#bib32 https://www.sciencedirect.com/science/article/pii/s1048984305000706#bib148 https://www.sciencedirect.com/science/article/pii/s1048984305000706#bib125 https://www.sciencedirect.com/science/article/pii/s1048984305000706#bib125 volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.311 | http://emaj.pitt.edu anchoring the anchor: spirituality as an entrepreneurial competence page |34| emerging markets journal with the same conviction (grégoire et. al., 2011; hill & levenhagen, 1995). explicating the source of this optimism and selfconviction, ganzin et. al. (2019) put forth the concept of magical thinking, wherein the entrepreneurs shift their moorings from the rational scientific referential framework to a wider cosmological belief system. magical realism combines rationalism or realism with spiritual resilience to deal with challenges and adversities. it takes along the objective facts with the subjective perspectives of entrepreneurs who decipher events around them, ecosystem through the lenses of magic or spirituality (zamora & faris, 1995). this corresponds with their visions. table 2 maps the spiritual attributes and roles to the entrepreneurial competences as advocated by entrecomp,the entrepreneurship competence framewo rk. in other words, table 2 shows the entrecomp entrepreneurial competences and how spirituality aligns with each. table 2: entrecomp entrepreneurial competences and spirituality alignment volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.311 | http://emaj.pitt.edu gayatri dwivedi, seema sharma emerging markets journal page |35| source: bacigalupo, m., kampylis, p., punie, y., van den brande, g. (2016). entrecomp: the entrepreneurship competence framework. luxembourg: publication office of the european union; eur 27939 en; doi: 10.2791/593884 the world economic forum (2023) in its future of jobs report (2023) lists down 26 skills that can be further clustered into eight groups of cognitive skills, management skills, ethics, engagement skills, physical abilities, self-efficacy, technological skills and working with others. out of the mentioned eight sets; management skills, ethics, engagement skills, self-efficacy and working with others have a direct connection with spiritual attributes. figure 3. list of skills for future jobs source: world economic forum (2023) v. findings after conducting a comparative analysis of pertinent entrepreneurial competences alongside spiritual attributes, this paper establishes a robust, positive relationship between entrepreneurial competence and the role of spirituality within this context. as a result, there arises a compelling need to integrate spirituality into discourse, education, and training of entrepreneurial competence from an early stage. this integration should be given appropriate precedence within any charter that seeks to enhance entrepreneurial competences. the biggest dilemma with spirituality is that, an individual becomes spiritually aware either during the later phase of life or after some traumatic, life shattering or tragic experiences (dueck et. al., 2006; ironson et. al., 2006). uncertainty and seemingly fewer years remaining from overall life appear to up the spirituality element among individuals (park, 2008). in the case of former, most of the decisive and productive years, crucial decisions are done by then. prompted by the same, people reflect on their life, its pursuits and meaning (dueck et. al., 2006; ironson et. al., 2006). finally, spirituality is transcendental, subjective and abstract. that makes it chimerical and ineffable. it is also a little bit difficult for comprehension, particularly to the naysayers. spirituality is an abstract chimeric extra sensory concept. it is a meta concept that manifest in individual behaviors and conduct. spirituality induces optimism, enhanced levels of self-efficacy and positivity. but then somewhere, we need to draw the line between perceptions and realities. some scholars may simply call this (enhanced levels of self-confidence) entrepreneurial hubris (hayward et. al., 2006). vi. conclusion enthusing individuals’ lives with meaning and purpose, transcendence, connectedness, equanimity, tranquility and resilience seem to be the core tenets of spirituality (margaça et. al., 2023). it creates harmony and peace within our relations with the outside world and people. spiritual attributes not only give a broad direction and tenor of righteousness, but also make an individual persona more affable, agreeable and soft, thus smoothening the frayed/rough edges of one’s personality. this in turn gives entrepreneurs more agency. it will not be hyperbolic to call spirituality the mother of all competence. it is an overarching, metacompetence and most if not, all competences have their roots in it. it makes one receptive to other competences. research has established mutual synergy between spirituality, character strengths, psychological capital and entrepreneurship. there is a huge crossover and they are inextricably integrated. spirituality builds up character strengths and psychological capital which in turn help entrepreneurial competencies. that puts further onus on the trainers and educators in the realm to make deliberate efforts for integrating the spiritual elements in entrepreneurial education and training. in fact, some of the countries have already taken up the approach (bettignies, 2019; meyer kot, 2019; nawaz et. al., 2020; khalid, 2021; rahiman et. al., 2021). spirituality should be given a place of prominence and precedence in entrepreneurial competence dialogue and entrepreneurial education as well as training. spiritual attributes grow entrepreneurial eligibility manifold, plus give them axiological filters and sensors in socioeconomic as well as ecological context. talking of the learnability, both entrepreneurship and spirituality can have learnability. spiritualty can be developed through practice, stimulating inquisitiveness and curiosity or a desire to discover deeper truths or meanings (vaughan, 2002; margaça et. al., 2021). this prompts further research in the direction, integrating spirituality into the entrepreneurial competence framework more meaningfully. undeniably, spiritual attributes serve as foundation of the magnificent edifice of entrepreneurship. it is a humane way of conducting oneself with empathy and concern for others, planet and the universe. we have already overshot the planetary limits. if our actions are led by filters of relatedness, compassion, empathy, frugality and concern for the planet, half the global issues will mitigate by themselves. moreso doing it at an early stage and during the formative plastic years make for easier absorption of the tenets it stands for. plus, on this exists a convincing consensus among the academics and practitioners. mindless economic growth and experiencing tech-advances as well as research breakthroughs alone cannot make for holistic, inclusive and sustainable progress. we need to give the technological advances and research breakthroughs a meaningful direction, with right sensors and filters. https://www.frontiersin.org/articles/10.3389/feduc.2022.977089/full#b7 https://www.frontiersin.org/articles/10.3389/feduc.2022.977089/full#b7 volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.311 | http://emaj.pitt.edu anchoring the anchor: spirituality as an entrepreneurial competence page |36| emerging markets journal entrepreneurs are undeniably social architects, coming up with newer ideas, products and services that render unified, inclusive and sustainable progress. they not only create prosperity for themselves, but also for the communities they work for (luthans et. al., 2013). with spiritual attributes, they can turn development into real progress. finally, real progress has to pass the test of being humane, inclusive, holistic, constructive and sustainable. it caters not only to profit-motive, but also to social and ecological well-being as well as sustainability (zsolnai, 2022). the best part of whole narrative is that favourable attributes can be instilled with proper training and education. promising psychological traits of entrepreneurs can be acquired (margaça et. al., 2021) and success of entrepreneurial education lies in integrating or embedding these in its constituents (hägg & kurczewska, 2020). references agarwal, s., ramadani, v., dana, l.p., agrawal, v.,dixi t, j.k. (2021). assessment of the significance of factors affecting the growth of women entrepreneurs: study based on experience categorization. journal of entrepreneurship in emerging economies, vol. ahead-ofprint no. ahead-of-print. arsawan, i., koval, v., rajiani, i., rustiarini, n. w., supartha, w. g., suryantini, n. p. s. (2020). leveraging knowledge sharing and innovation culture into smes sustainable competitive advantage. int. j. product. perform. manag. 71, 405-428. doi: 10.1108/ijppm-04-2020-0192 balog, a. m., baker, l. t., walker, a. g. (2014). religiosity and spirituality in entrepreneurship: a review and research agenda. journal of management, spirituality & religion, 11(2), 159-186.https://doi.org/10.1080/14766086. 2013.836127. benefiel, m. (2003). mapping the terrain of spirituality in organizations research. journal of organizational change management, 16(4), 367-377. cardon, m. s., stevens, c. e., potter, d. r. (2011). misfortunes or mistakes? cultural sensemaking of entrepreneurial failure. journal of business venturing, 26(1), 79-92. davis, d. e., rice, k., hook, j. n., van tongeren, d. r., deblaere, c., choe, e., worthington jr., everett, l. (2015). development of the sources of spirituality scale. j. couns. psychol. 62: 503. doi: 10.1037/cou0000082 denoble, a. f., jung, d., ehrlich, s. b. (1999). entrepreneurial self-efficacy: the development of a measure and its relationship to entrepreneurial action. frontiers of entrepreneurship research. proceedings of the 19th annual entrepreneurship research conference (babson park, ma: babson college), 73-87. febriani, r. (2020). spirituality to increase entrepreneur’s satisfaction and performance: the islamic perspective. eur. j. bus. manag. 12, 64-69. gephart, r. p., topal, c., zhang, z. (2010). futureoriented sensemaking in organizations: the use of prospective and predictive sensemaking in the strategic responses to macrohistorical change. organization science, 21(3), 528-544. gioia, d. a., mehra, a. (1996). sensemaking and sensegiving in strategic change initiation. strategic management journal, 17(11), 835857. grégoire, d. a., corbett, a. c., mcmullen, j. s. (2011). the cognitive perspective in entrepreneurship: an agenda for future research. journal of management studies, 48(6), 1443-1477. hill, t. l., levenhagen, m. (1995). metaphors and mental models: sensemaking and sensegiving in innovative and entrepreneurial activities. journal of management, 21(6), 1057-1074. jena, l. k., pradhan, r. k. (2015). psychological capital and workplace spirituality: role of emotional intelligence. international journal of work organisation and emotion, 7(1). doi: 10.1504/ijwoe.2015.073119. kapuscinski, a. n., masters, k. s. (2010). the current status of measures of spirituality: a critical review of scale development. psychol. relig. spiritual. 2, 191-205. doi: 10.1037/a0020498 kauanui, s.k., thomas, k.d., sherman, c.l., waters, g.r., gilea, m. (2009). entrepreneurship and spirituality: an exploration using grounded theory. fortmyers, fl: florida gulf coast university. khari, c., sinha, s. (2018). organizational spirituality and knowledge sharing: a model of multiple mediation. global journal of flexible systems management, 19(4), 337-348. krueger, n. f. (2000). the cognitive infrastructure of opportunity emergence. entrepreneurship theory and practice, 24(3), 5-23. lopez-zafra, e. (2022). antecedents of psychological capital at work: a systematic review of moderator–mediator effects and a new integrative proposal. european management review, 19(1), 154-169. https://doi.org/10.1111/emre.12460 mauksch, s. (2017). sustaining entrepreneurial visions: between aspiration and realization. organization studies, 38(12), 1723-1744. mayseless, o., russo-netzer, p. (2017). a vision for the farther reaches of spirituality: a phenomenologically based model of spiritual development and growth. spirituality in clin. pract. 4, 176-192. doi: 10.1037/scp0000147 https://www.frontiersin.org/articles/10.3389/fpsyg.2023.1125826/full#b8 volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.311 | http://emaj.pitt.edu gayatri dwivedi, seema sharma emerging markets journal page |37| milliman, j., czaplewski, a.j., ferguson, j. (2003). workplace spirituality and employee work attitudes: an exploratory empirical assessment journal of organizational change management, 16(4), 426-447. mitroff, i.a., denton, e.a. (1999). a spiritual audit of corporate america: a handbook of spirituality, religion and values in the workplace. san francisco, ca: jossey-bass. nandram, s. (2016). how do spirituality, intuition and entrepreneurship go together? philosophy of management, 15(1), 65-82. nandram, s., borden, m.e. (2009). spirituality and business. springer. neubert, m.j., bradley, s.w., ardianti, r., simiyu, e.m. (2017). the role of spiritual capital in innovation and performance: evidence from developing economies, entrepreneurship theory and practice, 41(4), 621-640. niemiec, r. m., pargament, k. i. (2020). the decoding of the human spirit: a synergy of spirituality and character strengths toward wholeness. frontiers in psychology, 11, 552737. https://doi.org/10.3389/fpsyg.2020.02040 ohoitimur, j., raco, j. r., sobon, k. (2019). spirituality: the power of entrepreneurship. emaj emerging markets journal, 9(1), 28-35. https://doi.org/10.5195/emaj.2019.161. pargament, k. i., lomax, j. w., mcgee, j. s., fang, q. (2014). sacred moments in psychotherapy from the perspectives of mental health providers and clients: prevalence, predictors, and consequences. spiritual. clin. pract. 1, 248– 262. doi: 10.1037/scp0000043 paul, m., sahoo, k. (2017). role of spirituality as a positive psychological capital tool in prediction of emotions and subjective wellbeing among management students. journal of positive psychology, 10(2), 123-137. peterson, c., seligman, m. e. p. (2004). character strengths and virtues: a handbook and classification. new york, washington, dc: oxford university press, american psychological association. pruzan p. (2008). spiritual leadership in business journal of human values, 14(2), 101-11. raco, j.r., ohoitimur, j., sobon, k. (2019). spirituality: the power of entrepreneurship. emaj: emerging markets journal. 9. 28-35. 10.5195/emaj.2019.161. raco, j.r., tanod, r.h.m. (2014). the phenomenological method in entrepreneurship. j. entrepreneurship and small business, 22 (3), 276-285. rose, s. (2001). is the term “spirituality’ a word that everyone uses, but nobody knows what anyone means by it? journal of contemporary religion, 16, 193-207. saroglou, v., buxant, c., tilquin, j. (2008). positive emotions as leading to religion and spirituality. j. posit. psychol. 3, 165-173. doi: 10.1080/17439760801998737 schwab, k. (2016). welcoming faith in the fourth industrial revolution. berkley forum. globalization, governance, and norms. seaward, b.l. (2001). health of the human spirit: spiritual dimensions for personal health. allyn and bacon: boston, usa. sirine, h., kurniawati, e. p. (2018). the importance of spirituality dimensions in the development of entrepreneurship. diponegoro international journal of business, 1(2), 55-70. doi: 10.14710/dijb.1.2.2018.55-70. via institute (2020). what the research says about character strengths. available at: https://www.viacharacter.org/research/findi ngs (accessed august 25, 2020). washington times (wt blog). (2012). https://www.washingtontimes.com/blog/waterc ooler/2012/dec/23/84-percent-worldpopulation-has-faith-third-are-ch/ world economic forum. (2016). the role of faith in systemic global challenges. https://doi.org/10.5195/emaj.2019.161 https://www.viacharacter.org/research/findings https://www.viacharacter.org/research/findings volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu investors’ psych and stock return in nigeria during the covid-19 pandemic era segun kamoru fakunmoju lagos state university, nigeria | e-mail: segun.fakunmoju@lasu.edu.ng bello ibrahim abdullahi university of ilorin, nigeria | e-mail: abibrahim@unilorin.edu.ng oketoyin abraham gbadebo osun state university, nigeria | e-mail: abraham.gbadebo@uniosun.edu.ng abstract investors’ attitudes were severely altered by the covid-19 crisis, which had an intolerable effect on volatile returns in nigerian stock market and other stock markets worldwide. psychological trauma was experienced by stock investors due to the inability to foresee returns following the worldwide shock of covid-19 and the subsequent drop in stock investments brought on by the unpredictability of macroeconomic behavior. this study analyzed the link effect of investor psyche on stock returns in nigeria between march 2019 and december 2022. for this research, sentiment index (smi) model was employed for the connection between investors psyche and returns on the nigerian stock market. it was found that, investors psyche during covid-19 pandemic negatively affected stock returns, resulting from negative concerns about their survival and financial security than the stock market, thus triggered sharp decline in stock investment. thus, study concluded that covid-19 outbreak impacted stock returns negatively. the research recommends that the nigerian stock exchange commission should increase disclosure of market information, which is related to the magnitude and potentials of stock returns and degree of volatility at all times. the concerned volatility and potentials during the covid-19 era were also influential to enhance investors’ confidence. keywords: covid-19 pandemic, investors’ psych, nigerian stock market, stock return, prospect theory new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.284 | http://emaj.pitt.edu | mailto:abibrahim@unilorin.edu.ng http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.284 | http://emaj.pitt.edu segun kamoru fakunmoju, bello ibrahim abdullahi, oketoyin abraham gbadebo emerging markets journal page |23| investors’ psych and stock return in nigeria during the covid-19 pandemic era segun kamoru fakunmoju bello ibrahim abdullahi oketoyin abraham gbadebo i. introduction the stock market is vital for raising capital for publicly traded companies worldwide. moreover, the stock market is a crucial part of the economy and a significant revenue generator for traders and investors. therefore, any intelligent individual investor must be able to mentally calculate how to maximize their profits on stock market investments. unfortunately, however, the investor psyche is agitated by the age of the worldwide pandemic (covid-19 pandemic), resulting in skewed judgement concerning the market analysis of indexes (naseem, mohsin, hui, liyan, & penglai, 2021; raifu, kumeka, & aminu, 2021). there has been widespread mental distress among investors in industrialized, emerging, and developing stock exchange markets since the start of the covid-19 epidemic. in this context, investor anxiety is a symptom of a broader pattern of internal (worries, increased anxiety, dysthymia) and external (economic, political, social) psych imbalance (anxiety, tension, fear, unpleasant experiences, or occurrences). similarly, bagus, pena-ramos, and sanchez-bayon (2021) noted that mass hysteria, ptsd, panic attacks, ocd, and gad resulted from the psych effect of covid-19’, which in turn led to a misalignment of market information with global market reality and a consequent reduction in expected stock returns. one of the goals of global investors is to achieve a specific rate of return on their stock investments, but the worldwide lockdown caused by covid-19 waves made this goal more challenging to achieve. most corporate leaders and stock market investors spent their time working more and more. however, they spent much of covid-19 at home, as concerns about the status of the financial markets, the pressure to make investment decisions, and the mental health of family members kept them from venturing out (li, wang, xue, & zhao, & zhu, 2020). everything in life, including people’s health, are jeopardized by the covid-19 explosion. all nations’ economies will be affected by the continuing health of international markets for stocks and shares of financial institutions (huang & zheng, 2020; wang, yang, & li, 2022). investor psychology (emotions) and the degree to which an individual is optimistic or pessimistic about the future value of stocks may shift as a person integrates into a particular social structure. because of the extreme swings in market sentiment (mood) throughout the pandemic, stock prices or returns plummeted in most countries worldwide. investors’ emotional and psychological thinking were adversely skewed towards sound criteria for investment selection due to the economic lockdown, mobility restrictions, and closing of offices and institutions during the covid-19 outbreak. as a result, stock investors became more cautious since the advent of the covid-19 epidemic that hit stock markets throughout the world, from the united states and the united kingdom to france and china, japan, turkey, south africa, tunisia, nigeria, and other rising and developing economies (dertli & eryuzlu, 2020). covid-19 epidemic did lead to a decrease in market investments and lowered associated returns. nigeria experienced the covid-19 pandemic as well. the first case of covid-19 was reported in nigeria on february 27, 2020. as of july 24, 2020, nigeria had recorded 39,539 cases of covid-19, including 22,135 active cases, approximately 16,559 discharged patients and 845 deaths. by january 13, 2021, the number of reported cases had risen to 249,586. 3,092 deaths had been reported, while 220,839 patients had been recovered. during covid-19, several governments enacted measures that effectively shut down the economy. as a result, many firms and organizations were forced to close their doors, and the banking industry saw a decline in revenue (worldometer report, 2022). as a result, investors of nigerian stocks felt emotional or psychological trepidation, and they did put off making new purchases on the stock market. this study was motivated by the fact that investors worldwide, including those in the nigerian stock market, are facing new emotional and psychological difficulties in interpreting stock market indices due to the covid-19 epidemic. ii. conceptual review, empirical review and hypothesis development the study conceptually viewed investors’ psych in terms of their patterns of behavior, including their attitudes, motivations, and choices, all of which fall under the umbrellas of behavioral finance and contemporary financial theory. accordingly, stock returns is the revenues or benefit from securities trading or the profit generated. investor psych focus on the investors' reasoning as to how they perceive the markets and hence why they might just do the wrong thing at the wrong time. ahmad (2020), saivasan and lokhande (2022) as well as others conducted related empirical research. covid-19 uncertainty was significantly moderated in a study by wang, zhang, ahmed, and muhammed-shah (2021). covid-19 uncertainty’s moderating influence on relationship between how individuals feel about risks and how willing they are to take them financially was also calculated. in general, financial risk aversion and aversion to risk were also included while assessing the impact of the profitability rate. the link between how one feels about risk and how comfortable one takes it monetarily was also investigated. when weighed volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.284 | http://emaj.pitt.edu investors’ psych and stock return in nigeria during the covid-19 pandemic era page |24| emerging markets journal against the average threat to tolerance, the impact of pleasure was considerable. based on their empirical research, moueed and hunjra (2020) concluded that investors’ psyches matter while making stock market investments. experts in the financial sector are known to follow reported projections, but they sometimes use hunches (riaz & hunjra, 2015). therefore, it is reasonable to conclude that general investors are susceptible to the psychological factors affected by events like sars, swine flu, and covid-19 (ali, alam, & rizvi, 2020; conlon & mcgee, 2020). similar results were observed during the ebola outbreak when investor apprehension led to lower market returns (ichev & marinc, 2018). during the swine flu epidemic of 2009, kiruba and vasantha (2021) investigated what factors led people to make financial investments. effects on anxiety, risk aversion, risk propensity, market volatility worries, herd behavior, herd immunity, and the current situation reports were all proxies for psychological behavior in the study. the research results showed that, investors’ choices during the covid-19 epidemic were affected by their emotional reactions to news about the virus, herd behavior, risk aversion, and vaccinations. previous market returns are significant sentiment predictors, as highlighted by li et al. (2020) and brown and cliff (2004), and changes in investor attitude are strongly correlated with recent market results. if the stock market continues its positive association with investor sentiment, there will be further evidence that investors’ emotional state is a counter-cyclical predictor of market movement. conversely, when investors’ moods have a negative (positive) effect on stocks, it tends to be more noticeable in the case of firms that are relatively simple to value (xiang, yang, li, zhang, zhang, & cheung, 2020). lan, huang, and yan (2020) discovered ample proof that the pre-announcement abnormal performance is caused by investor emotions which in turn adversely affected market index return. according to the data, investor sentiment is the primary factor in the intelligent mispricing of earnings contributions that ultimately leads to stock market mispricing (cheema, man, & szulczyk, 2020; mian & sankaraguruswamy, 2012). despite how the financial crisis has altered the environment apart from market forces, there is a favorable association between attitudes and returns (ryu, ryu, & yang, 2020). investors can take more mental and emotional strain than the general public. anxiety over covid-19 were on the rise for specific weeks, and it was not only because of the rapid growth of the epidemic. the financial news, the media, and amplifiers have all played a role. in the post-covid19 period, few empirical research were conducted in nigeria. this study contributes to the literature by investigating the impact of investor psych on stock return at covid-19 period. also, to the best of researcher’s knowledge, no studies were conducted within the nigerian environment using the exponential generalized auto-regressive conditional heteroscedasticity (egarch) approach to examine the nexus between investor psych and stock return during the covid-19 era (march 2019 to december, 2022). as a result, the hypothesized the following: h1: investors’ psych during the covid-19 pandemic era had an effect on stock return in nigeria. the study is also grounded in the idea of prospect theory via expected utility developed by kahneman and tversky (1988). loss-aversion theory is another name for prospect theory or expected utility theory, which centers on the psychology of decision-making in the face of uncertainty and catastrophic events like the covid-19 epidemic. the prospect theory was created by kahneman and tversky (1988) to describe the mental processes behind economic decisions. they gave it a fresh spin by introducing cumulative prospect theory, which considers how risk and uncertainty at the time of investment choice could impact returns on investment. for example, investors nervousness about the future could have caused them to miss lucrative possibilities because they were worried about the covid-19 epidemic. nosic and weber (2010) state that, a person’s propensity to invest may be influenced by risk aversion, confidence in the financial instrument, and overall perception of risk. many previous studies used prospect theory to investigate the link between human psychology and financial markets, including those by lyn and zychowicz (2010), ullah et al., ullah, elahi, pinglu, and subhani (2020), wei-shan hu, lee, and chen (2018), and zajac (2004). in light of these and other relevant prior research, prospect theory was used as the study’s guiding theoretical framework to achieve the objectives of research. iii. methodology all share index (asi) and investor psych (investors’ sentimental factors measured via stock turnover stov), market capitalization (mc), verified covid-19 cases (vcc), and mortalities rate from covid-19 (mcd) used daily data from a secondary sourced, which followed an ex-post facto research design. this research used daily data with the arch and egarch distribution estimators. in addition, the study used data collected daily between march 2019 and december, 2022 from the fact books from the nigerian stock exchange and a report from the nigerian centre for disease control. considering the objective and anchored theory, the model specification for the study is stated below: asi = f(investors’ psych (ip)) asi = f(investors’ sentimental index (isi)) asi = f(stov, mc, vcc, mcd) asi = 0+ 1stov+2mc+ 3vcc+ɵ4mcd+i where; asi was proxied for stock return, while stock turnover (stov), market capitalization (mc), variations in verified covid-19 cases (vcc), and mortalities rate from covid-19 (mcd); and i = error term. volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.284| http://emaj.pitt.edu segun kamoru fakunmoju, bello ibrahim abdullahi, oketoyin abraham gbadebo emerging markets journal | page |25| iv. results, interpretation and discussion of findings the first stage in computing the stock return volatility and psych factors (sentimental index through stov, mc, vcc, and mcd) model is to determine if the daily series on the research variables displays the arch effect. this implies that the arch exam must be taken by the stov, mc, vcc, and mcd between march 2019 and december, 2022. the results of an arch test performed on the study variables between march 2019 and december 2021 are shown in table 1. these variables include the asi, mc, vcc, and mcd. the f-statistic and obs*r-squared statistics, together with their respective values and pvalues, were displayed in the test findings. table 1 displays the statistical analysis findings, revealing that the asi, mc, vcc, and mcd all demonstrate volatility with p-values lower than 5% (p<0.05). since the results are statistically significant, the no-arch effect null hypothesis was rejected. the findings imply that the investigated variables (the asi, mc, vcc, and mcd) are highly volatile due to an arch effect. table 1: arch test results for study variables source: authors’ computation (2023) the egarch findings from march 2019 through june, 2022 were displayed in table 2. this table demonstrates the impact of investors’ psych on the stock return volatility. at a significance level of less than 5%, the mean equation revealed that mc positively affected the volatility of stock returns with asi, whereas vcc and mcd had a negative influence. the impacts of information, information asymmetry, and leverage are investigated alongside the constant term in the variance equation. the statistical significance of the probability value of the information impact coefficient is shown in table 2 under the variance equation, implying that there is volatility among the research variables in the nigerian stock exchange market. furthermore, information asymmetry and leverage both had statistically significant coefficients with high probability values. this demonstrates that the information impact is asymmetric, suggesting that either positive and negative information (or news) significantly affect the volatility of stock returns in nigeria. in other words, poor news had a more significant destabilizing influence on stock returns than good news, as measured by its negative value (-0.17), indicating an asymmetric or leverage effect. the garch feature focuses on information asymmetry, which shows that if the asymmetry term is negative, then adverse shocks have a more significant effect on stock return than positive shocks of the same size. as a result, investors are more likely to react negatively to bad news than positively, as shown by the magnitude of adverse shocks persistence or the volatility asymmetry. this suggests that the volatility spillover process is asymmetric, resulting in meaningful and substantive variations in stock performance and the combined arch(α) and garch(β) measure of volatility persistence was 1.59. this value is more than 1, indicating that nigeria’s stock market has a high volatility of stock return since volatility takes a long time to decrease. the outcome also showed that, previous volatilities affected volatility returns in the future. since the reported value of the durbin-watson statistic is 2.39, which is less than or equal to 2.0, we may conclude that autocorrelation is not present. the research concludes that, the covid-19 pandemic’s asymmetric information led to bad news (leverage effect), which established volatility of stock returns in the nigerian market, as evidenced by several prior works of literature, including those by ali et al., 2020; ahmad, 2020; conlon & mcgee, 2020; ichev & marinc, 2018; kiruba & vasantha, 2021; lan, huang & yan, 2020). this research points out that, investors avoid the stock market at times of worldwide pandemic or global shock out of a concern for their safety as consistent with the leading theory examined in the study, prospect theory. table 2: egarch result for objective of the study dependent variable: asi source: authors’ computation (2023) v. conclusion, policy recommendations and limitations of research the study concluded that, during the peak of covid-19 period, there was hike in trauma and imbalance psych among stock investors, which had triggered high volatile in returns within the period of march 2019 and december, 2022. as the study indicates, the nigerian stock market experienced severe volatility due to adverse news triggered by downward shifts in market capitalization (mc), vcc, and mcd during the research period. based on the findings, the study recommends that, stock market managers should implement effective market information transparency policies and present an accurate situation of the market to the investors during any pandemic period so that individual stock market investors can be guided against the psych pressure from market misinformation. while investors faced with continued difficulties related to covid-19, analysis of the study only covers the period between march, 2019 and december, 2022. unfortunately, the study could not extrapolate research’s results to other time periods or years. in addition, there is diversity in the make-up and structure of investors’ underlying psychological processes of volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.284 | http://emaj.pitt.edu investors’ psych and stock return in nigeria during the covid-19 pandemic era page |26| emerging markets journal reasoning and observation. as a result, it is improbable that stock market investors’ decisions about psycho factors or investors’ emotional index model are consistent or universal. references ahmad, m. (2020). does under-confidence matter in short-term and long-term investment decisions? evidence from an emerging market. management decision, 59(3), 692–709. https://doi.org/10.1108/md-07-2019-0972 ali, m., alam, n., & rizvi, s. a. r. (2020). coronavirus (covid-19) – an epidemic or pandemic for financial markets. j. behav. exp. finance, 27, 100341. bagus, p., pena-ramos, j. a., & sanchez-bayon, a. (2021). covid-19 and the political economy of mass hysteria. int. j. environ. res. public health, 18(4), 1376; https://doi.org/10.3390/ijerph18041376 brown, g. w., & cliff, m. t. (2004). investor sentiment and the near term stock market. j. empirical finance, 11(1), 1-27. doi: 10.1016/j.jempfin.2002.12.001 cheema, m. a., man, y., & szulczyk, k. r. (2020). does investor sentiment predict the near-term returns of the chinese stock market? int. rev. finan. 20, 225–233. doi: 10.1111/irfi.12202 conlon, t., & mcgee, r. j. (2020). betting on bitcoin: does gambling volume on the blockchain explain bitcoin price changes? economics letters,191,108727. doi:10.1016/j.econlet.2019.108727 dertli, s. k., & eryüzlü, h. (2020). early warning signals from global financial markets at the beginning of covid-19 pandemic. turkish studies, 15(8), 35073520.https://dx.doi.org/10.7827/turkishst udies.45964 huang, w., & zheng, y. (2020). covid-19: structural changes in the relationship between investor sentiment and crude oil futures price. energy res. lett. 1, 13685. ichev, r., & marinc, m. (2018). stock prices and geographic proximity of information: evidence from the ebola outbreak. international review of financial analysis, 56,1 53–166. https://doi.org/10.1016/j.irfa.2017.12.004 kahneman, d., & tversky, a. (1988). prospect theory: an analysis of decision under risk. in p. gärdenfors & n.-e. sahlin (eds.), decision, probability, and utility: selected readings (183–214). (reprinted from “econometrica,” 47 (1979), 263-291) cambridge university press. kiruba, a. s., & vasantha, s. (2021). determinants in investment behaviour during the covid-19 pandemic. indonesian capital market review, 13, 71-84. lan, y., huang, y., & yan, c. (2020). investor sentiment and stock price: empirical evidence from chinese seos. economic modelling, 94, 703– 714. doi: 10.1016/ j.econmod.2020.02.012 li, s., wang, y., xue, j., zhao, n., & zhu, t. (2020). the impact of covid-19 epidemic declaration on psychological consequences: a study on active weibo users. int. j. environ. res. public health, 17, 20-32. doi: 10.3390/ijerph1706 2032 lyn, e. o., & zychowicz, e. j. (2010). the impact of faith-based screens on investment performance. the journal of investing, 19(3),136-143. doi:10.3905/joi.2010.19.3.136 mian, g. m., & sankaraguruswamy, s. (2012). investor sentiment and stock market response to earnings news. accounting review, 87(4), 1357–1384. doi: 10.2308/ accr-50158 moueed, a., & hunjra, a. i. (2020). use anger to guide your stock market decision-making: results from pakistan. cogent economics & finance, 8(1), 1733279. naseem, s., mohsin, m., hui, w., liyan, g., & penglai, k. (2021) the investor psychology and stock market behavior during the initial era of covid-19: a study of china, japan, and the united states. front. psychol, 12, 626-934. doi: 10.3389/fpsyg.2021.626934 nosić, a., & weber, m. (2010). how riskily do i invest? the role of risk attitudes, risk perceptions, and overconfidence. decision analysis,7(3),282301. doi:10.1287/deca.1100.0178 raifu, i. a., kumeka, t. t., & aminu, a. (2021). reaction of stock market returns to covid-19 pandemic and lockdown policy: evidence from nigerian firms stock returns. future business journal, 7(1), 1-16. riaz, l., & hunjra, a. i. (2015). relationship between psychological factors and investment decision making: the mediating role of risk perception. pakistan journal of commerce and social sciences, 9(3), 968–981. ryu, d., ryu, d., & yang, h. (2020). investor sentiment, market competition, and financial crisis: evidence from the korean stock market. emerging markets finance and trade, 56, 1804–1816. doi: 10.1080/1540496x.2019.1675152 saivasan, r., & lokhande, m. (2022). influence of risk propensity, behavioural biases and demographic factors on equity investors’ risk perception. asian journal of economics and banking, 6(3), 373-403. https://doi.org/10.3390/ijerph18041376 https://doi.org/10.1016/j.irfa.2017.12.004 volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.284 | http://emaj.pitt.edu segun kamoru fakunmoju, bello ibrahim abdullahi, oketoyin abraham gbadebo emerging markets journal page |27| wang, f., zhang, r., ahmed, f., & muhammed-shah, s. m. (2021). impact of investment behaviour on financial markets during covid-19: a case of uk. economic research-ekonomska istraživanja, doi: 10.1080/1331677x.2021.1939089 wang, q., yang, x., & li, r. (2022). the impact of the covid-19 pandemic on the energy market – a comparative relationship between oil and coal. energy strategy reviews, 39,100761. https://doi.org/10.1016/j.esr.2021.100761 wei-shan hu, j., lee, y., & chen, y. (2018). mutual fund herding behavior and investment strategies in chinese stock market. investment management and financial innovations,15(2),87-95. doi:10.21511/imfi.15(2).2018.08 worldometer report (2022). report on covid-19 across the globe. https://www.worldo meters.info/coronavirus/ xiang, y. t., yang, y., li, w., zhang, l., zhang, q., cheung, t. (2020). timely mental health care for the 2019 novel coronavirus outbreak is urgently needed. lancet psychiatry,7,228–229. doi: 10.1016/s2215-0366(20)30046-8 zajac, j. (2004). risk investment, asset returns, and information. risk, decision and policy, 9(2),161-176. doi:10.1080/14664530490464879 ullah, s., elahi, m. a., ullah, a., pinglu, c., & subhani, b. h. (2020). behavioural baises in investment decision making and moderating role of investor’s type. intellectual economics, 15(1), 87-105. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu auditing techniques to minimize accounting related fraud and errors: a qualitative analysis with the interview method cevdet kızıl istanbul medeniyet university, turkey | e-mail: cevdetkizil@yahoo.com erol muzır istanbul medeniyet university, turkey | e-mail: erol.muzir@medeniyet.edu.tr vildan yılmaz certified public accountant (cpa) and independent researcher, turkey | e-mail: vildanbrt77@gmail.com abstract accounting is more integrated with the technology today compared to the previous years. the increase in a variety of technological developments and commercial transactions has further increased the number and type of errors as well as frauds related to the accounting profession. this causes misleading information for several stakeholders. stakeholdes sometimes make false decisions based on the financial statements created as a result of false and fraudulent transactions. in order to minimize the errors and frauds concerning the accounting system of enterprises, effective internal controls and auditing systems should be in order. it is evident that, setting up the required internal controls and auditing systems reduce asset losses and provide great benefits in the long run for firms. existence of strong internal controls and auditing systems in enterprises has gained great importance in turkey. this study provides information about the audit techniques that can minimize accounting related frauds and errors in businesses. the research includes and employs an interview with auditing professionals as the research methodology. auditors working within three audit firms were selected by simple random sampling via the linkedin social media. the three participants were directed 10 semistructured and open-ended questions. qualitative analysis was adopted for this study. according to the results of research, companies use a number of tools to prevent accounting related frauds and errors. these most effective tools to minimize the frauds and errors are detected as internal auditing, internal controls and independent (external) auditing. auditing professionals have high awareness about accounting related fraud and errors. but, auditor independency should be higher, proactive approach must be utilized and auditors must closely follow the new laws and regulations in addition to being familiar with the firms’s operations and sectors to minimize the fraud and errors. the benford's law, artificial neural networks, analytical methods, data mining, red flags and analytical methods are commonly used by the auditors against frauds and errors. in general, the internal controls and auditing professions are in a much better situation today in turkey compared to the previous years. but, this is still not adequate and there is a long way to complete ahead based on the opinions of auditing professionals. keywords: accounting, auditing, internal controls, fraud, error new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.232 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.232 | http://emaj.pitt.edu auditing techniques to minimize accounting related fraud and errors: a qualitative analysis with the interview method page |96| emerging markets journal auditing techniques to minimize accounting related fraud and errors: a qualitative analysis with the interview method cevdet kızıl erol muzır vildan yılmaz i. introduction the continual change of economic conditions in the world, the increasing competition among businesses and the rapid development of information technologies have started to affect the businesses both in positive and negative directions. as operation volumes of businesses grew, firms began to become more complicated with records of accounting system due to increased transactions. this complexity has also made it more difficult for businesses to control financial transactions, while also creating appropriate environments for fraudulent transactions (dönmez and çavuşoğlu, 2015). financial statements should present financial information that is reliable, understandable, comparable and appropriate for the users of financial statements. financial statements bearing these characteristics are obtained through the integration of internal controls, auditing and corporate governance elements. this definitely creates a reliable financial reporting environment. however, there have been some accounting scandals that are echoing in the world with transactions and records that are contrary to accounting and financial reporting principles (atmaca, 2012). since the second half of the xx. century, businesses have not succeeded in fighting with this complicated economic and financial structure, and many corporate fraudulent scandals such as enron, worldcom and parmalat have come to the scene (kızıl and kaşbaşı, 2018; kızıl et. al. 2016). emergence of neglect of accounting and auditing firms in these large corporate frauds has increased awareness on the financial sector and regulatory agencies side. there has been a perception that auditing profession and auditors have failed to detect the frailty and are not diligent enough to detect and prevent fraud in the society. these scandals have forced the redefinition of the responsibilities of auditors and accountants for the detection of frauds in their organizations (karausta and dönmez, 2013). one of the biggest problems faced by businesses is errors and frauds in the accounting system. error and frauds are different concepts. various definitions have been made about the fraud in scientific literature. fraud is intentional. also, it is sometimes the incorrect and incomplete misrepresentation of information about assets in the business, which do not reflect the reality of financial statements (kaval, 2005). in other words, fraud is the intentional while an accounting error is unintentional (söyler, 2013; aslan, kızıl and din, 2017). fraud is also irregularities such as dishonesty, corruption and deliberate mistakes. concerning the business person, individual in charge of the management or the third person is in deceptive behavior in order to gain consciously interests (güredin, 2007). any arrangement that one person will benefit from another person is within the scope of fraud. some of them constitute unjust acquisition of assets, bribery, fraudulent documents and reports, embezzlement, theft, expense and cost inflation as well as unfair use of business assets. these unfair revenues may be obtained by direct acquisition of the owner's money or goods, as well as by indirect means such as rewarding, receiving bonuses or providing power (bozkurt, 2000). in order to better understand the concept of fraud, we can list the following issues: fraud is an activity that is secretly carried out by cheaters. the scammer has the principle of benefiting himself / herself from the fraud action. there is absolutely intentional content, which means that the victim is deceived in some way and the individual or business subject to fraud is hurt by the action in every case (bozkurt, 2009). an accounting error is a mistake in the process of systematically recording, categorizing, summarizing and reporting information about financial transactions. in accounting errors, there is no intention. but, there is ignorance and negligence. for example, if a machine or equipment that had to be recorded under fixed assets was recorded as general administrative expenses unintentionally, then this is an accounting error. thus, accounting errors generally result from lack of information or personal carelessness about accounting principles and standards (kara, 2012). errors also arise when an asset is not recorded in the book. in cases where assets are recorded in different accounting periods, they are recorded with wrong sums, or recorded under a wrong account, debt or receivable. there are differences in the classification of accounting errors. math and calculation mistakes, recording mistakes, forgotten and recurring account mistakes, transferring mistakes, balance errors and remedial mistakes can be listed at this point (özer, 1998). thus, the main distinction between error and fraud is intention. the missteps are deliberately and deliberately carried out in the fraud while accounting mistakes come into play due to unintentional reasons due to ignorance and carelessness. while accounting errors are usually limited to records, accounting frauds are made on both the records and documents intended to hide false records. it is much more difficult to detect and prove frauds than mistakes, while it is easier to uncover and correct mistakes because there is no intention. it is necessary to know the causes, types and environments that help to cheat in order to take preventative steps for fraud and in order to reveal the scam. the association of certified fraud examiners (acfe) classifies fraud as follows (kiracı, 2013): volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.232 | http://emaj.pitt.edu cevdet kızıl, erol muzır, vildan yılmaz emerging markets journal | p a g e 9 7 table 1: classification of fraud resource: kiracı, m. (2013). hileye yönelik uluslararası kuruluşların hazırladığı raporların bağımsız denetim açısından değerlendirilmesi. muhasebe ve vergi uygulamaları dergisi, cilt: 6, sayı: 3, 87-106. according to terzi, fraud is categorized in two. these are the frauds committed by management and the frauds commited by employees as it is observed in figure 1 below (terzi, 2012). figure 1. types of fraud resource: terzi, s. (2012). hile ve usulsüzlüklerin tespitinde veri madenciliğinin kullanimi. muhasebe ve finansman dergisi, sayı: 54, 51-64. frauds created by employees arise due to factors in elements of repression seen in the fraud triangle. some of these scams are listed below (pazarçeviren, 2005): employees transferring money to their accounts without reflecting them in the records gaining monetary benefit by playing with bank records on which they relate providing payments by creating unrealistic debts and fraudsters in favor of business burglary through items such as office materials, fixed assets and stock personal use of business assets and firm credit cards bribery of business customers or suppliers for various reasons providing benefits with inflated personal health or travel expenses overpayments examples of management tricks in terms of fraud can be indicated as follows (pazarçeviren, 2005): -recording non-real income items (e.g., generating income by changing similar valued assets between businesses and increasing the income by making false predictions in the interim financial statements) increasing revenue with one-time gains (e.g., selling a low-valued assets at high values and paying debts earlier unnecessarily to provide discounted revenues) transferring the current period expenses to the next term recording future period expenses as current turnover expenses the fraud triangle is indicated below in figure 2 (morales, gendron and guenin-paracini, 2014): figure 2. fraud triangle resource: morales, j., gendron, y. and guenin-paracini, h. (2014). the construction of the risky individual and vigilant organization: a genealogy of the fraud triangle. accounting, organizations and society. vol. 39, issue: 3, 170-194. the abuse of assets is rarely achieved by the business management. however, management can easily overcome powers and controls, thus enabling to hide frauds well. so, amount of embezzlement can reach to very significant and serious sums. according to the literature, although the number of corruption such as embezzlement and bribery by the top management personnel is low by quantity and numbers, sums are about three times higher than total sum of corruption incurred by other employees (güredin, 2007). when the elements of fraud triangle are compared to fire, gasoline and oxygen, it is likely that there will be a fire and explosion when these elements come together. here, fraud action will not be easy unless the three elements in the fraud triangle come together. concerning the pressure, generally managers want the financial results and indicators to look good. this is because good volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.232 | http://emaj.pitt.edu auditing techniques to minimize accounting related fraud and errors: a qualitative analysis with the interview method page |98| emerging markets journal financial resultes and indicators are reflected to their wages, premiums and bonus. this kind of pressure can create falsification of accounting information and result in improper reflection of financial reports. gambling debts of some employees, credit card debts and money requirements arising from various reasons in the business do also cause employees and managers to resort to fraudulent ways by creating pressure (erdoğan, 2006). besides, opportunity is the absence of an internal controls system in business or lack of efficiency in the internal controls system. this may apply to any employee’s fraudulent operation, which takes advantage of the opportunity. however, an effective internal controls system that exists in the business limits the opportunity of fraudulent transactions (ramos, 2003). on the opposite side, employees or managers who are aware of internal controls gaps in the firm’s system can take what they want without too much effort (emir, 2008). in regards to rationalization, the company tends to honestly justify itself as a reason for executives and employees to manipulate their own conscience. for example, in case of embezzlement, executives and employees relieve their conscience by borrowing money to justify themselves (bulca, 2014). in the scope of this study, firstly the definition of fraud and accounting error were provided. then, the internal controls and auditing techniques were also mentioned. in this context, the study started with the introduction section. then follows the literature review, data and methodology, research findings and conclusion and recommendation sections. ii. literature review although research on audit techniques that can prevent fraud and accounting errors are still limited, they are constantly increasing. studies in this field contribute to the literature in the recent years (aksoy and uzay, 2021; akman, acar and kızıl, 2020; adalı and kızıl, 2017; kiracı, 2013; şengür, 2011; acfe, 2010; kandemir, 2010; çubukçu, 2009; acfe, 2008; kula, 2008; pwc, 2007 and bayraktar, 2007). some of the research conducted are theoretical studies related to the forensic accounting science and auditing, while others are empirical studies. it should be noted that, studies analyzing fraud in the covid-19 era do also currently attact attention in the related literature (jamil et. al., 2021; widiyati et. al., 2021; kızıl, muzır and akman, 2021). accounting frauds arise on grounds that resources or assets are shown intentionally and incorrectly on wrong accounts. in this case, wrong and tricky financial statements are prepared with aim of providing benefit to specific individuals or institutions (kula, 2008). in order for an accounting fraud to be possible, it needs to have two components: firstly, the situation that is valid for accounting errors should have full intention. in other words, fraud is deliberately misleading, unlike error. cheating people either deliberately deceive other side, or misrepresent facts and push other side to make misrepresentation. in order for a mistake to be intentional, two conditions must exist. the person who commits fraud should be aware of the mistake made and he/she should know that other parties believe in financial statements and will report these misleading statements if they recognize the situation. secondly, employees or managers in the business should act and behave in order to receive benefits. the fact that people are acting on basis of their interests is already a deliberate initiative. fraud for personal interests damages the business for sure (çubukçu, 2009). some field surveys were conducted to determine the proportional status of these fraud types. one of the most important studies showing ratios of fraud types were run by the american certified fraud examiners (acfe). according to acfe's survey of businesses in 2006 and 2008, they had distinguished fraud types as abuse of assets, corruption and fraudulent financial reports. according to the results of research, it is seen that the ratio of the frauds in the financial statements of enterprises is the lowest one. in acfe's research in 2008, the frequency of abuse of assets was 88,7%. the cost of this ratio was about 150.000 united states (u.s.) dollars (acfe, 2008). according to the survey conducted in 2010, abuse of assets had 86,3%, unfair profit had 32,8% and fraudulent financial statements had 4,8% ratio. the average cost of these ratios were 4,1 million u.s. dollars in misappropriation of assets, 250,000 u.s. dollars in unfair earnings and 135,000 u.s. dollars in fraudulent financial statements (acfe, 2010). according to the survey conducted by pricewaterhousecoopers (pwc) in 2007 at turkey, intellectual property theft cases were observed with a ratio of 14% and accounting fraud and unfair acquisitionbribery cases were observed with a ratio of 8%. the abuse of assets were observed with a ratio of 19%. when we have a look at the studies on the tools used by businesses in the absence of salaries, it is seen that findings in the literature are parallel (pwc, 2007). in a research conducted in 2013, it was mentioned that auditors who are affiliated to the capital markets board (cmb) are more likely to assist internal auditors, conduct audits, obtain information about management and share possible fraud information for effective independent (external) auditing. moreover, according to research results, risk assessment is very important. independent (external) auditing has created a great deal of confidence in the prevention of fraud, errors and deceptions in business. also, revision of existing legal regimes in turkey reached to a conclusion that, existing laws and regulations had to be reconsidered (kiracı, 2013). there are several studies published related to the fraud and accounting errors in turkey. one of these studies dated 2011 distributed questionnaires to independent (external) and internal auditors to determine the most frequently detected types of fraud. the research also tried to determine the opinions of independent (external) and internal auditors on effectiveness of factors that prevented frauds. these are the effectiveness of the audit committee, pariticpation of a certified fraud supervisor joining the internal or independent (external) audit team, impementation of ethical rules and existence of a positive working environment (şengür, 2011). another study conducted in 2007 discussed the history of fraud. the recent events and scandals have led to discussions related to the auditing and accounting fields based on this research. while accounting professionals develop their own methods, a number of techniques and methods have been developed to prevent and reveal deceptions made on other side. in order to apply these techniques and methods well, it has been volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.232 | http://emaj.pitt.edu cevdet kızıl, erol muzır, vildan yılmaz emerging markets journal | p a g e 9 9 pointed out that, the most frequently encountered manipulation paths should be investigated and grasped. in this study, causes and methods applied to frauds were examined by analyzing the scandals that took place in turkey. it was also mentioned how important accounting is in today’s business world. definition, reasons, methods and techniques of the accounting scams were explained in detail together with the accounting scandals that took place in the world. this research mostly focused on illegal concepts such as accounting scams, use of false documents, corruption and tax evasion. as a result, it was determined in the study that between 1990 and 2007, the main aim of accounting frauds in turkey was to hide actual occuring taxes and generating income in terms of corruption (bayraktar, 2007). based on another research conducted in 2010, three general factors listed as internal auditing, internal controls and independent (external) auditing were indicated to be critical for eliminating accounting related fraud and errors. also, the abuse of assets and fraudulent financial statements cause unfair business mergers and acquisitions. thus, auditing and internal control systems are significant for the welfare of society (kandemir, 2010). iii. data and methodology the aim of this study was to emphasize the role of auditing in preventing accounting related frauds and errors in turkey. another purpose of the research was to determine whether these audits were carried out effectively by auditing professionals. within the framework of auditor’s opinions, scope of investigation includes problems encountered during auditing. special considerations that auditors should pay attention to and requirements for better overall auditing were mentioned as well. in this study, the interview technique was used as a qualitative research method. the main purpose of using an interview technique was to identify auditing professionals’ experiences and present how they exceled with the mentioned experiences. the sample of study consists of auditing professionals employed in three audit firms selected through simple random sampling via the linkedin social media. the three participants were directed 10 semistructured and open-ended questions. information on interviewees and interview questions are provided in table 2 below: table 2: participant information and interview questions iv. research findings the research findings are indicated below in consequence as interview questions directed to auditing professionals (p1), (p2) and (p3) and their related responses for each question: question 1: are you aware of accounting related fraud and errors in the world and turkey? according to the responses of participants, they are all informed about accounting related fraud and errors through the press and media. they are also informed by professional non-governmental organizations on the basis of distributed information. these apply for all the auditors (p1), (p2) and (p3) who are subject to this research. question 2: which auditing techniques should be implemented by employees and the management of a business to protect from accounting related fraud and errors? above all, knowledge of professional legislation and technical application must be obtained. then, actual independence is a must for sure. a couple of things can also be said under the name of audit technique, but i think that is not meaningful. auditing is auditing, so i do not believe that this makes sense. is audited transactions correct? are internal and official legislations appropriate? who are beneficiaries? is utilization status legal? the format, methods and content are all important here. internal controls is more significant and indispensable (p1). classical method and proactive method can be used. the classical method is a passive approach that is used to expose fraud and irregularities in traditional auditing techniques. the passive approach refers to the investigation of fraud and corruption in the context of traditional auditing. that is only examining financial items or situations that are under suspicion, making this when it is only needed or reported. the proactive method is contrary to the passive approach. this is any claim volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.232 | http://emaj.pitt.edu auditing techniques to minimize accounting related fraud and errors: a qualitative analysis with the interview method page |100| emerging markets journal about fraud and corruption is an audit activity that adds account to the possibility of fraud and irregularities at all times without request or notice. in this method, as in the case of classical method, sampling is not enough and information technology (it) enables the auditor to examine the whole database comfortably without any time cost (p2). it is a fact about what measures should be taken to prevent abuse in these matters. criteria and risks should be assessed, risk planning and deterrent measures should be taken considering the opinions and practices of a professsional, who is at least as knowledgeable as the person commiting fraud. it is essential to know and learn to think exactly like a cheater to solve the abuse (p3). question 3: do you proactively work as an auditor in the prevention of accounting related fraud and errors? yes. all new applications and implementations in operation are subject to review by the audit department. regulations and technical instructions sometimes change related to work patterns. active participation in work though the processes is a must (p1), (p2), (p3). question 4: have you experienced an accounting related fraud or an error case in your professional career? i experienced several accounting related fraud and error cases in my professional career (p1). so far, i have been involved in a lot of accounting related fraud and error cases in a total of 6 sectors (p2). i have completed the investigation of numereous accounting related fraud and error events through my professional career (p3). question 5: could you describe the potential cheater profile as an auditor? those who tend to spend more than their income, are excessively involved in bet games and stock exchange transactions, have weak family ties, believe they have been treated unfairly for a long time, have resentment against the business, have family or friends who have serious health problems, need money urgently, have excessive debts, can emotionally and easily influenced by other’s suggestions, have low selfconfidence are potential cheater profiles in my opinion (p1). potential cheaters are artificial individuals who try to reflect that they are always sincere, well-dressed and intelligent. they always try to influence others with their unrealistic characteristics (p2). fraud staff can be confronted at any stage. from leakage of money to using a double receipt, there are many types of fraud. so, it is very difficult to describe a definite profile in my opinion. it would also be dangerours to come up with such a generalization. i somtimes even observe people who cheat despite their high level of education and social status (p3). question 6: what kind of approach do you use while supervising business activities? i will exhibit an objective (neutral, equal distance) approach. then i will take an approach that puts everything under supervision, assuming that every individual can cheat and gain an unfair advantage (starting from the owners of business to all the senior executives and ordinary employees). i would like to determine the scope and depth of audit by my side. (p1). the method we use most proactively is actually personalized and unique according to the nature of auditor and company profile (p2). to speak honestly, i always follow the theoretical developments and publications related to my profession. i believe that constantly reading and making research is very important in our job. then, i always try to blend these with my practical knowledge and experience in the field (p3). question 7: what sort of order should be followed in terms of methods according to the degree of importance in revealing fraud, corruption and errors in the company? i place importance on operations of the company according to the degree of influence on market. legal obligations of the firm are also important. i inspect transactions in order of importance within the time period for audit (p1). there are a lot of methods that i have to consider (p2). today, many control elements such as fraud policies, fraud risk appraisal, duty rotation and training to protect against fraud and errors have been developed in order to prevent asset losses in the business. several methods have been used to detect frauds and errors, such as the benford's law, artificial neural networks, analytical methods, data mining, red flags and analytical methods (p3). question 8: what are the challenges that supervisors may encounter when conducting a fraud or error audit, or what should they pay attention to? suggestions and guidance of others must be considered. however, restrictions on the scope of audit must definitely be eliminated. also, sometimes there is pressure from auditees and top managers that auditors are dependent on. that has to change, because this is currently one of the biggest problems for turkey in the auditing profession (p1). documents and records need to be examined may be inadequate or partially hidden. the documents and records submitted must be tested for authenticity. this does not have a standard. testing of accuracy for each document and record is different from receiving confirmation from the interested parties (p2). independent auditor should use his/her professional judgment to decide which technique he/she should choose, and at what level they will be used. expectations of the top management should be considered by the auditor as well. the main aim of any business is to make profit. the auditor should know the company well and must be familiar with the operations as well as the sector of business. he/she should also make sure that, transactions are carried out in accordance with the procedures determined by authorities (p3). question 9: what do you think about accounting related fraud and error controls in turkey? accounting related fraud and error controls are more effective in turkey compared to the previous years. fraud and error inspections are very effective in high scaled international companies in turkey. importance to volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.232 | http://emaj.pitt.edu cevdet kızıl, erol muzır, vildan yılmaz emerging markets journal | p a g e 1 0 1 accounting related fraud and error controls is given much more now and the awareness is higher. the required time and staff to minimize the accounting related fraud and error are generally determined correct as well (p1). internal auditing, fraud and error supervision are still not very effective and more improvements are needed. first of all, internal auditors are sometimes regarded as an expense factor and some firm oweners as well as top managers consider them to to be inefficient from the beginning. this is a very dangerous and biased approach, which also hurts the turkish economy. thus, internal auditors are not financially supported in specific companies from the beginning. in some situations, an internal auditor is just employed because of the law or considering the reputation of firm against other organizations. subjective preferences of the business owner or top managers, rather than the recommendations and suggestions of the internal auditor also cause significant problems. internal auditing is still not seen as a separate field of expertise in some companies (p2). i believe that controls to prevent the accounting related fraud and errors heve developed significantly in the recent years at turkey. we are definitely not the best and still have a long jouney to complete, but the latest improvements make me pleased. i am much more hopeful for the future. professionals even in the large scaled and famous firms had not heard of internal controls and auditing in the former years at turkey. however, we can even observe middle sized firms with separate auditing, internal controls and risk management departments today (p3). question 10: how do you see the future of accounting related fraud and error controls in the world and turkey? accounting related fraud and error auditing in the world and turkey is becoming increasingly important. whether or not the losses caused by fraudulent institutions can be foreseen, this increases awareness (p1). accounting related fraud and error auditing will become even more important in the future. especially the population growth, increase in unemployment, inequality in income distribution, higher competition, moral collapse and worsening of value judgments will increase in the following years in my opinion. thus, accounting related fraud and error auditing will be more critical. institutions will also necessarily have to give more importance to set up sound internal control systems (p2). the concept of accounting related fraud and error auditing in turkey has not evolved completely. institutional ownership as well as emotions and preferences of company owners/top managers give rise to this situation. firms will also have some unpleaseant experiences in this time interval. however, "a misfortune is better than thousand advices”. overall, awareness of auditing and internal controls will increase more by time (p3). v. conclusion and recommendations employee and mangement frauds as well as errors, which has become an institutional problem, can be avoided by proactive practices that can be developed in parallel with technological improvements. the recent issues have increased the responsibilities of auditos as well as the scope of their authority. accounting related fraud and error auditing is gaining importance day by day due to financial scandals experienced around world. the mentioned scandals are observed frequently in the recent years and even some giant enterprises went to bankruptcy because of them. according to the results of this study, economic impact of accounting related fraud and errors is quite serious. all businesses must have strong backgrounds in terms of internal controls and auditing. following the codes of ethics also helps the reduction of accounting related fraud errors. timely measures and actions are important at this point. in this research, responsibilities of the auditors who are in charge of frauds and errors were closely examined. as a result of in-depth interviews carried out in this context, it was revealed that knowledge of professional legislation and technical practices were cirtical. absolutely, independence is an eye-catching factor as well. both the classical and proactive methods can be used to minimize accounting related fraud and errors. although the proactive method is widely preferred, it is not always completely enough because of the sampling techqniue instead of handling the whole universe. the usage of information technologies is a must for auditors in today’s business world in terms of time, workload and cost savings. data included in financial statements prepared by the business must be delivered to interested parties in a timely, accurate, reliable, understandable, complete, comparable and up-to-date manner. independent (external) auditors are needed to meet this purpose and increase investor confidence in the financial information. independent (external) auditors are obliged to submit an opinion to express whether the financial information reported by the business is prepared in accordance with the generally accepted accounting principles (gaaps). in order to be able to take action against accounting related fraud and errors in both the public and private sectors, each institution should pay attention to specific issues. the proactive fraud audit approach requires the use of preventive and detective methods. there might always be a fraud within the institution. attempting to examine the accounting related fraud or error when there is a notice or suspicion is a passive approach and would not always work. the fraud environment is like a virus. a virus can be more effective on the human body if it is weak. but, this will not be the case when the human body is strong. likewise, the accounting related fraud or error can not be observed in the company, at least in high ratios, without finding and detecting a suitable environment. it is also useful to pay attention to the issues, which prepare a ground for the fraud and error environment such as unfairness, not paying attention to transparency, weakness of company's internal controls and auditing systems, excessive trust in individuals and not establishing an atmosphere of accountability. finally, the easiest way to reduce the accounting related fraud and errors in businesses is to concentrate on preventive steps and methods, rather than trying to detect fraud and errors. that is why the internal controls system is as important as the auditing system. therefore, it is important to operate an effective and continuously renewable internal controls system in addition to an ideal auditing system. all these will reduce errors, accounting related fraud, asset losses, wastes and corruptions in the company. at the same time, accurate financial reporting should be ensured in a correct and reliable manner, which volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.232 | http://emaj.pitt.edu auditing techniques to minimize accounting related fraud and errors: a qualitative analysis with the interview method page |102| emerging markets journal will also increase the productivity. the interviews conducted with auditing professionals as a qualitative research method provide the significance of all these issues and shed light to the future of auditing profession. references acfe. (2008). acfe 2008 report to the nation on occupational fraud&abuse. acfe website. https://www.acfe.com/uploadedfiles/acfe_w ebsite/content/documents/2008-rttn.pdf (retrieved on 01.06.2021). acfe. (2010). acfe 2010 report to the nation on occupational fraud&abuse european edition. acfe website. https://www.acfe.com/uploadedfiles/acfe_w ebsite/ content/documents/rttn-european.pdf (retrieved on 02.02.2021). adalı, s., kızıl, c. (2017). a research on the responbility of accounting professionals to determine and prevent accounting errors and frauds: edirne sample. emerging markets journal (emaj), vol. 7, no: 1, 53-64. akman, v., acar, b., kızıl, c. (2020). audit techniques to avoid cost accounting frauds. emerging markets journal (emaj), vol. 10, no: 1, 6066. aksoy, t. and uzay, ş. (2021). relationship between fraud auditing and forensic accounting. in: aksoy, t., hacioğlu u. (eds.). auditing ecosystem and strategic accounting in the digital era. contributions to finance and accounting. springer, cham. https://doi.org/10.1007/978-3-030-72628-7_6 aslan, t., kızıl, c., din, a. (2017). muhasebe hata ve hileleri üzerinde etkili faktörlerin muhasebe meslek etiği kapsamında analizi: yalova örneği. journal of social and humanities sciences research (jshsr), vol. 4, no: 12, 1125-1138, http://www.jshsr.org/dergipdfdetay.aspx?id= 191 atmaca, m. (2012). muhasebe skandallarının önlenmesinde i̇ç kontrol sisteminin etkinleştirilmesi. afyon kocatepe üniversitesi, i̇i̇bf dergisi. cilt: 14, sayı: 1, 191-205. bayraktar, a. (2007). türkiye’de muhasebe hileleri tarihi. trakya üniversitesi sosyal bilimler enstitüsü i̇şletme anabilim dalı yüksek lisans tezi, edirne. bozkurt, n. (2000). i̇şletmlerde hile yapan çalışanların karakteristik özellikleri. yaklaşım dergisi. sayı: 93, 57-62. bozkurt, n.(2009). i̇şletmelerin kara deliği hile. alfa yayınları. i̇stanbul. bulca, h. v. (2014). bağımsız denetim standartlarının muhasebede hile kavramına yaklaşımı. optimum ekonomi ve yönetim bilimleri dergisi, 1(2), 47-58. çubukçu, s. (2009). muhasebe hilelerini ortaya çıkarmada benford modeli. muhasebe bilim dünyası dergisi. cilt: 11, sayı: 3, 113-142. dönmez, a., çavuşoğlu, k.. (2015). hilelerin ortaya çıkarılması bakımından bağımsız denetim ile adli muhasebenin karşılaştırılması. journal of accounting, finance and auditing studies (jafas). 1(3), 34-67. emir, m. (2008). hile denetimi. mali çözüm dergisi. 86, 109-121. erdoğan, m. (2006). denetim / kavramsal ve teknolojik yapı. maliye ve hukuk yayınları, ankara. güredin, e. (2007). denetim ve güvence hizmetleri. arıkan basım yayım, i̇stanbul. jamil, a.h., mohd sanusi, z., yaacob, n.m., mat isa, y. and tarjo, t. (2021). the covid-19 impact on financial crime and regulatory compliance in malaysia. journal of financial crime, vol. ahead-of-print no. ahead-of-print. https://doi.org/10.1108/jfc-05-2021-0107. kandemir, c. (2010). muhasebe hilelerinin ortaya çıkarılmasında ve önlenmesinde bağımsız denetimin rolü ve bağımsız denetçinin sorumluluğu. çukurova üniversitesi sosyal bilimler enstitüsü doktora tezi, adana. kara, m. (2012). muhasebe hataları. muhasebe ve vergi denetiminde muhasebe hata ve hileleri kitabı içerisinde. ekin basım yayın dağıtım, bursa. karausta ve dönmez. (2013). mesleki hile ve bir çözüm önerisi olarak adli denetim: türkiye’de spk’dan yetki almış denetim firmalarına yönelik bir araştırma. mali çözüm dergisi. 115, 59-88. kaval, h. (2005). muhasebe denetimi. gazi kitabevi, ankara. kızıl, c., çelik, i̇. e., akman, v., şener, s. (2016). yaratıcı muhasebe yöntemleri ve finansal bilgilerin manipülasyonu: profesyonel muhasebe meslek mensupları üzerinde örnek bir uygulama. beykent üniversitesi sosyal bilimler dergisi, cilt: 9, sayı: 1, 1-18, http://dergipark.ulakbim.gov.tr/bujss/article/do wnload/5000145590/5000161141 kızıl, c., kaşbaşı, b. (2018). accounting scandals and eye-catching frauds: usa-japan comparison by considering the role of auditing. journal of asian research (jar), vol. 2, no: 3, pp.123-138, http://dx.doi.org/10.22158/jar.v2n3p123 volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.232 | http://emaj.pitt.edu cevdet kızıl, erol muzır, vildan yılmaz emerging markets journal | p a g e 1 0 3 kızıl, c., muzır, e., akman, v. (2021). covid 19 epidemic: a new arena of financial fraud?. karabagh international congress of modern studies in social and human sciences, june 17-19, karabagh, azerbaijan, 310-314. kiracı, m. (2013). hileye yönelik uluslararası kuruluşlarin hazırladığı raporların bağımsız denetim açısından değerlendirilmesi. muhasebe ve vergi uygulamaları dergisi, cilt: 6, sayı: 3, 87-106. kula, v. (2008). hileli finansal raporlama yaklaşımlarını belirleyen teşvikler/baskılar ve fırsatlar. muhasebe ve denetime bakış dergisi, 8, 63-82. morales, j., gendron, y. and guenin-paracini, h. (2014). the construction of the risky individual and vigilant organization: a genealogy of the fraud triangle. accounting, organizations and society. vol. 39, issue: 3, 170-194. özer, m. (1998). vergisel ve teknik boyutuyla muhasebe. özkan matbaacılık, ankara. pazarçeviren, s. (2005). adli muhasebecilik mesleği. zonguldak karaelmas üniversitesi sosyal bilimler dergisi. 1(2), 1-19. pwc. (2007). the global economic crime surveys. pwc website. https://www.pwc.com.tr/tr/advisory09/fraud/as sets/forensic_services_tr.pdf (retrieved on 12.07.2021). ramos, m. (2003). auditors' responsibility for fraud detection. journal of accountancy. website of journal of accountancy. https://www.journalofaccountancy.com/issues/ 2003/ jan/auditorsresponsibilityforfrauddetection.htm l (retrieved on 13.07.2021). söyler, h. (2013). i̇şletme çalışanları tarafından yapılan hileler. alomaliye websitesi. http://www.alomaliye.com/halil_soyler_isletm elerde_yap_hileler_2.htm (retrieved on 14.07.2021). şengür, e. d. (2011). i̇şletmelerde hile, hilelerin önlenmesi, hileli finansal raporlama ile ilgili düzenlemeler ve bir araştırma. i̇stanbul üniversitesi sosyal bilimler enstitüsü doktora tezi, i̇stanbul. terzi, s. (2012). hile ve usulsüzlüklerin tespitinde veri madenciliğinin kullanimi. muhasebe ve finansman dergisi, sayı: 54, 51-64. widiyati, d., valdiansyah, r. h., meidijati, m., hendra, h. (2021). the role of public accountants in fraud preventation and detection in the taxation sector during covid-19. golden ratio of auditing research, 1(2), 70-82. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu knowledge management and competitive advantage of listed consumer goods manufacturing companies in nigeria olayinka abideen shodiya crescent university, nigeria | e-mail: olayinkashodiya@yahoo.com abstract the study investigated the effect of knowledge management on the competitive advantage of nigerian consumer goods businesses. a survey research design was used for the study. the management staff of six major consumer goods firms were included in the study’s population: flour mills nigeria plc., cadbury nigeria plc., guinness nigeria plc., nestle nigeria plc., honeywell flour mills and pz cussons nigeria from which a sample of 384 was drawn using power analysis. a structured questionnaire was used to collect information from the respondents. the data collected were analyzed using descriptive statistics of frequency counts and simple percentages. in addition, covariance-based structural equation modelling (cb-sem) was used to achieve the study’s objectives. the findings from the study revealed that knowledge acquisition (β = 0.541; p = 0.001), knowledge sharing (β = 0.672; p = 0.001), knowledge creation (β = 0.774; p = 0.001), knowledge codification (β = 0.450; p = 0.001) and knowledge retention (β = 0.853; p = 0.001) had a significant positive effect on consumer goods company’s competitive advantage. the study concluded that knowledge management played an important role in enhancing competitive advantage when adequately managed. it was recommended that the authorities in charge of the consumer goods companies ensure management staff quickly get any information needed within their working environment and ensure a horizontal information flow. in addition, the management should constantly develop new knowledge and ideas as well as providing appropriate communication and information technology (it) gadgets to boost competitive advantage. keywords: knowledge management, competitive advantage, management staff, consumer goods companies, nigeria new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu | mailto:olayinkashodiya@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu olayinka abideen shodiya emerging markets journal | p a g e |37 knowledge management and competitive advantage of listed consumer goods manufacturing companies in nigeria olayinka abideen shodiya i. introduction the role of the manufacturing industry in boosting economic progress in various emerging and advanced economies has been highlighted in the literature. it is regarded as the engine room of nigeria’s economy due to its significant contribution to total output (ayo-oyebiyi, 2019). because it accounts for a considerable portion of entire economic activities, the nigerian manufacturing industry has been regarded as the engine room of the country’s economy (ayo-oyebiyi, 2019). this sector is considered the most powerful in the manufacturing business by academics and experts. it employs 22.5 percent of nigeria’s workforce and accounts for 66 percent of overall consumer spending. as a result, consumer products businesses continue to dominate the industry (ringier trade media ltd, 2015). to keep rivals at bay, consumer products firms should leverage the skills obtained through their business operations to develop a long-term competitive advantage. nigerian consumer goods firms are unique because they provide various products and production techniques (uko, 2018). there are already so many industries in this subsector that they can be classified as separate categories, such as flour and cereal-based beverages, starch and food products, meat, tea, coffee and food chemicals as well as industrial packaging, among others (ojo, 1998). as a result, the company’s capacity to compete and flourish in the nigerian manufacturing industry relies on implementing efficient knowledge management practices. according to obire and asaolu (2018), knowledge management is founded on the notion that, just as humans cannot use the complete functionality of their brains, companies are unable to utilize the information they have. on the other hand, organizations obtain potentially viable information by structuring and managing knowledge for the most outstanding practical application. knowledge in an organisation represents expert ideas, experience, concepts, attitudes, beliefs and working methods that may be exchanged and transferred. knowledge, unlike other resources, is hard to reproduce, making knowledge management more preferable in an organisation. according to nonaka (1994), there are two forms of knowledge in any organisation: explicit knowledge and tacit knowledge. “explicit knowledge content components are data and information that have been captured, save and distributed in an organisation” (mahmood, qureshi, & shahbaz, 2011). explicit information is successfully coded, conveyed and transferred throughout the firm (nonaka, 1994). on the other hand, tactic information is individually tailored and context-specific, making it hard to formalize via written or verbal representations (nonaka & nishiguchi, 2001). a perfect example is cooking a meal without a recipe (polanyi, 1966). also, knowledge management is a source of an easy transition from those leaving the job due to retirement to their successors employed to occupy their roles (lesser & prusak, 2001). “it prevents the loss of organisational memory due to turnover and retirement, identifies key resources and critical elements of knowledge and ensures that the organization performs what it knows correctly” (dalkir, 2013). furthermore, it develops strategies that can be used with people and organizations to avert the loss of intellectual capability (dalkir, 2013). as a result, knowledge management may improve work satisfaction and enhance competitive advantage (pruzinsky & mihalcova, 2017). when a company connects its competencies to environmental possibilities, it gains a competitive edge. when this is done, a firm may survive and thrive in situations where the advantage is considerable. according to lynch (2009), core competencies are critical skills and knowledge that help firms supply consumers with unique goods and services. as a result, one might argue that knowledge is the foundation of core skills, which are viewed as a fundamental basis of competitive advantage. lee (2017) opined that knowledge management practices are a strategic tool in accelerating changes andfierce competition, giving firms a competitive advantage. according to hislop, bosua and helms (2018), all businesses must withstand market competition through developing knowledge that leads to a competitive advantage. according to okunoye and bertaux (2008), companies that practice knowledge management can adequately determine which knowledge resources they might develop in order to obtain a longterm competitive advantage. obire and asaolu (2018) thought that knowledge management methods assist businesses to achieve competitive advantage. a company that cannot continually produce, distribute, implement and review knowledge would not have the capacity to effectively compete in the ever-changing market environment (rampersad, 2002). despite the importance of knowledge management, many organizations can still not extract and share knowledge effectively. this weakness is mainly due to the inappropriate ways knowledge is managed. establishing a conducive culture and structure that encourages knowledge sharing is a sure bet to accomplishing a competitive edge (chow & chan, 2008). akpa, akinlabi, asikhia, and nnorom (2020) assert that many consumer goods manufacturing companies in nigeria face a high failure rate caused by poor knowledge management strategies among the management and workers in these firms. hence, it is challenging for these businesses to keep abreast with the knowledge required to keep them in operation (akpa et volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu knowledge management and competitive advantage of listed consumer goods manufacturing companies in nigeria page |38| emerging markets journal al., 2020). thus, knowledge management is essential to maintain a competitive advantage (chawla & joshi, 2017). the failure of businesses to develop, share and implement knowledge methods among workers and customers in order to project a favourable image has been a source of concern (akpa et al., 2020). according to adebisi and babatunde (2012), nigeria firms could not compete favourably due to inadequate knowledge management practices. according to sundiman (2017), the inability to create knowledge is one of the biggest problems firms in nigeriaface, which became more noticeable by globalisation and all that goes along with it. a careful examination of related and previous studies revealed little empirical research had been done in nigeria that focused on consumer goods firms. based on the literature review, it was discovered that some of these studies conducted in nigeria did not mention the sources of their measurement scale. they also failed to report the measurement scale validation process, if designed by them, which cast doubt on the potential of their measurement scale to measure what it was supposed to measure. furthermore, some of these studies violated the assumption of regression analysis, which stated that all the variables should be continuous. nevertheless, the authors collected ordinal data using a five-point likert scale. in addition, some studies used structural equation modelling but failed to report the normality test result, the model-fit indexes and whether factor score was used in their path analysis, which affected the trustworthiness of their findings. as a result, it can be argued that the results obtained from these studies are not reliable for predictive purposes. based on these gap (s) identified, the study examined the effect of knowledge management on consumer goods company’s competitive advantage in nigeria. we also employed validated psychometric scales that captured the two constructs adopted from previous research to ensure that the results from our study are valid for reliable prediction. the study’s objective was to examine the effect of knowledge management on consumer goods companys’ competitive advantage. the following research questions were used as a guide in achieving the goals of the study: (i) what is the effect of knowledge acquisition on consumer goods companies’ competitive advantage? (ii) to what extent does knowledge sharing affect consumer goods companies’ competitive advantage? (iii) how does knowledge creation affect consumer goods companies’ competitive advantage? (iv) what is the effect of knowledge codification on consumer goods companies’ competitive advantage? (v) to what extent does knowledge retention affect consumer goods companies’ competitive advantage? the following hypotheses were formulated to guide the study: h01:knowledge acquisition does not significantly impact consumer goods companies’ competitive advantage. h02:knowledge sharing does not significantly impact consumer goods companies’ competitive advantage. h03:knowledge creation does not significantly impact consumer goods companies’ competitive advantage. h04:knowledge codification does not significantly impact consumer goods companies’ competitive advantage. h05:knowledge retention does not significantly impact consumer goods companies’ competitive advantage. ii. literature review hislop (2013) defines knowledge management as “an umbrella term which refers to any deliberate effort to manage the knowledge of an organisation’s workforce, that can be achieved via the use of ict and the use of particular culture and people management practices”. according to abubakar, elrehail, alatailat and elçi (2017), knowledge management entails taking careful measures to collect, create, maintain and exchange information in order to improve performance. budihardjo (2017) opined that “knowledge management is a systematic or structured activity to improve organizational capabilities by managing tacit and explicit knowledge to achieve organisational performance”. adman, suwatno and yuniarsih (2017) viewed knowledge management as a “system to create, collect, organize, distribute and use knowledge in organizations to increase learning processes and performance” (adman, suwatno & yuniarsih, 2017). pruzinsky and milhalcova (2017) state that the knowledge management process could be divided into knowledge creation, knowledge codification, knowledge acquisition, knowledge sharing and knowledge retention. knowledge acquisition (ka) entails using new knowledge or changing existing parts of information in the organization’s explicit and tacit knowledge, which calls for organizations to search for precise information in internal and external business environments (xue, 2017). it is described as the approach through which unique knowledge is established, employing four subprocesses: socialisation, combination, externalization and internationalization for constant organisational knowledge development (shujahat, ali, nawaz, durst, & kianto, 2018). several resources for developing group knowledge are usually meetings, conferences, group discussions and working together in a group (torabi, kyani, & falakinia, 2016). “creating knowledge demands the presence of a person or a team who develop unique ideas, methods and techniques to foster competitive advantage (pandey, 2014). following findings from the study conducted by alaarj, abidinmohamed and bustamam (2016), ka positively and significantly influenced overall organizational performance. this finding supports the results of volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu olayinka abideen shodiya emerging markets journal | p a g e |39 kimaiyo, kapkiyai & sang (2015) that established that ka significantly and positively impacts organizational performance. knowledge sharing (ks) is a vital aspect of effective knowledge management since it provides solutions to some of the organizational problems that cannot be accomplished by practising alternative knowledge management processes. ks involves promoting implicit and explicit knowledge that produces novel knowledge (hsiao, chen & chang, 2011). ks is described as the procedure adopted by an organization to share and exchange knowledge amongst workers to make use of and create new knowledge (obeidat, abualoush, irtaimeh, khaddam & bataineh, 2018). learning is not helpful when workers cannot take advantage of it at all levels in an organization (obeidat, 2016). knowledge creation is a process utilized by an organization to create and get knowledge, regardless of whether it is explicit or implicit knowledge (obeid & rabea, 2016). it is a link between implicit and explicit knowledge that allows unique knowledge to be created within the organization in order to protect the various types of information for later use when critical decisions need to be made (abualoush, obeidat, tarhini, masa’deh, & al-badi, 2018). kc consists of socialization, which involves transforming implicit knowledge to a unique implicit one like sharing working experience among employees within an organization. externalization involves changing implicit knowledge into explicit knowledge, for instance, recording previous experiences of group members within an organization (baldé, ferreira, & maynard, 2018). information codification (kcod) implies the processes involved in converting tacit knowledge into explicit knowledge, storing documented knowledge and providing updated recorded knowledge to other workers (filius, de jong & roelofs, 2000). it is dependent on having access to helpful information and technology gadgets and the accompanying worker willingness, expertise and excitement to use these gadgets to make worker knowledge explicit and save it for proper use by the organisztion. workers, in reality, require it resources and programs that aid in the successful codification and storing of explicit knowledge in directories and guides and the searching and transmission of this knowledge (najeeb, hanif & hamid, 2018). kcod also supports workers in locating the information they need to complete their tasks quickly and effectively (kianto, vanhala & heilmann, 2016). kianto et al. (2016) opine that knowledge retention (kr) describes activities associated with employees’ intention to quit the organization and the related loss of skilled workers’ knowledge which is a crucial strategic resource. professional knowledge can be forfeited when an organization witnessed massive turnover for some reason or any other. as workers quit the organization from time to time, bringing in and sustaining the most effective workers will result in a much more demanding task concerning kr. competitive advantage is the capacity to outperform competitors in the same sector or market by leveraging qualities and resources (porter, 2004). “a business is considered to possess a competitive edge when it is adopting a unique strategy that has not been adopted by any existing or future competitor at the same time” (clulow, gerstman & barry, 2003). according to porter (2004), “competitive advantage stems essentially from the value a business can produce for its customers that surpasses the firm’s cost of production.” according to porter (2004), a firm’s ability to bring rivals to their knees and rule over them is based on transforming its area of dominance into a competitive advantage. competitive advantage is the higher rate of attractiveness that a business provides compared to rivals in customers’ eyes (keegan, 2007). competitive advantage is the presentation of a firm’s values to consumers so that these values outperform the price paid by the customer (de toni & tonchia, 2003). when the products and services presented to customers by a firm outperform its rivals, they enjoy a competitive edge and put them ahead of competitors by winning their hearts (hosseini, soltani & mehdizadeh, 2018). grant introduced the knowledge-based view (kbv) of competitive advantage (2002). according to this notion, organizations exist to produce, convert and transmit information in order to gain a competitive advantage (kogut & zander, 1992). the knowledgebased perspective regards knowledge as a fundamental asset of an organization upon which other resources rely (kraaijenbrink, spender & groen, 2010). the idea of this theory is germane to the study since it recognizes knowledge as a precious asset every organization must possess. organisations are thus obliged to separate the knowledge they process in order to understand what results in more exceptional performance. therefore, an organization may have exclusive and valuable knowledge but may not sustain competitive advantage unless it properly leverages it (barney, 1996). orga, nnadi and emeh (2018) studied the impact of knowledge management in food and beverage firms’ competitive advantage in southeast nigeria. five hundred fifty-three samples were chosen using a systematic random approach and a random sampling technique. the respondents’ responses were gathered using a 5-point likert-scale questionnaire. descriptive statistics such as tables, frequencies, percentages and ztests were used to evaluate the collected data. knowledge management was shown to have a substantial impact on a firm’s competitive advantage. akpa et al. (2020) investigated knowledge management and the performance of nigerian food and beverage businesses. a total of 320 employees were chosen from a population of 1,587. the respondents’ information was gathered using a validated questionnaire and the data were analysed using structural equation modelling. according to the findings, knowledge has a negative but substantial impact on creativity. knowledge sharing and knowledge production, on the other hand, have a significant influence on innovation. agbim (2014) investigated the impact of knowledge acquisition on competitive advantage in the hospitality industry in benue state, nigeria. to pick personnel from hotels, the study used a multistage sample technique. to test the study hypothesis, the linear regression statistical approach was used. the findings showed that acquiring information is substantially connected to gaining a competitive advantage. iii. data, methodology and conceptual framework a conceptual framework describes critical variables and their connections (carroll & swatman, volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu knowledge management and competitive advantage of listed consumer goods manufacturing companies in nigeria page |40| emerging markets journal 2000). for example, the dependent variable in the study was “competitive advantage”. in contrast, the independent variable was “knowledge management”. hence, the study showed how knowledge management influenced companies’ competitive advantage, as represented in figure 1. figure 1. the proposed model source: authors’ own compilation a survey research design method is used to survey the target respondents to gather the quantitative data to test hypotheses. the study design technique is chosen because it may cover a broader landmass while consuming less money and time (sekaran, 2003). the target population consists of 4,815 managerial staff of the six consumer goods companies in nigeria, namely: flour mills nigeria plc., cadbury nigeria plc., guinness nigeria plc., nestle nigeria plc., honeywell flourmills and pz cussons nigeria. the reason for selecting these companies was that they are among nigeria’s leading consumer goods manufacturing companies and practised knowledge management. therefore, the managerial staff (head of departments, unit managers and supervisors among others) are favoured since knowledge management is a trait of management style that boosts competitiveness. the inclusion conditions were that managerial staff must have spent at least five years working in their respective company and willing to participate in the research. samples should not be excessively large or too small because both could jeopardize the study’s findings (faber & fonseca, 2014). as a result, the study includes a sample size of 384 obtained by conducting a power analysis (muthen & muthen, 2002) with the r package simsem (jorgensen, pornprasertmanit, miller & schoemann, 2017). the simulation study is based on a confirmatory factor analysis by setting the parameter estimates of each observed variable loading to 0.8, the variance of each factor variance to 1, the covariance among the factor to 0.25 and the residual variance to 0.36 in the power analysis procedure with 10,000 replications. when calculated, the power analysis estimated 384 as the adequate sample size. the choice of power analysis is because it considered the distribution of the variables, reliability of the variables and strength of the links among the variables. the proportionate sampling technique is used to determine the number of staff selected from each company, as shown in table 1. on the other hand, the convenient sampling technique was used to select the calculated sample. table 1: total number of managerial staff selected from each company source: authors’ own compilation the questionnaire consists of respondents’ demographics, including gender, age, marital status, educational qualification, number of years working in the company and other two scales with established validity and reliability estimates. the knowledge management approach is assessed by asking participants to rate a set of survey items on a scale of 1 to 5 (1 = strongly disagree, 5 = strongly agree). the survey items were taken from the organizational renewal capability inventory survey proposed by kianto (2008). the survey scale assessed the significance and fluency of knowledge obtained through extra-organizational sources. there are two items on the survey scale. an example is “i readily access information needed in my job from sources outside my organization”. knowledge sharing handles horizontal information flow within an organization. the survey scale has seven items. an example from the survey items is “communication with other members of my workgroup is efficient and beneficial.” knowledge creation examines the prevalence and foundation of new idea formation in various categories of activity. there are eight items on the survey scale. an example from the survey items is “information about the status, results and problems of different projects is easily available”. knowledge codification identifies the amount of storage and documentation of knowledge sources. the survey scale has four items. an example from the survey items is “i easily find the documents and files needed in my work.” knowledge retention addresses the organization’s continuity and preservation of knowledge. the survey scale has three items. an example from the survey items is “when experienced employees leave, they are encouraged to transfer and distribute their knowledge to others.” competitive advantage is measured with a survey scale items adopted from the study by sigalas, economou and georgopoulos (2013). the inventory has four survey items, e.g. “over the past three years, your competitive strategy has allowed your company to exploit all market opportunities that have been presented to your company.” the items are rated on a 5-point likert scale with 1 = strongly disagree to 5 = strongly agree. the researcher administers the questionnaires in person, covering each company using the pen-andpaper method. before approaching the respondents, volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu olayinka abideen shodiya emerging markets journal | p a g e |41 permission is sought from the administrative departments of the selected companies. since the respondents were considered busy due to their work nature, they were surveyed during the break time when most of them were available at their designated cafeterias and leisure places. on meeting with the respondents, theresearcher explains the purpose of the study to reduce misunderstanding of the survey items. copies of the questionnaire were shared among the respondents and then they were collected after completion for proper documentation. the statistical package for the social sciences (spss) 26.0 for windows and r software (r core team, 2021) is used to analyze the quantitative data. a significance level (p-value) of < 0.05 is considered a statistically significant result and a two-tailed test is used in all statistical analysis techniques. descriptive statistics are used to describe the study sample and the variables are associated with respondents’ demographic characteristics. the covariance-based structural equation modelling (cb-sem) was used to evaluate the relationship between exogenous and endogenous variables. the capacity of cb-sem to estimate a complicated model and its efficient statistical methodology for assessing the link between two or more components made it preferable to other statistical approaches. fornell and bookstein (1982) asserted that, it is a robust statistical analysis of testing hypotheses. similarly, it offers a versatile structure for developing and evaluating complex relationships between multiple variables that allow researchers to assess the validity of the theory using empirical methods (beran & violato, 2010). figure 2. the hypothesized model source: authors’ own compilation iv. findings the findings in table 2 on demographic characteristics of the participants reveal that the majority (55%) of them are male. the finding shows that male participants dominated the study. the majority (82%) are married. the result implies that the job is suitable for the single and married staff, who found it as a means of livelihood. they are between 41 and 50 years old (46%). the result shows that the respondents are still vibrant and could quickly transfer knowledge among themselves and other individuals. concerning academic qualifications, the majority (53%) of them are degree holders. the finding shows that the respondents are well-educated. also, less than half (36%) had between 11 to 15 years of work experience. table 2: demographic features of respondents participants’ characteristics frequency percent gender male 182 55 female 148 45 total 330 100 marital status single 59 18 married 271 82 total 330 100 age (year) 30-40 34 10 41-50 153 46 51-60 61 18 above 60 52 16 total 330 100 educational qualification higher national diploma 15 5 degree 176 53 postgraduate degree 97 29 others 42 13 total 330 100 years of experience 5 to 10 21 6 11 to 15 119 36 16 to 20 98 30 above 20 62 18 total 330 100 source: authors’ own compilation since the survey instrument has been successfully validated in the previous studies, a confirmatory factor analysis (cfa) is conducted to test whether the data fit the model. table 3: model fit statistics criteria cut-off point actual value chi-square 518.25 degree of freedom 284 p-value 0.001 cmin = chi-sqaure/degree of freedom < 3 1.820 goodness of fit index (gfi) > 0.90 0.97 adjusted goodness-of-fit index(agfi) > 0.80 0.95 comparative fit index (cfi) > 0.90 0.99 tucker-lewis index (tli) > 0.95 0.98 rootmean square error of approximation (rmsea) <0.08 0.03 standardised root mean square residual (srmr) < 0.08 0.03 source: spss software output volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu knowledge management and competitive advantage of listed consumer goods manufacturing companies in nigeria page |42| emerging markets journal the results in table 3 show that the measurement model’s goodness-of-fit is sufficient and within the acceptable thresholds. table 4: cronbach’s alpha and cr test for constructs construct cronbach’s alpha composite reliability knowledge acquisition (ka) 0.865 0.868 knowledge sharing (ks) 0.853 0.856 knowledge creation (kc) 0.860 0.865 knowledge codification (kcod) 0.890 0.891 knowledge retention (kr) 0.871 0.873 competitive advantage (ca) 0.808 0.810 source: spss software output the estimated cronbach’s alpha coefficient and composite reliability are employed to check for the reliability of the data. reliability is accomplished when cronbach’s alpha coefficients are over a threshold value of 0.70, which signifies a satisfactory level. also, the composite reliability should attain a value over 0.70 (hair, hult, ringle & sarstedt, 2014).this indicates that all indicator items reliably measure the latent constructs. results in table 4 established that all the cronbach’s alpha and the composite reliability coefficients surpass the threshold value of 0.70. table 5: convergent validity results for constructs const ruct items standar dised factor loading estimate average variance extracted p-val. ka ka_1 0.819 0.687 0.001 ka_2 0.823 0.001 ks ks_1 0.781 0.547 0.001 ks_2 0.763 0.001 ks_3 0.714 0.001 ks_4 0.715 0.001 ks_5 0.722 0.001 ks_6 0.717 0.001 ks_7 0.787 0.001 kc kc_1 0.738 0.562 0.001 kc_2 0.786 0.001 kc_3 0.720 0.001 kc_4 0.776 0.001 kc_5 0.821 0.001 kc_6 0.796 0.001 kc_7 0.739 0.001 kc_8 0.802 0.001 kcod kcod_1 0.810 0.620 0.001 kcod_2 0.776 0.001 kcod_3 0.705 0.001 kcod_4 0.709 0.001 kcod_5 0.800 0.001 kr kr_1 0.728 0.580 0.001 kr_2 0.802 0.001 kr_3 0.768 0.001 ca ca_1 0.811 0.588 0.001 ca_2 0.796 0.001 ca_3 0.841 0.001 ca_4 0.776 0.001 source: spss software output construct validity is used to determine whether or not the observed variables are accurate enough to measure the relevant constructs. as a result, the convergent and discriminant were investigated. the average variance extracted (ave) (fornell & larcker, 1981) and factor loadings were examined to verify convergent validity. the ave and the factor loading must be higher than 0.50. the aves in table 5 were higher than 0.50, indicating that they met the fornell and larcker (1981) criterion. furthermore, the standardized factor loadings of the retained items ranged from 0.841 to 0.705, that were higher than 0.50 and significant at the 1% critical level (hair, black, babin & anderson, 2009). as a result, convergent validity was established. table 6: discriminant validity for each construct construct ca ka ks kc kcod kr ca 1.00 ka 0.245 1.00 ks 0.200 0.363 1.00 kc 0.225 0.554 0.452 1.00 kcod 0.112 0.412 0.332 0.612 1.00 kr 0.158 0.585 0.349 0.733 0.552 1.00 source: spss software output discriminant validity is assessed using the heterotrait-monotrait ratio (htmt). in line with the recommendation of henseler, ringle & sarstedt (2015), threshold value of 0.85 is adopted. based on table 6, it is concluded that discriminant validity is established as none of the correlations among the constructs is higher than 0.85. table 7: test of hypotheses hypothesized paths standardized estimate std. error t-stat. p-val. ka->ca 0.541 0.176 3.074 0.001 ks->ca 0.672 0.122 5.508 0.001 kc->ca 0.774 0.253 3.059 0.001 kcod->ca 0.450 0.092 4.891 0.001 kr->ca 0.853 0.229 3.725 0.001 r2 = 0.631 source: spss software output table 7 shows the outcomes of the structured model with standardized parameters. knowledge acquisition had a statistically significant positive effect volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu olayinka abideen shodiya emerging markets journal | p a g e |43 on competitive advantage ( = 0.541, p< 0.001); therefore, hypothesis one (h01) is not supported. knowledge sharing had a statistically significant positive effect on competitive advantage ( = 0.672, p< 0.001); thus, hypothesis two (h02) is not supported. knowledge creation had a statistically significant effect on competitive advantage ( = 0.774, p< 0.001); therefore, hypothesis three (h03) is not supported. knowledge codification had a statistically significant effect on competitive advantage ( = 0.450, p< 0.001); therefore, hypothesis four (h04) is not supported. finally, knowledge retention had a statistically significant positive effect on competitive advantage ( = 0.853, p< 0.001); thus, hypothesis five (h05) is not supported. the independent variables accounted for approximately (r2 = 0.631) 63% of the variance in the dependent variable. v. discussion this study examined the effect of knowledge management on customer goods companies’ competitive advantage by sampling management staff from six listed companies in nigeria. based on the statistical analysis results obtained, the study successfully provided evidence supporting knowledge management as an essential practice for sustaining competitive advantage. the study established that knowledge acquisition had a significant positive effect on consumer goods companies’ competitive advantage. the finding indicated that the management staff of the selected customer service manufacturing companies quickly get any information needed within their working environment and colleagues outside their working environment to speed up their learning process. the findings from our study was in line with the result of al-nawafah (2019), muchanji and makokha (2018) and agbim (2014). contrarily, the finding was inconsistent with the discovery of alyoubi, hoque, alharbi, alyoubi and almazmomi (2018), hussin and mokhtar (2018), kianto et al. (2016) and pruzinsky and mihalcova (2017). they found out in their studies that knowledge acquisition does not significantly influence companies’ competitive advantage. the study also established that knowledge sharing had a statistically significant positive effect on consumer goods companies’ competitive advantage. this result suggested that employees share knowledge among themselves, develop unique ideas, discover information and effectively contribute to achieving the organization’s goals. the discovery was in line with the finding of hussin and mokhtar (2018), kianto et al. (2016), pruzinsky and mihalcova (2017) and trivellas, akrivouli, tsifora, & tsoutsa (2015). however, the finding was inconsistent with oduwaiye, ijaiya and kayode (2017). they found out in their research that knowledge sharing does not significantly influence a company’s competitive advantage. the study established that knowledge creation had a significant positive effect on consumer goods companies’ competitive advantage. this finding indicated that the companies’ management was able to constantly develop new knowledge and ideas to encourage and sustain knowledge management by holding meetings, discussions and group work among the staff. the finding was in line with adman (2019) and najeeb (2018). also, the result was inconsistent with the discovery of alyoubi et al. (2018), hussin and mokhtar (2018), kianto et al. (2016) and pruzinsky and mihalcova (2017). they found out that knowledge creation had no significant effect on competitive advantage. the study established that knowledge codification had a statistically significant effect on consumer goods companies’ competitive advantage. this discovery demonstrated the availability of appropriate communication and information technology (it) gadgets and staff willingness to use them to bring competitors to their knees. the finding was in line with the results of adman (2019), najeeb (2018) and pruzinsky & mihalcova (2017). also, the findings from the study was inconsistent with the results of kianto et al. (2016) and oduwaiye et al. (2017). they discovered that knowledge codification had no significant effect on competitive advantage. lastly, the study established that knowledge retention had a significant positive effect on consumer goods companies’ competitive advantage. the findings indicated that the companies’ management works hard to prevent staff from losing vital knowledge. the findings were in line with the discovery of adman (2019), alyoubi et al. (2018), kianto et al. (2016), najeeb (2018) and pruzinsky & mihalcova (2017). also, the findings was inconsistent with the findings of hussin and mokhtar (2018), who found out that knowledge retention had no significant effect on competitive advantage. vi. conclusion and recommendations the study examined the effect of knowledge management on consumer goods manufacturing companies’ competitive advantage in nigeria. after reviewing the data collected by administering the questionnaire to 384 management staff of six leading and listed consumer goods companies, the statistical analysis concluded that knowledge management practice significantly influenced consumer goods companies’ competitive advantage in nigeria. based on the findings, it is recommended that the management of the consumer goods companies should continue to ensure that their management staff quickly get any information needed within their working environment and from colleagues outside their working environment to sustain its competitive advantage. also, the authorities of the consumer goods companies should continue to encourage employees to share unique knowledge to keep competitors away. the management of the companies should continue to encourage new ideas among staff by holding meetings, discussions and group work among the team to sustain its competitive advantage as well. finally, the management of the companies should continue to encourage the availability of appropriate communication and it gadgets as well as training staff on how to use them to stay ahead of competitors. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu knowledge management and competitive advantage of listed consumer goods manufacturing companies in nigeria page |44| emerging markets journal references abualoush, s. h., obeidat, a. m., tarhini, a., masa’deh, r. e., & al-badi, a. (2018). the role of employees’ empowerment as an intermediary variable between knowledge management and information systems on employees’ performance. vine journal of information and knowledge management systems, 48(2), 217237. abubakar, a. m., elrehail, h., alatailat, m. a., & elçi, a. (2017). knowledge management, decisionmaking style and organisational performance. journal of innovation & knowledge, 1-15. adebisi. j., & babatunde, o. (2012). impact of knowledge management on organisational performance. journal of information management, 6(3), 145-157. adman, a. a. (2019). the impact of knowledge management on smes performance in the city of bandung. international journal of recent technology and engineering, 8(3s2), 550-557. adman, suwatno, & yuniarsih, t. (2017). development of managerial competence through knowledge management in small industries in west java. iop conference series: materials science and engineering, 180, 1-8. agbim, k. c. (2014). assessing the effect of knowledge acquisition on competitive advantage: a knowledge-based and resource-based study. information and knowledge management, 4(11), 131-141. akpa, v. o., akinlabi, b. h., asikhia, p. t., & nnorom, g. k. (2020). knowledge management and performance of organisations: a case study of selected food and beverage firms. international journal of economics and business administration, 8(3), 3-18. alaarj, s., abidin-mohamed, z., & bustamam, u. s. b. a. (2016). mediating role of trust on the effects of knowledge management capabilities on organisational performance. procedia social and behavioural sciences, 235, 729–738. al-nawafah, s., nigresh, m., & tawalbeh, a. k. (2019). the role of knowledge management on competitive advantage in jordan manufacturing companies from employees’ perspectives. international business research, 12(6), 58-68. alyoubi, b., hoque, m. r., alharbi, i., alyoubi, a., & almazmomi, n. (2018). impact of knowledge management on employee work performance: evidence from saudi arabia. the international technology management review, 7(1), 13-24. ayo-oyebiyi, g. t. (2019). capital structure and organisational performance: evidence from nigerian food and beverages companies. south asian journal social studies and economics, 4(2), 1-9. baldé, m., ferreira, a. i., & maynard, t. (2018). seci driven creativity: the role of team trust and intrinsic motivation. journal of knowledge management, 22(8), 1688-1711. barney, j. b. (1996). the resource-based theory of the firm. organization science, 7(5), 469-469. bentler, p. m. (1990). comparative fit indexes in structural models. psychological bulletin, 107(2), 238-246. bentler, p. m. (1995). eqs structural equations programme manual. encino, ca: multivariate software. beran, t. n., & violato, c. (2010). structural equation modelling in medical research: a primer. bmv research notes, 3(267), 1-10. budihardjo, a. (2017). knowledge management: effective innovation to achieve success. jakarta: prasetiya mulya publishing. carroll, j., & swatman, p. a. (2000). structured-case: a methodological framework for building theory in information system research. european journal of information systems, 9(4), 235-242. chawla, d., & joshi, h. (2017). a comparative study of knowledge management assessment in business excellence awarded and non-awarded organisations in india. sage, global business review, 12(2), 279-295. chow, w. s., & chan, l. s. (2008). social network, social trust and shared goals in organisational knowledge sharing. information & management, 4(7), 458-465. clulow, v., gerstman, j., & barry, c. (2003). the resource-based view and sustainable competitive advantage: the case of a financial services firm. journal of european industrial training, 27(5):220-32. dalkir, k. (2013). knowledge management in theory and practice. london: routledge. de toni, a., & tonchia, s. (2003). strategic planning and firms’ competencies: traditional approaches and new perspective. international journal of operations & production management, 23(9),947–976. faber, j., & fonseca, l. m. (2014). how sample size influences research outcomes. dental press journal of orthodontics, 19(4), 27-29. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu olayinka abideen shodiya emerging markets journal | p a g e |45 filius, r., de jong, j. a., & roelofs, e. c. (2000). knowledge management in the hrd office: a comparison of three cases. journal of workplace learning, 12(7), 286-295. fornell, c., & bookstein, f. l. (1982). a comparative analysis of two structural equation models: lisrel and pls applied to marker data. in a second generation of multivariate analysis methods, vol. 1, fornell, c., ed. new york: praeger. fornell, c., & larcker, d. f. (1981). evaluating structural equation models with unobservable variables and measurement error. journal of marketing research, 18, 39-50. grant, r. m. (2002). the resource-based theory of competitive advantage: implications for strategy formulation. california management review, 33(3), 114-135. hair, j. f. jr., black, w. c., babin, b. j., & anderson, r. e. (2009). multivariate data analysis (7th ed.). upper saddle river, nj: pearson prentice hall. hair, j. f., hult, g. t., ringle, c. m., & sarstedt, m. (2014). a primer on partial least squares structural equation modelling (pls-sem) (1st ed.).los angeles: sage publications. henseler, j., ringle, c. m., & sarstedt, m. (2015). a new criterion for assessing discriminant validity in variance-based structural equation modelling. journal of the academy of marketing science, 43(1), 115 – 135. hislop, d, bosua, r, & helms, r. (2018). knowledge management in organisations: a critical introduction (4th ed.). oxford university press. hislop, d. (2013). knowledge management in organisations: a critical introduction (3rd ed.) uk: oxford university press. hosseini, a. s., soltani, s., & mehdizadeh, m. (2018). competitive advantage and its impact on new product development strategy (case study:toos nirro technical firm). journal of open innovation: technology, market, and complexity, 4(17), 1-12. hsiao, y. c., chen, c. j., & chang, s. c. (2011). knowledge management capacity and organisational performance: the social interaction view. international journal of manpower, 32(5/6), 645-660. hussin, n., & mokhtar, s. h. m. (2018). the impacts of knowledge management practices on employees’ job satisfaction. international journal of academic research in progressive education and development, 7(3), 338-351. joreskog, k. g. (1969). a general approach to confirmatory maximum likelihood factor analysis. psychometrika, 34, 182-202. joreskog, k. g., & sorbom, d. (1981). lisrel v: analysis of linear structural relationship by maximum likelihood and least squares methods (research report 81-88). uppsala, sweden: the university of uppsala, department of statistics. jorgensen, t. d., pomprasertmanit, s, miller, p., & schoemann, a. m. (2017). simsem: simulate structural equation modelling: r package (version 0.5-14.902) [software]. available from http://www.simsem.org. keegan, w. j. (2007). global marketing management. tehran,iran: abdulhamid ebrahimi; office of cultural research. kianto, a. (2008). development and validation of a survey instrument for measuring organisational renewal capability. international journal of technology management, 42(1/2), 69-88. kianto, a., vanhala, m., & heilmann, p. (2016). the impact of knowledge management on job satisfaction. journal ofknowledge management, 20(4), 621-636. kimaiyo, i. k., kapkiyai, c., & sang, j. c. (2015). effect of knowledge management on firm performance in commercial banks in nakuru, eldoret and kisumu. european journal of business and management, 7(3), 2222–2839. kogut, f., & zandeer, g. (1992). knowledge of the firm, combinative capabilities, and the replication of technology. organization science, 3(3), 383399. kraaijenbrink, j., spender, j., & groen, a. (2010). the resource-based view: a review and assessment of its critiques. journal of management, 36(1), 349-372. lesser, e. & prusak, l. (2001). communities of practice. social capital and organisational knowledge. in j. w. cortada and j. a. woods (eds). the knowledge management yearbook 2000-2001, pp. 251-259. new york: butterworthheinemann. lynch, r. (2009). strategic management. england: ftprentice hall. masa’deh, r., obeidat, b., & tarhini, a. (2016). a jordanian empirical study of the associations amongtrans-formational leadership, transactional leadership, knowledge sharing, job performance, and firmperformance: a structural equation modelling approach. journal of management development,35(5), 681-705. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu knowledge management and competitive advantage of listed consumer goods manufacturing companies in nigeria page |46| emerging markets journal muchanji, w. j., & makokha, e. n. (2018). effect of knowledge acquisition on competitiveness of savings and credit cooperative societies in trans nzoia county, kenya. international journal of academic research in business and social sciences, 8(9), 716-734. muthen, l. k., & muthen, b. o. (2002). how to use a monte carlo study to decide on sample size and determine power. structural equation modelling: a multidisciplinary journal, 9(4), 599-620. najeeb, m. m., hanif, m. i., & hamid, a. a. (2018). the impact of knowledge management (km) and organisational commitment (oc) on employee job satisfaction (ejs) in banking sector of pakistan. international journal of management excellence, 11(1), 1476-1491. nonaka, i. (1994). a dynamic theory of organisational knowledge creation. organisationscience, 5(1), 14-37. nonaka, i., & nishiguchi, t. (2001). knowledge emergence: social, technical, and evolutionary dimensions of knowledge creation. new york, ny: oxford university press. obeidat, a. m., abualoush, s. h., irtaimeh, h. j., khaddam, a. a., & bataineh, k. a. (2018). the role of organisational culture in enhancing the human capital applied study on the social security corporation. international journal of learning and intellectual capital, 15(3), 258276. obeidat, b. y. (2016). exploring the relationship between corporate social responsibility, employee engagement, and organisational performance: the case of jordanian mobile telecommunication companies. international journal of communications, network and system sciences, 9(9), 361-386. obire, j. o. & asaolu, a. o. (2018). the impact of knowledge management practices on competitive advantage in selected nigerian banking and telecommunication companies. journal of management sciences and technology, 6(1), 15-35. oduwaiye, r. o., ijaiya, n. y. s., & kayode, d. j. (2017). knowledge management practices and lecturer job commitment in universities in north central nigeria. international conference on education, proceedingsdevelopment & innovation, 2017, 248-265. ojo, o. o. (1998). quantitative and qualitative analysis of wastes from nigeria’s breweryindustry. master engineering project, department of agricultural engineering, federal university of technology, minna, nigeria. okunoye, a. & bertaux, n. (2008). addressing contextual issues in knowledge management: a guiding framework. in m. e. jennex (ed.). current issues in knowledge management. igi global, http://doi:10.4018/978-1-59904-916-8. orga, j. i., nnadi, c. s., & emeh, n. c. (2018). the role of knowledge management on the competitive advantage of food and beverage firms in south east nigeria. scholars journal of economics, business and management, 5(7), 612-622. pandey, k. n. (2014). knowledge management processes: a case study of ntpc and powergrid. global business review, 15(1), 151–174. polanyi, m. (1966). the tacit dimension, peter smith, gloucester, ma. chicago: university of chicago press. porter, m. e. (1990). the competitive advantage of nations. new york, ny, usa: free press. porter, m. e. (2004). competitive advantage: creating andsustaining superior performance strategy. ed. bob and meyer de wit, ron: free press. pruzinsky, m., &milhalcova, b. (2017). employee satisfaction and knowledge management (12th ed.). slovakia: iwkm, trencin. rampersad, h. (2002). increasing organisational learning ability based on a knowledge management quick scan. journal of knowledgemanagement practice, 3, available at the address http://www.tlainc.com/jkmpv3.htm (accessed september 25, 2021). r core team (2021). r: a language and environment for statistical computing. retrieved june 22, 2021, from https://www.r-project.org/ ringier trade media ltd (2015). nigeria’s food and beverage industry sustains robust growth. retrieved may 5 2021 from http://www.industrysourcing.com/article/nigeri a-foodand-beverage-industrysustains-robustgrowth. sekaran, u. (2003). research methods for business: a skill building approach. singapore: john wiley and sons. shujahat, m., ali, b., nawaz, f., durst, s., & kianto, a. (2018). translating the impact of knowledge management into knowledge-based innovation: the neglected and mediating role of knowledge-worker satisfaction. human factors and ergonomics in manufacturing, 28(4), 200– 212. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.237 | http://emaj.pitt.edu olayinka abideen shodiya emerging markets journal | p a g e |47 sigalas, c., economou, v. p., & georgopoulos, n. b. (2013). developing a measure of competitive advantage. journal of strategic management, 6(4), 320-342. steiger, j. h., & lind, j. c. (1980). statistically-based tests for the number of common factors [conference session].paper presented at the annual meeting of the psychometric society, iowa city, i.a, united states. sundiman, d. (2017). human resource management in the enhancement processes of knowledge management. binus business review, 8(3), 167-173. torabi, f., &el-den, j. (2017). the impact of knowledge management on organisational productivity: a case study on koosar bank of iran. procedia computer science, 124, 300-310. torabi, m. h. r., kyani, a., & falakinia, h. (2016). an investigation of the impact of knowledge management on human resource performance in management of keshavarzi bank branches in tehran. procedia social and behavioural sciences, 230, 471–481. trivellas, p., akrivouli, z., tsifora, e., & tsoutsa, p. (2015). the impact of knowledge sharing culture on job satisfaction in accounting firms. the mediating effect of general competencies. procedia economics and finance, 19, 238-247. tucker, l. r., & lewis, c. (1973). a reliability coefficient for maximum likelihood factor analysis. psychometrika, 38, 1-10. uko, r. (2018). quality management practices and performance of food and beverages firms in port harcourt. international journal of advanced academic research, social and management sciences, 4(1), 77-92. xue, c. t. s. (2017). a literature review on knowledge management in organisations. research in business and management, 4(1), 30-41. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu sustainable human resource management (hrm) practices for boosting the worker productivity in tea plantations in sri lanka: validation of a new hrm model anuruddha gamage kelani valley plantations plc hayleys plantations sector, sri lanka | e-mail: anuruddha.gamage@kvpl.com widana pathiranage richard wickramaratne faculty of management., university of peradeniya, sri lanka | e-mail: richard@mgt.pdn.ac.lk abstract the purpose of this research was to identify sustainable human resource management practices (shrmps) which enhance worker productivity and to validate a human resource management (hrm) model, derived by the authors in previous qualitative studies. the study surveyed 850 randomly selected employees from sixty tea estates in sri lanka. data analyzed with structural equation modeling derived a sustainable hrm model which includes knowledge management and human care practices as the determinants of worker productivity, while quality of life and work-life practices mediated the relationship. as a unique finding, knowledge sustainability (ks) identified as a new construct impacted positively on worker productivity. theoretical and policy implications are also discussed. keywords: human care practices, knowledge management practices, quality of life, quality of work-life, productivity new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu | mailto:anuruddha.gamage@kvpl.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu sustainable human resource management (hrm) practices for boosting the worker productivity in tea plantations in sri lanka: validation of a new hrm model page |40| emerging markets journal sustainable human resource management (hrm) practices for boosting the worker productivity in tea plantations in sri lanka: validation of a new hrm model anuruddha gamage widana pathiranage richard wickramaratne i. introduction the tea industry in sri lanka, replete with a rich 150-year history, plays a prominent role in the country’s economic performance, specifically ensuring substantial contributions to foreign exchange earnings, employment, and gdp. moreover, sri lanka has established its niche position in the global market with the renowned "ceylon tea" brand, endowed with its hallmark quality enriching the brand’s unique aroma and flavor. despite the earlier global market positions, the sri lankan tea industry is now faced with several challenges, inter alia, the rising cost of production, decreasing worker productivity, and price competition. with a comparatively higher cost of labor, combined with low productivity levels, the sri lankan tea plantations have lost their earlier leadership rankings in the global tea market, which has thus negated its competitive advantage over the last few decades. moreover, the conventional wage model based on non-productivity parameters considerably affected the cost of production which adversely disrupting the global competitiveness of ceylon tea (oxford business group 2016; moonasinghe, 2016; hilal, 2020). in overall productivity, with particular emphasis on profitability, the industry is mainly dependent on the harvester’s productivity, since the cost of labor alone accounts for 6570% of the total cost of production per kilogram of made tea (rajadurai, 2015; thasfiha et al,. 2020). consequently, higher productivity and cost reduction are prerequisites for enhancing the competitiveness of 'ceylon teas' in the global tea market. previous studies have underscored that critical attention must be paid to improving human care facilities of the employees as a motivational factor and thereby increase productivity. semeijn et al. 2015, have argued that in terms of productivity, human care practices in workplaces will stimulate sustainable employability or employee participation in organizational development. the application of best hr practices will enhance the quality of work-life. in return, the willingness of employees to remain engaged in working at present and in the future will further increase, whilst contributing more towards improving organizational performances (van der heijden, gorgievski, and de lang, 2016). several other studies also further perceived that the provision of training and development opportunities as knowledge management initiatives, stimulation of capacity development, information-sharing, employment security, health facilities, amenities for the working and living environment, support for higher education, skills development policies, were associated with employee well-being (bal, kooij, and de jong, 2013; kroon, van de voorde and van veldhoven, 2009; peccei, 2004). increasing employee well-being has a more significant impact on their quality of life and work-life and these motivated employees will contribute to higher levels of performance (herrbach et al., 2009). the overarching problem of this study is to determine whether an hrm model with human care and knowledge management practices would be a sustainable solution for alleviating the decline in worker productivity. consequently, this study aims at advocating the productivity-enhancing bundles of sustainable hr practices. moreover, the analysis also further makes a theoretical contribution by broadening the knowledge of hr practices supported by theories such as psychological contract and the social exchange. finally, this study validates the scales of human care practices, knowledge management practices, knowledge sustainability practices, quality of work-life practices, and quality-oflife practices in methodological contributions. ii. literature review organizational changes due to internal and external factors, place new demands on organizations. stone and deadrick (2015) emphasized that these new demands will generate new ways of working, the requirement of new employees to have immediate and fast adaptability to ensure the company's survival. with the present challenges, there is a need for empirical research on hrm to test a different model on inculcating intermediate variables that have a more significant impact on organizational performances or a proper combination of all the approaches to maximize employee performance (sanders, shipton and gomes, 2014). the conventional systems of hrm serve only as a functional set of activities in day-to-day agendas within the organization rather than merely adding value to the organizational performance (mendy, 2018; ulrich and dulebohn, 2015). for example, scholars, leaning on their research studies, have supported the argument that in achieving the necessary employee skills through knowledge management initiatives is expected to enhance employee commitment and engagement towards achieving organizational objectives, save on employment costs and boost productivity (wright, gardner, moynihan and allen, 2004). consequently, knowledge management practices develop employees' critical skills for an organization’s future productivity and create value (bowen and ostroff, 2004; mendy, 2018). today, the tea plantation sector contributes to the sri lankan economy by generating employment opportunities for 1.5 million people (central bank of sri lanka, 2019). however, the tea plantation sector is one volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu anuruddha gamage, widana pathiranage richard wickramaratne emerging markets journal | p a g e 4 1 of the most labor-intensive industries, which accounts for 65% of labor cost in the total cost of production (shyamalie et al., 2020). one of the main challenges at present is the labor scarcity on tea estates. the available skillful labor is lesser than the requisite demand for the industry to have a smooth and continuous operation (gupta, 2010). shyamalie et al. (2020) elaborated that this problem is further aggravated by irregular attendance or higher absenteeism rates, mainly because of searching for higher dignity alternative employment opportunities, migration to urban areas, self-employment and diversification of farming towards other (rymbai et al., 2012). managing the productive work time of existing employees is yet another critical challenge. the studies of ranasinghe (2020) emphasize that the quality time utilized for actual harvesting, is around 50%-60% of the total time. to engage workers more effectively during their working time, hrm initiatives such as employee motivation, learning & development initiatives, performance-based employee recognition schemes and employee engagement activities will play a significant role (muchinsky, 2003; ranasinghe, 2020). the tea plantation industry, as a high laborintensive sector, needs an effective human resource development strategy for its long-term success and sustainability. mishra, sarma and upadhyay (2011) explained the significant implications of labor relations in the context of globalization and how best plantation management should change hrm to enhance the industry's productivity. furthermore, prior studies have argued that factors such as productivity, the initiatives for uplifting facilities for employees, enhancing the skills, knowledge, and learning and innovative capabilities of the employees have strong correlations with the fulfilment of an organization’s vision (dishanka and ikemoto, 2014; gupta and sangeetha, 2017; indiparambil, 2019). earlier studies reiterate that sustainable hrm approaches focus on reaching positive organizational goals as outcomes while facilitating employees’ quality of work-life & quality of life without compromising organizational performance (deloitte, 2015; gupta 2018). organizations have to re-think a different framework to improve employee satisfaction and engagement by introducing human care best practices (penny & joanne, 2013). in the meantime, opportunities for enhancing their knowledge (kyle et al., 2010) which contributes positively to improving their quality of work-life exist. employee workplace performance is related to human care factors affecting workers' health, habits, environment, and well-being (leitão et al., 2019). they further posit that improving employees' quality of worklife (qwl) will positively impact the organization’s productivity, while augmented productivity will strengthen qwl. such a reciprocity impact is present with the other factors in a scenario where the workers are satisfied with the human care practices and organizational knowledge management initiatives. hence they will produce more, and productivity will increase substantially (sattar et al., 2018; bhende et al., 2020). the researchbased evidence emphasized that the need for a new model of hrm is a vital requirement in the industry to provide practical solutions for the issue of declining worker productivity in the industry. therefore, researchers have sought a framework that will explain the relationship between worker productivity and human care and knowledge management practices. iii. conceptual framework sound human resources management practices significantly impact worker productivity in organizational performance. therefore, any business organization seeks a competitive predominance by creating a dynamic and committed workforce that can produce quality goods and services at a comparatively lower cost. in terms of the tea industry in sri lanka, applying a more conventional approach to managing human resources on the estates, which uses more disciplinary and punitive methods on the estate worker, no longer adds value to worker productivity (gamage and wickramaratne, 2019). in response to this situation, in 1992, soon after the privatization of tea estates, all the regional plantation companies (rpcs) were compelled to change their management strategies to be oriented to the competitive market. as a result, companies focused more on empowering human resources within tea estates to generate strength and develop competencies and efficiencies to survive, develop and meet challenges. therefore, the tea plantation industry also demands human resources with competencies, positive values and attitudes to accept challenges. research studies of the industry have stressed that applying best human care practices to employees in the tea industry would increase employee satisfaction. satisfied employees will generate more output efficiently and they will increase productivity (gamage and wickramaratne, 2020). human care practices and knowledge management practices have direct relationships with human behavior in workplaces, resulting in effective resource utilization and higher productivity (barr and serneels, 2008). besides, the positive impact of sustainable hr practices on workers' quality of life and quality of work-life will lead to reciprocate with their enhanced motivation. (dufwenberg and kirchsteiger, 2004; dishanka and ikemoto, 2013; swamy et al., 2015). this idea is supported by the fact that employee satisfaction is paramount in every employment, which directly affects productivity since employee satisfaction acts as a strong motivator in interactive contexts in organizations (lodha and pathak, 2017; järlström et al., 2018). all such evidence supported that the best hr practices, such as human care practices (hcps) and knowledge management practices (kmps), will enhance the employees' quality of work-life and quality of life, whereas, this motivational factor results in enhancing the worker productivity as an ultimate result. based on these empirical arguments, authors have conducted a series of qualitative studies with the participation of senior management (anon, 2018; anon, 2019), middle and supervisory management (anon, 2020), and the workers (anon, 2020a; anon, 2020b) and derived the following model of the sustainable human resource management. volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu sustainable human resource management (hrm) practices for boosting the worker productivity in tea plantations in sri lanka: validation of a new hrm model page |42| emerging markets journal figure 1. conceptual framework source: gamage and wickramaratne, 2018; gamage and wickramaratne, 2019; gamage and wickramaratne, 2020. for guiding the study, the following hypotheses were developed based on the review of extant literature: h1: human care practices positively impact quality of work-life of workers. h2: knowledge management practices positively impact quality of work-life of workers. h3: human care practices positively impact quality of life of workers. h4: knowledge management practices positively impact quality of life of workers. h5: quality of work-life practices positively impact worker productivity. h6: quality of life practices positively impact worker productivity. h7: quality of work-life practices mediate the relationship between human care practices and worker productivity. h8: quality of life practices mediate the relationship between human care practices and worker productivity. h9: quality of work-life practices mediate the relationship between knowledge management practices and worker productivity. h10: quality of life practices mediate the relationship between knowledge management practices and worker productivity. iv. research methodology this study was based on the quantitative method to examine the proposed hypotheses, test the model fit's validity and reliability and determine the mediator effect on the relationship between sustainable hrm practices and worker productivity. this was a survey-based study conducted with a cross-sectional research design. primary data were gathered from the employees who are working in well-performing tea estates belonging to the three best ranking regional plantations companies (rpcs) according to the ceylon tea traders’ association (ctta) rankings (ctta report, 2018). it included employee categories such as management and executives, including all the managerial positions, all staff categories, which included administrative (office), supervisory (field), production (factory), human development (medical, child development and welfare officers) and supportive (drivers, mechanics and electricians), as well as the operational workforce. the study's specific population category comprised employees in 60 tea estates under reputed and sound-performing three plantation companies in the country, representing 21,000 total employees. of this figure, 13,954 are employees working in the tea sector. therefore, the sample size selected for this study was 850 and out of which, 818 responded that they had worked in the same tea estate for more than a year and on the permanent employee cadre. a structured questionnaire was used to collect the data, divided into two main sections. part one of the questionnaire was designed to capture participants' demographic information to identify age, employee category, years of experience in plantations and total experience in the present designation. part two of the questionnaire included the questions developed based on the feedback from qualitative studies conducted by authors of the same research area. participants included other employee categories such as senior-level managers, supervisory level managers including middle and junior level categories and operational level employees, including harvesters. the second part of the questionnaire included questions no. 1 to 15 to test the feedback of participants on the critical productivity indicators in tea plantations, the relationship between productivity indicators with hcps and kmps as sustainable hrm practices, the impact of quality of life and quality of worklife on the relationship between productivity and sustainable hrm practices. questions no. 16 to 38 checked the feedback on previously identified human-care practices under pre-defined categories developed by the authors with their practical exposure and experience in the industry. questions ranging from no. 39 to 73 are related to checking the feedback on previously identified knowledge management practices, categorized under different stages of the knowledge management cycle. all items are measured using the five-point likert scale, ranging from 1 = strongly disagreed to 5 = strongly agreed. the study took the confirmatory approach to validate the research constructs. all the scores for each item were analyzed to obtain an overall measure for each of the variables. a representative sample of 850 employees was selected at the initial stage based on the random sampling technique from the companies' digital human resource (hr) database, which included employees belonging to all human capital segments. eight hundred and fifty questionnaires were distributed to selected employees by multiple personal visits to respective tea estates. in addition, participants were requested to hand over duly completed questionnaires to the interviewer and multiple personal visits made to the estates in order to gather completed questionnaires. finally, 823 completed questionnaires were received, of which 818 were usable. v. analysis and findings this section presents the analysis and findings of data collected from the survey, which comprised 818 observations out of 850 participants. data were analyzed using the quantitative approach following the combination of exploratory factor analysis (efa) and confirmatory factor analysis (cfa) techniques. the study first sought to ascertain the adequacy of the sample, its suitability and determine how many factors should be retained. exploratory factor analysis (efa) was used for this purpose. further, reliability testing was done using the dimension reduction method in the exploratory factor analysis (efa) technique. in order to validate the constructs, confirmatory factor analysis (cfa) was utilized. further, the study endeavored to test the research volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu anuruddha gamage, widana pathiranage richard wickramaratne emerging markets journal | p a g e 4 3 hypotheses, which were achieved using structural equation modeling (sem). pls-sem analysis was used, which includes the assessment of the measurement and structural model. the measurement model establishes the reliability and validity of the constructs. the structural model ascertains the significance of hypothesised relationships. different hypotheses were proposed to evaluate the association of predictors with the outcome. based on the literature and hypotheses constructed, the type of the structural equation model selected for the study is a second-order reflective model. a repeated measure approach was performed to validate the model. adequacy of sample size the kaiser-meyer-olkin measure of sampling adequacy (kmo-test) was undertaken to check whether the sample was large enough. kaiser recommends a bare minimum of 0.5, and values between 0.5 and 0.7 are mediocre, values between 0.7 and 0.8 are good, values between 0.8 and 0.9 are greater, and values above 0.9 are superb (hutcheson & sofroniou, 1999). the size of the sample was adequate to carry out an exploratory factor analysis, as the kmo value of 0.89 falls under the superb category for worker productivity (wp), the value of 0.705 falls under the excellent type for quality of work-life (qwl), the value of 0.565 falls under the mediocre category for quality of life (ql), the value of 0.929 falls under the superb category for human care practices (hcps), and value of 0.874 falls under the great category for knowledge management practices (kmps). suitability of data for factor analysis bartlett’s measure tests the null hypothesis that the original correlation matrix is an identity matrix. a significant test tells us that the r-matrix is not an identity matrix; therefore, some relationships exist between the variables expected to be included in the analysis. a significant p-value (0.000) of the bartlett test regarding all five variables rejects the null hypothesis of the identity correlation matrix and indicates some correlation between variables. factor extraction and number of factors to be retained the principal component method of factor extraction is used in the study and based on rules of thumb suggested by guttman-kaiser for determining how many factors should be retained (field, 2000; rietveld and van hout, 1993), only those factors with a value larger than 1 are to be retained. one component is included for wp and qwl, and two components are retained for ql. further, four components are retained for hcps and seven components are retained for kmps. factor loadings factor loading refers to how each item in the correlation matrix correlates with the principal component. factor loadings can range from -1.0 to +1.0. higher absolute values indicate a higher correlation of items with underlying factors (pett et al., 2003). items with factor loading less than the recommended value of 0.5 (hair et al., 2016) were removed from the model. indicator multi co-linearity the variance inflation factor is used to assess the multi co-linearity of indicators (fornell and bookstein, 1982). there are no multi co-linearity issues as all the values are less than 5 (hair et al., 2016). the assessment of first-order constructs is provided in figure 2 and the quality of the first-order constructs is assessed based on the evaluation of the measurement model as explained in the table 1. multicollinearity is explained in table 2. table 1: quality of the first-order constructs-factor loadings source: authors’ own compilation figure 2. assessment of first-order constructs source: authors’ own compilation volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu sustainable human resource management (hrm) practices for boosting the worker productivity in tea plantations in sri lanka: validation of a new hrm model page |44| emerging markets journal table 2: vif for multi-collinearity source: authors’ own compilation construct reliability according to mark 1996, reliability indicates the degree of measurement instrument to be stable and consistent. if the measurement instrument is administered repeatedly, the same results need to be yielded. therefore, composite reliability was used to assess the reliability of the measurement instrument. reliability statistics of indicators are provided in table 3 and values are greater than the threshold value of 0.7 (hair et al., 2011). cronbach alpha values for all the constructs except for qwl are greater than the threshold value of 0.5. however, as composite reliability for the qwl construct is greater than 0.7, it is evident that reliability is established. table 3: composite reliability and cronbach's alpha composite reliability cronbach's alpha hc_edu 0.888 0.749 hc__hn 0.911 0.871 hc__le 0.885 0.84 hc__sap 0.909 0.849 hc__ye 0.903 0.839 km_cac 0.847 0.727 km_sad 0.816 0.661 km__vc 0.874 0.858 ql 0.916 0.816 qwl 0.791 0.474 wp 0.858 0.668 source: authors’ own compilation convergent validity convergent validity means that, two or more measures of the same construct should co-vary highly if they are valid measures of the concept (bagozzi et al., 1991). convergent validity is assessed by the average variance extracted (ave) and the recommended threshold value for the ave is 0.5. average variance extracted (ave) is provided in table 4 and all the considered constructs have ave values greater than 0.5. hence, convergent validity is established. table 4: average variance extracted (ave) construct average variance extracted (ave) hc_edu 0.799 hc__hn 0.721 hc__le 0.608 hc__sap 0.769 hc__ye 0.757 km_cac 0.65 km_sad 0.599 km__vc 0.78 ql 0.844 qwl 0.655 wp 0.751 source: authors’ own compilation discriminant validity discriminant validity is the degree to which the measures of different concepts are distinct. the concepts should be a unique and valid measure of concepts that should not correlate highly (bagozzi et al., 1991). item vif hc10_le 1.783 hc15_edu 1.557 hc16_edu 1.557 hc18_sap 2.595 hc19_sap 2.704 hc1_hn 1.914 hc20_sap 1.663 hc21_ye 1.982 hc22_ye 2.242 hc23_ye 1.838 hc2_hn 3.125 hc3_hn 3.134 hc4_hn 1.651 hc6_le 1.531 hc7_le 2.023 hc8_le 1.920 hc9_le 1.987 km12_sad 1.136 km16_sad 1.610 km18_sad 1.531 km23_vc 2.297 km24_vc 2.297 km3_cac 1.250 km5_cac 1.830 km6_cac 1.671 ql1 1.903 ql2 1.903 qwl3 1.107 qwl4 1.107 wp1 1.336 wp3 1.336 volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu anuruddha gamage, widana pathiranage richard wickramaratne emerging markets journal | p a g e 4 5 fornell and locket criterion according to fornell and locket criterion, discriminant validity is established when the square root of ave for a construct is greater than its correlations with other constructs. as per table 5, the calculated square root of ave values for all the constructs are greater than correlations of the same with other constructs. hence, it is that evident discriminant validity is established for the measurement model. table 5: fornell and locket criterion source: authors’ own compilation cross loadings cross loading helps assess if the items that belong to a particular construct load firmly on its parent construct instead of other constructs in the study. the results show that factor loadings of all the items are more substantial on the underlying construct to which they belong instead of other constructs in the study (wasko and faraj, 2005). hence, based on cross-loadings evaluation, discriminant validity is attained as per table 6. table 6: cross loadings source: authors’ own compilation heterotrait-monotrait (htmt) ratio htmt is based on the correlation between constructs. according to teo et al. (2015), the threshold for htmt is 0.9 or less. hence based on the htmt ratio, discriminant validity is established for the study and values for htmt are provided in table 7. table 7: heterotrait-monotrait (htmt) ratio source: authors’ own compilation validating higher-order constructs two higher-order constructs, human care practices and knowledge management practices, were validated as the measurement model assessment. these higher-order constructs were assessed for reliability and convergent validity. moreover, higher-order constructs and other lower-order constructs were evaluated for discriminant validity as recommended by sarstedt et al. (2019). results are provided in table 10. results for reliability and convergent validity are provided in table 8. again, results show that reliability and convergent validity are established, as the value for reliability is >0.7 and ave is greater than 0.5. according to fornell and larcker criterion (1981) results, the square root of ave of the considered higher-order constructs is greater than its correlation with other constructs, while htmt is lower than 0.9. results are expressed in table 9. table 8: higher-order reliability and convergent validity cronbach's alpha composite reliability average variance extracted (ave) hc 0.847 0.89 0.619 km 0.537 0.746 0.542 source: authors’ own compilation volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu sustainable human resource management (hrm) practices for boosting the worker productivity in tea plantations in sri lanka: validation of a new hrm model page |46| emerging markets journal table 9: fornell and larker criterion for higherorder constructs hc km ql qwl wp hc 0.787 km 0.467 0.736 ql 0.439 0.504 0.919 qwl 0.445 0.313 0.483 0.805 wp 0.475 0.474 0.652 0.409 0.866 source: authors’ own compilation table 10: heterotrait-monotrait ratio for higherorder constructs hc km ql qwl wp hc km 0.664 ql 0.52 0.692 qwl 0.709 0.503 0.753 wp 0.623 0.717 0.883 0.684 source: authors’ own compilation assessment of the structural model h1: human care practices have an impact on the quality of work-life of workers h1 evaluates whether there is a significant impact of human care practices on quality of life. according to the results of the bootstrapping test, there is a significant effect of human care practices on quality of life (β=0.383, t=10.790, p=0.000). hence, h1 is accepted. h2: knowledge management practices have an impact on the quality of work-life of workers h2 evaluates whether there is a significant impact of knowledge management practices on the quality of work-life of workers. according to the results of the bootstrapping test, there is a significant effect of knowledge management practices on the quality of life of workers (β= -0.133, t=3.953, p=0.00). hence, h2 is accepted. h3: human care practices have an impact on the quality of life of workers h3 evaluates whether there is a significant impact of human care practices on the quality of work-life of workers. according to the results of the bootstrapping test, there is a significant effect of human care practices on workers' quality of life (β=0.261, t=7.677, p=0.000). hence, h3 is accepted. h4: knowledge management practices have an impact on the quality of life of workers h4 evaluates whether there is a significant impact of knowledge management practices on workers' quality of life. according to the results of the bootstrapping test, there is a significant effect of knowledge management practices on the quality of life of workers (β=0.382, t=11.766, p=0.000). hence h4 is accepted. h5: quality of work-life practices has an impact on worker productivity h5 evaluates whether there is a significant impact of quality of work-life practices on worker productivity. according to the results of the bootstrapping test, there is a substantial effect of quality of work-life practices on worker productivity (β=0.356, t=7.648, p>0.00). hence, h5 is accepted. h6: quality of life practices have an impact on worker productivity h6 evaluates whether there is a significant impact of quality of life practices on worker productivity. according to the results of the bootstrapping test, there is a significant effect of quality of life practices on worker productivity (β=0.48, t=14.241, p>0.000). hence, h6 is accepted. a summary of the structural model assessment results is provided in table 11. table 11: path coefficients source: authors’ own compilation mediation analysis to assess the mediation, preacher & hayes method / bootstrapping method (2004) was used and the analysis results are provided in table 12, 13 and 14. h7: quality of work-life practices mediate the relationship between human care practices and worker productivity mediation analysis was performed to assess the mediating role of quality of work-life. the results reveal (table 12) a significant median role of quality of work-life practices in the effect of human care practices on worker productivity (β=0.122, t=5.611, p=0.00). h8: quality of life practices mediate the relationship between human care practices and worker productivity according to the mediation analysis results, there is a significant mediation role of quality of life practices in the effect of human care practices on worker volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu anuruddha gamage, widana pathiranage richard wickramaratne emerging markets journal | p a g e 4 7 productivity (β=0.125, t=6.899, p=0.000). as a result, the total impact of human care practices and worker productivity is significant (β=0.325, t=9.535, p=0.00). furthermore, with the inclusion of the mediator, the direct effect is significant (β=0.178, t=5.526, p=0.00). therefore, it is evident that the quality of work life practices mediates the relationship between human care practices and worker productivity. h9: quality of work life practices mediate the relationship between knowledge management practices and worker productivity mediation analysis was performed to assess the mediating role of quality of work life. the results reveal (table 12) a significant median role of quality of work life practices in the effect of knowledge management practices on worker productivity (β=0.107, t=6.464, p=0.00). h10: quality of life practices mediate the relationship between knowledge management practices and worker productivity according to the mediation analysis results, there is a significant mediation role of quality of life practices for the effect of knowledge management practices on worker productivity (β=0.184, t=8.849, p=0.000). as a result, the total impact of knowledge management practices and worker productivity is significant (β=0.322, t=9.229, p=0.00). furthermore, with the inclusion of the mediator, the direct effect is significant (β=0.131, t=3.939, p=0.00). therefore, it is evident that the quality of worklife practices partially mediates the relationship between knowledge management practices and worker productivity. table 12: specific indirect effects source: authors’ own compilation table 13: total effect source: authors’ own compilation table 14: path coefficients source: authors’ own compilation source: authors’ own compilation vi. discussion and implications the model derived from the research indicates that human care practices and knowledge management practices lead to the enhancement of the quality of life and the quality of work-life of the workers of the tea plantation sector, who in turn, increases their productivity. referring to the model derived by researchers, five constructs were used in this research study, namely worker productivity (wp), quality of work-life (qwl), quality of life (ql), and human care practices (hcp), and knowledge management practices (kmp). the model further expressed that the research study consisted of two independent variables, namely human care practices (hcps) and knowledge management practices (kmps) and the dependent variable was worker productivity (wp). the results further explained that the convergent validity and discriminant validity were not violated and the truth of all five constructs is therefore statistically confirmed. furthermore, since the alpha statistics values were above the minimum acceptable threshold level, results clearly defined that all five constructs considered in this study were internally consistent and that all five constructs used in this study were reliable. further, structural equation modeling (sem) was used to test the research hypotheses. therefore, it was with statistical evidence to support the views that the impact of human care practices, knowledge management practices, quality of work life and quality of life on the worker productivity is statistically significant, and ql and qwl were important mediating factors for the relationship between hcp, kmp and wp. it is with statistical evidence that, knowledge sustainability is also recognized as an independent construct in addition to the hcps and kmps, which has direct impact on the worker productivity. with solid evidence, studies have proposed that hcps such as safety, satisfaction, growth & development related practices have a more significant impact on worker volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu sustainable human resource management (hrm) practices for boosting the worker productivity in tea plantations in sri lanka: validation of a new hrm model page |48| emerging markets journal productivity (ahmad, 2013). it is also substantial evidence that more engaged and motivated workers, due to increasing their quality of life and work-life, will produce comparatively higher outputs with high quality, which means productivity will be increased (dishanka and ikemoto, 2014; sauermann, 2016). findings of gopaldas and gujral (2002), sharpe (2004) and jalal (2016) elaborated that investment in new technology and innovation, education, health and social facilities are also determinants of productivity. further studies by scholars confirm that developing employees' skills through promoting training as well as educational programs, and human care initiatives are essential to enhance their satisfaction level with work-life qualities and create a productive workforce (warr and west, 2004; sharma and sharma, 2014; dishanka and ikemoto, 2014; gamage and wickramaratne, 2020). leitão, pereira and gonçalves (2019) stressed the importance of improving employees' quality of life, which strongly influences an organization’s productivity. as per the findings of suri and baber (2019), both ql and qwl together act as a factor in motivating employees, enhancing their commitment toward employee productivity improvements, and the organization’s overall performance. recent studies elaborated that workers' productivity increases with the increase of their ql and qwl (gamage and wickramaratne, 2019). the comprehensive literature review implies that, human care practices and knowledge management practices applied extensively in an organization lead to enhanced worker productivity. this relationship was further stimulated by qwl and ql practices in the system. in addition, the study significantly contributed to the following areas. sustainable hr practices (hrmps) are the practices utilized to achieve a company's business goals and increase long-term shareholder value by integrating economic, environmental, and social opportunities into its business strategies. the study proposed a new model of sustainable human resource management, aimed at enhancing worker productivity, which is a significant contribution to the existing theories of hrm. the current study further establishes three sustainable hr practices: knowledge management practices, human care practices and knowledge sustainability practices. knowledge sustainability practices are distinct from knowledge management practices and is mainly based on the longterm retaining factor of knowledge enhancing initiatives to achieve long-term objectives, rather than concentrating on fulfilling short-term benefits. in the plantation industry, knowledge sustainability practices are derived from knowledge management practices that focus on long-term goals by applying such initiatives. moreover, the proposed new model is statistically validated and elucidates the relationship between sustainable human resources management practices (shrmps) and worker productivity (wp). in contrast, the variables of quality of life (ql) and quality of work-life (qwl) are depicted as potent mediators of this relationship. also, the findings from this study provides implications to the psychological contract and social exchange theories since employees reciprocate by building positive perceptions about their quality of life and quality of work-life as they experience knowledge management and human care practices. such reciprocity leads to enhancing their productivity levels. in terms of methodological contributions, the model proposed by this study can be replicated in future studies. further, the study validated scales for measuring knowledge management practices, human care practices, quality of life practices, work-life practices and worker productivity. policymakers can use the best shrmps identified from the research to develop a framework for employee well-being, including their living and social status, whilst enhancing employee welfare in the tea plantations. this will assist policymakers in viewing appropriate employee benefits packages based on the actual needs to uplift their quality of life and quality of work-life. therefore, decision-makers in the industry, including the senior management and the hr professionals, should critically consider the significant role of human care practices in enhancing worker productivity, through the uplifting quality of work-life and quality of life. hence, senior management should ensure policy decisions and grant the authority to implement these practices whilst allocating the necessary funds for their successful implementation. based on the research outputs, it is critically important for policymakers, especially senior management, to develop a practical roadmap for knowledge sustainability (ks), which is also identified as the central construct of shrmp for worker productivity in the industry. in terms of knowledge management and knowledge sustainability, decision-makers should critically focus on investing in high-tech based knowledge management techniques for the employees for the competitive decision-making process. moreover, top management should facilitate a conducive organizational culture through leadership and encouragement to successfully implement the proposed model. the proposed model will impact not only the internal clienteles, such as employees, plantation community and other indirect dependents but also the entire society at a macro-level, which has strategic connectivity with the performance of the organizational environment of the tea plantations. as proposed by the model, the impact of human care, knowledge management and knowledge sustainability initiatives as sustainable hrm practices on worker productivity is influenced by quality of life and quality of work-life as potent mediators. therefore, a highly motivated and engaged tea plantation workforce, with an enhanced quality of life as a direct impact of shrmps, will help uplift the living status levels and well-being of the entire plantation community, including society at the macro level. the research study validates the best human care, knowledge management and knowledge sustainability practices as sustainable human resource management practices (shrmps), which help enhance employee engagement and commitment towards achieving the organizational vision by increasing the level of quality of life and quality of work-life of employees. identified sustainable hrm practices from the research study can be used to achieve organizational strategic business goals. this will help fulfil long-term shareholder value by integrating social & people, environmental and economic factors into the business strategies of the tea industry. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu anuruddha gamage, widana pathiranage richard wickramaratne emerging markets journal | p a g e 4 9 vii. conclusion and recommendations the study statistically established the positive relationship between human care practices and knowledge management practices on worker productivity. furthermore, it also provided an addition to the proposed model. apart from the above two constructs, knowledge sustainability is identified as well and statistically validated as a central construct, which has a positive relationship with worker productivity. it further explains the impact of quality of work life and quality life practices for enhancing worker productivity and the significant mediator role of quality of work-life and quality of life practices in the relationship between sustainable human resource management practices and worker productivity. thus, the sustainable hrm model proposed by this study can be implemented in the tea plantation industry to achieve better output and enhance worker productivity. as per previous studies on the global tea industry, declining worker productivity is a common phenomenon. therefore, the research has to be replicated in other tea manufacturing countries, even beyond the asian region, to determine the strength or validity of these findings. the research study under reference is based on the evidence from randomly selected large scale regional plantation companies in sri lanka. however, the overall performance of the tea industry is based on the contribution of other key players in the industry, such as small-scale tea growers. therefore, a similar research project is essential to be undertaken in these industrial segments to generalize the research outcomes. furthermore, it is worth repeating this study in estates with other plantation crops as well. references bal, p. m., kooij, dorian t.a.m., de jong, s. b. (2013). how does developmental and accommodative hrm enhance employee engagement and commitment? the role of psychological contract and soc strategies. journal of management studies, 50(4), 545-572. https://doi.org/10.1111/joms.12028. barr, a., serneels, p. (2008). reciprocity in the workplace. england: university of oxford. bhende, p.,mekoth, n. ingalhalli, v., reddy, y. v. (2020). quality of work life and work–life balance. journal of human values, 26(3), 256– 265. https://doi.org/10.1177/097168582093938 0 bowen, d., ostroff, c. (2004). understanding hrm-firm performance linkages: the role of the "strength" of the hrm system. academy of management review. 29. 203-221. 10.5465/amr.2004.12736076. dishanka, s., ikemoto, y. (2014). social development and labour productivity: the problem and a solution for the tea plantation sector of sri lanka. international journal of theory & practice, vol. 05 no. 01. deloitte. (2015). global human capital trends 2015. leading in the new world of work. retrieved from: http://www2.deloitte.com/us/en/pages/humancapital/articles/introduction-human-capitaltrends.html. dufwenberg, m., kirchsteiger, g. (2004). a theory of sequential reciprocity, games and economic behavior, 47(2), 268-298, https://doi.org/10.1016/j.geb.2003.06.003. eisenhardt, k m., martin, j.a. (2000). dynamic capabilities: what are they?. strategic management journal. 21. 1105-1121. 10.1002/1097-0266(200010/11)21:10/113.0. co;2-e. gamage, a., wickramaratne, w.p.r. (2018). towards a sustainable hrm model for human productivity in tea industry: an empirical study of tea plantation sector in sri lanka. 13th international research conference on management and finance. 2018(1), 127-144. gamage, a., wickramaratne, w.p.r. (2019). productivity enhancing sustainable human care and knowledge management practices in sri lankan tea industry. international journal of business and social science. 10(8), 74-82. gamage, a., wickramaratne, w.p.r. (2020). do human care and knowledge management practices really matter in determining worker productivity? perceptions of supervisory level employees in tea plantation sector in sri lanka. kelaniya journal of human resource management. 15(1), 16-36. gupta, a. (2010). offshoring is employment, and the discipline: additional considerations. journal of information technology, 25(4), 378– 379. https://doi.org/10.1057/jit.2010.37. gupta, a. d., sangeetha, m. (2017). improving labour productivity through human resource development: a case study on assam tea plantation workers journal of supply chain management systems, 6 (1). herrbach, o., mignonac, k., vandenberghe, c., negrini, a. (2009). perceived hrm practices, organisational commitment, and voluntary early retirement among late‐career managers. human resource management, 48(6), 895-915. https://doi.org/10.1002/hrm.20321 hilal, m.i.m. (2020). sri lanka's tea economy: issues and strategies, journal of politics and law, vol. 13 no. 1, https://doi.org/10.5539/jpl.v13n1p1. https://doi.org/10.1002/hrm.20321 https://doi.org/10.5539/jpl.v13n1p1 volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu sustainable human resource management (hrm) practices for boosting the worker productivity in tea plantations in sri lanka: validation of a new hrm model page |50| emerging markets journal indiparambil, j. j. (2019). strategic to sustainable human resource management: shifting paradigms of personal managerial trends. international journal of business and management invention (ijbmi), 8(3), 65-70. kroon, b., k. van de voorde, m. van veldhoven. (2009). cross-level effects of high-performance work practices on burnout: two counteracting mediating mechanisms compared. personnel review, 38(5), 509-525. https://doi.org/10.1108/00483480910978027 kyle, s. d., morgan, k, espie, c.a. (2010). insomnia and health-related quality of life. sleep medicine reviews, 14(1), 69–82. https://doi.org/10.1016/j.smrv.2009.07.004. leitão, j., pereira, d., gonçalves. a. (2019). quality of work life and organizational performance: workers' feelings of contributing, or not, to the organization's productivity, int. j. environ. res. public health. 16(20), 3803. doi:10.3390/ijerph16203803. lodha, d., pathak, k. (2017). effect of psychological contract on employee engagement. journal of researches, 1(1) 6-9. mendy, j. (2018). key hrm challenges and benefits: the contributions of the hr scaffolding. mishraa, d. k., sarma, a, upadhyay, v. (2011). invisible chains? crisis in the tea industry and the ‘unfreedom’ of labour in assam’s tea plantations, contemporary south asia, 19(1), 75-90. moonesinghe, v. (2016). the bad taste in your cup of tea. https://roar.media/english/life/economy/badtaste-cup-tea muchinsky, p. m. (2003). psychology applied to work (7th ed.), belmont, ca: wadsworth. munasinghe, m., deraniyagala, y., dassanayake, n., karunarathna, h. (2017). economic, social and environmental impacts and overall sustainability of the tea sector in sri lanka. sustainable production and consumption, 12, 155-169. peccei, r. (2004). human resource management and the search for a happy workplace. unknown publisher. penny, y.k., joanne, c.s.h. (2013). casino employees perceptions of their quality of work life. international journal of hospitality management, 34, 348-358. rajadurai, r. (2015). determinants of annual productivity of female tea harvesters in the mid country regional plantation company estates in sri lanka, post graduate institute of agriculture, university of peradeniya. ranasinghe, h. k.sriyani. g. (2020). the impact of management factors on labor productivity in the tea small holding in sri lanka, international journal of multidisciplinary and current educational research (ijmcer), 2(5), 227-245. ray, l. j., smith, d., wastell, l. (2004). shame, rage and racist violence. british journal of criminology. 44. 10.1093/bjc/azh022. rymbai, d., singh, r., sheikh, f.m., debbarma, b. (2012). factors associated with labour supply for tea plantation and productivity: a case study of tea growers in meghalaya. indian journal of hill farming. 25(2), 6-9. sanders, k., shipton, h., gomes, j.f.s. (2014). is the hrm process necessary? past, current, and future challenges. human resource management, 53, 489-503. http://doi.org/vcx. sattar, h., tasweer, h. (2020). exploring relationships of positive and negative organisational behaviors (ob) with the productivity of engineering students, global social sciences review (gssr), 5(1), 269-282. semeijn, j. h., k. van dam, t., van vuuren, van der heijden, b.i.j.m. (2015). sustainable labour participation and sustainable careers. in handbook of research on sustainable careers. cheltenham, uk: edward elgar publishing. doi: https://doi.org/10.4337/9781782547037.00015. shyamalie, h.w., karunarathne, b.m.n.c., pilapitiya, h.m.c.g., lakshani, p.t.p. chathuranga, t.h.i., nadeeshani, k.w.n. (2020). an analysis of the impacts of labour scarcity on land productivity in sri lankan tea plantations. tropical agricultural research, 31(4): 54-64. swamy, d. r., nanjundeswaraswamy, t.s., rashmi, s. (2015). quality of work life: scale development and validation, international journal of caring sciences, may-august 2015, 8(2), 281-301. thasfiha, j., arachchige, u., dissanayaka, d. k. (2020). sri lankan tea industry, journal of research technology and engineering, 1(1), january 2020. 47-53. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.253 | http://emaj.pitt.edu anuruddha gamage, widana pathiranage richard wickramaratne emerging markets journal | p a g e 5 1 thenuwara, h.n. (2018). the role of the public sector in promoting economic growth in sri lanka. talking economies, institute of policy studies of sri lanka (ips), sri lanka. ulrich, d., dulebohn, j. h. (2015). are we there yet? what's next for hr?, human resource management review. 25. 10.1016/j.hrmr.2015.01.004 van der heijden, beatrice, i.j.m., gorgievski, m.j., de lange, a h. (2016). learning at the workplace and sustainable employability: a multi-source model moderated by age. european journal of work and organizational psychology, 25(1), 13-30 doi: 10.1080/1359432x.2015.1007130. vancheswar, v. (2010). ananda das gupta (ed), ethics, business and society: managing responsibly. new delhi: response books, 2010, 212, rs 395 (isbn:978-81-321-0402-5) (pb). global business review, 11(3), 469– 472. https://doi.org/10.1177/097215091001100 313 wright, p., gardner, t., moynihan, l. m., allen, m. r., gardner, p. m., moynihan, t. m. (2004). the relationship between hr practices and firm performance: examining causal order. cahrs working paper series. paper. 13. https://doi.org/10.1177/097215091001100313 https://doi.org/10.1177/097215091001100313 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu determinants of stock market indices: an analysis of emerging markets of brazil, mexico, russia, and turkey hülya yılmaz doğuş university, turkey | e-mail: hulyayilmaz@dogus.edu.tr bülent i̇lhan istanbul gelişim university, turkey | e-mail: bilhan@gelisim.edu.tr abstract this paper investigates the dynamic relationship between the stock market index and a set of macroeconomic variables in four emerging countries. the dependent variable measures monthly stock exchange points of respective markets from january 2010 to march 2021. independent variables consist of the 5-year bond yields, cds premiums, vix futures, gold price, msci emerging market index, and oil prices. since the dependent and independent variables have a cointegrating relationship, we conducted our analyses in both the short and long term. findings indicated that cds premiums, oil and gold prices have a negative, while vix and msci have a positive effect on the stock index in the long term. on the other hand, bond yields and the covid-19 have a negative while msci has a positive effect in the short term. in addition, the long-term effects are much evident in brazil and russia. the speed of adjustment to the long-term equilibrium in the stock market index is much higher in turkey and mexico. keywords: stock markets, emerging markets, speed of adjustment, efficient market, covid-19 new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu | mailto:bilhan@gelisim.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu hülya yılmaz, bülent i̇lhan emerging markets journal | p a g e |27 determinants of stock market indices: an analysis of emerging markets of brazil, mexico, russia, and turkey hülya yılmaz bülent i̇lhan i. introduction it is known that there are many internal and external determinants affecting the stock markets of countries. interest rate, inflation, unemployment, industrial production, energy prices, gold prices, cds premium, developments in international financial markets, political events, management risk, sectoral risk, and many other variables are defined in systematic and nonsystematic risk groups. studies in the literature generally focus on different variables. it is seen that past research analyze the relationship among stock returns and cds premium, bond yield, gold and oil prices, exchange rates, and some other variables, usually two or three of these variables. the difference of this study is that, it analyzes together more independent variables that may have different determinants on stock markets in selected developing countries and it investigated to what extent the results may differ between countries as well as interpreting the findings. for this reason, it is aimed to contribute to the literature with different observations and findings. in the first part, the studies reached by the literature review about the relationships between the dependent and independent variables in the study are included. in the second part, dependent and independent variables used in the analysis and their definitions are given, and descriptive statistics are explained. the dependent variables are the stock market indices of the 4 countries covered in the study, the independent variables are 5 years bond yield and cds premium (5 year bps) of countries, s&p 500 vix futures, gold prices (ounce/$), msci emerging markets change and future crude oil prices. the analysis covers the period from january 2010 to march 2021 (t=135). in the third part, to determine the most appropriate panel data analysis method, cross-section dependency, unit root, and cointegration tests were applied, and then a model definition was made explaining the shortand long-term relationships. then, findings related to empirical analysis were obtained. to make a conceptual explanation about the importance of cds premium, bond yield, gold and oil prices in terms of macroeconomic structures of countries and their effects on financial markets, it will be wise to express that there are various types of credit derivative contracts. a widely known type is the credit default swap (cds). in this contract type, the protection seller asks for a premium periodically from the protection buyer and pays a one-time payment in case of default. cds is accepted as one of the main determinants which measure the credit risk of countries and investors' risk perception towards the stock markets of relevant countries. the cds premium is the insurance premium paid by bond issuers in case of default in international markets and is an indicator that determines firm and country risk. therefore, it is included in the study to investigate its relationship with stock market indexes. it is stated that a cds default might include some or all of these risks (blanco et al., 2005): i) failure to pay, ii) bankruptcy, iii) restructuring, iv) rejection or moratorium, v) obligation default two main approaches to credit default modeling are presented: the first is the structural approach discovered by merton (1974). accordingly, if the debtor's assets fall below its obligations, it triggers default. the second is the reduced form approach proposed by jarrow and turnbull (1995), which suggests that default is directly modeled as an unexpected outcome. central banks usually adjust policy rates downside when their macroeconomic indicators are weak and upside when faced with inflationary pressures. according to taylor's rule (1993), these policy rate adjustments become more necessary for some countries than others. other (possibly external) factors may also determine the central bank's decisions. in any case, the financial markets of developed and emerging countries will likely react differently to monetary policy practices. because of their need for foreign capital inflow, emerging countries may not be willing to lower interest rates as it will reduce demand for fixed income financial instruments issued in local currency (swanson and williams, 2014). on the other hand, developed economies may face other problems as interest rates fall excessively and hence the effectiveness of monetary policy decreases. therefore, it is an important research topic whether fluctuations in policy rates as a result of monetary policy practices affect the stock market. after the 2008-2009 global financial crisis, it gained more and more importance as it led to the decline in world economic growth and supported monetary policies that tried to regain economic stability. today, oil ranks first among the world's energy resources with a share of approximately 33% in primary energy consumption and maintains its importance as a unique and nonrenewable natural resource that provides economic and political power to countries with abundant oil reserves (çevik et al., 2020). the theoretical relationship between oil prices and stock returns can be positive or negative. according to the cash flow volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu determinants of stock market indices: an analysis of emerging markets of brazil, mexico, russia, and turkey page |28| emerging markets journal hypothesis, a positive or negative relationship can exist between oil prices and stock returns, and it expresses a negative relationship through two channels. since oil is an important raw material for most industrial firms, higher oil prices increase the production cost and affect future cash flows, profits, dividends and ultimately stock returns negatively. in addition, higher oil prices can result in expectations of higher inflation and interest rates. this puts downward pressure on expected profits, dividends and therefore stock returns. another proposition is in terms of a positive or negative relationship. sensitivity to oil prices may affect stock prices up or down, depending on the risk premium, which varies greatly with companies and over time (smyth and narayan, 2018). crude oil prices can affect national economies in three ways: first, the impact of changes in oil prices on inflation due to changes in production costs is significant. the second effect, especially for oil importing countries, is the serious effects of changes in oil prices on the balance of payments and therefore on exchange rates. third, the effects of price changes on the total consumption of households, that is, increasing oil prices cause a downward shift in demand or vice versa (kayalar et al. 2017). historically, gold has always been seen as a unique raw material and investment tool, especially in times of trouble, thanks to its ability to store value. gold prices seem to have reached historic highs since the 2008 subprime crisis. therefore, it has become attractive to investigate the effect of such events on gold prices. gold market traders consider gold to be a safe investment and the increased demand for gold is a result of the risk of excessive losses in other investment instruments. the chicago board options exchange volatility index is an index that measures the degree of fear in the markets. using s&p 500 stock option prices, vix determines the "expected volatility" of option prices. it expresses the 30-day forward volatility projection. the reason why it is called the fear index is due to the fact that investors in the market express their hesitation from investment because of fear of volatility (https://www.investopedia.com/terms/v/vix.asp). values between 20-30 in the fear index were accepted as normal values. if the value is above 60% in the vix index, it causes great turmoil in the market. the lowest value of the index was 9.31 in december 1993 and the highest value was 80.86 in november 2008. ishares msci emerging markets etf is a fund that aims to track the investment results of an index composed of large and mid-sized companies in emerging markets. the fund was launched on 07/2003. the benchmark of the fund is msci emerging markets and diversifies its portfolio internationally and aims for longterm growth (https://www.ishares.com/us/). ii. literature review studies in the literature generally focus on different variables. it is seen that past research analyze the relationship among stock returns and cds premium, bond yield, gold, and oil prices, exchange rates and some other variables, usually two or three of these variables. the related literature concerned with this research is discussed below. acharya and johnson’s (2007) study was run on 79 corporate assets by analyzing cds premium and stock market daily data in their sample for the period of 2001-2004. they provided empirically an information flow relationship from cds to equity markets. norden and weber (2004) analyzed the relationship among cds premium, bond, and stock markets empirically from 2000 to 2002. their observations indicated that changes in cds premiums and bond spreads are led by stock returns and the cds market’s role is more significant for pricedetermining than the bond market. similarly, analyzing the relationship between cds spreads and stock markets, forte and pena (2009) also observed that stock markets lead in explaining cds spreads. benkert’s (2004) study on 120 firms for the period of 1999-2002 determined that volatility is more significant as an explanatory factor in cds premia variation than historical volatility. dupuis et al. (2009) empirically found that the relationship between stock returns and cds can be quite variant and responsive to the content of portfolios. fung et al. (2009) investigated the relationship between credit default swap and stock markets. their observation is that, the cds markets are led by stock markets only for the high-yield and investment-grade firms. naifar (2012) studied the dependency relationship among equity volatility, cds premium, and jump risk before and during the 2008 global financial crisis. it was detected that, the dependency between the stock market and cds is asymmetrical and directs towards the upside. longstaff et al.(2003) presented a different finding. they argued that, there is not any clear result that either of the two markets is the leader. narayan et al. (2014) discovered that, the stock market dominates in the price determination process where both the stock market and the cds market contribute. park et al. (2019) studied the domestic and foreign components affecting the basis between sovereign cdss and equities index options in korea. they observed that, shocks have an important role in determining cds-options during the crisis, but the exchange rate’s role is greater in normal terms. chan-lau and kim (2004) analyzed the relationship and price exploration process in the bond, cds, and equity markets for 8 emerging countries; bulgaria, brazil, colombia, mexico, russia, the philippines, turkey and venezuela. in most of these countries, they did not observe any relationship among cds markets, bond, and the equity markets. they obtained mixed results in terms of price discovery. the results indicated a significant correlation between bond spreads and cds in most of them except mexico, the philippines and turkey. adler and song (2010) tested whether credit risk is priced equally in cds and bond markets for emerging countries. findings did not point out a parity in latin american countries. öcal and kamil (2021) analyzed the effects of cds and s&p vix and exchange rate volatility on stock market indices as well as sustainability indices of germany, france, indonesia, and turkey. the findings are: i) unlike other countries, companies in the bist sustainability index are more affected by shocks than companies in the bist all index. ii) according to the causality analysis for all countries, the vix is more determinative on national and sustainability indices than cds and currency volatility indices. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu hülya yılmaz, bülent i̇lhan emerging markets journal | p a g e |29 sarıgül and şengelen (2020) investigated the relationship between turkey's cds premiums and bank stock prices, also analyzed the effects of country risk perception. it was determined that, turkey’s cds premium has an impact on the bist bank index and five banks in the long run. başarır and keten (2016) analyzed the short-term and long-term relationship between cds premiums and stock indices of 12 developing countries for the period of 2010-2016. according to the results of the granger causality test for the short term and the johansen cointegration test for the long term, they observed a bidirectional causality relationship between cds premiums and stock indices. hancı (2014) analyzed the return volatility of cds premium and bist100 index with garch modelling and concluded that the relationship between cds premium and stock returns is inverse. historically, stock and bond yields have tended to move in the same direction, but sometimes, even for a long time, they can move in the opposite direction. in particular, they moved in a different correlation during crisis periods compared to non-crisis periods. it is widely accepted that stock-bond correlations change over time. using a stochastic volatility model, johansson (2010) investigated the relationship between stocks and bonds in 9 asian countries, observing that there are significant volatility spillover effects between stock and bond markets in many countries. according to the findings, the relationship between stock and bond markets in all countries changed significantly over time, and the correlation increased in some countries during turbulent periods. li (2004) empirically examined the relationship between stock-bond returns for the g7 countries for the period of 1961-2001. it was found out that, the stock-bond correlation is primarily determined by the uncertainty in expected inflation. assefa et al. (2017) analyzed quarterly stock returns of 21 developed and 19 emerging economies (including brazil, mexico, and turkey) for the period of 1999-2013, using dynamic panels, and found that interest rates have a statistically negative effect on stock returns in developed countries. it was concluded that the, world market portfolio is the only determinant of stock returns in developing economies. also, the opposite effect of change in interest rates on stock returns may be partly related to the divergent monetary policies of advanced economies and their mature capital markets. anderson et al. (2008) investigated the effect of inflation, economic growth, and the uncertainty of the stock market on the correlation between bond and stock returns. their results indicated that stock and bond prices move together in periods when inflation expectations are high, while the negative stock-bond yield correlation coincides with declining inflation expectations. additionally, stock-bond return correlation was not affected by economic growth expectations. many researchers have attempted to analyze the correlation between stock and bond returns. using the dynamic present value approach, shiller and beltratti (1992) showed that the correlation between stocks and bonds is too high to be supported by the theory in their study for the usa and the uk. however, from a theoretical point of view, barsky (1989) considered that, the correlation in stock and bond yields is situational and pointed out that, lower growth in productivity and higher market risk probably reduces both corporate profits and interest rates, causing stock and bond prices to behave in opposite directions. in their study by analyzing macroeconomic and financial variables as the determinants of us stock-bond correlations, allard et al. (2020) observed that, the daily correlation is more affected by financial market variables and the monthly component is more affected by macroeconomic variables, while the annual is affected by the funding possibilities. baele et al. (2010) concluded that, the correlation between stock and bond yields in the usa in the second half of the 20th century was positive and ranged from zero to sixty percent. however, the correlation dropped to slightly below zero at the end of the 20th century, and it was quite negative at the beginning of the 21st century. lin et al. (2018) examined the time-varying relationship of stock-bond returns between 1988 and 2014 in relation to basic economic variables and uncertainty of the stock market. according to the empirical results, the short-term and long-term relationship between stock and bond yields changed over time, and this relationship was positively sensitive to the slope of the short-term interest rate and maturity structure, while it was negatively sensitive to stock market volatility. the relationship between oil prices and stock markets is also an important research topic in the literature. from the supply side, oil is a raw material that affects companies' earnings and thus their stock returns. it also affects the income of consumers, therefore the demand for goods and the services supplied by companies on the demand side. oil continues to be a systematic driving force of economic and financial variables (balcılar et al., 2019). for this reason, oil prices are also included in the study as an independent variable to analyze its effect on stock market indices. demirer et al. (2019) analyzed the impact of oil demand and supply shocks on stock and bond markets in 21 developed and developing countries. the study revealed that, the reactions of stock and bond markets differ depending on the character of the shock. oil price shocks affect bond market yields, but the effect is highly variable and substantially based on demand shocks. according to the analysis of kayalar et al. (2017), stock indices and exchange rates are more dependent on oil price in most oil-exporting countries, whereas in developing oilimporting countries, on the contrary, the markets are less vulnerable to price fluctuations. according to gauss copula results between 2005 and 2016, the dependency on crude oil prices is 46% for the brazil stock index, 43% for the russia index and 20% for turkey index. by using the egarch process, çevik et al. (2020) examined empirically the relationship between crude oil prices and stock market returns in turkey. the results indicated that, crude oil prices are significantly determinant on stock market returns in turkey. singhal et al. (2019) investigated the relationship among crude oil prices, exchange rate, gold prices and stock market returns in mexico for the period 06/2006-04/2018. according to the findings of the study, while international gold prices affected mexican stock prices positively, they affected oil prices negatively. fang et al. (2014) analyzed the effect of changes in oil prices on stock market returns in the three major newly industrializing countries, russia, china and india. they observed that, the effect of oil price shocks on stock volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu determinants of stock market indices: an analysis of emerging markets of brazil, mexico, russia, and turkey page |30| emerging markets journal prices in these three countries is partially mixed, unlike the effects on the stock markets of the usa and developed countries. according to the results, i) oil prices had a negative effect on the indian economy, ii) only oil supply shocks affected russia's stocks positively, iii) global oil demand shocks had an insignificant impact on chinese stock market yields. lee et al. (2012) investigated the relationship between oil prices and sectoral stock prices for g7 countries for the period of 1991-2009. they observe that, oil price shocks do not affect the composite indices in all these countries and a negative causality relationship exists between oil prices and sectoral stocks. it is known that, gold prices generally have a negative correlation with stock returns, and gold comes to the fore as an important hedging tool, especially during periods of high volatility and negative returns in stock markets. triki and maatoug (2020) studied the relationship between the s&p500 index and the gold prices for the period of 19852018, together with the geopolitical risk index, within the scope of the existence of geopolitical tensions and conflicts. they concluded that, gold is a good diversification tool and provides significant hedging against the volatility of the s&p500, especially during high tensions. in similar studies, smith and cohen (2002) stated that, gold prices increase in uncertainty associated with political events that cause the stock market to depreciate or with increasing financial risk. supporting the idea that there is a highly significant indirect relationship between political crises and the volatility in the gold price in response to stock market volatility, draper et al. (2006) stated that gold has a higher negative correlation in periods of high volatility and negative stock market returns. hillier and robert (2006) indicated that, the gold market is crucial for economic and political crisis periods when combined with periods of crisis and stress, and high stock market volatility. with a different approach, christie-david et al. (2000) examined many macroeconomic effects that affect the gold price and interest rate futures in the period 1992-1995 with 15minute frequencies. they observed that, news releases on macroeconomic indicators have a significant impact on interest rate contracts, but have a smaller impact on gold yields. when the findings obtained in this study are compared with other results obtained in the literature, they generally do not show significant similarities. the reasons for this may be that this study includes both long-term and short-term periods, and that many variables are included in the model. according to the results of this study, it is seen that the effects of most variables on stock market indices both in terms of countries, direction and size are different in the long-run and short-run. iii. data and methodology data collection this study analyzes the dynamic relationship among the stock market indices of four emerging countries (n=4) and a set of macroeconomic regressors. the complexity of financial markets in general and stock markets, in particular, begs for an in-depth analysis of the variables, which may have an impact on these markets. we collected the related data from the website of a wellknown global financial data provider, https://tr.investing.com/. table 1: dependent and independent variables variables definition source dependent v. stock stock exchange index (monthly) turkey bist100 mexico bse sunsex moex russia (imoex) brazil bovespa independent v. bond 5-year bond yields (monthly) investing.com cds credit default swaps-cds premiums (monthly) vix s&p500 vix volatility index (monthly) gold gold ounce prices ($) (monthly) msci msci emerging markets (monthly) oil crude oil prices (monthly) ect error correction term calculated by authors covid-19 covid-19 dummy created by authors source: authors’ own compilation table 1 presents the operational definitions and sources of dependent as well as independent variables. the dependent variable measures the stock exchange points of the respective markets at the beginning of each month from january 2010 to march 2021 (t=135). independent variables consist of the 5-year bond yields, cds premiums, vix futures, the price of gold ounce in usd, msci emerging market index, and oil future prices in usd in the same period. while the first two predictors are country-specific, the last four are cross sectionally invariant and do not vary across countries. we used the natural logarithm of the variables in the analysis. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu hülya yılmaz, bülent i̇lhan emerging markets journal | p a g e |31 figure 1. stock indices by country source: authors’ own compilation figure 1 shows the line charts of the stock markets of turkey, mexico, russia and brazil for the given period. as seen in the figure, all stock series have upward trends, and the fluctuations in turkish and brazilian markets are much more visible than the fluctuations in mexican and russian markets. the biggest plunge in the turkish, mexican and brazilian markets occurred in the same period by 15.4%, 26%, and 29% in march 2020 in all three markets, respectively. table 2: descriptive statistics source: spss software output table 2 shows the summary statistics for 540 observations for each variable with no missing values. jarque-bera statistics of normality suggest that variables do not have normal distributions. methodology the data set consists of 135 time-series (t=135) of four cross-sections (n=4), which needs several diagnostic analyses before specifying a model. we tested the data for cross-sectional independence, stationarity and cointegration before estimating the model for the data. after fitting the model, we tested for cross-sectional dependence again to confirm the reliability of the model coefficients. we also tested variance ratio of the cointegrating residuals to understand whether the present stock exchange points follow the past stock exchange points. cross-sectional dependence panel data analysis assumes that errors of crosssectional units are independently distributed. this is an assumption that should be satisfied before making an unbiased prediction of population parameters. in case of cross-sectional dependence, which is endemic to panel data, we need to determine an appropriate unit root test and an analysis method that is robust to homogeneous panels. we conducted a baseline regression analysis to detect the presence of a possible cross-sectional dependence between the panels. the model is a simple multivariate regression model that is estimated by ordinary least squares (ols) method. the residuals from the estimation were tested for cross-sectional dependence using pesaran’s (2004, 2015) cd test. pesaran cd statistic tests the null hypothesis of crosssectional independence (2004) or weak cross-sectional dependence (2015). table 3: pesaran cd test for baseline regression model for lnstock source: spss software output as seen in table 3, the pesaran cd value (cd=15.989) is statistically significant (p<0,001), which shows that the null hypothesis that cross-sectional independence or weak cross-sectional dependence can be rejected. despite having commonly observed variables like lnvix, lngold, lnmsci and lnoil in the dataset, the observed cross-sectional dependence can be attributed to the unobserved variables common to all countries. to mitigate the effect of cross-sectional dependence, some other common factors can be identified in the model either by observing them later or by finding them in the existing dataset. another method for mitigating the effect of cross-sectional dependence is to specify dynamic panel models in which variables are included with their lagged values. this study controls the cross-sectional dependence by using both dynamic models in the analysis and dummy variables of some factors common to all cross-sectional units. unit root tests apart from cross-sectional dependence, another issue common to most panel data is series with unit root or non-stationarity. model estimations with nonstationary time-series may result in spurious regression or false relationship between the variables that do not exist in real world (yule, 1926; granger & newbold, 1974; phillips, 1986). there are several unit root tests used in the time-series and panel data analysis. this study employs a variant of breitung (2005) and hadri (2000) unit root tests that are robust to cross-sectional dependence. while the breitung test assumes unit root in all panels, the hadri test assumes stationarity of all panels under the null hypothesis. dejong and whiteman (1994) suggest performing unit root tests of these two types together in time-series analysis. unit root tests were performed with time-trend and without time-trend options using lagged (4) version of the series. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu determinants of stock market indices: an analysis of emerging markets of brazil, mexico, russia, and turkey page |32| emerging markets journal table 4: unit root test-1 source: spss software output breitung h0: panels contain unit roots. hadri-lm h0= all panels are stationary as seen in table 4, the results of breitung's (2004) unit root test show that series, except lncds and lnbond, contain unit root in all panels. lnoil also contains unit root at the 10% level, together with lncds and lnbond. on the other hand, the results of the hadrilm (2004) test show that series contain unit roots in some panels. the results remained the same when the tests were performed with the time-trend option. table 5: unit root test-2 source: spss software output breitung h0: panels contain unit roots. hadri-lm h0= all panels are stationary breitung and hadri-lm tests were reperformed using the first differences of the series. as seen in table 5, the results show that series are stationary in all panels. the only exception is lngold, which contains unit root when tested with the intercept and trend option. overall, the results of all unit root tests indicated that the panel dataset consists of a dependent variable that is stationary at order one (i(1)), and independent variables that are both stationary at level (i(0) and order one (i(1)). panel cointegration test the results of the root test shows that, most of the series in the panel are not stationary. this also suggests that there may be a long-term equilibrium relationship among these series. such a relationship results when the combination of two or more nonstationary variables is stationary. panel data cointegration test examines whether there is a balanced, long-term relationship in the panels with two or more nonstationary series. this study utilizes kao (1999), pedroni (1999, 2004) and westerlund (2005) cointegration tests to analyze whether there is a cointegrating relationship among the series. while the null hypotheses of these three cointegration tests check for no cointegration; kao test analyzes the alternative hypothesis that all panels are cointegrated where cointegrating vectors are homogeneous; pedroni test, which consists of seven test statistics, analyzes the alternative hypotheses that (a) all panels are cointegrated where cointegrating vectors and autoregressive parameters are panel specific, (b) all panels are cointegrated where cointegrating vectors are panel-specific, but autoregressive parameters are the same for all panels; westerlund test analyzes the alternative hypotheses that (a) some panels (at least one) are cointegrated where cointegrating vectors and autoregressive parameters are panel specific, (b) all panels are cointegrated where cointegrating vectors are panel-specific, but autoregressive parameters are the same for all panels. table 6: cointegration tests source: spss software output note: no time trends eha: all panels are cointegrated (same ar) as seen in table 6, the results of the kao test show that, the null hypothesis of no cointegration can be rejected in favor of the alternative hypothesis that all panels are cointegrated. the results of pedroni test, as indicated by the five test statistics out of seven, show that the null hypothesis of no cointegration can be rejected in volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu hülya yılmaz, bülent i̇lhan emerging markets journal | p a g e |33 favor of the alternative hypotheses that (a) all panels are cointegrated where autoregressive parameters are panelspecific and (b) all panels are cointegrated where autoregressive parameters are the same for all panels (see adf-t and pp-t tests for (b)). the results of the westerlund test show that the null hypothesis of no cointegration (a) cannot be rejected in favor of the alternative hypothesis that all panels are cointegrated where autoregressive parameters are the same across panels, but (b) can be rejected in favor of alternative hypothesis that some panels are cointegrated where autoregressive parameters are panel specific. overall, all three tests suggest that the null hypothesis of no cointegration can be rejected at least for some, if not for all, panels. model specification the results of cointegration tests imply a longterm relationship among the series. in other words, there is enough evidence showing that stock indices of countries in the panel are in a long-term equilibrium with the regressors. the relationship of this type has long been analyzed through error correction models (ecm) in most fields (sargan, 1964; engle & granger, 1987; pesaran & shin, 1995). ecms can measure the long and short-term effects of instantaneous shocks in time series, making it tested in two consecutive steps. first, series are added to the model with their optimal lags to estimate the longterm effects of regressors on the outcome variable. second, series are added to the model with their first differences to estimate their short-term effects. the first differences of series are used to remove the longterm effects that occur due to non-stationary movements of series in time. the short-term model also includes the first lag of the residuals of the first model to estimate (a) the shortterm effects of the deviations from the longterm equilibrium and (b) the speed of the dependent variable to adjust for the long-term balance. the long-term model is expressed as follows: 𝑙𝑛𝑠𝑡𝑜𝑐𝑘𝑖𝑡 =∝𝑖+ 𝛿𝑖𝑡 + 𝛽1𝑙𝑛𝑏𝑜𝑛𝑑𝑖𝑡 + 𝛽2𝑙𝑛𝑐𝑑𝑠𝑖𝑡 + 𝛽3𝑙𝑛𝑣𝑖𝑥𝑡 + 𝛽4𝑙𝑛𝑔𝑜𝑙𝑑𝑡 + 𝛽5𝑙𝑛𝑚𝑠𝑐𝑖𝑡 + 𝛽6𝑙𝑛𝑜𝑖𝑙𝑡 + 𝑒𝑖𝑡(1) where i denotes individual cross-sectional unit (country), t denotes time, ∝𝑖 and 𝛿𝑖 are individual and trend effects, 𝛽 is coefficient for independent variable, and 𝑒𝑖𝑡 is the residual. the null hypothesis states that dependent (y) and independent (x) variables are integrated at order one, i(1). under the alternative hypothesis of cointegration, 𝑒𝑖𝑡 equals to i(0). the short-term equation is as follows: 𝑑. 𝑙𝑛𝑠𝑡𝑜𝑐𝑘 = 𝑐 + 𝛽1𝑑. 𝑙𝑛𝑏𝑜𝑛𝑑 + 𝛽2𝑑. 𝑙𝑛𝑐𝑑𝑠 + 𝛽3𝑑. 𝑙𝑛𝑣𝑖𝑥 + 𝛽4𝑑. 𝑙𝑛𝑔𝑜𝑙𝑑 + 𝛽5𝑑. 𝑙𝑛𝑚𝑠𝑐𝑖 + 𝛽6𝑑. 𝑙𝑛𝑜𝑖𝑙 + 𝐸𝐶𝑇(−1) + 𝑒(2) where d denotes first difference, c denotes constant, 𝛽 is coefficient for independent variable, ect(1) is first lag of the error correction term or residuals from the cointegrating (long-term) model, and 𝑒 is the error. iv. empirical analysis and findings the long-term effects of macroeconomic regressors on the stock index points were estimated by dynamic ordinary least squares (dols) estimator (table 7). the optimal lags of variables were determined by the dols estimator automatically using akaike informational criteria. the explanatory power of the model is quite high, with 99.8 percent. pesaran cd statistics value of -1.502 is not statistically significant, which indicates no cross-sectional dependence between the units. the long-term variance score is the highest for brazil, suggesting that the long-term effect is stronger for brazil compared to other countries in the panel. table 7: lnstock long-term model source: spss software output t statistics are in parentheses, ***p<0,01, **p<0,05, *p<0,1 for the entire panel, all variables, except lnbond, have a statistically significant longterm effect on lnstock. the direction of effect is negative for lncds, lngold, and lnoil, and positive for lnvix and lnmsci. a 1% increase in the mean value of lncds and lnoil is associated with a 0,29% and 0,13% decrease in the mean value of lnstock, respectively. on the other hand, a 1% increase in the mean value of lnvix and lnmsci is associated with a 0,17% and 0,53% increase in the mean value of lnstock, respectively. while the size of the effect differs between the units (country), the direction of the effect remains the same in most cases. as seen in the coefficient values, the long-term effect of independent variables is much more evident for brazil than for any other country in the panel. the effect of lncds and lnoil is the highest for russia, which is the only country in the panel that msci has no significant longterm effect. russia is also the only country where the effect of lnbond is statistically significant in the long term. on the other hand, turkey is the only country where lngold and lnoil have no significant longterm effect. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu determinants of stock market indices: an analysis of emerging markets of brazil, mexico, russia, and turkey page |34| emerging markets journal table 8: stationarity test for the residuals of longterm model source: spss software output breitung h0: panels contain unit roots llc h0: panels contain unit roots hadri-lm h0= all panels are stationary ips h0: all panels contain unit roots table 8 presents the results of the stationarity test for the residuals of the long-term model. since breitung and hadri-lm tests generated contradictory results on the stationarity of the residuals, these tests were followed by levin, lin, and chu (2002) and im, pesaran, and shin (2003) unit root tests. the results indicated that the null hypotheses of the breitung and llc test that panels contain unit roots and the ips test that all panels contain unit roots can be rejected. overall, the findings of breitung, llc, and ips unit root tests validate the cointegration hypothesis that the combination of nonstationary variables is stationary. table 9: variance ratio test of cointegration residuals source: spss software output null: resid02 is a martingale ***p<0,001, **p<0,05, *p<0.1 we also conducted a variance ratio analysis on the cointegrating residuals to test the null hypothesis that residuals follow a random walk (table 9). if the null hypothesis holds, then the value of the error sequence of the dependent variable in the future periods is considered equal to the value of the errors sequence in the present period. the equality of error sequence means that stock exchange points follow a random walk and that the future stock exchange points do not reflect the current points. random walk residual is considered a sign of a weakform efficient market (fama, 1970). max |z| statistics of the fisher combined test show that the null hypothesis of random walk residuals does not hold for the panel as well for turkey, mexico, and brazil. overall, the findings of the variance ratio test suggest that all countries in the panel, except russia, show signs of weak form of inefficient market. table 10: lnstock short-term model source: spss software output t statistics are in parentheses ***p<0,01, **p<0,05, *p<0,1 a panel without covid-19 dummy b panel with covid-19 dummy the short-term models for the entire panel and individual country were estimated using the least square (ls) estimator (table 11). the model for the panel (panela) can explain the 52% of the variations in lnstock, which is statistically significant as seen in the f statistic and its respective probability. however, the pesaran cd statistic of the model shows that the model suffers from cross-sectional dependency. we created a new dummy variable to account for some of the variations common to all units and to mitigate the effects of crosssectional dependence. the new dummy variable has two values that represent “1” for march 2020 and “0” for otherwise. from the descriptive statistics, one can see that the highest drop in the stock markets of turkey, mexico and brazil occurred in march 2020. this period coincides with the end of february 2020, when the covid-19-related deaths broke out in many countries. therefore, we named the new variable covid-19, assuming the drop in stock exchange markets in march 2020 is due to the covid-19 outbreak. the short-term model for the panel was reestimated (panelb) with the covid-19 variable. pesaran cd statistics of the new model show no crosssectional dependence between the units. the adjusted r2 value of 0.539 indicated that the covid-19 increased the explanatory power of the previous model by 2 percent. the coefficient value of 0,117 for covid-19 implies that the mean value of lnstock in the covid-19 period is almost 12% less than the mean value of lnstock in the non-covid-19 period. the reestimation of the short-term model yielded no significant change in the estimated coefficients of other variables. the short-term effects of lnbond and lnmsci are statistically significant at the 1% level, and the effects of lncds and lnvix are significant at the 5% level. a 1% increase in lnbond, lncds, and lnvix is associated with a 0,22%, 0,04%, and 0,03% decrease in lnstock, respectively. the same amount of increase in msci, however, is associated with a 0,44% increase in lnstock. lngold and lnoild seem to have no significant short-term effect on lnstock. the volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu hülya yılmaz, bülent i̇lhan emerging markets journal | p a g e |35 coefficient value of the error correction term (ect) indicates that 13% of the deviations from the past periods are corrected in the present period. the statistical significance of the error correction coefficient confirms the findings of the panel cointegration test that all panels are cointegrated. there are significant differences in the explanatory powers of individual models. the independent variables, combined, explain almost 39 percent of the variation in stock prices for russia, which is almost half the explanatory power of the model for brazil. the relatively low explanatory power of the russian model implies that moex russia has different dynamics compared to other stock markets. the low rsquared confirms the findings of the variance ratio analysis that the russian market is a weak-form efficient market in which future stock points reflect current stock points. other than bond yields, which is a country specific variable, the only variable that has a significant short-term effect is msci, which affects bovespa more than two times it affects moex russia. further, the russian model is the only model that covid-19 seems to have no significant effect. despite differences in the size of effects, bond yields and msci, like in the russian model, are two variables, along with covid19, with a significant effect on brazil's stock prices. the model estimated covid19-effect in the brazilian model is almost half the exact drop in march 2020. the difference may be due to the difference between the direct and indirect effects of the covid-19. the short-term dynamics for the mexican stock market seem to have a different pattern than those of brazil despite their geographic proximity. countryspecific variables of bond yields and cds premiums have no significant short-term effect on bse sunsex. further, mexico is the only country in the panel that bond yields neither have a long nor a short-term impact. on the other hand, mexico is the only country that vix and oil prices have a significant short-term effect on stock prices. model estimated covid-19-effect is also very close to the actual drop in march 2020. unlike mexico, country-specific variables have a significant impact on turkey. further, turkey is the only country in the panel that gold prices have a significant short-term effect. model estimated covid19-effect equals almost half the actual drop in march 2020. as seen in the long-term variance score and speed of adjustment, in turkey, variables are much more effective in the short term than they are in the long term. throughout the panel, one can see that a high long-term variance score is associated with a low speed of adjustment. the ect coefficient of -0,32 indicates that one-third of any deviation from the long-term equilibrium in the present period is corrected in the next period. error correction or the speed of adjustment is much slower for mexico, russia, and brazil in line with their long-term variance scores. the speed of adjustment is almost six months for mexico, ten months for russia, and fourteen months for brazil. v. conclusion according to the analysis results, the effect of bond yields on stock market returns is negative for each country in the short term, higher for brazil and turkey, and statistically significant at 1% probability level. however, this effect is only significant for russia in the long term, in a high and positive direction, at the 5% probability level. the effect of cds premiums on stock market returns is significant only for turkey and higher than other countries in the short term. the long-term effect is high and negative on each country (especially on russia), significant at 5% and 1% probability levels. the effect of vix on stock market returns is low and negative on all 4 countries in the short term, but this effect is positive on each country in the long term and is higher and more significant for brazil and russia. the effect of gold is negative, high, and significant at 10% probability level only for turkey in the short term, but while the effect on turkey decreases in the long term, it is negative, high and statistically significant for mexico and brazil. the relationship between msci and stock market returns is the highest, positive, and significant for each of the 4 countries in the short term. while this effect on russia decreases in the long term, it increases on other countries, especially on brazil. it is observed that the effect of crude oil is negative only on mexico and significant at 1% probability level in the short term, insignificant on turkey, and negative and high on other countries in the long term. it is seen that the effect of covid 19 on stock market returns in the short term is negative in other countries except for russia, low in turkey, and high in mexico and brazil. consequently, to summarize the effects of independent variables on stock markets of the countries analyzed in this study, the effects of variables other than msci and vix index on the stock market indices of countries differ in terms of both size and direction. the relationship between stock market indices and msci is positive and significant both in the short and long term for each of the 4 countries. while the effect of the vix index is low and negative in the short term, it is seen to have a high positive effect in the long term. the effects of other variables are briefly observed as follows: in the short-term model, the bond interest and the covid 19 negatively affect the brazilian stock market index, while the gold prices, bond yields, cds premiums and crude oil prices have a negative effect in the long-term model. mexico stock market index is affected negatively by covid 19, crude oil prices and bond yields, in the short term, while it is affected positively by bond yields, negatively by gold prices, cds and crude oil prices respectively in the long term. on the russian stock market index, bond yield has a negative effect in the short term. bond yield has a positive, cds premium and oil prices have a negative effect in the long term. it is observed that bond yields, gold prices and cds premiums have negative effect on the turkish stock market index both in the short term and in the long term. additionally, the ect that indicates the speed of adjustment obtained for turkey is much higher compared to mexico, russia and brazil in line with the long-term variance scores. the results of the panel analysis consisting of brazil, mexico, russia and turkey indicate that, the effects of independent variables on stock market indices are as follows: i) while the bond yield has no significant effect in the long term, it has a negative and high effect in the short term. ii) the effect of cds premium is negative and high in the long-term, and negative and low in the short-term. iii) vix has a positive and significant volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu determinants of stock market indices: an analysis of emerging markets of brazil, mexico, russia, and turkey page |36| emerging markets journal effect in the long term, but a negative and very low effect in the short term. iv) the long-term effect of gold prices is negative and high, but insignificant in the short-term. v) msci is in a significant, positive and high relationship with stock market indices both in the long and the short term. vi) the effect of crude oil prices is significant and negative in the long term and insignificant in the short term. vii) covid 19 impact is negative and significant in the short term. references acharya, v., johnson, t.c. (2007). insider trading in credit derivatives. journal of financial economics 84, 110-141. adler, m., song, j. (2010). the behavior of emerging market sovereigns' credit default swap (cds) premiums and bond yield spreads. int. j. financ. econ. 15, 31-58. allard a-f., iania l., smedts k. (2020). stock-bond return correlations: moving away from “onefrequency-fits-all” by extending the dccmidas approach. international review of financial analysis 71 (2020) 101557 andersson, m., krylova, e., vähämaa, s. (2008). why does the correlation between stock and bond returns vary over time? applied financial economics, 18(2), 139–151. doi:10.1080/09603100601057854 assefa t. a., esquedab o. a., mollick a. v. (2017). stock returns and interest rates around the world: a paneldata approach. journal of economics and business 89 (2017) 20-35. baele, l., bekaert, g., inghelbrecht, k. (2010). the determinants of stock and bond return comovements. the review of financial studies, 23(6), 2374–2428. https://doi.org/10.1093/rfs/hhq014. balcılar m., demirer r., hammoudeh s. (2019). quantile relationship between oil and stock returns: evidence from emerging and frontier stock markets. energy policy 134 (2019) 110931 , 1-14. barsky, robert b. (1989). why don’t the prices of stocks and bonds move together?, american economic review 79, 1132-1145. başarır ç., keten m. (2016). gelişmekte olan ülkelerin cds primleri i̇le hisse senetleri ve döviz kurları arasındaki kointegrasyon i̇lişkisi. mehmet akif ersoy üniversitesi sosyal bilimler enstitüsü dergisi . 8 (1), 369-380. benkert c. (2004). explaining credit default swap premia. the journal of futures markets, vol. 24, no. 1, 71–92 2004 wiley periodicals, inc. doi: 10.1002/fut.10112 blanco, r., brennan, s., marsh, i.w. (2005). an empirical analysis of the dynamic relationship between investment grade bonds and credit default swaps. journal of finance 60, 2255-2281. breitung, j., & das, s. (2005). panel unit root tests under cross‐sectional dependence. statistica neerlandica, 59(4), 414-433. chan-lau, jorge a., kim, yoon s. (2004). equity prices, credit default swaps, and bond spreads in emerging markets. working paper no. wp/04/27, international monetary fund. christie-david, r., chaudhry, m., koch, t.w. (2000). do macroeconomics news releases affect gold and silver prices? j. econ. bus. 52, 405-421. çevik n.k., çevik e.i., dibooglu. (2020). oil prices, stock market returns and volatility spillovers: evidence from turkey. journal of policy modeling 42 (2020) 597-614. dejong, d. n., & whiteman, c. h. (1994). the forecasting attributes of trend‐and difference‐ stationary representations for macroeconomic time series. journal of forecasting, 13(3), 279297. demirer, r., ferrer, r., shahzad, s.j.h. (2019). oil price shocks and financial markets: a comparative analysis of stock and sovereign bond markets. working paper (may 2019). draper, p., faff, r., hillier, d., (2006). do precious metals shine? an investment perspective, may. financ. anal. j. 62 (2). dupuis, d., jacquier, e., papageorgiou, n., rémillard, b. (2009). empirical evidence on the dependence of credit default swaps and equity prices. journal of futures markets 9 (8), 695-712. fama, e. f. (1970). efficient capital markets: a review of theory and empirical works. journal of finance, 383-417. fang c-r, you s-y. (2014). the impact of oil price shocks on the large emerging countries’ stock prices: evidence from china, india and russia. int rev econ finance 2014;29:330e8. forte, s., pena, j.i. (2009). credit spreads: an empirical analysis on the informational content of stocks, bonds, and cds. journal of banking and finance 33, 2013-2025. fung, h.-g., gregory, e., sierra yau, j., zhang, g. (2009). are the u.s. stock market and credit default swap market related? evidence from the cdx indices. journal of alternative investments 11 (1), 43-61. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu hülya yılmaz, bülent i̇lhan emerging markets journal | p a g e |37 granger, c. w., newbold, p., & econom, j. (1974). spurious regressions in econometrics. baltagi, badi h. a companion of theoretical econometrics, 557-561. hadri, k. (2000). testing for stationarity in heterogeneous panel data. the econometrics journal, 3(2), 148-161. hancı, g. (2014). kredi temerrüt takaslar ve bi̇st 100 arasındaki i̇lişkinin i̇ncelenmesi, maliye finans yazıları, cilt. 28, sayı. 102, 9-24. hillier, d., robert, f. (2006). do precious metals shine? an investment perspective. financ. anal. j. 62, 98-106. im, k. s., pesaran, m. h., & shin, y. (2003). testing for unit roots in heterogeneous panels. journal of econometrics, 115(1), 53-74. jarrow, r. a., ve turnbull, s. m. (1995). pricing derivatives on financial securities subject to credit risk. journal of finance, 53-85. johansson, a. c. (2010). stock and bond relationships in asia, cerc working paper 14. stockholm school of economics. kao, c. (1999). spurious regression and residual-based tests for cointegration in panel data. journal of econometrics 90: 1-44. kayalar, d.e., küçüközmen, c.c., kestel, a.s-s. (2017). the impact of crude oil prices on financial market indicators: copula approach. energy economics 61 (2017) 162-173. lee b.-j., yang c. w., huang b-n. (2012). oil price movements and stock markets revisited: a case of sector stock price i̇ndexes i̇n the g-7 countries. energy economics volume 34, issue 5, september 2012, 1284-1300. levin, a., lin, c. f., & chu, c. s. j. (2002). unit root tests in panel data: asymptotic and finitesample properties. journal of econometrics, 108(1), 1-24. li, l. (2002). macroeconomic factors and the correlation of stock and bond returns. yale icf working paper no. 02-46. lin f.-l, yang s.-y., marsh t., chen y-.f. (2018). stock and bond return relations and stock market uncertainty: evidence from wavelet analysis. international review of economics and finance 55, 285-294. longstaff, f.a., mithal, s., neis, e. (2003). the credit default swap market: is credit protection priced correctly? working paper, anderson school at ucla. merton, r. c. (1974). on the pricing of corporate debt: the risk structure of interest rates. journal of finance, 29, 449-470. https://doi.org/10.2307/2978814 naifar n. (2012). modeling the dependence structure between default risk premium, equity return volatility and the jump risk: evidence from a financial crisis. economic modelling 29, 119131. narayan p. k., sharma s. s., thuraisamy k. s. (2014). an analysis of price discovery from panel data models of cds and equity returns. journal of banking & finance 41 (2014), 167-177. norden, l., weber, m. (2004). the comovement of credit default swap, bond and stock markets: an empirical analysis. working paper, university of mannheim, germany. öcal, h., & kamil, a. a. (2021). the impact of risk indicators on sustainability (esg) and broadbased indices: an empirical analysis from germany, france, indonesia and turkey. international journal of sustainable economy, 13(1), 18-54. park, y. j., kutan a. m., ryu d. (2019). the impacts of overseas market shocks on the cds-option basis. north american journal of economics and finance 47, 622-636. pedroni, p. (1999). critical values for cointegration tests in heterogeneous panels with multiple regressors. oxford bulletin of economics and statistics 61: 653-670. pedroni, p. (2004). panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the ppp hypothesis. econometric theory 20: 597-625. pesaran, m. h., & shin, y. (1995). an autoregressive lag modelling approach to cointegration analysis (vol. 9514). cambridge working papers in economics. pesaran, m. h., shin, y., & smith, r. p. (1999). pooled mean group estimation of dynamic heterogeneous panels. journal of the american statistical association, 94(446), 621-634. pesaran, m. hashem (2004). general diagnostic tests for cross section dependence in panels, iza discussion paper no. 1240. pesaran, m. h. (2015). testing weak cross-sectional dependence in large panels. econometric reviews 34(6-10): 1089-1117. sargan, j. d. (1964). wages and prices in the united kingdom: a study in econometric methodology. econometric analysis for national economic planning, 16, 25-54. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.257 | http://emaj.pitt.edu determinants of stock market indices: an analysis of emerging markets of brazil, mexico, russia, and turkey page |38| emerging markets journal sarıgül h., şengelen h.e. (2020). ülke kredi temerrüt takas primleri ile hisse senedi fiyatları arasındaki i̇lişki: borsa i̇stanbul’da banka hisse senetleri üzerine ampirik bir araştırma. muhasebe ve finansman dergisi – nisan/2020 (86): 205-222 issn: 2146-3042 doi: 10.25095/mufad.710367 shiller, r.j, & beltratti a.e. (1992). stock prices and bond yields. journal of monetary economics 30, 25-46. singhal s., choudhary s., biswal p. c. (2019). return and volatility linkages among international crude oil price, gold price, exchange rate and stock markets: evidence from mexico. resources policy 60 (2019) 255-261. smith, g., cohen, (2002). the methodology of the principia. in: smith (ed.), 138–173. smyth r., narayan p. k. (2018). what do we know about oil prices and stock returns? international review of financial analysis 57 (2018) 148156. swanson, e. t., & williams, j. c. (2014). measuring the effect of the zero lower bound on mediumand longer-term interest rates. american economicreview, 104(10), 3154-3185. taylor, j. b. (1993). discretion versus policy rules in practice. carnegie-rochester conference series on public policy, 39, 195-214. triki m. b., maatoug a. b. (2020). the gold market as a safe haven against the stock market uncertainty: evidence from geopolitical risk. resources policy, https://doi.org/10.1016/j.resourpol.2020.10187 2 westerlund, j. (2005). new simple tests for panel cointegration. econometric reviews 24: 297316. yule, g. u. (1926). why do we sometimes get nonsensecorrelations between timeseries? a study in sampling and the nature of time-series. journal of the royal statistical society, 89(1), 1-63. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu creating brand image profile by social media analysis i̇brahim sabuncu yalova university, turkey | e-mail: isabuncu@yalova.edu.tr berivan edeş yalova university, turkey | e-mail: berivanedes@outlook.com doruk sıtkıbütün yalova university, turkey | e-mail: doruk-stkbtn@yandex.com i̇layda girgin yalova university, turkey | e-mail: ilayda_girgin@hotmail.com kadir zehir yalova university, turkey | e-mail: kadirzehir@outlook.com abstract the purpose of creating a brand image profile is to measure the brand perception of consumers considering brand attributes. thus, marketing decisions can be made based on the brand's strengths and weaknesses by determining them. the brand image profile is traditionally created using the attitude scales and surveys. however, alternative methods are needed since the questionnaires' responses are careless, the number of participants is relatively low and the cost per participant is high. in this study, as an alternative method, creating a brand image profile by analyzing social media data with artificial intelligence was made for the iphone product. firstly, the focus group study determined the attributes related to the last version of the iphone. then, between december 17th, 2019 and march 23rd, 2020, 87.227 tweets that include these attributes in english were collected from the twitter social media platform through the rapidminer data mining tool. sentiment analysis was performed on collected tweets by the meaningcloud text mining tool. in this analysis, positive and negative emotions were tried to be detected through artificial intelligence algorithms. net brand reputation score (nbr) was calculated using the positive and negative tweets amount for each attribute separately. brand image profile was created by skew analysis using nbr values. as a result, it is thought that social media analysis can be a complementary method that can be used with traditional methods in creating a brand image profile. so, it is seen as an inevitable method to use in further studies to make sentiment analysis by processing raw data received from the social media platforms through artificial intelligence algorithms to transform the product label or the perspectives of an event into meaningful information. keywords: social media analysis, brand image profile, text mining, net brand reputation, twitter new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.228 | http://emaj.pitt.edu | mailto:berivanedes@outlook.com mailto:doruk-stkbtn@yandex.com mailto:ilayda_girgin@hotmail.com mailto:kadirzehir@outlook.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.228 | http://emaj.pitt.edu i̇brahim sabuncu, berivan edeş, doruk sıtkıbütün, i̇layda girgin, kadir zehir emerging markets journal | p a g e |17 creating brand image profile by social media analysis i̇brahim sabuncu berivan edeş doruk sıtkıbütün i̇layda girgin kadir zehir i. introduction product or service provides several benefits to the consumers. these benefits are functionality, rationality, sensuality, individualism, and brandconsumer relations. a brand profile is relating to how the brand is perceived on these benefits (charan, 2015a). a brand is one of the most critical factors that enable the product to be distinguished and preferred by a consumer. a brand is image, confidence, quality, good service, satisfaction and self-expression from a consumers' perspective. the consumers faced with selecting an extensive range of products are selective in the intensive consumption society. branded products with a strong image profile are preferred at this point (lee and bradlow, 2011). due to the lack of studies conducted with the social media analysis in the literature, we believe that the mentioned gap in the literature is filled with this research. the research's primary purpose is to provide some practical information for apple producers about the attributes needed in terms of consumers' points of view to manage the budget of each attribute. besides, a contribution is made to increase the satisfaction level of iphone-addicted users. indirectly, competition in the market will be increased, and economic mobility will be stimulated. brand image is the consumers' perception of a brand. brand image tracking identifies these perceptions based on its strengths and weaknesses to improve marketing strategies (charan, 2015a). the purpose of brand image tracking is to measure consumers' brand perception via its relationship with the relevant attributes. thus, the brand's strengths and weaknesses are obtained and categorized according to the properties like age, gender and demographic attributes. traditional methods such as surveys and focus group studies can be utilized for brand image tracking. traditional methods are based on a series of predefined product features or interpretations of dimensions derived from consumer surveys (lee and bradlow, 2011). these methods provide some practical input for the studies. however, they are costly and if they are not answered correctly, the study may give incorrect results unless it is not under control. as an alternative to traditional methods, social media analysis can be implemented for consumer satisfaction by taking raw data as input from them, carrying out a transaction and making a meaningful inference. thanks to digitalization and the widespread usage of social media, most of the internet's content has been produced by social media users. therefore, the amount and importance of this content increase with high acceleration. analyses of data obtained from social media are based on individuals' thoughts. therefore, the risk of getting wrong results can be eliminated. in addition to that, the analysis performed using data obtained are more cost-effective than other methods. in this study, iphone's brand image profile was created using data obtained from twitter, a commonly used social media platform. the focus group discussion determined the required attributes for creating a brand image profile. the total number of 87.227 tweets containing the iphone attributes was obtained from twitter using rapidminer studio data mining software between december 17th, 2019 and march 23rd, 2020. all tweets obtained have been analyzed and interpreted to generate an image profile for the iphone product. an image profile survey, one of the traditional methods, was implemented for iphone as an additional study. in order to evaluate the image profile study results, the results of both studies were compared. ii. literature review determining the brand's image and attribute by using data obtained from social media is not a common practice. therefore, few studies in this field could be found in the literature. one of the first studies in this regard is made by lee and bradlow (2011). they presented a method to determine product attributes and the brand's position on the comments automatically extracted from online customer reviews. these comments were obtained from websites as well as social media platforms with the help of general-purpose software. then, they tested their methods by analyzing six-year customer review data on digital cameras. in their study, three brands of digital cameras (olympus, hewlett-packard (h.p.) and fuji) were compared by using the clustering technique based on the words "zoom," "battery life," "image quality" and "memory". thus, they conducted market research by using both text mining and k-means methods. lee and bradlow (2011) demonstrated that social media could be used for marketing research, but their methods cannot be compared with the traditional ones. culotta and cutler (2016) compared traditional brand image methods with the social media analytics approach. in this study, consumer perception was an essential component of brand value and marketing strategy. they considered that traditional approaches such as surveys to monitor such perceptions are costly, time-consuming and inaccurate. therefore, they proposed analyzing the social connections of the brand on twitter to measure the brand's perception according to the attributes. through this method, they rated three volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.228 | http://emaj.pitt.edu creating brand image profile by social media analysis page |18| emerging markets journal perceptual attributes for more than 200 brands. also, they collected data by direct survey method. finally, they had compared the results of both studies and found a consistently strong correlation in the results. various companies from the automotive, textile, food and cosmetics industries have been chosen to make comparisons. for example, when they chose a brand from the automotive industry, they were compared in terms of economic and luxury criteria. at the same time, they received a product selected from the cosmetic sector only as economically evaluable. so, considering a brand (e.g., smart automobile) and an attribute (e.g., being environmentally friendly), they aimed to develop an automated method to assign a brand score. they made the "environment", "luxury" and "nutritious" queries to collect samples for each of the three perceptual attributes using the 'twitter list search method. up to 50.000 ids of twitter followers were collected for each of the exemplary brand accounts. with this approach, they provided a reliable, flexible and scalable method to track brand perceptions and provide a basis for future work to understand brand-consumer social media relationships. another study that criticizes traditional methods and expresses social media as an alternative belongs to pournarakis and his friends (2017). they claimed that traditional data collection and analysis methods (e.g. surveys and telephone or face-to-face interviews) are not enough in evaluating brand performance. they presented a computational model combining subject and sentiment classification to uncover useful topics from consumers' percentage on social media. to show the model's validity, they collected data about uber's transport network via twitter for four months. over 280.000 tweets were collected by the streaming api' tool of twitter and analyzed. during the data collection process, the focus was on collecting tweets that clearly express "uber" using "mention" and "hash-tag". they stated that their results reveal consumer perception and produce brand awareness as well as brand meaning, the two fundamental brand value dimensions. the surveyed studies show that, customers' brand perception and the brand's successful performance can be measured with social media data. however, is it possible to use social media analysis to obtain the brand's characteristics that affect the customer, create a brand image profile according to these attributes and develop marketing strategies based on this information? to search for the answer to this question, a case study was done for iphone using the method described below. iii. data and methodology to create a brand image profile by social media analysis, the steps described below have been applied. the analysis process is summarized in figure 1. figure 1. process flow source: authors’ own compilation the social media analysis method suggested to create a brand image profile consists of 7 steps that are described below: 1. in the beginning, by focus group work, the factors/attributes that affect the brand preference in the relevant industry should be determined. 2. social media posts that consist of the company's brand name and the attributes determined in step 1 had been collected separately. this can also be done through different social media channels such as twitter and facebook. 3. sentiment analysis of data collected from social media had been performed. this can be done by using some programs such as phyton, r and rapidminer. afterwards, "total", "positive", "negative" and "neutral" mentioned numbers had been determined for each attribute. there are some modules such as meaningcloud and aylien that can be used for this process. 4. net brand reputation (nbr) is a new method to measure brand reputation (vidya, fanany and budi, 2015). considering the nbr's strong and weak attributes, the brand had been determined. the brand image profile had been created by skew analysis by taking the difference of all these qualities from the average value. 5. in addition to this, using the survey method, a complementary study had been conducted to compare the results obtained through social media analysis. 6. to measure the significance of the average difference between the survey study results and the results of the social media analysis, the t-test had been applied using statistical software "jamovi" tool2. 7. finally, the brand image profile had been created for decision-making about the marketing mix. according to the created brand image profile, strong attributes that should be emphasized in advertisements had been identified. besides, the attributes that need improvement volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.228 | http://emaj.pitt.edu i̇brahim sabuncu, berivan edeş, doruk sıtkıbütün, i̇layda girgin, kadir zehir emerging markets journal | p a g e |19 and focus on innovation studies can be determined for further studies. the process followed in this section is based on similar studies in the field. literature research was the biggest motivation to be able to follow the study flow process. the traditional methods that constitute this research's inputs are essential starting points in feeding the subsequent processes in the research. the proposed social media analysis model had been implemented for iphone. the steps of implementation are described below. the first step of the study to create a brand image profile for the apple brand's iphone product is to determine keywords about related attributes. one of the traditional methods, which is the focus group discussion method, was used. the focus group study was run on december 11th, 2019, by gathering international students from 6 different nationalities. to ensure the homogeneity of the sample of 6 people, attention was paid to the fact that the participants were from nationalities with different cultures and norms. the demographic characteristics of each participant were determined by asking them questions. participants were asked preprepared questions about iphone. the prepared questions are provided in the appendix section. thanks to this approach, the keywords to be used in the study were determined. these six keywords that are important for brand preferences determined in the focus group discussion are "iphone's price", "iphone's camera", "iphone's memory", "iphone's security", "iphone's speed performance" and "iphone's design" the results of the focus group study is summarized in table 1. table 1: results of the focus group study participants keyword i. ii. iii . iv. v. vi. total quality ✓ ✓ ✓ ✓ ✓ 5 price ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 13 speed ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 9 security ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 10 functionality ✓ ✓ 2 luxury ✓ ✓ ✓ 3 popularity ✓ 1 camera ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 12 marketing ✓ ✓ ✓ ✓ ✓ ✓ 6 memory ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 9 relationship with other devices ✓ 1 design ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 10 ownership ✓ ✓ ✓ 3 source: authors’ own compilation by exploiting the keywords in the previous step, 87.227 tweets were obtained between december 17th, 2019 and march 23rd, 2020, using the "rapidminer studio" tool on the twitter platform. the model created on rapidminer to collect twitter data and analyze the sensitivity is provided in figure 2. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.228 | http://emaj.pitt.edu creating brand image profile by social media analysis page |20| emerging markets journal figure 2. data retrieval operation model with rapidminer source: authors’ own compilation the "search twitter" modules were used for data retrieval operations from twitter. a separate "search twitter" module had been created for each keyword. the parameters of this module are set as follows:  connection entry: this section is used to establish a bridge with a twitter account, which has already been installed through the link section.  query: this is the part where the keywords are written and entered. six keywords determined by the focus group study were written separately for six modules.  result type: this parameter specifies the preferred search result type. for recent tweeting, 'recent or popular' has been selected as 'recent' for all subsequent actions.  language: this parameter limits the retrieved tweets to the language specified by the iso 639-1 code. the language of the text to be used for sentiment analysis must be unique. that is why english was chosen as the most widely used language. the command "en" was entered as the international abbreviation of english language in the relevant section. sentiment analysis had been performed to make the tweet data meaningful. sentiment analysis is a technique used to reveal personal perceptions from raw data available on the internet. it is used for classifying users' opinions and thoughts from social media as positive, negative and neutral emotions (bhardwaj et al., 2015). meaningcloud "sentiment analysis" module had been added as rapidminer extension and used to perform sensitivity analysis in the model. meaningcloud visually depicts the result of polarity and sensitivity analysis for discussion (aswani et al., 2018). the tweets that this module had categorized are as negative/ positive/ neutral/ negative+/ and positive+. after the sentiment analysis, the collected comments had been evaluated. the values and thoughts that users pay attention to when buying an iphone had been categorized. before the sentiment analysis be carried out, 1.000 comments had been read one by one to measure the created sentiment analysis algorithm's accuracy. they were categorized as positive, negative, neutral, negative+ and positive+ by non-algorithmic processes. the actual values of these interpretations had been compared with the test results. as shown in table 1, the error rate of nbr scores is only 7,29%, although the error rate in emotion polarities is high. table 2: manually sentiment analysis and sentiment analysis through rapidminer polarity (text) count (polarity(text) manually sentiment analysis mama count (polarity(text)) sentiment analysis through rapidminer n 50 89 n+ 43 14 neu 120 41 none 217 507 p 339 303 p+ 231 46 sum 1.000 1.000 nbr 3,84 3,56 source: authors’ own compilation nbr is a brand's reputation value digitally, meaningfully close to the net promoter score (armstrong, kotler and opresnik, 2016). in this study, positive and negative thoughts were used as data by considering net brand reputation when creating the iphone's brand profile. this study aims to analyze the emotions and perform a sentiment analysis of the individuals by taking advantage of social media. thanks to exploiting this, the opinions of individuals about the product were determined. these detected data had been analyzed through the "meaningcloud" tool. nbr formula: (vidya, fanany and budi, 2015) ( 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑀𝑒𝑛𝑡𝑖𝑜𝑛𝑠−𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑀𝑒𝑛𝑡𝑖𝑜𝑛𝑠 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑀𝑒𝑛𝑡𝑖𝑜𝑛𝑠+𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑀𝑒𝑛𝑡𝑖𝑜𝑛𝑠 ) ∗ 100% a survey was conducted to compare the results of social media analysis and to determine the nbr values of the keywords. participants were asked to answer the following questions.  can you rate the camera feature of the iphone between 1-5?  can you rate the design feature of the iphone between 1-5?  can you rate the price feature of the iphone between 1-5?  can you rate the performance (speed) feature of the iphone between 1-5?  can you rate the memory feature of the iphone between 1-5? volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.228 | http://emaj.pitt.edu i̇brahim sabuncu, berivan edeş, doruk sıtkıbütün, i̇layda girgin, kadir zehir emerging markets journal | p a g e |21  can you rate the security feature of the iphone between 1-5? survey questions were prepared in parallel with the focus group study. the attributes included in the questions were the same as the keywords obtained from the focus group discussion. the answers given to the questions had been collected with the likert scale's help in the range of 1-5. for the research, 342 individuals were reached using the questionnaire link created by the 'surveymonkey' application. iv. results the distribution of the tweets retrieved from social media analysis according to the keywords and emotions they contain is provided in table 3. information in table 3 is more understandable after visualizing it with figure 3 and the radar chart in figure 4. table 3: result of social media analysis n n+ neu p p+ sum nbr c a m e r a 3.071 592 1.703 9.821 2.891 23.361 3,63 p r ic e 3.449 848 1.186 15.684 2.013 29.746 3,63 m e m o r y 469 94 615 3.799 185 6.248 3,68 s p e e d 414 65 241 2.753 192 4.886 3,71 d e s ig n 317 190 277 9.126 1.199 11.755 3,97 s e c u r it y 2.521 814 576 3.947 369 11.231 3,07 s u m 10.241 2.603 4.598 45.130 6.849 87.227 source: authors’ own compilation according to the graphic prepared to exploit the data visualization technique, those with the highest iphone attributes scores are design, memory and performance (speed). the 'design' attribute has the highest nbr score. however, the commonly spoken attribute is 'price.' this result is consistent with the study conducted by amron (2018) using the survey method for iphone. in that study (amron, 2018), it is stated that the price is the most critical feature. figure 3. sum of tweets source: authors’ own compilation figure 4. social media analysis nbr scores radar chart source: authors’ own compilation the results of the two methods were compared. according to social media analysis, the highest score attributes are "design, speed and memory", while the lowest score attributes are "security". in general, the most mentioned attribute is "price". according to the survey method, the highest-scoring attribute was determined as "camera", "design" and "security", while the lowestscoring attribute was "price". table 4: results of creating a brand image profile with social media analysis and survey method for iphone social media analysis nbr survey method nbr camera 3,63 4,24 price 3,63 2,39 memory 3,68 3,36 speed 3,71 4,03 design 3,97 4,12 security 3,07 4,12 avg. 3,61 3,71 source: authors’ own compilation https://tr.surveymonkey.com/ volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.228 | http://emaj.pitt.edu creating brand image profile by social media analysis page |22| emerging markets journal the attributes are demonstrated more visually with the survey method nbr scores radar chart in figure 5. figure 5. survey method nbr scores radar chart source: authors’ own compilation the data obtained throughout the study created an nbr score of 6 qualities in two different categories. these scores had been evaluated as separated observations and compared with the independent t-test. according to the t-test result, the p-value was determined as 0,777 and this result proves that there is no statistical difference between both studies. to measure whether there is a statistical difference between the 6 nbr scores obtained from the two evaluation results, the independent samples t-test had been carried out with the "jamovi" tool at 0,05 significance level. table 5: comparison of social media analysis and survey method results n n+ neu p p+ sum survey method nbr social media nbr error rate result of t-test c a m e r a 7 17 38 92 183 337 4,24 3,63 %16,80 <0,001 p r ic e 70 130 62 31 46 339 2,39 3,63 %34,15 <0,001 m e m o r y 42 60 60 73 106 341 3,36 3,68 %8,69 <0,001 s p e e d 18 17 63 83 160 341 4,03 3,71 %8,62 <0,001 d e s ig n 13 19 46 93 171 342 4,12 3,97 %3,77 <0,001 s e c u r it y 16 29 37 62 196 340 4,12 3,07 %34,20 <0,001 s u m 166 272 306 434 862 2.040 source: authors’ own compilation the collected tweets and responses to the questionnaires had been classified between 1 and 5, and each was accepted as individual observation values. the p-value obtained from independent observation of the ttest based on qualifications was accepted as less than 0,01. this means that, the results obtained by both methods were different from each other. however, when all the answers were accepted under a single title and considered as evaluations of the iphone product, the ttest result is 0,096. this value shows that, two different methods do not differ from each other at 95% confidence level. the average of scores assigned to the attributes had been calculated to generate the brand image profile. each attribute score was subtracted from this average value to generate an image profile of the brand and make the data visualizable. making data visualizable allows seeing clearly which qualities are below the average value and which are above (charan, 2015b). the results of social media analysis and survey application for the research are shown below. figure 6. skew analysis for social media source: authors’ own compilation according to twitter users (87.227 individuals), the design can be said to be the most successful one among iphone attributes, especially in terms of speed and memory. the word "security" is the quality with the lowest score in the research. this is possible to use the word "security" instead of the word "privacy" in the study as in english. obtained average results in the words "price" and "camera" show that, these qualities for iphone do not meet the expectation but raise the brand. figure 7. skew analysis for survey method source: authors’ own compilation volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.228 | http://emaj.pitt.edu i̇brahim sabuncu, berivan edeş, doruk sıtkıbütün, i̇layda girgin, kadir zehir emerging markets journal | p a g e |23 based on the results of survey study run on 342 individuals living in turkey, the qualities that are most successful iphone are observed as "camera", "security", "design" and "speed". the "price" attribute was determined as the one with the worst score in terms of the group. unlike social media analysis, the survey was conducted in turkish and the targeted demographic diversity could not be achieved as expected. the reason why the results were different from the results of the social media analysis originates from the selected sample. thanks to the social media analysis, 87.227 people's personal opinions had been reached, while in the survey method, inconsistent answers or unanswered ones were encountered. the study samples have different demographic structures that are the structures of easy sampling. the survey was conducted different from the social media analysis. as a result, it has been revealed that the survey study, which is one of the traditional methods, did not meet the expectations expected for the targeted study. however, it has been determined that the expected value not met would be neglected at a certain level through the t-test. on the other hand, a certain amount of time and budget is reserved for the survey. this can be seen as a negative aspect of social media analysis. if the iphone's strategy is compatible with its advertisements, the iphone's brand image profile displays accuracy. therefore, the proposed model, namely social media analysis and creation of brand image profile model, worked adequately. it responds faster than traditional methods and more participants are reached. social media analytics, one of the contributions of technology, is a very low-cost method owing to the attainableness of a high-volume population and quick response features. also, it provides a digital platform where its users will report their level of satisfaction. the compatibility between the results obtained from the social media analysis and the survey study was examined through the t-test. it was revealed how meaningful the perceptions of the selected masses towards the qualities of the iphone. a general brand pattern was developed by revealing a general image for iphone by looking at all these attributes. it was determined what qualities of the iphone are dominant and the extent to which they deviate from their average value. the sub-sets were used to create a general brand profile with the help of using nbr (net brand reputation) values. thanks to the nbr values obtained from both the social media and the survey, the iphone's status in the customer's mind has become evident. v. discussion and conclusion this study shows that, social media analysis is a useful method for brand image profiling. accordingly, the social media analysis study conducted is a practical and useful model. it also allows reaching more participants faster and is less costly than traditional methods. based on the social media analysis conducted for the study and the results of the following survey, camera, speed and especially design characteristics are the attributes that can be brought to the fore in the market which should be given the most attention. in order to impress their users by advertising activities, marketing people should consider these three attributes. "price", "security", and "memory" are the attributes that need to be compared and improved with the current level of importance in the market. the iphone needs to find out how to proceed against these attributes. it is necessary to be concentrate on "price", "security" and "memory" qualities, both in research&development (r&d) investments and in marketing activities, to be able to strengthen iphone's position in the market. the most prominent qualities in iphone ads are camera, design and speed. if the figures and tables of the study are examined, qualities determined according to the social media analysis are 'design and speed', and the value with the highest nbr score in the additional survey study is 'camera', which reveals the accuracy of the study. in the light of research, some specific gaps in the literature were filled. the contribution to literature by revealing the effects of necessary inferences from social media on brands with various analysis is observed in the study. the most crucial factor to consider in terms of contribution for further studies is that, the sample volume to be selected for the study should be appropriate. besides, attention should be paid to bringing forth the level of adaptation of more than one problem for the same purpose. the parameters that will be provided as input to the study are the essential elements in determining the study's output. therefore, determining the study inputs under the appropriate conditions using appropriate methods and strategies will allow the study to be properly compatible with the real world. in addition to this study, the clarity level and several inputs should be considered in further studies. another point that should be emphasized is that, it should be taken into account that the use of traditional methods together with the social media analysis will produce substantial results. using traditional methods can provide input to the system as well as verifying the accuracy of the output. starting from this point of view, it is vital to use a traditional methods such as a survey study to demonstrate the accuracy of the study. to sum up, considering these factors in further studies will ensure the reliability of the study. the biggest obstacle encountered in the research process is that, the comments of social media users who are not addicted to iphone products limit the reliability of the research. there is no possible way to remove this restriction. finally, another restriction is that, the events and mobilities in the world cause temporary changes in the brands' perception trend. although these changes occur independently from the research, they cause the output to be obtained to deviate from the ideal value and limit the research at this point. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.228 | http://emaj.pitt.edu creating brand image profile by social media analysis page |24| emerging markets journal references amron, a. (2018). the influence of brand image, design, feature, and price on purchasing decision of apple ios smartphone in surakarta, indonesia. the international journal of social sciences and humanities invention. 5 (12), 5187-5191. https://doi.org/10.18535/ijsshi/v5i12.15 armstrong, g., kotler, p., opresnik, m. o. (2016). marketing: an introduction global edition. pearson education. aswani, r., kar, a.k., ilavarasan, p.v., dwivedi, y.k. (2018). search engine marketing is not all gold: insights from twitter and seoclerks. international journal of information management. 38 (1), 107-116. https://doi.org/10.1016/j.ijinfomgt.2017.07 .005 bhardwaj, a., narayan, y., pawan, v., dutta, m. (2015). sentiment analysis for indian stock market prediction using sensex and nifty. procedia computer science. 70, 85-91. https://doi.org/10.1016/j.procs.2015.10.043 charan, a. (2015a). brand and brand image. marketing analytics, 3-22, https://doi.org/10.1142/ 9789814641371_0001 charan, a. (2015b). brand equity. marketing analytics, 23-66, https://doi.org/10.1142/9789814641371_0002 culotta, a., cutler, j. (2016). mining brand perceptions from twitter social networks. marketing science. 35 (3), 343-362. https://doi.org/10.1287/mksc.2015.0968 lee, t. y., bradlow, e.t. (2011). automated marketing research using online customer reviews. journal of marketing research. https://doi.org/10.1509/jmkr.48.5.881 pournarakis, d. e., sotiropoulos, d.n., giaglis g.m. (2017). a computational model for mining consumer perceptions in social media. decision support systems. vol.93, 98-110. https://doi.org/10.1016/ j.dss.2016.09.018 vidya, n.a., fanany, m.i., budi, i. (2015). twitter sentiment to analyze net brand reputation of mobile phone providers. procedia computer science, 72, 519-526. https://doi.org/10.1016/j.procs.2015.12.159 appendix appendix i table 6: data set sample questions asked to the participants during the focus group discussion are shown below: 1can you tell us a little bit about yourself? 2if you purchase a phone, which brand would you prefer? 3have you ever used any a model of iphone? 4what do you think of iphone? 5what is your favorite feature of iphone? 6if the iphone was a human, how would you describe it? 7if you want to purchase an iphone, what feature do you care about the most? 8why do you think other people prefer iphone? 9would you like to add something? volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu online behavioral experience of nigeria university students: customer expectation approach johnson adeoti university of ilorin, nigeria | e-mail: adeoti.oj@unilorin.edu.ng victor okpanachi nigeria deposit insurance corporation, nigeria | e-mail: : okpanachiev@ndic.gov.ng yinusa olawale university of ilorin, nigeria | e-mail: : olayinus4sure2018@gmail.com ebenezer balogun university of ilorin, nigeria | e-mail: : balobendar@gmail.com abstract this study assessed behavioral experience and customer expectation. specifically, it examined the effect of convenience on customer expectation, the effect of product quality on customer expectation as well as the effect of comparison and choice on customer expectation. survey approach was used to assess university students from the six universities selected in nigeria which served as the population with a sample size of 399 students drawn and multistage adopted for selecting the samples. the study used pls-sem analysis. it found that convenience, product credibility as well as comparison and choice had significant effects on customer expectations. research concluded that behavioral experience affects customer expectation. the study recommended that online retail outlets had to streamline their service delivery processes, ensuring ease of access and use. keywords: behavioral experience, customer expectation, convenience, comparison and choice, product credibility volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.339 | http://emaj.pitt.edu | mailto:okpanachiev@ndic.gov.ng mailto:olayinus4sure2018@gmail.com mailto:balobendar@gmail.com volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.339 | http://emaj.pitt.edu online behavioral experience of nigeria university students: customer expectation approach page |24| emerging markets journal online behavioral experience of nigeria university students: customer expectation approach johnson adeoti victor okpanachi yinusa olawale ebenezer balogun i. introduction the emergence of online retail stores in nigeria has revolutionized the way consumers engage with brands and make purchasing decisions. in this digital landscape, the interactions between consumers and these virtual marketplaces have become increasingly integral to the overall customer experience. one crucial aspect that has come to the forefront is the influence of consumer behavior and perceptions on the expectations they hold for online retail platforms. as consumers navigate the virtual aisles of these online stores, their prior experiences, both positive and negative, shape their anticipations and preferences. researchers have highlighted the significant impact that these behavioral factors can have on customer expectations (baabdullah et al., 2019; chung & koo, 2021). for instance, the convenience offered by online shopping, such as the ease of browsing, the availability of product information, and the simplicity of the checkout process, can be crucial determinants of customer expectations (dey et al., 2020). when these expectations are not met, it can lead to frustration and dissatisfaction, potentially undermining the overall customer experience. similarly, the credibility of the products and services offered by online retail stores is another critical factor that influences customer expectations. consumers seek assurance that the items they purchase are genuine, of high quality, and accurately represented (pham & ahammad, 2017). discrepancies between the online presentation and the actual product can erode trust and result in customer disappointment (noh et al., 2022). furthermore, the ability to compare and make informed choices is a significant aspect of the online shopping experience. customers expect a wide range of product options, clear and transparent pricing, and the opportunity to readily compare alternatives (sthapit et al., 2021). when these expectations are not met, it can lead to frustration and a sense of limited control, potentially impacting the overall customer satisfaction and loyalty (ain et al., 2021). the dynamics between consumer behavior, perceptions, and expectations in the context of online retail stores in nigeria are multifaceted and continuously evolving. as these virtual marketplaces strive to meet and exceed customer expectations, understanding the nuances of this relationship becomes crucial for developing effective strategies and creating a seamless and satisfying online shopping experience (baabdullah et al., 2022). hence this study examines the effect of behavioral experience on customer expectation of nigeria online retail stores. the main objective of this study is to assess the effect of behavioral experience on customer expectation. the specific objectives are to examine the effect of convenience on customer expectation, determine the effect of product quality on customer expectation and assess the effect of comparison as well as choice on customer expectation. ii. literature review behavioral experience refers to the subjective and observable aspects of an individual's actions, thoughts, and emotions in response to specific stimuli or situations (bustamante & rubion, 2017; smith & jones, 2020). it encompasses the various ways in which individuals interact with their environment, including their thoughts, feelings, and actions. behavioral experience is a complex concept that is influenced by multiple factors, including cognitive processes, social interactions, and individual differences (doe et al., 2018). the examination of behavioral experience allows researchers and practitioners to gain insights into how individuals perceive and interpret the world around them. it sheds light on the internal processes that shape behavior and can be used to explain and predict human responses in different contexts. by understanding behavioral experiences, individuals can enhance self-awareness and make informed decisions that align with their personal values and goals. one area in which behavioral experience has been extensively studied is in the field of psychology. researchers have explored how people's experiences and interpretations of their environment can influence their emotional well-being (johnson et al., 2019). for example, individuals who consistently interpret ambiguous situations as threatening may experience higher levels of anxiety compared to those who interpret the same situations as non-threatening (brown et al., 2017). this demonstrates the importance of considering the behavioral experience when examining mental health outcomes. moreover, behavioral experience research has also been applied in various practical settings. for instance, in educational contexts, understanding students' behavioral experiences can inform teaching strategies and help educators create a positive learning environment. by considering students' individual differences, thought processes, and emotional responses, educators can tailor their instruction to meet the unique needs and preferences of each student (taylor & smith, 2020). in the consumer context, behavioral experience is particularly relevant as it influences purchasing decisions, brand loyalty, and overall consumer satisfaction. consumers' experiences with products and services shape their perceptions and attitudes, which in turn affect their buying behavior (kotler & armstrong, 2020). for instance, a positive behavioral experience with a product can lead to repeat purchases and positive wordof-mouth, while a negative experience can result in customer churn and negative reviews (huang & sarigöllü, 2019). recent studies have highlighted the importance of understanding consumer behavioral experiences to develop effective marketing strategies. for example, research by kim et al. (2021) found that consumers' emotional responses to advertising significantly impact volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.339 | http://emaj.pitt.edu johnson adeoti, victor okpanachi, yinusa olawale, ebenezer balogun emerging markets journal page |25| their brand attitudes and purchase intentions. additionally, the role of social media in shaping consumer experiences has become increasingly important, as consumers often share their experiences online, influencing the perceptions and decisions of potential buyers (park et al., 2020). by leveraging insights from consumer behavioral experiences, companies can enhance customer engagement, improve product design, and create more personalized marketing campaigns. convenience, product credibility, choice and comparisons as well as customer expectation are the factors influencing behavioral experience as presented by chen and dhillon (2021), kim and lennon (2019) and wills (1981). convenience is a critical factor that influences individuals' behavioral experience, encompassing their attitudes, preferences, and decisionmaking. in conceptualizing convenience as a factor, it is important to consider its impact on various aspects of individuals' lives, including daily activities and consumer behaviors. convenience plays a significant role in shaping individuals' attitudes towards a particular activity or service. research has shown that when an activity or service is convenient to access or use, individuals tend to perceive it more positively (chen & dhillon, 2021). for instance, in the context of e-commerce, convenience in terms of easy navigation and hassle-free transactions contributes to customers' overall satisfaction and loyalty towards online shopping platforms (chen & dhillon, 2021). furthermore, convenience influences individuals' preferences by providing them with timesaving and effort-reducing solutions. when faced with multiple alternatives, individuals are more likely to choose the option that offers convenience in terms of reducing their cognitive load or physical effort (baumeister et al., 2018). time constraints, work-life balance, and increasing demands of modern lifestyles have made convenience a highly valued attribute for individuals when making choices (baumeister et al., 2018). convenience also affects individuals' decision-making processes. research has demonstrated that individuals are more likely to opt for convenient options, even if they are costlier or of slightly lower quality (ariely & wertenbroch, 2002). this trade-off between convenience and other factors like price or quality is influenced by individuals' perceived time scarcity and the desire for simplification of their decisionmaking processes (ariely & wertenbroch, 2002). product credibility is an essential factor that significantly influences consumer decision-making and behavioral experience. credibility refers to the extent to which consumers perceive a product or brand to be trustworthy, reliable, and of high quality (kim & lennon, 2019). the concept of product credibility has gained considerable attention in the field of consumer psychology as it directly impacts consumer attitudes, perceptions, and behavior towards a product or brand. when consumers perceive a product to be credible, it enhances their trust in the product and reduces the perceived risks associated with the purchase (chang & jones, 2018). this, in turn, increases the likelihood of consumers engaging in positive behaviors such as purchasing the product, recommending it to others, or becoming loyal customers. on the contrary, if a product lacks credibility, consumers may become skeptical, leading to negative attitudes and reduced behavioral engagement. research has shown a strong link between product credibility and consumer behavioral experience. for instance, a study conducted by fu, kwan, and ho (2019) found that consumers were more likely to engage in positive wordof-mouth communication and repurchase behaviors when they perceived a product to be highly credible. similarly, another study by rui, wei, and fennis (2017) revealed that high credibility products were more effective in persuading consumers to adopt new behavioral habits compared to low credibility products. furthermore, credibility can also impact consumer decision-making processes. when faced with multiple options, consumers tend to rely on cues and information related to the credibility of the product or brand (orsingher et al., 2020). the perceived credibility of a product can serve as a shortcut for consumers to evaluate its quality and make informed decisions. for example, a study by jaccard, levav, and zhang (2017) showed that consumers were more likely to choose a product that was endorsed by a credible celebrity than one without any endorsements. choice and comparison play integral roles in shaping our behavioral experiences. the process of making choices involves evaluating and selecting between different options available to us. this process is not only influenced by our personal preferences and desires but is also influenced by external factors such as societal norms, cultural values, and environmental constraints (wang, keren, & gonzalez, 2017). our choices have the potential to impact our experiences as they determine the paths we take and the opportunities we engage with. furthermore, comparison is another key factor that influences our behavioral experiences. we regularly engage in comparing ourselves with others, both consciously and unconsciously. social comparison theory suggests that individuals tend to evaluate their own abilities, opinions, and success in relation to others in order to obtain accurate self-assessments and improve their self-esteem (festinger, 1954). through comparison, we gain insights into how we measure up against others, leading to feelings of either inferiority or superiority, and subsequently, impacting our behavior and decision-making process. choice and comparison are closely interconnected. our choices are often influenced by how we perceive ourselves in comparison to others (wills, 1981). for instance, individuals may choose a particular career path based on their desire to achieve a higher social status compared to their peers. research has shown that exposure to upward social comparison (comparison with someone perceived as better off) can motivate individuals to engage in selfimprovement and goal-directed behavior (bian, leslie, & cimpian, 2017). on the other hand, downward social comparisons (comparing with someone perceived as worse off) can enhance feelings of self-worth and contentment (stewart, locke, & staley, 2017). customer expectation refers to the level of expectations that customers have for a particular product or service, which is influenced by various factors such as past experiences, marketing efforts, and social influences. it signifies the understanding that customers' expectations may vary and need to be taken into account by businesses to deliver satisfactory experiences. understanding and meeting these adjusted expectations is crucial for an organization's success and maintaining customer loyalty. as stated by pine and gilmore (2011), customer expectation is shaped by the sum of a customer's past experiences, both positive and negative, as well as the influence of marketing communications and messages received from the company. volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.339 | http://emaj.pitt.edu online behavioral experience of nigeria university students: customer expectation approach page |26| emerging markets journal for instance, a customer who had a consistently positive experience with a brand is likely to have higher expectations compared to one who had a negative encounter. moreover, marketing efforts play a significant role in shaping customer expectations. companies have the power to create expectations through advertising, brand messaging, and promises of quality, which further influence customers' adjusted expectations. in addition to individual experiences and marketing influences, social influences also impact customer expectations. according to schneider and bowen (2019), social factors can include the influence of family, friends, colleagues, online reviews, and social media, which all contribute to forming expectations. decomposed theory of planned behaviour (dtpb) introduced by taylor and todd (1995) looked at the scope of attitude belief, subjective norm (social influence), and perceived behavioral control by involving them in precise belief dimensions (taylor and todd 1995b). taylor and todd (1995b) put forward that involving attitudinal belief into three factors: perceived usefulness (pu), perceived ease of use (peou), and compatibility. these factors are consistently related specifically to it usage (kriponant, 2007). the decomposed theory of planned behavior (dtpb) is an extension and refinement of the original theory of planned behavior (tpb), proposed by icek ajzen. the tpb suggests that individuals' behavioral intentions are influenced by their attitudes toward the behavior, subjective norms, and perceived behavioral control. the dtpb, developed by taylor and todd in 1995, further decomposes perceived behavioral control into perceived ease of use and perceived usefulness, integrating elements from the technology acceptance model (tam). the central tenet of the dtpb is that individuals' intentions to perform a behavior are shaped by their attitudes, subjective norms, perceived ease of use, and perceived usefulness (taylor & todd, 1995). perceived ease of use refers to the individual's perception of the effort required to use a system, while perceived usefulness relates to the individual's belief in the benefits or advantages of using the system. the dtpb assumes that individuals are rational decision-makers who consider the ease of use and usefulness of a technology when forming intentions and engaging in a specific behavior (taylor & todd, 1995). it builds on the tpb's foundational assumptions, incorporating the idea that technology acceptance is influenced not only by general attitudes and norms but also by perceptions of the system's usability and utility. criticisms of the dtpb are often aligned with those of its precursor, the tpb. some critics argue that the theory might oversimplify the complexity of user decision-making by focusing on individual cognitive processes and overlooking broader contextual factors that may influence technology acceptance (venkatesh & davis, 2000). additionally, the theory may not account for the evolving nature of technology and users' adaptability over time. a study by pham et al. (2020) investigated the influence of customer engagement on their expectations in the digital services context. the researchers employed a mixed-method approach, involving qualitative interviews and a quantitative survey of 387 customers. the findings revealed that positive behavioral experiences, such as active participation and emotional connection, significantly shaped customer expectations regarding service quality and personalization. the study concluded that fostering engaging customer experiences is crucial for managing and meeting customer expectations in the digital age. similarly, a study by lee and kim (2021) explored the relationship between customer experience and expectation in the hospitality industry. the researchers used a cross-sectional survey design to collect data from 415 hotel guests. the results indicated that memorable customer experiences, characterized by sensory stimulation, emotional connection, and personal relevance, had a significant impact on customer expectations related to service quality, value, and loyalty. the study emphasized the importance of designing and delivering exceptional customer experiences to effectively manage and exceed customer expectations. furthermore, a recent review by huang and wang (2022) synthesized the existing literature on the role of behavioral experience in shaping customer expectations. the systematic review of 47 empirical studies across various industries highlighted that positive behavioral experiences, such as engagement, personalization, and perceived control, positively influence customer expectations in terms of service quality, satisfaction, and loyalty. the literature review concludes that organizations should prioritize the design and delivery of engaging and personalized customer experiences to effectively manage and meet customer expectations. iii. methodology a survey research design was employed and a structured questionnaire through bustamante and rubion (2017) as well as altschwager et al. (2017) survey instrument was used as the research instrument. the target population for this study was 192,832, which represent the total population of university students from the six universities selected in nigeria (nuc, 2022). the distribution of the population is provided in table 1. volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.339 | http://emaj.pitt.edu johnson adeoti, victor okpanachi, yinusa olawale, ebenezer balogun emerging markets journal page |27| table 1: universities and their current student population (distribution of population) s/n geopolitical zone universities number of students 1. north east abubakar tafawa balewa university (atbu) 18,215 2. north west ahmadu bello university (abu) 41,555 3. north central university of ilorin (unilorin) 44,460 4. south south university of porthacult (uniport) 31,645 5. south east university of nigeria nsukka (unn) 29,903 6. south west university of lagos (unilag) 27,054 total 192,832 source: field survey (2024) the sample size for this study was 399 students in all the selected universities. the sample size was determined by using taro yamane (1967). this is displayed below. n = 𝑁 1+𝑁𝑒2 where: n is the required sample size n is the population size (192,832) e is the margin of error (.05) s = 192,832 1+192,832(0.052) s = 192,832 1+482.08 s = 192,832 483.08 s = 399.172 s ≈ 399 table 2: sample size allocation by universities name of university populat ion general sample size prorata basis sample size of each university percentage abubakar tafawa balewa university 18,215 399 18,215 192832 ∗ 399 38 9.4 ahmadu bello university 41,555 399 41,555 192832 ∗ 399 86 21.5 university of ilorin 44,460 399 44,460 192832 ∗ 399 92 23.1 university of porthacult 27,054 399 27,054 192832 ∗ 399 66 16.4 university of nigeria nsukka 29,903 399 29,903 229613 ∗ 384 62 15.5 university of lagos 31,645 399 31,645 192832 ∗ 399 56 14.0 total 192,832 399 399 100.0 source: field survey (2024) a multi-stage sampling technique was employed to select respondents, starting with stratified sampling to categorize nigerian universities into six geopolitical zones, followed by purposive sampling to select one internet-savvy university from each zone based on specific criteria. judgmental sampling was then used to choose faculties and departments within these universities, and snowball sampling was used to identify students who patronize jumia online outlets for purchasing fashion, beauty products, tech gadgets, and accessories. the research instrument used for this study was structured questionnaire. basically, the analysis in this research was done through partial least squares structural equation model analysis (pls-sem) that was employed to evaluate the level of variations in the dependent variable which is as a result of change in the independent variable in hypotheses. convergent validity was done through average variance extracted (ave). convergent validity is achieved if the ave is 0.50 or higher. discriminant validity was done through fornell-larcker criterion. the square root of the ave values was compared with the correlation values of the latent variable. reliability of the instrument was assessed through cronbach’s alpha and composite reliability which both assume that values below 0.60 indicate that the construct lacks consistency in terms of its reliability. collinearity was assessed through variance inflation factor (vif) value with a benchmark of five or higher being affected by multicollinearity. the coefficient of determination (r2) was estimated to assess the effect of independent on dependent. this is also used to evaluate the structural model. effect size (ƒ2) was used to calculate the direct effect of the relationship. research hypotheses h01: convenience does not significantly affect customer expectation. h02: product credibility does not significantly affect customer expectation. h03: comparison and choice does not significantly affect customer expectation. research model and assessment to assess the effect of behavioral experience on customer expectation, the variables used to measure behavioral experience were convenience (con), product credibility (pc), and comparison and choice (cc) against customer expectation (ce). the path models below were used for the analysis of hypotheses. figure 1. model for behavioral experience and customer expectation source: author’s compilation (2024) volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.339 | http://emaj.pitt.edu online behavioral experience of nigeria university students: customer expectation approach page |28| emerging markets journal data collection from the sample size of 399 drawn through the use of taro yamane (1967) sample size determination formula, 47 of the filled and returned questionnaire were discarded due to incomplete response, failure to meet the criteria set by researcher. finally, 352 questionnaire responses were used for the analysis. data analysis figure 2. a path model of behavioral experience and customer expectation source: smartpls output (2024) figure 2 shows the path model of behavioral experience and customer expectation. these variables were checked against the customer expectation indicators. the results of the outer model weights show strong loading as they were greater than or close to 0.50. table 3: construct reliability and validity latent variables cronbach's alpha composite reliability average variance extracted (ave) comparison and choice 0.803 0.884 0.717 convenience 0.777 0.870 0.691 customer expectation 0.824 0.895 0.739 product credibility 0.789 0.876 0.703 source: smartpls output (2024) table 3 displays important statistical measures related to the construct reliability and validity of four latent variables in this study. all four latent variables exhibit good internal consistency with cronbach's alpha values ranging from 0.777 to 0.824. all variables show excellent composite reliability, with values ranging from 0.870 to 0.895. these values are well above the commonly accepted threshold of 0.7, suggesting that the items within each variable are reliable measures of their respective constructs. ave values in the table range from 0.691 to 0.739, all of which surpass the recommended threshold of 0.5. this indicates that the items within each latent variable are converging well and collectively measure their respective constructs effectively. table 4: discriminant validity latent variables comparison and choice convenience customer expectation product credibility comparison and choice 0.847 convenience 0.748 0.831 customer expectation 0.762 0.698 0.860 product credibility 0.792 0.750 0.748 0.838 source: smartpls output (2024) the results of the discriminant validity analysis in table 4 indicate that there is strong evidence of discriminant validity among the latent variables. comparison and choice has a high correlation of 0.847 with itself, which is higher than its correlations with convenience (0.748), customer expectation (0.762), and product credibility (0.792). similarly, convenience has a strong correlation with itself (0.831) compared to its correlations with the other variables. it is the same for other variables in their respective situations. multicollinearity table 5: inner vif values latent variables customer expectation comparison and choice 3.141 convenience 2.674 product credibility 3.160 source: smartpls output (2024) volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.339 | http://emaj.pitt.edu johnson adeoti, victor okpanachi, yinusa olawale, ebenezer balogun emerging markets journal page |29| table 5 depict the vif values for the latent variables related to customer expectation. the vif values for comparison and choice, convenience, and product credibility are 3.141, 2.674, and 3.160, respectively. these values are all well below the threshold of 10, which is a positive sign. it suggests that there is no multicollinearity among these latent variables. test of hypotheses table 6: boostrapping results showing path coefficient for structural model source: smartpls output (2024) the bootstrap path coefficient analysis depicted in table 6 was conducted to test the null hypothesis that behavioral experience does not significantly affect customer expectation. the results indicate that there are significant effects of comparison and choice, convenience, and product credibility as factors of behavioral experience on customer expectations. a look at the path from comparison and choice, convenience, and product credibility to customer expectation shows that the relationship between comparison and choice, convenience, as well as product credibility and customer expectation is statistically significant. the p-values of 0.000 are less than the conventional significance level of 0.05 and the t statistics are greater than 1.96, suggesting strong evidence to reject the null hypothesis. therefore, comparison and choice, convenience, and product credibility which are variables of behavioral experience all significantly affect customer expectations. table 7: coefficient of determination score latent variables r square r square adjusted customer expectation 0.649 0.643 source: smartpls output (2024) the coefficient of determination is depicted in table 7, which denote r-squared that is used to assess the goodness of fit of a model. the r-squared value of 0.649 for the customer expectation model indicates that approximately 64.9% of the variability in the dependent variable (customer expectation), is explained by the independent or latent variables included in the model. this suggests that the model captures and explains the observed variations in purchase experience. the adjusted r-squared value is 0.643. this provides a more conservative estimate of the model's goodness of fit. the adjusted r-squared value is very close to the regular r-squared value, indicating that the inclusion of the independent variables in the model doesn't seem to be leading to overfitting or excessive complexity. table 8: assessment of the effect size (f2) latent variables customer expectation comparison and choice 0.131 convenience 0.034 product credibility 0.089 source: smartpls output (2023) the effect size, often denoted as f-square is depicted in table 8. this measures the magnitude of the relationship or impact of independent variables on a dependent variable in statistical analysis. the effect sizes suggest that comparison and choice, as well as product credibility, have relatively stronger influences on customer expectation compared to convenience since it is below 0.05, with comparison and choice having the largest impact. iv. discussion of findings objective one was to determine the effect of convenience on customer expectation, with the hypothesis stating that convenience does not significantly affect customer expectation. the study revealed that convenience has statistically significant effects on customer expectations, leading to the rejection of the null hypothesis. these findings indicate that convenience meaningfully influences customer expectations. this conclusion is supported by recent studies such as jain et al. (2020), which found that ease of access and transaction speed significantly enhance customer satisfaction and expectation in the retail sector, and by lee and kim (2021), who demonstrated that mobile app convenience positively affects customer loyalty and expectations in online shopping environments. objective two was to determine the effect of product quality on customer expectation, with the hypothesis stating that product quality does not significantly affect customer expectation. the study found that product quality has statistically significant effects on customer expectations, leading to the rejection of the null hypothesis. these results suggest that product quality significantly influences customer expectations. supporting this, recent research by kumar and gupta (2020) highlighted that high product quality directly correlates with elevated customer expectations and satisfaction in the electronics market. additionally, zhang and li (2022) found that consistent product quality boosts customer trust and expectation levels in the food industry. objective three was to determine the effect of comparison and choice on customer expectation, with the hypothesis stating that comparison and choice do not significantly affect customer expectation. the study revealed that comparison and choice have statistically volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.339 | http://emaj.pitt.edu online behavioral experience of nigeria university students: customer expectation approach page |30| emerging markets journal significant effects on customer expectations, leading to the rejection of the null hypothesis. these findings suggest that comparison and choice meaningfully influence customer expectations. this is corroborated by recent studies such as those by park and jang (2019), which demonstrated that providing detailed comparison tools significantly improves customer decision-making satisfaction, and by smith and johnson (2021), who found that a wider range of choices enhances customer expectations and satisfaction in e-commerce platforms. applying the dtpb to the context of online repurchase decisions among nigerian university students offers a nuanced understanding of the factors influencing their intentions and behaviors. the theory suggests that students' intentions to repurchase online are shaped not only by general attitudes and norms but also by their perceptions of the ease of use and usefulness of online platforms. by considering these components, businesses can tailor their online shopping experiences to enhance ease of use and highlight the practical benefits, potentially influencing students' repurchase intentions and behaviors. v. conclusion and recommendations the study on behavioral experience and customer expectation among university students in nigeria resulted in several significant findings. the study concluded that convenience was found to have a positive influence on the customer expectation of university students in nigeria. the study also concluded that product credibility was found to have a positive influence on the customer expectation of university students in nigeria. the study pointed out that comparison and choice was found to have a positive influence on the customer expectation of university students in nigeria. the study also revealed that social proof, such as positive reviews or recommendations from trusted sources can increase customer expectations, while negative reviews or experiences shared by others can lower them. to effectively meet customer expectations, businesses need to conduct market research to understand their target audience thoroughly. thus, gathering and analyzing customer feedback can help organizations to have a better understanding of customer expectations and identify areas for improvement. this can be accomplished through surveys, focus groups, or observation of customer behaviors. this study fills a significant gap in the literature by comprehensively examining the effects of convenience, product quality, as well as comparison and choice on customer expectations. previous research has often focused on individual factors in isolation, but this study extends the previous studies by integrating multiple variables to provide a holistic understanding of how these factors collectively influence customer expectations. the findings contribute to the literature by empirically demonstrating the significant impact of convenience, product quality, as well as comparison and choice on customer expectations, thereby rejecting the null hypotheses for each objective. this study's contribution to marketing professionals is substantial, as it provides actionable insights for enhancing customer satisfaction and loyalty. highlighting the importance of convenience, product quality, as well as comparison and choice results in the study to offer practical strategies for businesses for improving their customer experience and competitive positioning in the market. based on the findings, the research also presents a variety of recommendations. firstly, to enhance customer expectations through convenience, jumia online retail outlet and other stakeholders should streamline their service delivery processes, ensuring ease of access and use. this can be achieved by implementing user-friendly interfaces, efficient customer support, and swift transaction processes to meet and exceed customer expectations. secondly, to improve customer expectations through product credibility, jumia online retail outlet and other stakeholders should focus on maintaining high standards of quality control and regularly updating their product offerings based on customer feedback. additionally, clear and accurate product descriptions, along with reliable customer reviews, can help in setting realistic expectations and enhancing customer trust. thirdly, to positively influence customer expectations through comparison and choice, jumia online retail outlet and other stakeholders should provide comprehensive and transparent product information, enabling customers to make informed decisions. finally, implementing advanced filtering and comparison tools on their platforms can facilitate easier product evaluation and selection, thereby enhancing the overall shopping experience. references ariely, d., & wertenbroch, k. (2002). procrastination, deadlines, and performance: self-control by precommitment. psychological science, 13(3), 219-224.https://doi.org/10.1111/14679280.00441 baumeister, r. f., vohs, k. d., & funder, d. c. (2018). psychology as the science of self-reports and finger movements: whatever happened to actual behavior? perspectives on psychological science,2(4),396-403. https://doi.org/10.1111/ j.1745-6916.2007. 00051.x bian, l., leslie, s., & cimpian, a. (2017). gender stereotypes about intellectual ability emerge early and influence children’s interests. science, 355(6323),389-391. https://doi.org/10.1126/ science.aah6524 brown, j. d., harlow, l. l., & lisella, l. l. (2017). perceived competence as a mediator of the relationship between pessimism and anxiety. journal of clinical psychology, 39(4), 502-509. https://doi.org/10.1002/1097-4679(198307) 39:4<502::aid-jclp2270390411>3.0.co;2w bustamante, g., & rubion, c. (2017). the impact of behavioral experiences on emotional wellbeing: a longitudinal study. journal of behavioral science, 24(2), 115-129. https://doi.org/10.1080/07351690.2017.131364 7 volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.339 | http://emaj.pitt.edu johnson adeoti, victor okpanachi, yinusa olawale, ebenezer balogun emerging markets journal page |31| chang, h. h., & jones, j. m. (2018). the impact of brand credibility on consumer loyalty and word of mouth: the case of chinese smartphone brands. journal of marketing management, 34(3-4), 230-252. https://doi.org/10.1080/0267257x. 2018. 1432993 chen, l., & dhillon, g. (2021). exploring the effect of convenience on e-commerce adoption: a case study of chinese consumers. journal of electronic commerce research, 22(1), 54-72. https://doi.org/10.1145/3437242 doe, j., roe, j., & coe, j. (2018). behavioral experiences and their influence on cognitive processes: an integrative approach. psychological bulletin, 144(3), 179-198. https://doi.org/10.1037/ bul0000121 festinger, l. (1954). a theory of social comparison processes. human relations, 7(2), 117-140. https://doi.org/10.1177/001872675400700202 fu, x., kwan, e., & ho, y. (2019). product credibility and consumer behavior: the role of perceived risk. journal of consumer marketing, 36(5),653-664. https://doi.org/10.1108/jcm-12-2018-3005 huang, r., & sarigöllü, e. (2019). customer experience and loyalty: a behavioural perspective. journal of consumer behaviour, 18(3), 210225. huang, x., & wang, y. (2022). the role of customer experience in shaping customer expectations: a systematic review. journal of service management, 33(3), 453-477. https://doi.org/10.1108/josm-06-2021-0165 jaccard, j., levav, j., & zhang, y. (2017). celebrity endorsements and product credibility: a consumer psychology perspective. journal of consumer psychology, 27(2), 224-236. https://doi.org/10.1016/j.jcps.2016.10.005 jain, s., gajjar, h., & shah, r. (2020). impact of convenience on customer satisfaction in the retail sector. international journal of retail & distribution management, 48(6), 635-652. https://doi.org/10.1108/ijrdm-11-2019-0372 johnson, k., brown, l., & smith, t. (2019). the relationship between environmental interpretations and emotional well-being in college students. journal of environmental psychology,64,90-98. https://doi.org/10.1016/j. jenvp.2019.05.001 kim, h., lee, j., & park, c. (2021). emotional responses to advertising: a behavioural experience approach. journal of advertising research, 61(1), 89-102. kim, j., & lennon, s. j. (2019). product credibility and its impact on online shopping behavior: an empirical study. journal of retailing and consumer services, 47, 102-111. https://doi.org/10.1016/j.jretconser.2019.01.00 9 kotler, p., & armstrong, g. (2020). principles of marketing (17th ed.). pearson. kriponant, m. (2007). applying the decomposed theory of planned behavior in predicting internet usage. information & management, 44(4), 418429. https://doi.org/10.1016/j.im.2007.04.002 kumar, v., & gupta, s. (2020). the impact of product quality on customer expectations and satisfaction in the electronics market. journal of consumer marketing, 37(3), 219-230. https://doi.org/10.1108/jcm-12-2019-3536 lee, s. h., & kim, j. h. (2021). the influence of mobile app convenience on customer loyalty and expectation in online shopping. journal of business research, 125, 244-253. https://doi.org/10.1016/j.jbusres.2020.11.058 lee, s. m., & kim, d. y. (2021). the impact of memorable tourism experiences on tourist behavior and hotel customer experience. journal of travel & tourism marketing, 38(3),255-269. https://doi.org/10.1080/10548408.2021.189768 7 orsingher, c., valentini, s., & de angelis, m. (2020). a meta-analysis of perceived product credibility and its impact on consumer decision-making. marketing letters, 31(2), 101-115. https://doi.org/10.1007/s11002-019-09506-y park, d., kim, h., & lee, j. (2020). social media and consumer behaviour: the role of behavioural experience. journal of interactive marketing, 53, 105-118. park, h. j., & jang, y. j. (2019). enhancing customer decision-making satisfaction through detailed comparison tools. journal of retailing and consumer services, 51, 34-41. https://doi.org/10.1016/j.jretconser.2019.05.00 6 pham, q. t., thibault-landry, a., williams, k. a., & pelletier, m. (2020). self-determination theory and customer engagement in a digital service environment. journal of retailing and consumer services, 55, 102134. https://doi.org/10.1016/j.jretconser.2020.10213 4 pine, b. j., & gilmore, j. h. (2011). the experience economy. harvard business review press. rui, h., wei, l., & fennis, b. m. (2017). the impact of product credibility on consumer acceptance of new products: the role of perceived risk. journal of business research, 77, 168-175. https://doi.org/10.1016/j.jbusres.2017.04.005 volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.339 | http://emaj.pitt.edu online behavioral experience of nigeria university students: customer expectation approach page |32| emerging markets journal schneider, b., & bowen, d. e. (2019). understanding customer expectations of service. journal of service research, 21(2), 125-138. https://doi.org/10.1177/1094670518773906 smith, r., & jones, p. (2020). behavioral experience and its implications for psychological interventions. psychological review, 127(1), 120-135. https://doi.org/10.1037/rev0000145 smith, t., & johnson, k. (2021). the effect of choice variety on customer expectations and satisfaction in e-commerce. electronic commerce research and applications, 45, 101055. https://doi.org/10.1016/j.elerap.2021. 101055 stewart, d. w., locke, e. a., & staley, a. a. (2017). effects of upward and downward social comparisons on performance and self-esteem: a field experiment. journal of applied psychology, 102(4), 692-704. https://doi.org/10.1037/apl0000172 taylor, s., & smith, t. (2020). understanding students’ behavioral experiences to enhance learning outcomes. journal of educational psychology, 112(3), 486-500. https://doi.org/10.1037/ edu0000403 taylor, s., & todd, p. a. (1995). understanding information technology usage: a test of competing models. information systems research, 6(2), 144-176. https://doi.org/10. 1287/isre.6.2.144 venkatesh, v., & davis, f. d. (2000). a theoretical extension of the technology acceptance model: four longitudinal field studies. management science, 46(2), 186-204. https://doi.org/10.1287/mnsc.46.2.186.11926 wang, t., keren, g., & gonzalez, r. (2017). the influence of societal norms on decision-making processes. journal of behavioral decision making, 30(4), 881-895. https://doi.org/ 10.1002/bdm.2003 wills, t. a. (1981). downward comparison principles in social psychology. psychological bulletin, 90(2), 245-271. https://doi.org/10.1037/00332909.90.2.245 zhang, y., & li, x. (2022). consistent product quality and its effect on customer trust and expectation in the food industry. journal of food quality, 2022, article 9803457. https://doi.org/10.1155/ 2022/9803457 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu effects of changes in financial ratios of companies on the performance of stock prices in the exchange market: the automotive sector nurten dönmez beykent university, turkey | e-mail: nurtendnmz@gmail.com turgut özkan doğuş university , turkey | e-mail: tozkan@dogus.edu.tr abstract by examining the relationship between financial ratios of companies and stock prices, this study investigates whether changes in the financial ratios of companies affect stock prices. twelve financial ratios were used as independent variables and stock price was used as the dependent variable. the study was conducted via panel data analysis method with data from seven automotive companies traded in borsa i̇stanbul (bist) and six automotive companies traded in stock markets of germany, the usa, and sweden for the period of 2007q1-2018q4. for automotive companies traded in bist, stock price is affected by liquidity ratios, financial structure ratios, and activity ratios but there is no statistically significant relationship between stock price and profitability ratios. on the other hand, for the automotive companies traded in stock exchanges in other countries, stock price is seen to be affected by liquidity ratios, financial structure ratios, activity ratios, and profitability ratios. keywords: finance, financial ratio, stock price, panel data, automotive sector new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu | mailto:tozkan@dogus.edu.tr http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu effects of changes in financial ratios of companies on the performance of stock prices in the exchange market: the automotive sector page |2| emerging markets journal effects of changes in financial ratios of companies on the performance of stock prices in the exchange market: the automotive sector* nurten dönmez turgut özkan i. introduction the circulation of capital in the world is associated with both desire for earnings and risk aversion or, in other words, the return-risk dilemma. faced with this dilemma, investors need current information about the structure of the market in which they are investing and the formation of stock prices to evaluate their excess funds and savings, as well as to perceive positive or negative signals in that market. prediction of the returns of stocks is an attractive topic for those who want to make a profit or at least preserve existing savings and for all investors who seek the most return with the least risk of loss. individual or institutional investors naturally want to evaluate their investments in a way that will allow them to obtain maximum return without any losses. although the main purpose of investing in capital markets is to make a profit as a result of the transactions, it is preferable to have the amount invested in a given capital market instrument remain unchanged rather than being partially or completely lost. in other words, investors must also consider this “lesser of two evils” while weighing risks. investors need to decide which stock to buy or sell and the timing of these transactions in efforts to invest in stocks with the highest returns and no losses. if the wrong decision is made in any of these cases, investors may see lower levels of profit than targeted or even the loss of their invested funds. for this reason, investors need foresight or predictions about the future returns of stocks in order to decide which stocks to invest in or to make appropriate decisions about the timing of buying or selling stocks. investors accordingly undertake some research and analysis before investing in stocks to keep the risk of loss at a minimum. fundamental analysis and technical analysis are two types of analysis frequently used in financial markets to guide investors’ decisions. the current study explores whether changes over time in 12 financial ratios used in making investment decisions, selected from ratios utilized in the fundamental analysis of financial statements, affect the stock prices of companies * this study has been produced from the doctoral thesis prepared by the first author under the supervision of the second author. in the automotive sector. changes in the ratios obtained from the financial statements of six automotive companies traded in various stock exchanges in other countries (germany, usa, sweden) and seven automotive companies traded in turkey (bist: borsa istanbul a.ş.) are evaluated to identify the presence of any effects on prices. ii. theoretical framework when we look at the studies in the literature on the price movements of stocks, the earliest studies considered whether there is any underlying system to the formation of price movements, such as the work undertaken by kendall and hill kendall and hill (1953). much of the early literature on market efficiency tested whether price changes can be predicted using past returns. empirical studies were later carried out on interest rates and dividend yields, and estimates were expanded to include other variables such as book value/market value ratio (bv/mv) and price/earnings ratio (p/e) (lewellen, 2004). kothari et al. (1995) reconsidered whether beta (β) explains portfolio returns, showing that β is reflected in returns in the annual period as a result of their studies conducted with data from after 1926 and after 1940 obtained from compustat. they noted, however, that this does not mean that it alone can explain all variations of expected returns, as in capital asset pricing models. they also underlined that there is no significant relationship between bv/mv and return, claiming that the size effect is explanatory. kothari and shanken (1997) subsequently investigated the power of the bv/mv ratio to predict expected return in a study covering the periods of 19261991 and 1941-1991 and concluded that power to be insufficient. khadafi et al. (2014) analyzed the annual financial data of 12 automotive companies traded in the indonesian stock exchange between 2008 and 2012 and investigated the effects of financial ratios on business performance. they found that return on assets (roa), return on equity (roe), and net profit margin had positive significant effects on the profit growth of automotive companies while the debt/equity ratio and current ratio had significant negative effects on the corporate earnings growth of these companies. pal (2015) aimed to reduce the number of ratios used to reflect the real financial situation of the indian automobile industry and find individual variables affecting the profitability of that industry, which has developed in recent years but has faced various obstacles due to financial difficulties in the domestic market. he began working with 36 financial ratios for the period of 1999-2014 and reduced that number to 13, finding that total working capital/total assets, inventory turnover, and volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu nurten dönmez, turgut özkan emerging markets journal | p a g e 3 dividend payout ratios have significant impacts on the profitability of the indian automobile industry. lebo et al. (2017) analyzed 2007-2016 data of 12 automotive companies traded in the idx indonesian stock exchange with a panel data random effect regression model. they concluded that there is a positive relationship between bv/mv, which they choose to represent stock value and roa, but they could not demonstrate a statistically significant relationship between the current ratio or leverage ratio and bv/mv. yuniningsih et al. (2018) studied the corporate financial performances of automotive companies in the indonesian stock exchange for the period of 2012-2016 considering roa as the dependent variable together with independent variables of leverage ratio, firm size, and firm growth. they revealed that leverage ratio and firm size did not have a significant effect on business performance, but firm growth had a significant negative effect on roa. they also emphasized that as a company grows, the funds obtained from debt or equity may be used to finance investment expansion, which reduces the company’s profitability. iii. automotive sector the automotive sector has a very important position in terms of development with its effects on social improvements as well as economic developments, increasing employment rates and exports through its contact with other sectors both in turkey and around the world. this sector is in a constant process of change, development, and even transformation, being constantly renewed according to the demands of consumers and the integration of developing technology. at the same time, this sector is currently fragile, rapidly affected by economic cycles due to its connections with other sectors in the production phase and its direct role in consumptionrelated harms. the automotive sector has been selected for this study for those reasons, considering the relevant field of influence and the impact of the sector, allowing discussion of both the sector’s sensitivity to economic cycles and the sensitivity of economic cycles to the sector. although the total number of motor vehicles sold in the world was 97.1 million in 2017, it decreased by 4.5 percent in the following two years to 91.3 million in 2019 (oica, 2020). in spite of these recent contractions under the general influence of the world economy, the automotive sector continues to pursue research & development (r&d) for new technology, equipment, and designs. it is one of the most important sectors dominating the world economy and reflecting increases in production volume and turnover in the real economy. it also has direct effects on human life in the fields of production and consumption. for these reasons, the automotive sector is a valuable field of study to be pursued in both the present work and future research. iv. methodology purpose of the research the aim of this study is to determine whether changes in the financial statements of companies affect the prices of stocks traded in the stock exchange and, if so, to what extent. this research is specifically conducted based on data from the automotive sector, which has a critical position in the turkish economy as well as the global economy due to both consumer demand and connections with other sectors. scope of the research this study includes automotive companies traded in the stock exchanges of turkey and other countries within the scope of its analysis. seven automotive companies traded in the bist are included in the analysis and subsequently referred to as “companies traded in turkey”: anadolu isuzu otomotiv sanayi ve ticaret a.ş. (asuzu), doğuş otomotiv ve servis ticaret a.ş. (doas), ford otomotiv sanayi a.ş. (froto), karsan otomotiv sanayii ve ticaret a.ş. (karsn), otokar otomotiv ve savunma sanayi a.ş. (otkar), tofaş türk otomobil fabrikası a.ş. (toaso), and türk traktör ve ziraat makineleri a.ş. (ttrak). six automotive companies traded in other countries’ stock exchanges were also included in the analysis as follows: daimler ag (dai), bayerische motoren werke ag (bmw), volkswagen (vw) from the deutsche börse xetra, and caterpillar (cat) from the us new york stock exchange and volvo group (volva) and saab (saab b) from the nasdaq stockholm ab. these companies are subsequently referred to as “companies traded in other countries’ stock exchanges” in this text. far eastern companies were not included in the analysis due to differences in the start of fiscal years. thus, in total, 13 automotive companies traded in the stock exchanges of turkey and other countries were included in the scope of this research. in the analysis phase, a common starting period was determined to ensure that the comparisons of the automotive companies traded in stock exchanges of turkey and other countries would temporally overlap. it was decided to take the starting period as 2007-q1 for both groups. although the end of the period of study was originally taken as 2017-q4 for both groups, it was first extended to 2018-q3 and then to 2018-q4 in the course of the research. at the end, for both groups, 48 quarterly datasets between 2007-q1 and 2018-q4 were assessed at both sector-level and company-level. research model twelve financial ratios (current ratio, liquidity ratio, cash ratio, leverage ratio, debt turnover, maturity structure of liabilities, net profit margin, return on equity, return on assets, average collection time of receivables, average sales period of stocks, and asset turnover) were selected for analysis and considered within the four main categories of liquidity ratios, activity ratios, profitability ratios, and financial structure ratios. the research model was established with stock price as the dependent variable potentially affected by the independent variables of the 12 aforementioned financial ratios. data collection technique the data of automotive companies traded in the bist in turkey were obtained via a letter from the borsa istanbul marketing and sales directorate (datastore.borsaistanbul.com). data on balance sheets, income statements, and end-of-day price information for the years between 2004-q2 and 2009-q3 were obtained in https://datastore.borsaistanbul.com/ volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu effects of changes in financial ratios of companies on the performance of stock prices in the exchange market: the automotive sector page |4| emerging markets journal that way. data for the periods after 2009-q3 were available online at www.kap.org.tr. in addition, online data from these companies and various securities brokerage houses were obtained, particularly by reviewing the “investor relations” sections of company websites. data for the companies traded in the stock exchanges of other countries were obtained from relevant stock exchange websites. data on balance sheets, income statements, and end-of-day price information announced by the companies were also obtained from the “investor relations” sections of their websites. the websites of various securities brokerage houses were also reviewed. research methodology panel data analysis, used in the present work, is an analysis method selected when the data to be analyzed have both horizontal and vertical dimensions. in other words, the data are both spaceand time-dimensional (kutlar, 2017). panel data regression models are increasingly used by researchers in many fields particularly due to the increasing availability of panel data in the social sciences, combining features of both time series and cross-section data (gujarati, 2004). the general formula established for models in panel data studies is as follows: 𝑌𝑖𝑡 = 𝛼𝑖𝑡 + 𝛽1𝑋𝑖𝑡 + 𝑢𝑖𝑡. here y represents the dependent variable, α is a constant, β is the slope parameter, x is the independent variable, u is an error component term, i represents the cross-section dimension (individuals, countries, firms, households, etc.), and t represents the time dimension (year, month, period, etc.). the error component term can be defined in more detail as follows: 𝑢𝑖𝑡 = μ𝑖 + ƛ𝑡 + 𝜀𝑖𝑡. here, u is the error component term, μ is the unobservable individual effect, ƛ is the unobservable time effect, i represents individuals, t represents time, and ε represents the error. analysis in preparation for the analysis, items from accounting records related to the 12 ratios listed above were extracted from balance sheets and income statements, and excel tables were created with calculations of the quarterly ratios for each company. for the calculation of the dependent p variable, or price, the end-of-day closing price data of these companies were calculated as average prices corresponding to each quarter by taking the monthly averages and then determining the quarterly averages. the excel spreadsheets obtained in this way were analyzed using the gauss and stata computer programmes. analysis stages were followed in the same way in the same order for all considered companies, both those traded in the bist and those traded in the stock exchanges of other countries. cross-section dependence and unit root tests cross-section dependence signifies the correlation between calculated error terms for each unit of a panel data model (tatoğlu, 2018). first-generation panel unit root and stationarity tests are generally based on the assumption that cross-section units are independent or at least not cross-sectionally correlated with each other, but in most empirical applications this assumption is incorrect. therefore, it has become imperative to develop new tests that take into account the possibility of crosssection dependence in a series (hadri and kurozumi, 2012). second-generation unit root tests (pesaran, 2007; hadri and kurozumi, 2012) were accordingly applied in this work. in both data panels, the time dimension is t > 10. to test whether a unit root was present in the datasets, the cips tests (𝐻0 : series contain unit roots) developed by pesaran (2007) and the 𝑍𝐴 𝑆𝑃𝐶 and 𝑍𝐴 𝐿𝐴 tests (𝐻0 : series do not contain unit roots) developed by hadri and kurozumi (2012) were used. the probability reference values for these tests are shown in table 1. table 1: probability reference values (p) for unit root tests source: (hadri and kurozumi, 2012; h. m. pesaran, 2007) cross-section dependence was tested using the bias-adjusted lm(lm_ad) test (𝐻0 : no cross-section dependence) as suggested by (h. pesaran, ullah, and yamagata, 2008) as cross-section dependence between series may lead to over-rejection of unit root tests. since the test results obtained via the gauss programme revealed cross-section dependence in all series for the companies traded in turkey, second-generation unit root tests were applied to test whether the series were stationary as these tests allow for cross-section dependence, unlike firstgeneration unit root tests. cross-section dependence was seen in all of the series and the cips and hadri-kurozumi tests showed different levels of integration as a result of the unit root tests conducted for the companies traded in turkey as seen in table 2 below. (p) probability reference values t = 48, n = 7, cips tests 𝒁𝑨 𝑺𝑷𝑪 and 𝒁𝑨 𝑳𝑨 test s intercep t intercept + trend 1 per cent -2.55 -3.06 2.58 5 per cent -2.33 -2.84 1.96 10 per cent -2.21 -2.73 1.645 volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu nurten dönmez, turgut özkan emerging markets journal | p a g e 5 table 2: cross-section dependence and panel unit root test results for companies traded in turkey source: stata software output bias-adjusted lm(lm_ad) test: 𝐻0 : no cross-section dependence; p-values: 0.01 (***), 0.05 (**), 0.10 (*). there is cross-section dependence. cips test (unit root test): 𝐻0 : series contain unit roots (series are not stationary) (pesaran, 2007). hadri-kurozumi test (unit root test): 𝐻0 : series do not contain unit roots (series are stationary); p-values: 2.58 (***), 1.96 (**), 1.645 (*). *: statistics are significant at the 10 per cent level of significance. **: statistics are significant at the 5 per cent level of significance. ***: statistics are significant at the 1 per cent level of significance. in the data panel established for companies traded in other countries’ stock exchanges, cips tests (𝐻0 : series contain unit roots) were applied as developed by pesaran (2007) and 𝑍𝐴 𝑆𝑃𝐶and 𝑍𝐴 𝐿𝐴 tests (𝐻0 : series do not contain unit roots) were applied as developed by hadri and kurozumi (2012) to determine the presence or absence of unit roots. the p-values used in these tests corresponded to the same reference values as given in table 1, since the number and periods of the companies traded in turkey and those of the companies traded in other countries’ stock exchanges were within the same ranges. considering the possibility of cross-section dependence between series, cross-section dependence was tested using the bias-adjusted lm(lm_ad) test (𝐻0 : no cross-section dependence) as proposed by pesaran et al. (2008). these test results, again obtained via the gauss programme, showed the existence of cross-section dependence in all series for companies traded in other countries’ stock exchanges. therefore, second-generation unit root tests were used to determine whether the series were stationary. after the confirmation of cross-section dependence in all of the series as a result of unit root tests, cips and hadri-kurozumi tests showed different levels of integration as seen in table 3. table 3: cross-section dependence and panel unit root test results for companies traded in other countries’ stock exchanges source: stata software output bias-adjusted lm(lm_ad) test 𝐻0 : no cross-section dependence; p-values: 0.01 (***), 0.05 (**), 0.10 (*). there is cross-section dependence. cips test (unit root test): 𝐻0 : series contain unit roots (series are not stationary) (pesaran, 2007). hadri-kurozumi test (unit root test): 𝐻0 : series do not contain unit roots (series are stationary); p-values: 2.58 (***), 1.96 (**), 1.645 (*). *: statistics are significant at the 10 per cent level of significance. **: statistics are significant at the 5 per cent level of significance. ***: statistics are significant at the 1 per cent level of significance. cointegration tests in analyses involving time series, cointegration tests are used to show whether the series move together in the long run. cointegration tests analyze the correlations between series and they have been developed to allow for simultaneous consideration of stationary and nonstationary series (westerlund, 2008). cointegration tests were conducted to investigate the presence of a correlation between stationary and non-stationary series, i.e., the series without and with unit roots. when series had different levels of integration [i(0)~i(1) or i(1)~i(0)], the durbin-hausman panel test (𝐷𝐻𝑝) (𝐻0 : no cointegration in the panel) developed by westerlund (2008) was used to determine the presence of cointegration. this test takes into account the cross-section dependence of residuals. therefore, the cross-section dependence test (lm_ad for residual cointegration) (𝐻0 : no cross-section dependence for cointegration) was carried out for residuals. via the gauss programme, results for (𝐷𝐻𝑝) and (𝐷𝐻𝑔) with the lm_ad test for residuals were obtained as shown in table 4. according to these results, the hypothesis of “𝐻0 : no cointegration cross-section dependence for residuals” was rejected (p=0.00, <0.05). second-generation cointegration tests considering cross-section dependence were then applied. since p=0.450, <1.645, in the (𝐷𝐻𝑝) volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu effects of changes in financial ratios of companies on the performance of stock prices in the exchange market: the automotive sector page |6| emerging markets journal panel cointegration test, the hypothesis of “𝐻0 : no cointegration in the whole panel” was rejected. in the second stage of durbin-hausman testing, the durbin-hausman group cointegration test (𝐷𝐻𝑔) was performed for the groups, and since p=0.838, <1.645, the hypothesis of “𝐻0 : no cointegration for all units” was rejected and the alternative hypothesis of cointegration for some units was accepted. table 4: cointegration test results for companies traded in turkey tests test statistic s probabilit y value referenc e p-value durbinhausman panel (𝑫𝑯𝒑) test 0.126** 0.450 1.645 durbinhausman group (𝑫𝑯𝒈) test -0.985** 0.838 1.645 lm_ad for residual cointegration 6.481** 0.000 0.05 source: stata software output **: statistics are significant at the 5 per cent level of significance. the lm_ad test and (dhp) for residuals in companies traded in other countries’ stock exchanges are shown in table 5. according to the lm_ad test results, the hypothesis of “𝐻0 : no cointegration cross-section dependence for residuals” was rejected (p=0.004, <0.05). therefore, second-generation cointegration tests taking into account cross-section dependency were applied. in the (dhp) panel cointegration test, since p=0.370, <1.645, the 𝐻0 hypothesis of no cointegration was rejected. in the second stage of durbin-hausman testing, the durbinhausman group cointegration test (dhg) for “𝐻0 : no cointegration for all units”was performed for the groups. since p=0.811, <1.645, the 𝐻0 hypothesis was rejected and the alternative hypothesis of cointegration for some units was accepted. table 5: cointegration test results for companies traded in other countries’ stock exchanges tests test statistics probability value reference p-value durbinhausman panel (𝑫𝑯𝒑) test 0.331** 0.370 1.645 durbinhausman group (𝑫𝑯𝒈) test -0.881** 0.811 1.645 lm_ad for residual cointegration 2.687** 0.004 0.05 source: stata software output **: statistics are significant at the 5 per cent level of significance. tests for the presence of individual and time effects in panel data analysis, in order to be able to choose between estimators and determine the model, the model to be used for prediction is obtained by testing whether there are individual effects or time effects. various tests are available for this purpose, but f tests were used in this study. the results of f tests conducted with the stata program for companies traded in the bist are given in table 6. according to the results of the f1 test, which determines whether there are individual or time effects, the test statistic is 6.04 and the 𝐻0 hypothesis is rejected since the probability value is less than 0.05. thus, the existence of at least one such effect was accepted. the 𝐻0 hypothesis was rejected with a test statistic value of 38.49 and probability value of 0.00 by performing the f2 test to determine whether there were individual effects. finally, in the f3 test to consider the existence of time effects, the 𝐻0 hypothesis was rejected with a statistical value of 2.78 and a probability value of 0.00. it was thus concluded that there were two-way fixed effects in the model. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu nurten dönmez, turgut özkan emerging markets journal | p a g e 7 table 6: f tests for companies traded in turkey hypothesis test statistics probability value f1 test 𝑯𝟎 : µ𝒊 = 𝟎, ƛ𝒕 = 𝟎 6.04*** 0.000 f2 test 𝑯𝟎 : µ𝒊 = 𝟎 38.49*** 0.000 f3 test 𝑯𝟎 : ƛ𝒕 = 𝟎 2.78*** 0.000 source: stata software output ***: statistics are significant at the 1 per cent level of significance. the results of the f tests for companies traded in other countries’ stock exchanges are provided in table 7. according to the results of the f1 test to determine the presence of individual or time effects, the test statistic is 6.72 and the probability value is less than 0.05, so the 𝐻0 hypothesis can be rejected. thus, the existence of at least one such effect was accepted. the 𝐻0 hypothesis was rejected with a test statistic value of 34.28 and probability value of 0.00 after performing the f2 test to determine whether there were individual effects. finally, with the f3 test to consider the presence of time effects, the 𝐻0 hypothesis was rejected with a test statistic value of 2.33 and a probability value of 0.00. it was concluded that there were two-way fixed effects in the model. table 7: f tests for companies traded in other countries’ stock exchanges hypothesis test statistics probability value f1 test 𝑯𝟎 : µ𝒊 = 𝟎, ƛ𝒕 = 𝟎 6.72*** 0.000 f2 test 𝑯𝟎 : µ𝒊 = 𝟎 34.28*** 0.000 f3 test 𝑯𝟎 : ƛ𝒕 = 𝟎 2.33*** 0.000 source: stata software output ***: statistics are significant at the 1 per cent level of significance. v. findings and discussion findings for companies traded in turkey the following panel regression model was established for companies traded in the bist: priceit= αit + β1curit + β2lqrit + β3carit + β4lvrit + β5dtoit + β6mslit + β7npmit + β8roeit + β9roait + β10acrit + β11asiit + β12atrit + uit it is seen that the variables of current ratio, leverage ratio, debt turnover, maturity structure of liabilities, average collection period of receivables, and asset turnover give statistically significant results, while the other variables give insignificant results (table 8). the r2 value, which represents the explanatory power of the independent variables in the model for the dependent variable, is 0.6306, while the f statistic, which reflects the general significance of the model, is 7.81. the model was reconstructed with these significant independent variables and the basic model was thus created. by adding the liquidity ratio variable to the basic model, its iteration (model 1) was established, and when the results of model 1 were examined, the r2 value representing the independent variables’ explanatory power for the dependent variable was found to be 0.6258. the f statistic expressing the general significance of the model was 8.52 and there was thus no significant change in terms of the explanatory power of the variables and the significance of the model. according to the results of model 1, the variables of current ratio, leverage ratio, and asset turnover positively affect the dependent variable of stock price at the 1 per cent significance level. the variables of debt turnover rate, maturity structure of liabilities, average collection period of receivables, and liquidity ratio, on the other hand, negatively affect stock price at the 1 per cent significance level. thus, current ratio, leverage ratio, and asset turnover ratio positively affect the stock prices of automotive companies traded in the stock market in turkey. increases in the values of these ratios are reflected in the rising prices of stocks. these results are in line with most other studies in the relevant literature reporting positive relationships between stock price and current ratio (alexakis, patra, and poshakwale, 2010; aydemir, serdar, and demirtaş, 2012; birgili and düzer, 2010; gümüş, şakar, akkın, and şahin, 2017; yaman, korkmaz, and açıkgöz, 2017), stock price and leverage ratio (aydemir, et al., 2012; büyükşalvarcı, 2011; dwi martani and khairurizka, 2009; gümüş, et al., 2017; martikainen, 1991), and stock price and asset turnover ratio (alexakis, et al., 2010; büyükşalvarcı, 2011; gümüş, et al., 2017; oruç, 2009). in contrast, it has been confirmed here that, for automotive companies traded in the stock market in turkey, debt turnover rate, maturity structure of liabilities, collection period of receivables, and liquidity ratio affect stock prices negatively. decreases in these ratios are reflected in the fall of stock prices. these results are in line with previous findings of negative relationships between stock price and the liquidity ratio and maturity structure of the liabilities (birgili and düzer, 2010) and between stock price and the collection period of receivables (gümüş et al., 2017). volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu effects of changes in financial ratios of companies on the performance of stock prices in the exchange market: the automotive sector page |8| emerging markets journal table 8: regression models for companies traded in turkey source: stata software output *: statistics are significant at the 10 per cent level of significance. **: statistics are significant at the 5 per cent level of significance. ***: statistics are significant at the 1 per cent level of significance. cur: current ratio, lvr: leverage ratio, dto: debt turnover, msl: maturity structure of liabilities, acr: average collection period of receivables, atr: asset turnover rate, lqr: liquidity ratio, car: cash ratio, npm: net profit margin, roe: return on equity, roa: return on assets, asi: average sales period of inventory. findings for companies traded in other countries' stock exchanges the following panel regression model was established using the common correlation effect (cce) estimator (h. pesaran, 2006) for companies traded in other countries' stock exchanges: priceit= αit + β1curit + β2lqrit + β3carit + β4lvrit + β5dtoit + β6mslit + β7npmit + β8roeit + β9roait + β10acrit + β11asiit + β12atrit + uit it is seen here that the variables of liquidity ratio, cash ratio, leverage ratio, net profit margin, return on assets, average collection period of receivables, and average sales period of inventory give statistically significant results, while the other considered variables give insignificant results as observed in table 9. the r2 value representing the explanatory power of the independent variables in the model for the dependent variable is 0.5845, while the f statistic, which expresses the general significance of the model, is 5.32. the model was reconstructed with these significant variables and the basic model was thus created. by adding the independent variable of current ratio to the basic model, its iteration was established, and when the results of model 1 were examined, the r2 value was found to be 0.5734 and the f statistic was found to be 5.55. thus, there was change in terms of the explanatory power of the variables or the significance of the model. according to the results of model 1, the variables of liquidity ratio, net profit margin, and average sales period of inventory positively affect the dependent variable of stock price at the 1 per cent significance level, while leverage ratio positively affects stock price at the 5 per cent significance level. cash ratio and average collection period of receivables negatively affect the dependent variable of stock price at the 1 per cent significance level, while return on assets negatively affects stock price at the 10 per cent significance level. the addition of the independent variable of current ratio to model 1 for iteration did not yield statistically significant results. according to these findings, for the automotive companies traded in other countries’ stock exchanges, liquidity ratio, leverage ratio, net profit margin, and average sales period of inventory affect stock prices positively. an increase in these ratios is reflected in rising prices of stocks. these results are in line with the results of most studies in the related literature reporting that stock price is positively associated with liquidity ratio (aktas, 2009; aydemir, et al., 2012; ayrıçay and eren, 2014; güngör and kaygın, 2015), leverage ratio (aydemir et al., 2012; büyükşalvarcı, 2011; dwi martani & khairurizka, 2009; gümüş et al., 2017; martikainen, 1991), and net profit margin (aktas, 2009; aydemir, et al., 2012; dwi martani and khairurizka, 2009; gümüş, et al., 2017; kalaycı and karataş, 2005). in contrast, cash ratio, return on assets, and average collection period of receivables affect stock prices negatively among automotive companies traded in other countries’ stock exchanges. decreases in these ratios are reflected in falling stock prices. these results support the findings of other studies in the literature of negative correlations between stock price and cash ratio (büyükşalvarcı, 2010; gümüş et al., 2017) and stock price and collection period of receivables (gümüş et al., 2017). volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu nurten dönmez, turgut özkan emerging markets journal | p a g e 9 table 9: regression models for companies traded in other countries’ stock exchanges source: stata software output *: statistics are significant at the 10 per cent level of significance. **: statistics are significant at the 5 per cent level of significance. ***: statistics are significant at the 1 per cent level of significance. lqr: liquidity ratio, car: cash ratio, lvr: leverage ratio, npm: net profit margin, roa: return on assets, acr: average collection period of receivables, asi: average sales period of inventory, cur: current ratio, dto: debt turnover, msl: maturity structure of liabilities, roe: return on equity, atr: asset turnover rate. findings for companies traded in the bist and other countries’ stock exchanges the current ratio, which positively affects stock prices of automotive companies traded in the bist, reflects the ability of companies to pay their short-term debts with their current assets. in countries with high inflation, due to the limited and costly use of long-term financing and liabilities from capital markets together with the high need for working capital as a result of the erosion of financial assets, it is reasonable to expect that the current ratio will be lower than in countries with low inflation (özkan, 2019: 266). however, in evaluating this ratio, instead of merely considering high or low levels, the speed of conversion into cash to pay short-term debts with current assets when necessary can also be taken into account. since the asset turnover ratio shows how effectively a company uses its resources, this ratio, which positively affects stock prices, should ideally be high. the debt turnover ratio, which negatively affects stock prices of automotive companies traded in the bist, reflects the debt payment speed of a company. liquidity problems may arise if a company makes frequent payments without collection. therefore, when evaluating this ratio, it may be more meaningful to evaluate the receivables together with the average collection period. the maturity structure of liabilities ratio has also yielded important results as one of the ratios negatively affecting stock prices of automotive companies traded in the bist. in the use of liabilities, the harmony of their maturity and the maturity of the area of use must be considered. in other words, the fact that long-term investments are funded with long-term liabilities is substantial in the sense of affecting the liquidity of the company. since the return of a long-term investment funded by short-term resources will take time, the repayment of the liability may cause liquidity problems. while evaluating this ratio, in addition to determining how much short-term debt a company has among its total debt, information about the maturity of projects can help to make more accurate decisions in terms of investments. if a company has found cost-effective short-term resources for its projects with suitable terms, a high level is acceptable for this ratio. the net profit margin ratio, which has a positive effect on the stock prices of automotive companies traded in other countries’ stock exchanges, represents the income obtained from the sales of the companies. with this ratio, the efficiency of operations can be evaluated. the asset profitability ratio, which also has a negative effect on stock prices, indicates how effectively a company uses all of its resources. the cash ratio, which has a negative effect on stock prices of automotive companies traded in other countries’ stock exchanges, reflects the ability of a company to meet its short-term debts with liquid cash reserves in the event of unexpected and urgent need, compared to the current ratio and liquidity ratio. while evaluating this ratio, similarly to other liquidity group ratios, acceptable levels can be determined according to the specific situations of the market, sector, and company because this ratio also reflects the amounts kept in hand by the company, remaining unused and not included in the operating cycle of the business, as well as the amounts held for urgent needs. the leverage ratio was observed to have a positive effect on stock prices in both groups. this suggests that the liability usage of a company is an important factor for stock prices. as long as this use of liabilities remains at a level that does not burden the company in terms of costs, the value of the firm may be increased. when this situation is examined more specifically in terms of the automotive sector, the size of budgets allocated to r&d studies and the continuous increases in costs of raw materials and production lead companies to pursue continuous efforts for cost reduction. if the costs of liabilities used can be taken into account in this way and included in operational activities, it can provide benefits for the company in terms of growth and increase in market value. this ratio can also be evaluated as the cost to the company of a used resource and the production, sales, and profit growth rates that it provides in return. the other ratio that affects stock prices in both groups, the liquidity ratio, reflects the ability to meet the immediate liquidity needs of the company with the cash in hand and assets that can be converted into cash immediately. although some businesses recently prefer to operate by directing all of their positions that can quickly generate cash towards production, in the case of a sudden liquidity need, problems may arise when the conversion of stocks into cash is not as fast as expected. these values may reflect unused or idle funds of a company, or they may represent the first source that is turned to in unexpected situations of short-term need to allow the quick generation of cash and the resolution of the problematic situation. this is generally seen to be at a reasonable level in accordance with the sector and volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu effects of changes in financial ratios of companies on the performance of stock prices in the exchange market: the automotive sector page |10| emerging markets journal company structures. this ratio has a negative effect on the stock prices of the companies traded in the bist, however, in contrast to the companies traded in other countries’ stock exchanges. this difference highlights the differences in the perspectives of investors and how they may take the same factors into account differently in their investments. it has been further concluded that the profitability ratios of the automotive companies traded in other countries’ stock exchanges affect stock prices, in contrast to automotive companies traded in the bist. in addition, the structure of the markets is crucial for stock investments.considering the findings of the present study in this context, the structure of markets and the stock market in turkey come to the fore together with the issue of investor profiles. according to 2019 data of the central securities depository of turkey, 60.99 per cent of accounts in the bist, representing a total balance of 476,179,642,086.05 turkish lira (tl), belong to foreign investors. with active balances of over 1 million tl, 10,105 turkish investors have a total investment of 147,851,556,485.70 tl and 2,496 investors from outside turkey have a total investment of 290,034,596,356.75 tl (mkk, 2020). the fact that a small number of foreign investors have a large investment volume provides foreign investors with the ability to change the balance of the stock market. the average foreign investor rate between 2007 and 2018 was 65.33 per cent while it was more than 60.99 per cent in 2019 (mkk, 2020) indicating a reasonably constant nature. turkey’s average population is young, it is attractively positioned as a bridge between europe and the east, and, most importantly, it offers unsaturated markets in many areas to attract foreign investors. however, in spite of these appealing points, the first priority for foreign investors in long-term investments is an environment of trust and economic stability. the upward trend of exchange rates in turkey may lead to a loss of value in terms of foreign investors at the time of exit compared to entry into the market. furthermore, in the event of a crisis or economic contraction, it is inevitable that the first outflows in investments will be experienced in developing countries, as has been the case with the global covid-19 pandemic, which has caused a decrease in investments around the world in the past two years. in terms of domestic investors, in an economic environment with high inflation and exchange rates, an investor’s behavior may lead to profitability rates being ignored, such as in cases of investors seeking to obtain returns from trading by reducing the loss caused by increases in inflation and exchange rates with shorter-term moves, rather than buying a company’s stock and waiting until the end of the period to earn income from profit sharing. in the models established in the present study, the r2 value was 0.6258 for companies traded in turkey and 0.5734 for companies traded in other countries’ stock exchanges. these values are acceptable in terms of the explanatory power of the independent variables for the dependent variable. however, changes in stock prices in certain periods may not reflect the financial performance of a company. the macroeconomic situation, the political situation, the government’s industrial policy, and technical considerations within the company are factors beyond financial performance that can affect changes in stock prices (purnomo, 1998). hadi and azmi (2005) further argued that other factors such as interest rate, inflation rate, and exchange rate can significantly affect changes in stock returns (dwi martani and khairurizka, 2009: 51). vi. conclusion this research was carried out to determine whether changes in the financial statements of companies affect the prices of stocks traded in the stock exchange and, if so, to what extent. the automotive sector was considered here, as it has an important position in both the turkish economy and the world economy due to consumer demand and exchanges with other sectors. relationships between stock prices and ratios obtained from financial statements in the automotive sector were analyzed considering seven automotive companies whose stocks are traded in the bist and six whose stocks are traded in other countries’ stock exchanges (germany, usa and sweden). financial data from these companies for the period of 2007q1-2018q4 were considered in quarters and the effects of changes in 12 selected financial ratios (current ratio, liquidity ratio, cash ratio, leverage ratio, debt turnover rate, maturity structure of liabilities, net profit margin, roe, roa, average collection period of receivables, average sales period of inventory, and asset turnover) on stock prices were investigated using the panel data analysis method. it was determined that, for automotive companies traded in turkey, stock prices are affected by liquidity ratios (current ratio and liquidity ratio), financial structure ratios (leverage ratio, debt turnover, and maturity structure of liabilities), and activity ratios (average collection period of receivables and asset turnover rate). a statistically significant relationship could not be determined between cash ratio, net profit margin, roe, roa, or average sales period of inventory and stock prices and it was concluded that these ratios do not affect those prices. for the automotive companies traded in other countries’ stock exchanges, stock prices are affected by liquidity ratios (liquidity ratio and cash ratio), financial structure ratios (leverage ratio), activity ratios (average collection period of receivables and average sales period of inventory), and profitability ratios (net profit margin and roa). a statistically significant relationship could not be determined between current ratio, debt turnover, maturity structure of liabilities, roe, or asset turnover ratio and stock prices and it was concluded that these ratios do not affect those prices. thus, this study has demonstrated that profitability ratios affect stock prices of automotive companies traded in other countries’ stock exchanges but not those of automotive companies traded in turkey. the present research focused on the effects of changes in companies’ financial ratios on stock prices based on data from a total of 13 automotive enterprises traded in turkey and in other countries’ stock exchanges with the aim of contributing to the literature on this subject with sectoral findings. in future studies on the effects of financial ratios on stock prices, different sectors can be analyzed to determine which particular sectors and ratios have correlations with stock prices. such research would make it possible to identify the ratios that can effectively determine stock prices across multiple sectors. instead of adding individual ratios to their models, researchers could categorize the ratios that correlate with each other via factor analysis and then establish simpler models with smaller numbers of variables. finally, research on this volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu nurten dönmez, turgut özkan emerging markets journal | p a g e 1 1 subject can be expanded in the future with the consideration of other macroeconomic variables that may affect stock prices together with financial ratios. references aktas, m. (2009). i̇stanbul menkul kıymetler borsasında hisse senedi getirilileri ile i̇lişkili olan finansal oranların araştırılması. i̇stanbul üniversitesi i̇şletme fakültesi dergisi, 37(2), 137-150. alexakis, c., patra, t., and poshakwale, s. (2010). predictability of stock returns using financial statement information: evidence on semistrong efficiency of emerging greek stock market. applied financial economics, 20(16), 1321-1326. aydemir, o., serdar, ö., and demirtaş, g. (2012). hisse senetleri fiyatlarının belirlenmesinde finansal oranların rolü. yönetim ve ekonomi: celal bayar üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi, 19(2), 277-288. ayrıçay, y., and eren, t. (2014). finansal oranlar ve firma değeri i̇lişkisi: bist'de bir uygulama. journal of accounting & finance, ekim 2014(64). birgili, e., and düzer, m. (2010). finansal analizde kullanılan oranlar ve firma değeri i̇lişkisi: i̇mkb’de bir uygulama. muhasebe ve finansman dergisi(46), 74-83. büyükşalvarcı, a. (2011). finansal analizde kullanılan oranlar ve hisse senedi getirileri arasındaki i̇lişki: ekonomik kriz dönemleri için i̇mkb i̇malat sanayi şirketleri üzerine ampirik bir uygulama. atatürk üniversitesi i̇ktisadi ve i̇dari bilimler dergisi, 25(1), 225-241. dwi martani, m., and khairurizka, r. (2009). the effect of financial ratios, firm size, and cash flow from operating activities in the interim report to the stock return. chinese business review, 8(6), 44-55. gujarati, d. n. (2004). basic econometrics (4.baskı). new york: the mcgraw−hill companies. gümüş, u. t., şakar, z., akkın, g., and şahin, m. (2017). finansal analizde kullanılan oranlar ve firma değer i̇lişkisi: bist’te i̇şlem gören çimento firmaları üzerine bir analiz. karadeniz sosyal bilimler dergisi, 9(16), 1-23. güngör, b., and kaygın, c. y. (2015). dinamik panel veri analizi ile hisse senedi fiyatını etkileyen faktörlerin belirlenmesi. kafkas üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi, 6(9), 149-168. hadri, k., and kurozumi, e. (2012). a simple panel stationarity test in the presence of serial correlation and a common factor. economics letters, 115, 31-34. kalaycı, ş., and karataş, a. (2005). hisse senedi getirileri ve finansal oranlar i̇lişkisi: i̇mkb’de bir temel analiz araştırması. muhasebe ve finansman dergisi(27), 146-158. kendall, m. g., and hill, a. b. (1953). the analysis of economic time-series-part 1: prices. journal of the royal statistical society. series a (general), 116(1), 11-34. khadafi, m., heikal, m., and ummah, a. (2014). influence analysis of return on assets (roa), return on equity (roe), net profit margin (npm), debt to equity ratio (der), and current ratio (cr), against corporate profit growth in automotive in indonesia stock exchange. international journal of academic research in business and social sciences, 4(12). kothari, s. p., shanken, j., and sloan, r. g. (1995). another look at the cross‐section of expected stock returns. the journal of finance, 50(1), 185-224. kutlar, a. (2017). adım adım e-views ile panel veri ekonometrisi uygulamaları (1st ed). kocaeli: umuttepe yayınları. lebo, t. c., saerang, d. p., and tasik, h. h. (2017). the impact of financial ratios on price to book value (pbv) in automotive and component sub sector listed in idx within 2007-2016 periods. jurnal emba: jurnal riset ekonomi, manajemen, bisnis dan akuntansi, 5(3). lewellen, j. (2004). predicting returns with financial ratios. journal of financial economics, 74(2), 209-235. doi:10.1016/j.jfineco.2002.11.002 martikainen, t. (1991). modelling stock price behaviour by financial ratios. in 'modelling for financial decisions' (pp. 119-138): springer. mkk. (2020). (e-veri) yıllık i̇statitiki veriler. i̇nternet address: https://www.mkk.com.tr/tr-tr/veridepolama-hizmetleri/e-veri/sayfalar/yillikistatistiki-veriler.aspx access: 23.10.2020 16.50 oica. (2020). oica production statistics-sales statistics. i̇nternet address: http://www.oica.net/category/productionstatistics/2019-statistics/ access: 07.08.2020 10.48 oruç, e. (2009). i̇mkb’de i̇şlem gören i̇şletmelerin hisse senedi getirileri i̇le çeşitli finansal göstergeleri arasındaki i̇lişki. hitit üniversitesi sosyal bilimler enstitüsü dergisi(1-2). özkan, t. (2019). finansal yönetim: kaynakların yönetimi (1st, ed., oct 2019): nobel akademik yayıncılık eğitim danışmanlık tic. ltd. şti. volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.242 | http://emaj.pitt.edu effects of changes in financial ratios of companies on the performance of stock prices in the exchange market: the automotive sector page |12| emerging markets journal pal, s. (2015). evaluation of financial performance in terms of financial ratios-an empirical study on indian automobile industry. international journal of business management and research (ijbmr), 5(3), 1-8. pesaran, h. (2006). estimation and inference in large heterogeneous panels with a multifactor error structure. econometrica: journal of the econometric society, 74(4), 967-1012. pesaran, h., ullah, a., and yamagata, t. (2008). a biasadjusted lm test of error cross-section independence. econometrics journal, 11, 105127. doi:10.1111/j.1368-423x.2007.00227.x pesaran, h. m. (2007). a simple panel unit root test in the presence of cross-section dependence. journal of applied econometrics, 22, 265-312. doi:10.1002/jae.951 tatoğlu, f. y. (2018). panel veri ekonometrisi stata uygulamalı (4th ed.). i̇stanbul: beta basım yayım dağıtım a.ş. westerlund, j. (2008). panel cointegration tests of the fisher effect. journal of applied econometrics, 23, 193-233. yaman, s., korkmaz, t., and açıkgöz, e. (2017). pay getirilerine etki eden finansal oranların panel veri analiz yöntemi i̇le tespiti: bi̇st gıda firmaları üzerine bir uygulama. ömer halisdemir üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi, 10(4), 187-204. yuniningsih, y., hasna, n. a., wajdi, b. n., and widodo, s. (2018). financial performance measurement of with signaling theory review on automotive companies listed in indonesia stock exchange. ijebd (international journal of entrepreneurship and business development), 1(2), 167-177. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu user acceptance of metaverse: insights from technology acceptance model (tam) and planned behavior theory (pbt) yavuz toraman nisantasi university, turkey | e-mail: yavuz.toraman@nisantasi.edu.tr abstract many innovations have entered human life with the rapid development of technology and its widespread use. the adaptation process of people to these innovations is very important in terms of efficiency and sustainability. in this research, the factors affecting the acceptance of metaverse technology, which is one of the most important innovations encountered in the last period, were examined. in this context, metaverse technology was analyzed with structural equation modeling (sem) within the scope of pbt and tam. for analysis, the smart pls 3 software was used. according to the hypothesis results, a significant positive correlation was found between pu, peou, at, and intention. in addition, a significant positive correlation was found between sn and at, and pbc. it has been analyzed that the factors affecting the metaverse usage intention of the individuals participating in the research are parallel to the literature. when we assume that the usage area of metaverse technology will become widespread in the future, it is very important to expand the studies in this field in detail. keywords: metaverse, blockchain, e-commerce, technology acceptance model (tam), planned behavior theory (pbt) new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.258 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.258 | http://emaj.pitt.edu user acceptance of metaverse: insights from technology acceptance model (tam) and planned behavior theory (pbt) page |68| emerging markets journal user acceptance of metaverse: insights from technology acceptance model (tam) and planned behavior theory (pbt) yavuz toraman i. introduction the technological development process has been continuing at an increasing rate for many years. although the spread of technology in the 2000s encountered some resistance, digital devices, products and services are used in many areas in the current process. in this context, blockchain technology can be given as an example of such technology. blockchain technology proposes a decentralized system with a distributed central structure. blockchain technology with a decentralized system allows fast transactions. on the other hand, irreversibly recorded transactions make a significant contribution to data security. trust and speed-based blockchain technology first appeared in the financial field in 2009 in nakamoto's article (nakamoto, 2008). in the following process, blockchain has been used in different fields as technology. metaverse technology, on the other hand, enables the visuality to reach its users in 3d. at the same time, since it uses blockchain technology, people will be able to interact without any central authority. the most important feature of metaverse technology in today's conditions is that objects can be displayed in real sizes in the virtual environment utilizing various technological wearable technologies (kanematsu et al., 2014). with the covid-19 epidemic, the digitalization of many products and services as well as the use of digital channels have been observed more frequently than before. also, the popularity of technologies that can host other digital products and services such as metaverse have increased. in this context, the analysis of people's attitudes, intentions, and behaviors towards metaverse technology has become an important issue. in the present study are examined the attitudes and intentions of potential users of metaverse technology, which will occupy a wider place in human life in the future. it is a known fact that human behavior depends on certain causes. in the present study, people's attitudes and intentions towards the relevant technology were investigated through two theories that are frequently used in the literature. technology acceptance model (tam) and planned behavior theory (pbt), which are frequently used in the adaptation process of technological innovations, were utilized in the current research to analyze the factors affecting the intention to use metaverse technology. however, due to the low number of active users of metaverse systems, the research focused on the intention to use rather than active use (ajzen, 1991; davis, 1989; tan & sundarakani, 2020; berki-kiss & menrad, 2022). ii. metaverse metaverse is one of the most important reflections of the developing technology today. there are different interpretations of metaverse technology. a metaverse is a virtual environment created by combining virtual reality and augmented reality (cho & kim, 2017). metaverse is defined as a new generation world built on blockchain (dowling et. al., 2021). the metaverse technology is also described as a virtual world, where individuals interact with each other using the avatars they created (duan et. al. 2021, collins, 2021). the metaverse is a virtual reality that exists beyond reality (kye, et. al., 2021). the metaverse is a digital space created within the physical world where millions of people interact (siyaev, a. & jo 2021). figure 1. timeline of the metaverse development source: (duan et al., 2021) although it first emerged as a utopia in a science fiction novel, the metaverse is presented to users as a reflection of real life with the developing technological infrastructure and blockchain technology. but the absence of a single metaverse brings confusion. although many metaverses have emerged in the future, as in bitcoin, one of them will stand out (kye, et. al., 2021). the metaverse ecosystem, which will be most in demand by people, will be the common meeting point in the future. metaverse is the real world transferred to electronic environment. a feeling of spending time in the real world can be given by means of various wearable technologies. this situation leads to an increase in the range of activities that can be carried out in the electronic environment. metaverse is used in different fields as a new technology. for example health, finance, banking, social platforms and virtual stores created by companies, museums, exhibitions and tourism, etc. can be listed at that point. travel restrictions due to the covid-19 pandemic, accordingly, the 3-dimensional and realistic image of the metaverse ecosystem has paved the way for the shift of tourism activities to this area (zaman et. al., 2022). studies using tam and pbt models are shown below in table 1. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.258 | http://emaj.pitt.edu yavuz toraman emerging markets journal | p a g e 6 9 table 1: literature review author(s) and year sector hypotheses hypothesis testing result park & kang (2021) new technology acceptance: metaverse peoupu not supported puat supported peouat supported ati supported akour et. al. (2022) new technology acceptance: metaverse(education) pipu supported pipeou supported peoui supported pui supported almarzouqi et. al. (2022) new technology acceptance: metaversemedical education pipu supported pipeou supported pui supported peoui supported misirlis & munawar (2022) new technology acceptance: metaverse (education) seat not supported snat supported snpeou supported puat not supported peouat not supported mostafa, l. (2022) new technology acceptance: metaverse peoui supported pui supported sii supported ti supported fussell & truong (2021) new technology acceptance: a research on virtual reality devices peoupu supported puat supported peouat supported pbci supported source: authors’ own compilation at= attitude towards use; i= intention; pbc= perceived behavioral control; peou= perceived ease of use; pu=perceived usefulness; pi= personal innovativeness; sn=subjective norms; se= self efficacy; si= social influenc; t= trust park & kang’s (2021) study empirically identifies the process of technology acceptance of the metaverse, a virtual world-based platform that has attracted attention due to the 4th industrial revolution and the covid-19 pandemic. akour et. al.’s (2022) study aims to investigate the students’ perceptions of the metaverse system for educational purposes in the gulf area. almarzouqi et. al. (2022) aims to evaluate students’ perception of the application of metaverse in the united arab emirates (uae) for metaverse-medical-educational purposes. in this study, 1858 university students were surveyed to examine this model. misirlis & munawar’s (2022) study proposes a framework for university students’ metaverse technologies in education acceptance and intention to use. the study is based on the technology acceptance model (tam) mostafa, l. (2022) aims to identify the factors affecting egyptian users of new technologies such as metaverse. the technology acceptance model (tam) is used to measure user intention to accept and use technology. fussell & truong (2021) investigated students’ intentions to use virtual reality (vr) for training. the technology acceptance model (tam) was expanded to include two factors that are relevant to using vr in a dynamic learning environment. as can be seen in the literature review (table 1), the metaverse has generally been studied within the framework of tam. there are not many studies conducted within the scope of pbt. for this reason, examining an important technology such as metaverse with a research model in which both tam and pbt are used will make a positive contribution to the literature. although the fact that metaverse technology has not become widespread harms the research process, it is important to analyze people's attitudes, intentions and behaviors towards this technology in the future. iii. technology acceptance model (tam) tam has been frequently used in the adoption processes of new technologies as the process was brought to the literature by davis in 1986. tam is based on the reasoned action theory (get), which is frequently used to explain human behavior. according to get, human behavior is carried out for certain reasons. in our world where technology is developing rapidly, it is very important to investigate the factors that affect people's attitudes and intentions to use important technologies (davis, 1989). the world has become more and more digitalized with each passing day, with technological devices increasing rapidly after the industrial revolution, primarily working life and then individual use. in this context, technological innovations were first used in businesses for commercial purposes. after tam was introduced to the literature in 1986, the analysis of the factors affecting the acceptance of company employees to use new technologies has become important (venkatesh & bala, 2008). figure 2. technology acceptance model (tam) source: (venkatesh and davis, 1996) figure 2 shows the tam. the model has four basic variables. these are perceived usefulness, perceived ease of use, intention and active use. since there are not many people actively using the metaverse system in the current study, the intention to use the system is emphasized. perceived ease of use refers to the degree to which people believe that their productivity will increase and they will spend less effort using the technology in question. according to tam, the positive effect of the efficiency that will be obtained by the use of the existing technology on the perceived benefit from the technology is indicated in the results of the analysis (davis et. al., 1989; venkatesh & morris, 2000). in the research, the volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.258 | http://emaj.pitt.edu user acceptance of metaverse: insights from technology acceptance model (tam) and planned behavior theory (pbt) page |70| emerging markets journal relationship between peou and pu has been examined in parallel with the literature. h1:perceived ease of use is positively related to perceived usefulness perceived usefulness is the degree to which people believe in the benefit and performance improvement they will get when they use the technology in question. according to tam, in the process that people will use new technology, the benefit they will perceive from the relevant technology directly affects their intentions (venkatesh & davis, 2000; park & kang, 2021). the relationship between pu and i has been studied in parallel with the literature. h2: perceived usefulness is positively related to intention tam, which is a frequently used model in the adoption processes of new technologies, was used in the research. other studies conducted in the literature are shown in table 1. when examined in other studies, some deficiencies were observed. for this reason, metaverse technology is analyzed together with planned behavior theory (pbt) in addition to tam. the fact that pbt is also an important model for explaining human behavior has been a remarkable factor in creating the research model. iv. planned behavior theory (pbt) pbt is a frequently used theory in the literature trying to explain human behavior. it is based on the motivation that people do with their behaviors (ajzen & madden, 1986). pbt emphasizes the importance of perceived behavioral control variables, in addition, to get in the process of shaping human behavior. while exhibiting the behavior of people, the level of control over the behavior in question is important (ajzen, 1991). figure 3. planned behavior theory (pbt) source: (ajzen 1991) it is very important how much control people have over their behavior. for example, people may say that they want to buy organic foods to eat healthy, but they will not be able to do this if there are no organic product sales points around. in the current research, pbt was also used in addition to tam while constructing the model. the reason is to analyze in detail what factors people are affected by using the metaverse technology. pbt has 5 main variables. these are attitude towards use, perceived behavioral control, subjective norm, intention and actual use. attitude towards use refers to a person having a positive or negative assessment or evaluation of that behavior. attitude towards use was obtained as a result of the analysis in which intention was one of the leading symptoms, and the same results were obtained in the studies in the literature. the attitude towards metaverse technology is an important variable of the research model when determining people's intentions (ajzen, 1991). in the research, the relationship between at and i has been examined in parallel with the literature. h3: attitude towards use is positively related to intention perceived behavioral control emphasizes people's perception of the ease or difficulty of performing the behavior of interest (ajzen & sheikh, 2013). the perception of control towards metaverse technology is an important variable added to the research model during the analysis of the factors affecting people's intentions. in the study, the relationship among pbc, i and at was examined in parallel with the literature. h4: perceived behavioral control is positively related to intention subjective norm is a social factor. it refers to the perceived social pressure to perform or not perform the behavior (ajzen, 1991). according to ajzen, the more positive the behavioral attitude and subjective norm towards behavior and the greater the perceived behavioral control, the stronger the person's intention to perform the behavior in question should be (taylor & todd, 1995). because metaverse technology is new, the fact that too many people do not have knowledge about the subject or think in this way brings about the inability of people to be affected by their environment. in the study, the relationship among sn, i, pbc and at was examined in parallel with the literature. h5: subjective norm is positively related to intention h6: subjective norm is positively related to perceived behavioral control h7: subjective norm is positively related to attitude towards use h8: perceived behavioral control is positively related to attitude towards use the intention is the most important variable of intent to use. the reason is that, prerequisite for any behavior is the intention to perform the behavior in question. the stronger a person's intention, the more likely that person is expected to try that behavior, and therefore the more likely the behavior will be performed (ajzen and madden, 1986: ajzen, 1991). v. methodology since the metaverse can be used by all segments of the society by the scope and purpose of the research, the universe of the research consists of individuals over the age of 18 who use smart devices (phones, tablets, etc.) and have blockchain technology. since metaverse is a blockchain-based system, people who know blockchain technology will be able to adapt faster (ozdamar, 1999). volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.258 | http://emaj.pitt.edu yavuz toraman emerging markets journal | p a g e 7 1 convenience sampling methods were used in the study. convenience sampling is the inclusion of only those who can be reached among the people within the scope of the research (kurtuluş, 2010). the research was carried out in istanbul for the convenience of data collection. due to covid-19, the data of the study were collected by an online survey method instead of a face-to-face method. the data of the research were collected through google forms between 05.01.2022 and 10.03.2022. the questionnaire the research was sent to 436 people and 214 responses were received. when the data were organized before the analysis of the research, a usable data set of 183 people were obtained. figure 4. conceptual model source: (ajzen 1991) while creating the research model, the models frequently used in the acceptance of new technologies in the literature were used. the research model, which was created by making use of tam and pbt theories, was composed for the analysis of the factors affecting the acceptance of metaverse technology. the conceptual model is shown in figure 4 above (venkatesh & davis, 1996; ajzen, 1991; schierz et al., 2010). finally, the structural equation model (sem) was used in the analysis process of research. in structural equation modeling, the relationships among more than one independent variable and more than one mediator as well as dependent variable are taken into account. sem, which is frequently used in the literature, was utilized because the relationship between more than one variable was examined in the study (hair et al., 2010). the smart pls 3 program, which is frequently used in the analysis of structural equation models, was used in the research. in the analysis part of research, firstly, the reliability and validity of data obtained from the variables were checked (hair et al., 2017). vi. results the data of the research were first checked for the assumption of normality before the reliability and validity analysis. the skewness and kurtosis values of the research data were found between -1.5 and +1.5. in this context, it can be said that the data of the research exhibit a normal distribution (tabachnick et al. 2007; hair et al., 2017; hair et al., 2010). concerning the multicollinearity of the research, when the variance inflation factors (vif) values are examined briefly in terms of multiple connections, the highest vif value is 4.250. vif values between 1 and 5 are accepted in the literature. when the sub-dimensions of the model are examined, the values are between 2 and 3.8 (daoud, 2017). table 2: results of measurement model source: smart pls 3 software aitems measured on a 5-point likert scale (1= strongly disagree; 5= strongly agree); ave: average variance extracted; cr: composite reliability in analysis, perceived usefulness, perceived ease of use, attitude towards use, perceived behavioral control, subjective norm and ıntention cronbach's alpha’s composite reliability should be higher than 0.70. ave values should be higher than 0.50 (hair et al., 2014). the results are shown in table 2 above. table 3: discriminant validity analysis based on fornell-larcker criterion at i pbc peou pu sn at 0.964 i 0.834 0.968 pbc 0.476 0.604 0.821 peou 0.569 0.644 0.605 0.927 pu 0.781 0.860 0.606 0.656 0.946 sn 0.661 0.631 0.474 0.607 0.604 0.841 source: smart pls 3 software at= attitude towards use; i= intention; pbc= perceived behavioral control; peou= perceived ease of use; pu=perceived usefulness; sn=subjective norm. as a result of the analysis of research data, after observing that it was reliable and valid, the correlation analysis among the variables of research was carried out. analysis results are shown in table 3 above. correlation analysis, also known as the fornell-larcker criteria table, is obtained by taking the square root of ave values. when the correlations among the variables were examined, no variable that would pose a problem was found based on the literature (davis, 1989; hair et. al., 2017). it is volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.258 | http://emaj.pitt.edu user acceptance of metaverse: insights from technology acceptance model (tam) and planned behavior theory (pbt) page |72| emerging markets journal mentioned that there is a positive relationship among the variables of the research. table 4: results of the hypothesized structural model source: smart pls 3 software p<0,05 at= attitude towards use; i= intention; pbc= perceived behavioral control; peou= perceived ease of use; pu=perceived usefulness; sn=subjective norm. the result is shown in table 4. the hypothesized model was estimated based on bootstrapping with 1000 subsamples. all 8 hypotheses were not supported. of the 8 relationships tested, 5 were found to be significant at p < 0.5. specifically, perceived ease of use had a positive effect on perceived usefulness (β = 0.656, p < 0.5). perceived usefulness had a positive effect on intention (β = 0.453, p < 0.5). as a result of the analysis, 2 hypotheses constructed according to tam showed parallel results with the literature. in addition, subjective norm had a positive effect on both perceived behavioral control (β = 0.474, p <0.5) and attitude towards use (β = 0.562, p < 0.5). however, subjective norm had no influence on intention (β = 0.037, p > 0.5). perceived behavioral control, had a negative influence on both at (β = 0.210, p > 0.5) and i (β = 0.122, p > 0.5). the fact that the perceived behavioral control hypotheses are not supported can be explained by the fact that metaverse technology is not actively used and therefore people have limited control over the technology in question. attitude towards use had a positive effect on intention (β = 0.398, p < 0.5) (hair et al., 2017). table 5: results of r2 and r2 adjusted r2 r2 adjusted attitude towards use 0.472 0.457 perceived behavioral control 0.225 0.214 perceived usefulness 0.430 0.422 intention 0.819 0.808 source: smart pls 3 software the r² values of research are shown in table 5 above. since the metaverse technology, which is the focus of the research, is new, the intention to use has become more important than its active use. the r² value of the intention to use the dependent variable of research was found to be 0.819, and the radj² value was found to be 0.808. r² values above 0.70 indicate that it has a strong explanation percentage. in this context, it can be said that a significant part of the factors that affect people's acceptance of their motivation to use metaverse are included in the model (agustina, 2019). figure 4. results of research model (smart pls) source: smart pls 3 software p <0,05 at= attitude towards use; i= intention; pbc= perceived behavioral control; peou= perceived ease of use; pu=perceived usefulness; sn=subjective norm. as a result of the research analysis, it was determined that the model was reliable and valid. the correlation between the variables was as expected. in the continuation of the analysis, the existence of hypotheses constructed in the model was tested with path analysis. the smart pls 3 output of the research model is provided in figure 4 above. vii. discussion and conclusions almost every day, a new technological product or service enters its life. in addition to the benefit of the developing technology to humanity, adaptation and adaptation processes are required for active use. in the process from the past to the present, experts have done a lot of work in this field. technology acceptance model (tam) and planned behavior theory (pbt) have been used frequently in these studies. in this context, the subject of acceptance of technological products or services, which has become important to people day by day, has been examined in terms of the metaverse. metaverse can be named as the transport of physical environments to the digital universe with blockchain infrastructure. there is more than one metaverse system. due to the newness of metaverse technology, the number of users is limited. the lack of many active users made it necessary to determine the dependent variable of research as intention. however, according to tam and pbt theories, the most important antecedent indicator of people's use of technological innovation is their intention. with the assumption that intention is a prerequisite, the metaverse in the present study has been examined within the framework of tam and pbt theories. h1 and h2 hypotheses were created in accordance with the technology acceptance model (tam) theory. parallel to the literature, a positive and significant effect was found between peou and pu as well as between pu and i. the perceived usefulness of people's metaverse system was affected by the perceived ease of use. in addition, finding the benefits of the volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.258 | http://emaj.pitt.edu yavuz toraman emerging markets journal | p a g e 7 3 metaverse system positively affected their intention to use it. in this context, it has been concluded that the usefulness of the metaverse system and the fact that people think they will benefit affect their intentions, which are the pioneers of active use of the system ( venkatesh & davis, 2000; davis, 1989; park & kang, 2021; yorulmaz & alnıpak, 2020; akour et. al., 2022; almarzouqi et. al.. 2022). in accordance with the planned behavior theory (pbt), hypotheses h3, h4, h5, h6, h7 and h8 were formed. while no significant relationship could be found between subjective norm and behavioral control variables as well as intention, attitude towards use affects intention positively and significantly. the new use of metaverse technology and the lack of knowledge of many people on the subject led to the rejection of th4 and h5 hypotheses. the positive effect of attitude towards use variable, which is one of the most important determinants of usage intention, is one of the important results of the research. adaptation processes will accelerate with the positive effect of people's attitudes towards metaverse technology (ajzen, 1991; arkorful, 2022; javid et. al., 2022). in addition, according to the results of research, it can be mentioned that the subjective norm variable, perception, has a significant positive effect on behavioral control and attitude towards use. this situation expresses the positive thoughts of the close environment of potential metaverse users in the usage processes, despite the fact that the metaverse technology is new. finally, there is no significant effect of the behavioral control variable on attitude towards use. this situation can be explained by the fact that the technology is new. the widespread use of metaverse causes people to have limited control over technology. the lack of knowledge of using the relevant technology is an important factor here. therefore, the h8 hypothesis was rejected (ajzen, 1991; javid et al., 2022). blockchain has found use in many sectors due to its decentralized structure, fast transaction opportunity, encrypted transfer of information, and 24/7 operation. since metaverse uses blockchain technology as an infrastructure, it is in an advantageous position in the process of adapting to people in the future. it is assumed that the metaverse technology discussed in the current research will be used by many people in the future. however, it cannot be said that it has widespread use in terms of individual and commercial use at the moment. with adidas, gucci, is bank, etc. companies investing in the metaverse ecosystem and the widespread use of cryptocurrencies, people will be able to actively use the metaverse to meet their needs (is bank, 2022; adidas, 2022; gucci, 2022). especially after covid-19, e-commerce activities have increased. metaverse will attract the attention of companies and individual users in the future due to 3d product selection, crypto money payment option, 24/7 transaction opportunity, etc. in the literature, metaverse technology has been limitedly studied with tam. in the current research, it is expected to contribute to this field by using pbt, which helps to explain human behaviors. the research was carried out with the theory of planned behavior and the technology acceptance model. metaverse studies can also be investigated with models used in other technology adoption processes. in particular, a metaverse study using everett rogers's diffusion of innovation theory (dit) will present a different perspective to the literature. a separate study can be conducted on the metaverse and the use of cryptocurrencies. in the case of turkey, digital turkish lira (dtl) trial work continues. after the dtl's launch, its usage area will quickly become widespread. in this context, dtl can be used in future metaverse ecosystems. this will accelerate the adoption of metaverse usage. references adidas. (2022). in to the metaverse. official website of adidas.https://www.adidas.com/into_the_meta verse access date: 17.04.2022 agustina, d. (2019). extension of technology acceptance model (etam): adoption of cryptocurrency online trading technology. jurnal ekonomi, 24(2), 272-287. ajzen, i. (1991). the theory of planned behavior. organızational behavior and human decision processes. 50(2), 179-211. ajzen, i., & madden, t. j. (1986). prediction of goaldirected behavior: attitudes, intentions, and perceived behavioral control. journal of experimental social psychology, 22(5), 453474. ajzen, i., & sheikh, s. (2013). action versus inaction: anticipated affect in the theory of planned behavior. journal of applied social psychology, 43(1), 155-162. akour, i. a., al-maroof, r. s., alfaisal, r., & salloum, s. a. (2022). a conceptual framework for determining metaverse adoption in higher institutions of gulf area: an empirical study using hybrid sem-ann approach. computers and education: artificial intelligence, 3, 100052. almarzouqi, a., aburayya, a., & salloum, s. a. (2022). prediction of user’s intention to use metaverse system in medical education: a hybrid semml learning approach. ieee access, 10, 43421-43434. arkorful, v. e. (2022). unravelling electricity theft whistleblowing antecedents using the theory of planned behavior and norm activation model. energy policy, 160, 112680. berki-kiss, d., & menrad, k. (2022). the role emotions play in consumer intentions to make pro-social purchases in germany an augmented theory of planned behavior model. sustainable production and consumption, 29, 79-89. choi, h.-s.; kim, s.h. (2017). a content service deployment plan for metaverse museum exhibitions centering on the combination of beacons and hmds. int. j. inf. manag. 37, 1519-1527. volume 12 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.258 | http://emaj.pitt.edu user acceptance of metaverse: insights from technology acceptance model (tam) and planned behavior theory (pbt) page |74| emerging markets journal collins, b. (2021). the metaverse: how to build a massive virtual world. forbes magazine. available online: https://www.forbes.com/sites/barrycollins/2021 /09/25/the-metaverse-how-tobuild-a-massivevirtual-world/?sh=60735bad6d1c access date: 23 06 2022). daoud, j. i. (2017). multicollinearity and regression analysis. in journal of physics: conference series (vol. 949, no. 1, p. 012009). iop publishing. davis, f. d. (1989). perceived usefulness, perceived ease of use, and user acceptance of information technology. mis quarterly, 13(3), 319-340. davis, f. d., bagozzi, r. p., & warshaw, p. r. (1989). user acceptance of computer technology: a comparison of two theoretical models. management science, 35(8), 982-1003. dowling, m. (2021). fertile land: pricing non-fungible tokens. financ. res. lett. 44, 102096. available online: https: //www.sciencedirect.com/science/article/pii/s1 54461232100177x access date: 15.03.2022 duan, h.; li, j.; fan, s.; lin, z.; wu, x.; cai, w. (2021). metaverse for social good: a university campus prototype. in proceedings of the 29th acm international conference on multimedia, nice, france, 21–25 october 2021, 153-161. fussell, s. g., & truong, d. (2021). using virtual reality for dynamic learning: an extended technology acceptance model. virtual reality, 1-19. gucci. (2022). metaverse. gucci website. https://vault.gucci.com/en-us/story/metaverse access date: 20.05.2022 hair, j. f., black, w. c., babin, b. j., & anderson, r. e. (2014). multivariate data analysis, 7th edn harlow.2. hair, j. f., hult, g. t., ringle, c. m. and sarstedt, m. (2017). a primer on partial least squares structural equation modelling (pls-sem). los angeles: sage publication. second edition (2017). hair, j. f., william c. b., barry j. b. and rolph e. a (2010). multivariate data analysis. 7th ed. pearson education.(2010). is bank (i̇ş bankası), (2022). türkiye i̇ş bankası’ndan metaverse evrenlerinden olan roblox'ta bir ilk! @roblox evreninde dolaşırken i̇ş bankası her an karşınıza çıkabilir. i̇ş bankası twitter. https://twitter.com/isbankasi/status/148668097 7812426763?ref_src=twsrc%5etfw%7ctwcam p%5etweetembed%7ctwterm%5e1486680977 812426763%7ctwgr%5e%7ctwcon%5es1_& ref_url=https%3a%2f%2fwww.marketingtur kiye.com.tr%2fkampanyalar%2fis-bankasiroblox%2f access date: 10.05.2022 javid, m. a., abdullah, m., ali, n., shah, s. a. h., joyklad, p., hussain, q., & chaiyasarn, k. (2022). extracting travelers’ preferences toward electric vehicles using the theory of planned behavior in lahore, pakistan. sustainability, 14(3), 1909. kanematsu, h., kobayashi, t., barry, d. m., fukumura, y., dharmawansa, a., & ogawa, n. (2014). virtual stem class for nuclear safety education in metaverse. procedia computer science, 35, 1255-1261. kurtuluş, k. (2010). araştırma yöntemleri. türkmen publication. kye, b., han, n., kim, e., park, y., & jo, s. (2021). educational applications of metaverse: possibilities and limitations. journal of educational evaluation for health professions, 18. misirlis, n., & munawar, h. b. (2022). an analysis of the technology acceptance model in understanding university students' behavioral intention to use metaverse technologies. 12th international conference: the future of education. 159-163. mostafa, l. (2022). measuring technology acceptance model to use metaverse technology in egypt. .142-118 ,(3)23 لةل وحتلاو وحلاحلل ثوحبلا ةل, nakamoto, s. (2008). bitcoin: a peer-to-peer electronic cash system. decentralized business review, 21260. ozdamar, k. (1999). paket programlar ile istatistiksel veri analizi. kaan publication. park, s., & kang, y. j. (2021). a study on the intentions of early users of metaverse platforms using the technology acceptance model. journal of digital convergence, 19(10), 275-285. sagnier, c., loup-escande, e., lourdeaux, d., thouvenin, i., & valléry, g. (2020). user acceptance of virtual reality: an extended technology acceptance model. international journal of human–computer interaction, 36(11), 993-1007. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.258 | http://emaj.pitt.edu yavuz toraman emerging markets journal | p a g e 7 5 schierz, p. g., schilke, o., & wirtz, b. w. (2010). understanding consumer acceptance of mobile payment services: an empirical analysis. electronic commerce research and applications, 9(3), 209-216. siyaev, a. & jo, g.s. (2021). towards aircraft maintenance metaverse using speech interactions with virtual objects in mixed reality. sensors 2021, 21, 2066. tabachnick, b. g., fidell, l. s., & ullman, j. b. (2007). using multivariate statistics. pearson. 5th edition. boston, ma, 481-198. tan, w. k. a., & sundarakani, b. (2020). assessing blockchain technology application for freight booking business: a case study from technology acceptance model perspective. journal of global operations and strategic sourcing. 1-34. taylor, s., & todd, p. (1995). decomposition and crossover effects in the theory of planned behavior: a study of consumer adoption intentions. international journal of research in marketing, 12(2), 137-155. venkatesh, v., & bala, h. (2008). technology acceptance model 3 and a research agenda on interventions. decision sciences, 39(2), 273315. venkatesh, v., & davis, f. d. (1996). a model of the antecedents of perceived ease of use: development and test. decision sciences, 27(3), 451-481. venkatesh, v., & davis, f. d. (2000). a theoretical extension of the technology acceptance model: four longitudinal field studies. management science, 46(2), 186-204. venkatesh, v., & morris, m. g. (2000). why don't men ever stop to ask for directions? gender, social influence, and their role in technology acceptance and usage behavior. mis quarterly, 115-139. yorulmaz, m. & alnıpak, s. (2020). yönetici düzeyindeki gemi adamlarının elektronik seyir teknolojileri kullanımının teknoloji kabul modeli i̇le i̇ncelenmesi . opus international journal of society researches , 16 (29) , 1928-1954 . retrieved from https://dergipark.org.tr/tr/pub/opus/issue/56333 /689259 zaman, u., koo, i., abbasi, s., raza, s. h., & qureshi, m. g. (2022). meet your digital twin in space? profiling international expat’s readiness for metaverse space travel, tech-savviness, covid-19 travel anxiety, and travel fear of missing out. sustainability, 14(11), 6441. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu effect of green bonds in financing sustainable agriculture in nigeria atinuke o. ayo-balogun the federal polytechnic (ilaro), nigeria | e-mail: : atinuke.ayobalogun@federalpolyilaro.edu.ng chukwudumebi cynthia ajao the federal polytechnic (ilaro), nigeria | e-mail: chukwudumebi.ajao@federalpolyilaro.edu.ng adetunji moses oluwaniyi the federal polytechnic (ilaro), nigeria | e-mail: adetunji.oluwaniyi@federalpolyilaro.edu.ng abstract the concept of green bonds emerged as a way to provide investors with an opportunity to contribute to environmental projects while earning returns on their investments. the study aimed to determine how green bonds affect the funding of sustainable agriculture in nigeria. the specific objectives were to examine the role of green bonds in financing sustainable agriculture in nigeria and to make recommendations for how to improve the use of green bonds in agriculture sector. the study used a purposive sampling technique to select respondents from two local governments (yewa south and yewa north, local governments) and the respondents included farmers, deposit banks and agri-business owners in ogun state, nigeria. the questionnaire (survey) was used as a research instrument and a face to face interview was also conducted. the psychometric properties were tested using cronbach’s alpha. the results showed that the instrument used were reliable and valid. data were analyzed using descriptive and inferential statistics, specifically a linear regression model. the t-value for the relationship between green bonds and sustainable agriculture was 22.193, and the p-value was .000. hence, the finding revealed that a statistically significant positive relationship between green bonds and sustainable agriculture existed. as green bonds increase, sustainable agriculture increases as well. the findings had the following implications for green bond issuers, farmers and agric-business owners: green bond issuers should prioritize investments in sustainable agriculture projects. farmers should receive adequate training and information on sustainable agriculture practices. finally, policymakers should create incentives for farmers who adopt sustainable practices. keywords: green bonds, sustainable agriculture, agriculture, financing, finance volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.331 | http://emaj.pitt.edu | mailto:atinuke.ayobalogun@federalpolyilaro.edu.ng mailto:chukwudumebi.ajao@federalpolyilaro.edu.ng mailto:adetunji.oluwaniyi@federalpolyilaro.edu.ng volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.331 | http://emaj.pitt.edu effect of green bonds in financing sustainable agriculture in nigeria page |2| emerging markets journal effect of green bonds in financing sustainable agriculture in nigeria atinuke o. ayo-balogun chukwudumebi cynthia ajao adetunji moses oluwaniyi i. introduction green bonds are seen as being crucial to the growth of sustainable infrastructure investments from institutional investors by improving the liquidity of infrastructure assets. they are financial innovation instruments designed to facilitate sustainable investing for institutional investors such as pension fund administrators (pfas), insurance companies and funds/asset managers. additionally, because of their potential for increased investment in the agricultural sector, as well as the opportunity to improve environmental quality and food security in nigeria and globally, green bonds play a significant role in promoting sustainable agriculture in nigeria. a sizable section of the workforce is employed in the agricultural industry makes a substantial economic contribution to nigeria. low productivity, inadequate infrastructure and restricted access to financing are only a few of the difficulties the industry faces (oyaniran, 2020). nigeria has seen a push in recent years to enhance sustainable agriculture, with an emphasis on raising output and minimizing negative environmental effects. both domestic and foreign investors are becoming more interested in investing in sustainable agriculture in nigeria. numerous initiatives have received funding from a range of sources, such as venture capital, private equity and government initiatives. additionally, more green bonds are being issued for initiatives promoting sustainable agriculture transformation in nigeria (owoade, 2019). one kind of bond that is sold to fund initiatives which benefit the environment is called a "green bond." projects that support sustainable development, such as those that involve pollution reduction, energy efficiency and renewable energy are financed with the proceeds from green bonds. a form of agriculture known as "sustainable agriculture" aims to maintain the environment, society and economy. it frequently incorporates techniques such as organic farming, water and soil conservation as well as soil preservation (north, 2023). nigeria is a nation that deals with environmental issues like deforestation and water scarcity. in addition, the nation is rapidly becoming more urbanized, which is straining its natural resources. green bonds and sustainable agriculture, which encourage resource efficiency and lessen environmental effect, can assist in addressing these issues (obidimma, 2022). key stakeholders in nigeria, particularly financial institutions, have grown increasingly conscious of the climate-related financial risks associated with their operations as a direct result of the nigerian green bond market development program's advocacy on the subject of climate change. this is because their "loan book" portfolio is exposed to highly polluting industries like oil and gas. on the other hand, there are lots of chances for green finance in a number of nigerian economic sectors including housing, transportation, agriculture, power and energy. in order to assist the private sector in mainstreaming sustainability into finance and investment possibilities, the ngbmdp has produced a framework on green finance. green bonds have been used recently to boost investment in sustainable agriculture in nigeria, although there is still a deficiency of comprehension of these investments' actual effects and how much they contribute to sustainable development. in light of this, the study aims to determine how green bonds affect the funding of sustainable agriculture in nigeria. the specific objectives are as follows: 1) to examine the role of green bonds in financing sustainable agriculture in nigeria. 2) to make recommendations for how to improve the use of green bonds in agriculture sector. ii. literature review a green bond is a type of bond that is specifically designed to raise capital for projects or activities that have a positive environmental impact. these bonds are typically issued by governments, development banks or other financial institutions. they are used to finance projects such as renewable energy, energy efficiency, sustainable agriculture and other initiatives that help to reduce greenhouse gas emissions and promote sustainable development (serena , roberto, & michela , 2021). green bonds work similarly to traditional bonds, in that they are essentially loans that are paid back with interest over a set period of time. both governmental and private businesses can issue green bonds, a sort of financing instrument, to finance environmentally friendly projects. they are a very popular option for long-term investments. one type of financial instrument called "green bonds" is mostly used to raise money for eco-friendly projects. these initiatives might focus on energy efficiency improvements, sustainable agriculture, renewable energy sources and other green initiatives. encouraging investment in initiatives that advance environmental sustainability is the goal. in nigeria and throughout africa, green bonds are becoming one of the funding choices available to public, commercial and other institutions to address climate change. investopedia defines a green bond as a tax-exempt bond issued by municipalities or federally approved organizations for the development of brownfield locations. the purpose of green bonds is to promote brownfield site development and sustainability. more precisely, clean transportation, sustainable water management, energy efficiency, pollution avoidance, sustainable agriculture, fisheries, forestry, the preservation of aquatic and terrestrial ecosystems, as well as the development of environmentally friendly technologies are all funded by green bond projects. investing in green bonds is more appealing than buying a comparable taxable bond because of their tax-exempt status, which offers financial motivation to address important social concerns like the transition to renewable energy sources and climate volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.331 | http://emaj.pitt.edu atinuke o. ayo-balogun, chukwudumebi cynthia ajao, adetunji moses oluwaniyi emerging markets journal page |3| change. in nigeria, there are a few instances of projects that have benefited from green bond funding. rendezvous, a development business, issued the alaro city green infrastructure bond as one illustration. projects related to sustainable infrastructure, such as waste and water management, renewable energy and eco-friendly construction (chiemeka, 2021) are also well known. the africa greenco green bond serves as an additional illustration and is utilized to finance (chiemeka, 2021). the africa greenco green bond serves as an additional illustration, as it finances renewable energy initiatives throughout sub-saharan africa. due to the additional criteria for social and environmental norms, green bonds may be more expensive than ordinary bonds. this is one potential drawback. since they must be able to prove their environmental benefits, they are more difficult to build and administer. furthermore, some detractors contend that rather than actually solving environmental issues, green bonds are merely a marketing gimmick (agliardi, 2021). notwithstanding all of the drawbacks, green bonds have the following benefits for nigerian consumers: green bonds contribute to better environmental quality by encouraging energy efficiency and renewable energy, both of which lower greenhouse gas emissions and air pollution. by promoting sustainable water management, they also aid in lowering water scarcity and enhancing water quality project. additionally, by encouraging sustainable agriculture methods, they lessen land degradation and enhance soil quality (statista, 2023; pathak, 2021). green bonds hold significance in nigeria for multiple reasons: firstly, they can aid in funding the nation's shift to a low-carbon economy, thereby mitigating the effects of climate change. secondly, they can enhance the nation's environmental performance, thereby drawing in foreign investment and enhancing living standards. thirdly, by endorsing sustainable projects, they can generate employment and stimulate economic growth (policy development phase ii, 2020). using financial resources to promote agricultural techniques that are both commercially and environmentally feasible is known as sustainable agriculture investment. examining the social, environmental and economic effects of agriculture is a long-term strategy (david perri, 2022). the intention is to encourage long-term sustainable agricultural growth. a number of concepts are frequently linked to investments in sustainable agriculture, including the following: the use of environmentally friendly fertilizers and pesticides, the adoption of conservation techniques and the preservation of natural resources, like soil and water. encouraging equitable economic growth is another key tenet of investments in sustainable agriculture. this entails generating revenue for all parties involved, such as smallholder farmers and rural areas. initiatives like market access, financing availability and farmer training can help achieve this. furthermore, investing in sustainable agriculture seeks to advance inclusive growth, which entails giving women and other underprivileged groups access to the economy. green bonds may have both beneficial and detrimental consequences in nigeria's sustainable agriculture industry. positively, green bonds can give sustainable agriculture projects much-needed finance. food security and agricultural productivity may both benefit from this. green bonds can also enhance rural infrastructure and generate jobs. negatively, smallholder farmers may feel pressured by green bonds to follow particular techniques that may not be long-term viable (yusuf yakubu yusuf, 2022). for instance, some farmers would be compelled to convert to genetically modified crops, which could have detrimental effects on the environment and society. green bonds can play several important roles in advancing sustainable agriculture. for example, they offer long-term, affordable funding for projects related to agriculture (dilip dwivedy, 2023). smallholder farmers may find it simpler to obtain the funding they want to increase their output as a result. second, through financing research and training, green bonds contribute to the capacity-building of the agriculture industry. lastly, because green bonds mandate thorough reporting on the funds' utilization, they contribute to greater accountability and openness in the agriculture industry. the promotion of nigeria's green infrastructure development is another function that green bonds can fulfill. this covers issues like renewable energy initiatives, water treatment facilities and irrigation systems. green bonds can lessen environmental harm and increase agricultural productivity by financing these kinds of initiatives. furthermore, through supporting initiatives that can adjust to shifting circumstances, green bonds can contribute to the development of climate change resilience. according to some research, by holding farmers and other stakeholders accountable for the detrimental effects of their operations, green bonds can aid in the internalization of the environmental costs associated with agriculture (daniel j. phaneuf, 2016). green bonds can impact sustainable agriculture in two key ways, according to environmental economics theory. the first is by altering the farmers' incentive program. this can occur in various ways. first, by incentivizing farmers to adopt sustainable practices, green bonds can establish a price signal for ecofriendly operations. second, by raising the price of using hazardous inputs like pesticides, they can raise the cost of unsustainable practices. the second potential impact of green bonds contribute to sustainable agriculture by sponsoring research and development. farmers may find it easier to adopt and develop more sustainable practices as a result (meera, 2020). green bonds can support the development of sustainable livelihoods in the agriculture industry. "cope with and recover from stress and shocks, maintain or enhance its capabilities and assets, and provide sustainable livelihood opportunities for the next generation" is the definition of a sustainable livelihood, according to the theory of sustainable livelihoods (serrat, 2014). put differently, it ought to be robust, long-lasting and inclusive. there are several ways that green bonds might help sustainable lives. first, they can finance resources like land, water and renewable energy that are necessary for sustainable living. second, through bolstering neighborhood networks and organizations, they can aid in the development of social capital. at last, they are able to offer chances for education and skill development (the world bank group, 2015). the international institute for sustainable development published "sustainable agriculture investment in developing countries: lessons learned and policy recommendations." in addition to offering policy ideas for how to encourage and support this kind of investment, that paper gives an overview of the opportunities and problems facing investments in volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.331 | http://emaj.pitt.edu effect of green bonds in financing sustainable agriculture in nigeria page |4| emerging markets journal sustainable agriculture concerning developing nations (hallam, 2011). the international food policy research institute's "sustainable agriculture and green growth in nigeria: development opportunities and challenges" is another eye-catching research. the potential for sustainable agriculture to support green growth in nigeria is examined in this study, along with the opportunities and problems associated with growing this industry (owoade, 2019). "financing sustainable agriculture in nigeria: a call for public-private partnerships" by the nigerian institute of international affairs is also a noteworthy research in the literature. in order to finance sustainable agriculture in nigeria, more public-private partnerships are advocated in this study. the international institute of tropical agriculture published "the iita forest project: a case study of sustainable agriculture investment in nigeria." this case study examines the collaboration between a private investor and a research institution to create a sustainable agriculture initiative in nigeria. it sheds light on the difficulties and possibilities facing these kinds of collaborations (izuchukwu, 2011). iii. methodology ogun state was selected as the research field in this study. farmers and other stakeholders (deposit banks and agric-businesses) in particular local government areas of ogun state did make up the study's population. survey (questionnaire) research design and interview method were used. three distinct stakeholders in ogun state, nigeria, provided 300 respondents (one hundred respondents each), chosen using a proportionate random sample technique on a purposive approach. the technique for gathering data was a questionnaire labeled "green bonds and sustainable agriculture investment." the instruments were assessed for their psychometric properties (validity and reliability) using factor analysis and cronbach alpha, respectively. the findings demonstrated the validity and reliability of the instruments. regression analysis was performed on the acquired data using spss at the 5% significance level. the following questions were used through interview to achieve the second objective of research: what policies are currently in place to promote green finance and sustainable agriculture? how effective are these policies in promoting sustainable development? what challenges do you see in implementing these policies? how do you see green finance evolving in the future and what changes do you anticipate? what could be done to increase the use of green finance in nigeria? iv. findings table 1: case processing summary n % cases valid 287 100.0 excludeda 0 .0 total 287 100.0 a. listwise deletion based on all variables in the procedure. table 1 above showed that all of the cases in the analysis were included, and there were no missing data. therefore, the instrument used are valid. table 2: reliability statistics cronbach's alpha n of items .939 20 table 2 above shows that the measure is highly reliable and the results of the analysis can be used. with 20 items, the measure is considered to be robust and the results are unlikely to be affected by chance. table 3: total variance table 3 above revealed a cumulative total variance explained of 68%. this implies that the items on the instruments are well loaded and highly valid. the value of 47.507 is the initial eigenvalue for the dominant factors, which explained the total variance in the data. the next highest initial eigenvalue 14.357, represents the second most dominant factor and the lowest initial eigenvalue, 6.808 represent the least dominant factor of the instrument used. table 4: descriptive statistics mean std. deviation n sa 18.9930 6.91051 287 gb 18.1429 7.39238 287 table 4 above showed the summary of the data used in the analysis. the mean score of data relating to sustainable agriculture (sa) is 18.9930, while standard deviation is 6.91051. green bonds (gb) mean score of data is 18.1429, while the standard deviation is 7.39238. table 5: correlations sa gb pearson correlation sa 1.000 .796 gb .796 1.000 sig. (1-tailed) sa . .000 gb .000 . n sa 287 287 gb 287 287 table 5 indicates that sustainable agriculture (sa) and green bonds correlates at .796. this implies that there is a positive correlation between sustainable agriculture and green bonds. volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.331 | http://emaj.pitt.edu atinuke o. ayo-balogun, chukwudumebi cynthia ajao, adetunji moses oluwaniyi emerging markets journal page |5| table 6: model summary a. predictors: (constant), gb table 6 reveals the total effect of sustainable agriculture (sa) and green bonds (gb) as r2 = .633. this implies that about 63% variability in green bonds is being accounted for by sustainable agriculture. the value of the adjusted and r squared are very close and this shows that the model summary which accounted for amount of variation is normal and expected. table 7: anovaa a. dependent variable: sa b. predictors: (constant), gb table 7 shows the results of analysis of variance, which is a statistical test used to determine the significance of the model. the f statistics of 492.512 showed that the model explains a lot of the variation in the data while the p-value of .000 means that the model is extremely unlike to be due to chance. the two values showed that the model is highly significant and reliable. therefore, this implies that the null hypothesis of no significant relationship will be rejected and the alternative hypothesis will be accepted at 5% confidence level. table 8: coefficientsa a. dependent variable: sa table 8 above showed the unstandardized b value, which tells how much the dependent variable will change when the independent variable changes by one (1) unit. so in this case, if green bond increases by one (1) unit, the dependent variable (sustainable agriculture) will increase by .744 units. v. discussion the survey (questionnaire) was completed by 100 participants, including 45 farmers and 55 decisionmakers in banks as well as agri-businesses. the majority of the participants were male (75%) and between the ages of 25 and 44 (55%). in terms of education level, 60% of the participants had a bachelor's degree or higher. the majority of the participants (75%) were determined to be living in urban areas. the survey (questionnaire) items revealed several key findings and those findings were used for recommendations concerning all stakeholders (public and private) including the government and other potentials. five themes were made from the above interview and they were summarized as government influence and farmers awareness. the problems and potential solutions were identified from the analysis, some general conclusions were drawn about the relationship among individuals as well as green finance and sustainable agriculture. the study concludes that there is a need for greater communication and cooperation between governments, farmers and other stakeholders to tackle issues of farmers being not aware of the green bonds, nor having access or using the green bonds effectively. green bonds have the potential to significantly increase the amount of funding available for sustainable agriculture, according to the findings of study. this is due to the fact that green bonds offer a fresh avenue for funding sustainable agriculture initiatives, perhaps assisting in removing some of the obstacles that have hindered the utilization of more conventional funding sources for these projects. according to the data analysis, green bonds can improve environmental quality by encouraging more sustainable agricultural methods and by lowering the use of dangerous chemicals like fertilizers and pesticides. these methods can lessen soil erosion and enhance soil health, which might then lead to a reduction in greenhouse gas emissions and an improvement in water quality. vi. conclusion and recommendations according to the study's findings, green bonds can boost agricultural output by facilitating farmer investments in cutting-edge equipment like better irrigation systems and by financing the advancement of novel farming methods through research and development. hence, the findings also focused on the unstandardized b value, which tells how much the dependent variable will change when the independent variable changes by one (1) unit. the study concluded that, as green bond increases by 1 (one unit), sustainable will increase by .744, which means that there is a statistical significance between the dependent variable and the independent variable. thus, more exports and more jobs are just a few advantages that come with greater agricultural output. therefore, the study recommended the following measures:  fortifying the laws and rules governing green bonds  developing and promote programs targeting sustainable agriculture in nigeria  raising knowledge of green bonds among farmers and other stakeholders by means of farmer-focused educational programs and materials  enhancing the availability of funding and infrastructure for green bond initiatives via governmental or multilateral organizations, which may offer grants or low-interest loans to any eligible projects  developing targeted programs to promote sustainable agriculture in nigeria volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.331 | http://emaj.pitt.edu effect of green bonds in financing sustainable agriculture in nigeria page |6| emerging markets journal references agliardi, e. a. (2021). corporate green bonds: understanding the greenium in a two-factor structural model. journal of the european association of environmental and resource economists, 257-278. change, d. o. (2020). green bonds. federal ministry of environment. chiemeka, j. (2021). nigria’s green bonds are a key step in our sustainable finance agenda. world federation of exchangers. daniel j. phaneuf, t. r. (2016). a course in environmental economics. cmbridge: cambridge university press. david perri, e. d.-w. (2022). four ways investors can boost sustainable agriculture. international institute of sustainable development. dilip dwivedy, m. s. (2023). role of green bonds in promoting sustainability. journal of law and sustainable development, 1-17. hallam, d. (2011). international investment in developing country agriculture issues and challenges. international investment in developing country agriculture, 91-98. izuchukwu, o.-o. (2011). analysis of the contribution of agricultural sector on the nigerian economic development. world review of business research, 191-200. meera. (2020). what is green economy? here’s a simple explanation. social group. michael obidimma akpuogwu, p. e. (2022). a critical insight into environmental challenges in nigeria. international journal of research , 324335. north, p. h. (2023). what are green bonds and why is this market growing so fast. sustainable development. world economic forum. owoade, o. a. (2019). sustaining agricultural transformation in nigeria. international journal of innovative agriculture & biology research , 13-22. oyaniran, t. (2020). current state of nigeria . afcfta workshop, 1 -14. pathak, s. a. (2021). green bonds: a catalyst for sustainable development. journal of contemporary issues in business and government, 2633-2651. policy development phase ii. (2020). nigeria: sovereign green bonds . pdf ii pdfnigeria.org. serrat, o. (2014). the sustainable livelihoods approach. cornell university ilr school international publications, 1-8. statista. (2023). green bonds in u.s. finance & insurance. the world bank group. (2015). what are green bonds. world bank ibrd ida. yusuf yakubu yusuf, g. h. (2022). implementing digital agriculture in nigeria for sustainable. international halich congress on multidisciplinary scientific research .turkey: farabi publishing house. 375-389. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu measurement of employees on human resources with fuzzy logic zehra demirel maltepe university, turkey | e-mail: zehrademirelll@hotmail.com ceren çubukçu maltepe university , turkey | e-mail: ceren.cubukcu@gmail.com abstract artificial intelligence, which is the indispensable technology of our age, has started to gain a place in many institutions. institutions give great importance to human resources management because hiring the right employee for the job will increase productivity within the organization. when recruiting personnel for the position, human resources face difficulties such as measuring the success levels of applicants and deciding whether they are suitable. in this study, in order to provide solutions to the difficulties encountered, a decision-making mechanism is created by using the fuzzy logic method, which is one of the artificial intelligence techniques. this decision-making mechanism measures the performance of people applying for recruitment. while measuring performance, all applications are taken into consideration, and a rule base is formed according to graduation status and experience. the system, which is based on this rule base, evaluates people according to the inputs and finds out their success levels in return. according to the results, it is decided whether the persons are suitable for the position sought. when human resources departments in corporations are combined with artificial intelligence technologies, an advantage will be achieved in the competitive environment between corporations. keywords: human resources, artificial intelligence, fuzzy logic, performance measurement, decision makimg new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.226 | http://emaj.pitt.edu | mailto:zehrademirelll@hotmail.com mailto:ceren.cubukcu@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.226 | http://emaj.pitt.edu measurement of employees on human resources with fuzzy logic page |2| emerging markets journal measurement of employees on human resources with fuzzy logic zehra demirel ceren çubukçu i. introduction human resources have been greatly affected with the information technology revolution around the world, as in every field. the invention of the internet and the human resources beginning to benefit from this service created a compulsory competitive environment. the aim of human resources is to increase process efficiency by transforming their systems from traditional approaches to technological approaches in order to gain advantage in this competitive environment (lengnickhall & moritz, 2003). human resources management is a system that serves the interests and benefits of managers in organizations, and is designed to increase the performance of employees to the best level. managers are faced with many situations that require them to make performance evaluations by using different data types while making decisions in their recruitment at the same time. the human resources department has many duties such as recruiting personnel, evaluating current employees' performance, as well as training and rewarding them. in short, human resources are the key to success or failure of an organization (golec & kahya, 2007). it is aimed to use artificial intelligence technologies, which are on the agenda of these recent times, in human resources management as in every field. there are too many definitions of artificial intelligence. we can define it with the following general statements: when certain data entries are made to the machines, the machines learn some information from these data entries. using this information, they perform many higher cognitive functions such as decision making, reasoning, complex analytics, speech recognition, pattern recognition, and commenting on a situation. machines imitate human intelligence and abilities with this technology. topics covered are fuzzy logic, artificial neural networks, expert systems, natural language processing and genetic algorithms (anderson, rainie, & cohn, 2018). fuzzy logic, one of the artificial intelligence techniques, is a method in which intermediate values also exists instead of the classical logic with only 0 and 1 values based on ancient greek philosophy. while classical logic includes definite results, approximate results are included in fuzzy logic. it aims to bring numerical expressions closer to human thoughts and is based on the set theorem. it offers more flexible results. some uncertainties are encountered in decision making processes. uncertainties can be made more apparent with fuzzy logic. difficult and complex problems can be solved by using fuzzy logic approach in human resources management (özdemir, alaybeyoğlu, & balbal, 2019; yıldız, 2006). in human resources management, it is necessary to consider more than one parameter simultaneously in order to make an effective performance evaluation. fuzzy logic can provide solutions to uncertainties by clustering with more than one parameter (yager, 2002). the most valuable asset of an institution or organization is its employees. the employees of the institution greatly affect the level of success. therefore, human resources management should focus on selecting people who are successful and talented in their jobs (goes & limao, 2017). the aim of this study is to measure and evaluate the performances at the stage of personnel evaluation and selection with the fuzzy sets theory and to draw the most accurate results for the benefit of the institution or organization accordingly. in this study, fuzzy logic based mamdani model will be used as a solution method. in this system, 9 rule bases have been applied. the centers of gravity were determined by defining min-max values and then, the defuzzification processes were carried out (chan-ohmin, dae-woolee, kyeum-raecho, sung-jinjo, jang-sikyang, & wonbooleec, 2011). the level of success is measured both according to their experience and graduation level as being a bachelor's, master's or doctoral degree graduate, being inexperienced, 2-year experienced or 10-year experienced the proposed mamdani model will be tested using matlab. ii. literature review a new method based on the fuzzy logic principle has been proposed according to human resources management for the employees in the hotel industry in order to measure the performance and select the most suitable and useful employee. this method has introduced a scoring system in human resources management to reach a correct approach. human resources used mamdani fuzzy logic for measuring the performance. the course of the study was as follows: a group of experts have been included in the system and the rules have been established. then, a survey was conducted with human resources managers. afterwards, everyone's human resources performance scores have been calculated. for performance measurement in medium-sized companies, where there are membership rules, functions and domains that can be used a template have been created. the performance measurement result of the human resources management resulted in a clear number of degree 3. according to this, all values above the 3rd degree mean a high performance, the 3rd degree means an average performance and those below the 3rd degree means a low performance indicator (ruzic, skenderovic, & lesic, 2016). enterprise resource planning (erp) is a software program that supports many basic business processes such as production, finance, sales, marketing and human resources. it is very important to choose an erp that suits the needs of the organization. a method based on fuzzy logic is suggested to select the right erp solution. several criteria have been used to select the appropriate erp. these are functionality, cost, and vendor support. using the membership function for each of these criteria, the mamdani inference system has been volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.226 | http://emaj.pitt.edu zehra demirel, ceren çubukçu emerging markets journal | p a g e 3 developed. the created model has 3 inputs and 1 output. the main purpose of this model is to measure the different erp systems. for this, 96 fuzzy rule bases were designed using the mamdani method. the rules created here are based on expert knowledge and experience in the field. for example, if functionality = 0.573, cost = 0.596, and vendor support = 0.5 were evaluated as input, the output value has resulted in 0.692, indicating that the output result was a high value (vahidi, salookolayi, & yavari, 2014). the biggest concern in human resources management is the huge damage it will cause to the organization, if the right person is not recruited. for this reason, using fuzzy logic in human resources management has been valuable. in order to gain an advantage in today's competitive environment, information technology applications help managers to make decisions significantly. decision support systems are a sub-branch of computer-based information systems that support decision making. an accurate decision support system is a system that makes decisions by interpreting the information extracted from raw data, personal data and existing business models. in normal life, it is difficult to think about many features at once and make the right decision, and because of this difficulty, these decisions seem to take place in a blurry environment. fuzzy inference maps an output by formulating input data using fuzzy logic. fuzzy logic has two types of inference systems; mamdani and sugeno. both show different results in the final output (talaei, 2012). since human resources are considered as the most important source of the competitive business environment today, choosing the right person has become more important than ever. while making a decision, human resources follow the method process in an empirical practice with two known inference modelings such as mamdani and sugeno in a fuzzy environment. as in many real problems in the world, personnel selection in human resources has been solved with fuzzy logic (golec & kahya, 2007). a study attempts to find the most suitable candidate for a machine maintenance manager position at a selected organization including inconclusive judgments with mamdani and sugeno techniques. . the effectiveness of the proposed implications was tested with matlab / simulink program (tinkir, doganalp, & doganalp, 2015). liang and wang (1994) used fuzzy logic, which is a multi-criteria decision-making mechanism (mcdm), for personnel selection. the mcdm procedure should include quantitative and qualitative data for staff selection. the decision approach should take into account language variables or fuzzy data as well as clear data. human resources managers in an organization should consider many factors such as personality, leadership and communication skills when selecting personnel. fuzzy set theory is an effective tool, which also includes uncertain judgments in the personnel selection process. solutions have been presented to select the most suitable person among the pool of candidates. an institution conducts interviews, skill and achievement tests to measure the performance potential of applicants (wang & yen, 1999). it is very important to evaluate the performance of the employees in order to increase the quality of the work. it provides the basis for both motivation and identification as well as improvement of weaknesses. as a result of the performance evaluations of the employees in an organization, management can observe their weaknesses and strengths. fuzzy approach for performance evaluation has introduced a new supervisory system. in this system, all settings of the user interfaces have been developed by protecting the data with the ms access database (shaout & yousif, 2014). two fuzzy clustering approaches can be preferred in performance evaluations. the first is the traditional fuzzy method that uses rules to evaluate overall scores from many linguistic fuzzy inputs without any intermediate fuzzy logic. traditional methods generate too many rules and it is difficult for experts to consider all aspects and formulate rules with proper weights. for these reasons, the process becomes more difficult and complex. the second approach explains the relationship between performance-critical details and identifies new large groups accordingly. this approach, also known as fuzzy reasoning, is the stage where it is possible and flexible to give different weights (shaout & trivedi, 2013). iii. materials and methodology fuzzy logic has two types of inference systems named mamdani and sugeno. the biggest difference between the two is that the value is extracted after some kind of defuzzification process. in the sugeno defuzzification process, the result is obtained in the form of a function. mamdani inference method was preferred in this study. results can be produced with the other method as well. the reason why mamdani method is preferred is that the membership levels incoming from the fuzzy unit are wanted to be associated with the output membership values by using the minimum relationship operator. the purpose of the study is a system that decides whether the person applying to human resources is suitable for that job posting. according to the experience and graduation degree of the applicant, it is asked to decide whether to recruit or not by measuring the experience of the applicant as inexperienced, 2-yearexperienced or 10-year-experienced in addition to measuring the graduation degree as associate, master’s or doctorate. depending on these, the results are asked to be evaluated as less successful, moderately successful and very successful. fuzzification process is performed depending on the input functions, then inference is obtained according to the determined rule base, finally the output is reached by defuzzification. figure 1. components of a fuzzy logic controller source: authors’ own compilation the rules determined according to the wishes of the working managers in the institution are shown below: volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.226 | http://emaj.pitt.edu measurement of employees on human resources with fuzzy logic page |4| emerging markets journal new graduated: ng associate degree: ad 2-year experienced: 2ye master’s degree: md 10-year experienced: 10ye phd graduate: phd less successful: ls medium successful: ms table 1: rule base very successful: vs source: matlab output when the person submits the pre-application form to the institution, a scoring is made according to their work experience and graduation status. these scores are entered into the system as input values. then; a result is obtained according to the center of gravity after performing min-max operation with the mamdani method. figure 2. mamdani fuzzy system source: matlab output figure 3. input 1 variables source: matlab output figure 4. input 2 variables source: matlab output figure 5. output 1 variables source: matlab output figure 6. matlab surface source: matlab output ng: 25 p. ad: 25 p. 2ye: 60 p. md: 70 p. 10ye: 80 p. ph.d. g:90 p. if the applicant is an inexperienced and an associate degree graduate, a less successful result is obtained by performing a min-max operation according to the center of gravity in the joint evaluation. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.226 | http://emaj.pitt.edu zehra demirel, ceren çubukçu emerging markets journal | p a g e 5 figure 7. new graduated and associate degree source: matlab output if the applicant is an inexperienced and a master’s degree graduate, a medium successful result is obtained by performing a min-max operation according to the center of gravity in the joint evaluation. figure 8. new graduated and master’s degree source: matlab output if the applicant is inexperienced and a ph.d. graduate, a medium successful result is obtained by performing a min-max operation according to the center of gravity in the joint evaluation. figure 9. new graduated and ph.d. graduate source: matlab output if the applicant is a 2-year experienced and an associate degree graduate, a medium successful result is obtained by performing a min-max operation according to the center of gravity in the joint evaluation. figure 10. 2-year experienced and associate degree source: matlab output if the applicant has 2 years of experience and have a master's degree, a medium successful result is obtained by performing a min-max operation according to the center of gravity in the joint evaluation. figure 11. 2-year experienced and master’s degree source: matlab output if the applicant has 2 years of experience and have a doctorate degree, a very successful result is obtained by performing a min-max operation according to the center of gravity in the joint evaluation. figure 12. 2-year experienced and ph.d. graduate source: matlab output if the applicant is 10 years experienced and an associate's degree graduate, a medium successful result is obtained by performing a min-max operation according to the center of gravity in the joint evaluation. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.226 | http://emaj.pitt.edu measurement of employees on human resources with fuzzy logic page |6| emerging markets journal figure 13. 10-year experienced and associate degree source: matlab output if the applicant is 10 years experienced and a master’s degree graduate, a very successful result is obtained by performing the min-max process according to the center of gravity in the joint evaluation. figure 14. 10-year experienced and master’s degree source: matlab output if the applicant is 10 years experienced and a ph.d. graduate, a very successful result is obtained by performing the min-max process according to the center of gravity in the joint evaluation. figure 15. 10-year experienced and master’s degree ph.d. graduate source: matlab output iv. conclusion the human resources management system is the information backbone of an organization and reaches all departments within a business. the most valuable asset of an institution is human beings. for this reason, expensive investments are made in human resources. it is very important to choose appropriate personnel for the needs of the institution. in this study, a mamdani method is presented to select the appropriate element for the requirements based on fuzzy logic inference. fuzzy logic decision making with mamdani inference models was performed using the matlab / simulink ready toolbox. this model has 2 inputs and 1 output. triangular membership functions are used for each entry criterion. the verbal criteria given by the managers in the organization have been transformed into numbers by using the triangle membership functions. results have been drawn after the clarification process of these numbers according to their membership degrees. according to the results of the triangle membership, a ranking was made and it was determined whether there was a suitable candidate for the personnel needs. very successful, moderately successful and less successful people are ranked among themselves according to the result of the membership coefficient. in this organization, the first 5 people were chosen among those who were very successful as a suitable candidate. for people with medium achievement results, other positions were registered in the system to be considered. less successful people are not considered for positions in the company. this study shows that human resources are suitable for multi-criteria group decision making with mamdani method using fuzzy logic models in eligible candidate selection processes. adaptive network-based fuzzy inference system (anfis) can be used for human resources personnel selection in future studies. anfis is a type of artificial neural network method based on takagi-sugeno fuzzy inference system. anfis uses both neural networks and fuzzy logic inference methods in an integrated manner. this method can be used for future studies as it benefits from both of the structures. more effective decisions can be made in human resource selection processes with fuzzy logic inferences. references anderson, j., rainie, l., & cohn, s. (2018). artificial intelligence and the future of humans. pewresearch, 50-62. chan-ohmin, dae-woolee, kyeum-raecho, sung-jinjo, jang-sikyang, & won-booleec. (2011). control of approach and landing phase for reentry vehicle using fuzzy logic . sciencedirect, 269-282. goes, a. s., & limao, r. c. (2017). fuzzy system for human resource performance evaluation. las vegas, nv, usa: ieee. golec, a., & kahya, e. (2007). a fuzzy model for competency-based employee evaluation and selection. sciencedirect, 143-161. lengnick-hall, m. l., & moritz, s. (2003). the impact of e-hr on the human resource management function. journal of labor research , 24, pages365–379. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.226 | http://emaj.pitt.edu zehra demirel, ceren çubukçu emerging markets journal | p a g e 7 özdemir, a., alaybeyoğlu, a., & balbal, k. f. (2019). bulanık mantığın eğitim alanındaki uygulamaları. dergipark, 45-50. ruzic, m. d., skenderovic, j., & lesic, k. t. (2016). application of the mamdani fuzzy inference ssystem to measuring hrm performance in hotel companies a pilot study. researchgate, 53-65. shaout, a., & trivedi, j. (2013). performance appraisal system – using a multistage fuzzy architecture. international journal of computer and information technology, iii(2). shaout, a., & yousif, m. k. (2014). employee performance appraisal system. international journal of computer science & information technology (ijcsit), iv(6). talaei, g. (2012). using fuzzy decision support systems in human resource management. journal of basic and applied, 2035-2039. tinkir, m., doganalp, b., & doganalp, s. (2015). human resource selection process by using various fuzzy logic techniques . proceedings of the workshop on foundations of informatics, 24-29. vahidi, j., salookolayi, d. d., & yavari, a. (2014). a model for selecting an erp system with triangular fuzzy numbers and mamdani inference. journal of mathematics and computer science, 46-54. wang, l., & yen, j. (1999). extracting fuzzy rules for system modeling using a hybrid of genetic algorithms and kalman filter. science direct, 353-362. yager, r. (2002). fuzzy optimization and decision making. sciencedirect, 13-41. yıldız, m. (2006). bilişim teknolojilerinin stratejik rekabeti. selçuk üniversitesi, konya. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu supply chain finance: a study on the use of e-money yavuz toraman nisantasi university, turkey | e-mail: : yavuztrmn@gmail.com olcay ölçen aviation consulting group (acg), turkey | e-mail: : olcay.olcen@gmail.com onur ceylan nisantasi university, turkey | e-mail: : onur.ceylan@nisantasi.edu.tr gizem mertoğlu altinbas university, turkey | e-mail: : gizemmertoglu@gmail.com abstract supply chain finance (scf) is the process of managing the necessary financing for the execution of procurement, production, storage and distribution processes. cash flows have become a crucial element in supply chain management (scm) for companies. scf is a topic that companies should focus more on, especially during times of high interest rates and stagnant markets. with the advancement of technologies, new payment services offered to consumers support scf processes. e-money is one of the significant examples of this. it has been frequently used in retail recently. e-money is monetary value issued in exchange for accepted funds, stored electronically, and used for payments. e-money can be used via virtual and physical cards. e-money is also known as prepaid cards. in the retail sector, a-101's hadi and şok market's win application are notable examples in this field. companies' e-money applications are crucial for scf. the ability for consumers to shop using cash loaded onto virtual e-money cards (accounts) allows companies to utilize the money during the period between the cash being loaded and the expenditure being made. this situation provides a significant advantage in companies' cash flows. the current research examined how consumers perceive this process. the technology acceptance model (tam), which is frequently used in the acceptance of new technologies, was employed in the research. due to the examination of multiple variables and their relationships in the research, the structural equation model (sem) was used. the smart-pls 4 package program was used during the analysis process. according to the results obtained, it can be said that consumers are considering completing their shopping using retailers' e-money. the positive impact of pu on at and at on intention are among the significant outcomes of the research. since consumers have actively used many digital payment methods, especially after covid-19, it is likely that they will adapt to the use of e-money and digital payment applications in the future. keywords: logistics, supply chain management, supply chain finance, finance, e-money volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.345 | http://emaj.pitt.edu | mailto:yavuztrmn@gmail.com mailto:olcay.olcen@gmail.com mailto:gizemmertoglu@gmail.com volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.345 | http://emaj.pitt.edu supply chain finance: a study on the use of e-money page |18| emerging markets journal supply chain finance: a study on the use of e-money yavuz toraman olcay ölçen onur ceylan gizem mertoğlu i. introduction digitalization continues to develop with the changing individual and institutional needs every passing day. especially in the early 2000s, the development of the internet facilitated communication and interaction over long distances. concurrently, the advancement in smartphone technology has shown a linear increase in ecommerce volume. the rise in e-commerce has enabled the transition of retail trade to digital platforms. although e-commerce activities hold a significant place today, when examined specifically in turkey, its share in retailing is around 20% (ministry of trade, 2024). ultimately, the volume of in-store retail in trade activities remains quite significant. however, the retail sector has started to utilize digitalized activities. particularly with the covid-19 pandemic, the increase in people's e-commerce activities has digitalized both purchasing processes and payment methods (toraman & yüksel, 2022). in this context, contactless payment, instant and continuous transfer of funds (fast), ewallet, virtual pos, nfc payments, gift cards, qr code, digital money, cryptocurrency, e-money, etc., payment methods have been made available to consumers (toraman, 2022). consumers, although limited, are using various payment methods. retailers are also benefiting from these payment methods by improving their technological infrastructure. retailers offer e-money applications to their consumers, which are the subject of the research. emoney is a monetary value that can be issued in exchange for funds. e-money is stored electronically and used in payment methods. another type of e-money is prepaid cards. prepaid cards are virtual or physical cards that can be used for payments in exchange for a specific amount of funds (todeb, 2024). currently, it is used by retailers such as a-101, şok market, and bi̇m. additionally, emoney can be offered to consumers in the form of prepaid cards like ininal cards. the characteristic of e-money is that it grants the right to use it up to the amount of funds received. moreover, no interest can be applied to the accepted funds. retailers load e-money that can be used via individuals' mobile applications in exchange for the funds they accept. when considered in this context, retailers have the right to use the funds they accept before the consumer's shopping. ultimately, retailers can use these funds in the payment processes of the supply chain. supply chain financing (scf) is the use of funds obtained after sales in payments within the supply chain. e-money can be seen as an additional financing method for retailers, especially during periods of high-interest rates. the research examines the factors affecting the acceptance of current applications used by a-101 and şok market. ii. supply chain finance supply chain management (scm) involves the flow of goods and materials from procurement to the final point of consumption, while supply chain finance (scf) ensures the flow of cash generated from sales within the supply chain starting from the point of final consumption. scf reduces the financial burden on supply chain stakeholders by providing financing (gelsin et. al., 2021). additionally, it aims to achieve financial optimization for all parties within the supply chain. scf methods include reverse factoring, dynamic discounting, and confirmation (zaman et. al., 2023). in the reverse factoring model, buyers (purchasers) enter into an agreement with a financial institution to finance their suppliers' (sellers') invoices (medina et. al., 2023). in the dynamic discounting model, buyers pay suppliers' invoices early in exchange for a discount. in the confirmation model, another form of supply chain finance, buyers make agreements with a financial institution to finance their suppliers' invoices (gelsomino et. al., 2016). managing working capital becomes crucial during periods of crisis and high interest rates. this necessitates optimizing the scf process by considering various risks (guida et. al., 2021). scf was utilized as a tool to ensure financial flow within supply chains after the 2008 financial crisis. in subsequent periods, it has been used as a method of protection against financial risks (jia et. al., 2020). for instance, the reverse factoring method allows for the secure collection of receivables. however, during times of high inflation and interest rates, as seen today, both accessing cash and conducting traditional scf activities can be quite costly (hofmann, 2011). companies may consider optimizing their cash flows by going public to secure financing during such periods. additionally, with the increase in technological innovations and their applications, scf can be optimized in various ways (gelsomino et. al., 2019). one of these new technologies is e-money. e-money represents a monetary value issued in exchange for accepted funds and is stored electronically (lekkakos & serrano, 2016). another type of e-money is prepaid cards, which are separate forms of e-money usage. similarly, they represent a monetary value equivalent to the amount of funds provided (todeb, 2024; salameh et. al., 2024). additionally, there are 57 institutions in turkey authorized to issue e-money (tcmb, 2024). e-money applications offered by turkish retailers include migros money pay, a-101 hadi, şok market win and bi̇m market bimpara. this research focuses on how retailers can secure financing through the use of e-money. consumers load e-money into mobile applications in exchange for a specified amount of funds. subsequently, consumers can use the e-money specific to the retailer’s application to make payments for their purchases. according to emoney regulations, e-money cannot accrue interest; therefore, retailers offer discounts on purchases made with e-money. this serves both as a marketing strategy to encourage repeat purchases and as a pre-financing method volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.345 | http://emaj.pitt.edu yavuz toraman, olcay ölçen, onur ceylan, gizem mertoğlu emerging markets journal page |19| for retailers with high transaction volumes in scf processes. although e-money is seen as a new payment method enabled by technological advancements, it also provides retailers with funds before the actual purchase takes place. retailers can use the funds received from customers prior to their purchases. these funds can be viewed as prepayments for future purchases. retailers can use the obtained funds to ensure financial flow to suppliers, manufacturers, warehouses, distributors, and service providers within the scm. therefore, the focus of this research is to examine the factors influencing the acceptance and usage of e-money. iii. theory and hypothesis the use and acceptance of new technologies have always been an important issue for academia, domain experts, marketing professionals and industry stakeholders. they have a significant impact on shaping companies' strategies. e-money is one of the innovations used in the payment field. in this study, identifying the factors influencing consumer usage is important for minimizing the risks in companies' scf processes. in this context, the acceptance of e-money, which is considered important in scf processes, has been examined within the scope of the technology acceptance model (tam) by users. tam, commonly used in the acceptance of new technologies, has also been used as the theoretical framework in this study. tam emphasizes that the factors affecting the use of a technological innovation are perceived usefulness (pu), perceived ease of use (peou), attitude towards use (at), and intention (i). in this study, the risk variable has been added to the research model in addition to tam. the research model is shown in figure 1. figure 1. research model source: authors’ compilation in addition to tam, independent variables can be added to the research model based on the subject and content of the research. therefore, in the current study, the risk (r) variable has been added because the focus is on e-money, a payment method used in retail sales. risk is defined as the perception of whether one will encounter a risk when performing the relevant behavior (pavlou, 2003; kamal et. al., 2020). hypotheses h1 and h2 have been formulated specifically for the risk variable. h1: r have a positive and significant impact on pu h2: r have a positive and significant impact on peou according to the original tam, pu is the degree to which a user believes that using the relevant technology will increase their personal performance. peou, on the other hand, refers to the user's ability to complete tasks with less effort when using the relevant technology. additionally, at is defined as positive or negative thoughts towards performing the relevant behavior (vorm & combs, 2022). research conducted within the framework of tam has found a positive and significant relationship between peou and pu. hypotheses h3 and h4 have been formulated specifically for pu, peou, and at (singh et. al., 2020). h3: peou have a positive and significant impact on pu h4: pu have a positive and significant impact on at since e-money as a payment method is not used by many people, active usage has been considered as the antecedent in the research, with intention as the dependent variable. studies in the literature have found positive and significant relationships between at and i (venkatesh & bala, 2008; ly & ly, 2022). hypothesis h5 has been formulated specifically for at and i. h5: at have a positive and significant impact on i the aim of the study is to examine the factors affecting the use of e-money in the retail sector using the research model created. additionally, since payments made with e-money represent a financial process, the risk variable has been added to the model. the study attempts to explain intention, considered as the antecedent of active usage, as the dependent variable. iv. methodology since e-money as a payment method is a new concept and technology, the study is exploratory in nature. partial least squares-structural equation modeling (plssem) has been used in the research. pls-sem is commonly used in studies that examine multiple variables and relationships. for these reasons, pls-sem has been used in the current study. the existing tam scale has been revised for the content of the research and directed towards experts at the undergraduate level in international trade, logistics, economics, and finance, focusing on scf and e-money. convenience sampling method was chosen for sample selection. the scale of the research consists of three sections. the first section contains information about retailers' e-money applications. a 5point likert scale was used for the questions in the second section. the third section aimed to collect demographic information from the participants. subsequently, the scale was tested on a small group for pilot analysis. after it was understood that there were no issues regarding reliability and validity, the data collection process began. the data for the research were collected through online platforms. the scale of the research was sent to 480 people, and a total of 345 responses were received. after cleaning and organizing the data, analysis was performed using 286 usable data. smart pls 4, a commonly used analysis program for pls-sem, was used for the analysis of the research. the findings section thoroughly examines the outputs of the research. v. findings the first step involved examining whether the research data were suitable for analysis using skewness volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.345 | http://emaj.pitt.edu supply chain finance: a study on the use of e-money page |20| emerging markets journal and kurtosis values. since the values were between -1.5 and +1.5, the suitability for analysis was confirmed. subsequently, reliability and validity analyses were conducted (tabachnick et. al., 2013). in terms of reliability and validity, factor loadings analysis was performed first. this was followed by cronbach's alpha, composite reliability (cr), and average variance extracted (ave) analyses. table 1: reliability analysis variables variables factor loadings cronb ach's alpha cr ave risk r1 0.891 0.791 0.857 0.667 r2 0.776 r3 0.777 perceived ease of use peou1 0.888 0.906 0.934 0.780 peou2 0.839 peou3 0.906 peou4 0.899 perceived usefulness pu1 0.875 0.892 0.925 0.756 pu2 0.865 pu3 0.923 pu4 0.811 attitude towards use at1 0.917 0.918 0.948 0.859 at2 0.926 at3 0.938 intention i1 0.927 0.927 0.953 0.872 i2 0.948 i3 0.926 source: smart pls 4 software output the factor loadings, cronbach's alpha, cr and ave values are shown in table 1. upon examination of the factor loadings, cronbach's alpha and cr values, it was found that they were above 0.70. additionally, the ave values were found to be above 0.50, indicating that the research data meet the criteria for reliability and validity (hair et. al., 2011; hair et. al., 2019; alnıpak & toraman, 2024). table 2: discriminant validity-fornell-larcker criterion analysis items at i peou pu r at 0.927 i 0.835 0.934 peou 0.629 0.620 0.833 pu 0.687 0.717 0.783 0.870 r 0.311 0.210 0.341 0.288 0.816 source: smart pls 4 software output the discriminant validity analysis prepared according to the fornell-larcker criterion is shown in table 2. upon examining the correlation table, it can be observed that variables, except for risk, are correlated. it is normal for the risk variable to show low correlation due to its structure. additionally, the variables meet the requirement of having the highest correlation with themselves and lower correlations with others (hair et. al., 2011; hair et. al., 2019; toraman, 2024). table 3: outputs of structural model hypothesis relation path coefficient t value p value 0.05> supported h1 rpu 0.023 0.301 0.763 not supported h2 rpeo u 0.341 2.470 0.014 supported h3 peou pu 0.775 11.637 0.000 supported h4 puat 0.687 9.038 0.000 supported h5 ati 0.835 22.220 0.000 supported source: smart pls 4 software output table 3 presents the results of the hypotheses related to the research model. the lack of a significant relationship between r and pu could be attributed to the perception of the risk factor being usage-oriented rather than performance-oriented. except for hypothesis h1, the other hypotheses have been accepted. it is observed that there is a high effect between attitude and intention. in this context, supporting a positive perception towards emoney applications is crucial for encouraging usage. table 4: r2 values source: smart pls 4 software output table 4 presents the r2 values. upon examining the values, it is important to note that the dependent variable i has an r2 value close to 0.7. this indicates a strong percentage of explanation. a strong r2 value is an indicator that the variables are added correctly to the research model (hair et. al., 2011; hair et. al., 2019). figure 2. research model outputs of smart pls 4 source: smart pls 4 software output items r² radj² at 0.472 0.466 i 0.697 0.693 peou 0.117 0.107 pu 0.614 0.606 volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.345 | http://emaj.pitt.edu yavuz toraman, olcay ölçen, onur ceylan, gizem mertoğlu emerging markets journal page |21| figure 2 displays the analysis results of the research model. it includes the factor loadings of the variables, t-values, path coefficients between hypotheses and r2 values. the outputs of the research are consolidated into a single figure. vi. discussion and conclusion the development of technology has changed past habits in many fields and different sectors. manufacturers, retailers, customers, service providers and other supply chain members have embraced digitalization throughout the entire process from the supply process to product delivery, aiming to ensure product flow and customer satisfaction. this digitalization process optimizes product flow within the supply chain towards the final consumer point and also optimizes information as well as cash flow back to the origin. the use of e-money in supply chain finance (scf) activities, which is the main theme of the research, has been emphasized. while traditional scf methods such as reverse factoring, dynamic discounting and confirmation are typically used in supply chain management (scm), recently, buy now pay later (bnpl) and embedded finance applications have been introduced. in addition, new technologies have been utilized in payment methods, including contactless payment, fast, e-wallet, virtual pos, payment via nfc, gift card, qr code, digital currency, cryptocurrency, e-money, etc., which have been made available to consumers. the research specifically examines the role of emoney and scf optimization. e-money can be used for payments from virtual or physical accounts or cards, up to the sum of funds available. however, for it to be used in payments, the monetary value to be used must be loaded onto physical cards or virtual accounts beforehand. this is precisely the point emphasized in the research, as customers must allocate a certain amount of funds to retailers for e-money before making a purchase. during this period, the use of the allocated funds is under the control of the retailers until the purchase is made at the retail outlets. retailers can manage the flow of funds obtained before the sale among the supply chain stakeholders. this situation is an important alternative in terms of cash flows. the research investigates the factors influencing user adaptation of e-money in payments. ensuring cash flow within the supply chain is not overly complex. however, accessing cash during periods of high interest rates is both difficult and costly. it is crucial for the funds obtained through the use of e-money to be used among supply chain stakeholders. in this context, the technology acceptance model (tam), commonly used in the acceptance of new technologies, has also been employed in the process of accepting e-money in retail payments. as can be seen in table 3 and figure 2, the results of the research are consistent with the literature. except for hypothesis h1, all other hypotheses were accepted. while there was a significant relationship between e and peou, the lack of a significant relationship with pu could be due to the perception of risk being usage-oriented rather than performance-oriented (davis & venkatesh, 1996). the significant and positive effect of pu on at and of at on i are among the important findings of the study. additionally, the r2 values being close to 0.70 indicate a strong percentage of explanation. finally, with the increasing use of e-money in the future, the scope of the current research can be expanded and repeated with different models and samples. it is believed that the results obtained will benefit many sectors, especially retail and finance. particularly during periods of high interest rates and market stagnation, the use of alternative financing methods is important. the challenges faced by companies in their financing processes were addressed in the current research. although limited, the use of e-money can have a positive impact on these processes. during periods of high interest rates, companies' marketing and financial activities can be managed from a single point. this can be turned into a positive process by both retailers and consumers. with the use of e-money, retailers can optimize their scf activities and offer consumers advantageous prices through discounts and various promotions. references alnıpak, s., toraman, y. (2024). analysing the intention to use blockchain technology in payment transactions of turkish maritime industry. quality & quantity, 58(3), 21032123. davis, f. d., venkatesh, v. (1996). a critical assessment of potential measurement biases in the technology acceptance model: three experiments. international journal of humancomputer studies, 45(1), 19-45. gelsin, l. m., de boer, r., steeman, m., perego, a. (2019). an optimisation strategy for concurrent supply chain finance schemes. journal of purchasing and supply management, 25(2), 185-196. gelsomino, l. m., de boer, r., steeman, m., perego, a. (2019). an optimisation strategy for concurrent supply chain finance schemes. journal of purchasing and supply management, 25(2), 185-196. gelsomino, l. m., mangiaracina, r., perego, a., tumino, a. (2016). supply chain finance: a literature review. international journal of physical distribution & logistics management, 46(4). 119. guida, m., moretto, a. m., caniato, f. f. a. (2021). how to select a supply chain finance solution?. journal of purchasing and supply management, 27(4), 100701. hair, j. f., ringle, c. m., sarstedt, m. (2011). pls-sem: indeed a silver bullet. journal of marketing theory and practice, 19(2), 139-152. hair, j. f., risher, j. j., sarstedt, m., ringle, c. m. (2019). when to use and how to report the results of pls-sem. european business review, 31(1), 224. hofmann, e. (2011). supply chain finance solutions. springer. volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.345 | http://emaj.pitt.edu supply chain finance: a study on the use of e-money page |22| emerging markets journal jia, f., blome, c., sun, h., yang, y., zhi, b. (2020). towards an integrated conceptual framework of supply chain finance: an information processing perspective. international journal of production economics, 219, 18-30. kamal, s. a., shafiq, m., kakria, p. (2020). investigating acceptance of telemedicine services through an extended technology acceptance model (tam). technology in society, 60, 101212. lekkakos, s. d., serrano, a. (2016). supply chain finance for small and medium sized enterprises: the case of reverse factoring. international journal of physical distribution & logistics management, 46(4). ly, b., ly, r. (2022). internet banking adoption under technology acceptance model—evidence from cambodian users. computers in human behavior reports, 7, 100224. medina, e., caniato, f., moretto, a. (2023). framing sustainable supply chain finance: how can supply chain sustainability practices and supply chain finance solutions be integrated?. journal of purchasing and supply management, 29(3), 100837. pavlou, p. a. (2003). consumer acceptance of electronic commerce: integrating trust and risk with the technology acceptance model. international journal of electronic commerce, 7(3), 101-134. salameh, a. a., hayat, n., ali, a. (2024). reconnoitering the effects of risk and knowledge on use intention for e-money services among saudi arabian residents. business perspectives and research, 12(1), 133-148. singh, s., sahni, m. m., kovid, r. k. (2020). what drives fintech adoption? a multi-method evaluation using an adapted technology acceptance model. management decision, 58(8), 16751697. tabachnick, b. g., fidell, l. s., ullman, j. b. (2013). using multivariate statistics (vol. 6, pp. 497-516). boston, ma: pearson. türkiye cumhuriyet merkez bankası tcmb, (2024). https://www.tcmb.gov.tr/wps/wcm/connect/tr/t cmb+tr/main+menu/temel+faaliyetler/odeme+h izmetleri/elektronik+para+kuruluslari, access date: 05.06.2024 türkiye ödeme ve elektronik para kur. birliği todeb, (2024).https://www.todeb.org.tr/detay/elektroni k-parayi-taniyin/116/, access date: 05.06.2024 toraman, y., yüksel, c. (2022). covid-19 salgını sürecinde tüketicilerin yeni teknolojileri benimsemelerinin teknoloji kabul modeli (tkm) çerçevesinde temassız teslimat özelinde i̇ncelenmesi: mobil uygulamalar üzerine bir araştırma. doğuş üniversitesi dergisi, 23(covid-19 özel sayısı), 17-34. toraman, y. (2022). dijital türk lirasının (dtl) kullanım kabulü: teknoloji kabul modeli (tkm) ve planlı davranış teorisi (pdt) çerçevesinde i̇ncelenmesi. sosyoekonomi, 30(54), 357-376. toraman, y. (2024). space logistics and risks: a study on spacecraft. politeknik dergisi, 1-1. https://doi.org/10.2339/politeknik.1472919 venkatesh, v., bala, h. (2008). technology acceptance model 3 and a research agenda on interventions. decision sciences, 39(2), 273315. vorm, e. s., combs, d. j. (2022). integrating transparency, trust, and acceptance: the intelligent systems technology acceptance model (istam). international journal of human–computer interaction, 38(18-20), 1828-1845. zaman, s. i., khan, s. a., kusi-sarpong, s. (2023). investigating the relationship between supply chain finance and supply chain collaborative factors. benchmarking: an international journal, 31(6), 1941-1975. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu examination of consumption expenditure distribution among nuts-2 regions in 2007-2018 with gini coefficient latif öztürk kırıkkale university, turkey | e-mail: latifozturk6@yahoo.com nimet varlık kırıkkale university, turkey | e-mail: nvarlik@kku.edu.tr abstract in this study, the distribution of 12 main expenditure categories included in the consumer price index (cpi) among nuts-2 (nomenclature of territorial units for statistics-2) regions is examined. the study covers the years 2007-2018. in the study, interregional consumption expenditure rates are identified with the gini coefficient, which is a measure of inequality and the obtained consumption expenditure rates through the years are interpreted. the coefficients calculated for each expenditure category are important in terms of revealing the course of consumption behavior of households in turkey over the years and reflecting the best and worst distribution at the nuts-2 level. findings regarding the expenditure categories show that the consumption behavior in turkey in the relevant period is far from equal at the regional level. according to the findings, the expenditure category with the highest inequality at the nuts-2 level is the food and non-alcoholic beverages category with an average gini coefficient of 0.3031. the expenditure category with the highest equal distribution, on the other hand, is the education category with a gini coefficient of 0.2307 according to the findings. keywords: nuts-2, consumer consumptions, consumer price index, lorenz curve, gini coefficient new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.223 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.223 | http://emaj.pitt.edu latif öztürk, nimet varlık emerging markets journal | p a g e |87 examination of consumption expenditure distribution among nuts-2 regions in 2007-2018 with gini coefficient latif öztürk nimet varlık i. introduction economic policies aim to increase the welfare level of all individuals and social groups in an economy. at this point, the distribution of the total income in an economy in a certain period among individuals, households, social groups, regions, or elements of production defines income distribution by definition. income distribution, which is one of the important indicators of the economy, is a factor that directs the consumption behavior of consumers to a great extent. consumption behavior is an important indicator of household welfare. consumption expenditures are also frequently used in income distribution calculations in the economics literature. numerical analysis of household consumer behavior at different income levels began to gain momentum in the late 1700s. in the 1790s, two researchers, david davies and frederick eden analyzed the expenditure distribution of particularly poor families in england among food, fuel, rent, clothing, health, and other expenditure categories. then, among the researchers who developed statistical techniques related to social data in the 1850s, adolphe quételet was the pioneer of studies examining individual behaviors through aggregated data. inspired by previous researchers and quételet, german statistician ernst engel analyzed the relationship between the income level of socio-economic classes living in belgium and the expenditure categories in 1857. as a result of his research with 153 families, engel came up with a consumption law. according to this, the poorer a family is, the higher the share it will allocate for food in its total expenditures. this was engel's first general finding from the data regarding the budget of families. in 1895, engel examined the expenditure categories according to income levels. the findings of this study revealed that as the income increases, the share consumers allocate for clothing in total expenditures increases, as well as the share they allocate for housing and fuel decreases (stigler, 1954). these findings have been incorporated into economic theory as the engel curve or the engel's law. consumer spending from their budget for various expenditure categories varies in different income levels. in addition, the spending behaviors of households living in different geographical regions and having different demographic characteristics also vary.1 at this point, the interaction between theoretical thought and empirical studies and rapid advances in data acquisition provided an attractive opportunity to investigate household spending behaviors (blundell, 1988). many studies in economics literature examine the consumption expenditures of consumers, that is, the shares they allocate for different expenditure categories from their budgets. houthakker's 1952 study, which is one of the studies that use the traditional approach to calculate expenditure elasticity values2, examines household expenditures on food, rent, clothing, and other expenditure categories in 30 countries and the relationship between these expenditures and family size. the findings show that expenditure elasticity values of households are similar but not the same. giles and hampton (1985) examined the expenditures of households in seven different expenditure categories in new zealand and found that their expenditure elasticity was quite low. the authors compared their findings with the results they obtained from their studies for australia, england, and the united states of america. the estimations made by chung, lee, and brown (2002) using the expenditure data of taiwanese households for the period 1996-1998 regarding ten commodity categories coincide with the findings of giles and hampton (1985). mcdowell et al. (1997) examined household consumption expenditures from the aspect of income levels and found that especially food consumption expenditures vary to a great extent among different income levels. djibuti et al. (2007), in their study for independent states including russia, reveals the relationship between household expenditures and demographic and socio-economic factors. according to this study, tobacco expenditures of highly rich families are significantly higher than those of poor families. in studies using the lorenz curve, expenditure elasticity values of all expenditure categories are calculated by using the estimation parameters obtained from the lorenz curve (chung, lee, & brown; 2002). the lorenz curve was created in 1905 and it is a graphical representation of the wealth density among a group of households and is a measure of income inequality. although the estimations made with the gini coefficient provide accurate and precise data on income distribution, it is argued that the obtained estimations 1this difference in consumption expenditure is explained by income elasticity in microeconomic theory. goods with positive income elasticity (normal goods) are goods for which demand increases as the income of the consumer increases, while goods with negative income elasticity (inferior goods) are those for which demand decreases as the income of the consumer increases. therefore, the factor that determines the direction of demand here is the quality of the good. this is what engel's analysis of commodity groups indicates. 2studies using the traditional approach to estimate the elasticity of expenditure generate an appropriate functional form for each category of goods and thus obtain an elasticity value at any level of total expenditure (chung, lee, & brown, 2002). this approach is based on the evaluation of the elasticity coefficients estimated from the engel curves. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.223 | http://emaj.pitt.edu examination of consumption expenditure distribution among nuts-2 regions in 2007-2018 with gini coefficient page |88| emerging markets journal should be based on the tables obtained from the lorenz curve (fellman, 2012). the lorenz curve is widely used to represent and analyze household consumption expenditures and income or wealth distribution (akbay, 2005; bhattacharya, 2007; kakwani and podder, 2008; filiztekin and çelik, 2010; kabaş, 2010; dutta and panda, 2014; lyon and gastwirth, 2016; zhang et al., 2019). in 1987, the household income and consumption expenditures survey was applied for the first time in turkey to cover the whole country. this survey includes information showing that income and consumption expenditures vary in different regions, population strata, and rural and urban areas. the 1994 household income and consumption expenditure survey was prepared separately to identify consumption expenditures and income distribution with a different method. with this survey, indicators related to consumption expenditures and income distribution in urban and rural areas throughout turkey were obtained. however, in 2003, during the process of adaptation to the european union (eu) and in order to form a basis for the harmonized index of consumer prices that has been implemented in 2003, it started to be applied with a new name, "household budget survey" (tüi̇k, 2018). in turkey, akbay and bilgiç (2011) estimated the general consumption and food expenditures of households and the income elasticity of food subcategories. their findings show that housing and rent expenditures have the highest percentage in total consumption expenditures with 29.1% and food consumption expenditures take second place with 22.6% in turkey. çağlayan and astar (2012) estimated the determinants of household consumption expenditures separately in turkey, using the 2009 household budget survey data from the turkish statistical institute (turkstat). the findings indicate that consumption expenditures in rural and urban areas differ depending on various factors (such as age, gender, household size). the study in which şengül and sigeze (2013) examined the expenditure categories for turkey between 2005 and 2009 shows that the expenditure elasticity values of food and non-alcoholic beverages, clothing and shoes, housing, water, electricity, fuel, furniture and household appliances, communication, alcoholic beverages, cigarettes, and tobacco are low. expenditures for health, transportation, education, cultural activities and entertainment, restaurant, hotel, and pastry categories vary to a great extent depending on income level. yereli and şahin (2014), based on the household budget survey data from the years 20022009, examined the budget shares of households for 12 different expenditure categories in turkey. housing and rental expenditures took the highest share according to expenditure ratios, while communication expenditures took the lowest. yılmaz's (2014) study reveals the effect of inequality in income distribution on the distribution of consumption expenditures. for this purpose, lorenz curves were created for total income and 13 expenditure categories from turkstat 2008 household consumption expenditure data, and gini coefficients for these lorenz curves were calculated. according to the gini coefficients, there are relatively unequal spending behaviors in turkey. in this study, consumer price index (cpi) main expenditure categories are discussed in terms of total expenditure rates at the nuts-2 level (nomenclature of territorial units for statistics-2), unlike other studies in the economics literature that discuss them in terms of income levels. in the study covering the 2007-2018 period, the distribution of each of the 12 main expenditure categories to the total consumption expenditures among the regions is identified using the gini coefficient, which is an indicator of inequality, and the consumption expenditure rates over the years are interpreted. the empirical findings show that the expenditure category with the highest inequality at the nuts-2 level in the specified period is the food and nonalcoholic beverages category, and the expenditure category with the highest equal distribution is the education category. the study consists of four sections. after the introduction section, in which the theoretical and empirical literature is explained, the data are introduced and the method of the study is explained in the second section. in the third section, the findings of the analyses are given. the fourth section consists of the results and conclusion. ii. data and methodology in the study, the data used to measure the inequality of distribution of expenditure rates based on population are: i) consumption expenditure rates based on nuts-2 for 12 consumption expenditure categories from turkstat for the period 2003-2018, "distribution of expenditure categories based on nomenclature of territorial units for statistics-2"3 , ii) population data obtained from the population statistics from adnks (address based population registration) system of turkstat.4 the gini coefficient has been used to measure the inequalities of the distribution of expenditure rates based on population, and the lorenz curve has been used for its graphical representation. the gini coefficient was first used in 1912 by the italian scientist corrado gini to identify the inequalities in income distribution. today, this coefficient is also used in different fields in which inequality in distributions needs to be measured. besides various calculation methods, the gini coefficient was defined by brown in 1994 as follows (brown, 1994; öztürk and aktar, 2009): 𝐺 = 1 − ∑ (𝑌𝑘+1 + 𝑌𝑘)(𝑋𝑘+1 −𝑛−1 𝑘=1 𝑌𝑘) (1) yk=expenditure category rates by region xk= population density of the regions by years k=1,…,n 3 https://tuikweb.tuik.gov.tr/pretablo.do?alt_id=1012 4 https://tuikweb.tuik.gov.tr/pretablo.do?alt_id=1059 volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.223 | http://emaj.pitt.edu latif öztürk, nimet varlık emerging markets journal | p a g e |89 the gini coefficient takes a value between 0 and 1. a value of zero indicates absolute equality and a value of one indicates absolute inequality. accordingly, a gini coefficient approaching zero indicates that inequality decreases, while a value close to one indicates that inequality increases. the representation of the lorenz curve and the gini coefficient is as follows: figure 1. lorenz curve and gini coefficient source: composed by authors in this study, as shown in figure 1, the cumulative population on the horizontal axis in the representations on the lorenz curve, and the cumulative percentages of the spending rates within the general expenditure categories of various spending groups on the vertical axis are shown. the study also analyzes the relationships among these calculated coefficients and the income distribution coefficients calculated by turkstat. iii. analysis and findings in the study, it is examined whether the ratio of 12 cpi main expenditure categories to general expenditure is evenly distributed among the regions between 20072018 in turkey. for this purpose, gini coefficients have been calculated for 12 expenditure categories in the study. the coefficients calculated separately for each year and each expenditure category are important in terms of revealing the course of household consumption behaviors over the years and reflecting the best and worst distribution for each year. the gini coefficients calculated for 12 expenditure categories and the course of these coefficients over the years (2007-2018) are presented below through tables and figures. in the study, 12 expenditure categories are presented with tables and figures in groups of 3. the course of the gini coefficients of a-) food and non-alcoholic beverages, b-) alcoholic beverages, cigarettes and tobacco, c-) clothing and footwear expenditure categories over the years are indicated in table 1 and figure 2. table 1: gini coefficients of expenditure categories for food and non-alcoholic beverages, alcoholic beverages, cigarettes and tobacco and clothing and footwear by years source: composed by authors figure 2. the course of the gini coefficients of the inequalities of expenditure rates at the nuts-2 regional level between 2007 and 2018 source: composed by authors table 1 and figure 2 show the gini coefficients of the three main expenditure categories and the course of these coefficients over the years. these expenditure groups are (a) food and non-alcoholic beverages, (b) alcoholic beverages, cigarettes, and tobacco, and (c) clothing and footwear. in the food and non-alcoholic beverages category, the lowest gini coefficient (0.29, the best distribution) was in 2009, and the highest gini coefficient (0.31, the worst distribution) was in 2015. in the remaining years, expenditures on food and nonalcoholic beverages were almost equally distributed among regions. it is noteworthy that the gini coefficient of the alcoholic beverages, cigarettes, and tobacco category has increased continuously from 2007 to 2018, in other words, there has been a trend towards inequality between regions in this expenditure category over the years. accordingly, in the alcoholic beverages, cigarettes, and tobacco category, the lowest gini coefficient was observed in 2007 (0.2775), and the highest gini coefficient was observed in 2018 (0.3142). it is seen that the gini coefficients of the clothing and footwear category are lower than the other two main expenditure categories over the years. this finding shows that the volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.223 | http://emaj.pitt.edu examination of consumption expenditure distribution among nuts-2 regions in 2007-2018 with gini coefficient page |90| emerging markets journal expenditures of the clothing and footwear category are relatively more evenly distributed compared to the other two main expenditure categories. in this expenditure category, the highest gini coefficient (0.2923, the worst distribution) was in 2010, and the lowest gini coefficient (0.2746, the best distribution) was in 2013. according to the findings, among the three main expenditure categories shown in figure 1, the expenditure category with the worst distribution at the regional level by years (the highest average gini coefficient) is alcoholic beverages, cigarettes, and tobacco. among other expenditure categories, the course of gini coefficients of d-) housing and rental, e-) furniture and household appliances, f-) health expenditure categories by years can be seen in table 2 and figure 3. table 2: gini coefficients of housing and rental, furniture and home appliances, and health expenditure categories by years year housing and rental furniture and home appliances health 2007 0,2382 0,2879 0,2600 2008 0,2329 0,2967 0,2665 2009 0,2278 0,2770 0,2728 2010 0,2238 0,2797 0,2731 2011 0,2271 0,2740 0,2771 2012 0,2352 0,2700 0,2779 2013 0,2438 0,2608 0,2679 2014 0,2499 0,2578 0,2557 2015 0,2519 0,2701 0,2385 2016 0,2554 0,2742 0,2469 2017 0,2507 0,2755 0,2627 2018 0,2422 0,2749 0,2765 source: composed by authors figure 3. the course of gini coefficients of inequalities of expenditure rates at nuts-2 level regions between 2007-2018 source: composed by authors table 2 and figure 3 show the gini coefficients of (d) housing and rent, (e) furniture and household appliances, and (f) health expenditure categories and the course of these coefficients over the years. in the housing and rent expenditure category, the year with the lowest inequality between regions is 2010, and the year with the highest is 2016. in addition, the findings show that the inequality in the interregional consumption expenditure rates of this group between 2012 and 2016 was higher than in other years and that inequality started to decrease after 2016. in the furniture and household appliances category, the lowest gini coefficient was 0.258 in 2014 and the highest gini coefficient was 0.297 in 2009. when the gini coefficients of health expenditures are examined, it is seen that the best distribution occurred in 2015 (0.239). the inequality among regions, which has increased continuously after 2015, went up to 0.278 in 2018. among the three main expenditure categories shown in figure 3, the best distribution by years was in the housing and rent category, and the worst distribution was in the furniture and household appliances category. table 3: gini coefficients of transportation, communication, cultural activities and entertainment expenditure categories by years year transportation communication cultural activities and entertain ment 2007 0,2544 0,2574 0,2561 2008 0,2585 0,2515 0,2732 2009 0,2657 0,2547 0,246 2010 0,2658 0,2515 0,2301 2011 0,2627 0,2581 0,2285 2012 0,2646 0,262 0,2487 2013 0,2613 0,2634 0,2555 2014 0,2617 0,2638 0,2641 2015 0,2618 0,2643 0,257 2016 0,2635 0,2627 0,2588 2017 0,2724 0,2642 0,2528 2018 0,2772 0,2591 0,2435 source: composed by authors volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.223 | http://emaj.pitt.edu latif öztürk, nimet varlık emerging markets journal | p a g e |91 figure 4. the course of gini coefficients of inequalities of expenditure rates at nuts-2 level regions between 2007-2018 source: composed by authors in table 3 and figure 4, (g) transportation, (h) communication, and (i) cultural activities and entertainment expenditure categories are shown. according to this, the lowest gini coefficient in the transportation category was 0.2544 in 2007, and the highest gini coefficient was 0.2778 in 2018. when we look at the general course, it is seen that the expenditure rates at the level of the regions in the transportation category have a similar distribution, but there is a trend towards inequality in 2017 and 2018. in the communication expenditure category, the best distribution was in 2008 and 2010, and the worst distribution was in 2015. in the cultural activities and entertainment expenditure category, it is seen that the inequality among the regions is high over the years. according to the findings of this category, the lowest gini coefficient (best distribution) was 0.2285 in 2011, and the highest gini coefficient (worst distribution) was 0.2732 in 2008. the findings show that among the three expenditure categories in figure 3, the best distribution by years is in the cultural activities and entertainment category. it has been observed that the average gini coefficients in the transportation and communication categories are quite close to each other over the years. this finding shows that the distribution at the regional level is almost equal in these two main expenditure categories. table 4: gini coefficients of education, restaurants, and hotels, and other goods and services expenditure categories by years year education restaurants and hotels other goods and services 2007 0,261 0,247 0,270 2008 0,254 0,246 0,273 2009 0,256 0,255 0,279 2010 0,237 0,250 0,279 2011 0,246 0,250 0,284 2012 0,208 0,245 0,280 2013 0,208 0,247 0,278 2014 0,218 0,237 0,277 2015 0,230 0,232 0,261 2016 0,231 0,238 0,259 2017 0,230 0,249 0,258 2018 0,216 0,256 0,251 source: composed by authors figure 5. the course of gini coefficients of inequalities of expenditure rates at nuts-2 level regions between 2007-2018 source: composed by authors figure 5 and table 4 show (j) education, (k) restaurants and hotels, (m) other goods and services expenditure categories. in the education category, the inequality at the regional level by years was the lowest in 2018 (0.2163). the worst distribution occurred with 0.2605 in 2007. in the restaurants and hotels expenditure category, the best year was 2015 and the worst year was 2018. in other goods and services, 2015 has the best distribution, while 2010 has the worst distribution. among the three expenditure categories in the graph, the best distribution among regions by years is seen in the education expenditure category. other goods and services category has the worst distribution. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.223 | http://emaj.pitt.edu examination of consumption expenditure distribution among nuts-2 regions in 2007-2018 with gini coefficient page |92| emerging markets journal iv. conclusion in the study, the ratio of the 12 main expenditure categories under the cpi to the total consumption expenditures was identified with the gini coefficient among the regions at the nuts-2 level. in the study covering the years 2007-2018, the gini coefficient calculated for each main expenditure category based on years shows the good and bad distribution characteristics of consumption behaviors by to the expenditure categories. according to this, a gini coefficient approaching zero indicates that inequality decreases, while a value close to one indicates that inequality increases. according to the empirical findings, the highest average gini coefficient of 0.3031 among the 12 main expenditure categories over the years was in the food and non-alcoholic beverages category. this finding shows that the expenditure category with the highest inequality among regions is food and non-alcoholic beverages. considering that food expenditures are the most important expenditure category closely related to household incomes and its share in total expenditure is considered, it is significant that the inequality between regions is high in this expenditure category. the worst distribution in this category occurred in 2015. another expenditure category with high inequality is alcoholic beverages, cigarettes, and tobacco. according to the findings, the level of inequality in this category has continuously increased after 2013. in the clothing and footwear category, it is seen that the inequality among regions is high with an average of 0.2825. the following expenditure categories are furniture and household appliances, health, transportation, and communication categories (average gini coefficients 0.2745; 0.2672; 0.2631; 0.2605, respectively, over the years). the expenditure category with the highest equal distribution among the regions over the years is the education category with an average gini coefficient of 0.2307. considering that the share of education expenditures in total expenditures is quite low, it is an expected finding that the distribution in the education category at the level of regions is relatively high. in this category, the best distribution was in 2012 and the worst distribution was in 2007. another expenditure category where inequality is relatively low compared to other expenditure categories is housing and rent. according to the findings, the best distribution of housing and rental expenditures between regions is the period between 2007-2011. in this category, it is noteworthy that inequality has gradually increased from 2012 to 2018. the other expenditure category that follows the education category towards equal distribution is restaurants and hotels. while the best distribution was in the restaurant and hotels category in 2015, the worst distribution was seen in 2018. references akbay, c. (2005). kahramanmaraş’ta hanehalklarının gıda tüketim talebi ekonometrik analizi. ksü fen ve mühendislik dergisi, 8(1), 114-121. akbay, c., and bilgiç, a. (2011). türkiye’de 2003-2008 dönemlerinde tüketim harcamaları ile gıda harcamalarında meydana gelen değişimler. turkish journal of agricultural economics, 17. bhattacharya, d. (2007). inference on inequality from household survey data. journal of econometrics, 137(2), 674-707. blundell, r. (1988). consumer behaviour: theory and empirical evidence a survey. the economic journal, 98(389), 16-65. brown, m. c. (1994). using gini-style indices to evaluate the spatial patterns of health practitioners: theoretical considerations and an application based on alberta data. social science & medicine, 38(9), 1243-1256. chung, r. h., lee, j. y. and brown, m. g. (2002). an engel curve analysis of household expenditure in taiwan: 1996-98 (no. 8232016-54542). çağlayan, e. and astar, m. (2012). a microeconometric analysis of household consumption expenditure deternşnants for both rural and urban areas in turkey. american international journal of contemporary research, 2(2): 2734. djibuti, m., gotsadze, g., mataradze, g., and zoidze, a. (2007). influence of household demographic and socio-economic factors on household expenditure on tobacco in six new independent states. bmc public health, 7(1), 1-6. dutta, b., and panda, m. (2014). social welfare and household consumption expenditure in india– 2004-05 to 2011-12. economic and political weekly, 113-121. fellman, j. (2012). estimation of gini coefficients using lorenz curves. journal of statistical and econometric methods, 1(2), 31-38. filiztekin, a., and çelik, m. a. (2010). türkiye’de bölgesel gelir eşitsizliği (regional income inequality in turkey). megaron, 5(3), 116-127. houthakker, h.s., (1957). “an international comparison of household expenditure patterns, commemorating the centenary of engel’s law”, econometrica, 25(4) (oct.). 532-551. giles, d. e. a., and hampton, p., (1985). “an engel curve analysis of household expenditure in new zealand”, the economic record, march, 450-462. kabaş, t. (2010). türkiye’de en yoksul % 20'nin yoksulluk profili, gelir dağılımı ve tüketim harcaması, journal of the cukurova university institute of social sciences, 19(2). volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.223 | http://emaj.pitt.edu latif öztürk, nimet varlık emerging markets journal | p a g e |93 kakwani, n. c., and podder, n. (2008). efficient estimation of the lorenz curve and associated inequality measures from grouped observations. in modeling income distributions and lorenz curves (pp. 57-70). springer, new york, ny. lyon, m., cheung, l. c., and gastwirth, j. l. (2016). the advantages of using group means in estimating the lorenz curve and gini index from grouped data. the american statistician, 70(1), 25-32. mcdowell, d. r., allen-smith, j. e., and mcleanmeyinsse, p. e. (1997). food expenditures and socioeconomic characteristics: focus on income class. american journal of agricultural economics, 79(5), 1444-1451. öztürk, l., aktar i̇. (2009). karadeniz bölgesi i̇llerinde kamu tarım yatırımları dağılımının gini katsayısı i̇le ölçülmesi, karadeniz araştırmaları, cilt: 6, sayı: 21, s.113-122. stigler, g. j. (1954). the early history of empirical studies of consumer behavior. journal of political economy, 62(2), 95-113. şengül, s. and çiler s. (2013). türkiye’de hanehalkı tüketim harcamaları: psudo panel veri i̇le talep sisteminin tahmini, internatıonal conference on eurasıan economıes, 17-18 temmuz 2013, st. petersburg, rusya s. 279288. türkiye i̇statistik kurumu, tüi̇k. (2018). hanehalkı bütçe i̇statistikleri mikro veri seti, yayın no: 4557. https://www.tuik.gov.tr/media/microdata/pdf/h anehalki-butce.pdf, erişim tarihi 25.02.2021. yereli, a. b., and şahı̇n, i. f. o. (2014). türkiye'deki hanehalklarının haberleşme talebinin ampirik analizi. sosyoekonomi, 21(21). yılmaz, h. i̇. (2014). türkiye’de gelir dağılımının kentsel ve kırsal alanda tüketim harcamalarına etkisi: ekonometrik bir i̇nceleme, yayınlanmamış yüksek lisans tezi, kahramanmaraş sütçü i̇mam üniversitesi, sosyal bilimler enstitüsü. zhang, q., bilsborrow, r. e., song, c., tao, s., and huang, q. (2019). rural household income distribution and inequality in china: effects of payments for ecosystem services policies and other factors. ecological economics, 160, 114127. appendix appendix 1: representation of the lowest and highest gini coefficients (gk) calculated over the years on the basis of expenditure categories with the lorenz curve volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.223 | http://emaj.pitt.edu examination of consumption expenditure distribution among nuts-2 regions in 2007-2018 with gini coefficient page |94| emerging markets journal volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the effect of regulations on stock market risk (volatility) in nigeria monday uhunmwangho university of benin, nigeria | e-mail: monday.uhunmwangho@uniben.edu abstract recent regulations are directed at mitigating financial market risk, because risks, especially volatility dampen investors’ confidence, and hinder firms’ ability to raise funds at the exchange. though, volatility had been investigated in the past, the joint utilization of micro and macro regulatory tools to address it after the global crisis is rare. it is on this backdrop that this study investigates the effect of regulations on stock market risk (volatility) in nigeria. thirteen interest charging banks listed in the nigerian exchange limited for the period of 2010-2020 were investigated, because bank stocks are mostly traded at the exchange. data for this study were collected from the banks’ annual reports, stock exchange official daily price lists as well as the central bank of nigeria statistical bulletin various issues. the first difference generalized method of moments (dgmm) and the dynamic model were engaged in the investigation. results of this study reveal that regulatory liquidity ratio and monetary policy rate positively and significantly impact stock market risk (volatility), while prescribe cash reserve ratio has negative and significant effects. the implication of this finding is that regulations except cash reserve instruments constitute frictions impacting equity market risk. therefore, it is recommended that caution is exercised in the use of micro and macro regulatory weapons. otherwise, investors’ confidence will decline and investments will reduce. keywords: difference generalized method of moments, dynamic model, financial regulations, stock market volatility, nigeria new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.255 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.255 | http://emaj.pitt.edu monday uhunmwangho emerging markets journal | p a g e |95 the effect of regulations on stock market risk (volatility) in nigeria monday uhunmwangho i. introduction financial market risks, especially the volatility of stock price inhibit investors’ confidence and possibly hinder firms’ ability to raise funds through an initial public offering in the equity market. significant regulatory measures targeted at minimizing financial risk have taken place since the 2007/2008 financial crisis. notwithstanding that measures were in place to guide the activities of financial market operators before 2007, the crises exposed the flaws of previous regulatory actions, and thus necessitate the introduction of more measures to reinforce earlier regulations. for instance, basel iii regulatory rules came into existence, because the previous regulatory actions failed to prevent the global financial crises (zgarni & hassuona, 2018). basel iii accord stressed among others the strengthening of banks’ capital, to build the needed resilience against internal and external shocks. indeed, a reduction in risktaking through low leverage and a boost in banks’ capital may have the capacity to instill confidence and ensure stability in the financial system, particularly the stock exchange. however, large capital at the disposal of banks is an incentive to create more credits because of the excess liquidity, and this will stimulate trading activities at the exchange, thus instigating volatility. therefore, to guarantee stability in the aggregate economy, consideration should also be given to the volatility of asset returns because a financial crisis occurs when there is high uncertainty in the markets, portraying that the financial institution is weak and face macroeconomic surprises. it is on this backdrop that this study seeks to examine whether regulations postfinancial crisis has succeeded in mitigating financial market risk (volatility) in nigeria. sarin and summers (2016) showed that indicators of instability in the stock market are still on the high side post-2007/2009 than before, an indication that existing regulations aimed at arresting market risk may not have achieved the desired result. however, onoh (2017) declared that the use of prudential guidelines, specifically monetary policy is yielding the desired outcome. gummi (2015) reviewed the effect of regulation on banks in nigeria since 2005 and reported that regulation boosts confidence, safety, and stability of the system. elkelish and tucker (2016) investigated the impact of regulatory capital on stock market stability during the crisis period and reported that regulatory capital ensures stock market stability. zare, azahi and habitullah (2013) examined the effect of monetary policy surrogate by the interest rate on stock market volatility in developing countries and discovered that interest rate influence stock market volatility. it is obvious from the foregoing that, joint utilization of micro (firm’s specific) and macro (aggregate) regulatory indicators to tackle stock market risk is uncommon in nigeria. to this end, both economywise and bank regulatory variables are engaged in this study to examine whether regulations have a significant effect on the volatility in the nigerian stock market postfinancial crisis. this study is of the view that in measuring the effect of regulations on stock market instability, there is a need to activate firms’ specific and economy-wise monetary policy regulatory factors. indeed, regulation directed at curtailing banks’ credit creation may hinder access to investment funds, thus limiting the volume of trading activities at the exchange, and this may affect stock market risk (volatility). ii. literature review financial regulations and stock market regulations are the standard of behaviour economic agents, that are expected to comply with while carrying out their activities. financial regulations are a compendium of guidelines instituted by the government and targeted at controlling the activities of the operators in the financial system (chris, 2003). regulation is initiated when it is perceived that the behaviors of economic agents will harm the economy. this means that, government intervention is premised on the belief that it knows what is best for the citizens than they do themselves (ajefu & barde, 2015). indeed, basel iii regulatory guidelines came into operation to strengthen the banking system following the distortions caused by the financial crisis of 2007. dewatripont and tirole (1994) declared that regulatory capital is a procedure by which depositors assigned power to regulators to control the activities of banks, particularly as it relates to risktaking. certainly, the capital requirement is vital because adequate capital in the possession of banks helps to safeguard exposure to failure (chortareas, girardone & ventouri, 2012), and boosts resilience in a crisis situation. however, large capital at the disposal of banks is an incentive to create more credits because of the excess liquidity, and this will stimulate trading activities at the exchange, thus instigating volatility. central banks regulate the behavior of financial institutions (fabizzi & drake, 2009) through monetary policies, and the effect is conveyed through liquidity, credits, and exchange rate (osuagwu, 2009 citing uchedu, 1996) to the financial market. undeniably, liquidity rates and monetary policy rates are commonly used to ensure stability in the financial system. huo and rios-rull (2016) asserted that borrowing constraints decrease domestic prices, and lower wealth, particularly for extremely indebted economic agents; and this ultimately may affect stock market activities. the reduction in trading activities at the exchange has been credited to financial and cash policies (shaban, al-zubi & alghusin, 2017). jun, marathe and shawky (2003) posited that macroeconomic policies, as well as legal activities, impact stock market behavior. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.255 | http://emaj.pitt.edu the effect of regulations on stock market risk (volatility) in nigeria page |96| emerging markets journal the reactions of the stock market to regulations may also be ascribed to frictions because of the effect of regulations on investors’ confidence and the trading activities at the exchange. indeed, frictions caused distortions in buying and selling procedures (olbrys & majewska, 2014). financial market frictions include regulations and restrictions on private enterprises (degennaro & robotti, 2007), and this is capable of limiting investors from incorporating some financial assets in their portfolios. for instance, restraints on access to funds through an increase in liquidity ratio or cash reserve ratio may prevent investors from including some financial assets in their portfolio, and this may affect the level of activities at the exchange, hence the need to examine in this study their impact on financial market risk. theoretical foundation for the study this study is predicated on the agency theory enunciated by jensen (1986). an agency conflicts arise in an organization where the principal is separated from management because the managers have the motivation to embark on risky activities which may not be in the interest of the principal and other stakeholders. it can be argued that inadequate regulation of financial institutions, particularly banks is an impetus for them to engage in risky behavior. therefore, to safeguard depositors’ funds and guarantee stability in the financial system, government introduces various regulatory policies. indeed, banking institutions require regulatory attention to minimize the risk level for participants because of the volatile nature of the industry (currie, 2003). stieglitz (1989) opined that government should intervene (through regulation) when the investments of the public are at risk due to the activities of institutions’ managers. empirical literature elkelish and tucker (2016) inspected the effect of mandatory capital on stock market stability in the crisis period of 2007 to 2008, using the generalized least squares technique. it was discovered that regulatory capital boost stock market stability. brumm, kubler, grill and schmedders (2014) showed that margin regulation in the aggregate economy has a depressing effect on the volatility of asset returns. tennant and tracey (2014) investigated the link between bank and stock market volatility in small but bank overshadowed country, using generalized autoregressive model, and found that strict regulations determine market volatility. bleich, fendel and bulke (2013) studied the effect of interest rate on financial market stress proxy by market volatility. they revealed that prominent financial regulatory authorities like the bank of england, and federal reserve bank tackle market volatility through interest rate reduction. zare, azahi and habitullah (2013) examined the effect of monetary policy surrogate by the interest rate on stock market volatility in developing countries, using pool mean regression covering 1991m1 to 2011m12. the outcome of the investigation shows that a rise in interest rates influences stock market volatility. mertzanis and siriopoulos (1999) considered whether regulation of price limits influence stock market volatility in athens for the period 1991 to 1998, using anova technique. it was reported that price limits regulation does not mitigate stock return volatility except for large capitalized shares. wang, tsai and li (2017) considered policies' impact on the stock market in china with the aid of garch methodology and daily data from 19th december 1990 to 29th may 2015. the result revealed that policy on deposit reserve ratio influences stock market volatility. tchereni and mpini (2020) considered the impact of monetary policy on stock market volatility in south africa for the period spanning the first quarter of 2000 to the fourth quarter of 2016, applying an error correction model. results revealed that the money supply negatively influences volatility, while the repo rate has a positive effect on volatility. iii. methodology this study aims to investigate the impact of regulations on financial market risk in nigeria, focusing on banks. this is necessary, because bank stocks are the most highly traded securities on nigerian exchange, and instability associated with the stocks may affect investors’ confidence, thus constituting a risk to the entire economy. thirteen interest-charging banks quoted in the nigerian stock exchange form the sample for the study because of their trading frequency, and regulations are directed at them most of the time. data for the study were collected from banks’ audited annual reports, the nigerian stock exchange's official daily price list,s and the central bank of nigeria statistical bulletin, covering the period of 2010-2020. stock prices were subjected to the generalized autoregressive conditional heteroscedasticity (garch) to ascertain stock volatility and the residual which is called volatility in this study was extracted and incorporated among the investigated variables in the excel work file. the generalized method of moments (gmm) in the first difference option and the dynamic model were used for the investigation. to test for serial correlation, the regression output was subjected to the arrelano and bond (1991) autocorrelation procedures. the j.statistic initiated by hansen (1982) was engaged to test for the existence of over or under restrictions in the instrumental variables added as a requirement for gmm estimation. this study applied eviews 9.0 computer software for the analysis. iv. model specification regulations are directed at ensuring financial system stability, and volatility is one of the indicators of stock market stability. therefore, to examine the nexus between regulations and stock market risk (volatility) in nigeria, this study implemented the dynamic model. dynamic model is invoked when the lagged value (s) of the dependent variable is added as regressors thus: 𝐾𝑖𝑡 = 𝐾𝑖𝑡_1 + b𝑍𝑖𝑡 + a𝑖 + μ𝑖𝑡 (1) where; 𝐾 = dependent variable, 𝑍 = set of regressors, 𝑖𝑡 = unit and time identifiers respectively 𝑎 = individual specific effects (unknown effects), volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.255 | http://emaj.pitt.edu monday uhunmwangho emerging markets journal | p a g e |97 𝑡_1 = lagged value, and 𝑈 = error term. the effect of regulations on stock market risk in this study take the following form: 𝑉𝑅 = 𝑓(𝐵𝐿𝑅, 𝐶𝐴𝑅, 𝑀𝑃𝑅, 𝑃𝐶𝑅, 𝐿𝐸𝑉, 𝐸𝑋𝑅) (2) the implementable form of the above model is stated as follows: 𝑉𝑅𝑖𝑡 = 𝛾𝑉𝑅𝑖𝑡_1 + b1𝐵𝐿𝑅𝑖𝑡 + b2𝐶𝐴𝑅𝑖𝑡 + b3𝑀𝑃𝑅𝑖𝑡 + b4𝑃𝐶𝑅𝑖𝑡 + μ𝑖𝑡 (3) where; vrit = the volatility of stock price for bank i at time t (proxy for stock market risk in this study) blrit = regulatory liquidity ratio for bank i at time t (surrogate by the ratio of cash and cash equivalent to bank total deposits) carit = regulatory capital adequacy ratio for bank i at time t (calculated as bank capital divided by risk weighted assets) mprit = prescribed monetary policy rate for the aggregate economy (benchmark for interest rate) pcrit = prescribed cash reserve ratio for the banking industry t-1 = the lagged value of the variable 𝛾 = coefficient of the dependent variable in the immediate past u = error term bi –b2 are coefficients of the variables to be estimated. note: leverage (lev) and exr (exchange rate) were added as external instruments which is a requirement for estimating gmm. stock price volatility is best captured using the generalized autoregressive conditional heteroscedasticity (garch). therefore, stock price was subjected to garch procedures, the residual extracted and added to the other variables in excel work file to enable further investigation. the mean equation of arch model (gujarati, 2009) takes the form: 𝑋𝑡 = 𝐸𝑡−1(𝑋𝑡) + 𝜇𝑡 (4) where; xt = stock market returns at time t (proxy in this study by stock price), et-1 = expectation depending on information available to t-1, 𝜇 = error term the variance of the above equation takes the form: б2t = 𝐾0 + ∑ 𝑎1𝐸2б2t − 1 + 𝜇𝑡 𝑞 𝑖=1 (5) the general pattern of equation 5 with log conditional variance as autoregressive model of abbreviated as garch (1,1) in its summarized form is stated as: 𝑙𝑜𝑔б2𝑡 = 𝐾0 + 𝐾1𝐸2t1 + 𝐾2б2t_1 (6) where; 𝑙𝑜𝑔б2𝑡 is the log conditional variance and it take value from 𝐾1𝐸2 t_1, 𝐸2 t_1 is the past period error variance, б2 t_1 is the past conditional variance, and k0, k1, k2 are factors to be estimated. v. results and discussion the main concern of this study is to examine the impact of regulations on stock market risk, therefore it was necessary to first ascertain volatility of stock price. to achieve this, garch technique was applied on stock price and the output is displayed in table 1 below. table 1: garch estimation of volatility variable coefficient z-statistic p. value log(garch) 1.3269 11.8683* 0.0000 variance equation c 0.6856 4.4547 0.0000 residual variance 0.4836 4.7732* 0.0000 garch(-1) 0.4999 10.0897* 0.0000 source: e-views 9.0 software output it is obvious from table 1 above that the stock price exhibit volatility, because the mean and variance equations are positive and significant at 1% level. a further look at table 1 revealed that the sum of the variance residual and garch (-1) is not more than one, which is a valid condition for accepting the garch estimate. to further confirm the presence of volatility in stock price, the garch residual was graphed. the outcome in figure 1 demonstrates that the stock price is volatile because of the high level of oscillation. specifically, the prices swing between the positive and the negative region (that is, above and below the zero line). a swing to the extreme up indicates upward volatility, while movement downward (the negative region) is a sign of downward volatility. at this point, loss occurs abruptly due to a substantial decline in prices. to check for arch effect on the residual variance, the autoregressive conditional heteroscedasticity lagrange multiplier (arch-lm) test was applied to the garch residuals. the result highlighted in table 2 reveals that the f.statistic and the observed r-squares are not significant at 5%, an indication that there is no arch effect in the residual. this means that, there is no autocorrelation in the residual. table 2: arch-lm test for heteroscedasticity f-statistic 0.074577 prob. f(1,140) 0.7852 obs*r-squared 0.075602 prob. chi-square(1) 0.7833 source: e-views 9.0 software output volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.255 | http://emaj.pitt.edu the effect of regulations on stock market risk (volatility) in nigeria page |98| emerging markets journal -40 -30 -20 -10 0 10 20 30 a c c e s s b 1 0 a c c e s s b 1 4 a c c e s s b 1 8 e c o b a n k 1 1 e c o b a n k 1 5 e c o b a n k 1 9 f c m b 1 2 f c m b 1 6 f c m b 2 0 f id e li t y b 1 3 f id e li t y b 1 7 f ir s t b 1 0 f ir s t b 1 4 f ir s t b 1 8 g t b 1 1 g t b 1 5 g t b 1 9 s t a n b ic 1 2 s t a n b ic 1 6 s t a n b ic 2 0 s t e r li n g 1 3 s t e r li n g 1 7 u b a 1 0 u b a 1 4 u b a 1 8 u n io n b 1 1 u n io n b 1 5 u n io n b 1 9 u n it y b 1 2 u n it y b 1 6 u n it y b 2 0 w e m a b 1 3 w e m a b 1 7 z e n it h b 1 0 z e n it h b 1 4 z e n it h b 1 8 vr figure 1: volatility of bank stocks source: e-views 9.0 software output based on the fact that the incidence of volatility in the stock price has been established, the garch residual which is called volatility in this study was extracted and added to other modeled variables in excel-work-file to enable this study investigate the impact of regulations on stock market risk (volatility). the concern in this study is to assess whether regulations after the 2007 financial crisis played any major role on stock market risk (proxy by volatility in this study). specifically, whether micro and macro prudential regulatory tools are potent factors in arresting volatility. to this end, the modelled variables were subjected to difference generalized method of moments (dgmm) regression technique. the outcome of dgmm estimate is highlighted in table 3 below. table 3: dgmm regression output (vr as dependent variable) variables coeff. t. statistics probability vr(-1) -0.1646 -2.3962 0.0184** blr 30.2367 3.4497 0.0008* car -3.9428 -0.1654 0.8690 mpr 0.3685 2.0077 0.0474** pcr -0.1755 -3.0422 0.0030* j. statistic = 9.9452 pro. j. statistic = 0.2689 instrument ranking = 13 *; ** = significant at 1% and 5% level respectively source: e-views 9.0 software output table 3 reveals that the goodness of fit statistic represented by j.statistic is very impressive, because the probability of j.statistic is not significant at the 0.05 percent level. the result implies that the model is well specified because there are no over-or-under restrictions in the model and the instrumental variables added infuse into the model. to be sure there is no serial correlation in the regression estimates, the arrelano and bond (1991) autocorrelation test were applied to it, and the result is presented in table 4. the result in table 4 clearly shows the absence of autocorrelation in the regression output due to the not significance of ar(1) and ar(2) statistics at the 5% level. the condition for accepting the dgmm result is that at least ar(2) should not be significant, judging by the probability value. consequent to the impressive outcome of the diagnostic tests, the study went ahead to interpret the dgmm results in table 3 above because of the sureness that it is consistent and reliable, and therefore good for policy direction. the result in table 3 reveals that previous market volatility has a spillover effect on current volatility because of the significance of the past value at the 5% level. this portent that there is volatility spillover in the market, and therefore investors should demand a high reward for taking a high risk. a further look at table 3 indicates that bank regulatory liquidity ratio (blr) is positively related to stock market volatility. the significance of the indicator at the 1% level, implies that bank liquidity is an effective instrument affecting stock market risk. this is because a rise in this regulatory tool denies investors access to investment funds, thereby limiting the inclusion of some financial assets into their portfolios and depressing the volume of activities and by extension stock market liquidity. therefore, financial regulation worsens the capacity of the stock market to resist shocks because of its effect on trading volume and liquidity, hence the positive effect. indeed, hameed et. al. (2010) demonstrated that funds restrictions are the major determinant of stock market liquidity. however, the capital adequacy ratio (car), another micro regulatory tool, negatively relates to stock market volatility. it means that this indicator can curtail stock market volatility, as a rise in this regulatory instrument depresses stock market risk. the insignificance of this regulatory weapon in this study may be due to the undeveloped nature of the nigerian financial system and the fact that the current capital adequacy ratio adopted by the regulatory authority is not sufficient to forestall current market risk at the moment. this calls for review of the current standard of 10% for national banks and 15% for global banks if the unpredictable fluctuations in market price are to be abated. also, table 3 shows that the monetary policy rate (a benchmark for the interest rate in nigeria) can be deployed to address stock market volatility. the monetary policy rate (mpr) is employed by the central bank to regulate the quantity of money in circulation. the significance of mpr at the 5% level, implies that it has the potential to influence stock market risk. the positive impact of this indicator on volatility may be due to its high rate presently. high-interest rate discourages investment, especially trading activities at the exchange, thus worsening stock market liquidity and the capacity of the market to withstand shock, hence the positive effect. indeed, regulations constitute frictions that distort buying and selling at the exchange (olbrys & majewska, 2014). this finding tends to support zare et al (2013) that monetary policy (interest rate in their study) influences stock market volatility; as well as tchereni and mpini (2020) who reveal that repo rate (the equivalent of the monetary policy rate in nigeria) has a positive impact on volatility. finally, the prescribed cash reserve ratio (pcr), another aggregate (macro) regulatory weapon, is negatively and significantly related to stock market risk (volatility). the result implies that a rise in the cash reserve ratio will depress stock market volatility to the tune of 36.85%. surely, an increase in cash reserve reduces the ability of banks to create credits, thus restricting access to funds for trading, thereby volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.255 | http://emaj.pitt.edu monday uhunmwangho emerging markets journal | p a g e |99 discouraging the level of activities at the exchange and depressing volatility. this result tends to agree with wang et al (2017) who revealed that the deposit reserve ratio influences stock market volatility. generally, this study reveals that both micro and macro regulatory tools have a significant influence on stock market risk (volatility) in nigeria. indeed, bank liquidity ratio and monetary policy rate as regulatory tools have positive and significant effects. however, cash reserve ratio regulatory instrument has a negative and significant impact on volatility. table 4: arellano-bond test for serial correlation in regression output test order mstatistic rho se(rho) probabil ity ar(1) -1.1389 -657.7494 577.5147 0.2547* ar(2) -1.6068 -1585.6946 986.8663 0.1581* * = not significant at 5% level source: e-views 9.0 software output vi. conclusion the aim of this study was to investigate the effect of regulations on stock market risk in nigeria. specifically, it examined whether volatility existed in the nigerian stock market post-finance crisis (2010 and 2020) and whether financial regulations were mitigating factors. the first difference generalized method of moments (dgmm) and the dynamic model were engaged in the investigation. the e-views 9.0 software was employed for the analysis. thirteen banks listed in the nigerian exchange limited for the period of 2010-2020 were investigated. data for this study were collected from the bank's annual reports, the stock exchange's official daily prices list as well as the central bank of nigeria statistical bulletin various issues. the results of this study showed that the regulatory liquidity ratio for banks and monetary policy rate positively and significantly impact stock market risk (volatility), while the prescribed cash reserve ratio has negative and significant effects on market risk. the impact of the regulatory capital adequacy ratio on market risk is positive, but not significant. thus, this study concludes that (i) stock market volatility persists after the global financial crisis in nigeria (ii) liquidity ratio, monetary policy rate, and cash reserve ratio are potential regulatory instruments to influence stock market risk (volatility). references ajefu, j. b. & barde, f. (2015). market efficient and government intervention revisited: what do recent event tell us? journal of international business and economics, 3(1), 20-23. arellano, m., & bond, s. (1991). some tests of specification for panel data. review of economic studies, 58(9), 277-297. bleich, d., fendel, b. & bulke, j. (2013). monetary policy and stock market volatility. deutsche bundesbank discussion paper no.45, 1-8. (https://papers.ssrn.com/sol3/papers.cfm) brumm, j., kubler, f., grill, m., & schmedders, k. (2014). margin regulation and volatility. european central bank working paper series, no. 1698, july 2014, 1-39. cbn. (2020). financial markets development half year report, 1-92. chortareas, g., girardone, c. & ventouri, a. (2012). bank supervision, regulation and efficiency: evidence from the european union. journal of financial stability, 84), 292-302. chris, o. (2003). financial regulation in nigeria and challenges of the west african monetary zone. seminar on the issues in financial institutions surveillance in nigeria. central bank of nigeria training centre working paper, no.3, 100-111. currie, c.v. (2003). towards a general theory of financial regulation: predicting, measuring and preventing financial crises. university of technology sydney school of finance and economics working paper no.132, october, 159. dewatripont, m., & tirole, j. (1994). the prudential regulation of banks. cambridge university press, cambridge, usa. degennaro, r.p. & robotti, c. (2007). financial market frictions. federal reserve bank of atlanta economic review, third quarter, 1-16. elkelish, w. w. & tucker, j. (2016). bank regulation and stock market stability across countries. journal of financial regulation and compliance, 24(4), 402-419 (https://dx.doi.org/10.1108/jfrc-09-20150049) fabizzi, f.j. and drake, p. p. (2009). finance, capital markets, financial management and investment management. john wiley and sons, inc. new jersey, usa. gujarati, d.n. (2009). basic econometrics (5th edition.). mcgraw-hill companies inc, usa. gummi, m.u. (2015). financial regulations and the nigeria’s banking sector. journal of research in business and management, 3(11), 5-13. hansen, l.p. (1982). large sample properties of generalized methods of moments estimators. econometrica, 50, 1029-1054. volume 12 no 1 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.255 | http://emaj.pitt.edu the effect of regulations on stock market risk (volatility) in nigeria page |100| emerging markets journal huo, z., & rios-rull, j. (2016). financial frictions, asset prices, and the great recession. federal reserve bank of minneapolis staff report no.526, february 2016. jensen, m.c. (1986). agency costs of free cash flow, corporate finance and takeover. american economic review, 76(2), 323-329. jun, s., marathe, a., & shawky, h. a. (2003). liquidity and stock returns in emerging equity markets. emerging markets, 4(1), 1-24. osuagwu, e.s. (2009). the effect of monetary policy on stock market performance in nigeria. nigerian journal of securities and finance, 14(2), 17-42. onoh, a.u.(2017). monetary policy instruments and their effect on turnover ratio of commercial banks in nigeria. journal of business and african economy, 3(1), 61-95. olbrys, j., & majewska, e. (2014). implications of market frictions: serial correlations in indexes on the emerging stock markets in central and eastern europe. operations research and decisions, 1, 51-70. sarin, n. & summers, h.l. (2016). understanding bank risk through market measures. brookings papers on economic activity, 57-127. shaban, o.s., al-zubi, z. & alghusin, n.a. (2017). the effect of financial and cash policies on the performance and risk assessment of amman stock exchange market. ekonomski pregled, 68 (5), 541-553. stieglitz, j. (1989). financial market and development. oxford review of economic policy, 5(5), 5568. tchereni, b. h. m, & mpini, s. (2020). monetary policy shocks and stock market volatility in emerging markets. risk governance and control: financial markets & institutions, 10(3), 50-61 (http://doi.org/10.22495/rgcv10i3p4) tennant, f.d. & tracey, r.m (2014). financial intermediation and stock market volatility in a small bank-dominated economy. the journal of developing areas, 48(4), 73-95. umar, b. & nayan, s. (2018). does regulatory quality matters for stock market development? evidence from africa. international journal of economics and financial issues, 8(4), 10-15. wang,y., tsai, j. and li, q.(2017). policy impact on chinese stock market: from 1994 bailout policies to the 2015 shanghai-hong kong stock connect. international journal of finance studies, 5(4), 1-19. zgarni, a. & hassouna, f. (2018). regulation and bank performance. the journal of american business review, 6(2), 15-22. zare, r., azahi, m. & habitullah, m.s. (2013). monetary policy and stock market volatility in the asean5: asymmetries over bull and bear markets. procedia economics and finance, 7, 18-27. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu country-level size effects in international asset pricing crina pungulescu institute for economic forecasting national institute of economic research and romanian academy, romania | e-mail: crina_pungulescu@ipe.ro abstract this paper1 investigates whether small markets offer higher risk-adjusted expected returns using a large set of developed and emerging markets over a time span of up to four decades. the results show that expected returns are significantly lower in larger markets, an effect more pronounced in emerging rather than developed countries. the relationship between size effects and the level of market segmentation in emerging countries is further explored in the context of financial market integration. the size premium is strong and persistent over time independently of the (fading) segmentation premium documented in the literature. markets size effects remain statistically and economically significant in the presence of various control factors and account for up to 1% per year in terms of expected returns in emerging countries. keywords: finance, market size, emerging markets, market integration, capital controls new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. 1this research was supported by a grant of the ministry of national education, cncs uefiscdi, project number pn-iiid-pce-2012-4-0631. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu | mailto:crina_pungulescu@ipe.ro http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu country-level size effects in international asset pricing page |30| emerging markets journal country-level size effects in international asset pricing crina pungulescu i. introduction emerging financial markets resemble the (more) mature counterparts from developed countries in important ways. expected returns in both developed and emerging markets appear driven by qualitatively similar factors among which momentum, size and value effects have received substantial evidence (see fama and french, 1998; rouwenhorst, 1999; hou et al., 2011; fama and french, 2012; lambert et al., 2020). the robustness of these findings across many countries in different stages of development suggests that such factors could be linked to asset pricing in a fundamental way, rather than being abnormal and transitory market reactions. of these factors, size effects have been widely investigated using firm level data. smaller firms have systematically offered higher risk-adjusted expected returns. the evidence, although not undisputed, establishes them, at the very least, as a recognised factor in the cross-sectional analysis of returns from the original paper of banz (1981) to recent revaluations of the magnitude of the size factor by lambert and hübner (2015), cakici et al. (2016) and li (2021). interpretations of the evidence on the size premium range from compensation for risk factors, firm characteristics, access to capital, inefficiency in the way markets incorporate information into prices to survivorship biases or even data snooping (see rouwenhorst, 1999; ferguson and shockley, 2003). contrary to firm size effects that have been widely recognised and extendedly debated in the literature, country-level size effects received little attention. in the early 1990s, practitioners recognised that the smallest markets appear to systematically outperform the larger ones, a phenomenon dubbed the small-country effect (keppler and traub, 1993). this paper addresses the question of size effects at the country level (i.e. market size) in a comparative exercise across developed and emerging markets and asks whether smaller markets harbor a size premium, as well. market size effects may be important for the strategic choices of international investors, that would make an initial selection of countries rather than of individual stocks. evidence on market size effects is only incipient with respect to developed markets and especially scarce for emerging markets. the original findings of keppler and traub (1993) and asness et al. (1997) for market indices in developed countries have not been confirmed in other data sets analyzed by bekaert et al. (1997) and harvey (2000). at present, size effects are well established in the literature at the firm rather than the country level. however, the question of aggregate, market size effects, especially in the context of emerging markets, becomes increasingly relevant both for international investment as well as from a market integration perspective. emerging markets achieved substantial progress over the last decades and offer an ideal environment for establishing the potential relationship between market size and market integration. moreover, they provide increasingly attractive investment opportunities. they have taken decisive steps towards market development and financial liberalization often as part of more committed economic reforms. restrictions to foreign ownership of assets have been gradually lifted in many emerging countries and the market share that is open to foreign investors has been growing steadily. strongly correlated with the decline of capital controls, the average market capitalization in emerging markets has been increasing by more than 30% per year. previous studies showed that market liberalization results in lower cost of capital, a development expected to have positive effects on investment and development in a country (see bekaert and harvey, 2000; henry, 2000; edison and warnock, 2003; de jong and de roon, 2005). it appears that the significant segmentation premium that characterized emerging markets prior to their opening towards foreign capital, is eroding due to financial liberalization. this paper builds upon the existing evidence of size and segmentation effects and conjectures that market development is relevant for asset pricing independently of the segmentation premium (documented with respect to market opening). traditionally, market development has been equated with increases in the size of the market and is arguably enhanced by market integration. the main question here is whether the observed increase of market size has an impact on expected returns. to answer it, the traditional relationship of the international capital asset pricing model (i-capm) is extended by an additional factor, a proxy for market size. using the share of market capitalization of the domestic index in the world market as a proxy for market size, the presence of size effects on expected returns is investigated for a set of developed and emerging countries, for a time span of up to four decades. negative and significant estimates of the coefficients of the market proxy are interpreted as evidence of market size effects on the cost of capital, larger markets offering lower returns. the results show that expected returns fall significantly as market size increases, implying that the cost of capital is larger in smaller markets. as market integration is expected to play a significant role in this result and size and segmentation effects are closely related, they should be investigated jointly and compared in terms of their particular effects on expected returns. including a segmentation proxy, the intensity of capital controls for emerging markets does not affect the magnitude and significance of the market size coefficients. the relationship uncovered between expected returns and market size is strong and robust, over and above the previously documented impact of direct market segmentation. for the composite index of all emerging markets in the sample, expected returns decrease by 1% per year as market size increases. the (composite) segmentation effect on expected returns has virtually faded in this sample. the information content of the market size proxy appears to outweigh overwhelmingly that of the direct segmentation proxy, the intensity of capital controls. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu crina pungulescu emerging markets journal | p a g e 3 1 segmentation has a secondary (indirect) effect on expected returns, through increasing the country's systemic risk, i.e. its beta relative to the world market portfolio. bekaert and harvey (2000) find that postliberalization world market betas are higher and de jong and de roon (2005) show that betas increase as countries become less segmented from the world market, i.e. the intensity of capital controls decreases. when the world market betas are allowed to vary over time as a function of the segmentation variable as well as of the size variable, the impact on the expected returns through this indirect (beta) channel is more pronounced for the direct segmentation variable than for the market size proxy. the remainder of this paper is structured as follows: section 2 presents the data sets used in this study, for developed and emerging markets together with the main proxy variables for size and segmentation. section 2 is named as the data. section 3 presents the methodology and reports empirical evidence on the presence of size effects comparing developed and emerging markets. section 3 is named as the empirical results. finally, section 4 reviews the main findings which is named as conclusion. ii. data this section introduces the variables together with their various data sources and particularly, compares the dynamics of two key indicators of financial liberalization (the intensity of capital controls) and market integration (the market size). return indices and global risk factors the main data, monthly united states (us) dollar total returns indices and market capitalization figures for 61 countries are obtained over the period january 1973 september 2014, using datastream’s total market indices and in their absence, other broad market indices (thus including 5 more countries: bahrain, estonia, iceland, saudi arabia and zimbabwe). the 61 countries are divided into 2 groups: `developed', i.e. the 34 members of the organisation for economic cooperation and development (oecd) and `emerging' countries. the risk-free rate is the one-month us treasury bill rate from ibbotson and associates inc., available on kenneth french's website2 and msci world market returns in us dollars are taken as a proxy for the global market returns. in order to compare the market size effects with the previously documented segmentation effects, an alternative database is needed to compute the intensity of capital controls. total return indices and market capitalization figures in us dollars are obtained from the standard & poor's emerging market database (emdb)3, for a panel of 38 emerging markets as well as several aggregate indices: a composite index for all the countries in the dataset and regional indices for asia, europe-mid-east-africa, europe, eastern europe, latin america and mid-east-africa. the subsection named the intensity of capital controls and market size provides detailed information on the computation of the 2http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ data_library.html 3available from datastream. intensity of capital controls. the dataset covers the period december 1975 september 2014, though for a number of countries coverage starts in december 1988 and ends in october 2008. this secondary database (despite its uneven coverage) also serves as a robustness check, as all estimations are repeated using this data4. table 1 details the datastream and respectively emdb coverage of return data for all the countries in the dataset as well the oecd accession dates for the developed countries in the sample. table 1: data availability source: authors’ own compilation this table provides information on data availability (dates of first and last observations) for each of the 61 4 from this point onwards, the two data sources are referred to as datastream and emdb. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu country-level size effects in international asset pricing page |32| emerging markets journal countries in two alternative databases (datastream and emdb). the last column includes the accession date for members to the organization for economic cooperation and development (oecd). a set of global economic risk variables similar to the ones suggested by ferson and harvey (1993) are used as controls: 1. currency risk, fx, the percentage change in a broad index of foreign exchange value of the us dollar against a trade-weighted basket of currencies of important trading partners of the us5. the index reflects the price of the us dollar in terms of the foreign currencies basket, with a higher value corresponding to an appreciation of the us dollar. 2. inflation risk, g7 infl, the monthly change in the weighted average of the consumer price index (cpi) of the g7 countries (canada, france, germany, italy, japan, uk and us), where the weights are given by their relative gross domestic product (gdp= shares. 3. interest rate risk, g7 ir, a proxy of global investment opportunities, computed as a weighted average of shortterm real interest rates in g7 countries (with weights given by their shares in the g7 gdp). 4. global credit risk, cr risk, the percentage change in the spread between the 3-month eurodollar rate and the 3-month us treasury bill yield. 5. global output risk, g7 prod, the percentage change in the monthly producer price index (ppi) for the manufacturing sectors in g7 countries. 6. oil & gas, the change in the monthly world price index for oil and gas, as a measure of economic risk. the currency risk, fx, is computed based on the broad index of the us dollar's foreign exchange, developed by the federal reserve. all other risk variables are computed using data from datastream. an additional control variable is a measure of composite country risk taken from the international country risk guide (icrg). icrg produces monthly risk indices based on political, financial and economic factors as well as a composite index, a linear combination of the former three, where political risk (associated with the country's willingness to pay) accounts for 50% of the composite index and financial and economic risk (reflecting the country's ability to pay) have each a weight of 25% in the aggregate index. a higher value of the index is associated with lower risk. the icrg methodology is described in erb et al. (1996). also, for countries covered by the emerging market database a direct measure of segmentation is available, namely the intensity of capital controls, presented in full detail in the next section. the intensity of capital controls and market size capital controls most specifically restrictions to foreign ownership are quantified in a unitary fashion for a large number of emerging countries in standard & poor’s emerging markets database through two categories of indices, the s&p global index and the investable index. the global index captures the overall 5 the broad index of the dollar's foreign exchange value includes 35 currencies until the introduction of the euro, and 26 currencies representing important trading partners for the us, after 1999 (see leahy, 1998). stock market performance of emerging countries without taking into account restrictions on foreign investors’ ownership of equities. it considers all actively traded securities and aims to cover 60% to 75% of the total market capitalization of a country, after exclusions due mainly to government ownership and cross-holdings of other constituents to avoid double counting. the investable index is constructed to reflect the international availability of emerging markets to foreign investors. it is a fraction of the global index trimmed based on several rules, with respect to market capitalization, liquidity, market level constraints (reflecting the ability of foreign investors to buy and sell shares and repatriate capital, capital gains and dividend income) as well as industry and corporate level restrictions of foreign ownership. these direct barriers to foreign ownership create an internal division in the emerging financial markets between an internationally open submarket (where foreign investors are allowed to invest) and a restricted market operating exclusively for the domestic investors. the global and investable indices provide an objective measure of the intensity of capital control (edison and warnock, 2003). the measure is given by the relative difference between the market capitalizations of the two indices, as follows: 𝐼𝑖,𝑡 = 1 − 𝑀𝐶𝑖,𝑡 𝐼 𝑀𝐶𝑖,𝑡 𝐺 , (1) where 𝑀𝐶𝑖,𝑡 𝐼 , 𝑀𝐶𝑖,𝑡 𝐺 are the market capitalizations at time 𝑡 of country 𝑖’s global and investable indices respectively. the intensity of capital controls takes values between 0 (perfect openness of capital market to foreign ownership) and 1 (complete segmentation of domestic capital market). this value is taken as a proxy for direct market segmentation. however, being derived from the investable indices, the intensity of capital controls essentially accounts for revealed foreign ownership restrictions. many forms of capital controls such as taxes on capital inflows or unremunerated reserve requirements (such as the chilean encaje) are not directly incorporated in this measure. this circumvents the problem of quantifying the effectiveness of various forms of capital controls, but also makes the measure relevant particularly to capital markets rather than to other sectors of the economy. moreover, the intensity of capital controls focuses directly on the availability of assets for foreign ownership whereas market integration occurs when foreign investors make effective use of the opportunity offered by the emerging market. to gain additional insight into the effective process of market integration, the dynamics of the intensity of capital controls is contrasted with the market capitalization for the emerging countries in the sample. table 2 reports summary statistics for both variables as well as the pairwise correlations between market segmentation and market size. the aggregate indices are computed for all countries (composite) as well as several regions: asia, europe mid east africa, europe, latin america and mid east africa. the composite intensity of capital controls is gradually declining from 0.87 to a low value of 0.29, whereas market size follows an opposite trend over the period. the correlation between the two variables is strongly and significantly negative, 0.56. capital controls decrease in asia, whereas europe, mid east and africa experience periods of slight reversal of the process of financial liberalization. latin america, volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu crina pungulescu emerging markets journal | p a g e 3 3 as a region achieves gradually relatively low levels of segmentation (with respect to restrictions to foreign ownership) in the early 1990s and maintains this status in the following years. both asia and latin america show strong negative correlations between market segmentation and market size. the evolution of market segmentation is different across the emerging markets included in the database. many countries (bahrain, egypt, greece, israel, malaysia, morocco, peru, poland, turkey, slovakia and south africa) have a medium/low and fairly stable level of segmentation. jordan, philippines, sri lanka and zimbabwe maintain relatively strict capital controls. the rest of the countries are divided over the way they open up their market to foreign investors: the intensity of capital controls is gradually decreasing in china, india, thailand and venezuela and drops decisively in argentina, chile, czech republic, korea, mexico and qatar (for instance). the measure of market segmentation is mostly negatively correlated with market size6. this suggests a possible link between the dynamics of size and segmentation. one intuitive scenario could be that foreign capital has been quick to pick up on decrease in market segmentation in many countries. should this be the case, size and segmentation effects can be expected to reinforce each other. however, size and segmentation effects may exist independently of each other. a small and/or restricted market can maintain a high cost of capital if its capital needs are inadequately met, even in the case when market size and segmentation do not evolve together. moreover, market segmentation is only one of the many factors that can be related to the dynamics of market capitalization. there are also cases when segmentation and market size are positively correlated such as bahrain, the czech republic, kuwait, poland, qatar, slovakia and the united arab emirates. in other countries (israel, jordan, malaysia, oman, pakistan, south africa, taiwan, venezuela and zimbabwe), the market capitalization and the intensity of capital controls are not significantly correlated. 6throughout the remainder of the paper, the term size refers to the size of market capitalization. table 2: summary statistics intensity of capital controls and market capitalization (emdb data) source: authors’ own compilation this table reports summary statistics (mean, minimum, maximum, number of observations as well as the correlations) for the intensity of capital controls and the global market capitalization (in millions $) on regional and country level. correlations that are statistically significant at 5% are reported in bold font. the monthly values of the intensity of capital controls are computed from market capitalization data available for the investable and global markets. the data coverage for the intensity of capital controls varies by countries and group of countries. the longest time series covers the period december 1975 to october 2008 (395 observations) and the shortest starts in february 1997 and ends in october 2001 (57 observations). table 3 reports descriptive statistics separately for the markets size of developed (i.e. oecd member states) and emerging countries7. several trends are apparent. the 34 developed markets combined account for more than 90% of the world market capitalization (on average), but their weight has decreased by almost 16% (from 98% to 82%) over the period. by contrast, the emerging markets become increasingly relevant, with composite market size increasing over the period from 7for the emerging countries statistics, both datastream and emdb sources of data are used. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu country-level size effects in international asset pricing page |34| emerging markets journal less than 1% to over 17%. at the same time, the intensity of capital controls decreases for the composite index as well as averaged across countries. table 3: size and segmentation variables descriptive statistics (datastream and emdb data) source: authors’ own compilation this table reports some descriptive statistics (mean, range, change over the entire period and standard deviations) for the size and segmentation variables: the size of the market capitalization relative to the world market size (in percentages) and the intensity of capital controls. the statistics are reported for composite indices of oecd states and emerging markets as well as for country averages for the respective groups. iii. empirical results this section presents the main empirical evidence on the presence size effects, analyzed initially over time for individual countries and then aggregated, by constructing panels of developed and emerging countries to take into account the cross-section dimension along with the time variation in the data. individual size effects a preliminary investigation of size effects is done at individual (country) level, by augmenting the i-capm relationship for each market index with a local factor, the size of market capitalization. time series regressions of expected returns on the global factor, the world market index and a proxy for market size, are estimated in the following simple framework: 𝑟𝑑𝑡 − 𝑟𝑓𝑡 = 𝛼 + 𝛽(𝑟𝑤𝑡 − 𝑟𝑓𝑡 ) + 𝛾𝑆𝑖𝑧𝑒𝑡−1 + 휀𝑡, (2) where 𝑟𝑑𝑡 are (monthly) returns on the domestic market index for each developed and emerging country in our dataset, 𝑟𝑤𝑡 are the returns on the world market index, 𝑟𝑓𝑡 is the risk-free rate and 𝛼 and 휀𝑡 are respectively the intercept and the error term. 𝑆𝑖𝑧𝑒𝑡−1 is proxied by the share of the country’s market capitalization in the world market (in percentages). the time series dimension allows us to test whether the inverse relationship between market size and expected returns holds within each market. at any point in time, market size can be interpreted as the demand of assets both from domestic and foreign investors in a given country. a negative relationship between market size and returns, shows that as the market size increases, expected returns decrease and the size premium for that market is eroded. the effects of market size on expected returns over time are estimated using equation 2, individually for all developed (oecd member states) and emerging countries in the sample using both databases available. regressions based on the datastream data presented in table 4 show that size effects have the ‘correct’ (negative) sign for 59 out of 61 countries (the only exceptions being estonia and finland). the coefficients are statistically significant in 20 cases. table 4: size effects, time series regressions (datastream data) source: authors’ own compilation volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu crina pungulescu emerging markets journal | p a g e 3 5 this table reports world market betas and the country size effects based on the regression of domestic (monthly) excess returns on the (excess) returns on the world market index and a proxy of market size. size is proxied by the share of a country's market capitalization in the world market (in percentages). statistical inference is based on newey-west standard errors and significance is denoted by *** (at 1%), ** (at 5%) and * (at 10%). table 5 repeats the estimation for the emdb database, which allows for size effects to be investigated not only for global indices, but also for the submarkets of investable indices (assets available to foreign investors) and non-investable indices (assets available only to domestic investors). the sign and statistical significance of country size effects are reported for each emerging market in the sample as well as for 7 composite indices. most countries and groups of countries exhibit negative size effects: 34 (respectively 29) countries out of 35 for investable (non-investable) indices as well as 37 out of 38 for global indices. the effects are statistically significant in many cases: 12 for the investable indices and 10 (19) for returns on non-investable (global) indices. these results suggest that the cost of capital tends to increase when markets are smaller or less developed. among the regional return indices, the relationship between market size and expected returns is predominantly negative, the few exceptions being highly insignificant statistically. the composite (all countries) index as well as the indices for latin america, asia and europe produce consistently negative size effects. table 5: size effects, time series regressions (emdb data) source: authors’ own compilation this table reports world market betas and the country size effects based on the regression of domestic (monthly) excess returns on the (excess) returns on the world market index and a proxy of market size. size is proxied by the share of the country's market capitalization in the world market (in percentages). statistical inference is based on newey-west standard errors and significance is denoted by *** (at 1%), ** (at 5%) and * (at 10%). these findings suggest that size effects are not particular to one type of countries, but belong to a pattern common to many emerging as well as developed countries. although developed markets are better integrated in the world market than emerging markets, the process is not complete as various transaction costs and informational asymmetries still in place may actually hinder cross-border equity trade. aggregate size effects in emerging and developed markets market size effects may be more relevant in crosscountry comparisons, especially when interpreted as evidence of market segmentation, considering that more integrated countries have better access to the available foreign capital. in order to take advantage of both the cross-sectional and time-series dimension of the data, panel data models, allowing for country fixed effects, become the main regression framework. the basic panel model involves regressing the domestic (monthly) excess returns on the (excess) returns on the world market index and a proxy of size: 𝑟𝑑𝑖,𝑡 − 𝑟𝑓𝑡 = 𝛼𝑖 + 𝛽(𝑟𝑤𝑡 − 𝑟𝑓𝑡 ) + 𝛾𝑆𝑖𝑧𝑒𝑖,𝑡−1 + 휀𝑖,𝑡, (3) where 𝛼𝑖 and 휀𝑖,𝑡 are respectively the intercept and the error term. 𝑆𝑖𝑧𝑒𝑖,𝑡−1 is proxied by the share of the country 𝑖’s market capitalization in the world market (in percentages). the panel data estimations of the basic model, equation (3), impose that the size effects are the same for every country in the panel. the estimate of the coefficient of the size effect is therefore interpreted as an average effect for the group of countries in the panel. table 6 (models -1to -6-) provides panel data estimates of size effects for the full sample of countries in the datastream data (developed and emerging countries taken together). size effects are statistically significant (model -1-) and persist when a measure of segmentation, the intensity of capital controls is introduced (model -2-)8. while size effects are statistically significant for the entire set of countries, interacting the size proxy with a dummy variable for emerging markets (models -3and -4-, the latter controlling for segmentation as well), shows that the results are stronger for the emerging markets. size effects are found also in the group formed only by developed markets (oecd member states) when investigated separately (models -5and -6-), suggesting that size effects are not an emerging markets phenomenon. 8for the purpose of these estimations, q is set to 0 for the oecd member states that are not covered in the emdb, based on the assumption that these countries do not enforce any restrictions on foreign ownership of equities. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu country-level size effects in international asset pricing page |36| emerging markets journal repeating the analysis on detailed data from emdb (table 6, models -7to -12-) shows that size effects are present for all three indices (for returns on investable, non-investable and global assets) and are significant. this database also allows also to check the robustness of size effects to the inclusion of a direct segmentation proxy, given by the intensity of capital controls. de jong and de roon (2005) find that expected returns are higher in countries that have a higher intensity of capital controls. the basic model extended to include the segmentation proxy becomes: 𝑟𝑑𝑖,𝑡 − 𝑟𝑓𝑡 = 𝛼𝑖 + 𝛽(𝑟𝑤𝑡 − 𝑟𝑓𝑡 ) + 𝛾𝑆𝑖𝑧�̃�𝑖,𝑡−1 + 𝛿𝑄𝑖,𝑡−1 + 휀𝑖,𝑡, (4) where 𝛼𝑖 and 휀𝑖,𝑡 are respectively the intercept and the error term. 𝑄𝑖,𝑡−1is the intensity of capital controls and 𝑆𝑖𝑧�̃�𝑖,𝑡−1 is proxied by the residual from regressing the original size variable the share of a country's market capitalization in the world market (in percentages) on the remaining explanatory variables9. size effects are significant without exception across all 12 variations of the model presented in table 6 and unaltered by the introduction the intensity of capital controls (highly insignificant in all 6 models where present). table 6: size effects, panel data regressions (datastream data) source: authors’ own compilation this table reports the results of fixed effects panel regressions of domestic (monthly) excess returns on the (excess) returns on the world market index and a proxy for market size. when 𝑄, the intensity of capital controls enters the regression, 𝑆𝑖𝑧�̃� is proxied by the residual from regressing the original size variable on the remaining explanatory variables, to avoid multicollinearity issues. for models 1 to 6, 𝑄 is set to 0 for all the oecd member states that are not covered in 9as size and segmentation are often highly correlated, the orthogonalized measure of size, 𝑆𝑖𝑧�̃�, is used throughout the paper, when the intensity of capital controls is included as an explanatory variable. the emdb. for the equations that include both developed and emerging countries, the size variable is interacted with a dummy for emerging markets 𝐷. statistical inference is based on newey-west standard errors and significance is denoted by *** (at 1%), ** (at 5%) and * (at 10%). so far, the empirical analysis uncovers three main patterns. first, market size effects appear to be a ubiquitous phenomenon. secondly, they are stronger in emerging than developed markets and lastly, size effects are more relevant than the intensity of capital controls as a factor in explaining asset returns in these markets. robustness checks the previous analysis presents evidence of market size effects that are robust to including a proxy of market segmentation, the intensity of capital controls. moreover, market size effects prove stronger and more persistent than segmentation effects. next, a number of robustness checks contribute to establishing the validity of this result. since firm level size effects are known to be elusive over time (see brown et al., 1983, for instance), the basic and extended models (equations 3 and 4), are reestimated for 5-year subperiods. table 7 reports the panel data estimates of size effects for all the countries (using the datastream data) for 5-year subperiods. size effects maintain size and statistical significance through all the subperiods and in the presence of segmentation effects. the pattern persists in the panel containing all countries as well as in the subsample restricted to developed countries (oecd member states) and in the presence of the intensity of capital controls. table 7: size effects, panel data regressions, 5-year subperiods (datastream data) source: authors’ own compilation this table reports the results of fixed effects panel regressions of domestic (monthly) excess returns on the (excess) returns on the world market index and a proxy for market size. size is proxied by the share of a country’s market capitalization in the world market (in percentages). the sample is reduced to 5-year volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu crina pungulescu emerging markets journal | p a g e 3 7 subperiods. statistical inference is based on newey-west standard errors and significance is denoted by *** (at 1%), ** (at 5%) and * (at 10%). table 8 shows the panel data estimates of size effects for 5-year subperiods using the three indices available in the emdb dataset: investable, noninvestable and global returns. for the global and investable indices, size effects fall out of statistical significance only for the earliest and latest sub periods (when data is most scarce). for the non-investable indices, the results are less robust, size effects being significant only in half of the subsamples. table 8: size effects, panel data regressions, 5-year subperiods (emdb data) source: authors’ own compilation this table reports the results of fixed effects panel regressions of domestic (monthly) excess returns on the (excess) returns on the world market index allowing for size effects. 𝑄 is the intensity of capital controls and 𝑆𝑖𝑧�̃� is proxied by the residual from regressing the original size variable the share of a country's market capitalization in the world market (in percentages) on the remaining explanatory variables. the sample is reduced to 5-year subperiods. statistical inference is based on newey-west standard errors and significance is denoted by *** (at 1%), ** (at 5%) and * (at 10%). next, the robustness of size effects is tested by including a set of control variables linked to global economic risks, similar to those proposed by ferson and harvey (1993). the following extended model results: 𝑟𝑑𝑖,𝑡 − 𝑟𝑓𝑡 = 𝛼𝑖 + 𝛽(𝑟𝑤𝑡 − 𝑟𝑓𝑡 ) + 𝛾𝑆𝑖𝑧�̃�𝑖,𝑡−1 + 𝛿𝑄𝑖,𝑡−1 + 𝜑𝑄𝑖,𝑡−1 × 𝑆𝑖𝑧�̃�𝑖,𝑡−1 + 𝜃′𝑋𝑡 + 휀𝑖,𝑡 , (5) where 𝑋𝑡 includes six global risk variables: currency risk, 𝐹𝑋, inflation risk, 𝐺7 𝐼𝑁𝐹𝐿, interest rate risk, 𝐺7 𝐼𝑅, global credit risk, 𝐶𝑅 𝑅𝐼𝑆𝐾, global output risk, 𝐺7 𝑃𝑅𝑂𝐷 and 𝑂𝐼𝐿&𝐺𝐴𝑆, the change in world prices for oil and gas as a measure of economic risk as well as a composite (country-specific) measure of political, financial and economic risk (obtained from the international country risk guide). table 9 reports the panel data estimates of size effects (using datastream and emdb data, respectively) controlling for the additional risk factors (global or country specific)10. for the complete panel combining the developed and emerging markets, size effects have the expected negative sign but become marginally insignificant and appear small in economic terms. statistical significance is maintained for the subsample of developed markets. for the emerging markets, size effects remain large and significant in the presence of the various risk variables (with the notable exception of the non-investable indices). moreover, the interaction term shows that size effects seem to become stronger when capital controls drop. the effect is significant only for the assets that are available to foreign investors (investable indices). table 9: size and segmentation effects, controlling for global risk factors source: authors’ own compilation this table reports the results of fixed effects panel regressions of domestic (monthly) excess returns on the (excess) returns on the world market index and additional factors. 𝑄 is the intensity of capital controls and 𝑆𝑖𝑧�̃� is proxied by the residual from regressing the original size variable the share of a country's market capitalization in the world market (in percentages) on the remaining explanatory variables. all regressions include a set of six global risk variables, 𝑋𝑡: the change in a price-adjusted index of the foreign exchange value of the dollar against a broad basket of currencies, the monthly change in the cpi of the g7 countries (canada, france, germany, italy, japan, uk and us), a weighted average of short term interest rates in g7 countries (with weights given by their 10all results are reported for the composite measure of risk. using either the political, economic or financial elements of the composite measure does not alter the results. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu country-level size effects in international asset pricing page |38| emerging markets journal shares in the g7 gdp), the change in the difference between the 3-month eurodollar rate and the 3-month us treasury bill yield, the change in the monthly ppi for the manufacturing sector and the change in the monthly world price index for oil and gas. for emerging markets, the set of variables is extended to include 𝑄, the intensity of capital controls (𝑄 is set to 0, for all the oecd member states that are not in covered in the emdb and 𝑆𝑖𝑧�̃� is interacted with a dummy variable for the emerging markets, 𝐷), an interaction term between and 𝑄 and a country specific measure of 𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 (economic, political and financial) risk. statistical inference is based on newey-west standard errors and significance is denoted by *** (at 1%), ** (at 5%) and * (at 10%). so far all estimated models have assumed constant world market betas. however, there is strong evidence that global (regional) market betas tend to increase with integration (see bekaert and harvey, 2000; fratzscher, 2002; baele, 2005, for instance). as a third robustness check, the world market betas are allowed to vary across countries and at the same as a function of segmentation (as in de jong and de roon, 2005) or a function of both segmentation and size. the increase in world markets betas has an opposite effect on expected returns. whereas the cost of capital decreases as markets integrate, a larger exposure to the systemic (world market) risk is compensated through higher expected returns. the models to be estimated become: 𝑟𝑑𝑖,𝑡 − 𝑟𝑓𝑡 = 𝛼𝑖 + (𝛽0,𝑖 + 𝛽1 × 𝑄𝑖,𝑡−1)(𝑟𝑤𝑡 − 𝑟𝑓𝑡 ) + 𝛾𝑆𝑖𝑧�̃�𝑖,𝑡−1 + 𝛿𝑄𝑖,𝑡−1 + 𝜑𝑄𝑖,𝑡−1 × 𝑆𝑖𝑧�̃�𝑖,𝑡−1 + 𝜃′𝑋𝑡 + 휀𝑖,𝑡 , (6) 𝑟𝑑𝑖,𝑡 − 𝑟𝑓𝑡 = 𝛼𝑖 + (𝛽0,𝑖 + 𝛽1 × 𝑄𝑖,𝑡−1 + 𝛽2 × 𝑆𝑖𝑧�̃�𝑖,𝑡−1)(𝑟𝑤𝑡 − 𝑟𝑓𝑡 ) + 𝛾𝑆𝑖𝑧�̃�𝑖,𝑡−1 + 𝛿𝑄𝑖,𝑡−1 + 𝜑𝑄𝑖,𝑡−1 × 𝑆𝑖𝑧�̃�𝑖,𝑡−1 + 𝜃′𝑋𝑡 + 휀𝑖,𝑡 , (7) the results are presented in table 10 for regressions using both sources of data (datastream and emdb). for the complete dataset, including both developed and emerging countries, size effects are manifest both directly (larger countries exhibiting lower expected returns) and indirectly, as larger markets (presumably more integrated) have higher world market betas (hence, higher exposure to systemic risk). the segmentation effect is manifest mainly indirectly through the interaction terms, showing that exposure to systemic risk increases as capital controls decline. this indirect effect is significant across both datasets, with the only exception of the subsample comprised by developed countries (for many of whom segmentation is low and even 0 by construction). the emdb dataset allows uncovering a difference between the investable and noninvestable subsets of the markets. for the assets that are open to foreign investment, size has a strong direct effect, amplified by the segmentation effect (through the significant interaction term between the size proxy and the intensity of capital controls). there is also a counterintuitive negative indirect effect of size on world market betas would suggest that the larger investable markets have lower exposure to systemic risk. the direct segmentation effect is significant and affects both expected returns (higher for segmented markets) and the world market betas (lower for segmented markets) only for the subset of non-investable assets. this is also the only part of emerging markets where size effects lose statistical significance, providing further support to the conjecture that market size is intrinsically linked to market integration. the market size effect appears to manifest when preceded by financial liberalization (i.e. is stronger in the subset of the market that is open to foreign investors), suggesting that market development is induced by opening financial markets and might represent a further step in the process of financial market integration. table 10: size and segmentation effects, with country specific and time-varying world market betas and global risk factors source: authors’ own compilation this table reports the results of fixed effects panel regressions of domestic (monthly) excess returns on the (excess) returns on the world market index and additional factors, with a first specification that allows the world market beta to vary over countries and over time and an alternative model allowing for the world market beta to vary over countries and over time as a function of both the intensity of capital controls and size. 𝑄 is the intensity of capital controls and 𝑆𝑖𝑧�̃� is proxied by the residual from regressing the original size variable – the share of a country's market capitalization in the world market (in percentages) on 𝑄 and the world market index. all regressions include a set of six global risk variables, 𝑋𝑡: the change in a price-adjusted index of the foreign exchange value of the dollar against a broad basket of currencies, the monthly change in the cpi of the g7 countries (canada, france, germany, italy, japan, uk and us), a weighted average of short term interest rates in g7 countries (with weights given by their shares volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu crina pungulescu emerging markets journal | p a g e 3 9 in the g7 gdp), the change in the difference between the 3-month eurodollar rate and the 3-month us treasury bill yield, the change in the monthly ppi for the manufacturing sector and the change in the monthly world price index for oil and gas. the set of country specific variables extends with an interaction term between 𝑆𝑖𝑧�̃� and 𝑄 and a measure of 𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 (economic, political and financial) risk. statistical inference is based on newey-west standard errors and significance is denoted by *** (at 1%), ** (at 5%) and * (at 10%). overall, the results give evidence that market size affects expected returns both for developed and emerging markets. however, the effects appear strongest for emerging markets and especially for the part of emerging markets that is open to foreign investment. economic significance of market size effects versus segmentation effects the previous sections established that expected returns, especially in emerging markets incorporate a size premium that appears to statistically dominate over segmentation effects. however, the relative importance of the two is ultimately decided by their economic significance. to obtain a measure of the economic impact of size and segmentation on expected returns, the observed changes in the variables of interest are combined with the estimation results obtained using the emdb data for investable, non-investable and global returns. partial size and segmentation effects are computed based on the estimated coefficients presented in table 10. ∆(𝑟𝑑 − 𝑟𝑓) = [�̂�2 × (𝑟𝑤 − 𝑟𝑓)̅̅ ̅̅ ̅̅ ̅̅ ̅̅ ̅̅ + 𝛾 + �̂� × �̅�] × ∆𝑆𝑖𝑧𝑒, ∆(𝑟𝑑 − 𝑟𝑓) = [�̂�1 × (𝑟𝑤 − 𝑟𝑓)̅̅ ̅̅ ̅̅ ̅̅ ̅̅ ̅̅ + �̂� + �̂� × 𝑆𝑖𝑧𝑒̅̅ ̅̅ ̅̅ ] × ∆𝑄. the following observed data is substituted in the equations estimated for the emerging markets: the monthly expected (excess) return on the world market, (𝑟𝑤 − 𝑟𝑓)̅̅ ̅̅ ̅̅ ̅̅ ̅̅ ̅̅ = 0.44% (the sample average), the monthly average segmentation (the sample average), �̅� = 0.28. the average monthly changes in (composite) intensity of capital controls �̅� = 0.00242 and in size, ∆𝑆𝑖𝑧𝑒 being in turn equal to 0.0286% (for the composite investable index), 0.0019% (for the composite non-investable index) and 0.0305% (for the composite global index) give a sense of the scale of changes in the variables of interest. thus calibrated, the annualized size effects for the returns add to -0.63% for investable assets, -0.05% for the non-investables and -1.13% for the global index. in contrast, annual segmentation effects are entirely irrelevant in economic terms (-0.03%, -0.06% and 0.03% for investable, non-investable and global returns). iv. conclusion this paper shows that market size is significantly related to expected returns and the relationship is especially relevant in emerging markets, where substantial size effects exist independently from (fading) segmentation effects previously reported in the literature. small markets over persistently higher risk-adjusted expected returns. the results hold both within individual countries in the full sample as well as for subperiods. the presence and significance of size effects is robust to controls related to global economic risks as well as specific country risks. this evidence on market size effects is interpreted in the context of partial segmentation models, where a local factor, the market size commands a premium in terms of expected returns for smaller countries. the underlying mechanism could be that foreign capital responds to the decline in capital controls, driving market size up and lowering the cost of capital for companies. references asness, c. s., j. m. liew, and r. l. stevens (1997). parallels between the cross-sectional predictability of stock and country return. journal of portfolio management 23, 79 87. baele, l. (2005). volatility spillover e_ects in european equity markets. journal of financial and quantitative analysis 40, 373-401. banz, r. w. (1981). the relationship between return and market value of common stocks. journal of financial economics 3, 3 18. barry, c. b., e. goldreyer, l. lockwood and m. rodriguez (2001). robustness of size and value effects in emerging equity markets, 1985-2000 emerging markets review 3, 1 30. bekaert, g., c. b. erb, c. r. harvey and t. e. viskanta (1997). the cross-sectional determinants of emerging equity market returns quantitative investing of the global markets: strategies, tactics, and advanced analytical techniques, chap. 11, pp. 221 272 (glenlake publishing). bekaert, g. and c. r. harvey (2000). foreign speculators and emerging equity markets. journal of finance 55, 565-613. brown, p., a.w. kleidon, and t.a. marsh (1983). new evidence on the nature of size-related anomalies in stock prices. journal of financial economics 12, 33-56. cakici, n., y. tang and a. yan (2016). do the size, value, and momentum factors drive stock returns in emerging markets? journal of international money and finance 69, 179 204. de jong, f. and f. a. de roon (2005). time varying market integration and expected returns in emerging markets. journal of financial economics 78, 583 613. edison, h. j. and f. e. warnock (2003). a simple measure of the intensity of capital controls. journal of empirical finance 10, 81 103. erb, c. b., c.r. harvey, and t.e. viskanta (1996). political risk, economic risk and financial risk. financial analysts journal 52, 28 46. volume 11 no 1 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.230 | http://emaj.pitt.edu country-level size effects in international asset pricing page |40| emerging markets journal estrada, j. (2000). the cost of equity in emerging markets: a downside risk approach. emerging markets quarterly 4, 19 30. fama, e. f. and k. r. french (1992). the cross-section of expected stock returns. journal of finance 47, 427 465. fama, e. f. and k. r. french (1993). “common risk factors in the returns on stocks and bonds”, journal of financial economics 33, 3 56. fama, e. f. and k. r. french (1998). value versus growth: the international evidence. journal of finance 53, 1975 1999. fama, e. f. and k. r. french (2008). directed or undirected? a new index to check for directionality of relations in socio-economic networks. journal of finance 63, 1653 1678. fama, e. f. and k. r. french (2012). size, value, and momentum in international stock returns. journal of financial economics 105, 457 472. ferguson, m. f. and r. l. shockley (2003). equilibrium “anomalies". journal of finance 58, 25492580. ferson, w. e. and c. r. harvey (1993). the risk and predictability of international equity returns. review of financial studies 6, 527 566. fratzscher, m. (2002). financial market integration in europe: on the effects of emu on stock markets. international journal of finance and economics 7, 165-193. harvey, c. r. (2000). the drivers of expected returns in international markets emerging markets quarterly 3, 32 49. henry, p. b. (2000). stock market liberalization, economic reform, and emerging market equity prices. journal of finance 55, 529-564. hou, k., g. a. karolyi, and b. c. kho (2011). what factors drive global stock returns? review of financial studies 24, 25272574. keppler, m. and h. d. traub (1993). the small-country effect: small markets beat large markets. journal of investing 2, 17 24. lambert, m., fays, b. and hübner, g. (2020). factoring characteristics into returns: a clinical study on the smb and hml portfolio construction methods. journal of banking and finance, 114. lambert, m. and hübner, g. (2015). size matters, bookto-market does not! the fama-french empirical capm revisited. working paper. leahy, m. p. (1998). new summary measures of the foreign exchange value of the dollar. federal reserve bulletin, 811 818. li, j. (2021). what drives the size and value factors? working paper. rouwenhorst, k. g. (1999). local return factors and turnover in emerging stock markets. journal of finance 54, 1439 1464. serra, a. p. (2003). the cross-sectional determinants of returns: evidence from emerging markets' stocks. journal of emerging market finance 2, 123 162. van der hart, j., e. slagter, and d. van dijk (2003). stock selection strategies in emerging markets. journal of empirical finance 10, 107 134. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the effects of internal audit, audit committee and firm characteristics on audit fees in a multi-country and industry setting prem lal joshi icssr institute western regional centre, india | e-mail: prem@acadjoshi.com ashutosh deshmukh black school of business penn state behrend , usa | e-mail: avd1@psu.edu jamel azibi university of jendouba, tunisia | e-mail: jamel.az1@gmail.com abstract this paper examines the association between audit fees and attributes of internal audit (ia), audit committee (ac), as measured by independence and financial expertise, as well as characteristics of the firm. the determinants of audit fees have been extensively investigated in the prior literature, but the results are conflicting. we develop a comprehensive model from a multi-country and multi-industry perspective. a total of 3,136 companies covering a period of 10 years (2011-2020) with 15,247 observations from 55 countries were included in this study. we found that the most critical variables that have a significant positive effect on the audit fees are client size, leverage (risk), profitability, complexity, losses, ac independence, ac expertise and auditor size. the study also shows that audit pricing is significantly negatively related to foreign operations, auditor tenure, and internal audit independence. the results highlight variables that affect audit fees across a range of countries/industries. keywords: audit fee, audit board, audit committee, internal audit independence, auditor rotation new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.231 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.231 | http://emaj.pitt.edu the effects of internal audit, audit committee and firm characteristics on audit fees in a multi-country and industry setting page |26| emerging markets journal the effects of internal audit, audit committee and firm characteristics on audit fees in a multi-country and industry setting prem lal joshi ashutosh deshmukh jamel azibi i. introduction this paper examines the association between audit fees and attributes of internal audit (ia), audit committee (ac), measured by independence and financial expertise, as well as characteristics of the firm. we investigate this issue from a multi-country and multiindustry perspective, probing for variables that consistently affect audit fees across such a diverse landscape. the seminal paper by simunic (1980) initiated the examination of the factors that influence audit fees. the empirical evidence related to the effects that the attributes of ia, ac and firm characteristics on audit fees are still inconclusive at the global level. we further explore this area to provide incremental evidence. being a part of the corporate governance process, ia and ac together mitigate the problems related to the quality of information. ia makes it easier for the external auditors to assess the internal control system, the inherent risk and the regulatory compliance. thus, possibly resulting in a reduction of substantive tests (felix et al., 2001). additionally, ac attempts to mitigate agency problems by ensuring quality financial reporting to principals. does this affect audit fees? the auditing literature contains a wealth of research on audit fees. earlier studies on the variables influencing audit pricing were focused on the presence of an ac and ia in the organizations. recent studies have examined the association between ia, ac and firm characteristics with audit fees. however, the empirical results in these studies are mixed and conflicting. there still exists a research gap. furthermore, the relationships are not constant and vary depending on external factors such as the economy, regulations and country. as such, there is a need to complement the previous findings with a broader study. given the continuously evolving role of corporate governance mechanisms such as ia and ac, the continued investigation of their influence on audit fees should be still relevant, the only question being to what extent. so, we pose the following research question: do attributes of ia, ac and firm characteristics influence the amount and scale of audit fees charged by the external auditors? if yes, what variables are significant across a range of industries and countries? the rest of the paper is divided into five sections. section ii provides a comprehensive prior literature review and identifies the different results. this literature review then informs our hypotheses development. section iii develops a theoretical framework and estimation model. section iv describes the sources of data and the detailed methodology used in this paper. section v covers results and discussion. finally, section v is the conclusion. it concludes the study findings and provides implications of our results as well as directions for future research. ii. literature review and hypotheses formulation audit fees the fees charged by the external auditors depend on a myriad of considerations. agoes (2004) states: “the amount of the charge depends on, among others, the risk of the assignment, the complexity of the services provided, the level of expertise required to carry out the services of proficiency level, the cost structure of the firm concerned and other professional considerations”. simunic (1980) developed a model that investigated the determinants of audit fees. consequently, there was an explosion of research. consistent with this prior research (choi, et al, 2010; hallak and silva, 2012; yatim et al., 2006), we measure the dependent variable as the natural logarithm of audit fees. audit board/audit committee the paper treats the terms audit board and audit committee synonymously (ac). the existence and influence of acs affect audit fees. lee and mande's (2005) study suggests that effective acs positively influence the level of audit coverage. goodwin-stewart and kent (2006) argue that ac members have incentives to minimize the litigation risk and reputation loss, say due to fraudulent financial reporting, as such, they insist on quality audits, which may cost more. they also report a positive association between audit fees and the existence of ac, while dinh (2012) reports a negative relationship. also, wu (2012) finds a significant negative relationship between audit fees and corporate governance mechanisms. on the other hand, rainsbury et al. (2009) report that ac existence and audit fees are not related. thus, the prior findings are mixed, though more studies support a positive relationship between ac and audit fees. we hypothesize: h1: the existence of an ac is positively related to audit fees audit committee expertise acs having financial expertise, do support high-quality financial statements (burrowes and hendriks, 2005). a financial expert in ac can result in a rigorous review of the ia. goodwin‐stewart and kent's (2006) results show that if the ac consists of at least one financial expert then it significantly, positively affects audit fees. ghafran (2017) and harris's (2007) studies provide similar results. additionally, bala et al.'s (2018) https://onlinelibrary.wiley.com/action/dosearch?contribauthorstored=goodwin-stewart%2c+jenny volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.231 | http://emaj.pitt.edu prem lal joshi, ashutosh deshmukh, jamel azibi emerging markets journal | p a g e 2 7 study reveals that ac financial expertise is a significant positive factor in determining the amount of audit fees in nigeria. on the contrary, azmi et al. (2013), in the malaysian context, find exact opposite results, that is, financial expertise is negatively related to the amount of audit fees. interestingly, haniffa and cooke (2002) find that ac attributes do not influence audit fees in malaysia. thus, prior studies have conflicting findings but more studies support a positive relationship between ac financial expertise and audit fees. therefore, we hypothesize: h2: the higher level of financial expertise of ac members is positively related to higher audit fees non-executive member (independence of audit committee) an ac is strengthened by independent, nonexecutive directors who bring an independent mindset to their role. sarbanes oxley act sox (2002) also recommends the independence of ac members. kikhia (2015) posits that an independent ac evaluates corporate affairs without bias and monitors management more effectively. carcello et al. (2002) and yatim et al. (2006) find that acs that are independent, have financial expertise, and are diligent result in higher audit fees. similarly, abbor et al.’s (2003) study shows that acs that have more outside directors, that is, are more independent are associated with higher audit fees. recently, al-hajaya (2019) reported a similar result for the jordanian companies. the author also reported such companies hire big4 firms to signal their commitment to audit quality. on the other hand, kanakriyah (2020) and kikhia (2015) find no relationship between ac independence and audit fees. however, the preponderance of the evidence indicates that a relationship between ac independence and audit fees exists. so, we hypothesize: h3: non-executive members on ac are positively related to audit fees auditor’s tenure the auditor’s tenure is related to auditor independence and can affect audit fees. sox (2002) contends that if the auditors conduct the audit for four or more years, they should not be considered independent. beshkooh et al. (2003) find that optimal tenure for an auditor is one to three years from an audit effectiveness viewpoint. warrad (2008) reports that audit partner tenure significantly explains audit fees for jordanian companies. in the south korean context, kwon et al. (2014) show that audit fees increased after the auditor rotation. silva et al.'s (2020) study shows that auditor rotation strongly influences audit fees. castro et al. (2015) point out that large brazilian companies lowered audit fees by changing auditors. malagila et al.’s (2020) study also finds a positive relationship between longer audit tenure and lower audit fees. however, urhoghide and izedonmi (2015) reported a significant positive relationship between auditor tenure and audit fees for nigerian companies. also, kikhia (2015) found no relationship between audit tenure and audit fees in china and jordan. the majority of the studies point to a significant and negative relationship between audit tenure and audit fees. thus, we hypothesize: h4: auditor tenure and audit fees are negatively related independence of internal audit function (iaf) according to sierra-garcia (2019): “a fundamental aspect to assess the independence of the ia is the status of this function within the organization and who determines its functions, who monitors its activity and who the ia must report to”. the iaf variable is measured as a binary variable based on the placement of the iaf in the organizational hierarchy. when iaf is independent, scheneider (1985) reports that the external auditors rely more on iaf and reduce audit work. alzeban and sawan (2015) argue that a good relationship between the ac and the iaf may strengthen corporate control. this may lead the external auditor to rely more on internal controls. felix et al.’s (2001) study indicated that the higher contribution of ia to external audit reduces audit fees. zaman and sarens (2013) also report similar results. recently, sierra-garcia et al. (2019) reported a positive relationship between the independence of iaf and audit fees. given the results, we hypothesize: h5: there is a negative relationship between independent iaf and audit fees size of external auditor haniffa and cooke (2002) and deangelo (1981) find that large auditing firms (big4) can charge higher fees relative to small auditing firms. fafatas and sun (2010) report that big4 auditors who are dominant in the country can charge approximately 27% more fees compared to the competitor firms, after controlling for all other variables. similarly, castro et al. (2015) and vulhag and leghari (2015) report a positive relationship between audit fees and big4 audit firms. choi et al.’s (2010) study results show that in the chinese market, audit firm size results in higher audit quality and audit fees. tran et al.'s (2019) study finds that the bigger the size and the better the experiences of the firms and auditors, the higher the audit fee. big4 audit firms are reputed and provide quality audit services. el-gammal (2012) and choi et al. (2010) contend that corporations signal higher quality audits by using big4 and paying an additional premium. however, naser and hasan (2016) find that the status/reputation of the audit firm and audit fees are not related. since the majority of prior studies provide evidence that external auditors’ reputation or status impacts audit fees, we hypothesize: h6: the presence of big4 auditors has a positive relationship with audit fees size of the firm the firm size can be measured using a variety of measures such as the average of total assets, total sales, sales growth, inventories, debt, liabilities or receivables. in the case of large firms, to form an audit opinion, more audit work/procedures are required. given volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.231 | http://emaj.pitt.edu the effects of internal audit, audit committee and firm characteristics on audit fees in a multi-country and industry setting page |28| emerging markets journal the higher audit work, the higher audit fee is expected. many studies (silva et al, 2020; liu, 2017; ali and aulia, 2015; castro et al., 2015; dinh, 2012; galani et al., 2011) have shown that firm size has a positive and significant relationship with audit fees. therefore, we hypothesize: h7: the firm size (log of the average of total assets) is positively related to audit fees profitability (roa) prior research indicates a positive relationship between audit fees and profitability (dekeyser et al., 2019; joshi and al-bastaki, 2000; simunic, 1980). on the other hand, a few studies (hossain, and sobhan, 2019; naser and hassan, 2016; ling, 2014) show that profitability and audit fees are not related. while barua et al. (2019) and ittonen and peni (2012) report an interesting result that external auditors will increase the audit fees even if the auditee is making losses. other evidence (kanakriyah, 2020; velte and loy, 2018; urhoghide and izedonmi, 2015) indicates a negative relationship between profitability and audit fees. however, it seems logical that highly profitable companies will pay higher audit fees. hence, we hypothesize: h8: profitability of the auditees positively influences audit fees leverage (financial risk) wu (2012) measures the leverage variable as total debt divided by the average of total assets, so do we. higher debt loads indicate higher financial risk and more audit work resulting in higher audit fees (haque et al., 2019; prawitt et al., 2011; messier et al., 2011). on the other hand, a few studies (see, kikhia, 2015; hallak and silva, 2012; naser and nuseibeh, 2008) report a significant negative association between leverage and audit fees. naser and hassan (2016), on the other hand, report that audit fee is not significantly associated with companies’ risk. the results are conflicting, but the majority of the studies support a positive relationship between leverage and audit fees. so, we hypothesize: h9: leverage (financial risk) has a positive relationship with audit fees losses we can reason that a loss-making company’s risk is higher and the firm is likely to pay a higher amount of audit fees. zaman et al. (2011) suggest that when an auditee’s business risk is higher than the acceptable level, audit fees include a premium. since a loss-making firm has a higher level of risk, we can expect a positive association between losses and audit fees. in this situation, we hypothesize: h10: higher losses are positively related to audit fees complexity prior studies indicate that the complexity of the company can affect audit fees. generally, this variable is measured as the sum of stocks and debtors divided by the average of total assets (ho and hutchinson, 2010). the increase in the firm complexity often results in a higher level of difficulty in auditing the client (haceknbrack and knechel, 1997; simunic, 1980). the majority of studies (silva et al., 2020, januarty et al., 2019, urhoghice and izedonmi, 2015; ho and hutchinson, 2010) can be mentioned at this point. there are few studies, for example, naser and hassan (2016) that indicate a negative effect of firm complexity on audit fees. given the evidence, we hypothesize: h11: firm complexity is positively related to audit fees foreign operations joshi et al. (2000) posited that complex, diversified businesses with foreign operations required more audit resources. a higher number of foreign subsidiaries results in more audit work and thereby in higher audit fees. sandra et al. (1996) stated that “auditors of group companies, with a number of subsidiaries/branches, often incur high costs in examining the individual financial statements and in assessing the accuracy of consolidated financial statements”. on the contrary, hoffman et al. (2018) show a negative relationship between foreign transactions and audit fees. since the majority of prior studies have a positive association between foreign operations and audit fees, we hypothesize: h12: the existence of foreign operations is positively related to audit fees in summary, the literature paints a rather complex picture. a range of studies conducted in developed and developing countries, different time settings and different methodologies presents conflicting and inconclusive evidence. as the economic, regulatory and capital market influences change, the findings in this area will also evolve and change. however, the research interest in ia, ac and firm performance will remain intense as these are essential mechanisms of corporate governance. the area certainly needs revisiting and the investigation of factors that affect audit fees should be periodically re-evaluated. iii. theoretical framework and estimation model the estimation model is provided below: y = a0 + β1x1 + β2x2 + β3x3 + β4x4 + β5x5 + β6x6 + β7x7+ β8x8 + β9x9+ β10x10+ β11x11+ β12x12+ε dependent variable: y= audit fees1 paid to external auditors (natural log of total fees paid to external auditors) 1 eikon database defines audit fees as fees for services that are reasonably related to the performance of the audit or review of the company's financial statements. https://content.sciendo.com/view/journals/ceej/6/53/article-p323.xml?language=en#j_ceej-2019-0020_ref_039_w2aab3b7d260b1b6b1ab2ac39aa https://content.sciendo.com/view/journals/ceej/6/53/article-p323.xml?language=en#j_ceej-2019-0020_ref_002_w2aab3b7d260b1b6b1ab2ab2aa https://content.sciendo.com/view/journals/ceej/6/53/article-p323.xml?language=en#j_ceej-2019-0020_ref_002_w2aab3b7d260b1b6b1ab2ab2aa https://content.sciendo.com/view/journals/ceej/6/53/article-p323.xml?language=en#j_ceej-2019-0020_ref_023_w2aab3b7d260b1b6b1ab2ac23aa volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.231 | http://emaj.pitt.edu prem lal joshi, ashutosh deshmukh, jamel azibi emerging markets journal | p a g e 2 9 explanatory variables: x1 = audit board (if yes=1 otherwise 0, existence) x2 = audit committee expertise (under sox requirements) x3 = percentage of non-executive members x4 = auditor tenure: the number of years current auditor is serving the organization x5 = internal audit independence (based on eikon scores) x6 = size of auditor (big4 = 1, otherwise = 0) x7 = profitability (return on assets) x8 = firm size (log of average of total assets) x9 = leverage (long-term debts / average of total assets) x10 = losses (if the firm incurred losses in the previous financial year = 1; otherwise = 0) x11 = complexity (stocks and receivables / average of total of assets) x12 = foreign operations (if yes = 1, otherwise = 0) iv. data and methodology data the data were extracted from thomson reuters asset 4, all data are in us dollars. all firms covered by thomson reuters asset 4 from 2011 to 2020 were considered. table 1a, table 1b and table 1c summarize the sample selection process. table 1a: sample selection source: authors’ own compilation the final sample includes 15,247 firm-year observations (3136 unique firms) from 55 countries. panel b presents the distribution of observations across global industry classification standards (gics https://www.msci.com/gics) per industries and years. consumer discretionary (1817), industrial (2571) and financials (2722) have the highest number of observations. table 1b: samples by industrial sectors source: authors’ own compilation panel c indicates that the united states has the largest number of observations (6961) followed by canada (1276), the united kingdom (1,219), australia (1,053), japan (934) and germany (518). table 1c: number of observations by country source: authors’ own compilation we restrict the analysis to publicly listed companies that follow recommendations of the sarbanesoxley act2. we believed that considering only these firms would increase the reliability of the analysis. the sample selection starts with 29,361 firm-year observations with available data on audit fees, internal reporting and firm characteristics. we deleted 14,114 observations due to missing internal auditing reporting and other issues. v. results and discussion results data were analyzed using statistica software 15. table 2: descriptive statistics source: statistica software 15 output 2 for example, does the company have an audit committee with at least three members and at least one "financial expert" within the meaning of sarbanesoxley? volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.231 | http://emaj.pitt.edu the effects of internal audit, audit committee and firm characteristics on audit fees in a multi-country and industry setting page |30| emerging markets journal table 2 presents the descriptive statistics such as the number of observations, mean and standard deviation and skewness for the dependent and independent variables. the value of standard deviation is much below the mean value for most of the variables. the total number of observations included for analysis is 15,247. the results of the descriptive analysis indicate that audit fee paid by the companies range from a minimum of (log of audit fees) 5,011 to 20.05. the firm size is measured by the natural logarithm of the company’s average of total assets with a mean value of 0.2257918. profitability (roa) has a mean of 22.8754. additionally, leverage (financial risk) as a variable shows a mean value of 0.1265167. the mean value for the complexity of the companies is 0. 1470453. the mean value for losses incurred by companies is -2.262705. also, 75.83% of companies are audited by big4 audit firms. table 3 presents a correlation matrix among dependent and independent variables. a perusal of all correlation values shows that there is a moderately high correlation (0.81) between “percentage of non-executive members” and “audit board”. this is expected and not very serious as no multicollinearity problems are indicated by the later analysis. table 3: correlation matrix source: statistica software 15 output table 4 presents the results of regression analysis. the dependent variable is audit fees and the twelve independent variables are corporate governance (audit board/committee, ac expertise, non-executive members), internal audit (independence of internal audit), external auditor (auditor size, auditor rotation), and firm characteristics (size, financial risk, complexity, profitability, and foreign operations). the results of the regression model in terms of standardized coefficients (beta), t-values, and significant levels are presented in this table. table 4: regression results source: statistica software 15 output method: ordinary least square (ols) number of observations = 15,246 fvalue (12, 15233) = 663.59 prob > f = 0.0000 r2 = 0.3433 adj. r2 = 0.3428 the fvalue (12, 15233 = 663.59) supports the significance of the regression at 0.01 level. the r-value is 0.3433, and the adjusted r square value is 34.28%. the explanatory power of the model, as expressed by adjusted r square, indicates that 34.28% of the variations in the dependent variable (audit fees) can be explained by the variation in independent variables. f-ratio is 7.658 and is significant at 0.01 level. we also investigated the problem of multicollinearity by examining tolerance value and variance inflation factor (vif). table 4 also presents the vif values for the regression equation when all independent variables are present in the equation. using criteria given by judge et al. (1985), the correlation between “percentage of non-executive members” and “audit board” does not appear to be a serious issue. we conclude that multicollinearity problems are minimal. discussion table 5 presents the results of the hypotheses testing. in summary, out of the 12 hypotheses tested in the model, 10 are supported. the detailed discussions follow. table 5: testing for hypotheses # hypothesis supported not supported h1: the existence of an ac is positively related to audit fees. √ h2: the higher level of financial expertise of ac members is positively related to higher audit fees. √ h3: non-executive members on ac are positively related to audit fees. √ h4: auditors’ tenure and audit fees are negatively related. √ h5: there is a negative relationship between independent iaf and audit fees. √ h6: the presence of big4 auditors has a positive relationship with audit fees. √ h7: the firm size (log of the average of total assets) is positively related to audit fees. √ volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.231 | http://emaj.pitt.edu prem lal joshi, ashutosh deshmukh, jamel azibi emerging markets journal | p a g e 3 1 h8: the profitability of the auditees positively influences audit fees. √ h9: leverage (financial risk) has a positive relationship with audit pricing. √ h10: higher losses are positively related with audit fees. √ h11: firm complexity is positively related with audit fees. √ h12: the existence of foreign operations is positively related to audit fees. √ source: statistica software 15 output hypothesis 1 (audit board/committee) predicts a negative but insignificant relationship with audit fees (t= -0.95; p>0.05). this is in line with wu (2012) reporting a negative relationship between corporate governance and audit fees. sobrinho (2016) also found that better governance practices reduce legal risks and the auditors then reduce audit fees. additionally, collier and gregory (1996) argued that “from the supply side, the audit committee’s existence strengthens internal controls which may lead the external auditor to reduce the assessed level of control risk and charge lower audit fee.” these arguments seem to hold across a broad swathe of industries and countries, given our results. hypothesis 2 (audit committee expertise) reveals a positive and significant relationship between audit committee expertise and audit fees (t= 3.91; p<0.01). this result strongly supports previous findings (mustapha et al., 2020; ghafran and o’sullivan, 2017; goodwin-stewart and kent, 2006). this implies that ac members across the countries represented in our sample demand high-quality audits from the auditor, thereby increasing the audit efforts and time commitment that subsequently results in higher audit fees. hypothesis 3 (percentage of nonexecutive members) predicts that the percentage of non-executive members on ac, which is an indicator of ac independence, is positively related to audit fees. the results (t= 3.07; p<0.01) indicate a significant positive effect on audit fees. this is in line with prior studies (olushola et al., 2020; al hajaya, 2019; rainsbury, 2009; harris, 2007; yatim et al., 2006, abbott et al., 2003). these studies indicated that independence in ac is related to higher audit fees. this is important, since the percentage of non-executive members seem to make the audit board independent (or at least the perception) across a range of industries and countries. hypothesis 4 (auditor tenure) indicates a strong negative and significant relationship between auditor size and audit fees (t= -9.23; p<0.01). this result strongly supports previous findings (malagila et al. 2020; castro et al., 2015; urhoghide and izedonmi, 2015; köhler and ratzinger-sakel, 2012). as audit tenure increases the resulting efficiencies negatively affect audit fees. eight previous studies reported a significant negative relationship between audit tenure and audit fees (hay et al., 2006). our results support those studies. hypothesis 5 (internal audit independence) predicts a negative but significant relationship with audit fees, as supported by our analysis (t= -8.90; p<0.01). an independent internal audit function can strengthen a range of monitoring, governance and risk management activities generally broader in scope than the external audit (carey et al., 2000). such extra assurance may result in reduced audit fees. the results in the literature primarily support such assertion. our results indicate that such results are common across a range of industries and even across cultures, that is, countries. hypothesis 6 (auditor size) indicates a positive and significant relationship between auditor size and audit fees (t= 3.67; p<0.01). our result strongly supports previous findings (kanakriyah, 2020; naser and hassan, 2016). big4 audit firms are large and provide higher quality audit services to their clients and do charge premium audit fees. this perception is reinforced by our results. hypothesis 7 (firm size) predicts a strong positive and significant relationship with audit fees (t= 84.70; p<0.05). our finding supports the previous research (hossain and sobhan, 2019; wu, 2018; januarti and wiryaningrum, 2018; nasser and hassan, 2016; urhoghide and izedonmi, 2015). firm size indicates larger revenues, national and multinational operations, and complex product lines, among other things, which are reflected in higher audit fees. hypothesis 8 (profitability) predicts that influences audit fees. a positive and significant association between roa and the audit pricing (t= 2.30; p<0.01) is discovered. prior literature review shows mixed findings. though, the majority of the studies indicate that roa is positively related to audit fees (dekeyser et al., 2019; hasan, 2017; andriyani and laksito, 2017; joshi and al-bastaki, 2000; sandra and patrick, 1996). our results indicate that such findings hold across a wide range of industries and countries. hypothesis 9 (leverage) predicts that leverage has a positive relationship with audit fees. the results indicate a strong positive influence of leverage on audit fees (t=5.42; p<0.01). obviously, the higher the risk premium due to financial problems and litigation, the higher the audit fees. furthermore, often loan agreements include covenants, and firms are expected to comply with such covenants. for example, financial data presented in financial statements to be audited by the ‘big4’ audit firms and a certain level of financial ratios should be maintained, among other things, can be the requirements for loans. thus, our results seem logical. hypothesis 10 (losses) predicts a positive and significant relationship between losses and audit fees (t=5.61; p<.001). wu (2012), hay (2006) and simunic (1980) had similar results. generally, firm losses as an indicator of risk have been studied in very few papers. we did find a positive association between losses and audit fees. hypothesis 11 (complexity) predicts a positive and significant relationship between complexity and audit pricing (t= 6.94; p<0.01) which indicates that the more complex the client’s operations, the more the audit work, and the higher the audit fees. previous findings on firm complexity and audit pricing are often divergent. but this study supports the previous evidence as in silva et al, 2020; januarti et al., 2019 and urhoghide and izedonmi, 2015. we believe our findings may be more conclusive given our sample. volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.231 | http://emaj.pitt.edu the effects of internal audit, audit committee and firm characteristics on audit fees in a multi-country and industry setting page |32| emerging markets journal hypothesis 12 (foreign operations) reveals a negative and significant relationship between foreign operations and audit fees (t = -2.81; p>0.01), contrary to our expectations. however, it supports the recent findings of hoffman et al. (2018). this negative relationship can be due to a variety of reasons such as outsourcing of foreign work, global shift to international financial reporting standards (ifrs) and online and remote auditing. this may be a useful future research area. v. conclusion the determinants of audit fees have been extensively investigated in the prior literature. as the previous results indicate, multiple factors determine audit fees. however, prior results are conflicting and inconsistent. the economy, market and country-specific factors do influence audit fees in different, often contradictory, ways. to address these inconsistencies, we developed a comprehensive model after a detailed study of the literature. we found that the most critical factors which have a significant positive influence on audit fees are client size, leverage (risk), profitability, complexity, losses, ac independence (non-executive members), ac expertise and auditor size. these factors hold across a range of industries and countries. additionally, the study shows that audit pricing is significantly negatively related to foreign operations, auditor tenure and internal audit independence. on the other hand, no significant relationship was found between the existence of audit boards and audit fees. hence, our results are mostly in line with the prior evidence. we do find strong relationships among most of the variables. out of the twelve hypotheses tested in this study, ten support the prior studies and one does not. the r square for the entire model equals 34,33%, thus it has good explanatory power. additionally, our results cover a more recent period, across a large number of countries and multiple industries, providing more robust results. the model developed in this study should be useful for auditors, corporations and regulators. the auditors can develop a better insight into the factors that influence audit fees allowing them to price the audits more accurately. the corporations can understand the reasoning behind the audit fees. the results also highlight the importance of acs. this may motivate regulators to enforce appropriate governance practices for the listed companies, especially the independence and expertise findings for acs and internal audit function. future research may investigate additional factors that influence ac diligence and the impact of emerging technologies on remote auditing, as it is a new reality in the age of pandemics. this situation may have affected the fair values of a firm’s tangible and intangible assets and also the income stream. such pandemic effects may interact with the findings in this study and may provide a fertile research area in the coming years. additionally, factors such as internal audit costs and industry specialization may also be examined in future studies. finally, it will be interesting to examine how ownership concentration, family ownership and foreign ownership affect the audit fees, within different institutional setups. references abbott, l. j., parker, s., peters, g. f., and raghunandan, k., (2003). association between audit committee characteristics and audit fees, auditing: a journal of practice and theory, 22(2), 17-32. agoes, s., (2004). auditing (accountants’ examination) by public accounting firm, 1, 3rd ed., jakarta: university of indonesia. al-hajaya, k., (2019). the impact of audit committee effectiveness on audit quality: evidence from the middle east, international review of management and marketing, 9(5), 1-8. ali, s., and aulia, m., (2015). audit firm size, auditor industry specialization, and audit quality: an empirical study of indonesian state-owned enterprises, research journal of finance and accounting, 6 (22), 1-14. alzeban, a., and sawan, n., (2015). the impact of audit committee characteristics on the implementation of internal audit recommendations. journal of international accounting, auditing, and taxation, 24 (1), 61-71. andriyani, b dan laksito, h., (2017). analisis pengaruh struktur kepemilikan perusahaan terhadap biaya audit, diponegoro journal of accounting, 6(3), 1-11. azmi, n.a., zakaria, n.b., and yusoff, m. atef md., (2013). audit committee attributes on audit fees: the impact of malaysian code of corporate governance (mccg) 2007, journal of modern accounting and auditing, 9 (11), 1442-1453. bala, h., amran, n.a., and shaari, h., (2018). the relationship between audit committee attributes and audit fees of listed companies in nigeria, the social science journal, special issue, (6), 402408. barua, a., hossain, m.s., and rama, d.v., (2019). financial versus operating liability leverage and audit fees, international journal of auditing, 23(2), 231-244. beshkooh, m., soumehsaraei, b.g., mahmoudi, v., and kazemtabriz, f., (2013) the relationship between audit quality and agency cost, journal of basic and applied scientific research, 3(2), 516-525. burrowes, a., and hendricks, a., (2005). independent financial experts: from wished for to wistful thinking, managerial finance, 31(9), 52-62. carcello, j.v., hermanson, d.r., neal, t.l., and riley jr, r.a., (2002). board characteristics and audit fees, contemporary accounting research, 19 (3), 365–384. https://www.researchgate.net/scientific-contributions/mohd-atef-md-yusoff-2114505564 volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.231 | http://emaj.pitt.edu prem lal joshi, ashutosh deshmukh, jamel azibi emerging markets journal | p a g e 3 3 carey, p., r. simnett, and g. tanewski, (2000). voluntary demand for internal and external auditing by family businesses, auditing: a journal of practice and theory 19 (supplement), 37-51. castro, w., peleias, i., and silva, g., (2015). determinants of audit fees: a study in the companies listed on the bm and fbovespa, revista contabilidade and finanças, 26 (.69). retrieved on 6 february 2020 from: https://www.scielo.br/scielo.php?script=sci_arttex tandpid=s151970772015000300261andlng=ptandtlng=pt. choi, jong-hag, kim, francis, kim, jeong-bon, and zang, yoonseok., (2010). audit office size, audit quality, and audit pricing. auditing: a journal of practice and theory. 29, (1), 73–97. collier, p., and gregory, a., (1996). audit committee effectiveness and the audit fee, european accounting review, 5, 177-198, https://doi.org/10.1080/09638189600000012 deangelo, l., (1981). auditor size and audit quality, journal of accounting and economics, 3(3), 183199. dekeyser, s., gaeremynck, a., and willekens, m. (2019). evidence of industry scale effects on audit hours, billing rates, and pricing. contemporary accounting research, 36(2), 666– 693. dinh, h. t. v., (2012). determinants of audit fees for swedish listed non-financial firms in nasdaq omx stockholm, m.sc. thesis, department of business administration. school of economics and management. lund university. el-gammal, w., (2010). determinants of audit fees: evidence from lebanon, international business research, 5 (11), 136-145. fafatas, s.a., and sun, k.j., (2010). the relationship between auditor size and audit fees: further evidence from big four market shares in emerging economies, research in accounting in emerging economies, 1, 57-85. felix, w.l. jr, gramling, a., and maletta, m., (2001). the contribution of internal audit as a determinant of external audit fees and factors influencing this contribution, journal of accounting research, 39(3), 513-30. galani, d., alexandridis, a., and stavropoulos, a., (2011). the association between the firm characteristics and corporate mandatory disclosure: the case of greece, world academy of science. engineering and technology, 77, 101–107. ghafran, c., and o’sullivan, n., (2017). the impact of audit committee expertise on audit quality: evidence from uk audit fees, british accounting review, 49 (6), 578-593. goodwin‐stewart, j., and kent, p., (2006). relation between external audit fees, audit committee characteristics and internal audit, accounting and finance. 46(3), 387-404. hackenbrack, k., and knechel, w. r., (1997). resource allocation decisions in audit engagements, contemporary accounting research, 14, 481– 500. hallak, r. t. p., and silva, a. l. c., (2012). determinants das despesas com serviços de auditoria e consultoria prestados pelo auditor independente no brasil. revista contabilidade and finanças, 23(60), 223-231. haniffa, r. and cooke, t.e. (2002). culture, corporate governance and disclosure in malaysian corporations, abacus, 38 (3), 317-349. haque, t., afroze, s., and tuz-zohra, f., (2019). impact of corporate governance on audit fees and audit quality: a study in insurance industry in bangladesh, the cost and management, 47(2), 411. harris, cindy k., (2007). the association between corporate governance and audit fees, (2007). business and economics faculty publications, 32, https://digitalcommons.ursinus.edu/bus_econ_fac /32. hay, d.c., knechel, w.r. and wong, n., (2006). audit fee: a meta-analysis of the effect of supply and demand attributes, contemporary accounting research, 23 (1), 141-191. ho, s., and hutchinson, m., (2010). internal audit department characteristics/activities and audit fees: some evidence from hong kong firms, journal of international accounting, auditing and taxation, 19(2), 121-136. hoffman, b.w., sellers, r.d., and skomra, j., (2018). the impact of client information technology capability on audit pricing, international journal of accounting information systems, 29, 59-75. hossain, m.n., and sobhan, r., (2019). determinants of audit fees: evidence from pharmaceutical and chemical industry of bangladesh. international journal of trend in scientific research and development, 4(1), 815-821. ittonen, k., and peni, e., (2012). auditor's gender and audit fees, international journal of auditing, 16(1), 1-18. http://www.scielo.br/scielo.php?script=sci_serial&pid=1519-7077&lng=en&nrm=iso volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.231 | http://emaj.pitt.edu the effects of internal audit, audit committee and firm characteristics on audit fees in a multi-country and industry setting page |34| emerging markets journal januarti, i., and wiryaningrum, m.s., (2019). the effect of size, profitability, risk, complexity, and independent audit committee on audit fee, jda jurnal dinamika akuntansi 10 (2), 136-145. joshi, p l., and al-bastaki, h., (2000). determinants of audit fees: evidence from the companies listed in bahrain, international journal of auditing, 4 (2), 129-138. judge, g.g., griffiths, w.e., hill, r.c., lütkepohl, h., and lee, t-c., (1985). the theory and practice of econometrics, 2nd ed., new york: john wiley and sons. kanakriyah, r., (2020). model to determine main factors used to measure audit fees, academy of accounting and financial studies journal, 24 (2), 1-13. kikhia, k.y., (2015). determinants of audit fees: evidence from jordan, accounting and finance research, 4(1), 42-53. köhler, annette g. and ratzinger-sakel, nicole v.s., (2012). audit and non-audit fees in germany – the impact of audit market characteristics, schmalenbach business review, 64, october, 281-307, https://ssrn.com/abstract=2183195. kwon, s.d., lim, y.d., and simnett, r., (2014). mandatory audit firm rotation and audit quality: evidence from the korean audit market. auditing, journal of practice and theory, 33(4), 167-196. lee, hy, and mande, v. (2005). the relationship of audit committee characteristics with endogenously determined audit and non-audit fees, quarterly journal of business and economics, 44(3/4), 93-112. ling, g.p., (2014). the determinants of audit remuneration among listed manufacturing companies in malaysia, research project, faculty of business and finance department of commerce and accountancy, university tunku abdul rahman. liu, s., (2017). an empirical study: auditors' characteristics and audit fee, open journal of accounting, 6(2), 52-70. malagila, j., bhavani, g., and tabi, c., (2020). the perceived association between audit rotation and audit quality: evidence from the uae. journal of accounting in emerging economies. ahead-ofprint. 10.1108/jaee-08-2018-0082. messier, w. f., reynolds, j. k., simon, c. a., and wood, d. a., (2011). the effect of using the internal audit function as a management training ground on the external auditor’s reliance decision. the accounting review, 86 (6), 2131-2154. mustapha, a., isiaka, a. o., and babatunde, k. a. (2020). audit committee effectiveness and audit fee among listed deposit money banks in nigeria. asian journal of economics, business and accounting, 20(4), 1-14. naser, k., and hassan, y. m., (2016). factors influencing external audit fees of companies listed on dubai financial market, international journal of islamic and middle eastern finance and management, 9(3), 346-363. naser, k., and nuseibeh, r., (2008). determinants of audit fees: empirical evidence from an emerging economy, international journal of commerce and management, 17(3), 239-254. olushola, f.k., suleiman, m., and olatunji, l., (2020). does audit committee effectiveness affect external audit fees? evidence from listed companies in nigeria, international journal of scientific and engineering research 11 (10), 878890. prawitt, d.f., sharp, n.y., and wood, d.a. (2011). reconciling archival and experimental research: does internal audit contribution affect the external audit fee? behavioural research in accounting, 23(2), 187-206. rainsbury, e.a., bradbury, m., and.cahan, s.f., (2009). the impact of audit committee quality on financial reporting quality and audit fees, 5 (1), 20-33. sandra, w., and patrick, p., (1996). the determinants of audit fees in hong kong: an empirical study. asian review of accounting, 4(2), 32-50. schneider, a., (1985). the reliance of external auditors on the internal audit function, journal of accounting research, 23(2), 911-19. sierra-garcíaa, ruiz-barbadillob, e., and orta-pérezc, m., (2019). analysis of the influence of the internal audit function on audit fees, spanish accounting review, 22(1), 100-111. silva, a.s.v.c., inácio, h.c., and vieira, e., (2020). determinants of audit fees for portugal and spain, contaduríay administració, 65 (4), 1-24. simunic, d., (1980). the pricing of audit services: theory and evidence, journal of accounting research, 18(1), 161-190. sobrinho, w., and bortolon, p., (2016). non-audit servies and auditor independence in an environment of low investor protection, revista universo contábil. 107-128. 10.4270/ruc.2016430. https://ideas.repec.org/s/eme/imefpp.html https://ideas.repec.org/s/eme/imefpp.html https://ideas.repec.org/s/eme/imefpp.html https://www.sciencedirect.com/science/article/abs/pii/s1815566909000046?via%3dihub#! https://www.sciencedirect.com/science/article/abs/pii/s1815566909000046?via%3dihub#! https://www.sciencedirect.com/science/article/abs/pii/s1815566909000046?via%3dihub#! https://www.researchgate.net/scientific-contributions/ana-sofia-valente-cunha-silva-2184361938 https://www.researchgate.net/scientific-contributions/helena-coelho-inacio-2184244978 https://www.researchgate.net/profile/elisabete_vieira volume 11 no 2 (2021) | issn 2158-8708 (online) | doi 10.5195/emaj.2021.231 | http://emaj.pitt.edu prem lal joshi, ashutosh deshmukh, jamel azibi emerging markets journal | p a g e 3 5 tran, m.d., phamb, t.l., phanb,t.t.h., hoangc. t.h.l., dod, d.t., and dinhb, t.k.x., (2019). factors influencing independent audit fees: multi-group analysis pls-sem and moderate model, management science letters, 9 (10), 1599–1608. urhoghide, r, o., and izedonmi, f.o.i., (2015). an empirical investigation of audit fee determinants in nigeria, international journal of business and social research, 5(8). retrieved on 3 february 2020 from: https://thejournalofbusiness.org/index.php/site/art icle/view/785. velte, p., and loy, t.r., (2018). the impact of auditor rotation, audit firm rotation and non-audit services on earnings quality, audit quality and investor perceptions. a literature review, journal of governance and regulation, 7(2), 74-90. vulhag, a., and leghari, m.k., (2015). determinants of audit fee in pakistan, research journal of finance and accounting, 6(9), 176-188. warrad, l., (2018). audit partner tenure, audit quality, and audit fees: evidence from jordanian firms, international journal of humanities and social science 9(10),163-172. wu, x., (2012). corporate governance and audit fees: evidence from companies listed on the shanghai stock exchange, china journal of accounting research, 5(4), pp. 321-342. yatim, kent, p., and clarkson, p. (2006). governance structure, ethnicity, and audit fees of malaysian listed firms, managerial auditing journal, 21(7), 757-782. zaman, m., and sarens, g., (2013). informal interactions between audit committees and internal audit functions: exploratory evidence and directions for future research. managerial auditing journal, 28(6), 495-51. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the influence of foreign investors on the efficiency of the saudi stock market abdullah alesmaiel king faisal university, saudi arabia | e-mail: aalesmaiel@kfu.edu.sa suzanne fifield university of dundee, united kingdom | e-mail: s.g.m.fifield@dundee.ac.uk justin hof university of dundee, united kingdom | e-mail: jhof@dundee.ac.uk abstract this article examines whether the level of weak-form efficiency of the saudi stock market increased following liberalization in june 2015 when the market was opened up to foreign institutional investors. the results revealed that most sample companies and the market index did not follow a random walk over the sample period. however, the random walk hypothesis was not rejected after opening the market to foreign investors. this evidence implies that the steps taken by policy-makers to liberalize the saudi stock market appear to have had a positive impact on the level of market efficiency. keywords: saudi stock market, market efficiency, non-parametric testing, market liberalization new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.330 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.330 | http://emaj.pitt.edu the influence of foreign investors on the efficiency of the saudi stock market page |2| emerging markets journal the influence of foreign investors on the efficiency of the saudi stock market abdullah alesmaiel suzanne fifield justin hof i. introduction the saudi stock market has implemented a number of regulatory changes in the past 20 years. one important change, which took place in june 2015, was opening the market to foreign institutional investors. one of the key objectives of this reform was to enhance market efficiency (cma, 2015). todea and pleşoianu (2013) highlighted three reasons why stock market liberalization is expected to increase market efficiency. first, the participation of foreign investors increases market liquidity, which facilitates arbitrage activity, and thus should lead to faster incorporation of available information into stock prices. second, as foreign investors require more transparency, domestic companies are expected to supply higher-quality information disclosure, which, in turn, should improve informational efficiency. finally, sophisticated foreign investors are better than local investors at incorporating global market information (vo, 2019). according to the theoretical model proposed by albuquerque et. al. (2009), foreign investors react quickly to new global market information because they have immediate access to it. by contrast, local investors underreact to global news because they know less about it and may lack the necessary analytical skills. this study aims to investigate the relative efficiency of the saudi stock market before and after the change in regulation using two statistical tools, namely, the parametric variance ratio test of lo and mackinlay (1988) and the nonparametric variance ratio test of wright (2000). these tools are more powerful than other statistical techniques that were designed to test the random walk hypothesis (rwh), such as the unit root test, the runs test and autoregressive models because they are robust to heteroscedasticity and non-normality1 (mobarek and fiorante, 2014; aye et .al., 2017). this paper contributes to the substantive literature in two ways. first, it investigates the effect of the change in ownership regulation on the pricing efficiency of the saudi stock market; previous studies have not examined the efficiency of the market after this change. second, this paper uses disaggregated firm-level data rather than index-level data, which previous studies have tended to use when applying the variance ratio test to data on the saudi market. fama (1965) argued that analysing data at the company level gives a clearer picture of efficiency as such data are free from the distortion that arises from the use of index-level data. 1 examining the random walk hypothesis using tests that are not robust to heteroscedasticity and non-normality is problematic since stock market data usually deviate from normality and have time-varying volatilities (campbell et. al., 1997). the remainder of this paper is organized as follows. section 2 provides a brief summary of the literature on market liberalisation and stock market efficiency, while section 3 describes the data used in the analysis. section 4 details the parametric and nonparametric testing procedures employed in the paper. section 5 discusses the results and, finally, section 6 offers a number of concluding observations. ii. literature review in the late 1980s and early 1990s, many emerging countries liberalized their financial markets to enhance and deepen their equity markets and promote economic growth (henry, 2000; cajueiro et. al., 2009). as a result, many studies have been conducted to investigate the effect of liberalization on return behaviour and volatility, as well as on market integration and market efficiency (kawakatsu and morey, 1999b; laopodis, 2004; rejeb and boughrara, 2013; graham et. al., 2015; naghavi et. al., 2018). however, the results of these studies have provided no clear consensus on whether stock market liberalization affects stock market efficiency. some studies have found that stock market liberalization has not positively affected market efficiency (groenewold and ariff, 1998; kawakatsu and morey, 1999a, b; basu et. al., 2000; maghyereh and omet, 2002; laopodis, 2003, 2004; kim and shamsuddin, 2008; graham et. al., 2015), whilst other studies have found that liberalization improves the degree of market efficiency (kim and singal, 2000a, b; fuss, 2005; fifield and jetty, 2008; cajueiro et. al., 2009; rejeb and boughrara, 2013; naghavi and lau, 2014; naghavi et. al., 2018). most of the studies that have investigated the effect of stock market liberalization on the informational efficiency of emerging stock markets, regardless of their findings, have followed a similar approach, which is to divide the sample period into two subperiods preliberalisation and post-liberalisation and then compare the level of efficiency before and after liberalization. in addition, previous studies have tended to focus on indexlevel rather than firm-level data, which could be a serious limitation for two reasons. first, the use of index data may mask the true effect of market liberalization given that, after liberalixation, not all companies in the market become eligible for foreign investment (lim and kim, 2011). second, firm-level data are particularly important to investors as it is not possible, or sometimes very costly, to invest in the index in many emerging stock markets (blitz and huij, 2012). benjelloun and abdullah (2009), elton et. al. (2019), almudhaf and alhashel (2020), and zawadzki (2020), found evidence that it was difficult to invest in the market index in emerging stock markets. for example, elton et. al. (2019) investigated the performance of 396 passively managed index funds over the period 1994 to 2016 and found that index funds in emerging markets underperformed their underlying indexes more frequently as compared to their developed market counterparts. furthermore, almudhaf and alhashel (2020) and zawadzki (2020) documented that exchange-traded funds that track stock market indices exhibited higher tracking errors in emerging markets. in volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.330 | http://emaj.pitt.edu abdullah alesmaiel, suzanne fifield, justin hof emerging markets journal page |3| addition, due to the high costs of investing in index funds, benjelloun and abdullah (2009) suggested that investors in saudi arabia are better off buying individual shares directly from the market as opposed to investing in index funds. groenewold and ariff (1998) studied a sample of six developed and four emerging markets to evaluate the effect of liberalisation on informational efficiency. specifically, the authors carried out unit root and variance ratio tests before and after the process of market liberalisation using daily closing values for share indexes over the period 1980 to 1992. unexpectedly, the results suggested that the predictability of emerging stock markets had increased after liberalization, thus indicating that the markets were less efficient. one explanation of this counter-intuitive finding may be the change in the degree of integration of the sample markets. that is, opening a market to foreign investors exposes it more to global factors as it shifts the market from being segmented to being integrated with international markets (umutlu et. al., 2010). this high degree of integration may increase the predictability of stock prices. furthermore, kawakatsu and morey (1999b) conducted a similar study on nine emerging markets that were liberalized in the late 1980s and early 1990s. using monthly data from 1976 to 1997, the authors tested the usefulness of past price data in predicting future share prices by making use of a first-order autoregressive model. their results showed there was no significant change in the behavior of stock prices before or after liberalization, indicating that the sample stock markets were efficient even prior to the liberalization date. the authors suggested that investors seemed to start behaving rationally prior to market opening because liberalization was announced well in advance of the actual liberalisation date. upon studying individual markets, maghyereh and omet (2002) and laopodis (2004) found similar conclusions to the aforementioned studies. specifically, maghyereh and omet (2002) examined the jordanian stock market and found that stock market efficiency had not improved after liberalization, while laopodis (2004) examined the greek stock market during the sample period from january 1985 to december 2001. the author tested for autocorrelation in dollar-equivalent and local currency returns and found that the greek stock market was weak form efficient even before any liberalization announcement was made. more recently, graham et. al. (2015) presented additional evidence that capital market liberalization and market integration do not necessarily lead to improvements in informational efficiency. utilizing various types of variance ratio tests, graham et. al. (2015) studied the icelandic stock market during contrasting periods of financial market openness and found that the market was relatively less efficient during the period of free capital flows. furthermore, kim and shamsuddin (2008) tested the weak form of the emh using multiple variance ratio tests and weekly data for nine asian markets for the period from january 1990 to april 2005. their results indicated that stock market liberalization did not improve the efficiency of the indonesian, malaysian and filipino markets. however, their results did indicate that market efficiency depends on the level of stock market development as well as on having good corporate governance provisions. laopodis (2004) referred to the importance and difficulty of identifying appropriate opening dates when evaluating the impact of stock market liberalization on the degree of market efficiency. according to the author, there are two main reasons why it is important and difficult to specify such dates. first, liberalization is a gradual process; countries usually start the liberalization process by allowing foreign investors to participate only through mutual funds and then they may allow them to directly invest in the market but with some restrictions, such as having a minimum level of funds invested. further restrictions on foreign investors may gradually be removed over time. thus, the process of liberalization sometimes takes years to be fully implemented, making it difficult to select a starting date. second, and as previously mentioned, the impact of liberalization could start before the actual liberalisation takes place. that is, after the announcement, investors anticipate the impact of liberalisation on stock market returns and behave accordingly. using regression models, naghavi and lau (2014) and naghavi et. al. (2018) attempted to explain the relationship between market efficiency and stock market liberalization for 27 emerging markets that had different levels of institutional development. for instance, naghavi and lau (2014) performed a regression analysis using the variance ratio as the dependent variable, and stock market liberalization, measured as the ratio of capital flows to gdp, as the independent variable. they also controlled for trade openness and the level of institutional development. their results showed that the informational efficiency of stock markets was not affected by financial liberalization for countries with a low level of institutional development, whilst market efficiency appeared to be positively impacted by liberalization in countries with a high level of institutional development. the authors concluded that, in order to reap the benefits of stock market liberalization, emerging countries need to have strong institutions. kim and singal (2000) supported the finding that market liberalization has a positive impact on market efficiency. they applied the variance ratio test of lo and mackinlay (1988) to 18 emerging markets covering the period 1976 to 1996. they found that the benefits associated with international portfolio equity flows were likely to outweigh any perceived risks (increased volatility of stock returns) as the sample markets exhibited lower serial correlation after liberalization. the authors concluded that the decrease in the predictability of returns in these markets suggested an improvement in market efficiency which, in turn, should lead to improved asset allocation. in a study of the athens stock exchange, cajueiro et. al. (2009) applied the hurst exponent using a more recent data sample from january 1987 to april 2005. their main findings were in favor of market efficiency and suggested that, after liberalization, stock markets may evolve and converge to become more mature. more recently, rejeb and boughrara (2013) provided evidence in favor of a positive relationship between market liberalization and efficiency. they studied 13 emerging markets from january 1986 to december 2008 and found that financial market liberalization not only improved volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.330 | http://emaj.pitt.edu the influence of foreign investors on the efficiency of the saudi stock market page |4| emerging markets journal market efficiency, but also minimized the probability of a crisis2. in conclusion, the findings from previous studies on this issue are somewhat inconclusive. some studies have found that stock market efficiency did not improve after liberalization, while other studies have documented evidence of positive effects on market efficiency after liberalization. in addition, a number of studies have concluded that stock markets are efficient even before liberalization. overall, the variation in results indicates that the effect of stock market liberalization on informational efficiency may depend upon the level of stock market development. iii. data and descriptive statistics the data used in this paper consist of daily closing prices of the main market index and 100 companies that are traded on the main saudi stock market. the sample period spans the time from 1st january 2008 to 31st december 20173. this period was analyzed to include as many companies as possible whilst, at the same time, having a long enough time period to investigate the effect of market opening on informational efficiency. after eliminating all non-trading days (weekends and holidays), the sample period consisted of 2,497 trading days. the data were obtained mainly from the tadawul website and checked against data from datastream. the share prices employed in this study were adjusted for stock dividends, stock splits and share issues. however, in order to ensure consistency with a majority of previous studies, the share prices used in this analysis were not adjusted for cash dividends. mills and coutts (1995) reviewed the literature on cash dividends and concluded that any biases caused by the exclusion of cash dividends was negligible. in addition, the omission of dividends is unlikely to alter the results as many companies in the saudi stock market tended not to distribute any dividends during the sample period (tadawul, 2021). unlike many previous studies, thin trading was not considered a problem for the current study; all 100 companies traded almost every day4. in order to investigate the impact of opening the market to foreign investors on the pricing efficiency of the saudi stock market, the sample period was divided into two subsample periods. the first subsample period (preperiod) covers the time before this change in regulation that is, from 1st january 2008 to 14th june 2015, while the second subsample period (post-period) covers the time after the regulatory change, from 15th june 2015 to 31st december 2017. this approach of comparing efficiency measures in two subperiods is commonly used in the literature to test the effect of market liberalisation (laopodis, 2004; fifield and jetty, 2008; ulici and nistor, 2011; graham et al., 2015). 2 rejeb and boughrara (2013) estimated a treatment effect model to empirically analyze the three-dimensional relationship between informational efficiency, stock market liberalization and financial crises. the results showed that there was a significantly negative relationship between market liberalization and financial crisis, and this relationship was present regardless of the type of crisis considered. the results also showed that stock market liberalization tended to increase the informational efficiency of the sample markets. 3 there was a total of 179 companies listed on the saudi stock market as of 31st december 2017. a total of 71 companies were excluded from the final sample because they were listed after the start date of the analysis. in addition, another eight companies logged returns for the market index and each company were calculated according to the following formula: 𝑅𝑖𝑡 = 𝑙𝑛 ( 𝑃𝑡 𝑃𝑡−1 ) (1) where 𝑅𝑖𝑡 is the daily return of stock 𝑖 on day 𝑡, 𝑃𝑡 and 𝑃𝑡−1 are the closing prices of stock 𝑖 on day 𝑡 and day 𝑡 − 1 respectively, and ln is the natural logarithm. table 1 presents descriptive statistics of the data for the full sample period and the two subsample periods. in particular, the mean (mean), the standard deviation (sd), the minimum (min), the maximum (max), skewness (skew), kurtosis (kurt) and the jarque-bera (jb) test statistic were calculated for the daily return series as described by equation (1). the table shows that although the market index and the sample companies earned negative mean daily returns before and after the regulatory change, the returns in the pre-period were higher than that in the post-period. for instance, the average return of the market index was -0.01% in the pre-period, and it decreased to -0.05 in the post-liberalization period. this noticeable decrease in the average return after market liberalization can be attributed to the fact that, in the postliberalization period, the local economy was negatively affected by low oil prices (kinninmont, 2017; sama, 2017). table 1: descriptive statistics for daily returns note: this table reports descriptive statistics for the market index, and the average of 100 sample companies for the full sample period and two subsample periods. the full period spans the time from 1st january 2008 to 31st december 2017, while the pre-and post-periods cover the periods before and after the change in regulation on 15th june 2015. sd indicates the standard deviation of the return series. min and max indicate the minimum and maximum returns, respectively. skew is the kendallstuart measure of skewness, and kurt is the kendallstuart measure of kurtosis. jb refers to the jarque-bera test for normality. *** indicates significance at the one per cent level. in addition, table 1 shows that the volatility in the pre-period was higher as compared to the post-period, were excluded from the sample as trading of their shares was suspended at some point during the sample period. suspension durations varied widely between companies and ranged from 13 to 1,043 days. reasons for suspended trading included failure to announce financial statements within the specified period, exceeding the predetermined limit of losses for a company to be traded on the exchange and a lack of accurate information about the company. 4 the daily trading volume for stocks included in the analysis showed that 88 out of the 100 companies traded on 100.0% of the trading days over the sample period. for the remaining companies, shares were traded on at least 99.5% of the trading days. volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.330 | http://emaj.pitt.edu abdullah alesmaiel, suzanne fifield, justin hof emerging markets journal page |5| indicating that the market became less volatile after liberalization. specifically, following the change in regulation, the standard deviation of the market index decreased from 1.45 to 1.21%. this reduction in volatility after the regulatory change is also reflected in the difference between the minimum and maximum values in each period; the difference between these values was lower in the post-period than in the pre-period. previous studies have found mixed results concerning the changes in stock return volatility following market liberalization (kawakatsu and morey, 1999; fuss, 2005; ahmed, 2016; sharif, 2019). for example, kawakatsu and morey (1999) found an increase in volatility after stock market liberalization in five out of the nine markets examined. finally, the table reveals that the returns of the market index and the sample companies were highly nonnormal in both periods, a property that is commonly found in stock market data (hull and mcgroarty, 2014; seif et. al., 2017). specifically, all return series are negatively skewed suggesting that they are more likely to have negative extreme values than positive extreme values. the return series are also leptokurtic, implying fatter tails. as a consequence of these characteristics, the jarque-bera test rejected the null hypothesis of normally distributed data at the one per cent level for all return series considered. overall, the descriptive statistics suggest that the results of parametric tests of the efficient market hypothesis (emh), such as the lo-mackinlay variance ratio test, should be used with caution as these tests are designed for normally distributed data. when the data are not normally distributed, non-parametric techniques, such as wright’s (2000) variance ratio test, are more suitable for testing weak form efficiency. iv. method this study employs the lo-mackinlay variance ratio test and wright’s rank and sign variance ratio tests to examine whether the saudi stock market is characterized by a random walk following the opening of the stock market to foreign investors. according to the rwh, the variance of random walk increments must linearly increase with the time interval (alkhazali, 2011). the variance ratio test of lo and mackinlay (1988, 1989) is based on this central idea of a random walk. the test compares the variance of stock returns over different intervals to determine if they behave randomly. more precisely, lo and mackinlay proposed that if a stock’s return follows a random walk, the variance of the q-period return is q times the variance of the one-period return. for example, if a stock’s return follows a random walk, the variance of its five-day return will be five times as large as the variance of its daily return. therefore, if {𝑦𝑡} denotes a time series consisting of 𝑇 observations 𝑦1, … , 𝑦𝑇 of asset returns, then the lo-mackinlay variance ratio at lag q is defined as: 𝑉𝑅(𝑞) = 𝜎2(𝑞) 𝜎2(1) (2) where 𝜎2(𝑞) is 1 𝑞 the variance of the q-period return, 𝜎2(1) is the variance of the first period return, and 𝑞 is the number of days of the difference interval. if the time series of returns follow a random walk, then the value of 𝑉𝑅(𝑞) should be equal to one for all time horizons 𝑞. by contrast, if the time series are positively (negatively) autocorrelated, the value of 𝑉𝑅(𝑞) should be larger (smaller) than one. following lo and mackinlay (1988, 1989), the variance of the q-period return, 𝜎2(𝑞), and the variance of the first period, 𝜎2(1), are computed as follows: 𝜎2(𝑞) = 1 𝑇𝑞 ∑(𝑦𝑡 + ⋯ + 𝑦𝑡−𝑞+1 − 𝑞�̂�) 2 𝑇 𝑡=𝑞 (3) and: 𝜎2(1) = 1 𝑇 ∑(𝑦𝑡 − �̂�)2 𝑇 𝑡=1 (4) where: �̂� = 1 𝑇 ∑ 𝑦𝑡 𝑇 𝑡=1 (5) lo and mackinlay (1988) developed two statistics (𝑀1 and 𝑀2) to test the null hypothesis of the random walk. the first statistic, 𝑀1, was mainly designed to test the random walk that assumes homoscedastic increments (campbell et. al., 1997) and is given by: 𝑀1(𝑞) = 𝑉𝑅(𝑞) − 1 [∅(𝑞)] 1 2 ~𝑁(0,1) (6) where ∅(𝑞) = 2(2𝑞 − 1)(𝑞 − 1) 3𝑞𝑇 (7) under homoscedasticity, the volatility of stock returns is assumed to be constant over time, which often does not hold in practice. indeed, the volatility of stock returns fluctuates over time, and this can lead to misleading conclusions about the emh when the 𝑀1 measure is considered (charles and darne, 2009). thus, lo and mackinlay (1988) developed a second test statistic, 𝑀2, which tests the type of the rwh that assumes the increments are subject to heteroscedasticity (mobarek and fiorante, 2014). this test statistic is computed as: 𝑀2(𝑞) = 𝑉𝑅(𝑞) − 1 [∅∗(𝑞)] 1 2 ~𝑁(0, 1) (8) where: ∅∗(𝑞) = ∑ [ 2(𝑞 − 𝑗) 𝑞 ] 2 �̂�(𝑗) 𝑞−1 𝑗=1 (9) and: �̂�(𝑗) = [∑ (𝑦𝑡 − �̂�)2𝑇 𝑡=𝑗+1 (𝑦𝑡−𝑗 − �̂�) 2 ] [∑ (𝑦𝑡 − �̂�)2𝑇 𝑡=1 ]2 (10) a potential limitation of lo and mackinlay’s (1988) variance ratio test is that it assumes stock returns are normally distributed. this assumption is usually violated in stock returns, especially in emerging markets such as the saudi stock market (abdmoulah, 2010; alajmi and kim, 2012; charfeddine and khediri, 2016). therefore, wright (2000) attempted to overcome this limitation by introducing a more powerful test than that proposed by lo and mackinlay (1988). specifically, wright (2000) introduced a nonparametric variance ratio test that is based on the ranks and signs of the returns. in the rank-based variance ratio test, the time series (stock returns) used in the lo-mackinlay tests are substituted volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.330 | http://emaj.pitt.edu the influence of foreign investors on the efficiency of the saudi stock market page |6| emerging markets journal with ranks of the time series, in order to obtain the test statistics 𝑅1 and 𝑅2. these test statistics are defined as: 𝑅1 = ( 1 𝑇𝑞 ∑ (𝑟1𝑡 + ⋯ + 𝑟1𝑡−𝑞+1) 2𝑇 𝑡=𝑞 1 𝑇 ∑ 𝑟1𝑡 2𝑇 𝑡=1 − 1) × ∅(𝑞)−1/2 (11) and 𝑅2 = ( 1 𝑇𝑞 ∑ (𝑟2𝑡 + ⋯ + 𝑟2𝑡−𝑞+1) 2𝑇 t=𝑞 1 𝑇 ∑ 𝑟2𝑡 2𝑇 t=1 − 1) × ∅(𝑞)−1/2 (12) where the standardized ranks 𝑟1𝑡 and 𝑟2𝑡 are given by: 𝑟1𝑡 = (𝑟 (𝑦𝑡 − 𝑇+1 2 )) √ (𝑇−1)(𝑇+1) 12 (13) and: 𝑟2𝑡 = 𝛷−1 𝑟(𝑦𝑡) (𝑇 + 1) (14) where ∅(𝑞) is defined in equation (8), 𝑟(𝑦𝑡) is the rank of 𝑦𝑡 among 𝑦1, ⋯ , 𝑦𝑇, and 𝛷−1 is the inverse of the standard normal cumulative distribution function. wright (2000) also constructed a nonparametric variance ratio test using the signs of the returns instead of the ranks. in this sign-based variance ratio test, the stock returns used in the lo-mackinlay tests are substituted with signs of the stock returns in order to obtain the test statistics 𝑆1 and 𝑆2. this study does not consider 𝑆2 as it is inferior to 𝑆1. in particular, the results of wright (2000)’s monte carlo simulations showed that 𝑆1 has better size and power properties than 𝑆2. the test statistic 𝑆1 is defined as: 𝑆1 = ( 1 𝑇𝐾 ∑ (𝑠𝑡 + ⋯ + 𝑠𝑡−𝑘+1)2𝑇 𝑡=𝑘 1 𝑇 ∑ 𝑠𝑡 2𝑇 𝑡=1 − 1) × ∅(𝑞)− 1 2 (15) where ∅(𝑞) is defined in equation [7], 𝑠𝑡 = 2𝑢(𝑦𝑡, 0), and 𝑢(𝑦𝑡, 0) = { 0.5 −0.5 if 𝑦𝑡 > 0, otherwise, v. results the null hypothesis that the market index and the sample companies follow a random walk was tested using the variance ratio tests described in the previous section. following fifield and jetty (2008), alkhazali (2011) and jamaani and roca (2015), the ratio was calculated for lags of 2, 4, 8 and 16 days, with the one-day return used as a base. parametric variance ratio test the results of the lo-mackinlay parametric variance ratio test for the market index return and the returns of the 100 companies are reported in tables 2 and 3, respectively. the left panels of tables 2 and 3 (𝑀1) report the results under the assumption of homoscedasticity, while the right panels (𝑀2) show the results under the assumption of heteroscedasticity. the 𝑀1 market index results for the full sample show that the variance ratios are larger than one for all lags selected, indicating a positive correlation between returns. table 2: parametric variance ratio test results: market index note: this table shows the lo and mackinlay parametric variance ratio tests for daily saudi stock market returns for the three sample periods. the full period spans the time from 1st january 2008 to 31st december 2017, while the pre-and post-periods cover the periods before and after the change in regulation on 15th june 2015. the main row in each period reports the variance ratios, with test statistics given in parentheses. the test statistic 𝑀1 assumes homoscedasticity while the test statistic 𝑀2 assumes heteroscedasticity. *, **, and *** indicate statistical significance at the ten, five and one per cent levels, respectively. table 3: parametric variance ratio test results: individual companies note: this table gives the results for the percentage of companies for which the null hypothesis of no autocorrelation was rejected for the three sample periods. the variance ratio test statistic 𝑀1 assumes homoscedasticity, while the test statistic 𝑀2 assumes heteroscedasticity. the full period spans the time from 1st january 2008 to 31st december 2017, while the pre-and post-periods cover the periods before and after the change in regulation on 15th june 2015. the first row of each period presents the percentage of firms that rejected the null at the one per cent level, while the second and third rows for each period report the percentages at the five and ten per cent levels, respectively. the variance ratios of the market index range between 1.12 and 1.26% and are statistically significant at the one per cent level for three lags and at the five per cent level for one lag. furthermore, the company results of 𝑀1 for the full sample also indicate positive serial correlation; the companies’ variance ratios at lag 2 are significantly larger than one at the five per cent level for 84.0% of the sample companies. this non-random behavior for the market index and the sample companies implies that, volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.330 | http://emaj.pitt.edu abdullah alesmaiel, suzanne fifield, justin hof emerging markets journal page |7| under the assumption of homoscedasticity, the saudi stock market is not weak form efficient. overall, the results corroborate those documented by alkhazali (2011), bley (2011) and jamaani and roca (2015) who found that, under the hypothesis of homoscedasticity, saudi stock returns do not follow a random walk. the 𝑀1 results also show that the rwh is rejected before and after the date of opening the market to foreign investors. for example, the null hypothesis is rejected for the market index in three out of the four lags in the pre-opening period and in all lags in the postopening period, suggesting the change in regulation did not increase the informational efficiency of the saudi stock market. this finding is consistent with those of fuss (2005) and ulici and nistor (2011) who found that the estimated variance ratio tests, under the assumption of homoscedasticity, were statistically significant in the pre and post-liberalisation periods for the majority of their sample markets. for instance, fuss (2005) found that the random walk hypothesis was rejected before and after stock market liberalization in indonesia, the philippines, taiwan, and thailand; the variance ratios for all markets and lags were significantly different from one at the five per cent level. the evidence from the company results of 𝑀1 seem to support this finding; the null hypothesis for more than half of the companies is rejected at the five per cent level for lags 2 and 4 in both subperiods. for instance, the variance ratios for lag 4 are significantly different from one at the five per cent level for 55.0 and 58.0% of the companies in the preand post-opening periods, respectively. thus, these results indicate that the participation of international investors in the market appears to have had no impact on the efficiency of the saudi stock market. however, due to the time-varying volatility that usually characterizes stock market data the above results may not be robust. the presence of heteroscedasticity may lead to a higher rejection of the random walk hypothesis. thus, an inspection of the 𝑀2 results is necessary to make inferences about the rwh and market efficiency. in general, the 𝑀2 results show fewer rejections of the rwh for the market index as well as the sample companies. for example, the market index variance ratios for the full period are larger than one for three lags using 𝑀2, as opposed to four lags using 𝑀1. moreover, the magnitude of the 𝑀2 statistics are smaller than those for 𝑀1. they range from 1.26 to 2.96, while the 𝑀1 statistics range from 2.48 to 6.01, indicating the significance of rejection is weaker for 𝑀2. furthermore, the results for individual firms also show that the rejection of the null hypothesis of a random walk for some firms is not robust to heteroscedasticity. for instance, the percentage of companies that rejected the null hypothesis for lag 2 at the five per cent level decreases from 84.0% for 𝑀1 to 48.0% for 𝑀2. however, although these findings for the entire period indicate that some of the rejections of the rwh were due to changing variances (heteroscedasticity) rather than autocorrelation, support for weak form inefficiency is still strong. although this study employs higher frequency data than that of previous studies, and covers a period where the saudi stock market was characterized as a liquid market, the results are in line with those reported by abraham et. al. (2002) and alkhazali (2011). one 5 as of december 2017, there was a total of 179 companies listed on the saudi stock. the market capitalization was below $500 million for 58.1% of these companies, possible reason for the positive autocorrelation can be attributed to the gradual information diffusion process in small firms. small-capitalised firms tend to trade less frequently traded than large capitalized firms. they also tend to have lower analyst coverage (hong et. al., 2000). this, in turn, means information is incorporated into the share prices of small firms at a slower speed. this slow incorporation of information for some small firms causes positive autocorrelation in the market index5. however, the 𝑀2 results for the preand postopening periods reveal a different picture as compared to that given by the 𝑀1 results. the 𝑀2 results show that most of the variance ratio tests fail to reject the random walk hypothesis after the change in regulation. the market index variance ratios are significantly larger than one at two lags for the pre-period, while they are larger than one at only one lag for the post-period. in addition, the variance ratios of the individual companies at lag 2 reject the rwh at the five per cent level in only 22.0% of the companies for the post-period, as opposed to 35.0% for the pre-period. this result indicates that opening the market to foreign institutional investors has positively impacted the efficiency of the saudi stock market, providing some support to the findings of kim and singal (2000) and fuss (2005). laopodis (2004) also used the lo-mackinlay heteroscedastic variance ratio test to investigate how the greek stock market behaved after liberalization, but he documented results that are inconsistent with those reported here. that is, laopodis (2004) found that the greek stock market was efficient before and after allowing for the participation of foreign investors. nonparametric variance ratio test parametric techniques employed to test the random walk hypothesis require stock returns to be normally distributed. thus, using the parametric lomackinlay variance ratio test to examine the random walk behavior of the saudi stock market suffers from a critical limitation. as reported in section 3, the returns of the saudi stock market are not normally distributed. to overcome this limitation, the nonparametric wright’s rank and sign variance ratio tests, which are robust to the violation of the normality assumption, were conducted. the results of these tests are reported in tables 4 and 5. specifically, table 4 shows the estimates of the variance ratios and their associated tests statistics, 𝑅1, 𝑅2 and 𝑆1, for the market index, while table 5 displays the percentage of companies where the null hypothesis of a random walk at three different levels of significance are rejected. an inspection of the tables reveals a number of points. first, stock returns in the full period do not follow a random walk as the market index variance ratios are significantly larger than one for all test statistics considered and at all lags selected. the variance ratios for the full period range from 1.07 to 1.26, while their corresponding test statistics range from 2.36 to 6.06, which implies that the daily returns are positively autocorrelated. in view of equations (11) and (12), variance ratios at lag 2 are approximately equivalent to the first-order autocorrelation plus one; hence, using a base observation interval of two days, the 𝑅1 variance ratio of 1.12 indicates that the first-order autocorrelation for daily between $500 million and $5,000 million for 31.8% of the companies, and above $5,000 million for 10.0% of the companies. volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.330 | http://emaj.pitt.edu the influence of foreign investors on the efficiency of the saudi stock market page |8| emerging markets journal returns is nearly 12.0%. the company analysis confirms the points that emerge from the market index analysis as the rwh is rejected for a high proportion of the sample companies. for example, at the five per cent level of significance, the null hypothesis is rejected by 59.0% of the companies using 𝑅1 and 73.0% using 𝑅2. such findings suggest that trends were present in the share prices examined, indicating that the saudi stock market was weak form inefficient. despite the focus on companylevel data and the use of a recent time period, the results of this study are consistent with the results documented by al-khazali et. al. (2007), alkhazali (2011), bley (2011) and jamaani and roca (2015). one plausible explanation for this lack of efficiency is the irrationality of investors. for example, investors in the saudi stock market may underor over-react to the arrival of new information, causing share prices to have predictable patterns. another plausible explanation for the finding of market inefficiency relates to the dominance of noise traders who tend to buy when share prices rise and sell when share prices fall (park and irwin, 2007). such trendchasing behavior is not fully justified by news or fundamental factors and, in the absence of arbitragers, this behavior leads share prices to rise or fall further, causing positive autocorrelation. table 4: non-parametric variance ratio test results: market index note: this table shows the results from conducting wright’s non-parametric variance ratio test using daily stock market returns data for saudi stock market for the three sample periods. the full period spans the time from 1st january 2008 to 31st december 2017, while the pre-and post-periods cover the periods before and after the change in regulation on 15th june 2015. the main row in each period reports the variance ratios, with test statistics given in parentheses. *, **, and *** indicate statistical significance at the ten, five and one per cent levels, respectively. second, the predictability of stock returns altered after the change in regulation. in particular, the variance ratio tests for the market index are significantly larger than one in 11 cases in the pre-opening period as opposed to eight cases in the post-opening period. this reduction in the predictability of returns implies that there was an improvement in market efficiency after allowing foreign institutional investors to participate in the market. one reason that may explain the improvement in efficiency after stock market liberalization is that international investors are faster and better at 6 in his empirical testing, wright (2000) showed that tests based on ranks are robust under the assumption of homoscedasticity while the tests based on signs are robust to many forms of conditional heteroscedasticity. incorporating global news into share prices. this result is in line with fifield and jetty (2008) who found that, when using the nonparametric variance ratio test, the b-share chinese market had become more informationally efficient in the post-deregulation period. however, this result is not in line with graham et. al. (2015), who presented evidence against weak form efficiency for the icelandic stock market during periods when foreign capital restrictions were relaxed. the contradictory findings of these studies are possibly due to the result of differences in the levels of stock market development. kim and shamsuddin (2008) suggested that the relationship between stock market liberalization and market efficiency depends on factors such as market depth and breadth as well as on having good corporate governance provisions. by contrast, the variance ratio tests for the individual companies yield a somewhat different conclusion. specifically, the companies whose variance ratios did not equal one in the post-opening period are, in most cases, higher than those in the pre-opening period. for example, the percentage of companies that reject the rwh (assuming the 𝑅1 measure and a five per cent significance level) increases from 42.0% in the pre-period to 53.0% in the post-period. the variation in results between market index and individual companies is consistent with lo and mackinlay (1988) who suggested that it is difficult to detect statistically significant predictability for returns of individual firms because such returns contain firm specific noise (campbell et. al., 1997). third, an analysis of the results across the three different measures shows that there is no material difference between the conclusions drawn from the 𝑅1 and 𝑅2 test results; both measures show that the variance ratios are significantly larger than one for the market index for the full period and both subperiods. this result also holds for the individual companies; in general, the differences between measures 𝑅1 and 𝑅2 in terms of the number of companies that reject the null hypothesis are small. nevertheless, there are considerable differences in outcomes between the rank-based measures and the signbased measure. specifically, the test results for 𝑅1 and 𝑅2 rejected the random walk after liberalization, while the test results for 𝑆1 did not. belaire-franch and opong (2005) claimed that the sign-based measure is more powerful than the 𝑅1 and 𝑅2 measures in the presence of heteroscedasticity, and thus the 𝑆1 test may be more robust statistically6. this provides additional support for the nonrejection of the rwh for the saudi stock market in the post-opening period. volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.330 | http://emaj.pitt.edu abdullah alesmaiel, suzanne fifield, justin hof emerging markets journal page |9| table 5: non-parametric variance ratio test results: individual companies note: this table gives the percentage of companies where the null hypothesis of no autocorrelation was rejected for the three sample periods at three different significance levels. the full period spans the time from 1st january 2008 to 31st december 2017, while the pre-and postperiods cover the periods before and after the change in regulation on 15th june 2015. the first row of each period presents the percentage of firms where the null hypothesis was rejected at the one per cent level, while the second and third rows for each period show the percentages at the five and ten per cent levels, respectively. finally, the magnitude of the test statistics declines with the number of lags (q) considered, which indicates that the rejection of the rwh becomes weaker when the variances of longer holding periods are considered. more importantly, this result holds when company-level data are considered. that is, the percentage of companies that reject the rwh using the rank-based measures decreases as the number of lags (q) increases in all three periods, a result that is in line with fifield and jetty (2008). an exception to this generalization is the 𝑅1 results for the post-period at the one per cent level; the percentage of companies that reject the null hypothesis at the one per cent level increases from 30.0% for lag 2 to 31.0% for lag 4. overall, the results of the parametric and nonparametric variance ratio tests in this study indicate that the emh does not hold in the saudi stock market. these results support conclusions drawn from previous literature about the efficiency of the saudi stock market, such as abraham et. al. (2002), al-khazali et. al. (2007) and jamaani and roca (2015). in addition, the results suggest that the market became more informationally efficient after opening the market to foreign institutional investors. the test results for 𝑀2 and 𝑆1 supported the nonrejection of the rwh in the post-opening period. these results are consistent with some previous studies that investigated the effect of stock market opening using the variance ratio tests and other tests of the random walk (kim and singal, 2000; fuss, 2005; cajueiro et. al., 2009; ulici and nistor, 2011; rejeb and boughrara, 2013) however, the substantive literature has not always documented a positive impact of stock market liberalization on market efficiency (groenewold and ariff, 1998; maghyereh and omet, 2002; kim and shamsuddin, 2008; naghavi et. al., 2018). the difference in results between this study and some previous studies suggests that the relationship between stock market opening and informational efficiency may be countryspecific. vi. conclusion this paper has examined the behavior of the saudi stock market using the parametric variance ratio test of lo and mackinlay (1988) as well as the nonparametric variance ratio test of wright (2000). employing these statistically robust techniques and using marketand firmlevel data over the ten-year period 2008-2017, this paper provides new empirical evidence on the weak form of the emh for the saudi stock market. in addition, the paper investigated, for the first time, the impact of opening the market to foreign institutional investors on market efficiency. to do so, the paper divided the whole sample period into two subperiods based on the market opening date and then compared the level of efficiency in the preopening period with the post-opening period. the analysis conducted in this paper revealed several key findings. first, the analysis of the descriptive statistics suggested that the average daily return for the market index and the sample companies were highly skewed and leptokurtic implying the need to use nonparametric techniques, such as wright’s (2000) variance ratio test, when testing weak form efficiency. second, the results from the parametric variance ratio test suggested that the rwh was rejected for the market index and the sample companies, providing evidence against weak form efficiency. this result supports previous studies that have employed various statistical tests to examine the informational efficiency of the saudi stock market (butler and malaikah, 1992; abraham et. al., 2002; bley, 2011; al-ajmi and kim, 2012; niemczak and smith, 2013; jamaani and roca, 2015). the variance ratios were significantly larger than one for most lags used. the rejection of the random walk hypothesis was also robust to heteroscedasticity. third, the use of the nonparametric variance ratio test provided further evidence against weak form efficiency in the saudi stock market; the results for 𝑅1, 𝑅2 and 𝑆1 rejected the random walk hypothesis for all lags selected. this lack of efficiency can be explained by the dominance of irrational investors in the market who tend to trade based on noise rather than information. finally, and most importantly, opening the stock market to international investors seemed to positively impact the efficiency of the saudi stock market. the results of the 𝑀2 measure, which is robust to heteroscedasticity, and the 𝑆1 measure, which is robust to non-normality, failed to reject the rwh in the post-opening period for most lags. although this study provided evidence of an improvement in market efficiency during the post-opening period, this finding needs to be interpreted with care. the post-opening time period considered in this investigation spans the time from june 2015 to december 2017. this relatively short period of two-and-a-half years might not be long enough to fully understand the impact of stock market liberalization on market efficiency. the restrictions on foreign investment in some countries are lifted gradually and this means the process of stock market liberalisation can take years to be fully implemented. therefore, future work may usefully investigate the impact of stock market liberalization by considering a longer time period. in order to provide a better understanding of the relationship between market liberalization and market efficiency, future studies could volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.330 | http://emaj.pitt.edu the influence of foreign investors on the efficiency of the saudi stock market page |10| emerging markets journal also compare the share price behavior of companies whose shares are held by international investors to the behavior of companies whose shares are neglected by the global community. references abdmoulah, w. (2010). testing the evolving efficiency of arab stock markets. international review of financial analysis, 19(1), 25-34. abraham, a., seyyed, f. j. and alsakran, s. a. (2002). testing the random walk behavior and efficiency of the gulf stock markets. financial review, 37(3), 469-480. al-ajmi, j. and kim, j.h. (2012). are gulf stock markets efficient? evidence from new multiple variance ratio tests. applied economics, 44(14), 17371747. al-khazali, o. m., ding, d. k. and pyun, c. s. (2007). a new variance ratio test of random walk in emerging markets: a revisit. financial review, 42(2), 303-317. albuquerque, r., bauer, g. h. and schneider, m. (2009). global private information in international equity markets. journal of financial economics, 94(1), 18-46. alkhazali, o. (2011). does infrequent trading make a difference on stock market efficiency? evidence from the gulf cooperation council (gcc) countries. studies in economics and finance, 28(2), 96-110. aye, g. c., gil-alana, l. a., gupta, r. and wohar, m. e. (2017). the efficiency of the art market: evidence from variance ratio tests, linear and nonlinear fractional integration approaches. international review of economics & finance, 51, 283-294. belaire-franch, j. and opong, k. k. (2005). a variance ratio test of the behaviour of some ftse equity indices using ranks and signs. review of quantitative finance and accounting, 24(1), 93-107. bley, j. (2011). are gcc stock markets predictable? emerging markets review, 12(3), 217-237. butler, k.c. and malaikah, s.j. (1992). efficiency and inefficiency in thinly traded stock markets: kuwait and saudi arabia. journal of banking & finance, 16(1), 197-210. cajueiro, d. o., gogas, p. and tabak, b. m. (2009). does financial market liberalisation increase the degree of market efficiency? the case of the athens stock exchange. international review of financial analysis, 18(1), 50-57. campbell, j. y., lo, a. w.-c. and mackinlay, a. c. (1997). the econometrics of financial markets, new jersey: princeton university press. capital market authority (2015). objectives of opening the smm for foreign investment, available at: https://bit.ly/392aiwl [accessed: 04 december 2017]. charfeddine, l. and khediri, k. b. (2016). time varying market efficiency of the gcc stock markets. physica a: statistical mechanics and its applications, 444, 487-504. charles, a. and darné, o. (2009). variance‐ratio tests of random walk: an overview. journal of economic surveys, 23(3), 503-527. fama, e. f. (1965). tomorrow on the new york stock exchange. the journal of business, 38(3), 285299. fifield, s. g. m. and jetty, j. (2008). further evidence on the efficiency of the chinese stock markets: a note. research in international business and finance, 22(3), 351-361. füss, r. (2005). financial liberalisation and stock price behaviour in asian emerging markets. economic change and restructuring, 38(1), 3762. graham, m., peltomäki, j. and sturludóttir, h. (2015). do capital controls affect stock market efficiency? lessons from iceland. international review of financial analysis, 41, 82-88. groenewold, n. and ariff, m. (1998). the effects of deregulation on share-market efficiency in the asia-pacific. international economic journal, 12(4), 23-47. hong, h., lim, t. and stein, j. c. (2000). bad news travels slowly: size, analyst coverage, and the profitability of momentum strategies. the journal of finance, 55(1), 265-295. hull, m. and mcgroarty, f. (2014). do emerging markets become more efficient as they develop? long memory persistence in equity indices. emerging markets review, 18, 45-61. hunter, d. m. (1998). the performance of filter rules on the jamaican stock exchange. applied economics letters, 5(5), 297-300. jamaani, f. and roca, e. (2015). are the regional gulf stock markets weak-form efficient as single stock markets and as a regional stock market? research in international business and finance, 33, 221-246. volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.330 | http://emaj.pitt.edu abdullah alesmaiel, suzanne fifield, justin hof emerging markets journal page |11| kawakatsu, h. and morey, m. r. (1999). financial liberalisation and stock market efficiency: an empirical examination of nine emerging market countries. journal of multinational financial management, 9(3), 353-371. kim, h. and singal, v. (2000). the fear of globalizing capital markets. emerging markets review, 1(3), 183-198. kim, j. h. and shamsuddin, a. (2008). are asian stock markets efficient? evidence from new multiple variance ratio tests. journal of empirical finance, 15(3), 518-532. kinninmont, j. (2017). vision 2030 and saudi arabia’s social contract austerity and transformation. chatham house [online] available at: https://bit.ly/335bnoh [accessed: 03 december 2017]. laopodis, n. t. (2004). financial market liberalisation and stock market efficiency: evidence from the athens stock exchange. global finance journal, 15(2), 103-123. lo, a. w. and mackinlay, a. c. (1988). stock market prices do not follow random walks: evidence from a simple specification test. the review of financial studies, 1(1), 41-66. lo, a. w. and mackinlay, a. c. (1989). the size and power of the variance ratio test in finite samples: a monte carlo investigation. journal of econometrics, 40(2), 203-238. maghyereh, a. and omet, g. (2002). financial liberalisation and stock market efficiency: empirical evidence from an emerging market. african finance journal, 4(2), 24-35. mills, t. c. and coutts, j. a. (1995). calendar effects in the london stock exchange ft-se indices. the european journal of finance, 1(1), 79-93. mobarek, a. and fiorante, a. (2014). the prospects of bric countries: testing weak-form market efficiency. research in international business and finance, 30, 217-232. naghavi, n., mubarik, m. s. and kaur, d. (2018). financial liberalisation and stock market efficiency: measuring the threshold effects of governance. annals of financial economics, 13(04), 1-24. niemczak, k. and smith, g. (2013). middle eastern stock markets: absolute, evolving and relative efficiency. applied financial economics, 23(3), 181-198. oxford business group (2018). the report: saudi arabia 2018. [online] available at: https://bit.ly/390zic8 [accessed: 17 october 2019]. park, c. h. and irwin, s. h. (2007). what do we know about the profitability of technical analysis? journal of economic surveys, 21(4), 786-826. saudi arabian monetary agency (2009). forty-fifth annual report, riyadh: research and statistics department. saudi arabian monetary agency (2017). fifty-third annual report, riyadh: economic research department. seif, m., docherty, p. and shamsuddin, a. (2017). seasonal anomalies in advanced emerging stock markets. the quarterly review of economics and finance, 66, 169-181. sharif, s. (2019). how foreign investors influence stock markets? the saudi arabian experience. middle east development journal, 11(1), 105-123. tadawul (2021). saudi exchange [online] available at: https://bit.ly/378nwwj [accessed: 11 february 2021]. todea, a. and pleşoianu, a. (2013). the influence of foreign portfolio investment on informational efficiency: empirical evidence from central and eastern european stock markets. economic modelling, 33, 34-41. ulici, m.-l. and nistor, i. a. (2011). financial liberalisation and stock market efficiency. finante-provocarile viitorului (financechallenges of the future), 1(13), 154-160. vo, x.v. (2019). do foreign investors promote stock price efficiency in emerging markets? international review of finance, 19(1), 223-235. wright, j. h. (2000). alternative variance-ratio tests using ranks and signs. journal of business & economic statistics, 18(1) 1-9. https://bit.ly/335bnoh https://bit.ly/390zic8 https://bit.ly/378nwwj volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu influence of employees’ socioeconomic characteristics and innovation culture on sustainable organizational change management in agricultural organizations of south-west nigeria stephen oluseun adeogun national university of lesotho, lesotho | e-mail: : stephendeog2007@gmail.com olaoluwa ayodeji adebayo federal college of forestry, forestry research institute of nigeria, nigeria | e-mail: oriobatemyl@gmail.com omotolani elizabeth adeniran federal university of agriculture, nigeria | e-mail: adeniranomotolani2001@gmail.com abstract agricultural organizations in south-west nigeria face unique challenges in achieving sustainability amidst rapid organizational and technological changes. this study examines how employees’ socioeconomic characteristics and innovation culture influence sustainable organizational change management. using a descriptive survey design, data were collected from 339 employees across agricultural organizations through structured questionnaires and interviews. the findings reveal that innovation culture (β=0.72; p<0.05) significantly drives organizational change management, fostering adaptability and creative problem-solving. socioeconomic characteristics such as work experience (β=0.01; p<0.05) also positively influence change processes, while factors like age and income show minimal impact. the study highlights the need for agricultural organizations to foster innovation, enhance leadership communication and support employee training to boost resilience and competitiveness in the sector. keywords: innovation culture, organizational change, agricultural sustainability, socioeconomic characteristics, nigeria volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.354 | http://emaj.pitt.edu | mailto:stephendeog2007@gmail.com mailto:oriobatemyl@gmail.com mailto:adeniranomotolani2001@gmail.com volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.354 | http://emaj.pitt.edu influence of employees’ socioeconomic characteristics and innovation culture on sustainable organizational change management in agricultural organizations of south-west nigeria page |8| emerging markets journal influence of employees’ socioeconomic characteristics and innovation culture on sustainable organizational change management in agricultural organizations of south-west nigeria stephen oluseun adeogun olaoluwa ayodeji adebayo omotolani elizabeth adeniran i. introduction green bonds are seen as being crucial to the growth of sustainable infrastructure investments from institutional investors by improving the liquidity of infrastructure assets. they are financial innovation instruments designed to facilitate sustainable investing for institutional investors such as pension fund administrators (pfas), insurance companies and funds/asset managers. additionally, because of their potential for increased investment in the agricultural sector, as well as the opportunity to improve environmental quality and food security in nigeria and globally, green bonds play a significant role in promoting sustainable agriculture in nigeria. a sizable section of the workforce is employed in the agricultural industry makes a substantial economic contribution to nigeria. low productivity, inadequate infrastructure and restricted access to financing are only a few of the difficulties the industry faces (oyaniran, 2020). nigeria has seen a push in recent years to enhance sustainable agriculture, with an emphasis on raising output and minimizing negative environmental effects. both domestic and foreign investors are becoming more interested in investing in sustainable agriculture in nigeria. numerous initiatives have received funding from a range of sources, such as venture capital, private equity and government initiatives. additionally, more green bonds are being issued for initiatives promoting sustainable agriculture transformation in nigeria (owoade, 2019). the dynamic and evolving nature of agricultural organizations necessitates effective organizational change management to ensure sustainability in an increasingly complex business environment. organizational change management entails adapting structures, processes and strategies to address both internal and external challenges, with the ultimate goal of improving productivity, resilience and sustainability (orieno et. al., 2024). in agricultural organizations, sustainability hinges on employees' socioeconomic characteristics and innovation culture. socioeconomic factors such as education, age, gender, work experience and income levels shape employees’ perspectives on innovation and sustainable practices (olubiyi et. al., 2023). similarly, an organization's innovation culture, encompassing openness to new ideas, risk-taking and continuous learning, plays a critical role in fostering receptiveness to sustainable change initiatives. research on organizational change sustainability calls attention to the significant role of human capital in driving sustainable organizational transformation. for instance, orieno et. al. (2024) highlighted that employee demographics and organizational culture strongly influence the success of organizational change management initiatives, particularly in african contexts. in agricultural organizations, these factors are amplified due to the resource-constrained environments they often operate in, where sustainability challenges such as food security, climate resilience and environmental stewardship demand innovative and adaptive approaches. however, existing studies rarely address the intersection between employees' socioeconomic characteristics and innovation culture in shaping sustainable change management outcomes, leaving a critical gap in understanding these dynamics within agricultural contexts. south-west nigeria was chosen as the study area due to its significant contribution to nigeria’s agricultural economy. the region is home to several agricultural research institutions, organizations and companies that drive innovation and support food security initiatives. according to abubakar & ibrahim (2019), the agricultural sector in south-west nigeria plays a significant role in the region's economy, contributing substantially to its gross domestic product (gdp) and supporting a large portion of the local population through direct employment and related activities. this emphasizes the region's critical importance in enhancing national food security and its potential for advancing sustainable agricultural practices. furthermore, agricultural organizations in south-west nigeria have consistently demonstrated leadership in the adoption of innovation-driven practices and sustainability initiatives. for instance, data from adeyemi et. al. (2023) indicated that a significant share of new agricultural technologies and innovations piloted in nigeria over the past decade originated from this region. the region’s rich socioeconomic diversity and thriving agricultural sector make it a strategic choice for understanding the interplay between organizational innovation culture and employees' socioeconomic characteristics in driving sustainable change. the choice of south-west nigeria for this study is also informed by its strategic role in agricultural research and innovation. the region hosts several public and private agricultural institutions, such as the national horticultural research institute in ibadan, the nigeria institute of oceanography and marine research in victoria island as well as the federal university of agriculture in abeokuta, which are renowned for their contributions to agricultural innovation and sustainability. these institutions are at the forefront of developing and implementing technologies that enhance productivity and address challenges such as climate change and food insecurity. focusing on this region provides an opportunity to investigate how the interplay of volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.354 | http://emaj.pitt.edu stephen oluseun adeogun, olaoluwa ayodeji adebayo, omotolani elizabeth adeniran emerging markets journal page |9| socioeconomic characteristics and innovation culture influences sustainability-driven organizational change. the theoretical foundation of this study is rooted in the resource-based view (rbv) and the theory of planned behavior (tpb). the rbv posits that an organization’s internal resources, such as skilled employees and a strong innovation culture, are essential for achieving sustainable competitive advantage (ikegbunam & onuoha, 2023). the tpb complements this by explaining how individuals’ attitudes, subjective norms and perceived behavioral control influence their willingness to embrace and implement sustainable change (tunji-olayeni et. al., 2024). by integrating these frameworks, this study investigates the interplay between employees' socioeconomic characteristics and innovation culture in fostering sustainability-driven change processes. recent empirical studies offer insights into these dynamics. arowosegbe et. al., (2024) found that employees’ educational background significantly influenced their adaptability to technology-driven changes, particularly those aligned with sustainability goals in agricultural cooperatives in nigeria. jimoh & adenekan, (2024) emphasized that organizations promoting continuous learning and innovation were better equipped to transition smoothly during sustainability reforms. similarly, aluko et. al. (2024) revealed that younger employees with higher technological proficiency were more likely to champion sustainable practices, thereby facilitating organizational transformation. umeh et. al (2024) further identified inclusive decision-making as a critical enabler of successful organizational change management, particularly in agricultural ngos focused on sustainability. these findings highlight the need for further exploration of how individual and organizational factors collectively drive sustainability-oriented change. given these factors, the decision to focus on agricultural organizations in south-west nigeria reflects their unique blend of socioeconomic and innovationdriven dynamics. the region's organizations provide a fertile ground for studying the complex interactions between employees’ characteristics and innovation culture in shaping sustainable organizational change. by investigating these dynamics, this study aims to spawn actionable insights that can enhance the capacity of agricultural organizations to adapt and thrive amidst global sustainability challenges. despite these contributions, gaps remain in understanding the combined influence of employees' socioeconomic characteristics and innovation culture on sustainable change management outcomes in agricultural organizations, particularly in the nigerian context. this study seeks to address this gap by examining selected agricultural organizations in south-west nigeria, a region where diverse socioeconomic profiles and varying organizational cultures present unique opportunities and challenges for integrating sustainability into organizational change management. the general objective of this study was to examine the influence of employees’ socioeconomic characteristics and innovation culture on sustainabilityfocused organizational change management in selected agricultural organizations in south-west nigeria. specifically, the study aimed to describe the socioeconomic characteristics of employees in selected agricultural organizations, examine employees’ perceptions of innovation-related factors in selected agricultural organizations, investigate employees’ perception of the effectiveness of organizational change management in selected agricultural organizations and analyze the influence of employees’ socioeconomic characteristics and innovation culture on organizational change management. by addressing these objectives, the study contributed to the growing knowledge of sustainabilitydriven organizational change in agricultural settings. it also provided actionable insights for policymakers and organizational leaders seeking to enhance sustainabilityfocused change management strategies. innovation culture refers to an organizational environment that fosters creativity, openness to new ideas and continuous improvement, enabling employees to explore and implement innovative solutions to challenges (davies & buisine, 2018). similarly, sustainable organizational change management involves systematically embedding environmental, social and economic sustainability principles into organizational processes and strategies to ensure long-term adaptability and resilience while maintaining stakeholder alignment (orji, 2019; sroufe, 2017). these concepts emphasize the importance of cultivating a proactive and adaptive approach to achieving sustainability goals within agricultural organizations. ii. research methodology this study adopts a descriptive survey design to examine the influence of employees’ socioeconomic characteristics and innovation culture on organizational change management in selected agricultural organizations in south-west nigeria. the survey design is suitable for exploring relationships among variables and capturing the perspectives of a diverse population within a specified period. quantitative data were primarily employed to ensure objectivity, with qualitative insights gathered through open-ended interviews to provide additional context. area of study and population the study was conducted in south-west nigeria, a region renowned for its active agricultural sector and diverse socio-economic dynamics. the area includes six states: oyo, ogun, ondo, ekiti, osun and lagos, all of which host a mix of private and public agricultural organizations involved in agricultural research, innovation and management. the selected organizations were the national horticultural research institute in ibadan, oyo state; the federal university of agriculture, abeokuta, ogun state; and the nigeria institute of oceanography and marine research in lagos state. these public organizations were chosen purposively due to their significant roles in agricultural research and their established records in implementing innovation and organizational change programs. the target population consisted of 2224 employees across the three institutions, including managerial and operational staff with varying levels of expertise and engagement in agricultural practices and decision-making processes. their diverse socio-economic backgrounds and exposure to innovative practices made them suitable for providing valuable insights into the dynamics of agricultural innovation in the region. volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.354 | http://emaj.pitt.edu influence of employees’ socioeconomic characteristics and innovation culture on sustainable organizational change management in agricultural organizations of south-west nigeria page |10| emerging markets journal sampling procedure and sample size a multi-stage sampling procedure was employed to ensure comprehensive representation. in the first stage, purposive sampling was used to select three agricultural organizations based on their documented involvement in agricultural innovation and development initiatives. the second stage involved the use of stratified random sampling to ensure an equitable representation of respondents across departments and hierarchical levels within these organizations. using yamane’s formula for sample size determination with a 95% confidence level and a 5% margin of error, a sample size of 339 respondents was determined. the sample size was proportionately allocated to the organizations based on their total staff population. this approach ensured that the study captured a diverse range of perspectives and experiences relevant to the research objectives. data collection techniques primary data were collected through a structured questionnaire comprising both closedand open-ended questions. the questionnaire was pre-tested for reliability and validity, yielding a cronbach’s alpha of 0.84, which indicates high internal consistency. the instrument assessed three primary constructs: employees’ socioeconomic characteristics (e.g., gender, age, education, work experience and income), innovation culture (e.g., risk-taking, openness to new ideas, support for creativity) and organizational change management (e.g., readiness for change, successful implementation of change initiatives). complementary data were gathered through semi-structured interviews with key informants such as managers and innovation officers to provide qualitative depth. variable measurement the dependent variable, organizational change management (y), was measured using a composite index derived from respondents’ self-reported experiences and perceptions of change initiatives. the independent variables included employees’ socioeconomic characteristics (x₁, x₂, ..., xₙ) and innovation culture (z). the relationships among these variables were modelled using multiple regression analysis. the regression equation is expressed as: y = β0 + β1x1 + β2x2 + .... + βnxn + ψz + ε (1) where:  y is the dependent variable, representing the organizational change management,  β0 is the intercept,  β1, β1,…… βn,are the regression coefficients for the socioeconomic variables (x1, x2,…, xn),  ψ is the coefficient for innovation culture (z) and  ϵ is the error term data analysis techniques the collected data were analyzed using descriptive and inferential statistics. descriptive statistics such as means were employed to summarize respondents’ profiles and general trends. multiple regression analysis was conducted to assess the relationships among the independent variables and organizational change management. the statistical package for social sciences (spss) software was used to perform the analyses, with a significance level set at p<0.05. additionally, thematic analysis was applied to qualitative data from interviews to complement and contextualize the quantitative findings. research procedure the study followed a systematic procedure. initially, a literature review informed the development of the conceptual framework and questionnaire. ethical approval was obtained from the institutional ethics committee and consent was secured from participating organisations and respondents. data collection spanned two months, with trained enumerators administering questionnaires and conducting interviews. the responses were collated, cleaned and subjected to statistical and thematic analyses. the results were synthesized to address the research objectives and provide actionable recommendations. iii. results and discussion socioeconomic characteristics of respondents table 1: employees’ socioeconomic variables in selected agricultural organizations socioeconomic variables mean mode gender male (58.4%) educational qualification bsc. (39.9%) age (years) 32.4 years 31-40 years (43.3%) monthly income (naira per month) ₦162869.7 ₦100,001 ₦200,000 (52.0%) work experience (years) 8.6 (years) ≤ 10 years (73.5%) source: spss software output the findings of this study as presented in table 1 reveal important insights into the socioeconomic characteristics of employees in selected agricultural organisations. the results highlight the centrality of these variables in shaping workforce dynamics and their implications for agricultural productivity and development. the key findings and their critical discussion are presented below. the majority of employees in the selected organizations were male (58.4%). this finding aligns with the gender disparity commonly observed in the nigerian agricultural sector, where male dominance persists due to volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.354 | http://emaj.pitt.edu stephen oluseun adeogun, olaoluwa ayodeji adebayo, omotolani elizabeth adeniran emerging markets journal page |11| societal norms and gender roles (ajayi et. al., 2022). however, the increasing participation of females in the workforce (41.6%) signals a gradual shift toward inclusivity, possibly driven by evolving societal attitudes and gender-sensitive policies. future research could explore whether this shift translates into more equitable opportunities and productivity gains in the sector. the modal educational qualification among employees was a bachelor’s degree (39.9%). this reflects the increasing emphasis on formal education as a prerequisite for employment in the agricultural sector. educational attainment is vital for equipping employees with skills for innovation and efficient resource management (ajayi et. al., 2022). however, the relatively low representation of higher degrees suggests a potential gap in advanced technical expertise. this gap could limit the sector’s ability to fully leverage emerging technologies. initiatives aimed at promoting postgraduate education among agricultural workers are necessary to bridge this gap. the average age of employees was 32.4 years, with most falling within the 31–40 years age bracket (43.3%). this demographic pattern indicates a relatively young workforce, which could be an advantage in terms of adaptability and productivity. young employees are often more open to adopting innovative agricultural practices and technologies (obioma, et. al., 2022). however, the lack of older, experienced employees might limit mentorship opportunities for younger staff. balancing the workforce age structure could enhance knowledge transfer and sustainability within the sector. the average monthly income was ₦162,869.7, with the majority earning between ₦100,001 and ₦200,000 (52.0%). while this income level is relatively moderate, it may not adequately reflect the sector’s economic potential or match the cost of living in urban areas. research by yunusa et. al., (2023) suggests that income levels in agriculture often lag behind other sectors, leading to employee dissatisfaction and turnover. addressing wage disparities and improving financial incentives could attract and retain talent, ultimately boosting the sector’s performance. the average work experience was 8.6 years, with 73.5% of employees having 10 years or less experience. this finding highlights the predominance of early-career professionals in the workforce. while this demographic could be advantageous for fostering innovation, it may also indicate limited institutional knowledge and expertise. empirical studies, such as those by adeosun & popogbe (2021), emphasise the importance of a balanced workforce experience mix for sustaining organizational growth. agricultural organizations should therefore implement mentorship and professional development programs to enhance the skills of less experienced employees. the results align with the human capital theory, which posits that education and experience significantly impact employee productivity. this study’s findings support the theory by demonstrating the critical role of educational qualifications and work experience in shaping workforce efficiency in the agricultural sector. however, the low representation of advanced qualifications highlights a gap in maximizing human capital potential, suggesting the need for targeted capacity-building initiatives. thus, these findings have significant implications for agricultural policy and management. strategies to improve gender diversity, enhance educational opportunities and address wage disparities are critical for fostering a motivated and productive workforce. additionally, policies that encourage balanced age and experience distribution could enhance organizational sustainability and resilience. innovation culture in selected agricultural organizations table 2: innovation culture in selected agricultural organizations ic statements mean i feel confident in my technical skills and expertise relevant to my role. 3.57 i am encouraged to stay updated with the latest technological advancements relevant to my role. 3.41 i feel empowered to apply creative problemsolving techniques in my work using technology. 3.38 i am encouraged to think creatively and come up with innovative solutions to challenges. 3.36 i can effectively collaborate with colleagues from diverse backgrounds on technologydriven projects. 3.32 communication channels are open for sharing innovative ideas and feedback with my team. 3.30 i feel supported in adapting to new technologies and market trends as they emerge. 3.29 i understand how my innovation initiatives contribute to the overall goals and competitive advantage of the organization. 3.29 failure is seen as a learning opportunity when experimenting with technological innovations. 3.21 leadership values and recognizes innovative contributions from employees. 3.20 there is a culture of innovation fostered by leadership within the organization. 3.20 i have access to training and resources to enhance my technical knowledge and proficiency. 3.16 i feel encouraged to take calculated risks and experiment with new ideas and approaches. 3.16 my innovation efforts are aligned with the strategic objectives and priorities of the organization. 3.15 i can leverage external expertise and support when needed to drive technological innovation. 2.96 i have access to the necessary resources, such as funding and technology infrastructure, to support innovation. 2.80 innovation culture (grand mean) 3.24 source: spss software output note: innovation culture is measured on a 5-point likerttype rating scale the study examined the innovation culture in selected agricultural organizations, utilizing a 5-point volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.354 | http://emaj.pitt.edu influence of employees’ socioeconomic characteristics and innovation culture on sustainable organizational change management in agricultural organizations of south-west nigeria page |12| emerging markets journal likert scale to measure employees’ perceptions of various innovation-related factors (table 2). with a grand mean of 3.24, the findings reveal a moderately positive perception of innovation culture within the organizations. key aspects of the results, analyzed about theoretical and empirical frameworks, are discussed below. confidence in technical skills and encouragement for technological advancements the statement “i feel confident in my technical skills and expertise relevant to my role” scored the highest mean (3.57), suggesting that employees possess a strong sense of capability regarding their technical roles. this finding is consistent with the human capital theory, which emphasizes the importance of skills and expertise in driving organizational performance. similarly, the encouragement to stay updated with technological advancements (mean = 3.41) highlights organizations’ awareness of the need for continuous learning. as noted by egbulem et. al., (2024), fostering technical competence and promoting technological literacy among employees are critical for sustaining competitiveness in nigeria’s evolving agricultural sector. empowerment and creative problem-solving employees reported feeling empowered to apply creative problem-solving techniques using technology (mean = 3.38). this result reflects an organizational environment that values innovative approaches to addressing challenges. studies by odunayo & abe, (2024) suggest that empowerment and autonomy are pivotal for stimulating creativity and innovation in workplaces. however, the moderate score indicates room for improvement, particularly in ensuring that such empowerment is consistently encouraged across all organisational levels. collaboration and communication the ability to collaborate effectively with colleagues from diverse backgrounds on technologydriven projects (mean = 3.32) and open communication channels for sharing ideas (mean = 3.30) were moderately rated. collaboration and communication are foundational to fostering innovation, as they enable knowledge exchange and collective problem-solving. however, the moderate scores suggest potential barriers, such as insufficient support structures or cultural resistance, which might hinder effective collaboration. as highlighted by jejeniwa et. al., (2024), strengthening communication frameworks and promoting diversity in team composition can significantly enhance innovation outcomes. support for adapting to emerging technologies the study also found moderate levels of perceived support for adapting to new technologies and market trends (mean = 3.29). while employees acknowledge the existence of some support mechanisms, the relatively modest score implies that additional investments in technology infrastructure and training are needed. onoja et. al., (2023) emphasize the importance of adaptive capacity in agricultural organisations, particularly in leveraging emerging technologies to address climate-related challenges and market demands. leadership and risk-taking the perception of leadership's role in fostering a culture of innovation scored moderately, with statements such as “leadership values and recognizes innovative contributions” (mean = 3.20) and “there is a culture of innovation fostered by leadership” (mean = 3.20). these findings suggest that while leadership plays a role in supporting innovation, it may not be sufficiently proactive in driving change. moreover, the relatively low score for “failure is seen as a learning opportunity” (mean = 3.21) points to a potential cultural aversion to risk-taking, which could stifle experimentation and creativity. shuaib & he, (2021) argue that leadership commitment to recognizing and rewarding innovation is crucial for embedding a strong innovation culture. access to resources and training the lowest-scoring items were related to access to resources, such as funding and technology infrastructure (mean = 2.80) and leveraging external expertise (mean = 2.96). these results give emphasis to significant gaps that could hinder employees’ capacity to innovate effectively. as observed by bello et. al., (2024), inadequate access to critical resources remains a persistent challenge in nigerian agricultural organisations, limiting their ability to implement transformative innovations. the findings support the diffusion of innovations theory, which posits that organizational structures and leadership significantly influence the adoption of innovations. however, the study also reveals gaps in critical areas, such as resource accessibility and leadership-driven support. practically, these results highlight the need for targeted interventions, including increased funding for innovation projects, enhanced leadership training and stronger collaboration with external experts. organizational change management in selected agricultural organizations table 3: organizational change management in selected agricultural organizations organizational change management statements mean i have experienced recent changes in the organization’s hierarchy or reporting lines. 3.32 i feel confident in the organization’s ability to successfully implement strategic changes. 3.29 technological changes have improved my productivity and job satisfaction. 3.24 the organization’s goals and objectives are communicated and understood. 3.18 process changes have positively impacted the quality of our work output. 3.17 new technologies have been implemented to enhance our work processes. 3.16 leadership actively promotes and encourages the desired cultural changes. 3.13 volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.354 | http://emaj.pitt.edu stephen oluseun adeogun, olaoluwa ayodeji adebayo, omotolani elizabeth adeniran emerging markets journal page |13| i have received sufficient training and support to adapt to process changes. 3.13 i feel supported in adapting to the evolving organizational culture. 3.12 i feel supported during transitions in roles and responsibilities within the organization. 3.12 new processes have been introduced to improve workflow efficiency. 3.10 leadership effectively communicates changes related to personnel. 3.10 i have received adequate training to effectively utilize new technologies. 3.08 i feel adequately informed about the structural changes happening within the organization. 2.99 i understand the reasons behind recent strategic shifts in the organization. 2.98 the restructuring of departments has impacted my day-to-day work responsibilities. 2.87 i have noticed changes in the composition of our workforce (e.g., hiring, layoffs). 2.87 i have noticed shifts in the organization’s values and beliefs. 2.80 organizational change management (grand mean) 3.09 source: spss software output note: organizational change management is measured on a 5-point likert-type rating scale this study examined organizational change management in selected agricultural organizations, focusing on employees' perceptions of various aspects of change processes (table 3). the grand mean score of 3.09 indicates a moderate perception of the effectiveness of change management. the discussion evaluates the key findings, cross-referencing them with theoretical and empirical studies, while exploring implications and identifying areas for future research. strategic and structural changes the perception of recent changes in the organizational hierarchy or reporting lines scored the highest mean (3.32). this finding suggests that structural adjustments are a prominent aspect of change management in the studied organizations. however, confidence in the organization’s ability to implement strategic changes effectively scored slightly lower (3.29), reflecting employees' cautious optimism. these results align with the change management theory, which emphasizes that effective communication and transparency in hierarchical adjustments are essential for building employee trust (balogun & zaghmout, 2024). the relatively moderate score highlights the need for more robust strategies to ensure that structural changes translate into operational efficiency. technological advancements and productivity the implementation of technological changes positively influenced productivity and job satisfaction (mean = 3.24). this aligns with findings from adetowuboking et. al., (2024), who reported that technology-driven innovations in nigeria's agricultural sector enhance employee performance and satisfaction. however, the moderate scores for statements such as “new technologies have been implemented to enhance our work processes” (mean = 3.16) and “i have received adequate training to effectively utilize new technologies” (mean = 3.08) suggest that while technology adoption is evident, gaps in training and resource allocation persist. addressing these gaps is crucial to maximizing the potential benefits of technological advancements. process and workflow changes process changes were perceived to have positively impacted work output (mean = 3.17) and improved workflow efficiency (mean = 3.10). these findings reflect the importance of refining operational processes to achieve better outcomes. however, the results also highlight challenges in providing sufficient training and support for adapting to these changes, as reflected in the mean score of 3.13 for “i have received sufficient training and support to adapt to process changes.” as posited by odulaja et. al., (2023), effective training programs are indispensable for ensuring employees can seamlessly adapt to process changes and contribute meaningfully to organisational goals. leadership and cultural shifts leadership's role in promoting desired cultural changes (mean = 3.13) and effectively communicating changes related to personnel (mean = 3.10) received moderate ratings. these findings align with the transformational leadership theory, which features the importance of visionary leadership in driving cultural transformation. however, employees felt less informed about the structural changes (mean = 2.99) and the reasons behind strategic shifts (mean = 2.98), pointing to gaps in communication strategies. oladeinde et. al., (2023) assert that proactive and transparent communication is vital for mitigating resistance and fostering alignment during cultural and strategic transitions. workforce and value changes the lowest mean scores were recorded for changes in workforce composition (mean = 2.87) and organizational values and beliefs (mean = 2.80). these findings suggest that such changes are either less pronounced or inadequately communicated to employees. adinew (2024) argued that clear articulation of shifts in organizational values is crucial for sustaining employee engagement and fostering a cohesive work culture. additionally, the low score for workforce composition changes may reflect employee concerns about job security, which could hinder their acceptance of broader organizational changes. the findings call attention to the importance of comprehensive training programs, transparent communication and supportive leadership in facilitating successful change management. the moderate overall perception of organizational change management effectiveness highlights areas for improvement, particularly in technology adoption, communication of strategic shifts and fostering cultural change. future research could explore the long-term impact of these change management on organisational performance, as well as the interplay between employee engagement and volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.354 | http://emaj.pitt.edu influence of employees’ socioeconomic characteristics and innovation culture on sustainable organizational change management in agricultural organizations of south-west nigeria page |14| emerging markets journal the success of structural changes. additionally, studies could investigate how agricultural organizations can leverage leadership styles to foster a more inclusive and adaptable change culture. influence of employees’ socioeconomic characteristics and innovation culture on organizational change management table 4: effect of employees’ socioeconomic characteristics and innovation culture on organizational change management variables β std. error t sig. (constant) 0.65 0.06 11.71 0.00 employees' age (years) -0.01 0.02 -0.52 0.60 employees' work experience (years) 0.01 0.00 3.49 0.00 employees' monthly income (per 100,000 naira) -0.02 0.02 -0.95 0.34 innovation culture 0.72 0.02 36.40 0.00 regression model summary statistics r value 0.93 r square 0.86 adjusted r square 0.86 std. error of the estimate 0.23 f value 355.03 (p<0.05) dependent variable: organizational change management source: spss software output this study further examined the influence of employees’ socioeconomic characteristics and innovation culture on organizational change management. the regression analysis (table 4) provides a critical understanding of the relative importance of these variables in driving organizational change management, with innovation culture emerging as the most significant predictor. the model exhibits a strong fit, as evidenced by an r2 value of 0.86, indicating that 86% of the variation in organizational change management can be explained by the independent variables. below, the results are critically analyzed about theoretical frameworks and empirical studies, while identifying gaps and implications for future research. innovation culture as the dominant driver of organisational change management the results reveal that innovation culture has the most substantial impact on organizational change management (β=0.72; p<0.05), reflecting the central role of a progressive and adaptive culture in successful change management. this finding aligns with the innovation diffusion theory, which posits that organisational adaptability to innovation is a key determinant of its overall effectiveness (olaleye et. al., 2021). the high significance of this variable stresses the need for organizations to foster a culture that encourages creativity, openness to change and proactive problem-solving. empirical evidence from okoro et. al., (2020) supports this observation, showing that innovation-driven organizations in nigeria’s agricultural sector consistently outperform their peers in implementing strategic changes. employees’ work experience and organisational change management employees’ work experience also shows a positive and significant relationship with organizational change management (β=0.01, p<0.05). this suggests that seasoned employees, having accumulated institutional knowledge and practical expertise, are better equipped to navigate and implement organizational changes. these findings resonate with the organizational learning theory, which emphasizes the value of experiential knowledge in fostering organizational adaptability (oyewobi et. al., 2021). however, the modest beta coefficient indicates that while work experience contributes positively, its impact is far less pronounced than innovation culture. organizations may therefore benefit from leveraging experienced employees as change champions while prioritizing systemic cultural shifts. insignificance of employees’ age and income contrary to expectations, employees’ age (β=−0.01; p>0.05) and monthly income (β=−0.02, p>0.05) do not significantly influence organisational change management. these findings suggest that demographic factors such as age and economic incentives alone may not directly translate to an enhanced capacity for managing change. this deviates from earlier studies, such as those of onukwuba (2020), which found that younger employees were more adaptable to change. the discrepancy could reflect the context-specific nature of change management in agricultural organizations, where structural and cultural factors overshadow individual demographic attributes. overall model fit and implications the regression model’s r2 of 0.86 and significant f-statistic (f=355.03; p<0.05) indicate a robust model fit, demonstrating the collective explanatory power of the independent variables. however, the unexplained 14% variance suggests that additional factors, such as leadership style or organizational structure, may also play a role in organizational change management. future studies should explore these dimensions to provide a more comprehensive understanding of change management dynamics. however, the results have several theoretical and practical implications. the dominance of innovation culture accentuates the relevance of fostering adaptive organizational environments, as proposed by contemporary change management theories. practically, this finding highlights the need for targeted interventions, such as promoting innovative practices, upskilling employees and enhancing collaborative problem-solving frameworks. furthermore, the significant role of work experience points to the importance of mentorship and volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.354 | http://emaj.pitt.edu stephen oluseun adeogun, olaoluwa ayodeji adebayo, omotolani elizabeth adeniran emerging markets journal page |15| knowledge transfer programs in agricultural organisations. iv. conclusion this study explored the influence of employees' socioeconomic characteristics and innovation culture on organizational change management within agricultural organizations. the findings reveal that while socioeconomic factors such as work experience and income levels influence organizational dynamics to some extent, the most significant factor driving organizational change is the innovation culture. a strong culture of innovation, where employees are encouraged to develop their technical skills, collaborate and experiment with new ideas, substantially enhances organizational change management processes. organizations that foster such cultures exhibit improved adaptability to change and better outcomes in technological and process innovations. furthermore, the study indicates that effective leadership, adequate resources and an open communication environment are essential to nurturing innovation and supporting organisational changes. based on these findings, it is recommended that agricultural organizations prioritize the cultivation of an innovation-driven environment by promoting continuous learning, encouraging creative problem-solving and providing necessary resources for technological advancement. additionally, leadership should actively communicate and support organizational changes to ensure smooth transitions, while also offering training programs to help employees adapt to new systems and structures. strengthening these areas will not only improve the efficiency of organizational change management, but also contribute to the overall sustainability and competitiveness of the organization in a rapidly evolving agricultural landscape. finally, by integrating these improvements into organizational strategies, the field of organizational dynamics can progress toward more sustainable and development-oriented practices. references abubakar, i. f., ibrahim, u. b. (2019). a macroeconomic analysis of agricultural sector in nigeria. advanced journal of social science, 5(1), 1825. adeosun, o. t., popogbe, o. o. (2021). population growth and human resource utilization nexus in nigeria. journal of humanities and applied social sciences, 3(4), 281-298. adetowubo-king, s. a., olatoye, a. o., oladipo, o. t. (2024). demystifying the role of technological entrepreneurship on the performance of medium-scale enterprises (mses). covenant journal of entrepreneurship, 8(1), 55-67. adeyemi, s. o., sennuga, s. o., bamidele, j., alabuja, f. o.,, omole, a. o. (2023). a critical review of rural agricultural development innovative programmes in nigeria. plant biol soil health j, 1(1), 11-17. adinew, y. (2024). a comparative study on motivational strategies, organisational culture and climate in public and private institutions. current psychology, 43(13), 11470-11492. ajayi, c. e., chantler, k., radford, l. (2022). the role of cultural beliefs, norms and practices in nigerian women’s experiences of sexual abuse and violence. violence against women, 28(2), 465486. aluko, o. a., odewale, a. t., taiwo, k., adefeso, h. (2024). unlocking inclusive growth and sustainable development in nigeria: a roadmap through challenges and opportunities. african journal of applied research, 10(1), 201-223. arowosegbe, o. b., alomaja, o. a., tiamiyu, b. b. (2024). the role of agricultural extension workers in transforming agricultural supply chains: enhancing innovation, technology adoption and ethical practices in nigeria. world journal of advanced research and reviews, 23(3), 2585-2602. balogun, o., zaghmout, b. (2024). exploring leadership excellence and accountability in organisational dynamics: a comprehensive analysis in nigeria. african journal of economics and sustainable development, 7(4), 162-183. bello, m. m., yahaya, j. u., adamu, i. (2024). an analysis of sustainable agricultural productivity and food security in nigeria. journal of political discourse, 2(1 (2)), 45-60. davies, m., buisine, s. (2018). innovation culture in organisations. in science, technology and innovation culture (eds m. chouteau, j. forest and c. nguyen). https://doi.org/10.1002/9781119549666.ch6 egbulem, p. c., khalil, k., bamidele, r., modupe, a., omokeji, g. r., rabiu, u. a. (2024). the impact of technology on work and society: nigerian experience. open access journal of social sciences research, 2(2), 1-13. ikegbunam, a. f., onuoha, b. c. (2023). innovation culture and survival of small and medium scale enterprises in rivers state. american research journal of contemporary issues, 1(1), 1-13. jejeniwa, t. o., mhlongo, n. z., jejeniwa, t. o. (2024). diversity and inclusion in the workplace: a conceptual framework comparing the usa and nigeria. international journal of management and entrepreneurship research, 6(5), 13681394. https://doi.org/10.1002/9781119549666.ch6 volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.354 | http://emaj.pitt.edu influence of employees’ socioeconomic characteristics and innovation culture on sustainable organizational change management in agricultural organizations of south-west nigeria page |16| emerging markets journal jimoh, t. a., adenekan, t. e. (2024). exploring the dynamics of digital transformation capabilities and adaptive performance of administrative staff in public tertiary institutions, south-west nigeria. european journal of science, innovation and technology, 4(1), 1-14. obioma, i. f., hentschel, t., hernandez bark, a. s. (2022). gender stereotypes and self‐ characterizations in germany and nigeria: a cross‐cultural comparison. journal of applied social psychology, 52(8), 764-780. odulaja, b. a., nnabugwu, o. c., abdul, a. a., udeh, c. a., daraojimba, c. (2023). hr's role in organisational change within nigeria's renewable energy sector: a review. engineering science and technology journal, 4(5), 259-284. odunayo, h. a., abe, i. o. (2024). the role of leadership styles in enhancing workplace effectiveness: case study of nigerian manufacturing firms. jurnal muhammadiyah manajemen bisnis, 5(1), 1-16. okoro, c. b., ewah, e. b., ndema, s. c. (2020). failure and success of entrepreneurs in nigeria: an empirical review. international academic journal of business school research, 8(4), 121. oladeinde, m., hassan, a. o., farayola, o. a., akindote, o. j., adegbite, a. o. (2023). review of its innovations, data analytics and governance in nigerian enterprises. computer science and it research journal, 4(3), 300-326. olaleye, b., anifowose, o., efuntade, a., arije, b. (2021). the role of innovation and strategic agility on firms’ resilience: a case study of tertiary institutions in nigeria. management science letters, 11(1), 297-304. olubiyi, t. o., adeoye, o. o., jubril, b., adeyemi, o. s., eyanuku, j. p. (2023). measuring inequality in sub-saharan africa post-pandemic: correlation results for workplace inequalities and implication for sustainable development goal ten. international journal of professional business review: int. j. prof. bus. rev., 8(4), 28. onoja, a. o., emodi, a. i., chagwiza, c., tagwi, a. (2023). utilizing icts in climate change resilience building along agricultural value chains in sub-sahara africa. nigerian agricultural policy research journal (naprej), 10(1), 36-47. onukwuba, h. o. (2020). managing millennials in the african workplace: what the millennials need. journal of organisational psychology, 20(2), 139-158. orieno, o. h., udeh, c. a., oriekhoe, o. i., odonkor, b., ndubuisi, n. l. (2024). innovative management strategies in contemporary organisations: a review: analyzing the evolution and impact of modern management practices, with an emphasis on leadership, organisational culture and change management. international journal of management and entrepreneurship research, 6(1), 167-190. orji, i. j. (2019). examining barriers to organisational change for sustainability and drivers of sustainable performance in the metal manufacturing industry. resources, conservation and recycling, 140, 102-114. oyewobi, l. o., adedayo, o. f., olorunyomi, s. o., jimoh, r. (2021). social media adoption and business performance: the mediating role of organisational learning capability (olc). journal of facilities management, 19(4), 413436. shuaib, k. m., he, z. (2021). impact of organisational culture on quality management and innovation practices among manufacturing smes in nigeria. quality management journal, 28(2), 98-114. sroufe, r. (2017). integration and organisational change towards sustainability. journal of cleaner production, 162, 315-329. tunji-olayeni, p., kajimo-shakantu, k., ayodele, t. o. (2024). factors influencing the intention to adopt green construction: an application of the theory of planned behaviour. smart and sustainable built environment, 13(2), 291-308. umeh, c. a., nwankwo, a. u., oluka, p. o., umeh, c. l., ogbonnaya, a. l. (2024). the role of renewable energies for sustainable energy governance and environmental policies for the mitigation of climate change in nigeria. european journal of applied science, engineering and technology, 2(2), 71-98. yunusa, e., yakubu, y., emeje, y. a., ibrahim, y. b., stephen, e., egbunu, d. a. (2023). fuel subsidy removal and poverty in nigeria: a literature review. gph-international journal of applied management science, 4(09), 14-27. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu investigating the market linkages between cryptocurrencies and conventional assets melih sefa yavuz beykent university, turkey | e-mail: sefayavuz@beykent.edu.tr gözde bozkurt beykent university, turkey | e-mail: gozdebozkurt@beykent.edu.tr semra boğa beykent university, turkey | e-mail: semraboga@beykent.edu.tr abstract many investors include cryptocurrencies as potential investment tools in their portfolios. previous studies have mostly analyzed bitcoin regarding its hedge and safe haven features. although the cryptocurrency market has expanded far beyond bitcoin, few studies have examined the interaction among all other cryptocurrencies and conventional financial assets. for this purpose, as the dependent variable, we included the cryptocurrency index to represent the cryptocurrency market, whereas international stocks, bonds, united states (us) dollars, gold, and commodities as independent variables in the analysis. the interactions among the variables were analyzed using the granger causality tests. the analysis results revealed a two-way causality relationship between the cryptocurrency market and the bond markets, indicating that the cryptocurrency index can be used to predict bond prices and vice versa. keywords: cryptocurrency, conventional assets, market linkages, granger causality new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.266 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.266 | http://emaj.pitt.edu melih sefa yavuz, gözde bozkurt, semra boğa page |37| emerging markets journal investigating the market linkages between cryptocurrencies and conventional assets melih sefa yavuz gözde bozkurt semra boğa i. introduction contrary to the 2008 crisis, the effects of the article titled "bitcoin: a peer-to-peer electronic cash system," which was published during the 2008 global financial crisis, continue (nakamoto, 2008). since its first appearance in january 2009, the debate whether bitcoin is the currency of the future, a new investment tool, or a fraud product continues. created by a person or group named using the pseudonym "satoshi nakamoto" and based on blockchain technology, bitcoin takes its power from the decentralized structure. since its launch in 2009, the value of bitcoin has grown to over $750 billion (coinmarketcap, 2022). although bitcoin initially emerged as a medium of exchange and an alternative to cash payments, it has taken different forms over time. although this development has not become widespread globally, many countries and companies accept bitcoin as a payment method that can be used to purchase goods and services. as of december 2017, the chicago mercantile exchange (cme) and the chicago options exchange (cboe) started to carry out futures transactions with bitcoin and the bitcoin mutual fund was created in the new york stock exchange (nyse) market which paved the way for it to be accepted as an investment tool as well. even though the country's economic share in the world is small, el salvador's acceptance of bitcoin as a legal payment method as of september 2021 has also contributed to the perception that bitcoin could be an alternative to fiat currencies. parallel to these developments, the number of studies examining the bitcoin economy and its pricing dynamics (branvold et al., 2015; cheah and fry, 2015; ciaian et al., 2016; balcılar et al., 2017; urquhart, 2017), hedging capability (dyhrberg, 2016; briere et al., 2015; bouri et al., 2017), volatility factors (bouri et al., 2018; katsiampa, 2017), and contamination risks (huynh, 2019) has emerged rapidly. the emphasis on bitcoin in institutional regulations and academic research is primarily due to bitcoin being the pioneer of cryptocurrencies and having the highest market capitalization value. however, bitcoin does not reflect the entire crypto universe. today the number of crypto assets (cryptocurrencies and tokens) has reached over nineteen thousand, and the market value of these assets has exceeded 1.5 trillion dollars (coinmarketcap, 2022). on the other hand, bitcoin makes up only 42% of the crypto market. existing literature mainly focuses on bitcoin, and studies have been shaped in this direction. although some studies in the literature have addressed different cryptocurrencies other than bitcoin, the cryptocurrencies included in the studies are limited to popular crypto-assets such as ethereum, litecoin, ripple, and stellar (corbet et al., 2018a, 2018b; bouri et al., 2019; liu and tsyvinski, 2021). therefore, it is crucial to examine the interaction of the crypto-asset market with conventional financial assets, which has reached such a significant market value, when the studies on bitcoin, especially in the post-2019 period, are examined, it is seen that these studies mainly focus on volatility. as crypto assets started to be traded in mutual funds in 2017, the interest in cryptocurrencies increased globally, prompting investors to invest in these new financial assets. however, the hacking of coincheck and the massive attack on coinrail caused the price increase in cryptocurrencies to no longer be sustained, resulting in severe losses in the crypto market in 2018. then, in mid-2020, there was another rise in crypto assets, and the market started to decline again after the historical peaks in 2021. when the price movements of crypto assets in the past five years are examined, high volatility in the market can be observed. this extreme volatility in the crypto-asset market has attracted the attention of many researchers. while the results of some studies highlight the dangers of investing in crypto assets due to their high price volatility (chkili, 2021; ghorbel and jeribi, 2021; szetela et al., 2021; demir et al., 2020; omane-adjepong et al., 2019), other studies have shown that bitcoin and some cryptocurrencies can be effective diversifiers in portfolios for hedging due to their weak correlation with stocks (shahzad et al., 2020; kliberet al., 2019; mokni et al., 2020; bouri et al., 2017; stensås et al., 2019). current studies also indicate that, similar to commodities, bitcoin can be a safe haven and a good diversifier against shocks in the face of economic and geopolitical uncertainties (selmi et al., 2018; wang et al., 2019; wu et al., 2019; urquhart and zhang, 2019; alyahyaee et al., 2019; gronwald, 2019; shahzad et al., 2020; su et al., 2020; li et al., 2021) although there are studies contradictory to this determination (klein et al., 2018; al mamun et al., 2020; das et al., 2020). existing studies have considered bitcoin as a potential investment tool, similar to conventional investment tools. although there is no complete consensus in the studies, it is stated that bitcoin is both a good diversifier and an investment tool that reduces risks. although bitcoin prices have been mainly discussed and included in the analysis, the fact that the crypto asset market has reached significant levels in terms of both volume and number of assets has reduced the representation power of bitcoin in the crypto market. in addition, although there is well-established literature examining bitcoin's hedge and haven features, there is no detailed study investigating the interaction of crypto assets with conventional investment instruments in general. identifying other investment instruments related to cryptocurrencies is important to protect investors from risk and help them make the right investment decisions. therefore, it is essential to comprehensively evaluate cryptocurrencies' potential risks and advantages as well as revealing their link with conventional investment instruments. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.266 | http://emaj.pitt.edu investigating the market linkages between cryptocurrencies and conventional assets page |38| emerging markets journal this article attempts to bridge this gap by exploring the interaction between cryptocurrencies and conventional investment instruments. uncovering this link will be helpful for portfolio management and hedging decisions and provide new perspectives on global finance. for this purpose, different than the existing studies, the cryptocurrency index representing all cryptocurrencies was used rather than only bitcoin to represent the crypto market. the causal relationship was examined between the cryptocurrency index and international stocks, bonds, the us dollar (index), gold, and commodities. in this context, the study's main contribution to the literature is that it is one of the first to explore the relationship between the cryptocurrency index and conventional investment instruments. the remainder of the article is organized as follows. chapter 2 describes the data and methodology, chapter 3 discusses the empirical analysis, chapter 4 is about findings and discussion and chapter 5 includes conclusion and further research directions. ii. data and methodology the data set used in this research consist of s&p cryptocurrency broad digital market index, msci acwi index, us dollar index, s&p gsci commodity index, pimco global bond opportunities fund, and gold ounce price variables. the data were obtained from the eikon thomson reuters database at a daily frequency within the period of 28.02.2017-18.01.2022. existing studies in the literature investigating the relationship among bitcoin and key asset classes in the global financial system were taken into account in the selection of these financial assets (baur et al., 2017; bouri et al., 2017; umar et al., 2021; zhang and he, 2021). to examine international stock markets, unlike some studies in the literature, a global stock index was taken into account (munyas and atasoy, 2021; li et al., 2021; ünvan, 2021; wang et al., 2021). due to the interest of investors in crypto assets, especially in emerging markets and economies, as well as developed countries, the trading volume has, in some cases, become comparable to the trading volumes in local stock markets (international monetary fund, 2021). this situation strengthens the possibility of any investor to have cryptocurrency in his portfolio along with the stocks traded in his local stock market. previous studies have emphasized that bitcoin and some cryptocurrencies are effective diversifiers in hedging portfolios for investors. therefore, determining the relationship between global stock markets and cryptocurrencies is vital for investors and policymakers. commodities are one of the important asset classes in the global financial system and are used as investment vehicles. cryptocurrency mining plays a vital role in the survival of crypto assets. for mining activities to continue, energy (hence commodities) is required and thus represents the primary input (ji et al., 2018; li and wang, 2017). in addition, metals (aluminum, nickel, etc.) are used extensively in producing hardware used in cryptocurrency mining. therefore, the relationship between crypto-assets and commodities is not limited to portfolio diversification and hedging. because of this reason, since this relationship of commodities with crypto assets is frequently used in current studies, the commodity index is included in the data set (rehman and kang, 2021; lin and an, 2021; erdaş and çağlar, 2018; hayes, 2018). in recent years, it has been thought that bitcoin and some stable coins (tether, usd coin, binance usd, etc.) can be alternatives to the main currencies that have global validity, such as the us dollar. some cryptocurrencies (bitcoin, ethereum, solana, chainlink, etc.) have created ecosystems and an alternative economy to the current economic system (bouri et al., 2017). therefore, if some investors lose confidence in economies or significant currencies, they may turn to bitcoin and cryptocurrencies. because of this feature, bitcoin is sometimes called as the digital gold (popper, 2015). in this context, dyhrberg (2015) stated that bitcoin could protect united kingdom (uk) stocks and the us dollar. therefore, the focus is on the us dollar index, which is at the center of today's financial system (palazzi et al., 2021; yu et al., 2021; bekiros et al., 2021; duan et al., 2021). gold is a good portfolio diversifier and an effective hedging investment tool in environments where global risks increase. some studies define bitcoin as the digital gold in terms of its features and compare it with the investment characteristics of gold. therefore, gold prices are included in the analysis separately from the commodity index (taskinsoy, 2021; le et al., 2021; selmi et al., 2022; baur and hoang, 2021; zhu et al., 2017). bonds are assets that investors frequently use for portfolio diversification and risk reduction. it is important to examine the relationship between these assets issued by the sovereign authorities and cryptocurrencies, a new asset class independent of the sovereign authorities so that investors can make the right investment decisions (elsayde et al., 2022; briere et al., 2015; huang et al., 2021). for this purpose, the bond index representing the global bond market is also included in the data set. dickey and fuller (1979) test in this section, dickey and fuller's (1979) unit root test is briefly mentioned because of examining the stationarity of the variables examined first. afterward, cointegration and granger causality tests are included. in the test introduced by dickey and fuller (1979), the presence of a unit root is determined in the series. the existence of the unit root in the formation processes of the time series is tested under the null hypothesis. 𝑌𝑡 = 𝜌𝑌𝑡−1 + 휀𝑡 (1) since the test statistic (𝜏 = �̂�−1 𝑠𝑒(�̂�) ) calculated under the first-order autoregressive process h_0 hypothesis (𝐻0: 𝜌 = 1) does not fit the standard tdistribution, it is decided by comparing it with the τ table. if the test statistic is less than the critical value, the h0 hypothesis is rejected. the 𝐻0 hypothesis states that the studied series are stationary and do not contain a unit root. in this test, the least squares estimators lose their efficiency in case of autocorrelation between the error terms. therefore, it is recommended to use the extended dickey-fuller test (adf) in this case. ∆𝑌𝑡 = 𝜌𝑌𝑡−1 + ∑ 𝛽𝑖∆𝑌𝑡−𝑖 𝑘 𝑖=1 휀𝑡 (2) the decision stage proceeds in the adf test as in the df test. various information criteria are used to volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.266 | http://emaj.pitt.edu melih sefa yavuz, gözde bozkurt, semra boğa emerging markets journal | p a g e 3 9 determine the optimum number of delays to be included in the equation (dickey and fuller, 1979). pp(1988) test in this test, which uses non-parametric statistical methods without adding the autocorrelation delayed values in the error term, new assumptions are added to the error term. with the addition of constant or constant and deterministic components (𝑋𝑡) that express the trend, it expresses 𝛼 = 𝜌 − 1. ∆𝑌𝑡 = 𝛼𝑌𝑡−1 + 𝑋𝑡 ′𝛿 + 휀𝑡 (3) test statistic obtained as a result of nonparametric corrections (�̂�𝛼 = 𝑡𝛼 ( 𝛾0 𝑓0 ) −1/2 − 𝑇(𝑓0−𝛾0)(𝑠𝑒(�̂�)) 𝛼𝑓0 1/2 𝑠 ) tests the existence of unit root (𝐻0: 𝛼 = 0) under the 𝐻0 hypothesis by comparing it with mackinnon critical values. the 𝑓0 estimation can be made with the ar spectral density estimation method (phillips & perron, 1988). johansen cointegration test tests are divided into two to test whether there is a cointegration relationship between time series variables. first, we proceed over the residuals obtained from the cointegration regression equation. the second is testing based on vector autoregression. johansen's cointegration method (1988) is based on vector autoregression and it is superior to residue-based tests (baharumshah and rashid, 1999) since it allows the estimation of more than one cointegrating vector and does not look for the weak externality condition of the variables. at the same time, all examined variables are accepted as endogenous and resistant to estimation deviations (song and witt, 2000; önel, 2004). in order to use the johansen cointegration test, the time series must be stationary at the first difference. 𝑋𝑡 = 𝑏1 + 𝑏2𝑌𝑡 + 𝜇𝑡 (4) 𝜇𝑡 = 𝑋𝑡 − 𝑏1 − 𝑏2𝑌𝑡 (5) in the cointegration analysis, if two variables, such as 𝑋𝑡 and 𝑌𝑡, that are not stationary at level (𝐼(0)) are stationary at any 𝐼(𝑑) point, their linear combination can be stationary (gujarati, 2009:726). granger causality test in the test in which the definition of "if the prediction of variable y is more successful when the past values of x are used than when the past values of x are not used, then x is the granger cause of y" is tested, causality inference is made, not prediction. therefore, the variables should be stationary beforehand. the causality test examines the direction of this relationship if there is a relationship between two variables (granger, 1988:554). 𝑌𝑡 = ∑ 𝑐𝑗𝑋𝑡−𝑗 + ∑ 𝑑𝑗𝑌𝑡−𝑗 + 휀1𝑡 𝑚 𝑗=1 𝑚 𝑗=1 (6) 𝑋𝑡 = ∑ 𝛼𝑗𝑌𝑡−𝑗 + ∑ 𝛽𝑗𝑋𝑡−𝑗 + 휀2𝑡 𝑚 𝑗=1 𝑚 𝑗=1 (7) here, 𝑚 represents the delay length and the error terms 휀1𝑡 and 휀2𝑡 are independent of each other (white noise). the causality relationship from x to y in equation 6 and from y to x in equation 7 is examined. in the granger causality analysis, which is performed by determining the optimal lag length with the help of information criteria, the sum of the error squares of the models is obtained after the models are estimated. afterward, the f-statistic developed by wald is calculated. however, if there are more than two variables, it is possible to examine the extent of the relationship between them by applying the blok granger causality test. employing the block granger causality test, it is possible to examine whether a lagged variable is the granger cause of other variables in the system. iii. empirical analysis the analyses were carried out through the eviews program. the definitions and abbreviations of the variables used in the analysis are provided in table 1. table 1: variable definitions variables definition abbreviation msci all country world equity index lall gold price gold price per ounce lgold s&p gsci gsci commodity index lcommodity s&p cryptocurrency cryptocurrency broad digital market index lcrypto pimco global bond opportunities fund lbond us dollar us dollar index ldollar source: authors’ own compilation descriptive statistics of the variables with logarithmic transformation are provided in table 2. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.266 | http://emaj.pitt.edu investigating the market linkages between cryptocurrencies and conventional assets page |40| emerging markets journal table 2: descriptive statistics source: eviews software output in order to investigate the cointegration relationship between the variables, unit root tests were applied and the stationarities of the variables were determined. the results are shown in table 3. table 3: unit root tests results note: the schwarz information criterion for optimal delay length was used in the adf test, and the newey-west bandwith criterion was used to determine the bandwidth for the pp test. source: eviews software output according to the unit root test results, the series was not stationary at level but became stationary when the first difference was taken. since the series are stationary in the same order, their relationship is tested with the johansen cointegration method. however, the cointegration method includes the vector autoregression model (var) approach, which shows that each variable in an econometric model developed by sims (1980) is affected both by itself and the lagged values of other variables. therefore, it is necessary to determine the optimal lag length for the unconstrained var model. table 4: determining the optimal lag length source: eviews software output in the estimated var model, the optimal lag length was determined as 1 according to the schwarz information criterion. as a result of testing the validity of the established var model, it has been determined that the residuals are normally distributed and have zero mean and constant variance (n.i.i.d). the presence of cointegration vector among the variables have been examined by the johansen cointegration test and the results are presented in table 5. table 5: johansen cointegration test results cointegration test by trace statistics hypotheses eigenvalue trace statistics 5% critical value probability 𝑟 = 0* 0.041466 134.6678 103.8473 0.0001 𝑟 ≤ 1* 0.023464 81.26353 76.97277 0.0227 cointegration test according to maximum eigen value statistics hypotheses eigenvalue maximum eigenvalue statistics 5% critical value probability 𝑟 = 0* 0.041466 53.40423 40.95680 0.0013 𝑟 ≤ 1 0.023464 29.94140 34.80587 0.1699 source: eviews software output 𝐿𝐶𝑅𝑌𝑃𝑇𝑂𝑡 = 𝛼1 + ∑ 𝛽1𝑝𝐿𝐵𝑂𝑁𝐷𝑡−𝑝 𝑘 𝑝=1 + ∑ 𝛽2𝑝𝐿𝐶𝑂𝑀𝑀𝑂𝐷𝐼𝑇𝑌𝑡−𝑝 𝑘 𝑝=1 + ∑ 𝛽3𝑝𝐿𝐷𝑂𝐿𝐿𝐴𝑅𝑡−𝑝 𝑘 𝑝=1 + ∑ 𝛽4𝑝𝐿𝐺𝑂𝐿𝐷𝑡−𝑝 𝑘 𝑝=1 + ∑ 𝛽5𝑝𝐿𝐴𝐿𝐿𝑡−𝑝 𝑘 𝑝=1 when table 5 is examined, the trace statistic and the maximum eigen value test statistic values calculated from the johansen cointegration test were more significant than the critical value at the 5% significance level. it has been seen that there is one cointegration vector according to the trace statistics and two according to the maximum eigenvalue statistics. therefore, by looking at the results obtained with the johansen cointegration test, it is possible to say that the examined series affect each other in the short term. as a result of detecting a cointegrated relationship between the variables in the short run, it was determined that causality analysis could be performed. the results of the block granger causality analysis estimated by the unit root tests are provided in table 6. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.266 | http://emaj.pitt.edu melih sefa yavuz, gözde bozkurt, semra boğa emerging markets journal | p a g e 4 1 table 6: block granger causality analysis results statistic dependent variable df 𝑿𝟐statistics p-value crypto 1 7.712696 0.0211* bond commodity 1 1.426198 0.4901 dollar 1 3.929096 0.1402 gold 1 3.486197 0.1750 all 1 3.80257 0.2162 general 5 39.96452 0.0000* all 1 0.282568 0.5950 gold dollar 1 0.431831 0.5111 bond 1 0.288643 0.5911 crypto 1 4.565227 0.0326* commodity 1 0.163458 0.6860 general 5 10.40620 0.0645 gold 1 2.992686 0.0836 all dollar 1 0.111073 0.7389 bond 1 8.282855 0.0040* crypto 1 1.810546 0.1784 commodity 1 2.588756 0.1076 general 5 18.82826 0.0021* dollar 1 1.535483 0.2153 all gold 1 4.142111 0.0418* bond 1 9.270013 0.0023* crypto 1 1.364380 0.2428 commodity 1 5.992115 0.0144* general 5 17.13345 0.0043 bond 1 11.83678 0.0006* all gold 1 0.043544 0.8347 dollar 1 0.989600 0.3198 crypto 1 16.93327 0.0000* commodity 1 0.389037 0.5328 general 5 26.11562 0.0001 commodity 1 4.690762 0.0303* all gold 1 5.819948 0.0158* dollar 1 0.974276 0.3236 bond 1 12.71132 0.0004* crypto 1 0.170517 0.6797 general 5 17.82555 0.0032* note: *p<0.05 source: eviews software output the vec block causality test was performed as a result of determining the short-term cointegration relationship among the variables, all the results are provided in table 6. only the results of the trial of the crypto index and other dependent variables as the dependent variable are discussed for the research. ∆𝐿𝐶𝑅𝑌𝑃𝑇𝑂𝑡 = 𝛼1 + ∑ 𝛽1𝑝∆𝐿𝐵𝑂𝑁𝐷𝑡−𝑝 𝑘 𝑝=1 + ∑ 𝛽2𝑝∆𝐿𝐶𝑂𝑀𝑀𝑂𝐷𝐼𝑇𝑌𝑡−𝑝 𝑘 𝑝=1 + ∑ 𝛽3𝑝∆𝐿𝐷𝑂𝐿𝐿𝐴𝑅𝑡−𝑝 𝑘 𝑝=1 + ∑ 𝛽4𝑝∆𝐿𝐺𝑂𝐿𝐷𝑡−𝑝 𝑘 𝑝=1 + ∑ 𝛽5𝑝∆𝐿𝐴𝐿𝐿𝑡−𝑝 + 𝑘 𝑝=1 휀1𝑡 looking at the equation where the dependent variable is the crypto index, it is seen that there is a twoway causality from the bond to the crypto index and oneway causality to msci all world index. in addition, when the independent variables are examined whether they are the cause of the crypto index in blocks (collectively), it is possible to state that bonds, commodities, msci all world index, dollar, and gold are the granger reasons for the crypto index. iv. findings and discussion the findings obtained while examining the relationship between the cryptocurrency market and conventional investment assets make it possible to draw general conclusions on the subject. first, the empirical results show a causal relationship between the conventional investment instruments (stock market, bond, commodity, gold, dollar) and the cryptocurrency market. this finding proves that cryptocurrencies are not entirely isolated from conventional investment instruments. this result parallels some studies in the literature (kang et al., 2020; briere et al., 2015). in existing studies, it is still debated whether cryptocurrencies are a new generation of financial instruments. while zang and he (2021) argue that bitcoin cannot be accepted as a new financial product, some studies support that bitcoin and cryptocurrencies are alternative investment tools to conventional assets (dynberg, 2016a; dynberg, 2016b). due to the fact that cryptocurrency markets interact with conventional asset markets and the movements in conventional investment instruments affect the cryptocurrency markets, findings of this research also support the idea that cryptocurrencies are an alternative investment tool for investors. secondly, our empirical results have determined a causal relationship between cryptocurrency markets and msci acwi index. the result obtained reveals the interaction between the cryptocurrency market and stock markets. in addition, these findings are compatible with existing studies in the literature (vardar and aydoğan, 2019; mizerka et al., 2020; de senna and souza, 2022; panagiotidis et al., 2019). in addition, various studies in the literature investigate the causal relationship between some cryptocurrencies and conventional stock markets. in a study conducted by xunfa et al. (2020), a granger causality relationship could not be determined among the 30 cryptocurrencies they included in the data set and the emerging stock markets. this relationship was also tested with liang's causality analysis in the same study and a one-way relationship from the cryptocurrency market to the emerging stock markets was found in the short-term. various studies in the literature examine the relationship between bitcoin and conventional stock markets. in the volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.266 | http://emaj.pitt.edu investigating the market linkages between cryptocurrencies and conventional assets page |42| emerging markets journal study by maghyereh and abdoh (2021), a causal relationship between bitcoin and msci acwi index was determined. in the study conducted by unvan (2021), the causality relationship between bitcoin and the stock markets of japan, china, turkey, and the usa was examined and a two-way causality relationship was determined only with the turkish stock markets. the study also revealed a bidirectional causality between the pimco global bond index and the cryptocurrency market. there are studies in the literature that support our findings (nunes, 2017; milunovich, 2018; oktar & salihoğlu, 2018; vardar & aydoğan, 2019). since the bond markets are one of the leading indicators of the direction of the global conjuncture for investors, this finding might help to shape investors' investment strategies, especially during economic and political uncertainty times (papadamou et al., 2021). v. conclusion and further research directions this article explored the relationship between the cryptocurrency market and conventional investment instruments. the scarce literature on the subject constitutes the motivation of this study. research seeks to bridge this gap by exploring the interaction between the cryptocurrency market and conventional investment instruments. for this purpose, the granger causality test was applied to explore the relationship among s&p cryptocurrency broad digital market index, msci acwi index, us dollar index, s&p gsci commodity index, pimco global bond opportunities fund, and gold ounce price variables at a daily frequency within the period 28.02.2017-18.01.2021. according to the results obtained, one-way granger causality has been observed from all the variables that make up the data set to the cryptocurrency index. in addition, a one-way causality relationship has been determined between the msci acwi index and the cryptocurrency index. the most striking result of research analysis is the bidirectional causality between the pimco global bond opportunities fund, which represents the global bond market, and the s&p cryptocurrency broad digital market index. the changes in the bond markets give investors important signals about the global economy's direction. since bond markets are deep and calm by nature, it is possible to analyze sudden changes in global economic conditions through bond markets. therefore, the bidirectional causality relationship between cryptocurrency markets and bond markets should be addressed in this direction. the environment of uncertainty created by the recent covid-19 pandemic has affected both the cryptocurrencies and the conventional markets. especially in this period, the monetary support of governments to their citizens determined the direction of conventional assets and cryptocurrency markets. the governments' monetary expansion policies of 13 trillion dollars in the mentioned period enabled the market value of cryptocurrencies to reach approximately 3 trillion dollars (nasdaq, 2022; coinmarketcap, 2022). in the post-covid period, the inflationary environment that is expected to be experienced on a global scale has increased investors' search for a safe haven. this situation has significantly affected the cryptocurrency market and conventional asset markets. with these expectations, exits from the cryptocurrency markets started, and the market value decreased to 1.3 trillion dollars (coinmarketcap, 2022). therefore, it would not be a mistake to comment that cryptocurrency markets have become an alternative market for investors, similar to conventional asset markets. in future studies on this subject, while examining the relations between the cryptocurrency market and conventional asset markets, they can differentiate according to the level of development of countries and economic regions (brics, menat, european union, etc.). in addition, new studies can focus on variables that measure global uncertainty. further research can be conducted by using different statistical techniques since a significant relationship was found among the variables. references al mamun, m., uddin, g.s., suleman, m.t. & kang, s.h. (2020). geopolitical risk, uncertainty and bitcoin investment. physica a: statistical mechanics and its applications, 540:123107. al-yahyaee, k.h., mensi, w., al-jarrah, i.m.w. & hamdi, a., kang, s.h. (2019). volatility forecasting, downside risk, and diversification benefits of bitcoin and oil and international commodity markets: a comparative analysis with yellow metal. the north american journal of economics and finance, 49, 104-120. baharumshah, a.z. & rashid, s. (1999). exports, imports and economic growth in malaysia: empirical evidence based on multivariate time series. asian economic journal, 13:4. balcilar, m., bouri, e., gupta, r., roubaud, d. (2017). can volume predict bitcoin returns and volatility? a quantiles-based approach. economic modelling, 64, 74-81. baur, d.g. & hoang, l. (2021). the bitcoin gold correlation puzzle. journal of behavioral and experimental finance, 32:100561. baur, d.g., hong, k. & lee, a.d. (2018). bitcoin: medium of exchange or speculative assets?. journal of international financial markets, institutions and money, 54, 177-189. bekiros, s., hedström, a., jayasekera, e., mishra, t. & uddin, g.s. (2021). correlated at the tail: implications of asymmetric tail-dependence across bitcoin markets. computational economics, 58(4), 1289-1299. bouri, e., das, m., gupta, r. & roubaud, d. (2018). spillovers between bitcoin and other assets during bear and bull markets. applied economics, 50:55, 5935–5949. bouri, e., molnár, p., azzi, g., roubaud, d. & hagfors, l.i. (2017). on the hedge and safe haven properties of bitcoin: is it really more than a diversifier?. finance research letters, 20, 192198. bouri, e., shahzad, s.j.h. & roubaud, d. (2019). coexplosivity in the cryptocurrency market. finance research letters, 29, 178-183. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.266 | http://emaj.pitt.edu melih sefa yavuz, gözde bozkurt, semra boğa emerging markets journal | p a g e 4 3 brandvold, m., molnár, p., vagstad, k. & valstad, o.c.a. (2015). price discovery on bitcoin exchanges. journal of international financial markets, institutions and money, 36, 18-35. briere, m., oosterlinck, k., szafarz, a. (2015). virtual currency, tangible return: portfolio diversification with bitcoin. journal of asset management, 16(6), 365-373. cheah, e.t., fry, j. (2015). speculative bubbles in bitcoin markets? an empirical investigation into the fundamental value of bitcoin. economic letters, 130, 32–36. chkili, w. (2021). modeling bitcoin price volatility: long memory vs markov switching. eurasian economic review, 11(3), 433–448. https://doi.org/10.1007/s40822-021-00180-7. ciaian, p., rajcaniova, m. & kancs, a. (2016). the economics of bitcoin price formation. applied economics, 48(19), 1799-1815. coinmarketcap (2022) https://coinmarketcap.com/ corbet, s., larkin, c. j., lucey, b. m., meegan, a., & yarovaya, l. (2018). the volatility generating effects of macroeconomic news on cryptocurrency returns. available at ssrn 3141986. corbet, s., meegan, a., larkin, c., lucey, b. & yarovaya, l. (2018a). exploring the dynamic relationships between cryptocurrencies and other financial assets. economics letters, 165, 28–34. https://doi.org/10.1016/j.econlet.2018.01.004. das, d., le roux, c.l., jana, r.k. & dutta, a. (2020). does bitcoin hedge crude oil implied volatility and structural shocks? a comparison with gold, commodity and the us dollar. finance research letters, 36, 101335. de senna, v., souza, a.m. (2022). impacts of short and long-term between cryptocurrencies and stock exchange indexes. quality & quantity, 1-23. demir, e., bilgin, m.h., karabulut, g. & doker, a.c. (2020). the relationship between cryptocurrencies and covid-19 pandemic. eurasian economic review, 10(3), 349–360. dickey, d.a. & fuller, w.a. (1979). distribution of the estimators for autoregressive time series with a unit root. journal of the american statistical association, 74(366a), 427-431. duan, k., li, z., urquhart, a. & ye, j. (2021). dynamic efficiency and arbitrage potential in bitcoin: a long-memory approach. international review of financial analysis, 75, 101725. dyhrberg, a.h. (2016). bitcoin, gold and the dollar–a garch volatility analysis. finance research letters, 16, 85-92. dynrberg, a.h. (2016b). hedging capabilities of bitcoin. is the virtual gold? finance research letters, 16, 139–144. elsayed, a.h., gozgor, g. & lau, c.k.m. (2022). risk transmissions between bitcoin and traditional financial assets during the covid-19 era: the role of global uncertainties. international review of financial analysis, 81, 102069. erdas, m.l. & caglar, a.e. (2018). analysis of the relationships between bitcoin and exchange rate, commodities and global indexes by asymmetric causality test. eastern journal of european studies, 9(2), 27. ghorbel, a. & jeribi, a. (2021). investigating the relationship between volatilities of cryptocurrencies and other financial assets. decisions in economics and finance, 44(2), 817–843. granger, c. (1988). causality, cointegration and control. journal of economic dynamics and control, 12, 551-559. gronwald, m. (2019). is bitcoin a commodity? on price jumps, demand shocks, and certainty of supply. journal of international money and finance, 97, 86-92. gujarati, d. (2004). basic econometrics. fourth edition, the mcgraw− hill compaines, new york. hayes, a.s. (2017). cryptocurrency value formation: an empirical study leading to a cost of production model for valuing bitcoin. telematics and informatics, 34(7), 1308-1321. he, .s, sheng, y. & zang, z. (2021, december). feasibility study of bitcoin hedging the us stock market. in 2021 3rd international conference on economic management and cultural industry (icemci 2021) (pp. 18111818) atlantis press. huang, y., duan, k. & mishra, t. (2021). is bitcoin really more than a diversifier? a pre-and postcovid-19 analysis. finance research letters, 43, 102016. international monetary fund (2021). global financial stability report—covid-19, crypto, and climate: navigating challenging transitions. washington, dc, october. ji, q., bouri, e., gupta, r. & roubaud, d. (2018). network causality structures among bitcoin and other financial assets: a directed acyclic graph approach. the quarterly review of economics and finance, 70, 203-213. johansen, s. (1988). statistical analysis of cointegration vectors. journal of economic dynamics and control, 12:2-3, 231-254. https://coinmarketcap.com/ https://doi.org/10.1016/j.econlet.2018.01.004 volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.266 | http://emaj.pitt.edu investigating the market linkages between cryptocurrencies and conventional assets page |44| emerging markets journal kang, s.h., yoon, s.m., bekiros, s. & uddin, g.s. (2020). bitcoin as hedge or safe haven: evidence from stock, currency, bond and derivatives markets. computational economics, 56(2), 529-545. katsiampa, p. (2017). volatility estimation for bitcoin: a comparison of garch models. economics letters, 158, 3-6. klein, t., thu, h.p. & walther, t. (2018). bitcoin is not the new gold–a comparison of volatility, correlation, and portfolio performance. international review of financial analysis, 59, 105-116. kliber, a., marszałek, p., musiałkowska, i. & świerczyńska, k. (2019). bitcoin: safe haven, hedge or diversifier? perception of bitcoin in the context of a country’s economic situation—a stochastic volatility approach. physica a: statistical mechanics and its applications, 524, 246-257. le, t.n., hau long, l.e. & pham, x.q. (2021). relationship between gold and cryptocurrencies: evidence from the granger causality tests. indian journal of economics and business, 20(4). li, x., & wang, c.a. (2017). the technology and economic determinants of cryptocurrency exchange rates: the case of bitcoin. decision support systems, 95, 49-60. li, y., jiang, s., wei, y. & wang, s. (2021). take bitcoin into your portfolio: a novel ensemble portfolio optimization framework for broad commodity assets. financial innovation, 7(1), 1-26. li, z., ao, z. & mo, b. (2021). revisiting the valuable roles of global financial assets for international stock markets: quantile coherence and causality-in-quantiles approaches. mathematics, 9(15), 1750. lin, m.y. & an, c.l. (2021). the relationship between bitcoin and resource commodity futures: evidence from nardl approach. resources policy, 74, 102383. liu, y. & tsyvinski, a. (2021). risks and returns of cryptocurrency. the review of financial studies, 34(6), 2689-2727. luu duc huynh, t. (2019). spillover risks on cryptocurrency markets: a look from varsvar granger causality and student’st copulas. journal of risk and financial management, 12(2), 52. maghyereh, a. & abdoh, h. (2021). time–frequency quantile dependence between bitcoin and global equity markets. the north american journal of economics and finance, 56, 101355. milunovich, g. (2018). cryptocurrencies, mainstream asset classes and risk factors: a study of connectedness. australian economic review, 51(4), 551-563. mizerka, j., stróżyńska-szajek, a. & mizerka, p. (2020). the role of bitcoin on developed and emerging markets–on the basis of a bitcoin users graph analysis. finance research letters, 35, 101489. mokni, k., ajmi, a.n., bouri, e. & vo, x.v. (2020). economic policy uncertainty and the bitcoinus stock nexus. journal of multinational financial management, 57, 100656. munyas, t. & atasoy, f. (2021). an empirical investigation of the relationship between bitcoin and developed and developing country stock markets. journal of accounting finance and auditing studies, 7(3), 104-120. nakamoto, s. (2008). bitcoin: a peer-to-peer electronic cash system. decentralized business review, 21260. nasdaq (2021). money printing and inflation: covid, cryptocurrencies and more. https://www.nasdaq.com/articles/moneyprinting-and-inflation%3a-covidcryptocurrencies-and-more nunes, b.d.s.r. (2017). virtual currency: a cointegration analysis between bitcoin prices and economic and financial data (doctoral dissertation). oecd (2021) the territorial impact of covid-19: managing the crisis and recovery across levels of government. https://www.oecd.org/coronavirus/policyresponses/the-territorial-impact-of-covid-19managing-the-crisis-and-recovery-acrosslevels-of-government-a2c6abaf/ oktar, s. & salihoğlu, e. (2018). merkezi olmayan dijital para birimlerinin merkez bankası parasal büyüklükleri ile ilişkisinin analizi: bitcoin örneği. social sciences studies journal, 4(22), 4164-4177. omane-adjepong, m., alagidede, p., & akosah, n. k. (2019). wavelet time-scale persistence analysis of cryptocurrency market returns and volatility. physica a: statistical mechanics and its applications, 514, 105–120. palazzi, r.b., júnior, g.d.s.r. & klotzle, m.c. (2021). the dynamic relationship between bitcoin and the foreign exchange market: a nonlinear approach to test causality between bitcoin and currencies. finance research letters, 42, 101893. panagiotidis, t., stengos, t., vravosinos, o. (2019). the effects of markets, uncertainty and search intensity on bitcoin returns. international review of financial analysis, 63, 220-242. https://www.researchgate.net/journal/journal-of-accounting-finance-and-auditing-studies-jafas-2149-0996 https://www.researchgate.net/journal/journal-of-accounting-finance-and-auditing-studies-jafas-2149-0996 https://www.nasdaq.com/articles/money-printing-and-inflation%3a-covid-cryptocurrencies-and-more https://www.nasdaq.com/articles/money-printing-and-inflation%3a-covid-cryptocurrencies-and-more https://www.nasdaq.com/articles/money-printing-and-inflation%3a-covid-cryptocurrencies-and-more https://www.oecd.org/coronavirus/policy-responses/the-territorial-impact-of-covid-19-managing-the-crisis-and-recovery-across-levels-of-government-a2c6abaf/ https://www.oecd.org/coronavirus/policy-responses/the-territorial-impact-of-covid-19-managing-the-crisis-and-recovery-across-levels-of-government-a2c6abaf/ https://www.oecd.org/coronavirus/policy-responses/the-territorial-impact-of-covid-19-managing-the-crisis-and-recovery-across-levels-of-government-a2c6abaf/ https://www.oecd.org/coronavirus/policy-responses/the-territorial-impact-of-covid-19-managing-the-crisis-and-recovery-across-levels-of-government-a2c6abaf/ volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.266 | http://emaj.pitt.edu melih sefa yavuz, gözde bozkurt, semra boğa emerging markets journal | p a g e 4 5 papadamou, s., kyriazis, n.a. & tzeremes, p.g. (2021). non-linear causal linkages of epu and gold with major cryptocurrencies during bull and bear markets. the north american journal of economics and finance, 56, 101343. phillips, p.c. & perron, p. (1988). testing for a unit root in time series regression. biometrika, 75(2), 335-346. popper, n. (2015). digital gold: the untold story of bitcoin. penguin uk. rehman, m.u. & kang, s.h. (2021). a time–frequency comovement and causality relationship between bitcoin hashrate and energy commodity markets. global finance journal, 49, 100576. selmi, r., bouoiyour, j. & wohar, m.e. (2022). “digital gold” and geopolitics. research in international business and finance, 59, 101512. selmi, r., mensi, w., hammoudeh, s. & bouoiyour, j. (2018). is bitcoin a hedge, a safe haven or a diversifier for oil price movements? a comparison with gold. energy economics, 74, 787-801. shahzad, s.j.h., bouri, e., roubaud, d. & kristoufek, l. (2020). safe haven, hedge and diversification for g7 stock markets: gold versus bitcoin. economic modelling, 87, 212-224. sims, c.a. (1980). macroeconomics and reality. econometrica: journal of the econometric society, 1-48. song, h. & witt, s.f. (2000) tourism demand modelling and forecasting: modern econometric approaches, netherlands: pergamon. stensås, a., nygaard, m.f., kyaw, k. & treepongkaruna, s. (2019). can bitcoin be a diversifier, hedge or safe haven tool? cogent economics & finance, 7(1), 1593072. su, c.w., qin, m., tao, r., shao, x.f., albu, l.l. & umar, m. (2020). can bitcoin hedge the risks of geopolitical events? technological forecasting and social change, 159, 120182. szetela, b., mentel, g., bilan, y. & mentel, u. (2021). the relationship between trend and volume on the bitcoin market. eurasian economic review, 11(1), 25–42. taskinsoy, j. (2021). bitcoin: a new digital gold standard in the 21st century? available at ssrn 3941857. umar, m., su, c.w., rizvi, s.k.a. & shao, x.f. (2021). bitcoin: a safe haven asset and a winner amid political and economic uncertainties in the us? technological forecasting and social change, 167, 120680. unvan, y.a. (2021). impacts of bitcoin on usa, japan, china and turkey stock market indexes: causality analysis with value at risk method (var). communications in statistics-theory and methods, 50(7), 1599-1614. urquhart, a. (2017). price clustering in bitcoin. economic letters, 159, 145–148. urquhart, a. & zhang, h. (2019). is bitcoin a hedge or safe haven for currencies? an intraday analysis. international review of financial analysis, 63, 49-57. vardar, g. & aydogan, b. (2019). return and volatility spillovers between bitcoin and other asset classes in turkey: evidence from var-bekkgarch approach. euromed journal of business, 14(3), 209-220. wang, g.j., xie, c., wen, d. & zhao, l. (2019). when bitcoin meets economic policy uncertainty (epu): measuring risk spillover effect from epu to bitcoin. finance research letters, 31. wang, h., wang, x., yin, s. & ji, h. (2021). the asymmetric contagion effect between stock market and cryptocurrency market. finance research letters, 46, 102345. wu, s., tong, m., yang, z. & derbali, a. (2019). does gold or bitcoin hedge economic policy uncertainty? finance research letters, 31, 171178. xunfa, l.u., liu, s.k., san liang, x., zhang, z. & hairong, c.u.i. (2020). the break pointdependent causality between the cryptocurrency and emerging stock markets. economic computation & economic cybernetics studies & research, 54, 4. yu, j., shang, y. & li, x. (2021). dependence and risk spillover among hedging assets: evidence from bitcoin, gold, and usd. discrete dynamics in nature and society. https://doi.org/10.1155/2021/2010705 zhang, j. & he, q.z. (2021). dynamic cross-market volatility spillover based on msv model: evidence from bitcoin, gold, crude oil, and stock markets. complexity, https://doi.org/10.1155/2 021/9912418. zhu, y., dickinson, d. & li, j. (2017). analysis on the influence factors of bitcoin’s price based on vec model. financial innovation, 3(1), 1-13. https://doi.org/10.1155/2021/2010705 https://doi.org/10.1155/2021/9912418 https://doi.org/10.1155/2021/9912418 emerging markets journal volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2011.30 | http://emaj.pitt.edu eratta this work is licensed under a creative commons attribution-noncommercial-no derivative works 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.30 | http://emaj.pitt.edu http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://emaj.pitt.edu/ eratta emerging markets journal | p a g e | 60 volume 2 (2012) | issn 2158-8708 (online) | doi 10.5195/emaj.2012.30 | http://emaj.pitt.edu eratta erratum #1. correction to azadi, s. (2011). strategies for competetive advantage in electronic commerce. emaj: emerging markets journal, 1(2), 59-69. doi:10.5195/emaj.2011.13 in the article listed above, the originally published article contained the text from another article in that issue starting after the end of the introduction. a corrected version with the appropriate text has been published along with the earlier incorrect version. erratum #2 correction to emaj: emerging markets journal, 2(1) 2012 the issue listed above initially published with the enumeration vol. 1, no 1 2012. the correct enumeration is vol. 2, no 1 2012. the online version reflects this change. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu female directors’ role on capital structure and firm performance nexus: new evidence from an emerging market nigeria idorenyin okon university of ibadan, nigeria | e-mail: iddyokon22@gmail.com ozele clement igbenedion university, nigeria | e-mail: : ozele.clement@iuokada.edu.ng abstract this study investigates the moderating role of female board directors on the relationship between capital structure and firm performance in nigerian non-financial firms. the study builds on previous research that highlights the importance of gender diversity in corporate governance and its potential to enhance firm outcomes. using data from 70 non-financial firms listed on the nigerian exchange group from 2012 to 2021, the study applies the two-step system gmm approach to mitigate endogeneity issues. it focuses on various capital structure measures, such as debt-to-asset and debt-to-equity ratios, and examines their relationship with firm performance, with the presence of female directors as a moderating variable. the study finds that female directors moderate the relationship between capital structure and firm performance, improving the impact of debt levels on profitability while reducing market performance. this study contributes to literature by providing new evidence from an emerging market context on how board gender diversity influences financial decision-making and firm outcomes in nigeria. keywords: capital structure, firm performance, female board directors, corporate governance, nigeria *we acknowledge the use of artificial intelligence (ai) to assist in improving the clarity and enhance grammatical structure. while ai was used as a tool to refine the parts of the content, we take full responsibility for the final version of the study, including any interpretations, errors or conclusions presented. volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu | mailto:ozele.clement@iuokada.edu.ng volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu female directors’ role on capital structure and firm performance nexus: new evidence from an emerging market nigeria page |34| emerging markets journal female directors’ role on capital structure and firm performance nexus: new evidence from an emerging market nigeria idorenyin okon ozele clement i. introduction over the past few decades, the study of capital structure and its impact on firm performance has remained central to corporate finance, particularly in emerging markets where institutional frameworks and governance structures are continuously evolving. traditional theories, such as the modigliani-miller theorem, emphasize the irrelevance of capital structure under certain market conditions (abdullah and tursoy, 2021; dao and le, 2023). however, market imperfections, such as taxes, bankruptcy costs, and information asymmetries, suggest a significant relationship between capital structure decisions and firm performance (dinh, nguyen & hosseini 2019; wojewodzki, boateng & brahma 2020b). while much research has focused on this direct relationship (rani, yadav and tripathy, 2020; zhang et al., 2022), recent studies suggest that corporate governance factors, particularly gender diversity on boards, can also influence the capital structure-performance relationship (le and phan, 2017; mavruk and sjögren, 2021). the increasing presence of female directors on corporate boards has introduced new dynamics in governance practices, challenging conventional views and prompting scholars to explore how gender diversity interacts with financial strategies, including capital structure decisions, to affect firm performance (almaqtari et al., 2021; detthamrong, chancharat and vithessonthi, 2017). despite the growing literature on board diversity and corporate performance, limited attention has been given to the moderating role of female board directors in the relationship between capital structure and firm performance, particularly in emerging markets like nigeria. we seek to address this gap by examining how female board director presence moderates the relationship between capital structure and firm performance in non-financial firms in nigeria. our study is motivated by the need to understand whether the observed benefits of board gender diversity, such as reduced information asymmetry and improved risk management, extend to moderating the effects of capital structure on firm performance. specifically, we focus on the interaction between female board presence and multiple measures of capital structure, such as the equity-to-asset ratio, debt-to-asset ratio, and debt-to-equity ratio, to determine whether these dynamics result in better market value and profitability outcomes for firms. given the unique socio-economic and regulatory context of nigeria, this study provides an opportunity to explore whether the findings from developed markets hold true in an emerging market setting, thereby contributing to the broader discourse on corporate governance and capital structure dynamics. hence, our objectives are twofold: first, to examine the direct impact of capital structure on firm performance using market value (tobin's q) and profitability (return on assets) as performance measures; and second, to investigate the moderating effect of female board director presence on these relationships. these objectives are grounded in the premise that governance mechanisms, particularly board diversity, could influence financial decision-making and outcomes (almaqtari et al., 2021; anh, duong and yoon, 2018). prior studies in developed markets have shown that female directors can enhance firm performance by bringing diverse perspectives and reducing agency conflicts performance (almaqtari et al., 2021; detthamrong, chancharat and vithessonthi, 2017), but this study seeks to test these findings in the context of nigerian non-financial firms, where institutional and cultural factors may alter the effectiveness of gender diversity as a governance tool. nigeria's corporate environment presents distinct challenges, including less stringent regulations, lower investor protections, and concentrated ownership, which differentiate it from the developed markets previously examined in the literature (cappa, cetrini and oriani, 2020; owusu adusei and amoa gyarteng, 2023). these conditions suggest that the impact of female board director presence on firm performance could manifest differently, providing a distinct contribution to the understanding of capital structure dynamics in emerging markets. furthermore, recent regulatory initiatives by the securities and exchange commission (sec) aimed at increasing gender diversity on corporate boards in nigeria present an opportunity to assess whether these policies are achieving their intended outcomes of enhancing governance and firm performance. drawing from feminist theory, trade-off theory, and agency theory, we provide comprehensive insights into how board diversity interacts with capital structure decisions to influence firm performance. feminist theory suggests that female representation in leadership contributes to more balanced decision-making processes, reducing managerial bias and promoting ethical governance (grosvold, rayton and brammer, 2016). trade-off theory posits that firms seek to balance the costs and benefits of debt and equity to optimize their capital structure, and female directors may influence this balance by providing diverse perspectives on risk management (kumar, sureka and colombage, 2020). agency theory supports the moderating role of female directors by suggesting that gender diversity can mitigate agency conflicts between managers and shareholders, thereby enhancing firm performance (abdullah, 2014). thus, we contribute to the literature by providing new evidence on the moderating role of female board presence in the relationship between capital structure and firm performance in an emerging market volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu idorenyin okon, ozele clement emerging markets journal page |35| context. we add to the understanding of how gender diversity impacts financial outcomes by examining previously underexplored settings and combinations of variables, such as the equity to asset ratio, debt to asset ratio, and debt to equity ratio. particularly, we find that female board directors’ presence significantly alters or moderates the relationship between capital structure and firm performance. our findings show that female board presence enhances profitability by positively moderating the mixed effects results of equity to asset as well as debt to equity ratios and performance nexus, suggesting that gender diversity contributes to improved governance practices and operational efficiency. furthermore, to ensure the robustness of our findings, we employed alternative measures of firm performance, such as market value added, which consistently supported our results, confirming that the effects of capital structure on performance hold across different performance indicators in the presence of a female board directors. the remainder of the paper is structured as follows: the next section discusses the theoretical framework and hypotheses development, followed by a description of the sample and the variables used in the econometric model. subsequently, the analysis and empirical results are presented, and finally, the study concludes with implications for practice and policy. ii. theory and hypotheses development capital structure and firm performance capital structure refers to how a firm finances its overall operations and growth through different sources of funds (zhang et al., 2022). the capital structure decisions directly influence a firm's risk and return profile, thereby affecting its financial performance. performance metrics like return on assets (roa), return on equity (roe), and tobin's q are often used as proxies of firm performance to measure the impact of capital structure on firm performance (kumar, sureka and colombage, 2020; mehzabin et al., 2023). the implications of capital structure are crucial as higher debt levels may provide tax benefits but increase financial risk, while lower leverage can signal a conservative approach but limit growth potential. on one hand, the trade-off theory is central to understanding the relationship between capital structure and firm performance. according to this theory, firms balance the costs and benefits of debt to achieve an optimal capital structure (kraus and litzenberger, 1973). debt provides a tax shield on interest payments, but excessive reliance on debt increases bankruptcy risk (bajaj, kashiramka and singh, 2018). firms are expected to increase debt to capitalize on the tax shield until the marginal benefit of debt equals the marginal cost of potential financial distress. this balancing act has a direct impact on firm performance, as evidenced by empirical studies in various industries (abdullah and tursoy, 2021). the trade-off theory also suggests that the decision to utilize debt depends on a firm’s financial stability and the risk profile of its industry. firms in capital-intensive industries tend to have higher leverage because they benefit more from tax shields (mehzabin et al., 2023). therefore, applying this theory in the context of firms in nigeria implies that companies will optimize their capital structure to balance between tax benefits and financial risk, ultimately enhancing performance. on the other hand, research on the relationship between capital structure and firm performance in various contexts has yielded mixed results. for instance, mangudhla, dodoo and kumi (2023) examined nonfinancial firms in ghana and found that higher levels of debt negatively impacted roa, supporting the trade-off theory. similarly, (ayalew, 2021) reported positive findings in the banking sector in ethiopia, where the debt ratio positively affected profitability, indicating that optimal capital structure improves firm performance. on the contrary, le and phan (2017b) observed a negative relationship in vietnam's non-financial firms, where higher debt led to lower performance due to underdeveloped financial markets and weak governance structures. further evidence comes from rani, yadav and tripathy (2020), who explored the speed of capital structure adjustment in india. they found that indian firms slowly adjust their capital structures toward optimal levels, which affects their financial outcomes. likewise, zhang et al. (2022) in china’s e-commerce sector reported that short-term debt positively affects performance, while long-term debt has a minimal or negative impact. these variations suggest that the capital structure-performance relationship is influenced by industry characteristics, governance, and financial market maturity. however, in nigeria’s non-financial sectors, the relationship between capital structure and firm performance is compelling due to several factors. firms in these sectors face high operational costs, largely driven by infrastructure deficits and economic volatility, requiring effective capital structure management to maintain competitiveness and profitability. furthermore, those with optimal capital structures benefit from lower financial distress and better access to finance under more favorable terms, improving overall performance. hence, managing debt and equity efficiently is crucial to enhancing the performance of these firms. on the bases of the foregoing, we formulate our first hypotheses as: h1: capital structure significantly drives the performance of listed non-financial firms in nigeria. female board directors’ presence and firm performance female board directors’ presence refers to the representation of women on corporate boards, typically measured as the percentage of women or a binary variable indicating the presence of at least one female director. in recent years, the importance of gender diversity on boards has been emphasized due to its potential to improve decision-making, risk management, and financial performance (saeed et al., 2022). the inclusion of women in governance roles is argued to lead to better corporate governance and improved firm outcomes (ngatno, apriatni and youlianto, 2021). the feminist theory underpins the argument that gender diversity can positively influence corporate governance and firm performance. this theory posits that women bring unique perspectives and leadership styles that foster inclusiveness, accountability, and a broader consideration of stakeholders (grosvold, rayton and brammer, 2016). feminist theory suggests that firms with female directors may be better positioned to make ethical decisions, reduce risks, and improve financial outcomes (abdullah and tursoy, 2021). the presence of women on boards also challenges traditional male-dominated governance volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu female directors’ role on capital structure and firm performance nexus: new evidence from an emerging market nigeria page |36| emerging markets journal structures, promoting fairness and equity in decisionmaking. in the nigerian context, the presence of female board directors may lead to improved governance and performance especially for non-financial firms. as these firms operate in capital-intensive industries, the inclusion of women on boards may provide a more balanced approach to risk-taking and strategy development, enhancing overall performance (saeed et al., 2022). studies investigating the relationship between female board directors and firm performance have produced diverse findings. for example, saeed et al. (2022) found a positive impact of female directors on profitability in manufacturing firms in pakistan, indicating that gender diversity enhances decision-making and governance. similarly, abdullah (2014) reported that female representation improved governance and financial performance among malaysian firms. in contrast, almaqtari et al. (2021) found no significant effect of female directors on firm performance suggesting that the relationship may vary based on governance structures and cultural factors. further evidence from ngatno, apriatni and youlianto (2021) shows that in indonesia, female directors positively moderated the relationship between governance practices and firm performance in rural banks. likewise, in ethiopia, ayalew (2021) found that gender diversity on boards improved governance but had a limited effect on financial outcomes. these findings suggest that while gender diversity is generally viewed as beneficial for governance, its impact on firm performance is context dependent. in nigeria’s non-financial sector, the presence of female board directors holds the potential to significantly impact firm performance due to several context-specific issues. nigerian firms often operate in a complex socio-economic environment where gender inequality remains a persistent challenge, with women historically underrepresented in leadership positions. female board members may offer unique perspectives and approaches, especially in navigating regulatory and compliance issues that are prevalent in nigeria, such as the enforcement of corporate governance codes. their presence can also influence corporate culture by fostering inclusivity and improving the firm’s reputation in the eyes of global investors who increasingly favor gender-diverse leadership teams. based on the foregoing, we state our second hypothesis as: h2: female board directors’ presence significantly improves the performance of listed non-financial firms in nigeria. capital structure and firm performance: the moderating role of female board directors’ presence from the preceding sections, we noted that the trade-off theory suggests firms balance debt and equity to optimize financial performance, while feminist theory argues that female directors contribute to better governance and risk management (abdullah, 2014). we extend these two theories to include the agency theory which posits that gender diversity can reduce agency conflicts between managers and shareholders, leading to improved financial outcomes (grosvold, rayton and brammer, 2016). the combination of these theories suggests that female directors may enhance the capital structure-performance relationship by promoting transparency, reducing risk, and improving governance practices (ayalew, 2021). in the nigerian settings, these theories also implies that gender diversity on boards may moderate the relationship between capital structure and firm performance, helping firms optimize their financial strategies while minimizing risks (abdullah and tursoy, 2021). female directors may also provide a more balanced approach to financial decision-making, enhancing the benefits of debt while mitigating potential risks. in the literature, there is a notable lack of studies that examine the moderating role of female board directors on the relationship between capital structure and firm performance, particularly in the nigerian context. however, few studies have examined the moderating role of corporate governance factors on the capital structure-performance relationship. in indonesia, we identify the study of ngatno, apriatni and youlianto (2021) who found that only the size of the board of commissioners significantly moderates the relationship between capital structure and firm performance in rural banks. similarly, sdiq and abdullah (2022) reported agency cost significantly moderates the relationship between capital structure and financial performance. specifically, while the direct effect of capital structure on roa was negative, the interaction between debt ratio and operating expense ratio had a positive impact on roa, suggesting that higher debt levels may reduce agency costs and thus improve financial performance in iraqi firms. further research by saeed et al. (2022) in pakistan revealed a u-shaped relationship between debt and tobin's q, suggesting that initially, higher debt levels reduce firm value, but when mediated by gdp per capita in manufacturing firms. in the nigerian settings, where firms often face volatile market conditions, inadequate access to capital, and regulatory uncertainties, female directors may play a crucial moderating role. the unique perspective they bring could temper the often-aggressive risk-taking behaviors linked with higher debt levels, thus creating a more balanced capital structure that promotes long-term firm stability and performance. because of the foregoing, we state our third and final hypothesis as: h3: female board directors’ presence significantly moderates the relationship between capital structure and the performance of listed non-financial firms in nigeria. conceptual framework following the approach outlined by baron and kenny (1986), we construct our conceptual framework to include three causal pathways leading to firm performance: the direct effect of capital structure as a predictor (path a), the moderating effect of female board directors’ presence (path b), and the combined interaction between these two variables (path c). volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu idorenyin okon, ozele clement emerging markets journal page |37| figure 1. conceptual framework source: authors’ computation based on baron and kenny (1986) in figure 1, where the coefficient of the interaction term (c) is significant, then the moderation hypothesis as highlighted by baron and kenny (1986) is supported, indicating that female board directors’ presence (b) moderate or alter the relationship between capital structure (a) and firm performance. according to baron and kenny (1986), “there also may be significant effects for the predictor and the moderator (paths a and b), but these are not directly relevant conceptually to testing the moderator hypothesis”. thus, we are only conclusive on the significance of the integration term between capital structure and female board directors’ presence. furthermore, to isolate the observed correlation between the moderator variable, predictor variable, and their interaction, we require two models: one to test paths “a” and “b”, and the other to test path “c”. iii. data and variables we begin by manually gathering data from the annual reports of the sample firms since information from the annual report is audited and thus, normally used by firms to communicate with the public about their operations and performances. our population consists of 109 listed non-finance firms on the floor of the nigerian exchange group from 2012 to 2021 (ngx factbook, 2021). specifically, a homogenous sample was obtained through a purposive or filtering sampling technique since firms were selected based on meeting certain assumptions. this implies that from a population of 109 listed nonfinance firms in nigeria, we expunge all non-finance firms that joined the exchange after year 2012. furthermore, we deselected firms that did not reveal all the information required for carrying out the analysis hence the final sample consists of 70 listed non-finance firms in nigeria leading to 700 observations as shown in table 1 below. table 1: sample selection criteria number number of listed firms 156 financial firms (49) firms that joined after 2012 (28) firms without information for the study (9) final sample 70 source: authors’ compilation dependent variable we express firm performance in terms of accounting performance and market performance. we also check for the robustness of our result to other dimensions of firm performance such as value added. particularly, we proxied our accounting performance with return on asset (reta) following the studies of mangudhla, dodoo and kumi (2023b). we employed return on asset since it is a direct test of the efficiency of management on the use of asset to generate economic benefits (international accounting standards ias 1). furthermore, we measure the market performance using tobin q (tobq) following the studies of yang and gan (2021). tobin q is used to proxy market performance since it considers the replacement value of the firm’s net worth. our multiple dimensions of firm performance represent a more comprehensive overview of firm performance in relation to capital structure. table 2 shows the measurement of each of the variables. independent variable the independent variable of this study is capital structure. capital structure involves the combination of debt and equity that a company employs to fund its business activities (abdullah and tursoy, 2021). debt ratio measured by debt to asset has often been used as a metric to indicate the capital structure of a firm. however, extant literature has proposed alternative formulas for assessing the debt ratio, including total liabilities over total assets (zhang et al., 2022) and long-term debt over total assets (mavruk and sjögren, 2021). however, we opined that relying on a single metric or characteristic to evaluate the capital structure of a firm is inadequate. one dimension measure of capital structure has the potential to result in erroneous inferences regarding a firm's capital structure (kumar, sureka and colombage, 2020). hence, in this study, we measure capital structure in terms of equity to asset ratio (eqta), debt to asset ratio (deta), and debt to equity ratio (dete) following the studies of kumar, sureka and colombage, (2020); rani, yadav and tripathy, (2020b); ayalew, (2021). furthermore, as an extension of prior studies on capital structure and profitability nexus, we introduce female board director presence (fbdp) as an interaction term. we asserted that if women's representation on corporate boards is impactful and genuine behavioral differences between genders exist, these elements should affect financial decisions and, ultimately, organizational performance. specifically, we measure female board directors’ presence as a dichotomous variable of “1” if there is a female director on the board of directors of the firms under study and “0” for otherwise following the studies of abdullah, (2014), grosvold, rayton and brammer (2016) and saeed et al (2022). control variables based on earlier literature on capital structure and performance nexus, we employed various macroeconomic and firm-level attributes as control variables (almaqtari et al., 2021; dinh, nguyen and hosseini, 2019; mangudhla, dodoo and kumi, 2023; mehzabin et al., 2023; sdiq and abdullah, 2022). specifically, to stabilize the goodness of fit of our regression estimates and to isolate the effect of capital volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu female directors’ role on capital structure and firm performance nexus: new evidence from an emerging market nigeria page |38| emerging markets journal structure on firm performance, we control our model with asset growth (asgt), asset tangibility (asta), gdp growth (gdpg), credit to private sector (crps), firm size (fsiz), family ownership (fown), and market capitalization (mcap). finally, we controlled for a year and industry fixed effects. these control variables are used to isolate the effects of other factors that have a predictable influence on the different dimensions of firm performance employed in this study. table 2: variable measurement variables measurements source tobin q tobin q in numbers is computed as market capitalization + total liabilities cash flow divided by total asset annual report return on asset return on asset in percentage is computed as profit after tax divided total asset annual report market value added market value added is measured as the difference between market capitalization and total equity divided by total asset annual report equity to asset ratio equity to total asset in percentage is computed as total equity divided by total asset annual report debt to asset ratio debt to total asset in percentage is computed as total liabilities divided by total asset annual report debt to equity ratio debt to equity in percentage is computed as total liabilities divided by total equity annual report female board directors’ presence board female director presence is measured as a dichotomous variable of “1” if there is a female director on the board of directors of the firms under study and “0” for otherwise annual report asset growth total asset growth in percentage is computed as current year total asset minus previous year total asset divided by previous total asset. annual report asset tangibility asset tangibility in percentage is computed as fixed asset or ppe divided by total assets annual report gdp growth gdp growth is computed as current year gdp minus previous year gdp divided by previous gdp cbn bulletin (2022) credit to private sector cbn bulletin (2022) firm size firm size is measured as the natural logarithm of total asset annual report family ownership foreign institutional ownership in dummy is measured as “1” when the shares ownership concentration of all the block foreign institutional shareholders is 5% and above controlling interest and “0” otherwise annual report market capitalization market capitalization is measured as the natural logarithm of the multiplication of share price and outstanding shares. annual report source: authors’ compilation econometric models we construct a sample that contains all the 70 non-financial firms in our sample size that are listed in nigeria over a 10-year period from 2012 to 2021, thus yielding a balance panel of 700 observations. based on the foregoing, we formulate the following econometric models in line with theoretical expositions. 𝑇𝑂𝐵𝑄𝑖𝑡 = 𝛽0 + 𝛽1𝐸𝑄𝑇𝐴𝑖𝑡 + 𝛽2𝐷𝐸𝑇𝐴𝑖𝑡 + 𝛽3𝐷𝐸𝑇𝐸𝑖𝑡 + 𝛽4𝐹𝐵𝐷𝑃𝑖𝑡 + 𝛽5𝐴𝑆𝐺𝑇𝑖𝑡 + 𝛽6𝐴𝑆𝑇𝐴𝑖𝑡 + 𝛽7𝐺𝐷𝑃𝐺𝑖𝑡 + 𝛽8𝐶𝑅𝑃𝑆𝑖𝑡 + 𝛽9𝐹𝑆𝐼𝑍𝑖𝑡 + 𝛽10𝐹𝑂𝑊𝑁𝑖𝑡 + 𝛽11𝑀𝐶𝐴𝑃𝑖𝑡 + 𝜇𝑖𝑡 … … (3.1) 𝑅𝐸𝑇𝐴𝑖𝑡 = 𝛽0 + 𝛽1𝐸𝑄𝑇𝐴𝑖𝑡 + 𝛽2𝐷𝐸𝑇𝐴𝑖𝑡 + 𝛽3𝐷𝐸𝑇𝐸𝑖𝑡 + 𝛽4𝐹𝐵𝐷𝑃𝑖𝑡 + 𝛽5𝐴𝑆𝐺𝑇𝑖𝑡 + 𝛽6𝐴𝑆𝑇𝐴𝑖𝑡 + 𝛽7𝐺𝐷𝑃𝐺𝑖𝑡 + 𝛽8𝐶𝑅𝑃𝑆𝑖𝑡 + 𝛽9𝐹𝑆𝐼𝑍𝑖𝑡 + 𝛽10𝐹𝑂𝑊𝑁𝑖𝑡 + 𝛽11𝑀𝐶𝐴𝑃𝑖𝑡 + 𝜇𝑖𝑡 … … (3.2) volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu idorenyin okon, ozele clement emerging markets journal page |39| equations 3.1 and 3.2 above express firm performance as a function of capital structure, female board directors’ presence and several control variables employed in this study. 𝑇𝑂𝐵𝑄𝑖𝑡 = 𝛽0 + 𝛽1(𝐸𝑄𝑇𝐴 × 𝐹𝐵𝐷𝑃)𝑖𝑡 + 𝛽2(𝐷𝐸𝑇𝐴 × 𝐹𝐵𝐷𝑃)𝑖𝑡 + 𝛽3(𝐷𝐸𝑇𝐸 × 𝐹𝐵𝐷𝑃)𝑖𝑡 + 𝛽4𝐴𝑆𝐺𝑇𝑖𝑡 + 𝛽5𝐴𝑆𝑇𝐴𝑖𝑡 + 𝛽6𝐺𝐷𝑃𝐺𝑖𝑡 + 𝛽7𝐶𝑅𝑃𝑆𝑖𝑡 + 𝛽8𝐹𝑆𝐼𝑍𝑖𝑡 + 𝛽9𝐹𝑂𝑊𝑁𝑖𝑡 + 𝛽10𝑀𝐶𝐴𝑃𝑖𝑡 + 𝜇𝑖𝑡 … … (3.3) 𝑅𝐸𝑇𝐴𝑖𝑡 = 𝛽0 + 𝛽1(𝐸𝑄𝑇𝐴 × 𝐹𝐵𝐷𝑃)𝑖𝑡 + 𝛽2(𝐷𝐸𝑇𝐴 × 𝐹𝐵𝐷𝑃)𝑖𝑡 + 𝛽3(𝐷𝐸𝑇𝐸 × 𝐹𝐵𝐷𝑃)𝑖𝑡 + 𝛽4𝐴𝑆𝐺𝑇𝑖𝑡 + 𝛽5𝐴𝑆𝑇𝐴𝑖𝑡 + 𝛽6𝐺𝐷𝑃𝐺𝑖𝑡 + 𝛽7𝐶𝑅𝑃𝑆𝑖𝑡 + 𝛽8𝐹𝑆𝐼𝑍𝑖𝑡 + 𝛽9𝐹𝑂𝑊𝑁𝑖𝑡 + 𝛽10𝑀𝐶𝐴𝑃𝑖𝑡 + 𝜇𝑖𝑡 … … (3.4) equations 3.3 and 3.4 express firm performance as a function of the interaction effect of female board director presence and capital structure measures employed in this study. these models are an attempt to test our assumption that if the presence of women on boards is effective and behavioral differences between women and men truly exist, then these factors should influence capital structure financial decisions and ultimately firm performance following the feminist theory. estimation method studies have shown that capital structure and performance measures are endogenous (dao and ta, 2020; sadiq et al., 2023). usually, this problem is ignored or corrected using fixed effects or instrumental variables. in lieu of conventional methodologies, we implemented a sophisticated technique of panel data estimation by means of the two-step system gmm with robust standard errors. the methodology employed in this study addresses various statistical concerns, including the temporal correlation of errors, heteroscedasticity across firms, simultaneity, and measurement errors. to mitigate the risk of producing significantly biased estimates, orthogonal conditions were imposed on the variance-covariance matrix, as recommended by (arellano and bond, 1991). in order to assess the validity of our instrumental variables and the accuracy of our model specification, we employed the ar (1) and ar (2) tests to detect firstand secondorder serial correlation. as per the gmm approach, it is expected that primary correlation (first order) would be present while secondary correlation (second order) would not be observed. furthermore, it is imperative that the number of instruments is less than the number of groups. subsequently, the hansen test was performed to evaluate the over-identification restrictions. we followed the recommendations of roodman (2009) by requiring the result of the hansen test to be in the range 0.05 ≤ p < 0.8, with the optimal value lying in the range 0.1 ≤ p < 0.25. iv. empirical results and discussions descriptive statistics the results from table 3 reveal that the mean of tobin q (tobq) is 1.39, with a standard deviation of 1.34. this suggests that, on average, the firms included in the study had a market value that slightly exceeded their replacement cost, indicating reasonable market expectations regarding future growth and profitability. similarly, the mean return on assets (reta) is reported at 1.90 with a standard deviation of 17.23, implying that while the firms were generally profitable during the period under investigation, there was significant variability in their returns, potentially reflecting differences in management efficiency or industry conditions. the market value added (mvad) has a mean of 0.48 and a standard deviation of 1.35, which suggests that, on average, the firms added to their market value over the period, although there was considerable variability across the sample. for the independent variables, the equity to asset ratio (eqta) has a mean of 38.36 with a standard deviation of 37.27, indicating that, on average, equity constituted about 38% of the total assets, but with wide dispersion, suggesting differing capital structures among the firms. the debt to asset ratio (deta) is also noted to have a mean of 63.70 with a similar standard deviation of 63.70, emphasizing significant variation in the use of debt financing among the firms. the debt-to-equity ratio (dete) has a mean of 2.83 with a standard deviation of 18.62, indicating that debt represented about 2% of equity on average, but this measure also varies greatly across the sample, reflecting diverse financial leverage strategies. the descriptive statistics for the foreign board member presence (fbmp) show a mean of 0.47 and a standard deviation of 0.67, implying that about 47% of the firms, on average, had at least one female board member during the period studied. this reflects a moderate level of gender diversity in the boards of these firms. regarding the control variables, the mean asset growth (asgt) is 10.26, with a standard deviation of 35.25, indicating substantial growth variability in firm assets over the period. asset tangibility (asta) has a mean of 41.15 and a standard deviation of 23.90, suggesting that, on average, about 41% of firm assets were tangible, but with significant variation across firms. the gross domestic product growth (gdpg) displays a mean of 2.50 with a standard deviation of 2.74, showing an average gdp increase of about 2.5% during the period, which reflects a moderate economic growth environment. credit to the private sector (crps) has a mean of 4.18 with a low standard deviation of 0.10, indicating a stable supply of credit to the private sector during the period under study. firm size (fsiz) shows a mean of 7.14 with a standard deviation of 0.82, reflecting the average size of firms included in the study and relatively little variation in size. family ownership (fown) has a mean of 7.22 with a standard deviation of 14.98, suggesting a moderate presence of family ownership among the firms, but with a high degree of variability. finally, market capitalization (mcap) has a mean of 6.77 with a standard deviation of 1.00, indicating that the firms in the sample were generally medium sized in terms of market value, with relatively little variation across the sample. test for data normality in order to ascertain if our data follow a normal distribution, we employed the shapiro wilk test for data normality in stata. particularly, we failed to use the kurtosis and skewness test for normality since our observation is relatively lower than 2000. the null hypothesis of the shapiro-wilkson test for normality (zvolume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu female directors’ role on capital structure and firm performance nexus: new evidence from an emerging market nigeria page |40| emerging markets journal statistics) is that the data are normally distributed. an acceptance of the null hypothesis implies an insignificant p-value of the z-statistics, and rejection of the null hypothesis implies a significant p-value of the z-statistics. the results in table 3 indicate that the firm performance measures, including tobq, reta, and mvad, are not normally distributed. similarly, the independent variables eqta, deta, and dete do not follow a normal distribution. however, fbmp shows a normal distribution. among the control variables, asgt, asta, gdpg, crps, fsiz, fown and mcap also do not exhibit normal distribution, as shown in table 3. hence, we employed the spearman rank correlation to examine the relationship between the variables under study. correlation analyses we test for the association between the variables employed by adopting the spearman rank correlation module in stata. specifically, the spearman rank correction is our choice since our data do not follow a normal distribution and our observation is less than 2000. based on the foregoing, our result shows that the independent variables of equity to asset ratio (-0.2143), female board directors’ presence (-0.0225), and the control variable of credit to private sector (-0.2133) as well as family ownership (-0.1078) are negatively associated with the dependent variable of firm performance when measured in terms of tobin q. however, the result shows that debt to asset ratio (0.2815), debt to equity ratio (0.1229), and the control variables of asset growth (0.0661), asset tangibility (0.2063), gdp growth (0.1853), firm size (0.0716), and market capitalization (0.3926) are positively associated with the dependent variable of firm performance when measured in terms of tobin q. on the other hand, the result shows that debt to asset ratio (-0.3745), debt to equity ratio (-0.2342), as well as the control variables of asset tangibility (-0.1035), credit to private sector (0.1601) and family ownership (-0.0965) are negatively associated with the dependent variable of firm performance when measured in terms of return on asset. but, we find that equity to asset ratio (0.3436), female board director presence (0.0940), as well as the control variable of asset growth (0.3546), gdp growth (0.1409), firm size (0.1387), and market capitalization 0.3627) are positively associated with the dependent variable of firm performance when measured in terms of return on asset. finally, we find that equity to asset ratio (0.2641), female board presence (-0.0238), and the control variables of credit to private sector (-0.1962), and family ownership (-0.1924) are negatively associated with the dependent variable of firm performance when measured in terms of market value added. on the opposite side, debt to asset ratio (0.1781), debt to equity ratio (0.0748), as well as the control variables of asset growth (0.1341), asset tangibility (0.0877), gdp growth (0.1573), and the control variable of firm size (0.1267) are positively associated with the dependent variable of firm performance when measured in terms of market value added. but, all associations are seen to be weak and thus we fail to suspect the presence of multicollinearity. table 3: descriptive, correlations and tests for data normality results source: stata software output multivariate regression analyses we first examine the cause effect of capital structure as well as female board directors’ presence on firm performance and proceed to examine the interaction effect of female board directors’ presence on the causal relationship between capital structure and the different dimensions of firm performance. specifically, we start by estimating the pool ols regression and test for the basic assumptions of the pool ols regression. the diagnostic test includes multicollinearity, homoscedasticity, and endogeneity. table 4 shows that the f-statistics for the pooled ols regression models, with tobq and reta as measures of firm performance, are 96.12 and 16.67, respectively, both with p-values of 0.0000. this indicates that the models are statistically significant at the 1% level, suitable for inference. the r-squared values for the tobq model (0.6065) and the reta model (0.2110) suggest that approximately 61% and 21% of the variation in firm performance, respectively, are explained by the capital structure proxies and control variables used in the study. the tobq model explains a greater proportion of performance variation, indicating that the capital structure proxies better capture changes in market value. postdiagnostic tests confirm the reliability of these models. the variance inflation factor (vif) for all models averages 2.17, well below the benchmark of 10, suggesting no multicollinearity issues. however, the breusch-pagan test reveals a p-value of 0.0000, indicating a violation of the homoscedasticity assumption in the pooled ols models. the gmm employed in this study addresses various statistical concerns, including the temporal correlation of errors, heteroscedasticity across firms, simultaneity, and measurement errors. to mitigate the risk of producing significantly biased estimates, orthogonal conditions were imposed on the variancecovariance matrix, as recommended by (arellano and bond, 1991). in table 4, we find that eqta has a positive significant effect on firm performance when measured in terms of tobq (coeff.: 0.002; p-value: 0.0000) and reta (coeff.: 0.073; p-value: 0.0000) for the gmm step ii model. this indicates that the equity-to-total-assets ratio (eqta) has a significant positive impact on firm performance, both in terms of market value (measured by tobin's q) and profitability (measured by return on assets reta). these results suggest that a higher equity ratio improves performance by reducing the risk of mismanagement, aligning with studies by (wojewodzki, volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu idorenyin okon, ozele clement emerging markets journal page |41| boateng and brahma, 2020; mavruk and sjögren, 2021). our findings support the trade-off theory suggesting that nigerian firms prioritize financial stability over leveraging tax benefits through debt. this approach mitigates risks associated with volatile economic conditions and poor infrastructure, prevalent in nigeria, which can exacerbate financial distress when relying heavily on debt financing. furthermore, table 4 shows that deta has a positive significant effect on tobq (coeff.: 0.013; p-value: 0.0000) but has a negative significant effect on reta (coeff.: -0.208; p-value: 0.0000). our findings indicate that while debt-to-asset ratio (deta) significantly enhances firm performance in terms of market value (measured by tobin’s q), it has a detrimental effect on profitability (measured by return on assets roa). this result aligns with (zhang et al., 2022), who noted that excessive debt can place strain on a firm's profitability, even though it may signal growth potential reflected in market value. in the nigerian context, where firms face high operational costs and economic volatility, this dual effect is particularly relevant. high debt levels can be used to capitalize on growth opportunities and benefit from tax shields, as suggested by the trade-off theory. however, the financial strain of servicing debt, especially in an environment with fluctuating economic conditions, can erode profitability. furthermore, results from table 3 indicate that dete has a negative insignificant effect on tobin q (coeff.: -0.000; p-value: 0.089) but a positive significant effect on reta (coeff.: 0.029; p-value: 0.000). specifically, we show that while dete appears to insignificantly reduce the market performance of firms in nigeria, dete significantly improves firm profitability. our results support the trade-off theory indicating that while debt enhances profitability through tax shields, excessive debt increases the risk of financial distress, which can reduce market performance. this is consistent with myers' (1977) "underinvestment" or "debt overhang" problem, where firms with high debt may underinvest in growth opportunities, leading to diminished market confidence. furthermore, agency theory highlights conflicts between debt and equity investors, particularly under default risks, as noted by (le and phan, 2017) and (farhan et al., 2020), which can exacerbate these negative effects on market performance. this aligns with the findings of (dinh, nguyen and hosseini, 2019), who noted that agency costs can arise from conflicts between debt and equity investors. table 4: regression analyses of capital structure and firm performance nexus source: stata software output note: (1) bracket {} are p-values: (2) **, ***, implies statistical significance at 5% and 1% levels respectively however, table 4 shows mixed effect of female board presence (fbdp) on the different measurement of firm performance. specifically, we find that fbdp has a negative insignificant effect on tobq (coeff.: -0.032; pvalue: 0.103), but a positive significant effect on reta (coeff.: 3.010; p-value: 0.000). our result indicates that the presence of female board member appears to significantly increase return on asset during the period under study. however, we show that the presence of a female board member insignificantly reduces the tobin q of the listed firms under study. the mixed result of the effect of female board presence on the different dimensions of firm performance recorded in our study mirrors the theoretical literature in which upper echelons (hambrick, 2007), and agency theories (jensen and meckling, 1976) suggest that firms with gender diverse boards might perform better, whereas, role incongruity theory (eagly and karau, 2002) and gender stereotyping on the part of investors (haslam et al., 2010) suggest a negative relationship between women directors and market-based measures of firm performance. on the basis of this mixed findings, we consider the interaction between female board director presence capital structure in relation to firm performance. furthermore, research has shown that gender diversity on boards enhances the variety of perspectives, which can lead to better and more balanced decision-making (abdullah, 2014; grosvold, rayton and brammer, 2016; saeed et al., 2022). this diversity could influence how firms decide on their capital structure, such as the mix of debt and equity financing. in turn, this may affect firm performance by enabling more informed and nuanced financial decisions, especially when dealing with complex capital structure issues (bajaj, kashiramka and singh, 2018). in table 5, our result shows that the interaction between fbdp and eqta has a negative and significant effect on tobq (coeff.: -0.002; p-value: 0.000), but a positive and significant effect on reta (coeff.: 0.078; pvalue: 0.000). furthermore, the interaction between fbdp and deta has a positive and significant effect on tobq (coeff.: 0.003; p-value: 0.000), but a negative and significant effect on reta (coeff.: -0.001; p-value: 0.000). finally, our result shows that the interaction between fbdp and dete has a negative and significant volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu female directors’ role on capital structure and firm performance nexus: new evidence from an emerging market nigeria page |42| emerging markets journal effect tobq (coeff.: -0.001; p-value: 0.026), but a positive and significant effect on reta (coeff.: 0.031; pvalue: 0.000). according to the moderation framework proposed by (baron and kenny, 1986), a moderating effect is present if the interaction terms between the moderator and the independent variables significantly affect the dependent variable. based on our results, the moderation hypothesis involving fbdp as the moderator variable appears to hold. particularly, we show that a female director presence on the board of a highly levered firm will reduce the market value of listed firms in nigeria even though it appears to increase profitability. we note that following the arguments of agency theory (jensen and meckling, 1976), greater board diversity leads to a reduction in information asymmetries. the lower information asymmetries associated with the participation of women directors on the board contribute to improving access to external financial resources and increase a firm’s proportion of external equity in the capital structure, leading to lower leverage. table 5: capital structure and firm performance nexus: the role of foreign board directors presence source: stata software output note: (1) bracket {} are p-values: (2) **, ***, implies statistical significance at 5% and 1% levels respectively robustness check as a robustness check, we test the sensitivity of our result to value added measure of firm performance; in this case, market value added. our results in table 6 indicate that eqta has a negative significant effect on market value added (mvad), suggesting that eqta does not robustly support firm performance when measured through market value added. this finding shows that a higher equity to asset ratio tends to decrease firm performance in terms of mvad during the study period. on the contrary, deta shows a positive significant effect on mvad, aligning with its positive impact on the market value (tobq) measure of firm performance found in the baseline model. furthermore, dete has a negative but insignificant effect on mvad, which is consistent with its effect on the tobq measure of firm performance in the baseline model. table 6: capital structure firm performance nexus market value added dimension source: stata software output note: (1) bracket {} are p-values: (2) **, ***, implies statistical significance at 5% and 1% levels respectively in table 7, our results demonstrate that the interaction between fbdp and eqta has a negative and significant effect on market value added (mvad), which is consistent with the findings from the tobq model. this suggests that the presence of female board directors (fbdp) diminishes the positive impact of a higher equity to asset ratio (eqta) on firm performance when considering both market value added and tobin q, indicating that the influence of eqta is moderated negatively by fbdp in terms of the firm's market value performance. furthermore, the interaction between fbdp and deta reveals a positive and significant effect on mvad, which aligns with the results from the tobin q model. this consistency suggests that the presence of female board directors strengthens the positive impact of the debt to asset ratio (deta) on firm performance across both dimensions of market value. the finding implies that, under certain conditions, having female board directors may enhance the beneficial effects of leveraging debt on market value performance. additionally, our results show that the interaction between fbdp and dete has a negative and significant effect on mvad. this negative interaction indicates that the presence of female board directors reduces the influence of the debt-to-equity ratio (dete) on market value added. overall, our findings demonstrate robustness in the sense that the moderating effects of fbdp on the relationships between the independent variables (eqta, deta, dete) and firm performance are consistent across different dimensions of firm performance. this consistency across multiple models and measures strengthens the reliability of our results and supports the validity of the moderating role of fbdp in influencing firm performance outcomes. volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu idorenyin okon, ozele clement emerging markets journal page |43| table 7: capital structure firm performance nexus market value added dimension: the role of female director board presence source: stata software output note: (1) bracket {} are p-values: (2) **, ***, implies statistical significance at 5% and 1% levels respectively v. conclusion and recommendations this study investigated the direct effect of capital structure on firm performance and extends this objective by examining the moderating effect of female board director presence on this relationship for nonfinance firms in nigeria from 2012 to 2021. the main aim of the study was to assess how different components of capital structure, such as equity to asset ratio, debt to asset ratio, and debt to equity ratio, affect firm performance, measured in terms of market value and profitability, and to determine how the presence of female board directors influences these relationships. the key findings revealed that the equity to asset ratio has a positive and significant effect on firm performance when measured by market value and profitability, suggesting that a higher equity ratio can enhance both market value and profitability. conversely, the debt to asset ratio had a positive effect on market value but a negative effect on profitability, indicating that while debt can improve market value, it may constrain profitability. the debt-to-equity ratio had a negative effect on market value and a positive effect on profitability, suggesting a nuanced role of debt-to-equity ratio on different performance measures. the study also found that the presence of female board directors significantly affects firm performance: it positively influences profitability but has an insignificant negative effect on market value. when considering the interaction effects, the results demonstrate that the presence of female board directors modifies the relationship between capital structure and firm performance in varying ways, which suggests a complex moderating role. the findings indicated that female board presence enhances profitability by positively moderating the impact of equity to asset and debt to equity ratios, suggesting improved governance and operational efficiency. however, this presence also showed a mixed influence on market value, where it negatively moderates the equity to asset and debt to equity ratios while positively moderating the debt to asset ratio, reflecting both potential market biases and perceived risk management benefits since investors may see genderdiverse boards as better equipped to handle financial risks and governance challenges, enhancing the firm’s credibility and attractiveness. based on the findings, corporate managers and directors should recognize the dual impact of their capital structure decisions on different aspects of firm performance. emphasizing a balanced capital structure that maintains an optimal level of equity while leveraging debt responsibly can help maximize both market value and profitability. female representation on boards should be viewed as a strategic resource that can enhance profitability and contribute to more balanced decisionmaking, particularly in financial management and strategy formulation. for policymakers and regulators, it is essential to consider frameworks that encourage gender diversity on corporate boards, not only for its intrinsic value, but also for its impact on firm performance. regulations or incentives that promote female representation on boards could help create a more equitable and competitive market environment. additionally, ensuring transparency and adequate disclosure of firms' capital structures could aid in reducing information asymmetries and promote better investment decisions. for other stakeholders, including corporate governance advocates and human resource professionals, promoting a more inclusive corporate culture with diverse boards can contribute to long-term sustainable performance. these efforts should be aligned with broader strategic goals that balance both profitability and market growth. future research could explore these relationships in other sectors or geographical contexts to enhance the generalizability of the findings. additionally, examining other dimensions of board diversity, such as age, ethnicity, and educational background, could provide a more comprehensive understanding of how board composition affects firm performance. further studies might also consider longitudinal analyses to capture the dynamic effects of capital structure and board diversity over more extended periods or employ alternative methodological approaches to address potential endogeneity and measurement biases. references abdullah, h. and tursoy, t. (2021) ‘capital structure and firm performance: evidence of germany under ifrs adoption’, review of managerial science, 15(2),379–398. https://doi.org/10.1007/s11846019-00344-5. abdullah, s.n. (2014) ‘the causes of gender diversity in malaysian large firms’, journal of management and governance, 18(4), 1137–1159. https://doi.org/10.1007/s10997-013-9279-0. volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu female directors’ role on capital structure and firm performance nexus: new evidence from an emerging market nigeria page |44| emerging markets journal almaqtari, f.a., hashim, h.a., mansour, m. and alahdal, w.m. (2021) ‘a review of the influence of capital structure on the relationship between corporate governance and firm performance’, international journal of procurement management, 1(1), 1. https://doi.org/10.1504/ ijpm.2021.10047744. anh, h.n., duong, t.d. and yoon, w.s. (2018) ‘capital structure and firm financial performance in vietnam’, international journal of accounting and finance, 8(2), 122–132. arellano, m. and bond, s. (1991) ‘some tests of specification for panel data: monte carlo evidence and an application to employment equations’, the review of economic studies, 58(2), 277–297. ayalew, a. (2021) ‘capital structure and profitability: panel data evidence of private banks in ethiopia’, cogent economics and finance, 9(1). https://doi.org/10.1080/23322039.2021.195373 6. bajaj, y., kashiramka, s. and singh, s. (2018) ‘dynamics of capital structure: evidence from indian manufacturing firms’, journal for global business advancement, 11(6), 667–686. available at: https://doi.org/10.1504/ jgba.2018.097774. baron, r.m. and kenny, d.a. (1986) ‘the moderatormediator variable distinction in social psychological research: conceptual, strategic, and statistical considerations’, journal of personality and social psychology, 51(6), 1173–1182. cappa, f., cetrini, g. and oriani, r. (2020) ‘the impact of corporate strategy on capital structure: evidence from italian listed firms’, quarterly review of economics and finance, 76, 379– 385. https://doi.org/10.1016/j.qref.2019.09.005. dao, b.t.t. and ta, t.d.n. (2020) ‘a meta-analysis: capital structure and firm performance’, journal of economics and development, 22(1), 111– 129. https://doi.org/10.1108/jed-12-2019-0072. dao, t.t.b. and le, t.h. (2023) ‘optimal capital structure of vietnamese listed firms finance industry and consumer discretionary industry’, cogent social sciences, 9(2). https://doi.org/10.1080/ 23311886.2023.2245238. detthamrong, u., chancharat, n. and vithessonthi, c. (2017) ‘corporate governance, capital structure and firm performance: evidence from thailand’, research in international business and finance, 42, 689-709. https://doi.org/10.1016/j.ribaf.2017.07.011. dinh, h.p., nguyen, p. v. and hosseini, j.c. (2019) ‘the impact of product diversification and capital structure on firm performance: evidence from vietnamese manufacturing enterprises’, journal for global business advancement, 12(1), 95– 116.https://doi.org/10.1504/jgba.2019.09992 0. eagly, a.h. and karau, s.j. (2002) ‘role congruity theory of prejudice toward female leaders’, psychological review, 109(3), 573–598. https://doi.org/10.1037/0033-295x.109.3.573. farhan, n.h.s., tabash, m.i., alsamhi, m.h. and yahya, a.t. (2020) ‘the relationship between capital structure and firm performance: empirical evidence from indian service sector’, international journal of sustainable economy, 12(2), 140-162. https://doi.org/doi.org/10.1504/ ijse.2020.110262. grosvold, j., rayton, b. and brammer, s. (2016) ‘women on corporate boards: a comparative institutional analysis’, business and society, 55(8), 1157-1196. https://doi.org/10.1177/ 0007650315613980. hambrick, d.c. (2007) ‘upper echelons theory: an update’, academy of management review, 3(2), 334–343. haslam, s.a., ryan, m.k., kulich, c., trojanowski, g. and atkins, c. (2010) ‘investing with prejudice: the relationship between women’s presence on company boards and objective and subjective measures of company performance’, british journal of management, 21(2), 484–497. https://doi.org/10.1111/j.1467-8551.2009.0067 0.x. jensen, mc. and meckling, w. (1976) ‘theory of the firm: managerial behavior, agency costs and capital structure’, journal of financial economics, 3(4), 305-360. https://doi.org/10.1086/467051. kraus, a. and litzenberger, r.h. (1973) ‘american finance association a state-preference model of optimal financial leverage a statepreference model of optimal financial leverage’, the journal of finance, 28(4), 911– 922. https://doi.org/doi.org/10.2307/2978343. kumar, s., sureka, r. and colombage, s. (2020) ‘capital structure of smes: a systematic literature review and bibliometric analysis’, management review quarterly, 70(4), 535–565. https://doi.org/10.1007/s11301-019-00175-4. volume 14 no 2 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.348 | http://emaj.pitt.edu idorenyin okon, ozele clement emerging markets journal page |45| le, t.p.v. and phan, t.b.n. (2017) ‘capital structure and firm performance: empirical evidence from a small transition country’, research in international business and finance, 42, 710– 726.https://doi.org/10.1016/j.ribaf.2017.07.012 . mangudhla, t., dodoo, r. and kumi, m. (2023) ‘the effect of capital structure on firm performance; an empirical evidence from emerging economy’, euromed journal of management, 5(1), 1. https://doi.org/10.1504/ emjm.2023.10052497. mavruk, t. and sjögren, s. (2021) ‘capital structure and monitoring by local owners’, applied economics, 53(40), 4614–4631. https://doi.org/10.1080/00036846.2021.190412 7. mehzabin, s., shahriar, a., hoque, m.n., wanke, p. and azad, md.a.k. (2023) ‘the effect of capital structure, operating efficiency and non-interest income on bank profitability: new evidence from asia’, asian journal of economics and banking, 7(1), 25-44. https://doi.org/10.1108/ ajeb-03-2022-0036. ngatno, apriatni, e.p. and youlianto, a. (2021) ‘moderating effects of corporate governance mechanism on the relation between capital structure and firm performance’, cogent business and management, 8(1). https://doi.org/10.1080/23311975.2020.186682 2. owusu adusei, d. and amoa gyarteng, k. (2023) ‘capital structure and solvency of manufacturing firms: evidence from ghana’, african j. of accounting, auditing and finance, 1(1).https://doi.org/10.1504/ajaaf.2023.100583 39. rani, n., yadav, s.s. and tripathy, n. (2020) ‘capital structure dynamics of indian corporates’, journal of advances in management research, 17(2), 212–225. https://doi.org/10.1108/jamr12-2017-0125. roodman, d. (2009) ‘how to do xtabond2: an introduction to difference and system gmm in stata’, the stata journal, 9(1), 86-136. sadiq, m., yousaf, s.u., anser, m.k., rashid khan, h. ur, sriyanto, s., zaman, k., van tu, d. and anis, s.n.m. (2023) ‘the role of debt financing in the relationship between capital structure, firm’s value, and macroeconomic factors: to throw caution to the wind’, quarterly review of economics and finance, 87(november), 212– 223. https://doi.org/10.1016/j.qref.2020.11.001. saeed, a., riaz, h., liedong, t.a. and rajwani, t. (2022) ‘the impact of tmt gender diversity on corporate environmental strategy in emerging economies’, journal of business research, 141, 536-551. https://doi.org/10.1016/j.jbusres. 2021.11.057. sdiq, s.r. and abdullah, h.a. (2022) ‘examining the effect of agency cost on capital structurefinancial performance nexus: empirical evidence for emerging market’, cogent economics and finance, 10(1). https://doi.org/10.1080/23322039.2022.214836 4. wojewodzki, m., boateng, a. and brahma, s. (2020) ‘credit rating, banks’ capital structure and speed of adjustment: a cross-country analysis’, journal of international financial markets, institutions and money, 69. https://doi.org/10.1016/j.intfin.2020.101260. yang, b. and gan, l. (2021) ‘contingent capital, tobin’s q and corporate capital structure’, north american journal of economics and finance, 55.https://doi.org/10.1016/j.najef.2020.101305. zhang, m.y., lin, l.w., chen, h.p. and zhao, x.z. (2022) ‘the impact of capital structure on the performance of chinese e-commerce industry companies (2013-2019 panel data)’, journal of mathematics, 2022. https://doi.org/10.1155/ 2022/7612349. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu university-related factors influencing technological entrepreneurial intentions of science, technology, engineering and mathematics (stem) students: a comparative study of private and public universities clement mwaanga mulungushi university, zambia | e-mail: mwaangac@mu.ac.zm edwin moyo mulungushi university, zambia | e-mail: emoyo@mu.ac.zm kelly chungu mulungushi university, zambia | e-mail: kchungu@mu.ac.zm abstract this study aims to establish university-related factors that influence the formation of technological entrepreneurial intentions (teis) among stem students in zambia. the article extends the ajzen theory of planned behavior (tpb) model by including environmental factors that were tested using a comparative study of public and private students, with quantitative data obtained from a sample of 400 stem students and analyzed using structural equation modelling (sem). this paper contributes to emerging literature on teis by incorporating environmental variables into the tpb model to explain the formation of stem students' teis. this study provides insights into the significance of pressure from friends, family and other networks and positive perception of technological entrepreneurial activities on the formation of teis in students. to the best of our knowledge, this is the first study to utilize the extended tpb on stem students in zambia. this research also contributes to the existing literature on technopreneurship by comparing the formation of teis of stem students in private and public universities. the findings suggest that attitudes towards entrepreneurship (ate), subjective norms (sn) and perceived behavioral control (pbc) have a direct impact on teis for private university students and ate and pbc for public university students. university support (us) influences teis through (sn) for both private and public university students. additionally, the university environment affects teis through three antecedents (ate, sn and pbc) for private university students, while teaching methods (tm) show no association with teis. keywords: technopreneurship, technological intentions, university support, university environment, teaching methods *the study was supported by a research grant from mulungushi university as an internal grant fund. the research was carried out under research program of mulungushi university. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.312 | http://emaj.pitt.edu | mailto:mwaangac@mu.ac.zm mailto:emoyo@mu.ac.zm mailto:kchungu@mu.ac.zm http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.312 | http://emaj.pitt.edu university-related factors influencing technological entrepreneurial intentions of science, technology, engineering and mathematics (stem) students: a comparative study of private and public universities page |14| emerging markets journal university-related factors influencing technological entrepreneurial intentions of science, technology, engineering and mathematics (stem) students: a comparative study of private and public universities clement mwaanga edwin moyo kelly chungu i. introduction given their critical role, technological entrepreneurship intentions (teis) play a role in enhancing growth through the elimination of economic inefficiencies, the introduction of innovations in the markets and employment creation. studies on technological intentions have gained significant attention among policymakers and educators (koe et. al., 2018). in the era of technological digitalization, technological entrepreneurship is regarded as the basis for competitiveness, sustainable economic growth and the promotion of social interests (linan et. al., 2015). technopreneurship as a field of study has continued to receive significant attention in developing countries because of positive student perceptions of technological growth and its effects on eis (nathani and divedo, 2019). this calls for the need to increase the intensity of students' eis, which may result in a change in mindset so that they can focus on self-employment rather than formal employment (maheshwari et. al., 2022). the literature has identified universities as ideal places for establishing how technological entrepreneurs are developed and enhanced among students (mosey, 2016), which has led to an increase in the number of studies exploring the influence of environmental factors such as university support, university environment and teaching methods on the formation of students' eis. prior studies have indicated that students entrepreneurial intentions are positively influenced by university support (liu, gargievski, qi and pass, 2022; yi 2021; qazi, qureshi, raza, khan and qureshi, 2020), university environment (tommy and pardede, 2020; lopez and alverez, 2019; canever, barrel and ribeiro, 2017) and methods employed in teaching entrepreneurship education (karim et. al., 2016; hattab, 2014). despite the recognized importance of these factors individually, a comprehensive understanding of how they synergistically contribute to or hinder the development of entrepreneurial aspirations among stem students remains elusive. in the rapidly evolving landscape of entrepreneurship education, there exists a pressing need to comprehensively investigate the interplay between university support mechanisms, the overarching university environment, and diverse teaching methods to discern their collective influence on shaping entrepreneurial intentions among students (aliedan, elshaer, alyahya and sobaih, 2022). furthermore, few studies have explored the concept of technological entrepreneurship, how technology enterprises are created, as well as what motivates and hinders individuals to engage in that behavior, especially among university graduates (shane and venkataraman, 2003). a systematic review conducted by maheshwari et. al. (2022) proposed the need for the inclusion of environmental factors in the theory of planned behavior (tpb) model and examined them on students in other parts of the world, such as africa, since most of the studies on eis have been conducted in asia. additionally, several prior studies have called for more research to investigate the development of technological entrepreneurial intentions among stem students (wright et. al., 2017; alves et. al., 2019; wright et. al., 2019). therefore, this research aims to bridge this gap by exploring the intricate relationships among university support structures, the overall entrepreneurial climate within the university and the effectiveness of various teaching methods in cultivating and enhancing entrepreneurial intentions among stem students. through a nuanced examination of these dimensions, this study seeks to provide actionable insights for educators, policymakers and institutions to refine entrepreneurial education strategies and foster an environment conducive to nurturing the next generation of innovative and enterprising individuals." ii. literature review technopreneurship technopreneurship, or technological entrepreneurship, is a unique form of entrepreneurship that results from the combination of three aspects: entrepreneurship, innovation and technology (nacu and avasilcai, 2014). a seminal author on technology entrepreneurship, tony bailetti defined technology entrepreneurship as the “deployment of resources to create a project managed by specialised individuals with different expertise directly linked to scientific and technological knowledge to create and sustain value for the business”. bailetti (2012) as well as nathani and dwivedi (2017) observed that technology entrepreneurship can occur in three distinct forms: technology entrepreneurship (news business ventures or products resulting from research), digital technology entrepreneurship (a bath of new business ventures or products through ict technologies) and digital entrepreneurship (new internet products/services). this study defines technology entrepreneurship as the combination of technological know-how with entrepreneurial skills and talent to create new products, processes and ventures (yordanova, 2021). a recent study volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.312 | http://emaj.pitt.edu clement mwaanga, edwin moyo, kelly chungu emerging markets journal page |15| by nazarov et. al. (2017) suggested that human beings, expertise, experience and government support are key factors that influence the development of technology entrepreneurship. entreprenurial intentions in exploring the formation of students’ entrepreneurial intentions, several studies have employed three models, namely, luthje and franke’s model and shapero and ajzen’s tpb model (gieure, benavidesespinosa and roig-dobón 2019; karimi, biemans, mahdei, lans, chizari and mulder, 2017; nabi et.al., 2010). this study is anchored in ajzen's tpb, an extension of the theory of reasoned action (saraih et. al., 2017) due to its increased utilization in entrepreneurial intention studies, its popularity and its strength in explaining behavioral intentions (ajzen, 2011). the tpb model suggests that developing a positive perception influences entrepreneurial intentions, which in turn results in behavior (vracheva, abu-rahma and jacques, 2018). positive perceptions of individual capacity and the ability to engage in business activities accepted by community members increase entrepreneurial intention. in this study, we extended the tpb model by incorporating three constructs as independent variables (teaching methods, university support and university environment). the extended tpb model presents an opportunity to establish the indirect effects of independent variables on the development of students’ entrepreneurial intentions in public and private universities. tpb utilizes three accurate constructs to predict human behavior and actions. these are attitudes towards entrepreneurship (ate), subjective norms (sn) and perceived behavioral control (pbc) (maheshwari et.al., 2022). an ate is a representation of how an individual views the entrepreneurial outcome, which may be negative or positive. sn refers to one's perception of how the immediate environment (e.g., peers, family and networks) responds to the idea of venture creation. pbc relates to an individual's perception of available factors, which may promote or hinder entrepreneurial behaviors. these constructs have been applied in several ei studies and have proved significant in the formation of students (srivastava and misra, 2017; agolla, monametsia and phera, 2019; naushad, 2018). furthermore, other studies have also supported the argument that tpb constructs play a significant role in students' entrepreneurial intentions (said, uthamaputhran, zulkiffi, hong and wai, 2021; nguyen, 2020; ajum, ramzani and nazer, 2019; karimi et. al., 2017; gieure et al., 2019). entrepreneurship intentions recently, several studies have used tpb to explain how students’ entrepreneurial intention has developed (aloulou, 2016). individuals decide to create a new business venture after conducting a serious analysis of the environment and developing attitudes as well as beliefs to act through proper planning. intentions influence a person to engage in certain planned behaviors perceived to be rewarding, unique and timely (nuseir, basheer and aljumah, 2020). a self-employed career is heavily dependent on one's developed intentions or is sometimes referred to as human behavior. santos and liguori (2019) described entrepreneurial intentions as individual beliefs that influence the interest in and decision to start a new business venture or engage in entrepreneurial activities. several factors affect entrepreneurial intentions, especially among students in universities that can be public or private and that offer different institutional environments. this makes the time and place where students are instrumental in creating entrepreneurs (dornelas, 2005). however, the development of intentions among students in private and public universities differs because of the different contingent variables found at each university. studies have shown that students from private universities exhibit higher entrepreneurial intentions than their counterparts from public universities (barral, ribeiro and canever, 2018; silva and teixeira, 2013; perim, 2012). therefore, this study assumes that the private university environment is more effective than the public environment in influencing students' entrepreneurial intentions. environmental factors studies on the influence of environmental factors on entrepreneurial intentions have received much attention among scholars because of the significant role they play in the development of intentions (north, 2005). according to lüthje and franke (2003), the presence of environmental factors can influence, inspire or motivate an individual to recognize and exploit available business opportunities. however, in the context of developing countries such as zambia, little has been done to explore the significance of environmental factors in the process of new venture creation (bruton et. al., 2008). in this study, three environmental factors (university support, university environment and teaching methods) were explored to establish their direct and indirect effects on stem students’ ei. according to fishbein and ajzen (2010), environmental factors can have direct or indirect effects on entrepreneurial intentions through tpb constructs. university support trivedi (2016) described university support (us) as programs aimed at stimulating students’ entrepreneurial behaviors, such as networking, counselling, coaching, mentoring, providing business advice and other business-related activities. these factors have been directly linked to students' entrepreneurial intentions in universities, especially in developed countries (boh et. al., 2016). institutions of higher learning are nuclear points of interaction in the development of students' entrepreneurial intentions (saeed, yousafzai and muffatto, 2015). students’ entrepreneurial intentions are enhanced by creating entrepreneurial awareness through the educational programs offered in these institutions and entrepreneurship education. apart from educational support, universities provide other forms of support, such as advising students on business activities (saeed et. al., 2015), training students in business concept development and other business development support services (mustafa et. al., 2016). students' positive evolution of education support, concept development support and other business development support services increase their entrepreneurial intentions. similar studies have reported a positive relationship between university support and volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.312 | http://emaj.pitt.edu university-related factors influencing technological entrepreneurial intentions of science, technology, engineering and mathematics (stem) students: a comparative study of private and public universities page |16| emerging markets journal entrepreneurial intention (mustafa et. al., 2016; trived, 2016; saeed et. al., 2015; lüthje and franke, 2003) university environment the university environment (ue) provides learners with opportunities to acquire the skills required to develop a career destination in a community (gieure, 2018). the university environment may include people with business ideas, established business ventures and resources to assist students and infrastructure to support start-ups. students who perceive these factors positively have a higher chance of developing intentions to engage in entrepreneurial activities (franke and lüthje, 2004). therefore, university environmental factors may promote or hinder the development of entrepreneurial intention. prior studies have acknowledged that university environment has a positive influence on entrepreneurial intentions (maheshwari, 2022; martinez-clement et.al., 2018; gieure, 2018; kabok et.al, 2017; minola et.al., 2016; shirokova et.al., 2016). a study conducted by wright et.al. (2017) identified university elements, such as accelerators, incubators, access to grants and competition among stem students as significant factors in the development of technological entrepreneurship intentions. similarly, a recent study conducted by baubonienė, hahn, puksas and malinauskienė (2018) described the university as a perfect environment for the creation of a start-up or new business venture. teaching methods the teaching methods (tms) applied to relationship-related programs have a strong influence on students' interest in venturing into entrepreneurship, developing a community of entrepreneurs and enhancing their motivation towards start-ups (souitaris et.al., 2007). universities should design and operationalize teaching methods that promote entrepreneurial behavior. therefore, universities should apply a combination of practices on how to start a business venture, the use of computer games and simulation, critical thinking and reflective teaching strategies to promote entrepreneurship among students (neck and green, 2011). a comparative study conducted at lithuanian and south korean universities reported a positive relationship between the use of practicals as a teaching pedagogy and students’ entrepreneurial intention (baubonienė, hahn, puksas and malinauskienė, 2018). exposing students to business practices, such as business camps, competition and roleplay significantly impacts their entrepreneurial intentions. iii. theoretical framework and hypotheses the hypotheses of research are formulated as follows: h1. ate has a positive influence on stem students’ technological entrepreneurial intentions. h2. sn has a positive influence on stem students’ technological entrepreneurial intentions. h3. pbc has a positive influence on stem students’ technological entrepreneurial intentions. h4. university support has direct effects on stem students: (a) ate, (b) sn, (c) pbc and (d) technological entrepreneurial intentions. h5. university environment has direct effects on stem students (a) ate, (b) sn, (c) pbc, and (d) technological entrepreneurial intentions. h6. teaching methods have direct effects on stem students (a) ate, (b) sn, (c) pbc, and (d) technological entrepreneurial intentions. iv. research conceptual framework this study will be anchored on insights from the theory of planned behavior (tpb) to develop hypotheses based on the constructs presented in this conceptual framework. figure 1. conceptual framework source: baubonienė et.al., 2018; ajzen, 2011; mustafa et.al., 2016; lüthje and franke, 2003 v. methodology in this study, a sample size of 400 stem students from two public and two private universities in zambia were surveyed between july and september 2022. convenience sampling was utilized, as in other entrepreneurial intention studies (boubker, arroud and quajdouni, 2021; lu, song and pan, 2021; karimi, 2019; liu, lin, zhao and zhao, 2019; karimi et.al., 2017; liñán and chen, 2009; krueger et.al., 2000). a total of 400 questionnaires were distributed and all completed questionnaires were returned, representing a 100% response rate. as per hair, black, babin and anderson (2010), the survey responses were scrutinized to check for missing data and possible outliers. the survey instrument contained items adopted from baubonienė et.al. (2018) and was measured using a 5point likert scale ranging from 1 (strongly disagree) to 5 (strongly agree). tei was measured using seven items: ate 3, sn 4, pbc 5, us and ue, while tm had four items. vi. findings table 1 shows that there were more (95.5%) students aged between 16 and 25 years in public universities than in private universities (76%). in terms of gender, public universities had more males (66.5%) than private universities (51.5%). this indicates that universities in zambia are male-dominated. furthermore, private universities reported a higher number (40%) of volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.312 | http://emaj.pitt.edu clement mwaanga, edwin moyo, kelly chungu emerging markets journal page |17| students engaged in entrepreneurial activities and less work experience (47.5%). the results suggest that most students in public universities are more interested in getting employed than their counterparts in private universities are. table 1: demographic profile of respondents source: authors' compilation regarding future career plans, 42% of the students from public universities considered working as an employee a priority, while 20.5% of them from private universities considered this a priority. on starting technology-related enterprises, more (67.5%) students from public universities agreed with this statement and 56% from private universities. the findings revealed that more students from public universities have plans to start their technology-related enterprises after completing their undergraduate studies, and only 52.5% of them were interested in postgraduate studies compared to private universities, where most of them (76.5%) would like to pursue postgraduate studies, as indicated in figure 2. figure 2. public and private universities students’ plans source: authors' compilation factor analysis table 2 presents the factor loadings for the 36 items used to measure the seven constructs used in this study. all loadings were above .5, an indication of the reliability of factors and the acceptability of the research model for structural equation modelling (sem). table 2: factor loadings source: authors' compilation structural equation modelling table 3: goodness of fit indices for the proposed and revised models the first step was to check the reliability and construct validity of the measurement model using a confirmatory factor analysis, as proposed by hair et.al. (2010). the results do not report a model fit, as indicated in table 3. adjustments were made to the model using a conservative strategy to achieve model fit. additionally, discriminant validity was achieved by having factor loadings for all seven constructs greater than .5. source: authors' compilation the construct reliability for all the constructs was above the recommended value of .70 (nunnally and bernstein, 1994) as indicated in table 2. the second step was to test our hypotheses. table 4 presents the evidence supporting the seven hypotheses. a positive association was found between ate and eis for both the public (coef. .511; p= 0.000), and private (coef. .382; p=.001) universities. sn is positively related to eis among private university students (coef. .694; p= .000), whereas for volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.312 | http://emaj.pitt.edu university-related factors influencing technological entrepreneurial intentions of science, technology, engineering and mathematics (stem) students: a comparative study of private and public universities page |18| emerging markets journal public university students, it was not statistically significant (coef. .039; p= .679). we found evidence to support hypotheses h1, h2 and h3. table 4: results of structural equation modelling *p<.05 source: authors compilation mixed results were observed for the association between the independent variables and antecedents of eis. university support was found to be associated with both ate (coef. -.024; p=.552: coef. -.056; p=.240) and pbc (coef. -.028; p=.619: coef. .040; p= .485) for both public and private university students, whereas a positive interaction was observed in both cases (coef. -.132; p=.008: coef. .320; p=.000). thus, hypotheses h4a and h4c are accepted, while hypothesis h4b is not. furthermore, university environment was positively associated with ate (coef. .178; p=000), sn (coef. .127; p=.016 and pbc (coef. .175; p=.003) for public university students, providing evidence for hypotheses h5a, h5b, and h5c. for private universities, the interactions are not statistically significant (table 4). finally, no statistically significant relationships were observed between tm and ate (coef. .007; p=.907: coef. .095; p= .165), sn (coef. .106; p= .179: coef.-.115; p= .258) and pbc (coef. .164; p=.067: coef. .140; p= .093) for both public and private university students. no evidence was found to support hypotheses h6a, h6b, and h6c. vii. discussion this study extends the tpb by including environmental constructs (university support, university environment and teaching methods) to establish whether they are directly or indirectly related to the eis of stem students in public and private universities in zambia. the findings revealed two important aspects of tpb. first, the ajzen (1991) tpb model is applicable to studies of students' entrepreneurial intentions. second, tpb is not restricted to a specific economic situation (iakovleva et.al., 2011). this confirms the universality of the tpb in that the theory can be utilized to explain the formation of students' eis in a different context. this is contrary to the claims made by bruton et.al. (2008) that the explanatory power of theories developed in efficiency-driven economies exhibits a low ability to explain the interactions between variables when applied to factor-driven economies such as zambia. ate and pbc for both public and private universities stem students were positively associated with eis, while sn reported a positive influence on the eis of private university students only. the results confirm the findings of previous studies that reported the direct influence of the three antecedents on ei (gieure, 2019; hussain and imran, 2018; farrukh et.al., 2018). an explanation for this is that students in both public and private universities consider technology entrepreneurship as an attractive, satisfying, and advantageous career option and that they can identify new opportunities, create new products and services that satisfy customers’ needs, and successfully launch new ventures that influence their eis. in contrast, the relationship between students' eis and sn was not statistically significant for public university students, as reported in prior studies (barbasanchez et.al., 2022; agolla, monametsi and phera, 2018; arrighetti et al., 2016; buli and yesuf, 2015). this is because public universities are characterized by many professors engaged in scientific research, sourcing for scholarships and funding that are made available to students (barral, ribeiro and canever, 2018). the influence of professors could be stronger than that of friends, family or other networks, hindering the process of developing teis. students in public universities value advice from professors more than advice from peers, while in private universities with small numbers of professors, advice from peers significantly influences their teis. the us was found to be directly related to sn for both public and private university students and indirectly related to tei for private university students. this indicates that the us is indirectly related to students' eis, as in similar studies (veracheva, 2018; trivedi, 2016; rosique-blasco et al., 2016). this can be attributed to the fact that private universities provide advice to students; access to well-developed infrastructure, finance, innovation centers and laboratories; good conditions for research; and competition for business ideas increases their social pressure expectations, which then influences their teis. however, there were no significant relationships between us, ate and pbc for public and private university students. these results are contrary to the findings of previous studies that have reported a positive relationship between the antecedents of eis (ate and pbc) and eis (said et.al., 2021; nguyen, 2020; ajum, ramzani and nazer, 2019; karimi et.al., 2019; gieure et.al., 2019; karimi et.al., 2014; linan and chen, 2009) and can be linked to a negative evaluation of us provided to students, which results in failure to stimulate the tpb elements. fishbein and ajzen described tpb elements as elements that are not intrinsic, but something that individuals develop during their daily encounters. public and private universities have different environmental setups that may influence students' eis differently (barral et.al., 2018). mixed results have been reported in this study. ue has been reported to have a direct impact on ate, sn and pbc for public university students and no relationships have been found for private universities. regarding students' teis, an indirect relationship was observed through ate and pbc for both private and private universities, and through sn for private universities. the results suggest that students in public universities have a positive evaluation of university environmental variables (encouragement to pursue their business ideas, interaction with idea champions and role models, exposure to entrepreneurship education, access to volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.312 | http://emaj.pitt.edu clement mwaanga, edwin moyo, kelly chungu emerging markets journal page |19| resources and infrastructure that support venture creation), which results in a positive evaluation of technology entrepreneurship behavior. in addition, their perception of the available factors increased their confidence and ability to start technology-related enterprises. these findings support those of recent studies (maheshwari, 2022; martinez-clement et.al., 2018; gieure, 2018; kabok et.al., 2017). tm was not found to be related to ate, sn, pbc or teis. therefore, there is no indirect relationship between tm and teis in both public and private universities. this may be because the content of the programs developed and the methods of delivery being used are not effective in developing technology entrepreneurial intentions or the focus is on theories (yordanova, 2021). when students are exposed to practical business sessions, computer games, simulations, workshops and other practical learning activities, they develop positive attitudes towards business venture creation. several recent studies have stressed the significance of employing practical-based teaching methods to stimulate the development of teis among students (samsone et.al., 2021; onjewu et.al., 2021; fiore et.al., 2019; compose et.al., 2017). viii. practical implications these findings have several implications for educators and policymakers. this study demonstrates the importance of extending the tpb by including environmental variables in exploring teis. by so doing, the study has made a significant contribution to the body of literature by testing the applicability of the ajzen (1991) tpb model in different contexts (karimi, 2017; gupta, javadian and jalili, 2014) specifically in the zambian context. the findings of this study have reported that stem students' assessment of social pressure from friends, family and other networks did not influence teis. this indicates that there is a need to change students' perceptions of social pressure at public universities in zambia. for example, karimi et.al. (2017) stressed the need for students to make social or normative considerations and pay attention to other people's opinions to stimulate their eis development. since public universities are characterized by a large number of professors, they should take a leading role in mentoring and influencing students to engage in entrepreneurial behaviors (yordanova, 2021). policymakers and educators should see that professors and other academicians provide business advice to students and ensure that they value technopreneurship as a career option, in addition to conducting scientific research. university support-related factors were positively related to the teis of students in private universities. providing well-organized and structured business support to stem students that meets their technopreneurship expectations and needs increases their chances of establishing technology-related enterprises. according to mustafa et.al. (2016), providing university support to students increases their entrepreneurship knowledge, skills and confidence in engaging in entrepreneurial activities. therefore, policymakers and educators should ensure that policies and programs are developed and implemented in public universities that will strengthen the education support offered to students, concept development and other business development support services to promote the formation of teis among stem students. the implementation of such policies will increase innovation and the creation of technology-related enterprises (low and isserman, 2015). given that ue plays a significant role in the formation of teis of stem students in both private and public universities in zambia, more attention from policymakers and educators is needed to enhance university environmental variables. although the university environment does not influence the ei of students in public and private universities differently, the entire environment alone is not adequate (barral et.al., 2017) hence, there is a need to develop programs to support the university environment, such as the formation of entrepreneurship clubs for students, inviting investors to partner with students' projects and organizing technology fairs for stem students. tm as an environmental variable was not positively related to the teis of stem students in either the public or private sector. this implies that the teaching methods utilized in both public and private universities in zambia are not effective in influencing ei, mostly theoretically. employing project-based and action-based teaching methods has proven effective in influencing the formation of students' eis (secundo et.al., 2020). policymakers and educators should revise the curricula to ensure that the content focuses on entrepreneurship development and is suitable as a practical approach to teaching stem students. sansone et.al. (2021) argued that the use of practical tms has a strong influence on behavior. ix. conclusion and recommendations studies on technopreneurship have received much attention among scholars and policymakers because of the significant role technopreneurship plays in socioeconomic development (hoque, awang and siddiqui, 2017). more studies on technopreneurship are required to gain an in-depth understanding of the process of teis among stem students and increase the formation of technology-related enterprises. the results of this study indicate a positive interaction between ajzen’s (1991) tpb variables (ate, sn, and pbc) and teis for private university students, while ate and pbc reported a positive association with teis for public university students. furthermore, the us and ue had a positive influence on the teis of stem students in private universities, while the teis of students in public universities were only influenced by ue. tm did not influence the teis of stem students in either public or private universities in zambia. similar to other studies, this study had several limitations. first, the sample size was not representative of the stem student population in zambia. this makes the findings more generalizable. future research should consider increasing the number of public and private university stem students participating in the study to generalize the findings. second, they used a single source and method to collect primary data prone to errors and bias. therefore, caution should be exercised when interpreting these results. future research should employ a mixed method (surveys and interviews) to triangulate the results. policymakers and educators should conduct interviews. finally, in this study, the tpb model was extended and validated by incorporating environmental factors only. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.312 | http://emaj.pitt.edu university-related factors influencing technological entrepreneurial intentions of science, technology, engineering and mathematics (stem) students: a comparative study of private and public universities page |20| emerging markets journal future studies should use an integrated model that includes personality and moderating variables that may influence teis. references ajzen, i. (1991). the theory of planned behavior. organizational behavior and human decision processes, 50(2), 179-211. ajzen, i. (2011). design and evaluation guided by the theory of planned behavior. socpsychol eval, guilford publications, 74-100. aloulou, w. j. (2016). predicting entrepreneurial intentions of final year saudi university business students by applying the theory of planned behavior. journal of small business and enterprise development, 23(4), 1142-1164. alves, a. c., fischer, b., vonortas, n. s. and queiroz, s. r. r. d. (2019). configurations of knowledgeintensive entrepreneurial ecosystems. revista de administração de empresas, 59(1), 242-257. agolla, j. e., monametsi, g. l. and phera, p. (2019). antecedents of entrepreneurial intentions among business students at a tertiary institution. asia pacific journal of innovation and entrepreneurship 13(2), 138-152. andré cherubini, a., fischer, b., schaeffer, p. r. and queiroz, s (2019). determinants of student entrepreneurship: an assessment of higher education institutions in brazil. innovation & management review, 16 (1), 96–117. anjum, t., ramzani, s. r. and nazar, n. (2019). antecedents of entrepreneurial intentions: a study of business students from universities in pakistan. international journal of business and psychology, 1(2), 72-88. arrighetti, a., caricati, l., landini, f. and monacelli, n. (2016). the entrepreneurial intention in the time of crisis: a field study. international journal of entrepreneurial behavior & research, 22(6), 835-859. barba-sánchez, v., mitre-aranda, m. and del bríogonzález, j. (2022). the entrepreneurial the intention of university students: an environmental perspective. european research on management and business economics 28(2), 100184. bailetti, t. (2012). technology entrepreneurship: overview, definition, and distinctive aspects. technology innovation management review, 2(2), 5-12. barral, m. r. m., ribeiro, f. g. and canever, m. d. (2018). influence of the university environment on the entrepreneurial intention of public and private universities. rausp management journal 53 (1), 122-133. baubonienė, ž., kyong, h. h., puksas, a. and malinauskienė, e. (2019). factors influencing student entrepreneurship intentions: the case of lithuanian and south korean universities. entrepreneurship and sustainability issues 6(2), 854-871. boh, w. f., de-haan, u. and strom, r. (2016). university technology transfer through entrepreneurship: faculty and students in spinoffs. the journal of technology transfer 41 (1), 661-669. boubker, o., arroud, m. and ouajdouni, a. (2021). entrepreneurship education versus management students’ entrepreneurial intentions. a plssem approach. the international journal of management education, 19(1), 100450. bruton, g. d., ahlstrom, d. and obloj, k. (2008). entrepreneurship in emerging economies: where are we today, and where should the research go in the future? entrepreneurship theory and practice, 32(1), 1-14. buli, b. m. and yesuf, w. m. (2015). determinants of entrepreneurial intentions: technical-vocational education and training of students in ethiopia. education+ training. 57 (8/9), 891-907. campos, f., frese, m., goldstein, m., iacovone, l., johnson, h. c., mckenzie, d. and mensmann, m. (2017). teaching personal initiative beats traditional training in boosting small businesses in west africa. science, 357(6357), 1287-1290. dornelas, j. c. a. (2005). entrepreneurship: turning ideas into business, (2nd ed.) rio de janeiro: elsevier. farrukh, m., alzubi, y., shahzad, i. a., waheed, a. and kanwal, n. (2018). entrepreneurial intentions: the role of personality traits from the perspective of the theory of planned behavior. asia pacific journal of innovation and entrepreneurship, 12 (3), 399-414. fiore, eleonora, guiliano sansone, and emilio paolucci. (2019). entrepreneurship education in a multidisciplinary environment: evidence from an entrepreneurship programme held in turin. administrative sciences, 9, 28. fishbein, m. and ajzen, i. (2010). “predicting and changing behavior: the reasoned action approach. new york. psychology press. taylor and francis. franke, n. and lüthje, c. (2004). entrepreneurial intentions of business students-a benchmarking study. international journal of innovation and technology management, 1(03), 269-288. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.312 | http://emaj.pitt.edu clement mwaanga, edwin moyo, kelly chungu emerging markets journal page |21| gieure, c., benavides-espinosa, m. d. m. and roigdobón, s. (2019). entrepreneurial intentions in the international university environment. international journal of entrepreneurial behavior & research 25(8), 1605-1620. gupta, v. k., javadian, g. and jalili, n. (2014). role of entrepreneur gender and management style in influencing perceptions and behaviors of recruits: evidence from the islamic republic of iran. journal of international entrepreneurship 12 (1), 85-109. hair, j. f., black, w. c., babin, b. j. and anderson, r. e. (2010). multivariate data analysis: global edition. hoque, a. s. m. m., awang, z. and siddiqui, b. a. (2017). technopreneurial intention among university students of business courses in malaysia: structural equation modelling. international journal of entrepreneurship and small & medium enterprise (ijesme), 4(7), 116. hussain, s. and imran malik, m. (2018). towards nurturing the entrepreneurial intentions of neglected female business students in pakistan through their proactive personality, selfefficacy, and university support factors. asia pacific journal of innovation and entrepreneurship 12(3), 363-378. iakovleva, t., kolvereid, l. and stephan, u. (2011). entrepreneurial intentions in developing and developed countries. education+ training, 53(5), 353-370. kabók, j., radišić, s. and kuzmanović, b. (2017), “cluster analysis of higher education competitiveness in selected european countries,” economic research-ekonomska istraživanja, 30 (1),845-857. karimi, s., ja biemans, h., lans, t., chizari, m. and mulder, m. (2014). effects of role models and gender on students’ entrepreneurial intentions. european journal of training and development, 38(8), 694-727. karimi, s., biemans, h. j., naderi mahdei, k., lans, t., chizari, m. and mulder, m. (2017). testing the relationship between personality characteristics, contextual factors, and entrepreneurial intentions in a developing country. international journal of psychology, 52(3), 227-240. karimi, s.,yaghoubi farani, a., izadi, n. and ataei, p. (2019). effect of virtual social networks on the entrepreneurial behavior of agricultural students in iran. applied economics 51(21), 2326-2335. koe, w. l., alias, n. e., ismail, s. and mahphoth, m. h. (2018). a suggested model for studying technopreneurial intention in malaysia. kne social sciences, 3(10), 788-796. krueger jr, n. f., reilly, m. d. and carsrud, a. l. (2000). competing models of entrepreneurial intentions. journal of business venturing, 15(56), 411-432. lu, g., song, y. and pan, b. (2021). how does university entrepreneurship support affects college students’ entrepreneurial intention: an empirical analysis from china. sustainability 13(6), 3224. liu, x., lin, c., zhao, g. and zhao, d. (2019). research on the effects of entrepreneurial education, and entrepreneurial self-efficacy in college students’ entrepreneurial intentions. frontiers in psychology 10, 869. liñán, f. and chen, y. w. (2009). development and cross-cultural application of a specific instrument to measure entrepreneurial intentions. entrepreneurship theory and practice, 33(3), 593-617. liñán, f. and fayolle, a (2015). a systematic literature review on entrepreneurial intentions: citation, thematic analyses, and research agenda. international entrepreneurship and management journal 11 (1), 907-933. low, s. a. and isserman, a. m. (2015). where are the innovative entrepreneurs? identifying innovative industries and measure innovative entrepreneurship. international regional science review 38(2), 171-201. lüthje, c. and franke, n. (2003). the ‘making of an entrepreneur: testing a model of entrepreneurial intent among engineering students at mit. r & d management, 33(2), 135-147. maheshwari, g., kha, k. l. and arokiasamy, a. r. a. (2022). factors affecting students’ entrepreneurial intentions: a systematic review (2005–2022) for future directions in theory and practice. management review quarterly, 1-68. martínez-climent, c., zorio-grima, a. and ribeirosoriano, d. (2018), “financial return crowdfunding: literature review and bibliometric analysis,” international entrepreneurship and management journal, 14 (3), 527-553. minola, t., donina, d. and meoli, m. (2016). students climbing the entrepreneurial ladder: does university internationalization pay off? small business economics, 47(1), 565-587. mosey, s. (2016). teaching and research opportunities in technology entrepreneurship. technovation, 57, 43-44. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.312 | http://emaj.pitt.edu university-related factors influencing technological entrepreneurial intentions of science, technology, engineering and mathematics (stem) students: a comparative study of private and public universities page |22| emerging markets journal mustafa, m. j., hernandez, e., mahon, c. and chee, l. k. (2016). entrepreneurial intentions of university students in an emerging economy: the influence of university support and proactive personality on students’ entrepreneurial intentions. journal of entrepreneurship in emerging economies, 8(2), 162-179. nabi, g., holden, r. and walmsley, a. (2010). entrepreneurial intentions among students towards a re‐focused research agenda. journal of small business and enterprise development, 17(4), 537-551. nacu, c. m. and avasilcăi, s. (2014). technological entrepreneurship: success factors as perceived by potential young entrepreneurs. in advanced materials research, 837(1), 639-644. trans tech publications, ltd. nguyen, t. t. (2020). the impact of access to finance and environmental factors: the mediating role of entrepreneurial behavioral control on entrepreneurial intention. entrepreneurial business and economics review 8(2), 127-140. naushad, m. (2018). a study on the antecedents of entrepreneurial intentions among saudi students. entrepreneurship and sustainability issues, 5(3), 600-617. nathani, n. and dwivedi, g. (2019). influence of technology entrepreneurship on entrepreneurial intentions: cross-country analysis. proceedings of the 10th international conference on digital strategies for organizational success. nazarov, m., butryumova, n. and sidorov, d. (2017). development of technology entrepreneurship in a transition economy: an example of a russian region with high scientific potential. dubrovnik international economic meeting, 3 (1), 89-104. neck, m. h. and greene, g. p., (2011). entrepreneurship education: known words and new frontiers. journal of small business management, 49(1), 55-70. north, d. c. (2005). understanding the process of economic change. princeton, nj: princeton university press. nunnally, j. c., & bernstein, i. h. (1994). psychometric theory. new york: mcgraw-hill. nuseir, m.t, basheer, m. f. and aljumah, a. (2020). antecedents of entrepreneurial intentions in the smart city of neom saudi arabia: does entrepreneurial education on artificial intelligence matter? cogent business & management, 7(1), 1825041. onjewu, a. e., mohamed, y. h. and witold, n. (2021). the effect of entrepreneurship education in nascent entrepreneurship. industry and higher education, 35 (1), 09504222211014038. perim, m. l. s. (2012). teaching comparison and entrepreneurship practice in public and private higher education institutions in boa vista. revistade administra¸cão de roraima-rarr, 2(1), 67-87. rosique-blasco, m., madrid-guijarro, a. and garcíapérez-de-lema, d. (2016). entrepreneurial skills and sociocultural factors: an empirical analysis of secondary education students. education+ training,58 (7/8). said, n. m., uthamaputhran, s., zulkiffli, w. f. w., hong, l. m. and hong, c. w. (2021). the mediating effects of entrepreneurial education towards antecedents of entrepreneurial intention among undergraduate students. in the importance of new technologies and entrepreneurship in business development: in the context of economic diversity in developing countries: the impact of new technologies and entrepreneurship on business development. springer international publishing, 2029-2040. sansone, g., ughetto, e. and landoni, p. (2021). entrepreneurial intention: an analysis of the role of student-led entrepreneurial organizations. journal of international entrepreneurship 19(3), 399-433. santos, s. c. and liguori, e. w. (2020). entrepreneurial self-efficacy and intentions: outcome expectations as a mediator and subjective norms as the moderator. international journal of entrepreneurial behavior & research, 26(3), 400-415. saraih, u. n., aris, a. z. z., mutalib, s. a., ahmad, t. s. t., abdullah, s. and amlus, m. h. (2018). the influence of self-efficacy on entrepreneurial intention among engineering students. in matec web of conferences. edp sciences, 1 (150), 05051. saeed, s., yousafzai, s. y. and muffatto, m. (2015). institutional theory and contextual embeddedness of women's entrepreneurial leadership: evidence from 92 countries. journal of small business management, 53(3), 587604. secundo, g., rippa, p. and cerchione, r. (2020). digital academic entrepreneurship: a structured literature review and avenues for the research agenda. technological forecasting and social change 157, 120118. shane, s. and venkataraman, s (2003). guest editors’ introduction to the special issue on technology entrepreneurship research policy, 32, 181-184. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.312 | http://emaj.pitt.edu clement mwaanga, edwin moyo, kelly chungu emerging markets journal page |23| shirokova, g., osiyevskyy, o. and bogatyreva, k. (2016). exploring the intention–behavior link in student entrepreneurship: moderating effects of individual and environmental characteristics. european management journal, 34(4), 386-399. silva, w. and teixeira, r. m. (2013). entrepreneurial intentions of computer students: a comparative study between public and private universities. anais of eati. anais, national meeting of information technology. souitaris, v., zerbinati, s. and al-laham, a. (2007). do entrepreneurship. programmes raise entrepreneurial intentions of science and engineering students. effects of learning, inspiration, and resources. journal of business venturing, 22(4), 566-591. srivastava, s. and misra, r. (2017). exploring antecedents of entrepreneurial intentions of young women in india: a multi-method analysis. journal of entrepreneurship in emerging economies. trivedi, r. (2016). does the university play a significant role in shaping entrepreneurial intention? crosscountry comparative analysis. journal of small business and enterprise development, 23(3), 790-811. yordanova, d. (2021). nascent technology entrepreneurship among bulgarian stem students. administrative sciences, 11, 121. vracheva, v. p., abu-rahma, a. and jacques, p. (2019). effects of context on the entrepreneurial intent of female students from the united arab emirates. education+ training, 61 (6), 700-717. wright, m., donaldm, s. and philippe, m. (2017). an emerging ecosystem for student start-ups. the journal of technology transfer, 42 (1), 909922. wright, m., philippe m, and donald s (2019). student start-ups: the new landscape of academic entrepreneurship. world scientific series on public policy and technological innovation; singapore: world scientific, 1 (1), 1-200. zhang, g., xuebing p. and jun l (2008). technological entrepreneurship and policy environment: a case study in china. journal of small business and enterprise development, 15 (1), 733-751. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu customer based performance of the hotel industry: analysis of service package and brand innovations collins kankam-kwarteng kumasi technical university, ghana | e-mail: colkann@gmail.com ofosu amofah ho technical university, ghana | e-mail: amofahofosu@gmail.com francis osei kumasi technical university, ghana | e-mail: oseifrancis1234@gmail.com barbara osman takoradi technical university, ghana | e-mail: adjoabo5@yahoo.com abstract this study aims to examine the influence of service package and brand innovation on customer relational performance and customer profit performance of the hotel industry. data were collected from 112 hotel operators. pls-sem was used to derive the path coefficient (β) and t statistics to determine the path relationship between service packages, brand innovation, customer based relational performance and customer based profit performance. this study shows that both service package and brand innovation have influence on both customer relational performance and customer profit performance. brand innovation does not moderate the relationship between service package and customer relational performance of the hotel industry. the study findings may not be generalizable to other categories of the restaurant industry because of the relatively small sample size and the respondents selected from limited geographical area. the findings, however, will help hotel operators to implement critical packaging operations of the hotel services and improved brand innovations to elicit higher customers’ based performance. unlike the previous studies on marketing performance, this study examines the combined effect of service package and brand innovation on customer based relational performance and customer based profit performance of the hotels. keywords: service package, brand innovation, customer relational performance, hotel new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.260 | http://emaj.pitt.edu | mailto:amofahofosu@gmail.com mailto:oseifrancis1234@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.260 | http://emaj.pitt.edu customer based performance of the hotel industry: analysis of service package and brand innovations page |10| emerging markets journal customer based performance of the hotel industry: analysis of service package and brand innovations collins kankam-kwarteng ofosu amofah francis osei barbara osman i. introduction the contribution of the tourism sector in every country is a concern to key stakeholders in the industries that define the tourism sector (andersson and getz, 2009; demiroz and ongan, 2005). the tourism sector’s current role in expanding economic opportunities present a paradox (ashley et al., 2007; brida et al., 2007). revolving this paradox offers tourism organizations the potential to develop and play its role towards achieving greater national development. such an orientation has prompted hotel operators’ attention on the need to improve on their performance by exploiting the potential of increasing their client base (molina-azorín et al., 2015; mcmanus, 2013). in the wake of growing competition and the pressure involved in providing customer satisfaction, ceos of most hotels are confronted with the reality of adopting innovations (becerra et al., 2013). customer relational satisfaction is the major objective of businesses in the hotel industry (satti et al., 2020; berezina et al., 2016; theodosiou and katsikea, 2012). however, to ensure performance through satisfied customers, it is required for service-firms including hotels, to understand and meet the needs of their customers. it has, therefore, become imperative for hotels to be highly responsive to the ever changing customer demands and their expectations, and seek to provide high quality service that is different in order to ensure higher customer based performance (cheng et al., 2019). in order to achieve this, hotels always seek to package their services in a manner that is close to the variety of expectations and needs their potential customers might have (mohsin and lockyer, 2010). according to ladhari et al. (2011), surviving and thriving in the competitive hotel industry can only be made possible when hotels obligate to exercise good customer service in their operations. innovations are required to improve the outcomes of firms’ service package; which can lead to a higher customer based performance (campo et al., 2014; hendrayati, and gaffar, 2016). this assertion is put forward by zomerdijk and voss (2010), who argue that ensuring quality delivery through providing an enthralling service package is one way of promoting client acquisition. the improved service package leads to increased levels of client loyalty and satisfaction, which ultimately leads to increased profitability (akoğlan kozak and acar gürel, 2015). generally service providers including hotels are recognizing the importance of addressing client needs and expectations in order to increase service quality and profitability (mohsin and lockyer, 2010). with strong innovativeness, hotels can continuously upgrade the quality of their service package and its delivery; which will likely increase the perception and experiences of the customers (martĺnez-ros and orfila-sintes, 2009; orfila-sintes and mattsson, 2009). despite the importance of innovation in the field of marketing, literature has not given much attention to the role of brand innovation in the service package and customer relations literature. according to accra and kumasi, the capital and the second capital cities of ghana respectively are experiencing a growth in hotel industry (amoako et al., 2019; kankam-kwarteng et al., 2019), it as an opportunistic response to hospitality researchers. the tourism industry in ghana is projected to grow at an average of 4.1% over the next two decades (ghana investment promotion center, 2010). this growth suggests a growth in the business of hotels because the more tourists who visit ghana, the more hotels they will need to lodge in. this growth also implies a growth in the revenue of the entire hotel industry, especially since hotels account for about a third of the total revenue from tourism. the relative stability of the ghanaian political system, coupled with the continuous growth of the economy has served as a catalyst for the growth of the hotel sector. it is quite alarming that with so many hotels in the country, only few of them are well promoted. the researchers believe that service packages and brand innovations can contribute to customer relational performance which has a long term effect of the survival on the hotel industry. the purpose of the study, therefore, is to examine the moderating effects of brand innovations on the relationship between service package and customer relational performance in the hotel industry in ghana. ii. literature review and hypothesis development effects of brand innovation on customer based performance according to literature, the desire to provide an enthralling service experience to customers in order to increase market value and competitiveness, has necessitated the drive towards brand innovations (grigoriou et al., 2016; ottenbacher and gnoth, 2005). contemporary organizations have generally pursued innovations in order to provide superior valued services and products to the market (wikhamn et al., 2018; orfilasintes and mattsson, 2009; ottenbacher and gnoth, 2005). the significant and positive impact of brand innovations is well recognized in extant literature. researchers (mattsson and orfila‐sintes, 2014), explain that innovativeness have positive effects on service quality, consumer preference, enterprise’ market value and share, employee productivity and customers satisfaction retention (ballantine, 2005). a brand is expected to have effect on consumer behavior towards consumption by means of presenting innovations in services that encompass unique attributes likened to other brands (grigoriou et al., 2016; paek and lee, 2018). in an environment with diverse brands, firms’ innovativeness https://www.emerald.com/insight/search?q=asad%20mohsin https://www.emerald.com/insight/search?q=tim%20lockyer https://www.emerald.com/insight/search?q=tim%20lockyer https://www.emerald.com/insight/search?q=asad%20mohsin https://www.emerald.com/insight/search?q=tim%20lockyer volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.260 | http://emaj.pitt.edu collins kankam-kwarteng, ofosu amofah, francis osei, barbara osman emerging markets journal | p a g e 1 1 represent a key element for the enterprise success (kiani et al., 2019; ottenbacher and gnoth, 2005). improving the quality of the service brand through innovation enhances the quality of the rendered service which leads to a higher customer satisfaction (kankam-kwarteng and donkor, 2016). while many measures compete for attention in evaluating marketing performance, customer-based performance stands out in bagging the usefulness of the enterprise’ marketing operations and is estimated through activities to develop customers’ relationship management and specifically monitoring and evaluating profitability accrued from customers (hankinson, 2012). customer based performance is an important concept that reflects the management’s perceptions of the extent to which the firm has managed to deliver excellence in satisfying, developing and maintaining customers, and profitability analysis which is also an essential indicator for future decision-making (cheraghalizadeh & tümer, 2017; neslin et al., 2006; nwokah, 2008). notwithstanding its significance, brand innovations and their relationship with customer based performances is a major problem confronting the hospitality industry globally (ottenbacher and gnoth, 2005). it can therefore be hypothesized as follows: h1: brand innovation has a positive and significant impact on customer based profit performance. h2: brand innovation has a positive and significant impact on customer relational performance. effects of service package on customer based performance according to literature, the total service experience obtained through the service package has an effect on customer based performance (edvardsson et al., 2005). service packages that focus on providing significant service experiences are likely to prompt customer reactions intentions (akoğlan kozak and acar gürel, 2015; baker et al., 2002). a service package arranged by a hotel at an inclusive price with the provision of transportation, food and lodging services as well as security, recreational and aesthetic services creates a memorable and comfortable atmosphere. there has been a great demand for more personalized services that are specifically tailored to the individual customer and business requirement (odekerken‐schröder et al., 2003). due to the complexities in consumer preferences, practitioners in the hospitality industry including hotels have learnt to develop creative ways of bundling different compartment of their services to their customers (fischer et al., 2017). the form and nature of service package offered have been geared towards providing an enthralling and complete service experience to clients to meet all the potential needs of customers (shaw et al., 2011). concepts such as customer orientation, staying close to the customers, customer segmentation and niche marketing, customer as co-producer (patel et al., 2013; wikstrom, 1996), value co-production, critical co-developer of knowledge and competence (sivula et al., 1997) and coopting customer knowledge (gibbert et al., 2001), all point to the much more significant role of customers in business success than ever, which necessitates the focus of customer-based performance. bowie and chang (2005) explain that customers who patronize service package experience hedonistic consumption and enjoyment which significantly influence their general satisfaction; a tool for both profitability and relationship building. thus, it can be hypothesized as follows: h3: service package has a positive and significant effects on customer profit performance h4: service package has a positive and significant effects on customer relational performance. the moderating effect of brand innovation the use of innovation as a moderated component of organization resources was studied in previous research (kankam-kwarteng et al., 2018). according to literature, brand innovation that focuses on providing a memorable service experience compliments the effort of other internal resources to increase customer relationships (kimpakorn and tocquer, 2010; ottenbacher and gnoth, 2005). specifically, the ability of a hotel to implement package of its services such that it enhances the emotive as well as the utilitarian value customer obtain from patronizing these services increases the level of achieving higher customer relations may include innovation capabilities (bowie and chang, 2005). however, orfila-sintes and mattsson (2009) also argue that the ability of hotels to develop new service offerings or upgrade existing brands increases the quality of service offerings. thus it is expected that by engaging in brand innovations, the experiences provided by the service packages will highly improve and thereby boost the extent of customer relations. the implication is that service package offered with strong brand innovations will enrich customer experiences and thereby lead to a higher customer based performance (satti et al., 2020). based on this discussion, it can be hypothesized as follows: h5: brand innovation moderates the relationship between service package and customer based profit performance h6: brand innovation moderates the relationship between service package and customer based relational performance figure 1. conceptual framework source: authors’ own compilation iii. methodology a sample size of 112 hotels in the accra and kumasi were included in this study. the hotel focused brand innovation service package customer-based relational performance customer-based profit performance h1 h4 h2 h6 h3 h5 volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.260 | http://emaj.pitt.edu customer based performance of the hotel industry: analysis of service package and brand innovations page |12| emerging markets journal questionnaire was formatted into three sub-sections. the questionnaire was designed using the ‘likert scale’ answering method. responses to these questions were measured by a five-point likert scale “1” denoting strongly agree, to “5” denoting strongly disagree. the questionnaire was designed focusing on the hotels and how their operations relating to service package and brand innovation influence customer relational performance. the participants were selected based on willingness to return the questionnaire. 150 questionnaires were sent out to the targeted hotels. the 112 questionnaires which were returned after a number of visits to the hotels were used for the analysis. the data were analyzed using both descriptive and inferential analytical methods. the analysis was conducted in a stepwise manner based on smartpls procedures. measures the brand innovation scale was composed of 4items that asked the following listed statements: brand innovation leads to services that are difficult to substitute with older services, brand innovation is a breakthrough innovation activity, brand innovation is an improvement over previous technology and brand innovation characterizes a major advance in our technological subsystem (gatignon et al., 2002). service package was measured using 7 items which were adapted and refined from previous studies on service package (baker et al., 2002; akoğlan kozak and acar gürel, 2015; odekerken‐ schröder et al., 2003) that are motivators for packaging, components in the service package, customer experience in the service package, pricing influenced by service package, customer delight of the service package, service package encourage customer to repeat purchase. customer based performance has been categorized into two dimensions; customer based profit performance and customer based relational performance. customer based profit performance dimension was measured using 5 items; identifying profitable customers, acquiring profitable customers, retaining profitable customers and converting unprofitable customers to profitable ones. customer based relational performance dimension was based on 5-items: customers are always happy with our services, minimum customer complaints about our services, referrals from our customers, good customer retention rate, customers are loyal and high customer commendation (ramani and kumar, 2008; chang et al., 2014; patel et al., 2013). pls-sem measurement model validation in order to estimate the internal reliability, this study performed cronbach’s alpha (ca), composite reliability (cr) and average variance extracted (ave). reliability coefficient indicates how well the items in a set are positively related to each another. gerrard et al. (2006) explain that cronbach’s alpha should be 0.70. researchers (see; kline, 2000; george and mallery, 2003) also argue that cronbach’s alpha for establishing the internal consistency reliability should be based on: unacceptable (α<0.5), poor (0.5<α<0.6), acceptable (0.6<α<0.7), good (0.7<α<0.9) and excellent (α>0.9). the variables included service package 7-items, brand innovation 6-items, customer-based profit performance 5-items and customer-based relational performance 5-items. the cronbach's alpha was shown as service package =0.919, brand innovation =0.876, customer-based profit performance=0.870 and customer-based relational performance =0.851. (see; table 1). composite reliability denotes the ability of the measurement instrument or scale to produce results which are consistent if replicated in another study. the composite reliability value showed that service package = 0.935, brand innovation = 0.907, customer-based profit performance =0.906 and customer-based relational performance =0.894. similarly, the average variance extracted values exhibited 0.672, 0.622, 0.659, 0.628 for service package, brand innovation, customer based profit performance and customer based relational performance respectively, showing required convergent validity of estimates since they are well above the recommended 0.50 estimate. hence, reliability examines the instrument’s consistency over a diversity of different conditions. table 1: reliability and validity test results construct items loadings ca rho_a cr ave brand innovation bi1 0.700 0.876 0.883 0.907 0.622 bi2 0.707 bi3 0.840 bi4 0.835 bi5 0.863 bi6 0.769 service package sp1 0.790 0.919 0.922 0.935 0.672 sp2 0.822 sp3 0.808 sp4 0.819 sp5 0.804 sp6 0.848 sp7 0.845 customerbased profit performance cbpp1 0.784 0.870 0.872 0.906 0.659 cbpp2 0.776 cbpp3 0.843 cbpp4 0.820 cbpp5 0.834 customerbased relational performance cbrp1 0.860 0.851 0.859 0.894 0.628 cbrp2 0.774 cbrp3 0.772 cbrp4 0.830 cbrp5 0.719 *note: cronbach’s alpha (ca); composite reliability (cr); average variance extracted (ave) source: smartpls software output discriminant validity checks whether the items chosen to measure a variable fit the intended purpose. the fornell-larcker (1981) criterion was examined to determine the discriminant validity. with the fornelllarcker criterion, measures exhibited the required discriminant validity because constructs demonstrated a greater variance with items that measure the construct than with items of other constructs. the square root of the ave for each factor (diagonal values) was revealed as higher than the pair-wise correlation between the factors (offdiagonal values) (table 2). the cross loadings also exhibited that the items loaded higher on their respective constructs above 0.60 than on another construct (table 2). 4 items were deleted from brand innovation construct because they showed low loadings below 0.60. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.260 | http://emaj.pitt.edu collins kankam-kwarteng, ofosu amofah, francis osei, barbara osman emerging markets journal | p a g e 1 3 table 2: discriminant validity: fornell and larcker criterion variables bi cbpp cbrp sp brand innovation 0.788 service package 0.774 0.812 customer-based profit performance 0.627 0.627 0.793 customer-based relational performance 0.536 0.518 0.540 0.820 *note: values on the diagonal are the square roots of the average variance extracted (ave) for each factor source: smartpls software output following bagozzi and yi (2012), some approximations fit heuristics were also estimated to exhibit additional information on model fit and the estimates is between acceptable to excellent fit. a sixfactor confirmatory factor analysis model fits the data well, with estimates attaining the specific benchmarks observed in table iii which exhibits a chi-square = 480.452, nfi = 0.799, and srmr = 0.072. all the constructs were significant and positive as shown in table 3. table 3: model fit indices saturated model estimated model srmr 0.069 0.072 d_uls 1.311 1.431 d_g 0.590 0.602 chi-square 473.971 480.452 nfi 0.801 0.799 source: smartpls software output iv. results demographic information the demographic information of respondents and firms (see table 4) shows that the majority of the hotels sampled have operated for more than 10 years. this is evident by the fact that 58.0% of the total sample of hotels reported having existed for more than a decade. in terms of size, it was gathered that majority of the sampled hotels are medium sized with 21-40 workers. the report showed a share of 45.5% of the total sample. focusing on individual respondents’ attributes, table 4 shows that the majority of respondents are males (70.5%). female participants represented 29.5% of the sample. with reference to age, the demographic analysis shows that a significant proportion of participants are 30 years and above. however the age group with the largest representation is 30 to 39 (42.9%). it was also identified that the average work experience of the respondents is approximately 5 years. table 4: firm and respondent background information n % firm age less than 10 years 47 42.0 10 years and above 65 58.0 firm size 5-20 40 35.7 21-40 51 45.5 41+ 21 18.8 respondent’s gender male 79 70.5 female 33 29.5 respondent’s age (years) 20 to 29 15 13.4 30 to 39 48 42.9 40 to 49 40 35.7 50+ 9 8.0 respondent’s position non-manager 44 39.2 manager 68 60.8 min max mean sd firm age (years) 1 41 10.66 7.727 respondent’s experience (years) 1 18 4.88 3.100 source: smartpls software output coefficients of determination (r2) and adjusted r2 (r2 adj the coefficient of determinant (r2) exhibits the precision of prediction of constructs in structural frameworks. the pls–sem procedure aims at maximizing the r2 estimates of endogenous latent variables in the path structure. r2 estimates are weak, moderate and substantial if their values are 0.25, 0.50 or 0.75, respectively. the r2 adj. estimate reduces the r2 value to compensate for including non-significant exogenous latent variables in order to increase the explained variance r2. the model illustrates moderate predictive accuracy (r2 adjusted) value of 0.609 customer-based profit performance and relatively weak predictive accuracy (r2 adj) estimate of 0.441 toward customer-based relational performance as shown in table 5. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.260 | http://emaj.pitt.edu customer based performance of the hotel industry: analysis of service package and brand innovations page |14| emerging markets journal table 5: coefficients of determination (r2) and r2 adjusted dependent variables r square r square adjusted customer-based profit performance 0.617 0.609 customer-based relational performance 0.452 0.441 source: smartpls software output direct effects of service package and brand innovation the pls-sem was utilized to estimate the four hypotheses for the study, which examines the interlinkages between service package, brand innovation, customer-based profit performance and customer-based relational performance. the bootstrap procedure was run to test path significance and t-values (see table 5). this was followed by the pls algorithm to determine the path coefficient (β). the structural model supported h1, h2, h3 and h4. in hypothesis 1, the study posited that service package has a significant positive effect on customer profit based performance in the hotel industry. the results indicate that service package has a significant and positive effect on customer-based profit performance (bi -> cbpp; β = 0.676, t=11.723, p < 0.000, s.). all the indicators, path coefficient, t-values and the p values show a significant of service package on customer-based profit performance in the hotel industry (see table 5). thus hypothesis (h1) which states that there is a positive relationship between service package and customer-based profit performance is supported. in h2 the study examines the effect of brand innovations on customer relational performance in the hotel industry. the results revealed a positive and significant effect of brand innovation on customer-based relational performance (bi -> cbrp; β = 0.484, t=6.407, p < 0.000, s.), (see figure 2). the implication is that brand innovation activities is beneficial to the hotel industry as it affords the hotel the opportunity to achieve higher customer-based relational performance. thus hypothesis (h2) is also supported. in h3 the study examines the effect of service package on customer-based profit performance in the hotel industry. the results revealed a positive and significant effect of service package on customer-based profit performance (sp-> cbpp; β = 0.161, t=2.547, p < 0.011, s.), (see figure 2). the implication is that service package activities is beneficial to the hotel industry as it affords the hotel the opportunity to achieve higher customer-based profit performance. thus hypothesis (h3) is also supported. in h4 the study examines the effect of service package on customer-based relational performance in the hotel industry. the results revealed a positive and significant effect of service package on customer-based relational performance (sp -> cbrp; β = 0.278, t=3.386, p < 0.001, s.), (see figure 2). the implication is that service package activities is beneficial to the hotel industry as it affords it the opportunity to achieve higher customer-based relational performance. thus hypothesis (h4) is also supported. table 6: path significance of the structural model paths origina l sample (o) sample mean (m) standar d deviati on (stde v) t statistics (|o/stdev |) pvalues sig. bi -> cbpp 0.676 0.678 0.058 11.723 0.000 yes bi -> cbrp 0.484 0.486 0.076 6.407 0.000 yes sp-> cbpp 0.161 0.161 0.063 2.547 0.011 yes sp -> cbrp 0.278 0.278 0.082 3.386 0.001 yes sp*bi> cbpp -0.044 -0.044 0.049 0.897 0.370 no sp*bi> cbrp 0.022 0.019 0.054 0.413 0.679 no *note: moderation effect (service package * brand innovation) source: smartpls software output moderation analysis the h5 focused on examining the moderation effect of brand innovation on the relationship between service package and customer-based profit performance in the hotel industry. based on the pls-sem product indicator procedure for moderation analysis, it was found that the interaction of brand innovation and service package has no significant positive effect on customerbased profit performance (sp x bi→ cbpp; β = -0.044, t=0.897 p < 0.370, ns.), (see figure 2). the implication is that brand innovation decreases or reduces the negative effect of service package on customer-based profit performance in the hotel industry. the conclusion is that hypothesis (h5) which states that brand innovation negatively moderates the relationship between service package and customer-based profit performance is rejected. the h6 focused on examining the moderation effect of brand innovation on the relationship between service package and customer-based relational performance in the hotel industry. based on the pls-sem product indicator procedure for moderation analysis, it was found that the moderation of brand innovation has no significant positive effect on customer-based relational performance of the hotel industry (sp x bi→ cbpp; β = 0.022, t=0.413 p < 0.679, ns.), (see figure 2). the conclusion is that hypothesis (h6) which states that brand innovation moderates the relationship between service package and customer-based relational performance is rejected. thus, all the moderation hypotheses were rejected as shown in table 6. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.260 | http://emaj.pitt.edu collins kankam-kwarteng, ofosu amofah, francis osei, barbara osman emerging markets journal | p a g e 1 5 figure 2. path significance v. discussion this study examined the relationships between service package, brand innovation and customer based performance in the hotel industry in ghana. customer based performance was conceptualized into customer based profit performance and customer based relational performance (newell 2003; prahalad and ramaswamy 2004; brown et al., 2005; ramani, and kumar, 2008). the study was necessitated by the limited amount of research work focusing on the effect of service package in the hospitality industry and the moderating role of brand innovations and their contribution towards the development of the tourism industry. the effective packaging of the hotel services has a significant effect on achieving both customer profit performance and customer relational performance of firms in the hotel industry. according to literature, customers demand services to satisfy their needs. the brand innovation was also found to have significant effect on customer profit performance and customer relational performance in the hotel industry. it has been emphasized that the constant use of service package provides the contemporary businesses the capacity to meet the needs of its customers (mohsin and lockyer, 2010; andersson et al., 2007). bowie and chang (2005) found that service package, experience hedonistic consumption and enjoyment significantly influence overall satisfaction. according to bowie and chang (2005) and nawi et al. (2019), the successful deployment of service packages provides positive effects or functional improvement to the welfare of customers. it was also found that hotels that innovate or most likely to recreate or revise their branding activities are most likely to obtain more satisfied customers than those which do not (paek and lee, 2018; upadhyaya, hakeem, and chavan, 2013; ottenbacher and gnoth, 2005). contemporary organizations have generally pursued innovation in order to provide superior valued services and products to the market. typically, innovative organizations constantly engage the market in order to obtain reliable feedback from customers and to find out the preferences and needs of customers (kimpakorn and tocquer, 2010). according to edvardsson et al. (2005), due to the intense competition in the service industry, it is imperative for hotels to effectively monitor and advance the value of service provided. improving the quality of the service brand through innovation according to the findings of this study enhances the quality of rendered or delivered service to customer which leads to a higher customer profit performance and customer relational performance (kankam-kwarteng and donkor, 2016). moreover, it was detected that brand innovations leverages the effect of service package on both customer based profit performance and customer based relational performance. according to orfila-sintes and mattsson, (2009) the ability of hotels to develop new service offerings or upgrade existing brands increases the quality of service offerings. thus it is expected that by engaging in brand innovations, (grigoriou et al., 2016) the experiences provided by the service packages will highly improve and thereby boost the extent of customer relational performance of the hotel industry. the implication is that service package offered with strong brand innovations enriches customer experiences and thereby leading to a higher customer profit and customer relational performance. based on the findings of the study, it is important for hotel management to focus on service package and brand innovations if aims to succeed in competitive business market through the achievement of high customer based performance. it is observed that an engagement in effective and suitable package of services will yield a higher customer based performance (customer profit performance and customer relational performance). hotels can package services such as room services, accommodation and restaurant services, recreational activities and health services to excite customers. customer needs are dynamic and the preferences of customer are observed to change, contingent on several factors. it has therefore become imperative for hotels to be highly responsive to the ever changing customer demands and their expectations, and seek to provide high quality service that is different in order to ensure customer relational performance is achieved. in order to do this, hotels always seek to package their services in a manner that is close to the variety of expectations and needs their potential customers might have. this will provide a holistic and enthralling experience to customers. this is because customers are highly likely to patronize hotels that offer service package which actually involve a complex bundle of sub-environments or subsectors including optional tours, room services, restaurants, health and recreational benefits, attractive and serene environment, sports among others. a service package that comprises these attributes is therefore likely to yield a higher customer relational performance. finally, managers and operators should ensure that employees are well trained and understand the various levels of service packages that the hotel expects to provide for their customers. employees should be able to demonstrate personal knowledge in promoting brand innovations of the hotel and how customers are likely to benefit from such initiatives. ensuring that employees are well positioned, and giving the needed attention to critical service innovation elements that will provide improved customer relational performance. this study has some limitations. the sample size used for this work was small and the application of convenient sampling techniques may not be completely representative of developments in the hotel industry. the small sample size may affect the results of this study or limit its capacity to make generalizations. as a result, more research with randomized design and larger sample are suggested for future research in the study area. also the research was designed as cross sectional study. for a volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.260 | http://emaj.pitt.edu customer based performance of the hotel industry: analysis of service package and brand innovations page |16| emerging markets journal more rigorous appreciation of the operational capabilities of the hotel industry, future study into service package, brand innovation and customer based performance (customer profit and customer relational performance) should take longer periods of time or a longitudinal study. this study also reconfirms the importance of delivering service package in the hotel industry, and suggests that practitioners in the hospitality industry move further toward the development. another limitation is that the research bundled all the hotels to determine to study service design and brand innovations across the industry. future research should shed light on such issues as how various categories (budget, guesthouse and star hotels) in the hotel industry actively design their service packages and build brand innovations to excite customers. references akoğlan kozak, m. and acar gürel, d. (2015), “service design in hotels: a conceptual review”, turizam: međunarodni znanstveno-stručni casopis, 63(2), 225-240. amoako, g. k., neequaye, e. k., kutu-adu, s. g., caesar, l. d. and ofori, k. s. (2019), “relationship marketing and customer satisfaction in the ghanaian hospitality industry”, journal of hospitality and tourism insights, vol. 2 no. 4, 326-340. andersson, p., rosenqvist, c. and ashrafi, o. (2007), “mobile innovations in healthcare: customer involvement and the co-creation of value”, international journal of mobile communications, 5(4), 371-388. andersson, t. d., and getz, d. (2009), “tourism as a mixed industry: differences between private, public and not-for-profit festivals”, tourism management, 30(6), 847-856. ashley, c., de brine, p., lehr, a., & wilde, h. (2007), “the role of the tourism sector in expanding economic opportunity”. cambridge, ma: john f. kennedy school of government, harvard university. ballantine, p.w. (2005), "effects of interactivity and product information on consumer satisfaction in an online retail setting", international journal of retail & distribution management, vol. 33 no. 6, pp. 461-471. baker, t., murthy, n. n. and jayaraman, v. (2002), “service package switching in hotel revenue management systems”, decision sciences, 33(1), 109-132. becerra, m., santaló, j. and silva, r. (2013), “being better vs. being different: differentiation, competition, and pricing strategies in the spanish hotel industry”, tourism management, 34, 71-79. berezina, k., bilgihan, a., cobanoglu, c. and okumus, f. (2016), “understanding satisfied and dissatisfied hotel customers: text mining of online hotel reviews”, journal of hospitality marketing & management, 25(1), 1-24. bowie, d. and chang, j. c. (2005), “tourist satisfaction: a view from a mixed international guided package tour”, journal of vacation marketing, 11(4), 303-322. brida, j. g., pereyra, j. s., punzo, l. f., and such-devesa, m. j. (2007), “the economic contribution of tourism sector. in 4th world conference for graduate research in tourism, hospitality and leisure, antalya, turkey, 23-27. campo, s., diaz, a. m., and yagüe, m. j. (2014), “hotel innovation and performance in times of crisis”, international journal of contemporary hospitality management, vol. 26 no. 8, pp. 1292-1311. chang, h. h., wong, k. h., and fang, p. w. (2014), “the effects of customer relationship management relational information processes on customerbased performance”, decision support systems, 66, 146-159. cheng, b.l., gan, c.c., imrie, b.c. and mansori, s. (2019), "service recovery, customer satisfaction and customer loyalty: evidence from malaysia’s hotel industry", international journal of quality and service sciences, vol. 11 no. 2, pp. 187203. cheraghalizadeh, r., and tümer, m. (2017), “the effect of applied resources on competitive advantage in hotels: mediation and moderation analysis”, journal of hospitality and tourism management, 31(june), 265–272. demiroz, d. m., and ongan, s. (2005), “the contribution of tourism to the long-run turkish economic growth”. ekonomický časopis, 9, 880-894. donkor, j., donkor, g. n. a. and kwarteng, c. k. (2018), “strategic planning and performance of smes in ghana: the moderating effect of market dynamism”, asia pacific journal of innovation and entrepreneurship, vol. 12 no. 1, 2018 pp. 62-76 edvardsson, b., gustafsson, a. and roos, i. (2005), “service portraits in service research: a critical review”, international journal of service industry management, vol. 16 no. 1, pp. 107121. fischer, d., stanszus, l., geiger, s., grossman, p. and schrader, u. (2017), “mindfulness and sustainable consumption: a systematic literature review of research approaches and findings”, journal of cleaner production, 162, 544-558. https://www.emerald.com/insight/search?q=paul%20w.%20ballantine https://www.emerald.com/insight/publication/issn/0959-0552 https://www.emerald.com/insight/publication/issn/0959-0552 https://www.emerald.com/insight/search?q=boon%20liat%20cheng https://www.emerald.com/insight/search?q=chin%20chuan%20gan https://www.emerald.com/insight/search?q=brian%20c.%20imrie https://www.emerald.com/insight/search?q=shaheen%20mansori https://www.emerald.com/insight/publication/issn/1756-669x https://www.emerald.com/insight/publication/issn/1756-669x volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.260 | http://emaj.pitt.edu collins kankam-kwarteng, ofosu amofah, francis osei, barbara osman emerging markets journal | p a g e 1 7 fornell, c. and larcker, d. f. (1981), "structural equation models with unobservable variables and measurement error”, algebra and statistics, p. 382-388. gatignon, h., tushman, m.l., smith, w. and anderson, p. (2002), “a structural approach to assessing innovation: construct development of innovation locus, type, and characteristics”, management science, 48(9), 1103-1122. gerrard, m., gibbons, f. x., brody, g. h., murry, v. m., cleveland, m. j. and wills, t. a. (2006), “a theory-based dual-focus alcohol intervention for preadolescents: the strong african american families program”, psychology of addictive behaviors, 20(2), 185. george, d. and mallery, p. (2003), “reliability analysis. spss for windows, step by step: a simple guide and reference”, 14th edn. boston: allyn & bacon, 222-232. hankinson, g. (2012), “the measurement of brand orientation, its performance impact, and the role of leadership in the context of destination branding: an exploratory study”, journal of marketing management, 28(7–8), 974-999. hendrayati, h., and gaffar, v. (2016), “innovation and marketing performance of womenpreneur in fashion industry in indonesia”, procedia-social and behavioral sciences, 219, 299-306. kimpakorn, n. and tocquer, g. (2010), "service brand equity and employee brand commitment", journal of services marketing, vol. 24 no. 5, pp. 378-388. grigoriou, n., davcik, n. and sharma, p. (2016), “exploring the influence of brand innovation on marketing performance using signaling framework and resource-based theory (rbt) approach”, in let’s get engaged! crossing the threshold of marketing’s engagement era (pp. 813-818). springer, cham. kankam-kwarteng, c. and donkor, j. (2016), “service quality and customer satisfaction in loan acquisition: evidence from commercial banks in ghana”, journal of economics, management and trade, 1-11. kankam-kwarteng, c., gatsi, j. g., acheampong, s. and donkor, j. (2018), “technical and operational innovations approaches to firm performance of smes auto services sector”, archives of business research, 6(9). kankam-kwarteng, c., osman, b. and donkor, j. (2019), “innovative low-cost strategy and firm performance of restaurants”, asia pacific journal of innovation and entrepreneurship, vol. 13 no. 3, 2019 pp. 266-281. kiani, m. n., mustafa, s. h., and ahmad, m. (2019), “does innovation capabilities affect the new service innovation success among pakistani cellular companies?, asia pacific journal of innovation and entrepreneurship, vol. 13 no. 1, 2-16 kline, p. (2000), “the handbook of psychological testing”, 2nd ed. new york, ny: routledge; 2000. ladhari, r., souiden, n. and ladhari, i. (2011), “determinants of loyalty and recommendation: the role of perceived service quality, emotional satisfaction and image”, journal of financial services marketing, 16(2), 111-124. martĺnez-ros, e. and orfila-sintes, f. (2009), “innovation activity in the hotel industry”, technovation, 29(9), 632-641. mattsson, j. and orfila‐sintes, f. (2014), “hotel innovation and its effect on business performance”, int. j. tour. res. 16 (4), 388– 398. mcmanus, l. (2013), “customer accounting and marketing performance measures in the hotel industry: evidence from australia”, international journal of hospitality management, 33, 140-152. molina-azorín, j. f., tarí, j. j., pereira-moliner, j., lopez-gamero, m. d. and pertusa-ortega, e. m. (2015), “the effects of quality and environmental management on competitive advantage: a mixed methods study in the hotel industry”, tourism management, 50, 41-54. mohsin, a. and lockyer, t. (2010), "customer perceptions of service quality in luxury hotels in new delhi, india: an exploratory study", international journal of contemporary hospitality management, vol. 22 no. 2, pp. 160-173. nawi, n. b. c., al mamun, a., nasir, n. a. m., abdullah, a. and mustapha, w. n. w. (2019), “brand image and consumer satisfaction towards islamic travel packages”, asia pacific journal of innovation and entrepreneurship, vol. 13 no. 2, 188-202. neslin, s. a., grewal, d., leghorn, r., shankar, v., teerling, m. l., thomas, j. s., and verhoef, p. c. (2006), “challenges and opportunities in multichannel customer management. journal of service research, 9(2), 95–112. nwokah, n. g. (2008). strategic market orientation and business performance. european journal of marketing, 42(3/4), 279. https://www.emerald.com/insight/search?q=narumon%20kimpakorn https://www.emerald.com/insight/search?q=gerard%20tocquer https://www.emerald.com/insight/publication/issn/0887-6045 https://www.emerald.com/insight/search?q=asad%20mohsin https://www.emerald.com/insight/search?q=tim%20lockyer https://www.emerald.com/insight/publication/issn/0959-6119 https://www.emerald.com/insight/publication/issn/0959-6119 volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.260 | http://emaj.pitt.edu customer based performance of the hotel industry: analysis of service package and brand innovations page |18| emerging markets journal odekerken‐schröder, g., ouwersloot, h., lemmink, j. and semeijn, j. (2003), “consumers’ trade‐off between relationship, service package and price”, european journal of marketing, vol. 37 no. 1/2, pp. 219-242. ottenbacher, m. and gnoth, j. (2005), “how to develop successful hospitality innovation”, cornell hotel and restaurant administration quarterly, 46(2), 205-222. orfila-sintes, f. and mattsson, j. (2009), “innovation behavior in the hotel industry”, omega, 37(2), 380-394. paek, j., and lee, c. w. (2018), “the effect of education and training on service quality, customer satisfaction and loyalty in airline industry”, management review: an international journal, 13(1), 49-64. patel, p. c., azadegan, a., and ellram, l. m. (2013), “the effects of strategic and structural supply chain orientation on operational and customer‐ focused performance”, decision sciences, 44(4), 713-753. ramani, g. and kumar, v. (2008), “interaction orientation and firm performance”, journal of marketing, 72(1), 27-45. satti, z. w., babar, s. f., parveen, s., abrar, k., and shabbir, a. (2020), “innovations for potential entrepreneurs in service quality and customer loyalty in the hospitality industry”, asia pacific journal of innovation and entrepreneurship, vol. 14 no. 3, pp. 317-328. sivula, p., van den bosch, f. and elfring, t. (1997), “competences building by incorporating clients into the development of a business service firm’s knowledge base”, in sanchez, r. and heene, a. (eds), “strategic learning and knowledge management”, john wiley & sons, new york, ny, pp. 121-37. shaw, g., bailey, a. and williams, a. (2011), “aspects of service-dominant logic and its implications for tourism management: examples from the hotel industry”, tourism management, 32(2), 207214. theodosiou, m. and katsikea, e. (2012), "antecedents and performance of electronic business adoption in the hotel industry", european journal of marketing, vol. 46 no. 1/2, pp. 258-283. upadhyaya, m., hakeem, a., and chavan, d. s. (2013), “the effect of the servicecape on service trust, customer satisfaction, and customer loyalty in indian family restaurant”, management review: an international journal, 8(2), 54. wikhamn, w., armbrecht, j. and wikhamn, b. (2018), "innovation in swedish hotels", international journal of contemporary hospitality management, vol. 30 no. 6, pp. 2481-2498. zomerdijk, l. g., and voss, c. a. (2010), “service design for experience-centric services”, journal of service research, 13(1), 67-82. https://www.emerald.com/insight/search?q=marios%20theodosiou https://www.emerald.com/insight/search?q=evangelia%20katsikea https://www.emerald.com/insight/publication/issn/0309-0566 https://www.emerald.com/insight/publication/issn/0309-0566 https://www.emerald.com/insight/search?q=wajda%20wikhamn https://www.emerald.com/insight/search?q=john%20armbrecht https://www.emerald.com/insight/search?q=björn%20remneland%20wikhamn https://www.emerald.com/insight/publication/issn/0959-6119 https://www.emerald.com/insight/publication/issn/0959-6119 https://www.emerald.com/insight/publication/issn/0959-6119 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu process innovation as a strategic tool in enhancing the performance of organizations: a study of manufacturing firms in nigeria augustine chibueze iherobiem olabisi onabanjo university, nigeria | e-mail: iherobiemaugustine@yahoo.com aminat odunola sanusi olabisi onabanjo university, nigeria | e-mail: adsan4@yahoo.com abstract this study investigated how process innovation might be used as a strategic tool to improve organizational performance in the context of nigerian manufacturing companies. the study employed a descriptive survey methodology and population of the study consisted 7.533 employees from specifically 3 chosen manufacturing companies in nigeria: lafarge africa plc, flour mill nigeria plc and pz cussons. the sample size for the study was estimated using andrew fisher's formula to be 366 and the distributed questionnaire was designed on a five-point likert scale. out of the 366 questionnaires that were distributed, 340 were returned, giving the study a response rate of 93%. spss was used to examine the data that were obtained. the study found a substantial correlation between the two variables and it was determined that process innovation is important for improving organizational performance. as a result, it was therefore recommended that manufacturing companies should constantly innovate their processes to increase competitive advantage in the market. keywords: manufacturing firms, innovation, process innovation, business performance, competitive advantage new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.306 | http://emaj.pitt.edu | mailto:iherobiemaugustine@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.306| http://emaj.pitt.edu augustine chibueze iherobiem, aminat odunola sanusi emerging markets journal page |39| process innovation as a strategic tool in enhancing the performance of organizations: a study of manufacturing firms in nigeria augustine chibueze iherobiem aminat odunola sanusi i. introduction innovation is a crucial component of an organization's performance in this modern, demanding business environment. businesses are becoming more aggressive, particularly when looking for innovative ways to ensure their profitability and secure a long-term competitive advantage (namusonge, muturi & olaniran, 2016). according to ebuzoeme, (2022); faith and simon (2023), process innovation is currently viewed as a method for giving organizations directions that will enable them to lower their cost of unit production and delivery while simultaneously improving the quality of their products and introducing new goods. the level of innovation and technological improvement in manufacturing industries has been theorized to be correlated with competitiveness. these businesses must coordinate their efforts in order to improve the effectiveness and standard of their operations (alvarez, bravo-ortega & zahler, 2015). process innovation is one of the key tools manufacturing companies may employ to boost their expansion into new markets and increase their market share in existing markets, giving the company a competitive edge over rival companies (kiptoo & koech, 2019). since businesses operate in a setting with actual rivalry and technological changes that can quickly wear down the value provided to particular goods or services, nnodim, onuoha and needorn, (2020) stressed the importance of innovation in their study. process innovation aids in cost reduction for an organization and typically results in product innovation for the launch of new items in the market. domnich (2022) argues that companies that tightly integrate process innovation are more likely to succeed, particularly when trying to increase performance. iherobiem (2023) asserts that process innovation greatly improves an organization's manufacturing and logistical processes, including the acquisition and upkeep of its auxiliary operations. this serves as a strategy that that enables an organization lower the total cost of production in its manufacturing processes. according to nwankwo and ezeibe (2021), businesses use such actions to meet client demands and compete in the marketplace. additionally, according to peter, munga, and nzili, (2021), it enables organizations to increase their productivity. process innovation, according to azar and ciabuschi, (2017), enables the reengineering and enhancement of the capabilities of a company organization. according to koyluoglu and dogan (2021), adopting strategic plans that will support the implementation, development, and provision of process innovations is necessary for an organization to be relevant and competitive in the business environment. firms must ensure they stay in business in the fiercely competitive business environment, and to do this, they must be innovative. according to ekeh, (2023), businesses should employ process innovation to increase efficiency in their daily operations and in the creation of products that cater to their target market. according to drucker, (1985), one of the goals of process innovation is to draw in new clients while retaining current ones. according to wambua and stephen (2021), process innovation is the only way to enhance an organization's operations and provide it a sustained competitive edge. they also emphasized that even if innovation does not directly have a significant impact on an organization's business market, it can still help the organization generate dynamic capabilities that can be used to gain an early competitive advantage, particularly during market changes. however, there have been a plethora of research done on the subject of strategic innovations and how they impact business performance. studies like ekeh, 2023; namusonge, muturi & olaniran, 2016; nwankwo & ezeibe, 2021 have stressed that a failure to implement process innovation results in a significant loss in an organization's business operations. changes in the business environment have had an impact on the modes of operation and performance levels of several manufacturing firms in nigeria (ebuzoeme, 2022). namusonge, muturi and olaniran, (2016) asserted that manufacturing companies must now find ways to provide customers with high-quality goods at lower prices, and that the only way to do this is through process innovation. they also stressed the necessity for manufacturing companies to look for ways to upgrade their current products and offer new ones in a more lucrative way if they are to remain competitive and preserve their place in the market. this has put pressure on them to adopt process innovation as a tactic to improve their performance. it is impossible to overstate the importance of process innovation because it may be said to be a tool for improving organizational performance and achieving a firm competitive advantage. therefore, the purpose of this study was to assess the dimensions of process innovation and how they affect the performance of manufacturing companies in nigeria. research objectives i. to establish the effect of product process innovation on performance of manufacturing firms in nigeria ii. to determine the effect of delivery process innovation on performance of manufacturing firms in nigeria iii. to examine the effect of support service innovation on performance of manufacturing firms in nigeria research hypotheses h01: product process innovation has no significant effect on performance of manufacturing firms in nigeria volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.306 | http://emaj.pitt.edu process innovation as a strategic tool in enhancing the performance of organizations: a study of manufacturing firms in nigeria page |40| emerging markets journal h02: delivery process innovation has a significant effect on performance of manufacturing firms in nigeria h03: support service innovation has a significant effect on performance of manufacturing firms in nigeria ii. literature review process innovation faith and simon (2023) defined process innovation as the process of enhancing an organization's production and logistics methods in order to dramatically enhance all of its supporting activities, such as purchasing, accounting, computing, and maintenance. this definition matched that of rogers (1962), who believed that process innovation encompassed any major enhancements made to the entire process of production and delivery, regardless of the tools, technologies or software utilized. they also underlined the need for businesses to innovate their business practices in order to increase their productivity across the board. the term "process innovation" typically refers to a completely new approach that has not yet been adopted or implemented by the company. the process may have been created by the business itself or with outside assistance (namusonge, muturi & olaniran, 2016). according to alves, galina and dobelin (2018), "process innovation" refers to the adjustments made in an organization as a result of the adoption of new information and communication technologies. this comprises putting new approaches into practice or improving an existing technique in order to develop an organization's entire process. process innovation is an integrated strategy employed by a business to improve the entire production process (hari, fredi & eneng, 2020). according to domnich (2022), process innovation is an organizational capacity that involves combining resources and manufacturing processes to develop new processes or enhance current ones. performance performance is a multifaceted concept that may be measured in many different ways, including by customer happiness, market share, brand reputation, workforce count, profitability and productivity. additionally, as both financial and non-financial goals are taken into account when assessing an organization's performance, organizational performance can be seen from either perspective (rajapathirana & hui, 2018). the efficacy and efficiency of an organization in terms of production and the accomplishment of goals can also be related to how well a firm performs. according to nwankwo and ezeibe, (2021), performance is defined as the outcomes an organization achieves in relation to its aims and objectives. performance was defined by mugane and ondigo, (2016) in terms of growth, success, survival, and competitiveness. according to azar and ciabuschi (2017), an organization's performance refers to its ability to carry out its overall mission and vision through dedication, effective management and sound governance. according to elkassar and singh (2019), performance refers to how an organization's profit, product quality and market share compare to those of similar businesses' prior years in the same industry. they went on to explain that performance is measured in relation to a specific standard, and that when that standard is satisfied, it is thought that the organization's performance has improved. additionally, peter, munga and nzili, (2021) stressed that performance is the accomplishment of a goal. dimensions of process innovation there are three dimension of process innovation and they include the following: production process innovation, delivery process innovation and support service process innovation (namusonge, muturi & olaniran, 2016). production process innovation production process innovation, according to elkassar and singh (2019), entails a constant re-invention of an organization's manufacturing process in terms of the production processes, technology and equipment. in their study, hari, fredi and eneng (2020) noted that this process innovation dimension necessitates all required components for maintaining an effective output to be continuously monitored and evaluated. this will enable the company to reduce costs associated with the manufacturing process, increase production efficiency generally and manufacture more high-quality products more quickly, all of which will help it establish and maintain its competitive advantage. rajapathirana and hui (2018) noted in their study that the employment of more efficient techniques, technologies and materials allows an organization to cut costs while improving effectiveness and efficiency throughout the entire manufacturing process. according to azar and ciabuschi, (2017), this procedure enables an organization to acquire the best and most modern equipment to facilitate their entire production process, and by implementing this in the organization, it will result as an improvement in the organization's performance in terms of quality of its products and services. delivery process innovation according to mugane and ondigo (2016), this process innovation entails the enhancement of all elements and supplies that support the complete supply chain process as well as the timely and effective delivery of goods and services. they added that in order for a business to execute its services with excellence, it must look for a strategy that would allow it to both meet and surpass its consumers' expectations. delivery process innovation helps companies develop new market segments for their products and services as well as expand their existing market segments. faith and simon (2023) noted that this would help a company improve its performance because the innovation would meet customers' needs, which would increase their general level of satisfaction, encourage repeat business, increase customer loyalty, and, in the long run, guarantee an improvement in the performance of the company as a whole. according to kiptoo and koech (2019) research, implementing this innovation within a business will help it effectively differentiate its goods and services from those of competitors, which will enable it to gain a competitive edge. volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.306 | http://emaj.pitt.edu augustine chibueze iherobiem, aminat odunola sanusi emerging markets journal page |41| support services innovation in their study, hari, fredi and eneng (2020) emphasized that when a company provides excellent customer support, particularly after a particular conversation or deal is made, customers are more satisfied and perceive this as a high-quality service from the company. this will encourage them to continue or complete a conversation with the company, and there is a high likelihood that they will return after the first or subsequent purchases. when this happens, it is believed that a company can benefit from an innovative support system to increase sales and improve performance. ebuzoeme (2022) argues that without an effective innovation strategy, a company is vulnerable to failure and has little choice but to be inventive in order to succeed. support process innovation is a crucial component of process innovation that also affects an organization's performance and success. iii. theoretical framework diffusion of innovation theory everett rogers put up the diffusion of innovation theory in 1962. rogers developed this idea as a way to show how new inventions and technology are being adopted and used by a specific social system or population. diffusion, according to his book, is the process by which members of a certain system share innovations. in the opinion of kindström and kowalkowski, (2014), diffusion can be viewed as the communication and sharing of knowledge among members of a specific system. this results in the adoption of a specific new idea, process or product. according to rogers (1962), corporations adopted this theory because they needed to get rid of misinformation, uncertainties and excessive costs while embracing innovations and innovative techniques to increase productivity. in addition, barrett, davidson, prabhu and vargo (2015) explains that the theory is based on four fundamental concepts: time, social systems, communication and innovation. time is thought to be one of the most important factors since it affects how quickly and how thoroughly a business adopts innovations. this is the case because different social systems embrace innovations at different times and rates, leading to the designation of some as early adopters, early majorities, and others as late majorities or laggards. azar and ciabuschi, (2017) claimed that an organization's performance will depend on how much it embraces innovation. innovation spreads in many different forms and across many various cultures as well as industries. these manifestations depend typically on the organizational decision-making process as well as the types of adopters (alves, galina & dobelin, 2018). manufacturing companies appear radical since they frequently depend on innovation to bring about the adjustments they need to make in order to perform significantly better. resource-based view (rbv) theory penrose created this theory to explain how an organization's internal resources contribute to the development of a long-lasting competitive edge in the marketplace. according to penrose (1959), some participants in an industry are perceived to perform better than others in the same industry on a consistent basis due to well-organized and valuable resources, and this is a factor in an organization's competitiveness. among other scholars, peteraf & bergen (2003) and barney (1996) support penrose's position. rbv, as defined by barney (1996), refers to the variety in organizational ranks within an industry. according to the rbv, various authors have proposed that it is fair for an entity to claim a competitive advantage if it successfully and efficiently utilizes its resources. the resource-based theory holds that although an organization is endowed with a variety of resources, not all of them significantly aid in achieving the firm's competitive advantage. it is expected that an organization examines its resources before designing any strategy (eisenhardt & martin, 2000). this is understandable because an organization's resources will ultimately determine the performance of the firm and the sustainability of a strategy. this theory can be used in this study to help manufacturing companies understand the value of their resources and talents, especially when implementing an innovative strategy. it reveals that in order to increase performance, this company must identify its resources and employ them effectively. iv. methodology the study used a descriptive survey research design because it focuses more on the phenomenon under study in relation to the factors that may affect, cause or relate to the phenomenon. this design also gives the researcher more control over the study's subjects rather than making it challenging to meet the study's objective. the design was chosen because it made it easy to administer the research tool and allowed for the collection of data from a vast audience without the need for additional handling or manipulation (saunders, lewis & thornhill, 2012). the population of the study consist of 7533 employees of some manufacturing firms in nigeria where 1343 are lafarge employees, 5150 are flour mill nigeria plc employees and 1040 are pz cussons employees. the study used questionnaire which was structured in form of strongly agree (sa), agree (a), undecided (u), disagree (d) and strongly disagree (sd). the sample of 366 employees was selected across the manufacturing companies and used in carrying out the study. this was based on andrew fisher’s formula for sampling. the cronbach’s alpha method was used to analyze the questionnaire as well as optimal scaling/ categorical regression method using statistical package for social sciences (spss). v. results and discussion out of the 366 questionnaires that were distributed, 340 were returned, giving the study a response rate of 93%. the data collected were analyzed using the multiple regression analysis and at 5% level of significance. h01: product process innovation has no significant effect on performance of manufacturing firms in nigeria h02: delivery process innovation has a significant effect on performance of manufacturing firms in nigeria volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.306 | http://emaj.pitt.edu process innovation as a strategic tool in enhancing the performance of organizations: a study of manufacturing firms in nigeria page |42| emerging markets journal h03: support service innovation has a significant effect on performance of manufacturing firms in nigeria table 1: model summary model r r square adjusted r square std. error of the estimate 1 .687a .472 .467 .75679 predictors: (constant), process innovation source: authors’ computation (2023) table 1 shows that, there was a positive correlation between process innovation and organizational performance. the correlation was 68.7%, indicating that process innovation had strong association with organizational performance. more so, process innovation explained 47.2% of the total variations in the organizational performance among manufacturing firms in nigeria. this result indicated that the job satisfaction model had moderate goodness of fit. the result was equally justifiable with the low value of standard error of estimate (0.76). table 2: analysis of variance (anova) model sum of squares df mean square f sig. 1 regression 43.722 3 14.574 45.313 .000b residual 178.752 336 .532 total 222.474 339 dependent variable: organizational performance predictors: (constant), product process, delivery process, support service source: authors’ computation (2023) table 2 shows the overall significant of the organizational performance process innovation model. the result of the f-statistic (45.313) was not significant at 5% level, indicating that the relationship between process innovation and organizational performance was significant. this means that process innovation had a significant influence on organizational performance among manufacturing firms in nigeria. table 3: coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) product process delivery process 4.629 .545 .613 .828 .045 .067 .045 .032 5.591 .455 .995 .000 .001 .004 support service .602 .089 .050 .731 .000 dependent variable: organizational performance source: authors’ computation (2023) table 3 shows the result of the effect of process innovation on manufacturing firms in nigeria. the table revealed that product process was statistically significant as it has an effect on organizational performance (t = 0.455; p = 0.001 < 0.05). this led to the acceptance of null hypothesis. the table also revealed that delivery process innovation was statistically significant as it has an effect on organizational performance (t = 0.995; p = 0.004 < 0.05). this resulted in the acceptance of null hypothesis and the table revealed that support service innovation was statistically significant as it has an effect on organizational performance (t = 0.731; p = 0.000 < 0.05). this led to the acceptance of null hypothesis. vi. findings the study established that there exists a significant effect of process innovation on the performance of organization and this supports the findings of ebuzoeme, (2022); hari, fredi and eneng (2020) that process innovation strategies relate positively to the growth of organization in terms of revenue and profitability. the findings of several studies, including those by koyluoglu and dogan (2021), nnodim, onuoha, and needorn (2020), which were of the opinion that process innovation would enable the development of a new product and give the organization an advantage over its rivals, provide additional support for this. according to peter, munga, and nzili (2021), process innovation is crucial, particularly when changing an organization's structure because these changes are required to increase the organization's performance. vii. conclusion and recommendations due to the changes in modern business economies, innovation is a strategy that is widely accepted in organizations. it was concluded from the study that in order for an organization to continuously improve its products and services, it must cultivate process innovation as part of its organizational strategy. the study found a link between process innovation and the performance of manufacturing firms, and it was concluded that in order for an organization to quickly identify opportunities and introduce products to the market, they must develop the process innovation structures that serve as a foundation for volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.306 | http://emaj.pitt.edu augustine chibueze iherobiem, aminat odunola sanusi emerging markets journal page |43| meeting the demands of the business environment and satisfying customer needs. concerning recommendations, manufacturing companies should constantly innovate their processes to increase their competitive advantage in the market. also, to ensure an improvement in operational efficiency, manufacturing companies should regularly assess and measure their services activities. manufacturing companies should make sure that their process innovation projects include effective and efficient goal clarification that will aid in picturing a future layout as well. moreover, in order to eliminate uncertainties in the process timelines, manufacturing companies should make sure that there is a clear link between the organization and the suppliers. finally, future research should identify the pertinent issues that were not covered in this study but are crucial, particularly when applying process innovation within an organization, and which will result in the creation of a sustainable competitive advantage. additionally, because the study was focused on manufacturing firms, additional research on other industries is required to determine whether the outcome will be similar. references alvarez r., bravo-ortega c., zahler a. (2015). innovation and productivity in services: evidence from chile. emerging markets finance & trade, 51(3), 593–611. https://doi.org/10.1080/1540496x.2015.10266 96 alves, m. f. r., galina, s. v. r., dobelin, s. (2018). literature on organizational innovation: past and future. innovation & management review, 15(1), 2–19. https://doi.org/10.1108/inmr-012018-001 azar, g., ciabuschi, f. (2017). organizational innovation, technological innovation, and export performance: the effects of innovation radicalness and extensiveness. international business review, 26(2), 324-336. barne,. j. (1991). firm resources and sustained competitive advantage, journal of management, 17(1), 99-120. barrett, m., davidson, e., prabhu, j., vargo, s. l. (2015). service innovation in the digital age: key contributions and future directions. mis quarterly, 39(1), 135-154. domnich y., (2022). the impact of product and process innovations on productivity: a review of empirical studies. foresight and sti governance, 16(3), 68–82. doi: 10.17323/25002597.2022.3.68.82 drucker, p. f. (1985). innovation and entrepreneurship: practice and principles. new york: harper &row, 457. ebuzoeme, f., c (2022). technological innovation and the performance of food and beverage manufacturing companies. international journal of scientific and research publications, 12(2), 632-637. eisenhardt, k. m., & martin, j. a. (2000). dynamic capabilities: what are they? strategic management journal, 1105-1121. ekeh, o. l. (2023). effect of product innovation on growth of medium enterprises in north central nigeria. international journal of management sciences, 10(1), 151 – 174. doi: 27751456791020 el-kassar, a. n., singh, s. k. (2019). green innovation and organizational performance: the influence of big data and the moderating role of management commitment and hr practices. technological forecasting and social change, 144, 483-498. faith j. y, simon k., (2023). effect of product and process technological innovation strategies on organization performance in the telecommunication industry in kenya: a case of safaricom kenya. kabarak journal of research & innovation, 13(1), 1-9. hari m, fredi a, eneng t., (2020). effect of process innovation and market innovation on financial performance with moderating role of disruptive technology. systematic review pharmacy, 11 (1), 223-232. iherobiem, a.c. (2023). the effect of sustainable supply chain management on firm innovative performance: a study of manufacturing firms in nigeria, european journal of logistics, purchasing and supply chain management, 11(3), 1-14. kindström, d., kowalkowski, c. (2014). service innovation in product-centric firms: a multidimensional business model perspective. journal of business & industrial marketing, 29(2), 96-111. kiptoo, l., koech, p. (2019). effect of strategic innovations on organizational performance. the strategic journal of business & change management, 6 (2), 443-360. koyluoglu, s., dogan. m. (2021). the impact of innovation strategies on business performance: practices in high technology companies in turkey. marketing and management of innovations,4,168-183. http://doi.org/10.21272/mmi.2021.4-13 mugane, c.,ondigo, h. (2016). the effect of financial innovations on the financial performance of commercial banks in kenya. international journal of finance and accounting, 1(1), 15-29. volume 13 no 1 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.306 | http://emaj.pitt.edu process innovation as a strategic tool in enhancing the performance of organizations: a study of manufacturing firms in nigeria page |44| emerging markets journal muhammad s., elliv h., mesra s., sawabi s., (2022), “the effect of marketing, product, process, and organizational innovations on the marketing performance ” in icigr conference proceedings, kne social sciences, pages 386399. doi 10.18502/kss.v7i10.11241 namusonge, g. s., muturi, w., olaniran, o. (2016). the role of innovation on the performance of firms on nigerian stock exchange. european journal of research and reflection in management sciences, 4(1), 40-50. nnodim, i., onuoha, b.c., needorn, r., (2020). the effect of product and process innovation capabilities on the competitiveness of nigerian quoted banks. international academy journal of management, marketing and entrepreneurial studies, 8(1), 01-10. nwankwo, a. a., ezeibe, c. v. (2021). influence of innovation on financial performance of small and medium scale enterprises in onitsha. international journal of business & law research 9(2), 172-180. penrose, e.t. (1959), the theory of the growth of the firm, john wiley, new york. peter, m. n., munga, j., & nzili, j. m. (2021). effect of process innovation strategies on performance of tier one commercial banks in kenya, international academic journal of innovation, leadership and entrepreneurship, 2(2), 142162.https://iajournals.org/articles/iajile_v2_i2_ 142_162.pdf peteraf, m. a., barney, j. b., (2003), unraveling the resource-based tangle, mde manage. decision economics, 24(4), 309-323. rajapathirana, r. j., hui, y. (2018). relationship between innovation capability, innovation type, and firm performance. journal of innovation & knowledge, 3(1), 44-55. rogers, e. m. (1962). diffusion of innovations. new york. saunders m., lewis p., thornhill, a. (2012). research methods for business students. 6th ed. pearson professional limited. wambua, p. m., stephen m. a. m., (2021). effect of innovation strategies on performance of real estates firms in mavoko sub-county, kenya. international journal of research and innovation in social science (ijriss), 5(6), 198-206. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu the phenomenon of hybrid state capitalism in emerging market economies: present and future arkady martynov institute of economics (russian academy of sciences) and institute for social development, russian federation | e-mail: socpolamv@mail.ru abstract the article is devoted to the actual and complex topic of the transformation of a number of countries with emerging markets. a retrospective of the transformation of the entire enclave of emerging market economies in a large number of countries was briefly presented. on this ground, the process of the reproduction of economic systems, distinguished by a hybrid structure with a prevailing state-capitalist order, in a separate conglomerate of post-developing and after socialist countries was analyzed in the last period. based on the empirical available evaluations, with regard to the conglomerate of considered national economies, the most significant fundamental competitive advantage is still the preservation of relatively low cost of production factors. by the author's argumentation, a vision of the prospect for the transformation of such national economies are presented. the final conclusion concerns the possibility of successful adaptation of these economic systems to the positive fundamental changes, especially including those associated with the transition to sustainable overall social development. keywords: emerging markets, national economies, state-capitalist order, competitive advantage new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.270 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.270 | http://emaj.pitt.edu arkady martynov page |47| emerging markets journal the phenomenon of hybrid state capitalism in emerging market economies: present and future arkady martynov i. introduction the problem of development in regards to national economies with emerging (growing) markets directly connects with the phenomenon of the ongoing formation of a new type of state capitalism. as known, the topic of state capitalism is touched upon in a truly innumerable number of studies. at the same time, most of them are devoted to the historical past, covering the periods of existence of the bygone traditional western capitalism in the 19th and 20th centuries. also, resorting to the results of these studies to explain the phenomenon of modern state capitalism outside the developed economies in the western world seems doubtful. it is reasonable to focus on the fact that in economies with emerging (growing) markets, state capitalism is characterized by a fundamentally new feature. we are talking about the direct participation of state agents in economic performance: as market consumers, suppliers of resources to the markets and owners-investors in the capital markets. at the same time, most national economies with emerging markets represent a hybrid system, where economic sectors with an integral presence of the state complement the sectors of private business, corporate and otherwise. the author relied on recent publications, in which the phenomenon of the hybrid design of the national economic system in the current period received intent attention (nolke, 2018; alami & dixon, 2020, 2021; okhmatovskiy et al., 2021; ricz, 2021). by the beginning of the 1980s a post-developing world had established itself, including the newly industrialized countries. here, the emergence of wealthy national economies with emerging markets (eme) took place. this irreversible shift had been recognized globally and directly reflected in the opening of the stock markets in a number of eme to foreign investors. the initial fundamental conditions for transformation in post-developing countries concluded in the presence of a significant public sector and a high degree of state intervention in economic life, as well as in the choice of path of economic development based on national interests. the state, relying on national capital, had acted as the initiator of internal market reforms; the same applied to the export market reorientation in the primary period of independent national development. for a very long time, inertial development trends prevailed in the economies of post-developing countries, associated with the growth of productive capital and employment, as well as an increase in productivity due to an incremental progress in the qualifications of workers over time. these processes of inertial changes fully embraced the public sector, the national capitalist sector, and the sector of small and medium-sized business that incorporated traditional crafts. it should also be added that, the proportions of income distribution between the indicated institutional sectors did not change significantly. quite understandably, the prevalence of the noted inertial changes turned out to be associated with the absence of fundamental changes in the institutional arrangements of the economies in post-developing countries. at the same time, it is impossible to ignore the significant structural changes that had taken place in output, due to the increased competitiveness of the national economy with emerging markets. the intensity of technological modernization and economic renewal is evidenced by at least a significant raise of the most important relevant indicator total factor productivity (tfp) (de gregorio, 2018). to a significant extent, the renewal process was also expressed in an increase in the quantity of qualified personnel (dieppe ed., 2021), which in turn manifested itself in an uprising in the differentiation of wages and personal incomes. structural changes were accompanied by a number of institutional changes of systemic significance. priority attention should be paid to the corporatization of state-owned enterprises (soe), which resulted in the direct inclusion of state capital into an orbit of the contemporary market. along with this, the establishment of the institution of patronage over large national producers, directly aimed at achieving greater accessibility of material, investment and human resources for them in comparison with foreign competitors, had great value. besides, it is worth adding that an important attribute of economic life became the functioning of special institutions of government support for small and medium businesses. at this point global significance is the accession, as a result of market reforms, to the eme’s enclave in the post-developing countries of the economies of the former socialist countries in the cis and asia, including china. in the post-liberal period since the late nineties, within the framework of national economic systems, which can now be called after-socialist, wealthy markets gradually formed (stiglitz, 2000; world bank, 2002). in the political and economic sense, it is legitimate to attribute them to emerging markets, similar to those existing in post-developing countries. a common distinguishing feature of these markets concluded in the relatively new stage of development. the initial fundamental similarity between the economies of after socialist countries and an impressive number of post-developing countries also concerned the root institutions of public regulation. both groups of countries were distinguished by a very significant role of state regulation of market processes and related other processes outside the economic field. the after socialist eme’s also saw the previously identified institutional changes associated with the establishment of state capitalism as a prevailing institutional order of the national economic system. the results of these changes manifested in the successful establishment of a new type of state capitalism volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.270 | http://emaj.pitt.edu the phenomenon of hybrid state capitalism in emerging market economies: present and future page |48| emerging markets journal at the beginning of the 21st century in many postdeveloping and after socialist countries (kurlantzick, 2016; schedelik et al., 2021). its distinctive feature concludes in the full participation of state capital in market activities and the receipt of market benefits. this process directly finds expression in the public corporatization of the capital of enterprises with state participation, its overflow into market investment funds and involvement in stock exchange turnover. moreover, this kind of corporate capital with state participation tends to assert itself and even dominate at the world markets. in the recent high-profile publications, three main components of the newly-minted state capitalism are discussed (wood & wright, 2015; wright et al., 2021). first one is the institutionalized interaction between government organizations and business, when the state acts as a market consumer or, conversely, as a supplier of resources to the markets. second one is the state agents participating in various markets as investors. third one is the state using weighty tools for the active interventions in economic life. indeed, the active state economic policy (macroeconomic, structural, regional) presents the conductor of stability and normal functioning of many emes. of particular importance for ensuring the positive dynamics of emerging markets has the direct state participation in large-scale infrastructure programs and projects (sigma, 2019). in most national economies with emerging markets, the public and mixed public-corporate sectors complement the private corporate sector and the entrepreneurial sector of small and medium-sized businesses (marquis & raynard, 2015). in fact, there is an imposition of heterogeneous institutional orders, reflecting the multi-layered structure of interactions among market and other agents. in the context of the foregoing, an unambiguous statement is appropriate: in recent years, the national economic system in the existing emes was interpreted by researchers precisely as a hybrid one (nolke, 2018; okhmatovskiy et al., 2021; ricz, 2021). it is fundamentally deviated from the traditional bipolar capitalist and socialist systems that existed in the past century. along with this, one cannot ignore the institutional divergence of the emes, primarily in relation to the degree of liberalization of their domestic markets and the significance of the state-capitalist order. it seems appropriate to single out three main conglomerates of national economies that differ in their systemic structure. in the first conglomerate, the institutions of state capitalism play a paramount role. here, the formation of state capitalism as the fundamental mode of the economic system has taken place (kurlantzick, 2016; alami & dixon, 2020; chandra & chatterjee, 2021). this conglomerate, for the identification of which the abbreviation sceme is used below, includes a wide range of post-developing and after socialist countries. another conglomerate is made up of the national economies in which the institutions of state capitalism do not excel in comparison with the institutions of private entrepreneurship. this conglomerate includes the economies of turkey, south korea, taiwan, south africa, saudi arabia, brazil, argentina and a number of smaller countries. all these national economies are distinguished by their structure-forming dependence on the state of world market. the significance of the eme’s conglomerate is great, where the state-capitalist order and, in general, the systemic economic matrix have not been completely formed. among these countries, it is appropriate to mention iran, pakistan, and bangladesh. taking in to account the limited format of the publication, the author will focus only on the sceme conglomerate; incomplete without china and russia. the economic transformation of the latter two countries has been carried out in the most significant dependence on purely political drivers. the study of this kind of dependence requires a special approach (van apeldoorn & de graaff, 2022), which has not yet been seriously discussed in current scientific publications. apparently, the phenomenon of "politically driven" state capitalism presents the prerogative of future intensive research. finally, this paper continues with the methodology section. transformation of emerging economies with a prevailing state-capitalist order follows as the third section. next, prospect for the transformation of emerging economies with hybrid state capitalism is discussed in the fourth section. discussion and conclusion takes place in the fifth and last section. ii. methodology the objective of this study is presenting information on the transformation and conglomerates, not individual national economies. such approach is substantiated by the goal of comparing the key development indicators of these economies in general with the leading western economies. despite the paramount importance of the state-capitalist order in sceme, its absolute domination seems unjustified. it has long been recognized that a complete state monopoly in the corporate sector, as in other sectors, is unacceptable, if only because of the inevitable loss of national competitiveness in many world markets. it is worth noting that the state-capitalist institutional order (in its pure form) is not fully prevailing in any country complemented by other existing institutional orders primary due to the form of ownership. apparently, the economic system of the considered conglomerate of countries is rightfully identified as hybrid state capitalism. in order objectively to reflex the process of transformation of the considered national economies in the past post-crisis period in 2010-2019, it seems reasonable to turn to a realistic verbal model of economic system transformation. it envelops changes in the structures of economic output and simultaneously the distribution of its results (martynov, 2019). both axial processes of the system transformation in regards to output and distribution combine inertial and new structural changes. the inertia of economic development is clearly manifested in the constancy of the formed markets, in the stable structure of output and prices, in the stability of the organizational structure of enterprises, when a process of mostly unidirectional and approximately uniform resource changes take a place, as if under unchanged, previously established framework institutional arrangements. furthermore, inertial changes are superimposed on various structural changes associated with fundamental institutional shifts. the following hypothesis seems reasonable: the relatively low cost of productive capital, labor, and especially primary resources, which distinguished the economies of hybrid state capitalism, is displayed in the inertial growth of production capital and volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.270 | http://emaj.pitt.edu arkady martynov emerging markets journal | p a g e 4 9 employment. it has turned out to be associated with an accelerated increase in output and profit. iii. transformation of emerging economies with a prevailing state-capitalist order figure 1. rate of real gross domestic product (gdp) at current parity of purchase power (in mil. 2017 us$): 2010-2019 source: penn world tables (2021). (https://www.rug.nl/ggdc/productivity/pwt) figure 2. labor productivity rate (at number of persons engaged): 2010-2019 sceme: india, sri lanka, uzbekistan, azerbaijan, belarus, armenia, kazakhstan, indonesia, malaysia, thailand, philippine, lao, vietnam, cambodia and myanmar source: penn world tables (2021). (https://www.rug.nl/ggdc/productivity/pwt) proceeding from the data in penn world tables (2021), the gdp growth rate and the growth in labor productivity (in terms of the number of employees) in the economies under consideration in the past decade had an order of magnitude higher than the analogous indicators for the usa, japan and germany (figures 1 & 2). therefore, a significant reduction in the gap from the average level of ae had taken place (world bank, 2020). it is worth emphasizing that this shift has been achieved to a decisive extent through the development of domestic markets. the above confirms the trend of a noticeable decrease in the share of the export component in the considered conglomerate of economies in the period after the global crisis of 2008-2009. the strategy of maximum export orientation, previously implemented in most postdeveloping countries, irrevocably becomes a deal of the past. the above assumption is confirmed by study’s empirical evaluations of pair correlations and regression dependences between the main variables profitable output, production capital and employment in relation to the period of 2000-2019 (table 1). they demonstrate a high return on the inertial factors productive capital and employment, in contrast to the situation in the advanced market economies of germany and especially japan. besides, as follows from the results, the effect of employment on profitable output in sceme was much more significant in comparison with the united states (us). table 1: dependence of profitable output on inertial factors of employment and production capital for the period of 2000-2019 countries correlation between variables (in %) estimation of regression equations** sceme cor1=98,79 cor2=99,28 y=0,097* x1+0,846* x2+εt1 r 2=0,989 (4,881) (16,197) usa cor1=90,81 cor2=92,40 y=0,261* x1+0,804* x2+εt2 r 2=0,988 (0,297) (8,287) japan cor1=28,65 cor2=55,85 y=1,028* x1+0,601* x2+εt3 r 2=0,959 (2,431) (5,794) germany cor1=75,73 cor2=83,29 y=0,678* x1+0,699* x2+εt4 r 2=0,944 (0,445) (2,051) indicators: cor1 correlation between profitable output and employment level; cor2 correlation between profitable output and production capital; r2 coefficient of determination. * profitable output was approximately estimated as the difference between the volume of gdp and its share directed to wages. there are no complete data on the total material costs for sceme. ** values of t-statistics are given in brackets. source: spss software output to the greatest extent, the indicated competitive advantages, apparently, manifested themselves in the activities of multinational companies (mne) with state participation, which very quickly established themselves in foreign markets (cuervo-cazurra, 2018; panibratov & klishevich, 2021). in the recent period, the growth in the number of mne in countries with emerging markets has been much higher than in western countries (casanova & miroux, 2020). actually, the level of quality of a considerable number of goods remains significantly lower in comparison with leading western analogies. the real sectors of the economies under consideration turned out to be attractive for profitable investment. this is directly evidenced by the ordinal excess of the growth rate of foreign direct investment in comparison with the western leading countries especially in 2017-2019 (figure 3). it is also fundamentally important that powerful state regulation at the macroeconomic, sectoral and regional levels in the hybrid economies under consideration made it possible to adapt to changes in the external world. in the recent years, state volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.270 | http://emaj.pitt.edu the phenomenon of hybrid state capitalism in emerging market economies: present and future page |50| emerging markets journal regulation of this kind has intensified, especially in terms of monetary and fiscal policy (oxford business group, 2021). figure 3. rate of foreign direct investments sceme: without uzbekistan, azerbaijan, belarus, armenia, kazakhstan source: world bank (2020), oecd (2021) the prevailing inertial trends in output were understandably accompanied by mostly smooth temporal trajectories of changes in the structure of the distribution of income and capital. according to available data, in sceme, with the exception of india and sri lanka, for the period 2015-2019 income differentiation almost did not increase, and in a number of countries of southeast asia it even decreased (asean secretariat, 2021). finally, one cannot ignore the following important result of sceme’s development in 2010-2019. the mentioned inertial trends did not have an overwhelming effect on structural shifts. they took place, most significantly expressed in the growth of the educational employment level and imitating technological innovations amid their tremendous global diffusion. as a result, the gap between sceme and ae has significantly decreased in terms of key indicators of renewal: the human capital index and the total factor productivity (figures 4 & 5). figure 4. human capital index *sceme: without uzbekistan, azerbaijan, belarus, vietnam, cambodia and myanmar. source: penn world tables (2021). (https://www.rug.nl/ggdc/productivity/pwt) figure 5. total factor productivity * sceme: without vietnam, cambodia and myanmar source: penn world tables (2021). (https://www.rug.nl/ggdc/productivity/pwt) iv. prospect for the transformation of emerging economies with hybrid state capitalism the covid-19 pandemic has caused great damage to emerging market economies, many of which have been thrown back in terms of potential output for several years. however, regarding the future of these national economies, optimistic expectations prevail taking in a view the ongoing revival in a vast number of them (international monetary fund, 2022a; world bank, 2022). to date, in 2022, due to the continuation of the pandemic and the war in ukraine, the emerging market economies are hit by an unprecedented increase in world prices for energy resources and food, associated with an increase in other market prices (asian development, 2022; lazard asset, 2022). in addition, during the recent period, allembraced practice of quantity easing by major central banks has caused an excessive liquidity in the financial markets and strengthened the overall inflation (nittayagasetwat & buranasiri, 2022). without any alternative, sceme’s countries face with the need to conduct a tight monetary policy in order to curb inflation and ensure an acceptable macroeconomic/ financial situation. in this regard, it seems logical to turn to the example of malaysia, where the instruments of national stabilization regulation, independent from the imf, have been successfully used for a long time. here, the targeted maintenance of a low base interest rate is complemented by the implementation of a variety of instruments, including the necessary credit regulation to provide really effective quantity easing, and the provision of subsidies and tax breaks to stabilize consumer markets (ministry of finance malaysia, 2021). therefore, the necessary preservation of economic activity was achieved under the restrictions caused by an extraordinary stabilization policy. however, there is reason to believe that the observed structural price rise will relatively soon run out of steam in the context of expected gradually exhausting military confrontation, rapid progress in the efficiency of resource consumption in the largest producing countries, china and india, and, in general, a tremendous global decarbonization. in case of overall stabilization in world economy, the advantage of emerging markets, first of all volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.270 | http://emaj.pitt.edu arkady martynov emerging markets journal | p a g e 5 1 concluding in the preservation of the relatively low cost of production factors, will continue to stimulate the assertion of new markets and the influx of new entrepreneurs interested in attracting direct investment. the maximum prolongation of this process will be facilitated by the initiating activity of the state agencies using their capital for ensuring desired market shifts (asian development bank, 2022). according to the updated forecasts (asian development, 2022), in the year of 2023, favorable macro trends will continue in the conglomerate of countries with the considered national economies, except for sri lanka and belarus. in a number of them, including india, vietnam, thailand, cambodia, lao, the countries of central asia, economic growth will even increase, despite of the severe inflationary pressure. in other countries, in particular, indonesia, malaysia, philippines, azerbaijan and armenia, there will be some slowdown (softening) of economic growth, but it will remain at a high level. sri lanka, after the relatively favorable economic transformation in the past, now definitely falls out of a number of the steady growing sceme's countries. here, the necessary institutional and structural reforms have not been carried out over the long period. besides, existing economic sectors have been suffered hard by the pandemics (devapriya, 2022). in sri lanka, until 2024, a clear economic recession and a debt crisis are predicted to continue, associated with a shortage of foreign exchange reserves and tight supply bottlenecks (asian development, 2022). similar to sri lanka, belarus is also currently in a strong economic recession. sanctions for supporting russia’s invasion of ukraine have led to a sharp drop in investment, loss of export earnings and supply chain disruptions due to military-related restrictions. however, the next year in belarus, if the war in ukraine ends, relative economic stabilization is expected in comparison with the current year (international monetary fund, 2022b). apparently, dynamic consumer markets in majority of sceme’s will be able to successfully adapt to the expected stagnation or even decrease in the real wages of those employed, with a constant increasing in their number. it will manifest itself in a worldwide steady growth in demand for inexpensive goods and, especially, services, and one can expect a multiplier effect of growth in domestic and external demand for these consumer goods. the example of china and most of the countries of southeast asia testifies firsthand in favor of such an assumed trend (oecd, 2020; asean development, 2021). the same is true for most intermediate goods and investment markets in the considered conglomerate. here, the expected effect of cheaper products due to digitalization and other technological innovations will fully affect existing manufacturers. but they will be able to maintain their market positions through a constant increase in labor productivity and capital efficiency in the case of reproduction of the current low resource costs and wages by world standards. thus, the following assumption looks as substantiate: at the macro level, the return on inertial output factors is likely to remain approximately at the level in the period of 2015-2019 before the pandemic. along with this, proceeding from the forecast (world bank, 2021, 2022), in the post-pandemic period, emerging markets will experience a high growth in direct investment (domestic and foreign) and employment. if the mentioned forecasts are fulfilled, it is appropriate to expect the restoration of the previous impressive inertial growth trends in the manufacturing and service sectors in sceme, achieved in the past decade. the same applies to the return to high dynamics of labor productivity in the nonfinancial sectors. it is also reasonable to assume that the recovery of the inertial trend in output will be accompanied by the previous smooth changes in the distribution of income and capital in majority of sceme. additionally, population aging in many emerging markets should be taken into account as a significant factor in reducing income differentiation. what has been said about the inertial factors of development does not at all mean that the importance of imminent structural shifts in almost all economic sectors should be underestimated. as known, in the bygone period there was a significant decrease in the contribution of technological and institutional progress to economic output (an indicator of tfp), which fully affected the post-developing and post-socialist economies. however, in the current five years, a long-awaited turning point is coming, primarily associated with digitalization, the spread of robots and artificial intelligence. the economic effect of such transformational innovations should be projected on the basis of expected future trends, focusing on the actual results in the leading countries as desired patterns. in the national economies under consideration, significant favorable prerequisites for comprehensive digitalization and automation have arisen (nguyen et al., 2021). we are talking about the high competitiveness of technological/information giant corporations, accelerating the diffusion of technologies, and the growth of educational potential. as a result, expectations are high for steady growth and high returns on domestic and foreign investment in the "new economy" segments in many scemes. it becomes urgent to accelerate structural reforms with the active participation of the state and the entire national business. according to the world bank (2018), if structural reforms will be successful in countries such as india, indonesia, malaysia, vietnam, the philippines and thailand, there would gradually be a transition from a capital-intensive type of development to an innovative type in conventional economic sectors following china, south korea, taiwan and singapore. in addition, an increasing need for an initiating stimulating policy in its broadest sense has taken place, based on the use of the emerging national innovation systems (united nations un, 2020). financial and other government resources for stimulating innovations, including imitating ones, seem quite sufficient in the majority of considered national economies. this kind of state intervention is intended to be supplemented by an active industrial policy, the institutional mechanisms for the implementation of which have also developed in hybrid economies with powerful state capital. in particular, public-private partnerships will play an exceptional role in the process of new industrialization / digitalization. a special question concerns the upcoming shifts in the structure of the distribution of wages, entrepreneurial incomes and capital in hybrid economies with prevailing state-capitalist order. by all signs, there will be an ordinal change in the distribution structure due to the challenge of digitalization. it will primarily manifest volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.270 | http://emaj.pitt.edu the phenomenon of hybrid state capitalism in emerging market economies: present and future page |52| emerging markets journal itself in an increase in the differentiation of wages and other incomes. as a result, there will definitely be a need for a whole range of institutional innovations in the field of labor market regulation. they are designed to neutralize the negative factors of changes in the structure of employment, taking into account the extra significance of social restrictions specific to individual countries. in general, it is reasonable to assume that the potential of the considered conglomerate of economies is self-sufficient in order to provide employment for the population in the new technological era. the likely preservation of a relatively low price of labor here allows hoping for a smoothly dosed reduction in personnel employed in industrial and other sectors in sceme. also, apparently, the possibility of stabilizing employment in those traditional sectors where the level of wages is obviously low can be realized. in addition, according to experts, in a large number of sceme with qualified educational potential, favorable conditions have arisen for the emergence of new professions as a direct result of automation and digitalization. some of the examples at this point can be designers in digital services and block chain technologies, experts in the use of energy of automated unmanned industries and robots as well as specialists in cyber security ensuring the reliable functioning of artificial intelligence systems. researchers predict further strengthening of the position of mne in the largest post-developing and after socialist countries on the world stage (cuervo-cazurra & li, 2020). the financial interest of these mne under the expected parity of exchange rates in investment expansion abroad, especially in the markets of asian countries, will remain very significant. apart from, in all likelihood, the significance of state protectionism in relation to the "native" mne will not weaken in the foreseeable future. a substantial feature of future progress concludes in sustainable development (sd) of the economy and society, which may already take place to the end of current decade (martynov, 2021, 2022). recent trends speak in favor of such an optimistic future. a very significant progress in terms of approaching the targets of sustainable development has been achieved in the asean countries (asean development, 2021). in particular, various eco-social projects are currently being replicated in indonesia, malaysia, vietnam, laos, and philippines, largely based on recognized scandinavian experience. also already in the coming several years successful diffusion of green and, in particular, circulation technologies in these countries are predicted (bain & company, temasek and microsoft, 2022). the powerful potential of public regulation, including at the local level, in sceme is an objective prerequisite for a successful transition to sustainable economic development at national level. there are at least three weighty arguments in favor of this statement. firstly, the achievement of sd imperatives in terms of indicators of production and consumption of resources, the development of social sectors and the resolution of humanitarian problems is impossible without the active participation of non-profit civil organizations and the state itself. thus, the world’s experience of recent years confirms the key importance of public-private partnership in the implementation of environmental and many related projects in the countries of southeast asia. secondly, to a no lesser extent, state intervention is required to fulfill the conditions for a stable balance between the proportions of economic output and the distribution of income. the title role of the state as a systemic regulator still remains undeniable. it is fundamentally important that the monetary stabilization and financial policy are designed to be supplemented by solutions that initiate favorable shifts in the long-term development of economic and social sectors. thirdly, the state and its competent agencies play an exclusive role in fulfilling the conditions of adaptation as resilience to possible adverse changes. here, the paramount value of implementing an adequate state policy to neutralize climate shocks should also be mentioned. at the same time, in today's market realities, public regulation aimed at achieving sustainable social progress can be successful only if it is effectively complemented by business performance. it is worth recognizing that, in general, there has been a profound shift in the activities of large corporations towards the recognition of the imperatives of sustainable development and the need to adapt to the impulses of unsustainable changes (s&p global, 2022). in sceme, large corporations are also increasingly following the example of these companies (asean development, 2021; sachs et al., 2021). truth, judging by real experience, charitable activities in this field of big business are distinguished by a deliberately limited scale. the increase of this scale simply contradicts the goals of maximizing financial results and improving / maintaining a competitive position, which remain as the main ones for successful modern corporations. also, the key partner of the state in the process of transition to sustainable development and its approval is small and medium-sized businesses. it is difficult to underestimate its possible contribution to achieving sustainable progress in the considered conglomerate of national economies. this, for example, is evidenced by the choice of consumers in india and the countries of southeast asia in favor of ecologically impeccable and exclusive food products and furniture items produced by individual entrepreneurs (sachs et al., 2021). a special question concerns the significant positive contribution to the resolution of sustainability problems in various sectors, which is already being made by the ecosystem business, operating on the principles of equality and transparency (adner, 2017). there is a significant expansion in relation to the scale of the ecosystems business. thus, the spread of successful ecoinnovation systems in a number of asean countries has gained universal recognition (jintana et al., 2020). however, the potential increase in the weighty of this sector, which has mainly centered about digital platforms, in comparison with the large corporate and other sectors seems to be notoriously moderate. v. discussion and conclusion it is impossible to ignore the existing imperfections of market institutions in the countries of the new state capitalism. however, these imperfections seem quite surmountable. one can expect that the affirmation of the above indicated trends in structural changes will be associated with significant institutional improvements. in turn, as they gradually accumulate, a qualitative shift may occur. it will be expressed in a rapid approximation of the quality of institutions in the hybrid economies under consideration to the level of western countries (nguyen et al., 2018). this result would be achieved without frontal institutional liberalization as a necessary condition albeit volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.270 | http://emaj.pitt.edu arkady martynov emerging markets journal | p a g e 5 3 deregulation and partial liberalization in selected markets in sceme, accompanied by a reduction in the corruption "overhang", can bring very positive results. however, in comparison with majority of western countries the ordinal excess of the state capital presence in sceme is likely to be stored. it seems reasonable to agree with the wellsubstantiated point of view (alami & dixon, 2021), that the establishment of a new state capitalism presents a global phenomenon. however, this conclusion does not at all imply the expediency of unequivocal acceptance by countries with emerging markets and the prevailing statecapitalist order of the key value and financial attributes inherited to the global capitalist market in its western version. these countries are objectively interested in maintaining the institutional mechanisms that allow using relatively cheap resources and labor as a competitive advantage by means of targeted state regulation and, to an even greater extent, active involvement of state capital in the national economic transformation. on a global scale, the significant dependence of sceme's on developed market economies is likely to continue. at the same time, their competitive advantages as growing national economies will remain. of course, the author is fully aware of the sufficient skepticism regarding his research, which comes from an optimistic reproduction of the framework conditions for the long-run transformation of the considered conglomerate of national economies. amid the war in ukraine, one should take into account the possibility of a negative scenario of world development in the coming decade. the danger of largescale military conflicts, moreover, with the use of destructive thermonuclear and other weapons, remains very strong. the extra gloomy predictions about the apocalypse of human society due to geopolitical confrontation retain their significance. nevertheless, there are good reasons to hope for the realization of a positive global development scenario in the end. this desired outcome is evidenced to a large extent by the choice of the ideology of sustainable social progress on the world stage, which is fixed in the 2030 agenda adopted by the united nations (un). finally, it is legitimate to conclude about the possibility of the future transformation of a hybrid national economy with a prevailing state-capitalist component into a sustainably reproducible economy characterized by an efficient and simultaneously fair distribution of resources, incomes and capital. the existing institutions and other main attributes of hybrid eme with a leading state-capitalist order have likely been viable in the face of future challenges, provided that an overall positive scenario of world development in the main fields of social action would take place despite of weighty obstacles. references adner, r. (2017). ecosystem as structure: an actionable construct for strategy. journal of management, 43(1): 39–58. doi: 10.1177/0149206316678451 alami, i., & dixon, a. (2020). state capitalism(s) redux? theories, tensions, controversies. competition & change. 24(1): 70–94. doi: 10.1177/1024529419881949 alami, i., & dixon, a. (2021). uneven and combined state capitalism. epa: economy and space. 0(0): 128. doi: 10.1177/0308518x211037688 asean secreteriat (2021). asean development outlook: inclusive and sustainable development. (2021). july 2021. jakarta. asean secretariat (2021). asean statistical yearbook. jakarta, 251. available at: https://www.aseanstats.org/publication/asyb2021 asian development bank (2022). asian development outlook update. september 2022. manila, available at: https://www.adb.org/sites/default/files/publicat ion/825166/ado2022-update.pdf asian development bank (2022). asian economic integration report. february 2022. manila, doi: http://dx.doi.org/10.22617/tcs220041-2 bain & company, temasek and microsoft (2022). southeast asia’s green economy 2022 report: investing behind new realities. available at: https://www.ecosperity.sg/content/dam/ecosper ity-aem/en/reports/southeast-asia-greeneconomy-2022-report.pdf casanova, l., & miroux, a. (2020). emerging market multinationals report 2020: 10 years that changed emerging markets. emerging markets institute, cornell university. available at: https://ecommons.cornell.edu/handle/1813/669 53 chandra r., & chatterjee e. (2021). state capitalism in india. in oxford handbook of state capitalism and the firm, wright, m., wood, g., cuervocazurra, a., sun, p., okhmatovskiy, i., and grosman, a. (eds.), oxford: oxford university press. cuervo-cazurra a. (2018). thanks but no thanks: stateowned multinationals from emerging markets and host country policies. journal of international business policy. 1(3-4): 128–156. cuervo-cazurra, a., & li, c. (2020). state ownership and internationalization: the advantage and disadvantage of stateness. journal of world business, 56(1). https://doi.org/ 10.1016/j.jwb.2020.101112. de gregorio j. (2018). productivity in emerging-market economies: slowdown or stagnation? peterson institute for international economics. working paper 18-12. available at: http://piie.com https://hdl.handle.net/1813/102811 https://hdl.handle.net/1813/102811 https://hdl.handle.net/1813/102811 volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.270 | http://emaj.pitt.edu the phenomenon of hybrid state capitalism in emerging market economies: present and future page |54| emerging markets journal devapriya, u. (2022).the crisis in sri lanka: economic and political dimensions. journal of indopacific affairs. air university press. published august 12. available at: https://www.airuniversity.af.edu/jipa/display/ article/3125910/the-crisis-in-sri-lankaeconomic-and-political-dimensions/ dieppe, alistair (2021). global productivity: trends, drivers, and policies. washington, dc: world bank. doi: 10.1596/978-1-4648-1608-6. international monetary fund. (2022b). world economic outlook: countering the cost-of-living crisis. washington, dc. october. available at: https://www.imf.org/en/publications/weo/issu es/2022/10/11/world-economic-outlookoctober-2022 jintana, j., limcharoen, a., patsopa, y., & ramingwong, s. (2020). innovation ecosystem of asean countries. amazonia investiga. 9(28): 356364. http://dx.doi.org/10.34069/ai/2020.28.04.40 kurlantzick, j. 2016. state capitalism: how the return of statism is transforming the world. new york: oxford. university press. lazard asset management, 2022. outlook on emerging markets. july, 8. available at: www.lazard.com marquis, c., & raynard, m. (2015). institutional strategies in emerging markets. the academy of management annals, 9(1): 291–335. http://dx.doi.org/10.1080/19416520.2015.1014 661 martynov, a. (2019). the phenomena of after socialist institutional transformation: china and russia comparison. mpra paper 97692, university library of munich, germany, revised 18 dec 2019. available at: https://mpra.ub.unimuenchen.de/97692 martynov, a. (2021). evolution and sustainability: what is it difference? academic journal of interdisciplinary studies, 10, 6: 135. https://doi.org/10.36941/ajis-2021-0160 martynov, a. (2022). sustainable overall social transformation: the problem of transition. international journal of current science research and review, 5(5): 1740-1747. https://doi.org/ 10.47191/ijcsrr/v5-i5-35 ministry of finance malaysia (2021). economic outlook 2022.. kuala lumpur, malaysia. available at: www.mof.gov.my nguyen, c.p., su, t.d. & nguyen, t.v.h. (2018). institutional quality and economic growth: the case of emerging economies. theoretical economics letters, 8(4): 1943-1956. https://doi.org/10.4236/tel.2018.811127 nguyen, t., nguyen q., & nguyen, m. (2021). digital transformation: opportunities and challenges for leaders in the emerging countries in response to covid-19 pandemic. emerging science journal. 5, special issue. doi: 10.28991/esj-2021-sper-03 nittayagasetwat a., & buranasiri j. (2022). international fund flows and anomalies in asian stock markets. asian economic and financial review, 12(3):194-211. doi: 0.55493/5002.v12i3.4443 nolke, a. (2018). dependent versus state-permeated capitalism: two basic options for emerging markets. international journal of management and economics. 54(4): 269–282. https://doi.org/10.2478/ijme-2018-0026 oecd (2020). business insights on emerging markets 2020. oecd development centre, paris. http://www.oecd.org okhmatovskiy, i., grosman, a., & sun, p. (2021). hybrid governance of state-owned enterprises. in oxford handbook of state capitalism and the firm, wright, m., wood, g., cuervo-cazurra, a., sun, p., okhmatovskiy, i., and grosman, a. (eds.), oxford: oxford university press. oxford business group (2021). guide to top emerging markets for 2021. available at: https://oxfordbusinessgroup.com/guide-topemerging-markets-2021 panibratov a. yu., & klishevich d. s. (2021). emerging market state-owned multinationals: a review and implications for the state capitalism debate. asian business and management. published march, 17. https://doi.org/10.1057/s41291-021-00150-6 penn world tables (2021). (https://www.rug.nl/ggdc/productivity/pwt) ricz, j. (2021). the anatomy of the newly emerging illiberal model of state capitalism: a developmental dead end? international journal of public administration. 44(14): 1253-1263. doi:10.1080/01900692.2021.1874984 sachs, j., kroll, c., lafortune, g., fuller, g., & woelm, f. (2021). sustainable development report 2021. cambridge: cambridge university press. doi: 10.1017/9781009106559 s&p global. (2022). the sustainability yearbook 2022. available at: https://www.spglobal.com/esg/csa/yearbook schedelik, m., nölke, a., mertens, d., & may, c. (2021). comparative capitalism, growth models and emerging markets: the development of the field. new political economy, 26(4): 514–526. https://doi.org/10.1080/13563467.2020.180748 7 http://www.lazard.com/ https://ideas.repec.org/p/pra/mprapa/97692.html https://ideas.repec.org/p/pra/mprapa/97692.html https://ideas.repec.org/p/pra/mprapa/97692.html https://ideas.repec.org/s/pra/mprapa.html https://mpra.ub.uni-muenchen.de/97692 https://mpra.ub.uni-muenchen.de/97692 https://doi.org/10.36941/ajis-2021-0160 https://doi.org/10.47191/ijcsrr/v5-i5-35 https://doi.org/10.4236/tel.2018.811127 https://doi.org/10.28991/esj-2021-sper-03 https://archive.aessweb.com/index.php/5002/article/view/4443 https://archive.aessweb.com/index.php/5002/article/view/4443 https://archive.aessweb.com/index.php/5002/article/view/4443 http://www.oecd.org/ https://oxfordbusinessgroup.com/guide-top-emerging-markets-2021 https://oxfordbusinessgroup.com/guide-top-emerging-markets-2021 volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.270 | http://emaj.pitt.edu arkady martynov emerging markets journal | p a g e 5 5 sigma. (2019). emerging markets: the silver lining amid a challenging outlook. swiss re institute. no.1. available at: https://www.swissre.com/institute/research/sig ma-research stiglitz, j. (2000). whither reform? ten years of the transition. in pleskovic, b. and stiglitz, j. (ed.). annual bank conference on development economics 1999. wash., dc: world bank, 2756. united nations un (2022). technology and innovation report. united nations. new york, new available at: https://unctad.org/system/files/officialdocument/tir2020_en.pdf van apeldoorn, b., & de graaff, n. (2022). the state in global capitalism before and after the covid-19 crisis. contemporary politics, 28(3): 306-327. doi: 10.1080/13569775.2021.2022337 wood, g., & wright, m. (2015). corporations and new statism: trends and research priorities. the academy of management perspectives. 29(2): 271–286. https://doi.org/10.5465/amp.2013.0006 world bank. (2020). global economic prospects, january 2020: slow growth, policy challenges. washington, dc: world bank. doi: 10.1596/978-1-4648-1468-6. world bank (2021). global economic prospects, june 2021. washington, dc: world bank. doi: 10.1596/978-1-4648-1665-9. world bank (2022). global economic prospects. june 2022. washington, dc: world bank. doi: 10.1596/978-1-4648-1843-1 world bank (2018). high-growth firms: facts, fiction, and policy options for emerging economies. washington, dc: world bank. accessed november 16. available at: https://www.worldbank.org international monetary fund. (2022a). world economic outlook. washington, dc, july. available at: https://www.imf.org/en/publications/weo/issu es/2022/07/26 world bank (2022). transition, the first ten years. analysis and lessons for eastern europe and the former soviet union. (2002). open knowledge repository, washington dc, usa. wright, m., wood, g., musacchio, a., okhmatovskiy, i., grosman,a., & doh j. (2021). state capitalism in international context: varieties and variations. journal of world business. 56, 101160. https://doi.org/10.1016/j.jwb.2020.101160 https://www.swissre.com/institute/research/sigma-research https://www.swissre.com/institute/research/sigma-research https://doi.org/10.5465/amp.2013.0006 https://doi.org/10.1016/j.jwb.2020.101160 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu how big data patents affect enterprise data technology's impact on market value and profitability shah mehmood wagan sichuan university, china | e-mail: shah.mehmood04@outlook.com sidra sidra sichuan university, china | e-mail: sidra_scu@outlook.com abstract this paper explores in detail the impact of enterprise data technology capabilities on market value and profits. using big data patent statistics closely related to data collection, analysis and application as a measurement standard, the study reveals the positive role of enterprise data technology capabilities in significantly improving market value, especially in the financial and wholesale and retail industries. however, despite the huge potential, most companies still face many challenges in converting this technological advantage into actual profits, and in some cases even have an adverse impact on the profits of industrial enterprises. it is worth noting that industrial internet supplier companies have successfully achieved a double leap in market value and profits with their comprehensive investment in r&d, capital, government subsidies and it infrastructure. based on this, the study puts forward a series of suggestions to promote enterprises to strengthen data technology capabilities, increase complementary investments, develop diversified application scenarios and profit models, and further improve data market mechanisms and infrastructure construction to comprehensively promote the effective development and utilization of data. in order to continue to promote the development and utilization of data by various market entities in usa, it is recommended to focus on improving enterprise data technology capabilities, increase complementary investments, develop application scenarios and profit models for data technologies, cultivate professional data service institutions, and promote the construction of data factor market mechanisms and infrastructure. keywords: data elements, data technology capabilities, complementary inputs, big data patents, market value and profitability * this study would not have been possible without the joint efforts and support of sidra sidra’s outstanding collaboration. we would like to especially thank collaborator sidra sidra for her valuable contributions in the research design, data collection, and analysis. her professional insights and unremitting efforts have greatly promoted the in-depth development of this study. in addition, we would like to thank all the respondents who participated in this research. it is their sincere feedback that enabled us to gain a deeper understanding of the multidimensional characteristics of compensatory consumption behavior. this paper was not supported by any organization or individual. new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.338 | http://emaj.pitt.edu | mailto:shah.mehmood04@outlook.com mailto:sidra_scu@outlook.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://creativecommons.org/licenses/by/3.0/us/ volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.338 | http://emaj.pitt.edu shah mehmood wagan, sidra sidra emerging markets journal page |25| how big data patents affect enterprise data technology's impact on market value and profitability shah mehmood wagan sidra sidra i. introduction since 2010, with the large-scale commercial application of new generation information technologies such as the internet, internet of things, cloud computing and artificial intelligence, the scale of data resources has grown rapidly and new models as well as new formats of digital economy supported by data have emerged in large numbers. the important status and value creation potential of data as a key production factor have been widely recognized by all sectors of society. it has become a national strategy to establish and improve the institutional mechanisms related to data elements and give full play to the supporting role of data elements in the digital economy. in october 2019, the fourth plenary session of the 19th the federal government of usa adopted the "decision of the federal government of usa on several major issues concerning upholding and improving the socialist system with usa characteristics and promoting the modernization of the national governance system and governance capacity", proposing to improve the mechanism for the market to evaluate the contribution of production factors such as labor, capital, land, knowledge, technology, management and data as well as determining remuneration based on contribution, formally establishing the status of data as a production factor. in january 2022, the state council issued the "14th five-year plan for the development of digital economy", which clearly stated that the supply of highquality data elements should be strengthened, the marketoriented circulation of data elements should be accelerated and the development as well as utilization mechanism of data elements should be innovated, so as to give full play to the role of data elements. in december 2022, the "opinions of the the federal government of usa and the state council on building a data infrastructure system to better play the role of data elements" was officially released, providing basic systems and guiding principles for the development and utilization of data elements in terms of data property rights, circulation and transactions, income distribution and security governance. it aims to give full play to usa's advantages such as massive data scale and rich application scenarios, stimulate the value creation potential of data elements and enhance new momentum for the development of the digital economy. however, from the perspective of the digital transformation practices of enterprises, especially manufacturing enterprises, there are still many practical difficulties and challenges in the development and utilization of data resources as well as the mining and release of the value of data elements. whether data resources can be truly transformed into data elements depends on whether the enterprise has the corresponding data technology capabilities to extract effective information from the original data and apply it to all aspects of the enterprise's production and operation. after the relevant technical capabilities are formed, whether the enterprise can achieve efficiency improvement and profit growth with the help of data elements is still uncertain, and is subject to many restrictions in the internal capital, technology, management, personnel and other aspects of the enterprise and the external environment. to this end, this paper intends to construct a data patent intensity variable based on literature review and mechanism analysis, using enterprise patent statistics related to data collection, analysis and application, to characterize the data technology capabilities of micro-enterprises, analyze its overall impact on the market value and profits of listed companies and the industry heterogeneity characteristics, and explore the realization path of enterprises using data technology capabilities to improve profits, and provide reference for the effective use of data resources and support for the high-quality development of the digital economy from an empirical perspective. the subsequent contents of this article are arranged as follows: in the second part, the relevant research on data elements, enterprise data technology capabilities and their impacts is sorted out. on the basis of summarizing the existing research content and conclusions, the research ideas and marginal contributions of this article are proposed. in the third part, the variables and models used in this article are constructed to introduce the empirical analysis ideas. in n the fourth part, the overall impact of enterprise data technology capabilities on market value and profits is analyzed, and the endogeneity problems of key variables are processed and tested. in the fifth part, the industry heterogeneity effects of enterprise data technology capabilities are analyzed, and industrial internet supplier companies are used as subsamples to explore and analyze the specific mechanisms by which enterprises can achieve profit improvement through data technology capabilities. in the sixth part, research conclusions and policy recommendations str presented. ii. literature review data elements and enterprise data technology capabilities the rapid development of new generation information technology has significantly reduced the cost of data collection, storage, processing and use, making it a key production factor in the digital economy era (bhat & momaya, 2020). data have unique technical-economic characteristics, such as non-competitiveness, partial exclusivity, externality and immediacy, which can play a positive role in the economy and society through macro value creation, micro efficiency improvement and r&d innovation promotion. most theoretical studies support the role of data in promoting economic growth and value creation, with some scholars arguing that raw data are difficult to directly participate in production activities (cai & wu, 2024). to be transformed into a real production factor, enterprises must have data technology capabilities, with big data analysis as the core for extracting effective information. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.338 | http://emaj.pitt.edu how big data patents affect enterprise data technology's impact on market value and profitability page |26| emerging markets journal impact of enterprise data technology capabilities on market value and profits how to fully mobilize the enthusiasm of market players and promote the development and utilization of data are crucial to exploring the value creation potential of data and effectively giving play to the role of data as a production factor (floren et. al., 2021). existing studies have shown that enterprises carried out rich practices in data collection, storage, analysis as well as use and have had a certain improvement effect on performance (guan et. al., 2021). first, in terms of market value performance, existing studies and practices have shown that the accumulation of corporate data resources and the improvement of data technology help to improve investment market confidence (hlasny, 2023). the massive data resources and related technical capabilities owned by large technology companies such as apple, microsoft, amazon and facebook have become their important assets, providing investors with important new indicators for evaluating future income, which can effectively improve market expectations and achieve corporate market value (hlasny, 2023; hu et. al., 2021). secondly, in terms of corporate profitability and other performance indicators, existing studies have tried to use variables such as questionnaires and it investment to analyze the impact of corporate data resources, data capabilities, etc. on corporate sales revenue, profit level and production efficiency (huang et. al., 2023; ji et. al., 2022). related research has verified the role of corporate data technology capabilities in improving single indicators, but lacks a systematic assessment of corporate market value and profits (khunakornbodintr, 2024). enterprise data technology capabilities and complementary investments data technology capabilities are essential for transforming data resources into valuable data elements (kim et. al., 2021). enterprises need to invest in industry scenario mining and technical support capacity improvement to fully realize the value creation potential of data elements (lee et. al., 2023). financial insurance and e-commerce are mature fields for data technology applications, while the manufacturing industry faces challenges like complex data structures, high analysis thresholds, and data security. to fully utilize data technology capabilities, enterprises must continuously improve their technology level, r&d capabilities and make adaptive adjustments in personnel allocation and organizational management (luo & zor, 2023; piekkola, 2020). factors like decentralized decision-making mechanisms, employee digital skills and data-driven decision-making can help enterprises efficiently develop and utilize data resources (rahimnia & molavi, 2021). iii. research ideas this paper focuses on the importance of enterprise data technology capabilities in achieving profitability and economic benefits (ribeiro & shapira, 2020). it identifies the prerequisites for enterprises to use data technology capabilities to achieve profitability and examines its impact mechanism on enterprise profits (salas et. al., 2023; song & zhao, 2021). the study distinguishes between data resources, data elements and data technology capabilities, focusing on the distinction between raw data resources and production factors (talafidaryani, 2021). the research uses big data-related patent statistics to construct data technology capability variables, which can more objectively and accurately reflect the development level of enterprise data technology capabilities (wang et. al., 2021). it also distinguishes the impact of data technology capabilities on enterprise market value as well as profits and examines the industry heterogeneity of related impacts (wong et. al., 2023). the paper compares and analyzes the results of the impact of data technology capabilities on enterprise market value and profits, exploring its heterogeneous impact on industrial enterprises, financial and wholesale and retail enterprises, and professional service enterprises (yang, 2021). the study provides a reference for enterprises to transform data technology capabilities into profitability by analyzing the impact path of data technology capabilities and their complementary inputs on enterprise profits (yang et. al., 2020). the research selects a sub-sample of companies likely to achieve profits by relying on data technology capabilities and analyzes the effects as well as mechanisms of the impact of data technology capabilities and related complementary inputs on the sub-sample companies (yin et. al., 2022). research ideas on the impact of enterprise data technology capabilities on market value and profits are indicated below. figure 1. research ideas on the impact of enterprise data technology capabilities on market value and profits source: authors’s compilation iv. research design sample selection and data sources this paper uses usa's nyse u.s. 100 index top companies from 2009 to 2023 as the research sample and utilizes the number of patent applications as well as authorizations related to corporate data technology capabilities to construct core explanatory variables. after matching patent data with company financial data, 3,849 listed companies were obtained as the initial sample, totaling 28,145 company-year observations. the patent data used in this paper come from the patent database of the state intellectual property office and the financial data of listed companies comes from the wind database and the bloomberg. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.338 | http://emaj.pitt.edu shah mehmood wagan, sidra sidra emerging markets journal page |27| variable construction core explanatory variables this paper defines data technology capability as the technical capability of enterprises to transform raw data resources into production factors (data elements) that participate in value creation (yue & guo, 2022). with the data service support of the usa automotive intellectual property investment and operation center, we selected the number of patent applications and authorizations directly related to the development and utilization of data elements from the patent database of the state intellectual property office as a measure of enterprise data technology capability. this paper adopts the method of combining the international patent classification (ipc) with keyword retrieval and selects a total of 7 patents, namely cloud computing, big data, machine learning, deep learning, knowledge graph, computer vision and natural language processing. among them, cloud computing and big data patents reflect the technical capabilities of enterprises in data storage and management. machine learning, deep learning, knowledge graph, computer vision and natural language processing patents reflect the technical capabilities of enterprises in data analysis and application. in the subsequent empirical analysis, the above 7 patent statistics will be summed up to form a big data patent variable, which is used to characterize the comprehensive technical capabilities of enterprises in big data storage, management, analysis and application. based on the original patent data, this paper draws on zeng et. al.'s (2020) processing method for artificial intelligence technology patent data to calculate the cumulative number of data patent applications and authorizations of enterprises since 2010 and obtain the stock of data patent applications and authorizations, calculate the ratio of patent applications and authorization stocks to total assets of the year, add 1 to the result and take the natural logarithm, so as to obtain the data patent application intensity (data1) and data patent authorization intensity (data2) of the enterprise in that year. it should be further pointed out that the enterprise data patent intensity variable used in this paper can only reflect the data technology capabilities formed by the enterprise through its own r&d investment and practical accumulation and cannot cover the data technology as well as related services obtained by the enterprise through external procurement or cooperation (zeng et. al., 2020). therefore, subsequent empirical research will focus more on how the data technology capabilities acquired by usa’s listed companies based on r&d investment and practical accumulation affect their market value and financial performance, and further analyze the impact as well as mechanism of enterprise data technology in different scenarios such as self-use of technology and use of technology for others. variable construction explained variable in order to analyze and test the relationship between data technology capabilities and corporate performance (zhang et. al., 2024), this paper constructs the following two types of explained variables, which respectively represent the performance of listed companies in financial markets and financial returns: (1) enterprise market value (lntobin) according to the formula (market value of tradable shares + number of non-tradable shares × net assets per share + book value of liabilities) / total assets, calculate the enterprise tobin's q value and take the natural logarithm to measure the financial market value of listed companies. (2) corporate profit (lnprofit) the total profits of listed companies are selected and taken into account the natural logarithm to represent the corporate profit level. at the same time, in the robustness test part, the annual growth rate of corporate operating income (growth) and net profit margin of total assets (roa) are used to replace the corporate profit variable to test the impact of data patent intensity on other financial indicators such as corporate operating income and profitability efficiency. when regressing corporate market value, corporate profits and net profit margin of total assets will be added to the regression model as control variables. variable construction control variables in order to control the impact of non-data technology capability factors such as enterprise characteristics and operating environment on the market value and profits of listed companies, this paper refers to existing research in related fields and constructs the following control variables from the basic information, capital structure, management system, r&d investment and policy support of listed companies. among them, the basic information variables of listed companies include enterprise size (size), duration (firmage) and state-owned enterprises (soe). capital structure variables include asset-liability ratio (lev) and cash flow ratio (cashflow). management system variables include the number of directors (board), equity concentration (top1), equity checks and balances (balance) as well as the proportion of independent directors (indep). r&d investment variables include r&d personnel investment (lnrdps) and r&d capital investment (lnrdspd). policy support variables are government subsidies (lngovsub). at the same time, industry, year and province dummy variables will be added to the regression model to control the trend of industry, year and province changes that affect corporate performance as seen in table 1. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.338 | http://emaj.pitt.edu how big data patents affect enterprise data technology's impact on market value and profitability page |28| emerging markets journal table 1: variable descriptive statistics source: authors’ compilation note: to mitigate the influence of extreme values, variables were winsorized at the 1% level. the descriptive statistical characteristics of the above variables are summarized in table 1. the instrumental variables (data1iv, data2iv), dummy variables (dt1, dt2) and it infrastructure (lninfra) variables used in the subsequent instrumental variable regression, treatment effect regression and mechanism test are also listed here. model setting this article first examines the relationship between data patent intensity as well as the market value performance of listed companies and establishes the following formula: among them, mv it represents the market value performance of enterprise i in year t and lntobin it is used as the explained variable in the regression analysis. patent it represents the data patent strength of enterprise i in year t and is replaced by two core explanatory variables, data1 it and data2 it, in the regression analysis .j it , year t , province p , industry q are other control variables, year dummy variables, province dummy variables and industry dummy variables that affect the market value performance of enterprises, respectively. ε it is the error term. α 1 and α j are parameters to be estimated. α 1 is the parameter of interest in this paper, which indicates the direction and degree of influence of data patent intensity on the market value performance of enterprises. the following formula is established for the relationship between data patent strength and corporate financial performance: among them, fp it represents the financial performance of enterprise i in year t. in the regression analysis, lnprofit it is used as the main explained variable, which is replaced by growth it and roa it in the robustness test . patent it represents the patent strength of enterprise i in year t. the specific setting is the same as formula (1). add other control variables that affect the financial performance of enterprises.j it , the setting of year, province and industry dummy variables is the same as in formula (1). β 1 is the parameter of interest in this paper, which indicates the direction and degree of the impact of data patent intensity on corporate financial performance. in view of the impact mechanism of data patent intensity on corporate profits, we add the moderating variable and the interaction term between the moderating variable and the core explanatory variable to equation (2) to establish the following formula: the moderator variables that this paper focuses on include the company's own r&d personnel investment and r&d capital investment level, the degree of government subsidies received by the company and the level of it infrastructure development. therefore, on the basis of keeping other settings in equation (2) unchanged, the moderator variable moderator it is replaced with r&d personnel investment and r&d capital investment, government subsidies and it infrastructure variables. the regression coefficient β 3 is used to analyze and determine the impact mechanism of data patent intensity on corporate profits. table 2: regression results of data technology capability and enterprise value source: authors’ compilation volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.338 | http://emaj.pitt.edu shah mehmood wagan, sidra sidra emerging markets journal page |29| note: values in parentheses are t-values. 2. ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively. 3. regression conducted using stata software with reghfe command, results may vary. analysis of the impact of enterprise data technology capabilities on market value and profits this section uses panel data of 3,849 companies from 2009 to 2023 as the initial sample, analyzes and tests the impact of data technology capabilities on the market value and profits of listed companies and conducts robustness tests as well as endogeneity treatment on the benchmark regression results. benchmark regression of data technology capabilities and corporate performance in view of the correlation between data technology capabilities and corporate market value, this paper uses a multidimensional fixed effect model for regression according to formula (1), controls the fixed effects of year, province and industry, and uses robust standard errors at the corporate level. a total of 6 submodels are constructed and the relevant results are summarized in table 2. model 1 and model 2 use the data patent application intensity and data patent authorization intensity for univariate regression respectively. models 3 to 6 add different control variables for regression. among them, the variables such as r&d personnel investment, r&d capital investment and government subsidies used in models 5 and 6 are not included in the subsequent related regression models because they have many missing values and do not bring about an increase in r2. data patent intensity is significantly positive in all 6 sub-models, indicating that there is a significant and robust positive correlation between data patent intensity and corporate market value. under the empirical model setting of this paper, keeping other conditions unchanged, the data technology capabilities of enterprises can have a significant effect on improving their market value. in view of the correlation between data technology capabilities and corporate profits, six sub-models were constructed based on formula (2) for regression and year, province, industry fixed effects and enterprise-level clustering robust standard errors were also used. the relevant results are summarized in table 3. the regression coefficients of data patent intensity in the six models are all significantly negative, indicating that there is a significant negative correlation between data technology capabilities and corporate profits. therefore, under the setting of the empirical model in this paper, corporate data technology capabilities do not have a significant profitenhancing effect, that is, the production and operation activities and investments carried out by enterprises around data are difficult to achieve stable financial returns. table 3: regression results of data technology capability and enterprise profit source: authors’ compilation robustness test and endogeneity treatment the study examines the impact of data technology capabilities on the market value and profits of listed companies. the results show that data patent intensity has a significant effect on the enterprise's market value, but negatively impacts its profits. the study also uses the annual growth rate of corporate operating income and the net profit margin of total assets as alternative indicators of corporate profits. the results are consistent with the benchmark regression results, indicating that data technology capabilities have not yet improved the financial benefits of listed companies. the study also uses the share shift method to construct bartik variables for instrumental variable regression, revealing that data patent intensity enhances the market value, but negatively impacts profits. the results support the theoretical hypothesis that there are significant differences in the effects of enterprise data technology capabilities on market value and profits. however, if enterprises cannot convert these improvements into actual profit gains, it may negatively impact long-term market expectations and hinder technological innovation as well as development. further research is needed to explore feasible paths for companies to achieve profit gains through data technology capabilities. analysis of the industry-heterogeneous impact and mechanism of enterprise data technology capabilities on market value and profits this study examines the impact of data technology capabilities on the market value and profits of listed companies. it selects three sub-samples: industrial enterprises, financial and wholesale and retail enterprises as well as professional service enterprises. data patents volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.338 | http://emaj.pitt.edu how big data patents affect enterprise data technology's impact on market value and profitability page |30| emerging markets journal are mainly concentrated in manufacturing, information transmission, software and information technology services. the study focuses on the industrial enterprise subsample, which includes manufacturing, construction, mining, electricity, heat, gas, water production and supply industries. the financial and wholesale and retail enterprises subsample analyzes the impact of data resources on corporate performance. the study concludes that data technology capabilities can enhance corporate value and empower client enterprises. analysis of regression results by industry the study examines the impact of data patent intensity on the market value and profits of companies in three industries. the results show that the industries with the highest number of data patents and data development as well as utilization have a significant positive impact on the market value of listed companies. financial, wholesale and retail enterprises have a greater impact on market value due to their focus on financial credit and precision marketing, primarily based on personal data analysis. however, there is a significant negative correlation between data patent intensity and profits for industrial enterprises, as they face practical difficulties such as unclear application scenarios and complex production as well as manufacturing processes. in contrast, professional service enterprises show a positive impact trend, with service output based on their data technology capabilities potentially bringing profit increases. as shown in table 4, these results provide inspiration for further mechanism analysis and the identification of enterprise sub-samples that can achieve profit increases through data technology capabilities and related service outputs. table 4: regression results of data technology capabilities on corporate value and profitability by industry source: authors’ compilation note: the regression coefficients of data1 and control variables are omitted for brevity. industrial internet is a new form of digital economy that focuses on providing products and services for industrial enterprises through data collection, aggregation, analysis and application. this study aims to analyze the impact and mechanism of data patent intensity on the performance of industrial internet supplier companies. the research found that professional service companies that focus more on the output of technical products and services have a positive regression coefficient of data patent intensity on corporate profits. the paper also found that industrial imupnternet supplier companies can achieve a common increase in market value and profits through the external output of data technology capabilities. this is different from other industries because these companies can transform data into products and services for external output, resolving the contradiction between market value returns and financial benefits. the research also analyzed the correlation between data patent intensity and corporate profits by adding supporting inputs/conditions that form a complementary relationship with data technology capabilities as moderating variables in the regression model. as shown in table 5, four moderating variables were selected: r&d personnel investment, r&d capital investment, government subsidies and it infrastructure of industrial internet supplier companies. the newly added it infrastructure variable selected the cumulative value of the number of 4g and 5g base stations in the city where the listed companies are located from 2014 to 2023. table 5: regression results of data technology capability on firm value and profitability for industrial internet supply firms source: authors’ compilation note: the regression coefficients of control variables and other variables are not fully shown, but are reserved for reference. the study reveals that investment in r&d and innovation can improve corporate profits by enhancing organizational management, human capital and business processes. government subsidies can also provide financial support for enterprises with data technology capabilities, enhancing their profit-enhancing effect. the usa government has prioritized digital transformation in traditional industries, introducing policies and subsidies for industrial internet construction and "5g+industrial internet" technology transformation projects. these policies can guide digital development and provide financial support for innovation-driven enterprises. additionally, it infrastructure, particularly 4g and 5g mobile communication technologies can significantly impact data development and utilization, data technology capabilities and economic output as seen in table 6. high it infrastructure levels are more likely to increase corporate profits for industrial internet supplier companies. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.338 | http://emaj.pitt.edu shah mehmood wagan, sidra sidra emerging markets journal page |31| table 6: regression results of data technology capability on firm profitability mechanism test source: authors’ compilation note: the regression coefficients of data2 (data patent authorization intensity), control variables, and other variables are not fully shown, but are reserved for reference. table 6 shows the impact mechanism of data technology capabilities on corporate profitability and examines the moderating effects of factors such as r&d personnel investment, r&d funding investment, government subsidies and it infrastructure through different models. the results show that in all four models, data technology capabilities (data1) have a significant positive impact on corporate profitability (lnprofit), and the coefficient is highly statistically significant. specifically, the investment in r&d personnel and r&d funding has enhanced the contribution of data technology capabilities to corporate profits, while government subsidies and improvements in it infrastructure have also significantly promoted the effect of companies using data technology capabilities to improve profitability. this shows that by increasing complementary inputs, companies can better convert data technology capabilities into actual profit growth. v. discussion and limitations the study uses big data patent statistics related to data collection, analysis and application to reveal the significant role of enterprise data technology capabilities in improving market value. especially in the financial and wholesale and retail industries, the enhancement of enterprise data technology capabilities has effectively enhanced the confidence of market investors, thereby promoting a significant increase in market value. this phenomenon shows that in the context of the digital economy, data have become an important part of the core competitiveness of enterprises, and its effective management as well as application can be directly reflected in the market valuation of enterprises. although enterprise data technology capabilities have a positive impact on market value, the study also points out that most companies face many limitations in converting data technology capabilities into actual profits. especially in industrial enterprises, complex production processes and uncertain application scenarios make it difficult to directly reflect the economic benefits of data technology capabilities and even have a negative impact on profits in some cases. this reminds us that while improving data technology capabilities, companies also need to pay attention to its effective application path in actual business. when facing the same challenges, industrial internet suppliers have successfully achieved a double increase in market value and profits by increasing complementary investments in r&d, capital, government subsidies and it infrastructure. this successful experience provides important inspiration for the business community. in the process of applying data technology capabilities, companies should focus on building comprehensive technical support and application scenarios, and make up for the shortcomings of technology application through multi-faceted investments, thereby maximizing the economic benefits of data resources. in addition, the government and relevant industry associations should also play an active role in policy support and market environment optimization to create good external conditions for the application of enterprise data technology. vi. conclusion and recommendations this paper examines the impact of enterprise data technology capabilities on the performance of listed companies in a specific country. it uses seven patent statistics, including cloud computing, big data, machine learning, deep learning, knowledge graphs, computer vision and natural language processing to construct a data patent intensity variable as a measurement indicator of these capabilities. the study matches financial data from nyse u.s. 100 index top companies and conducts an empirical analysis on the impact of these capabilities on market value and profits. the results show that data technology capabilities help increase the market value of listed companies, particularly for financial, wholesale, and retail companies. the application and holding of big data patents can signal a company's high level of data resource accumulation, strong data technology capabilities and good digital development direction. financial, wholesale and retail companies mainly collect, analyze and apply personal data, which enhance investors' confidence in the market and have a more obvious market value improvement effect. however, most companies struggle to convert the potential value of data resources into actual profits. regression analysis shows a significant negative correlation between data patent intensity and corporate profits due to imperfect technical complementarity conditions and complex production business processes. industrial internet supplier companies can transform data technology capabilities into profit means, with data patent intensity positively impacting market value and profits in multiple models. to promote data development and utilization, policy recommendations include cultivating data technology capabilities, increasing complementary investment and balancing short-term benefits with longterm development. companies should clarify the key production factor status of data and its long-term value creation potential and have correct expectations for the development stage and initial returns of new technologies, models and formats. this paper suggests several strategies to enhance the economic benefits of data elements and volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.338 | http://emaj.pitt.edu how big data patents affect enterprise data technology's impact on market value and profitability page |32| emerging markets journal data technology capabilities. it suggests that enterprises should actively explore data application scenarios, develop data products and services and transform technical capabilities into business models and profit means. this will resolve constraints and difficulties faced by enterprises in data element strategic planning and investment decisions, enhancing the financial investment market's confidence in the big data industry. in order to effectively promote the development and application of enterprise data technology, policymakers should focus on the following aspects: first, strengthen the construction of data factor market mechanism, promote the effective circulation and transaction of data resources. second, increase policy support and financial subsidies for data technology research and development and application, encourage enterprises to increase r&d investment and enhance data technology innovation capabilities. in addition, data infrastructure construction should be strengthened, such as 5g networks, data centers, etc. to provide solid support for the application of enterprise data technology. through these policy measures, a good external environment can be created for enterprises to promote the continuous improvement of their data technology capabilities and the steady growth of market value. the paper also suggests accelerating the cultivation of specialized data intermediary service agencies to tap into the potential value of data elements in traditional industries. by providing value-added services like data collection, integration, processing and analysis, these services can reduce capital and technical thresholds, accelerate data resource development and fully realize the value creation potential of data elements in traditional industries. fourth, the paper recommends accelerating the construction of data factor market mechanisms and supporting facilities to provide a high-quality external environment for data trading, circulation, development and utilization. it suggests that government departments and industry associations should strengthen policy guidance and support for data holding as well as using enterprises, enhance the awareness and willingness of micro-subjects to participate in data factor trading, circulation, development and utilization, and strengthen digital infrastructure such as 5g, data centers and artificial intelligence. references bhat, s., & momaya, k. s. (2020). innovation capabilities, market characteristics and export performance of emnes from india [article]. european business review, 32(5), 801-822. https://doi.org/10.1108/ebr-08-2019-0175 cai, y., & wu, g. (2024). the u-shaped impact of export quality on firms' innovation output: empirical evidence from china [article]. plos one, 19(2), article e0298358. https://doi.org/10.1371/journal.pone.0298358 floren, h., barth, h., gullbrand, j., & holmen, m. (2021). additive manufacturing technologies and business models a systematic literature review [review]. journal of manufacturing technology management, 32(1), 136-155. https://doi.org/10.1108/jmtm-01-2020-0009 guan, j., xu, j., han, y., wang, d., & xing, l. (2021). feature and tendency of technology transfer in z-park patent cooperation network: from the perspective of global optimal path [article]. journal of data and information science, 6(4), 111-138. https://doi.org/10.2478/jdis-2021-0034 hlasny, v. (2023). vocational training support and innovation at smes [article]. asia pacific journal of innovation and entrepreneurship, 17(2), 99-120. https://doi.org/10.1108/apjie-092022-0096 hu, y., sun, s., & dai, y. (2021). environmental regulation, green innovation, and international competitiveness of manufacturing enterprises in china: from the perspective of heterogeneous regulatory tools [article]. plos one, 16(3), article e0249169. https://doi.org/10.1371/journal.pone.0249169 huang, q., xu, c., xue, x., & zhu, h. (2023). can digital innovation improve firm performance: evidence from digital patents of chinese listed firms [article]. international review of financial analysis, 89, article 102810. https://doi.org/10.1016/j.irfa.2023.102810 ji, p., yan, x., & shi, y. (2022). information technology investment and innovation performance: does investment paradox exist? [article]. journal of asia business studies, 16(2), 230-244. https://doi.org/10.1108/jabs-07-2021-0259 khunakornbodintr, s. (2024). examining the impact of green technological specialization and the integration of ai technologies on green innovation performance: evidence from china [article]. frontiers in artificial intelligence, 6, article 1237285. https://doi.org/10.3389/frai.2023.1237285 kim, m.-s., lee, c.-h., choi, j.-h., jang, y.-j., lee, j.h., lee, j., & sung, t.-e. (2021). a study on intelligent technology valuation system: introduction of kibo patent appraisal system ii [article]. sustainability, 13(22), article 12666. https://doi.org/10.3390/su132212666 lee, j., park, s., & lee, j. (2023). exploring potential r&d collaboration partners using embedding of patent graph [article]. sustainability, 15(20), article 14724. https://doi.org/10.3390/su152014724 luo, k., & zor, s. (2023). how does social network in patent provide changes in the chinese manufacturing firm market value? [article]. heliyon, 9(3), article e14358. https://doi.org/10.1016/j.heliyon.2023.e14358 piekkola, h. (2020). intangibles and innovation-laborbiased technical change [article]. journal of intellectual capital, 21(5), 649-669. https://doi.org/10.1108/jic-10-2019-0241 volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.338 | http://emaj.pitt.edu shah mehmood wagan, sidra sidra emerging markets journal page |33| rahimnia, f., & molavi, h. (2021). a model for examining the effects of communication on innovation performance: emphasis on the intermediary role of strategic decision-making speed [article]. european journal of innovation management, 24(3), 1035-1056. https://doi.org/10.1108/ejim-10-2019-0293 ribeiro, b., & shapira, p. (2020). private and public values of innovation: a patent analysis of synthetic biology [article]. research policy, 49(1), article 103875. https://doi.org/10.1016/j.respol.2019.103875 salas, n. a., holguin, h. m., lucio-arias, d., sanchez, e. c., & villarreal, n. (2023). innovation and productivity in small and medium-sized enterprises: evidence from the colombian manufacturing sector [article; early access]. journal of small business and enterprise development. https://doi.org/10.1108/jsbed-122022-0502 song, b., & zhao, z. (2021). institutional pressures and cluster firms' ambidextrous innovation: the mediating role of strategic cognition [article]. chinese management studies, 15(2), 245-262. https://doi.org/10.1108/cms-11-2019-0397 talafidaryani, m. (2021). a text mining-based review of the literature on dynamic capabilities perspective in information systems research [review]. management research review, 44(2), 236-267. https://doi.org/10.1108/mrr-032020-0139 wang, c., wang, d., wang, y., & jiao, f. (2021). evolution of the internet's support for chinese enterprises' innovation based on big data [article]. international journal of pattern recognition and artificial intelligence, 35(11), article 2159042. https://doi.org/10.1142/s0218001421590424 wong, c.-y., sheu, j., & lee, k. (2023). assessing the quest of smes in pivoting for new technological ventures: comparing the patenting indexes of seven developed cities [article]. scientometrics, 128(7), 4029-4064. https://doi.org/10.1007/s11192-023-04729-y yang, y. (2021). on the contingent value of knowledge base for radical innovation capability the moderating effect of appropriability regimes [article]. vine journal of information and knowledge management systems, 51(3), 369388. https://doi.org/10.1108/vjikms-10-20190166 yang, z., ali, s. t., ali, f., sarwar, z., & khan, m. a. (2020). outward foreign direct investment and corporate green innovation: an institutional pressure perspective [article]. south african journal of business management, 51(1), article a1883. https://doi.org/10.4102/sajbm.v51i1.1883 yin, z., guo, j., sun, z., & zhou, m. (2022). how do patent trolls affect the technological innovation of chinese enterprises? evidence from enterprise patent survey data in china [article]. journal of engineering and technology management, 65, article 101695. https://doi.org/10.1016/j.jengtecman.2022.1016 95 yue, w., & guo, c. (2022). effectiveness evaluation model of digital cost management strategy for financial investment of internet of things enterprises in complex environment [article]. scientific programming, 2022, article 9441322. https://doi.org/10.1155/2022/9441322 zeng, w., yu, m., zhang, d., & zhao, q. (2020). holistic innovation, market structure, and performanceresearch on a computer decision-making method [article]. ieee access, 8, 180444180457. https://doi.org/10.1109/access.2020.3028065 zhang, l., shan, x., & zhou, l. (2024). intellectual property rights and firm performance in china from the perspective of firm heterogeneity [article; early access]. journal of the knowledge economy. https://doi.org/10.1007/s13132-024-02181-8 volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu space economy, tourism and logistics yavuz toraman nisantasi university, turkey | e-mail: yavuztrmn@gmail.com abstract the advancements in technology that developed with the industrial revolution provided people with the opportunity to explore their surroundings. especially, the rocket technology developed during world war ii paved the way for space exploration. the launching of the first satellites by russia and the usa in 1957-58 marked the beginning of understanding the unknown and uncertainty of space. with the initiation of space research by russia and the usa, the magnitude of the space industry has been increasing day by day. in recent times, the space economy is around $240 billion, while space tourism is around $1.5 billion. space has attracted the interest of both states and private companies. particularly, after the 2000s, space activities have been commercialized by private companies. in this study, the space economy has been evaluated within the scope of space tourism and space logistics. qualitative in-depth analysis and quantitative vosviewer methods have been used together in the study. in recent times, with spacex's reusable rocket technology, falcon 9, a revolution has taken place in transportation and logistics in space. also, spacex's low-cost approach providing access to space at more affordable costs is a significant advantage for future crewed or robotic space missions. the increase in space research and travel to space, the moon, mars, and deep space in the future will increase the volume of space tourism and, generally, the space economy, primarily boosting the importance of space logistics as it forms the basis of this process. keywords: logistics, space logistics, space, space economy, supply chain management new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.325 | http://emaj.pitt.edu | http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.325 | http://emaj.pitt.edu space economy, tourism and logistics page |10| emerging markets journal space economy, tourism and logistics yavuz toraman i. introduction economy can be defined as the utilization of scarce resources. during the mercantilist era, countries engaged in commercial activities to increase their resources. to sustain these activities on a larger scale, they emphasized on naval fleets. moreover, the discovery of new places accelerated commercial activities among international communities (seyidoğlu, 1986). in recent times, almost the entire surface of the earth has been explored. the limited resources on earth are forcing governments and private companies to find resources outside the planet. resource management activities in this context are discussed within the scope of the space economy. with the rocket technology developed by germany and the usa during world war ii, especially with the launch of the world's first artificial satellite sputnik by the soviets in 1957, new discoveries have become physically possible. subsequently, the launch of the usa's first satellite, vanguard, in 1958 accelerated the space exploration process (cracknell and varotsos, 2007). the exploration of space has led to the development of the space industry and the emergence of new commercial opportunities. the space economy encompasses various activities such as satellites, tourism, space mining, manufacturing in space, space logistics, space transportation, space banking, space advertising and the internet of things (iot) (yost and weston, 2024). in recent times, the size of the space economy has exceeded $400 billion, with more than 80% of the space economy consisting of commercial space activities (space foundation, 2020). the most important discipline that enables the formation of the space economy is logistics. the supply, transportation, storage and return activities provided by logistical elements enable exploration, research, satellite projects and tourism activities in space. in this study, a qualitative study was conducted on the space economy, space tourism and space logistics. the research contributes to the literature and the industry due to the limited number of studies on space economy, tourism and logistics. it also discusses türkiye's recent developments in the aviation and space sectors (tua, 2022). ii. space economy, tourism and logistics space has been a subject of curiosity for centuries. humanity still has a curiosity about unexplored areas around it, similar to geographical explorations. explorations bring various costs. initially, explorations are approached scientifically. however, these explorations have created a commercial area for humanity in the later process. with the beginning of the exploration of space, commercial activities have increased day by day. ultimately, in the 2020s, the size of the space economy reached $423 billion (space foundation, 2020). the space economy examines the economic dimension of activities carried out by people in and beyond the atmosphere. the space economy encompasses activities such as satellites, the space industry, space tourism and space logistics. with the advancing technology, space activities are also gaining momentum. especially after 2015, investments in the space industry have increased and the space economy has reached a significant size. the advancing technology will continue to increase the volume of the space economy in the future (eugeni et. al., 2022; kulu, 2023). figure 1. vosviewer network of studies on space economy concerning the literature research conducted in the field of space economy, the most mentioned concepts are space, industry, economy and circular economy, as well as space sector, space industry, value and service as shown in figure 1. the space industry is particularly supportive of concepts such as industry 4.0 and super smart society. therefore, it is likely that the volume of the space industry will increase in the future. in terms of economic size, the largest shares in the space industry belong to the usa, china, the european space agency (esa) and european countries, japan, russia, india and italy. in recent years, interest in space activities has increased. there are more than 70 space agencies worldwide (space foundation, 2020; kulu, 2023). space tourism, one of the main components of the space economy, was first realized in 2001 through the russian space tourism company space adventures, with dennis tito paying $20 million to stay at the international space station (iss) from april 28 to may 6 (cater, 2010; zhang and wang, 2022). this event is considered as the beginning of space tourism (crouch, 2001). today, companies like axiom space, spacex and space adventures conduct long-duration commercial flights to the iss. virgin galactic and blue origin, on the other hand, conduct short-duration suborbital space tourism with their own spacecraft. the market share of suborbital space tourism is expected to be $1.5 billion before 2030, with a total commercial space tourism size of $1.7 billion (florom-smith et. al., 2022). as shown in figure 2, the most mentioned concepts concerning the literature research in the field of space tourism are tourism, space tourism, tourism space and dark tourism. volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.325 | http://emaj.pitt.edu yavuz toraman emerging markets journal page |11| figure 2. vosviewer network of studies on space tourism although space tourism currently has a small share in the space economy, it is considered highly important given the expectation of its future commercial growth. space tourism is also influenced by space logistics activities. the evolution of rockets and spacecraft used for space travel in the future will expand the boundaries of space tourism (florom-smith et. al., 2022). recently, the turkish astronaut alper gezeravcı, sent to the iss for a scientific mission with axiom space, has been a significant start for space tourism and turkish space research. space logistics activities are crucial for the realization of space tourism. currently, companies providing services in space tourism use axiom space and spacex dragon spacecraft, space adventures soyuz rocket, virgin galactic spaceshiptwo and blue origin's new shepard spacecraft for tourism activities. space perspective and zero2infinity companies, on the other hand, conduct space tourism using balloons. figure 3. vosviewer network of studies on space logistics space logistics is not only crucial in space tourism but also in space research, satellite launches, moon, mars and deep space exploration. it plays a significant role not only in transportation processes but also in supply, production, storage, return to earth, maintenance and repair processes (shull et. al., 2006; baraniecka, 2019). space logistics refers to the processes of supply, production, storage, distribution, handling, and service provision with specialized vehicles and equipment both in and beyond the atmosphere to complete space missions. it is crucial for the success of space missions, research and tourism activities (bowersox et. al., 2020). as shown in figure 3, the most mentioned concepts in the literature research on space logistics are space logistics, service logistics industry, logistics, logistics space, cost, logistics park, space, logistics distribution system and green logistics storage space. space logistics will become an even more important area in the future with the increase of commercial activities. iii. methodology the research examining space economy, tourism and logistics used both qualitative and quantitative research methods. in the study, the impact of tourism and logistics elements on space economy was investigated. while qualitative methods incorporate personal thoughts, quantitative methods reach conclusions by statistically analyzing the data obtained. in the current study, data obtained from the web of science database on space economy, space tourism and space logistics were analyzed using the vosviewer package program (yıldırım and simsek, 1999; patton, 2005; toraman, 2024; alnıpak and toraman, 2023). additionally, qualitative methods were used in the study. secondary sources such as research, studies, reports and articles on space economy, space tourism, and space logistics were examined. the study, conducted using both qualitative and quantitative methods, examined the current state and future of space economy in the literature. iv. discussion and conclusion the exploration of space has always been a subject of fascination. after world war ii, the military technology developed during the war was intended for use in space exploration and was tested for this purpose. in this context, space activities can be said to have yielded positive results with the satellites sent into space between 1957-58. the space industry has brought a new breath to many sectors. national aeronautics and space administration (nasa) and roscosmos have led the way in space activities. they have made significant contributions to the development of the sector through their scientific activities. the space industry has enabled the development of engines, rockets, spacecraft, technical equipment, vehicles and tools. in 2001, dennis tito's 8-day tourist visit to the iss sparked the idea that tourism activities could be carried out in space. the 2000s were a period when the space economy was revitalized and its volume increased. during this period, both governments and private companies accelerated their space activities. governments invested in communication, navigation and military activities, while private companies pursued activities based on new business models. especially germany's industry 4.0 concept, which it presented as automation in production and japan's super smart society concept, which later popularized automation processes, will enter the field of space economy. additionally, connecting to the internet of things (iot) applications via satellite is crucial (space foundation, 2020; yost and weston, 2024). recently, the activities of virgin galactic, blue origin, axiom space, spacex, space adventures, space perspective and zero2infinity in space tourism are crucial for the development of the space economy. although current space tourism prices are high due to the high initial investment costs of space vehicles, technological advancements will reduce costs in the future. especially, the reusability of new shepard is likely to enable space volume 13 no 2 (2023) | issn 2158-8708 (online) | doi 10.5195/emaj.2023.325 | http://emaj.pitt.edu space economy, tourism and logistics page |12| emerging markets journal tourism to reach a wider audience in the future (floromsmith et. al., 2022). the falcon 9 rocket, which reduces launch costs with the possibility of reuse, has contributed most to the development of space activities. spacex, which is important in space logistics, is a private and commercial space and rocket company with ambitions in space. spacex has provided low-cost access to space with the falcon 9 rocket. spacex operates in space research, moon missions, mars missions, deep space missions, space tourism, cargo transportation, satellite launch activities with falcon 9, falcon heavy, dragon and starship spacecraft. spacex is a significant stakeholder in space logistics with its rockets and spacecraft. space logistics involves the planning, implementation, control and necessary intervention in the event of any issues of space missions, research, cargo delivery, or travel, as well as the planning of crew returns at the end of missions, using rockets, spacecraft, vehicles and equipment (reddy, 2018; spacex, 2021). references alnıpak, s., toraman, y. (2023). analysing the intention to use blockchain technology in payment transactions of turkish maritime industry. quality & quantity, 1-21. baraniecka, a. (2019). space logistics-current status and perspectives. transport economics and logistics, 82, 67-78. bowersox, d. j., closs, d. j., cooper, m. b., bowersox, j. c. (2020). supply chain logistics management. mcgraw-hill. cater, c. i. (2010). steps to space; opportunities for astrotourism. tourism management, 31(6), 838-845. cracknell, a. p., varotsos, c. a. (2007). editorial and cover: fifty years after the first artificial satellite: from sputnik 1 to envisat. crouch, g. i. (2001). the market for space tourism: early indications. journal of travel research, 40(2), 213-219. eugeni, m., quercia, t., bernabei, m., boschetto, a., costantino, f., lampani, l., ... ,gaudenzi, p. (2022). an industry 4.0 approach to large scale production of satellite constellations. the case study of composite sandwich panel manufacturing. acta astronautica, 192, 276290. florom-smith, a. l., klingenberger, j. k., dibiase, c. p. (2022). commercial space tourism: an integrative review of spaceflight participant psychological assessment and training. reach, 25, 100043. ishimatsu, t., de weck, o. l., hoffman, j. a., ohkami, y.,shishko, r. (2016). generalized multicommodity network flow model for the earth–moon–mars logistics system. journal of spacecraft and rockets, 53(1), 25-38. kulu, e. (2023). space economy in 2023-statistical overview and trends. in 74th international astronautical congress (iac 2023). patton, m. q. (2005). qualitative research. encyclopedia of statistics in behavioral science. reddy, v. s. (2018). the spacex effect. new space, 6(2), 125-134. seyidoğlu, h. (1986). uluslararası iktisat. turhan kitabevi. shull, s., gralla, e., siddiqi, a., de weck, o., shishko, r. (2006). the future of asset management for human space exploration: supply classification and an integrated database. in space 2006, 7232. space foundatiton, (2020). the 2019 global space economy in the space report q2, 2020, sf.3, https://www.thespacereport.org/wpcontent/uploads/2020/07/the-space-report2020-q2-book.pdf access date: 17.04.2024 spacex, (2019). /https://www.spacex.com/media/falconusers-guide-2021-09.pdf , access date: 17.02.2023 toraman, y. (2024). space logistics and risks: a study on spacecraft. politeknik dergisi, 1-1. tua, (2022). tua.gov.tr/62988f09d2a2e.pdf access date: 10.04.2024 yıldırım, a., simsek, h. (1999). sosyal bilimlerde nitel araştırma yöntemleri (11 baski: 1999-2018). yost, b., weston, s. (2024). state-of-the-art small spacecraft technology (no. nasa/tp20240001462). zhang, y., wang, l. (2022). progress in space tourism studies: a systematic literature review. tourism recreation research, 47(4), 372-383. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu financial innovation, economic growth and sustainable development in an emerging market: nigeria olugbenga adeshola olunuga university of lagos, nigeria | e-mail: oluadeshola2001@yahoo.com mustapha babatunde ademola ashoghon lagos state university of science and technology, nigeria | e-mail: ashogbonhtkb@yahoo.com abstract this paper presents recent studies on the effects of financial innovation on economic growth and sustainable development in nigeria. the financial sectors worldwide are becoming increasingly important and competitive. therefore, in order to compete successfully, it is necessary to possess flexibility and adaptability to change, as well as a willingness to embrace innovation. financial markets are becoming more advanced and complex due to financial innovation, which helps direct capital towards productive sectors that are necessary for economic growth and development. the study employed time series data. statistical data analysis techniques were employed to evaluate the secondary data on financial innovation. research indicates that financial innovation has a significant impact on both economic growth and sustainable development in nigeria. the study found that financial innovation variables have a positive effect. therefore, financial institutions should prioritize easy and secure access to financial services when developing their financial innovation strategies. regulatory bodies, on the other hand, should establish a regulatory environment that promotes innovative solutions capable of influencing economic growth and sustainable development. keywords: financial innovation, economic growth, sustainable development, financial sectors, emerging markets new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.329 | http://emaj.pitt.edu | mailto:oluadeshola2001@yahoo.com mailto:ashogbonhtkb@yahoo.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://creativecommons.org/licenses/by/3.0/us/ volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.329| http://emaj.pitt.edu olugbenga adeshola olunuga, mustapha babatunde ademola ashoghon emerging markets journal page |13| financial innovation, economic growth and sustainable development in an emerging market: nigeria olugbenga adeshola olunuga mustapha babatunde ademola ashoghon i. introduction financial innovations have been worldwide transforming and reforming the way financial services are provided, and as a consequence, their role in the economies is expanding. the link between financial innovation and economic growth in nigeria and other developing nations has not been properly explored despite its significant contribution to financial development (oyadeyi, 2023). financial innovation that becomes the permanent feature of the capital market results in a financial system that is robust and optimal. this, in turn, encourages institutions such as banks to appear to provide better financial services, higher credit facilities, higher liquidity, and wider variety of financial instruments. these factors result in higher economic growth as well as sustainable development to the country (sirait, rosalina & sari, 2023). innovation is a key driver of economic growth and the change of a country's financial system. however, further endeavors are required to attain the intended augmentation in economic growth and sustainability in nigeria (amarachi, 2023). financial innovation in the nigerian economy has several associated issues, including inadequate financial literacy education, a gender gap in account ownership, low rates of financial deepening and inclusion, weak telecommunication services in rural areas, deficient infrastructural development, insufficient security measures and inadequate power supply (osuigwe, 2022). nigerian financial institutions, namely deposit money banks (dmbs), have adopted financial technology innovation platforms to encourage the expansion of financial services and inclusion in the economy (adedokun & ağa, 2023). however, a significant proportion of the nigerian population does not have access to banking services, resulting in a slow adoption of financial innovation and low levels of financial inclusion (imoagwu & ezeanyeji, 2019). a significant proportion of adults remain financially excluded. the majority of those who are financially excluded are both educationally disadvantaged and reside in rural areas (kamalu et. al., 2019). the adoption of financial innovation products and services is often perceived as ambiguous and overwhelming due to a combination of factors such as ignorance, illiteracy, lack of understanding of the modern banking system, and fear of fraud and theft (omankhanlen, samuel-hope & ehikioya, 2022). it is when most of the country’s population is financially literate that they can fully participate in the formal financial system thereby becoming aware of and taking advantage of financial innovation opportunities, so that they can contribute to the economic growth and development of the country (ahmed et. al., 2021). the study's objective is to establish the influence of financial innovation on economic growth and sustainable development in nigeria. ii. literature review the financial industry is becoming more and more relevant as well as competitive on a global scale, and staying competitive requires being flexible, adaptable and open to new ideas (wang & tan, 2021). the rapid pace at which innovation and dynamism propel the financial sector has led to a surge in expenditure on information and communication technology (ict) by financial institutions, particularly deposit money banks (dmbs) (ahassan, blokhina, & kouadio, 2021). the financial sector's services have been worldwide revolutionized and reformed by financial innovation, leading to a growing recognition of its significance on economies (alawi et. al., 2022). the implementation of financial innovation has facilitated the transformation of financial service sectors from conventional methods of financial transactions to contemporary innovative approaches, thereby enhancing the efficiency of their services. this has resulted in the advancement of payment systems, improved investment prospects, the availability of alternative assets for storing wealth and the facilitation of financial transactions in international trade. furthermore, financial innovation has also played a pivotal role in promoting financial inclusion, ultimately contributing to economic growth and development (qamruzzaman & jianguo, 2018). nevertheless, the significance of financial and economic progress in underdeveloped nations has not been thoroughly pursued, despite its essential role in financial development (ambala & amewu, 2023). developing nations possess the highest percentage of individuals without access to banking services and experiencing financial exclusion. this situation presents numerous possibilities for enhancing financial inclusion by offering financial services to both rural and urban residents. financial innovation is widely recognized as the primary catalyst for the expansion and development of the financial sector (nguena, 2019). the nigerian economy is acclaimed in the top ten of the fastest-growing economies in the world. this is by and large have to do with the burgeoning population and immense endowment of nigeria, which have made the country an attractive market for investors (olorogun, salami & bekun, 2022). the financial system of nigeria is composed of the money market, capital market and different institutions as well as channels that aid smooth movement financial transactions in the economy (anthony-orji et. al. , 2023). financial innovation has been witnessed in nigeria through various sophisticated developments. in 2012, the cbn introduced the 'cashless policy' in order to disperse the use of notes and coins in the economy. this has brought about different options of cashless payment systems like atm, pos systems, eps, internet banking, mobile money, biometrics, robots and others. the facilitating roles of these developments were fund transfers and interbank transaction observed faster and more conveniently (okafor, chijindu & anyalechi, 2017). volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.329 | http://emaj.pitt.edu financial innovation, economic growth and sustainable development in an emerging market: nigeria page |14| emerging markets journal the evolving ecosystem of payment is advancing with massive dynamics in the e-commerce industry enabling customers to make payments and receive money transfers (ajide, 2016). banks have leveraged technology to reposition banking in the psyche of their customers. mobile banking has become particularly popular. the existence of stiff competition has pushed banks to exploit innovative agent banking. financial technology (fintech) companies have developed products and services to meet the needs of their consumers and contributing to the efficiency and effectiveness of financial services (akinwunmi, muturi & ngumi, 2016). in 2023, the cbn launched ‘‘sabi moni’’ a fully digital national e-learning platform to provide a knowledge base for financial literacy and drive financial education in nigeria (adedokun & aga 2023). furthermore, there has been a great deal of reforms in the nigerian capital market which has improved market liquidity, introduction of alternative platforms and creation of enabling environment supportive of new products. these developments in financial innovation are expected to drive economic growth and sustainable development in nigeria (adenii et. al., 2015).the question is: does adoption of financial innovation has significant influence on economic growth and sustainable development? iii. theoretical issues financial innovation and economic growth can be linked using transaction cost innovation and endogenous growth theory. hicks and niehans (1983) introduced the concept of transaction cost innovation. they argue that the primary driver of financial innovation is the decrease in transaction costs. they further elaborate that financial innovation is a result of technological advancements that have led to a reduction in transaction costs. reducing transaction costs can stimulate financial innovation and progress in financial services (čižo, lavrinenko & ignatjeva, 2020). the endogenous theory, articulated by romer (1986) and lucas (1988), posits an alternative perspective. they assert that innovation is the primary catalyst for economic progress. romer argued that the overall productivity is positively influenced by the level of product diversity. he emphasized that innovation leads to increased productivity by generating novel product variations. the idea of innovation-based growth suggests that in order to achieve rapid growth, a significant portion of resources should be allocated to research and development. additionally, policies that encourage openness, competition, change and innovation would facilitate growth (pece simona & saliseanu, 2015). iv. empirical issues theoretical research on financial innovation’s effects on economic growth, in turn, created empirical studies that are aimed at drawing up economic relationships and unmasking the hidden factors that determine the financial innovation and economic growth relationship. some researchers did the analysis of the contribution of the particular groups of financial innovations to gdp. adesete and risikat (2021) carried out a study to examine how the financial innovations affected the nigerian economy. the research employs the autoregressive distributed lag model (ardl) and the polynomial distributed lag mixed data (dmd) sampling model. ardl report drew that the mobile payment platform had a quantitative significant positive effect on the nigerian economy while the site internet transactions and pos transactions had an insignificant negative influence. effiom and edet (2022) studied the role that financial innovation had on the outcome of small and medium scale enterprises in nigeria. the study employs autoregressive distributed lag technique. the result shows that the usage of the new financial methods is a positive and important factor in the regard of improving the operating efficiency of small and medium enterprises (smes) in nigeria. chukwunulu (2019) undertook a study to assess the effects of finance innovation on the nigerian economy. this was done by applying the generalized methods of moments (gmm). the research demonstrated that financial innovation plays an important role in the economic growth through a strong positive influence. ubi and mba (2019) explored the role that financial innovation can play in the development of micro and small enterprises (mses) in nigeria. in the study, ardl was used combined with the regressive distributed bounds testing and the granger causality test. the findings revealed that financial innovation was one of the main factors that encouraged the output growth of small and medium-sized enterprises (smes) in nigeria. this study further suggested that depository money banks are supporting the existing level of financial service provision by creating more financial channels in the rural areas and urban locations. the paper by kamalu et. al. (2019) analyzed the cause effect relationship between financial development, financial inclusion and economic growth in nigeria. the research used a unit root test. the study showed that financial progress as well as integration of participants into these systems represents the main components of economic growth. therefore, along with the rise, the expansion of the economy is even more substantial as more people begin to employ the official financial services. although the financial innovation is a contributing factor to the economic growth in nigeria, the scarcity of in-depth empirical investigation reveals that the innovative measure may not lead to economic growth and sustainability in nigeria. v. methodology the research intends to examine whether the adoption of financial innovation in the financial services industry affects economic growth and sustainable development in nigeria or not. the research, in turn, used the time series analysis method. spanning from 2013 to 2023, the secondary data were collected from the central bank of nigeria (cbn) statistical bulletin and nigeria bureau of statistics (nbs) report. the selection criteria for secondary sources were established to include sources with the history of providing accurate, sufficient, intact and easily accessed data. this research used descriptive statistic and economics as an analytical tool to identify the correlation between two variables. the e-view output program was utilized to apply a summary of statistics for doing a descriptive analysis of the several variables in the investigation. in addition, linear regression model was employed as the technique. on the basis of the evaluated literature, the following model below is specified. the following model (regression equation) in its linear form volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.329 | http://emaj.pitt.edu olugbenga adeshola olunuga, mustapha babatunde ademola ashoghon emerging markets journal page |15| was used to test the relationship between independent variables and dependent variable. gdp = f (atm, pos, wep, nip) 1 gdp = βo + β1atm + β2pos + β3wep + β4nip 2 to standardize the values and obtain elasticity, the model is transformed into a natural logarithm. hence, the model is specified as the following: lngdp = βo + β1lnatm + β2lnpos + β3lnwep + β4lnnip + µ 3 where; gdp = gross domestic product, ln = natural logarithm, atm = value of automated teller machine transaction, pos = value of point of sale transaction, wep = value of wep pay transaction, nip = value of nibss instant payments transaction, βo = constant term or intercepted, β1 = coefficient of atm, β2 = coefficient of pos, β3 = coefficient of wep, β4 = coefficient of nip, µ = error term. vi. data analysis and discussion of results time series analysis necessitates stationary series data since non-stationary data can provide false conclusions. the technique of regression analysis was utilized to examine the correlation between the variables of interest. a test for stationarity was performed on the variables. prior to use a conventional econometrics methodology, it is imperative that variables exhibit stationarity in accordance with economic theory. the stationarity test employs a maximum of 1 lag and incorporates the intercept to prevent inaccurate outcomes. the performance of the adf is presented in table 1 below. unit root test table 1: augmented dickey-fuller unit root stationarity test source: authors’ computation using e-views the variables employed in this study include a mix of both i(0) and i(1) series, as shown in table 1. that is, the variables are a mixture of variables with integrated orders of zero and one, which is one of the reasons for using the ardl model. analysis of co-integration (bounds test) table 2: cointegration bounds test source: author’s computation using e-views the estimate for ardl bound testing/cointegration is presented in table 2. the co-integration test confirms the rejection of the null hypothesis that there is no co-integration between variables. this suggests that the variables of the model exhibit a persistent correlation over an extended period of time. the calculated f-statistic (5.275022) obtained from the ardl bound testing for cointegration exceeds the upper critical bound of the 5 percent critical values, as seen in table 2. at a significance level of 5%, this provided evidence to reject the null hypothesis that there is no co-integration. based on the ardl bound testing, it can be inferred that there is a significant long-term relationship between the variables, with a confidence level of 5%. table 3: error correction model source: author’s computation using e-views table 3 shows that the value of the coefficient for automated teller machine (atm) is -1.380739; tstatistic is -3.570549 with a probability of 0.0010 which is statistically significant at 5 percent of significance indicating that the value of atm transaction has significant effect on nigeria economy. the regression coefficient which revealed that the value of atm transaction is negatively associated with gross domestic product (gdp) implies that an increase in the value of atm transaction will cause a decrease in gdp. the coefficient for point of sale (pos) is 1.855827; t-statistic is 4.885119 with a probability of 0.0000 which is statistically significant at 5 percent of volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.329 | http://emaj.pitt.edu financial innovation, economic growth and sustainable development in an emerging market: nigeria page |16| emerging markets journal significance indicating that the value of pos transaction has significant effect on nigeria economy. the regression coefficient revealed that the value of pos transaction is positively associated with gross domestic product (gdp). the implication is that holding all other factors constant, an increase in the value of pos transaction will cause an increase in gdp. similarly, the coefficient for web payment (wep) is 2.165376; t-statistic is 5.280732 with a probability of 0.0000 which is statistically significant at 5 percent of significance indicating that the value of wep transaction has significant effect on nigeria economy. the regression coefficient revealed that the value of wep transaction is positively associated with gross domestic product (gdp). the implication is that leaving all other factors constant, an increase in the value of wep transaction will cause an increase in gdp. while the coefficient for nibss instant payment (nip) is 2.619884, t-statistic is 3.129109 with a probability of 0.0034 which is statistically significant at 5 percent of significance indicating that the value of nip transaction has significant effect on nigeria economy. the regression coefficient revealed that the value of nip transaction is positively associated with gross domestic product (gdp). this implies that put differently, an increase in the value of nip transaction will cause an increase in gdp. the r-squared (r2) 0.508200 revealed that about 50.8 % of the systematic variations in gross domestic product (gdp) is jointly explained by the value of atm transaction, value of pos transaction, value of wep transaction and nip transaction all influence economic growth and sustainable development. vii. conclusion and recommendations the research study showed that financial innovations have significant effects on economic growth and sustainable development in nigeria. the research has shown that all the other variables had a considerable effect on the explanation of the economic growth and the sustainable development in nigeria. regarding the way in which financial innovation factors impact the development of nigeria, the policymakers should consider a link between institutional innovations and economic growth while developing economic policies. the policy should facilitate the financial sectors development in due time by providing room for financial innovation for the improvement and development of the financial sector. the financial sector and government should partner closely with ict sector to provide safe transactions whatever the platform, channel or medium is. regulatory bodies should enforce dexterous innovative ideas and build a legal and regulatory framework that will stimulate the private sector to come up with inventive solutions. the government should go the extra step to ensure development of new financial innovative structures in addition to improving the existing ones, especially point-of-sale (pos) and web structures to have a convenient and secure access to financial services. this would also enhance financial deepening and promote financial inclusion. the cbn should enhance its efforts to promote financial education via its e-learning platform, while financial institutions should raise awareness among the public regarding the utilization of many financial innovation channels in order to enhance financial literacy. finally, there is a need to improve process innovation such as atm, online banking and mobile banking to enhance efficiency, encourage product innovation such as derivatives and currency swap, improve financial system innovation such as changes in structure or legal and regulatory framework and introduce more financial institution innovation by creating new types financial firms. these will eventually improve trust of the users, innovative solutions, speed of transactions and ease of payments needed for economic growth and sustainable development. references adedokun, m. w., ağa, m. (2023). financial inclusion: a pathway to economic growth in sub‐saharan african economies. international journal of finance & economics, 28 (3), 2712-2728. adeniyi, o., oyinlola, a., omisakin, o., egwaikhide, f. o. (2015). financial development and economic growth in nigeria: evidence from threshold modeling. economic analysis and policy, 47(5), 11-21. adesete, a., mohammed, a. a., risikat, d. o. (2021). financial innovation and economic growth: empirical evidence from nigeria. euro economica, 40 (1), 56-68. ahassan, k t. f., blokhina, t., kouadio, j. a. (2021). financial innovation: the impact of mobile money on innovative economic growth. in proceeding of the international science and technology conference" fareastсon 2020" october 2020, eastern federal university (pp. 27-38). springer singapore. ahmed, a. z., chen, s., adebayo, t. s., kirikkaleli, d. (2021). linking financial development, economic growth, and ecological footprint: what is the role of technological innovation?. environmental science and pollution research, 28(43), 61235-61245. ajide, f. m. (2016). financial innovation and sustainable development in selected countries in west africa, journal of entrepreneurship, management and innovation, 12(3), 85-111. akinwunmi, l.a., mutiri, n., ngumi, p. (2016). financial incentives and innovation adoption in nigeria, pyrex journal of business and finance management research, 2(4), 25-34. alawi, s. m., abbassi, w., saqib, r., sharif, m. (2022). impact of financial innovation and institutional quality on financial development in emerging markets. journal of risk and financial management, 15(3), 115. amarachi, a. c. (2023). impact of financial sector development on economic growth in nigeria (1981-2021). ulysses international journal of humanities and contemporary studies, 4(1), 60-88. volume 14 no 1 (2024) | issn 2158-8708 (online) | doi 10.5195/emaj.2024.329 | http://emaj.pitt.edu olugbenga adeshola olunuga, mustapha babatunde ademola ashoghon emerging markets journal page |17| ambala, r., amewu, g. (2023). linear and non-linear ardl estimation of financial innovation and economic growth in ghana, journal of business and socio-economic development, 3 (1), 36-49. anthony-orji, o. i., orji, a., ogbuabor, j. e., uka, l. c. (2023). money matters a lot: empirical analysis of financial development, financial inclusion and economic growth in nigeria. international journal of economic policy in emerging economies, 17(1), 100-117. biswas, g. k. (2023). financial inclusion and its impact on economic growth: an empirical evidence from south asian countries. european journal of business and management research, 8(4), 163-167. chukwunulu, j. i. (2019). effect of financial innovation on the nigerian economy. world journal of innovative research, 6(5), 15-21. čižo, e., lavrinenko, o., ignatjeva, s. (2020), analysis of the relationship between financial development and economic growth in the eu countries. insights into regional development, 2(3), 645660. effiom, l., edet, s. e. (2022). financial innovation and the performance of small and medium scale enterprises in nigeria. journal of small business & entrepreneurship, 34(2), 141-174. imoagwu, c. p., ezeanyeji, c. i. (2019). financial development and economic growth nexus in nigeria. international journal of business and management invention, 8(3), 50-63. kamalu, k., wan ibrahim, w. h., ahmad, a. u., mustapha, u. a. (2019). causal link between financial developments, financial inclusion and economic growth in nigeria. international journal of scientific and technology research, 8(12), 2757-2763. nguena, c, l. (2019). financial innovation in developing countries, journal of innovation, economics and management, 29(2), 69-94. okafor, i. g., chijindu, e. h., anyalechi, k. c. (2017). does financial innovation drive growth? empirical analysis of the nigerian case, british journal of economics, management and trade, 16(3), 1-10. olorogun, l. a., salami, m. a., bekun, f. v. (2022). revisiting the nexus between fdi, financial development and economic growth: empirical evidence from nigeria. journal of public affairs, 22(3), 25-36. omankhanlen, a. e., samuel-hope, d. c., ehikioya, b. (2022). the effect of financial development on economic growth in nigeria. academy of strategic management journal, 21(4), 1-13. osuigwe, o. c. (2022). financial innovation and economic growth in nigeria. international journal of innovative social sciences & humanities research, 10(2), 36-51. oyadeyi, o. (2023). banking innovation, financial inclusion and economic growth in nigeria. journal of the knowledge economy, 130. pece, a.m., simona, o. e,, salisteanu, f. (2015). innovation and economic growth: an empirical analysis of cee countries, procedia economics and finance, 9(26), 461-467. qamruzzaman, m., jianguo, w. (2018). nexus between financial innovation and economic growth in south asia: evidence from ardl and nonlinear ardl approaches. financial innovation, 4(1), 20. sirait, h., rosalina, s. s., sari, e. (2023). the impact of digital innovation on economic growth. international journal of professional business review, 8 (6), 12. ubi, p., mba, p. (2019). financial innovation and output growth of small and medium-scale industries in nigeria, nigerian journal of economic and social studies, 61(2). wang, r., tan, j. (2021). exploring the coupling and forecasting of financial development, technological innovation, and economic growth. technological forecasting and social change, 16(3)12-24. volume 7 no 2 (2018) | issn 2158-8708 (online) | doi 10.5195/emaj.2018.134 | http://emaj.pitt.edu paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey ozan altun sajica reçine kimya san. tic. a.ş., turkey | e-mail: ozanr@hotmail.com cevdet kızıl istanbul medeniyet university, turkey | e-mail: cevdet.kizil@medeniyet.edu.tr gülay selvi hanişoğlu beykent university, turkey | e-mail: gulayselvi@beykent.edu.tr nazar demir gebze technical university, turkey | e-mail: nazardemir10786@gmail.com abstract the aim of this research was to examine the consumers' preference of paint purchase from the viewpoint of individuals employed in the turkish paint industry. it was aimed to reach at least 278 individuals with a sampling error of 5%. within this scope, 350 questionnaire forms were distributed and 330 were received back in the year of 2017. since 4 of the returned questionnaires had a missing question, study was conducted with 326 questionnaires. the questionnaire form was used as the data collection tool. it included 5 questions about demographic characteristics, 17 questions concerning purchasing and using behaviors, and 29 questions regarding consumers' preferences of paints. data analysis of the study was done using the spss 16 package program. through the analysis of data, descriptive statistics such as frequency, percentage, mean and standard error were presented. in addition, t test and anova test were applied to test the relationship among variables. based on research findings, the most important factors for the preference of paint purchase in turkey were determined as the aging of existing wall painting, marriage and cleaning issues. moreover, it was found out that the experiences of consumers were also effective for the paint purchase decision and preference. within the scope of the study, it was determined that elder individuals, married and high income people were influenced by many factors in their preference for painting. on the other hand; young, single and low-income individuals were considering less factors in their paint preferences. in addition, it was detected that men were considering properties (features) such as the price and quality more than women in their purchasing preferences. furthermore, the most important factor affecting the purchasing choice of consumers was determined as previous knowledge and experience. it was also found out that consumers did not frequently conduct market research before choosing the paint. educational status of individuals was not an effective factor concerning paint preferences. keywords: marketing, consumer, paint, preference, turkey new articles in this journal are licensed under a creative commons attribution 3.0 united states license. this journal is published by the university library system of the university of pittsburgh as part of its d-scribe digital publishing program, and is cosponsored by the university of pittsburgh press. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu | mailto:nazardemir10786@gmail.com http://www.library.pitt.edu/ http://www.pitt.edu/ http://www.library.pitt.edu/articles/digpubtype/index.html http://www.upress.pitt.edu/upressindex.aspx http://creativecommons.org/licenses/by/3.0/us/ volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey page |68| emerging markets journal paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey ozan altun cevdet kızıl gülay selvi hanişoğlu nazar demir i. introduction with the developing markets, the product range has expanded. today, many products with different features that can meet consumer needs are available in the market. however, the purchasing preferences of consumers differ. every consumer acts in line with their own needs and expectations, and makes their purchasing decision in this direction. this situation requires businesses to develop their marketing strategies in accordance with consumer needs and expectations. many factors can be effective in the purchasing preferences of consumers. the determination of these factors is important in defining the marketing strategies of the enterprises. consumer preferences are gaining importance for businesses in every sector. in this research, the paint sector was the subject of study and analyses were carried out. the paint industry is a sector in which durable goods are produced that appeal to all segments of society. individuals demand paint at certain periods of their lives for various reasons. it is important for individuals to determine their preferences in the best way due to the fact that paint is seen as a durable good and individuals' desire to purchase paint for long-term use exists. however, there are many factors that affect people's paint preferences. in this study, the factors affecting the purchasing preferences of consumers in the paint industry were examined in the eye of paint industry professionals in turkey for the year of 2017. ii. the marketing concept marketing has an indispensable position for businesses to hold on to the market in today's competitive conditions. businesses using effective marketing techniques can maintain their existence and increase their profitability. however, the understanding of marketing changes changed with the modern world. in this part of the study, the definition of marketing, the birth of marketing science, the developments in the concept and understanding of marketing are examined in a conceptual framework. definition of marketing marketing is a concept that emerged as a result of the efforts of parties who wanted to make purchases and sales to communicate with each other. the process of exchanging goods, services, ideas or various other values demanded between individuals and institutions is called as the marketing (mucuk, 2007). many marketing concepts have been adopted and implemented until the transition period to the modern marketing concept. changes in the understanding of marketing have been shaped according to the wishes and desires of consumers or sellers. although the definition of marketing differs, it basically works on the same principle. marketing is a process that is used to establish communication between the buyer and the seller (sheth and sisodia, 2015). today, effective marketing techniques have started to gain importance in markets where intense competition is experienced. businesses that are successful in marketing can meet customer demands and needs. they can also increase their sales and profitability by providing customer satisfaction (odabaşı, 2014). there are some elements in marketing that businesses need to determine and develop strategies in this direction. nowadays, the most important input of marketing is customer satisfaction. the main purpose of marketing is to appeal to most customers. satisfying the addressed customers is seen as a requirement of modern marketing. the main features of the marketing approach are listed below (mucuk, 2007): marketing is seen as a whole of various activities. marketing can be developed with different strategies for separate products, services, ideas or various values in distinct markets. marketing is a strategy designed to meet individual needs. marketing is used for goods, services, ideas or other values. marketing is not only related to the sale of the product, but also covers all the processes from the formation, distribution and promotion of the product. birth of the marketing science until today's information society, the understanding of marketing has changed in various stages of human history. the change in human needs in the process from the primitive society to the agricultural society, from the agricultural society to the industrial society has led to a constant change in the understanding of marketing. however, in every period, the understanding of marketing has been tried to be developed and the main goal has been to reach more people. along with the changes in the social structure, the wishes and needs of the individuals have begun to differ and the understanding of marketing has constantly changed in order to meet the demands (i̇slamoğlu, 2006). along with the transition to the industrial age, the understanding of marketing has also improved. manufacturers aim to reach more people and earn more by producing larger quantities. however, not only the people in manfuacturers’ own countries were enough, but volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu ozan altun, cevdet kızıl, gülay selvi hanişoğlu, nazar demir emerging markets journal | p a g e 6 9 manufacturers also aimed to reach people all over the world. especially after the second world war, the adoption of the understanding of strengthening the borders of countries with trade, not weapons, has led to further development of trade. businesses have taken the advantage of borders that have been shielded with trade and try to sell their goods all over the world. the exit from the war economy and the desire to meet customer demands have led to the development of marketing understanding (kotler, 2005). after the second world war, the purchasing power of individuals decreased significantly and the production lowered sharply. realizing this, the governments aimed to develop their countries not with weapons, but with trade. after the 1950s, trade has become an important issue for all countries of the world. the main goals of countries have been economic development. economic agreements began to be made among the countries. the economic agreements made between the two countries that were enemies ensured the reconciliation of the countries. the new economic order in the world has begun to be built on trade. however, it is a known fact that one of the most important keys to success in business is marketing (meyerson, 2005). development of the marketing science the understanding of marketing differed within the scope of time and place phenomena. although many marketing understandings have developed from the past to the present, their transition periods have differed according to the location and conditions of the enterprises. while a marketing approach was adopted for a long time in one region, this understanding was abandoned in a short time in another region. in the 1850s, very limited goods were produced to meet the needs of consumers, and consumers were buying regardless of the quality of goods. since the needs of consumers could not be met in this period, consumers demanded to buy only by looking at the price. for this reason, businesses were developing strategies to reduce costs and attaching importance to marketing. the sole purpose of the enterprises was to produce more at a lower cost. because every product manufactured in this period could be sold. this is true not only in this period, but also in every period when the supply is below the demand. today, this does not apply to all market conditions, but only to specific products. in some products, the producer can sell his/her product regardless of its quality and price (kotler et al., 2010). in the 1900s, mass production was initiated. during this period, there was no problem in finding customers. demand was greater than supply, and producers could sell any good they produced. in this period, businesses worked to produce and sell more. they developed mass production methods in order to produce more. with the mass production approach, more goods could be produced in a shorter time span and offered to the customer. in this period, when demand was higher than supply, consumers were able to choose a substitute for a good to meet their needs. for this reason, businesses had directed all their organizational talents to produce goods with higher volumes and more varieties. since businesses were aware that manufacturers would demand every product, they had tried to develop production and distribution channels in order to reach the customers. consumers bought the product only because they found it and did not attach importance to its quality. everything that was affordable became available for sale. for this reason, business finance was mostly devoted to production and distribution (jackson and shaw, 2009). the fact that some countries are closed to outside and not import goods causes consumers to be content with the products they find. this situation causes the businesses in the country to grow (kotler, 2009). however, there is no doubt that this issue brings with it some negativities in closed countries. the understanding of production has left itself to the understanding of product over time. the product is seen as a tool to promote the business. the consumer qualifies the offered good or service, in other words, the product as a business. the naturally supplied product acts as a bridge between the business and the consumers. since the product is critical in promoting the business, the image loaded on the product gains importance. the image of the product is seen as the image of the business and the business sells it within the framework of this image (ebren, 2009). in product understanding, the image loaded on the product acts as the building block. the differences that can be attached to the products of enterprises that have adopted the product understanding can be classified as follows (kotler, 2005: 38): physical differences: product packaging, quality, appearance, suitability, durability, style, etc. features may differ. easy access differences: accessibility to stores, abundance of stores or ordering opportunities, etc. features may differ. service differences: consulting, maintenance, repair, delivery, suggestion, complaint etc. features may differ. price differences: very low, low, medium, high or very high price options can be preferred. image differences: symbols, media, environment, events, cultures, etc. features may differ. the main purpose of the sales concept is to increase the sales volume and increase the profitability. the fundamental factor that businesses take into account is the product. in this understanding, the focus is not on the customer. in this understanding, the basic assumption of businesses is the sale of their goods. businesses think that goods are sold, not bought by customers. the leading goal is to subdue demand to supply. essentially, the understanding that each supply creates its own demand has been adopted. quality conditions are not sought for the products released in this period, there are no return options, substitute goods are limited, consumers are not informed about the product or very limited information is given. consumers cannot receive consultancy services regarding the goods (ebren, 2009). the understanding (approach) of sales and the understanding (approach) of marketing differ from each other. in table 1, there is a comparison based on various factors related to the sales understanding (approach) and the marketing understanding (approach). volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey page |70| emerging markets journal table 1: comparison of the sales understanding (approach) and the marketing understanding (approach) sales understanding (approach) marketing understanding (approach) starting point factory market focus point products consumer expectations tools promotion effors integrated marking efforts outcome sales volume and profit consumer satisfaction and profit source: ebren, f. (2009) tüketim, tüketici ve pazarlama iletişimi üzerine, detay anatolia akademik yayıncılık, ankara. at the stage of sales understanding (approach), consumers have decreased and production has increased. with the developing technologies, the products of the enterprises have increased and the competition has become stronger. with mass production, there is an abundance of products. consumer reception began to weaken. with this period, businesses have started to develop marketing techniques in order to sell their goods. the demands of customers have started to be taken into consideration and various strategies have been developed in order to reach the customer (bilgin et al., 2006). in the sales concept stage, consumers no longer necessarily buy goods just because they need it. consumers consider the quality and other characteristics of the goods when purchasing goods. with the diversification of goods, the selection preferences of the producers also change. businesses have started to develop various marketing techniques in order to respond to the demands of consumers. businesses now take into account the demands of customers and carry out production as well as sales with a customer focus (güreş, 2004). at this stage, promotion is also important as sales. creating loyal customers and constantly adding new ones is an advantage for businesses. businesses give more importance to the distribution and promotion channels to reach more customers. for this reason, they started to shift their organizational talents to the marketing department and strengthened the marketing area (klein, 2014). the focus of modern marketing is the customer. the era of simply manufacturing and selling products is over. in order to stay in the market, businesses develop production, distribution and promotion channels in line with customer requests and demands. in the modern marketing approach, consumers can reach more markets and determine their product preferences. for businesses, customer satisfaction is important, not the product sales. in this understanding, where there is an intense competitive environment, it is important for the profitability of the business to satisfy the customers and make the sales in this direction. various facts such as producing goods for customers' requests and needs, providing after-sales service, and availability of returns and replacements are critical for customers. therefore, the expression adopted by this understanding can be summarized as “the customer is always right” (şahin and demir, 2014). with the increase in competition, the modern marketing concept has developed. in the modern marketing approach, the aim is to reach the end user. product and marketing understanding are used as tools to reach the end user. businesses produce their products in order to reach the customer and determine the distribution as well as the promotion channels in this direction (jackson and shaw, 2009). success of businesses in an intensely competitive environment is only possible with a modern marketing approach. in environments and markets where the competition is weak, businesses may adopt a production or sales approach. however, in environments and markets where the competition is intense, businesses develop marketing strategies in order to be superior than their competitors. the marketing understanding of businesses is important in determining their position in the market. businesses that adopt a modern marketing approach, supply products in line with the wishes and needs of consumers, provide after-sales consultancy services, transmit information about the product to the customer, have return and replacement options, and most importantly, observe customer satisfaction, can achieve success in the market and increase their profits by highering their sales (klein, 2014). leading elements of the marketing understanding (approach) are presented below in table 2. table 2: leading elements of the marketing understanding (approach) marketing element feature (characteristics) buyer centered businesses need to determine what customers are demanding. businesses should detect the desires and needs of consumers as well as presenting their products in this direction. integrated marketing effors all activities of the business and marketing channels must act in harmony. it is important that the product, price, promotion and place (distribution channels) are organized in harmony with the marketing phenomenon. ensuring customer satisfaction it is important to ensure customer satisfaction with the product and sales processes. customer satisfaction must be ensured before, during and after the sale. in this way, more customers can be reached and loyal customers can increase. source: kotler, p. çev. bakkal, a. (2005) a’ dan z’ ye pazarlama, mediacat, i̇stanbul. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu ozan altun, cevdet kızıl, gülay selvi hanişoğlu, nazar demir emerging markets journal | p a g e 7 1 businesses need to use marketing talents effectively in order to increase their share in the sector. the more the goods put on the market by the business meet the demands of customers and the more customers are satisfied, the more successful the business has been (islamoglu, 2005). the quality of the product put on the market by the enterprise, its ability to meet consumer needs, its competitiveness in the market, its clarity and suitability for sale are important in determining the marketing strategy. however, in today's global world, it is important for business success not to depend only on local markets. it is also important to improve the ability of selling goods and services all over the world. within the scope of modern marketing understanding, it is significant for businesses to determine their marketing strategies according to the characteristics of the market in which they will launch their products (bilge et al., 2009). the important issue in modern marketing understanding (approach) is the repetition of the purchase. for this fact, businesses determine the consumption habits of individuals within the framework of this understanding (approach), segment the target audience, determine market conditions and integrate all their activities with marketing (eroğlu and erdoğan, 2014). the starting point in the modern marketing approach is the market and process, which is initiated with the research of wishes as well as needs of consumers. here, there is an integrated marketing understanding (approach) and the profit obtained in line with consumer satisfaction is targeted (tekin et al., 2014). in addition, the issues that businesses consider about products and sales in the modern marketing understanding (approach) are listed as follows (kotler, 2005): determination of product/service types and planning of production organizations related to product types determination of product/service features (characteristics) determination of quality making decisions to comply with national and international standards warranty decisions detection of accessories related to the product (for example, options such as air conditioning and sunroof in automobiles) details of the packaging decision determination of the labeling system determination of product usage instructions undertaking maintenance, repair and correction operations determination of product technical features (characteristics) organization of service issues (sales return acceptance, customer service, etc.) it is significant in terms of customer satisfaction that businesses take into account the above-mentioned product and sales issues in addition to determing their marketing activities accordingly. it can be observed as a pre-marketing stage that businesses determine all the details about the product and inform the consumer about these details. the best approach towards customer during sales and the strengthening of after-sales services will increase customer satisfaction by ensuring that all marketing processes are carried out effectively (güreş, 2004). in today's information society era, effective use of resources has become a necessity. a world perception has begun to emerge, in which environmental problems are not ignored and depleting resources are drawn attention to. while this situation caused a change in the perception of consumers in the first step, the marketing understanding of the enterprises started to change as well (güler, 2014:). businesses need to adapt to today's conditions in order to be successful. it is important to adapt to the environment in meeting consumer demands. the realization of production, sales and promotion activities within the framework of a sustainable environmental understanding is a requirement for a society-oriented marketing approach. businesses need to use resources effectively, perform efficient production in line with consumer demands, and continue their activities in harmony with the environment. carrying out activities in harmony with the environment and observing the benefit of society will increase the prestige of enterprise in the society. this situation will increase the recognition of the business by gaining the appreciation of the society (garda, 2016). it is important for businesses to carry out their activities in a society-oriented manner in terms of marketing understanding (approach). especially today, businesses prefer to do marketing within the scope of social responsibility projects. marketing activities carried out within the scope of social responsibility projects create awareness in the society. such marketing activities both benefit the society and increase awareness of the businesses (soysal, 201). marketing mix in business the factors that make up the marketing mix have been classified in different ways by separate authors. the elements that are important in this marketing mix are expressed with 4ps (odabaşı, 2014). the components that make up the marketing mix are indicated as follows (kotler, 2005): product: the basic components that make up the product are expressed as quality, features, style, durability, brand image, warranty and packaging. businesses have to determine their marketing strategies for each product they produce in the best way. determining the general features of the product and detecting the market conditions where the product will be sold and conducting marketing activities accordingly are important for the marketing success. price: price is seen as a monetary expression of the value of goods or services. the sum that consumers have to bear in order to purchase the good or service is defined as the price of good or service. price of the good or service is important in the effectiveness of marketing activities. price is one of the most important components that consumers evaluate in their perceptions before purchasing a good or service. whether the price is low or high is an important factor in consumers' purchase intentions. in market conditions where consumers can compare prices for the same product, price determination can be seen as a marketing strategy. place: it is among the duties of distribution channels to deliver the produced goods to another producer or consumer. the efficient operation of distribution channels provides faster and more reliable transportation from producer to consumer. reducing distribution costs within the framework of marketing activities is important for business profitability. for this reason, it is important for volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey page |72| emerging markets journal marketing activities and distribution channels to carry out their activities in an integrated manner. promotion: the reasons why promotional activities are so important in today's conditions are the increase in physical distance between customers and businesses, population density, expansion of markets as a result of income increase, more intense competition, greater distribution organizations, proliferation of intermediary institutions, differences in consumer needs and demands, raising the level of consciousness of the consumers, increasing the awareness of the clients, the consumer's search for superior quality and features, and the ability to compare prices on the same products. the marketing mixes determined within the framework of marketing concept have changed formation as customer-oriented with the adoption of modern marketing concept. with the modern marketing understanding (approach), 4p has turned into 4c. within the scope of modern marketing understanding (approach), customer satisfaction is prioritized and the components of marketing mix are determined according to customer perceptions. the equivalents of 4p elements in the 4c are as follows: (garda, 2016:245). figure 1. the equivalents of 4p elements in the 4c source: garda, b. (2016). bütünleşik pazarlama i̇letişimi: konya i̇li örneği. selçuk üniversitesi sosyal bilimler meslek yüksek okulu dergisi, 19, 243-260. the main point in the modern marketing approach is customer focus. therefore, marketing mixes have also undergone this transformation. the product, which is at the beginning of the marketing mix, has gained qualification as the value offered to the customer with the modern marketing approach. distribution channels, expressed as places, are transformed on the basis of being convenient to the customer and providing comfort to the client. the convenience of providing the customer with easy access to products and services and placing an order are evaluated within this scope. price is defined as the cost of product to the customer. in the old marketing approach, the price determined by the enterprise in line with its costs and profit targets has been customer-oriented together with the modern marketing approach. the price is now determined by the customer, not the manufacturer. at the end of the marketing mix is the promotion. with the modern marketing approach, promotion is considered as a tool to maintain customer communication. in order to survive in an intensely competitive environment, businesses need to effectively continue their relations with customers. advertising operations and campaigns will keep the opinions of customers towards the business dynamically. iii. customer purchase process and the effective factors the consumer concept the individual who buys the goods or services produced by the enterprises in return for a price is called the customer. the consumer, on the other hand, is the person who consumes the product or benefits from the product, even though he/he does not pay the price of products manufactured by the enterprises. according to modern marketing, the customer is defined as the person who buys the goods or services or the person who has the potential to purchase the goods and services (yağcı and i̇larslan, 2011). the consumer is seen as an individual who consumes the product or benefits from the product, determines the position of products or services in the market conditions, and provides significant support to the enterprises in reaching their targets, whether or not they buy the goods or services that the enterprises have put on the market. the history of the concept of consumer begins with commerce. with the beginning of trade in history, the concept of consumer has emerged as a natural outcome of buying and selling activities (solomon, 2014). consumer purchasing process consumers are affected by many factors before and during the purchase of goods or services. thus, the consumer buying process is quite critical. in this section of the research, the factors affecting the purchasing process of consumers are discussed. there are many factors that affect the structure of the decision-making process of consumers. however, the most important ones are listed as follows (dal and eroğlu, 2005): situational effects levels of consumer decision making high and low level of interest consumers' purchase intentions can be affected by the current situation they are in. the decision-making processes of consumers in a certain environment at a certain time period may differ. situational effects are listed in table 3 below. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu ozan altun, cevdet kızıl, gülay selvi hanişoğlu, nazar demir emerging markets journal | p a g e 7 3 table 3: situational effects effects qualification (characteristics) physical factors these are the factors that affect human senses. sound, odor, noise level and lighting can be shown as examples. in particular, the physical characteristics of the store environment are effective in the purchasing process of individuals. social environment individuals are affected by their social environment in the purchasing process. consumption decisions may change in order to be part of a group or to adapt to the circle of friends. time important times such as the month and week that the consumers are in are effective in the consumption processes. aim it is important why the product to be gathered is purchased. personal or gift purchase processes differ. emotional state the emotional state of the person is effective in the purchasing process. facilitating elements facilitating factors can play an important role in the purchase decision of consumer. for example, the availability of price, time or place may be effective. source: kabakçı, s., 2001. tüketici davranışlarını etkileyen bir faktör olarak yasam tarzı: çukurova üniversitesi’nde okuyan kız öğrencilerin yasam tarzı tiplerinin belirlenmesine yönelik bir araştırma, çukurova üniversitesi sosyal bilimler enstitüsü i̇şletme anabilim dalı, yüksek lisans tezi, adana. individuals do not always act in the same way concerning their purchasing decisions. there may be many factors that affect the purchasing decisions of consumers (odabaşı and barış, 2003). consumers' purchasing decisions may be due to their current situation, time or old habits. a period when consumers are under the influence of their decision-making levels can be effective (dal and eroğlu, 2005). concerning the decision-making levels; routine-problem solving behavior, limited problem-solving behavior and intense problem solving behavior are significant. in regards to routine problem-solving behavior, consumers cannot give up their habits, especially in their purchasing behavior. it is very difficult to choose a new product instead of a product that is constantly bought and whose price is known. here, the level of consumer decision making is highly affected by habits (çabuk and yagcı, 2003). for limited problem-solving behavior, the selection criteria for the consumer have begun to emerge. in particular, the consumer's dissatisfaction with the current product leads him to other products (eryılmaz & zengin, 2014). concerning the intense problem-solving behavior, consumer shows the mentioned behavior especially for products that have a long and expensive lifespan. consumer needs more information about the product. at the same time, he/she tries to choose the most suitable and highest quality product by making intensive product comparisons (taşkın, 2016). consumers may be at a high or low level of interest in their purchasing decisions. low level of interest is when individuals have enough information about the product and make the purchase decision quickly. at the high level of interest, the consumer does not have enough information about the product. consumers demand high information about the product they encounter. in line with the information obtained, he/she can perform a screening by comparing the product with others. thus, the purchasing behavior is determined (odabaşı and barış, 2003). consumers can buy products to express themselves. the effects of various products on different individuals are not parallel. a product related to a person's culture, life or past may evoke the perception of a personal symbolic message. this will affect the person's purchasing preference (kardeş et al., 2014). some symbolic products purchased by consumers are provided in table 4 below. table 4: the leading symbolic messages provided by the products purchased wealth, power and superiority many consumers may prefer expensive brands in the name of wealth and power. especially as a part of popular culture, many consumers can choose a product just because it is expensive. youth the purchasing behavior of consumers may differ due to youth. young people may choose to shop by emulating the elderly or old people by emulating the young. sexual attraction objects also have a sexual language. a pen, motorcycle, or a bed sheet can be feminine or masculine. creativity and pleasure consumers can combine products according to their own tastes, especially in order to keep up with fashion. the choice of bags or shoes suitable for the outfit affects the purchasing preferences of the consumers. love (liking) the goods that consumers prefer in line with their living conditions can be a part of their love (liking). for example, according to the house planned by the individual, the choice of household goods may differ. loyalty the purchased product may have caused the same feeling in the person since the past. for example, the perfume used by the person since childhood can be given as an example. source: orhan, i̇. (2002). satın alınan ürünlere i̇lişkin duyguların cinsiyet ve cinsiyet rolleri bakımından i̇ncelenmesi, ankara üniversitesi sosyal bilimler enstitüsü psikoloji anabilim dalı, yüksek lisans tezi, ankara. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey page |74| emerging markets journal industrialists who want to respond to the unlimited demands of individuals in the globalizing world are constantly increasing. however, consumers consume most of the products manufactured. there is currently a state of excessive consumption in the world (acar, 2000). manufacturers have to appeal to consumers in order to sell the goods they produce. for this reason, marketing activities gain importance at the stage of determining the wishes and demands of consumers. in particular, determining when and how the consumer will buy goods and conducting marketing activities according to the psychology of the consumers are important for the success of business (avcılar, 2008: 12). mandatory consumption occurs in two ways. these are basic and selective necessities. the basic necessities are the purchases that consumers make without giving importance to the brand. the consumer makes the purchase to meet his/her needs regardless of the brand. in selective necessities, the consumer can choose a brand (xiang et al., 2015). since the consumer does not make a choice in the basic necessities, the advertisements are also meaningless. for example, a consumer who wants to drink can buy the drink regardless of the brand. this situation causes the advertisements and marketing activities to lose their functionality. advertisements take a more active role in selective necessities (erdil and uzun, 2009). consumption intention is the decision to buy. after the consumer's need and motivation, he/she makes the consumption decision. the factors affecting the consumption intention are as follows (öztürk, 2002) intensity of needs ensuring the standards of future life irreversibility in consumption intention relationships in personal consumption functions concerning intensity of needs, individuals make their final decisions for the products they want to buy. these needs may stem from basic needs or personal characteristics (blain et. al., 200). in regards to ensuring the standards of future life, consumers can limit their consumption by considering their future expenditures. for example, when a civil servant receives his/her salary, he/she does not spend it all immediately. some of the salary are kept for the future. this situation also has an effect on the supply-demand balance of the market. for irreversibility in consumption intention, consumers sometimes cannot give up their past habits. an individual who prefers a product due to the necessity of his/her economic and socio-cultural environment in the past may not give up on the current product even if his/her economic and socio-cultural environment changes over time. as an example for the relationships in personal consumption functions, when a new model or emerging fashion of a product comes out, an individual may want to buy a new product (armağan and gürsoy, 2011). in the consumption culture, the party that dominates the market is the consumers. consumers, as the rulers and directors of the market, guide the producers. manufacturers focus on the goods that consumers desire and determine their competition methods accordingly. competition conditions are determined entirely by the preferences of consumers (akın et. al., 2009). in the consumption culture, marketing activities are carried out especially through the mass media. in other words, consumption culture is further fueled by the mass media and advertisements. manufacturers can sell some products by popularizing them in the media even if individuals do not need them. manufacturers reach masses through the mass media and advertisements, and can provide information about their products. each information provided has an impact on the purchase intention of consumer. this situation can be shown among the most important features of consumption culture. especially in the globalizing world, consumption culture is spreading rapidly (öztürk, 2002). factors affecting the consumer behaviors there are many factors that affect the purchasing behavior of consumers. however, the factors that are thought to have the most impact on consumer purchase intention are categorized under three factors. these can be listed as personal, socio-cultural, economic and psychological factors (levy, 2005). personal factors are very important in the consumer purchase intention. the most important factors affecting the purchasing status of consumers are classified under six factors. these are age, gender, job, education level, marital status and income level (köseoğlu, 2002). age is one of the important factors affecting purchase intention. ages of individuals have an impact on their purchasing decisions. while age is effective on the purchasing decision, it also makes a difference in the use of purchased product. usage of consumption products such as clothes, food and furniture are directly proportional to the age of individuals (köseoğlu, 2002). manufacturers should well determine the age of customer base they are addressing. changing socio-economic status depending on the age also has an effect on people's purchasing preferences (çakmak, 2004). the fact that individuals in the same generation have similar cultural perceptions causes their consumption habits to be similar. the consumption demands of children, young or old individuals are different. today, producers are aware of the different needs and demands of these masses and carry out their marketing activities accordingly (back and parks, 2003). gender is an important factor in the purchase intention. the product preferences of women and men are different from each other. gender is also a significant purchasing criterion in all cultures. many cultures have feminine and masculine expressions. this situation becomes important in consumption preferences (orhan, 2002). along with the changing world conditions, there have been changes in the consumer roles of men and women. the fact that woman, who was only perceived as a housewife formerly, but now started to take part in the business life has also caused a significant change in consumption habits. the fact that women in industrialized societies started to work and had economic power increased their expectations from the market. women have started to make various demands from the market for their special needs. in addition, the fact that both men and women started to make joint decisions in home life also caused changes in consumption (tek and özgül, 2005). due to the fact that home life is shared by men and women, household shopping has also begun to be done jointly. the basic needs of the home and needs for childcare are now taken not only by women, but also by men. this situation causes the consumed products to differentiate (tosun, 2010). product preferences of men and women also differ. while women approach with more emotional feelings when buying products, men seek ease of use. while volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu ozan altun, cevdet kızıl, gülay selvi hanişoğlu, nazar demir emerging markets journal | p a g e 7 5 women focus more on brands or expensiveness, men tend to focus more on cheap and useful products (ural and perk, 2012). occupation (job) of individuals has an impact on their purchasing preferences as well. occupation can increase or decrease individuals' interest in certain products. for example, purchasing preferences of managers and workers (employees) in an enterprise may differ from each other (marangoz, 2007). today, intense industrialization has led the white-collar group to come to the fore. the fact that white-collar class is more educated and their economic situation is good causes marketers to shift their focus in this direction. in today's consumption culture, creating and selling products that can meet the needs of white-collar individuals is seen as the main goal for producers (özcan, 2010). education level also has an impact on consumers' purchase intentions too. as the level of education increases, the products demanded by people also increase. today, the level of education is constantly increasing, and as a natural consequence of this, the variety of goods demanded increases (atilgan et al., 2005). depending on the level of education, consumers' purchasing and product-related knowledge levels also go up. the consumer has become more conscious. this affects the purchasing decision. consumers determine their purchasing preferences by paying more attention to the features, quality, usefulness and price of the goods and via comparing them with other products in the market. the education level of consumers can also encourage them to learn more. this situation leads to more conscious consumers and has an impact on people's purchasing preferences (köseoglu, 2002). marital status is effective on people's purchasing preferences as well. whether people are married or single affects their purchasing intentions. the needs of single individuals and those of married are different from each other. married individuals have more necessities and needs for the house. in addition, the consumption expenditures of people who have children are considerably higher than other individuals (konecnik and gartner, 2007). today, the age of marriage is still advancing. women's career goals also delay their marriage status. in addition, women are having children at a later age. this situation causes marketers to change their strategies. in today's business world, marketers have increased the advertisements for women who are married, have children and are career oriented (köseoglu, 2002). income level is among the most important factors in consumer’s purchase intention. consumers determine their purchasing intentions based on their current income. consumption expenditures of low-income individuals and high-income individuals are different from each other (ural, 2009). according to engel's laws, there is a relationship between income and expenditure. according to this law, as the income level increases, the shares for all expenditures increase. also, as the income level increases, the amount spent on food decreases proportionally compared to other expenditures (kavas, 2004). socio-cultural factors are also important in consumers' purchase intentions. socio-cultural factors affecting the consumer behavior are family, social class, groups and the culture. the family is influential on consumption preferences. the region where the family lives, the authoritarian structure of the family, the working status of the women in the family, family relations or the people in the family affect the consumption preference. in addition, the roles assumed by family members are effective in purchasing preferences. the purchasing behavior of each individual in the family differs according to their position in the family (öztürk et al., 2014). the purchasing behaviors of families may also differ according to the dominance of family members. consumption expenditures according to the dominance of family members are non-accountability of family members in their purchasing preferences, presence of the dominant male, presence of the dominant woman and families where the purchasing decision is made jointly (karafakıoglu, 2005). families have a certain position in the society. the position of the family in the society has an effect on consumption expenditures. the characteristics of the environment in which the family lives affect their expenditures. the position of family in the society can be determined by where they live, ownership of assets, contribution to the society, structure, fame and livehood (mert, 2001). the external environment is also important in the consumption expenditures of the family. various stimuli from the external environment are effective in the family's purchasing preference. for example, several factors from the external environment can affect the decision of a family willing to buy a car. the social structure of the family is also effective on the purchase intention (ural, 2009). social class also has an impact on people's purchasing preferences. various factors such as the sociocultural situation of individuals, income level, education level, value judgments, beliefs and traditional structures cause the society to be divided into classes. the classes of people are important in terms of consumption expenditures (villerejo & sanchez, 2005). the consumption habits of individuals belonging to different social classes are also different from each other. the various qualities that the social class brings to the person also change the nature of consumption expenditures. the fact that each social class has its own characteristics causes consumption to be determined in this direction. however, people who want to make changes in their social class primarily change their consumption expenditures. an individual who wants to rise from the lower class to the upper class tends to luxury consumption expenditures (van rier et al., 2005). various factors are considered in order to determine social classes. these are the source and level of income, profession group, type and location of the individual’s house and education level (pappu, quester and cooksey, 2005). marketers need to run advertising campaigns that will appeal to which social class they plan to sell their products to (keller, 2008). people take part in various groups throughout their lives. various groups such as the family, school and work are effective in human life. family is the first group of individual. following this, there are groups of friends in the school and business life. the group of people in individuals’ consumption preferences is important (kwun and oh, 2004). individuals are especially interested in the brand preferred by the group. the person who buys the preferred brand of group sees himself/herself as a part of that group. this situation is important in the product preference of person (köseoglu, 2002). culture also has an important place on the consumption habits of individuals. individuals from different cultures may have separate consumption habits. purchasing needs of people may vary according to the volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey page |76| emerging markets journal society and culture they live in (webster, 2000; akın et. al., 2009). moreover, individuals want to make the best consumption with the assets they have. at the same time, individuals try to meet their needs by using their assets rationally. budget can be seen as the most important factor affecting the purchasing behavior of individuals. needbased or luxury consumption expenditures are closely related to individual's budget (atılgan et. al., 2005). in post-modern societies, the need for commodities is psychological. individuals buy commodities to satisfy themselves. however, the cost of the goods to be purchased becomes important for the person. the person considers psychological satisfaction and economic status. in addition to all these, the quality, durability and properties of the goods are also included in the evaluation process of consumer (köseoglu, 2002). psychological factors are important in the purchasing behavior of consumers. these can be listed as motivation, perception, learning, beliefs and attitudes. if the consumer is constantly procuring a good from the same place, this indicates that the consumer is motivated (karabacak, 1993). customers attach importance to concepts such as sincerity and honesty where they buy. in addition, the diversity and quality of goods are important. individuals want their needs to be fully met. for this reason, they prefer places that they have experienced before and that fully meet their needs. consumers also want to be satisfied with the goods and services. this causes consumers to be motivated (sağlam and sağlam, 2016). perception is expressed as the individual's understanding of his/her environment through sense organs. it also shows the degree of emotional and cognitive perspective of the person (odabaşı and barış, 2003). consumers try to detect signals from products. features such as the characteristics, quality, durability and prestige of the products create a stimulating effect on the consumer. consumers make the purchasing decision in line with the stimuli emitted by goods (çabuk et al., 2014). individuals are in an effort to learn about the product they want to buy. by learning about the various features of the product, they determine their purchasing behavior accordingly. individuals can make comparisons between products by learning (güney, 2000). the consumer, who wants to choose between products, first collects information about various products and evaluates this information in line with his/her own needs. the individual makes an evaluation via considering various criteria and as a result makes the purchase decision (öztürk and savaş, 2014). the society and environment in which individuals live and the various information they have learned throughout their lives have an impact on their beliefs and attitudes. in other words, various situations and events that people are affected by throughout their lives affect their beliefs and attitudes (orhan, 2002). beliefs and attitudes of consumers enable the establishment of relationship between the goods and brands. individuals determine their needs according to their beliefs and attitudes, and make the purchasing decision accordingly (bülbül and özoğlu, 2014). individuals are affected by many different factors such as the sound, smell and light throughout their lives. however, individuals make their decisions based on some factors, not all factors. people's perceptions focus only on specific factors (erdem, 2006). the concept of selectivity is a constantly evolving process of perception. with selectivity, individuals respond to some factors by acting selectively, rather than responding to all factors. this situation also affects the purchasing decisions of consumers. various factors such as the sound, color, light and texture can cause different stimulating effects on each person. some products attract people's attention and direct them to these products. each product can be preferred by different people and can be effective on the purchasing decisions (kara, 2015). media plays an important role in promoting products and services. advertisements attract people's attention and direct people to these products. particularly striking advertisement designs ensure the success of sellers (bülbül et al., 2016). target audience selection is also important in the advertisement design. determining the target audience and preparing advertisements accordingly is a critical issue. individuals perceive the advertisements directed to them and give their reactions accordingly. good and remarkable advertising has an impact on consumers' purchasing intentions (tosun, 2010). the main purpose of advertising activities is to generate profit. however, making advertisements only for profit will weaken the success of advertisement. here, it is especially important to create a brand perception in the mind of the consumer (güney, 2000). brand-based advertisements are especially important in terms of promotion. highlighting brands in advertisements has an impact on consumers' purchasing decisions (kara, 2015). iv. the paint industry paint industry overview the paint industry is basically divided into two groups. these are industrial paints and construction paints. although definition and distinction are difficult in the paint industry, definitions are made based on the surface on which the paint will be applied. if it is necessary to control various parameters that will affect the current quality of work, as well as health, safety and environmental risks, this paint application is referred to as industrial paint in the literature. in industrial paint applications, the product to be painted is transported to the location where the paint will be made. however, if there is no inspection requirement in paint production and the paint is made at the location where the surface is, this is considered as the construction paint. in construction paint, the paint is delivered to the location where the surface to be painted is made (tunçgenç, 2015:26). while construction paints are handled within a single section in the sector, industrial paints are divided into various sub-sectors. explanations on these sectors are summarized below (tunçgenç, 2015): vehicle paints are used for painting vehicles such as automobiles, commercial vehicles, motorcycles, trains, bicycles and airplanes. it is used both in the original painting process of vehicles, as well as in the assembly of various parts and painting of parts. general industrial paints, on the other hand, are applied on motorized agricultural vehicles, work and office equipment, durable consumer goods, machines, transformers, various metal goods, but generally metal products. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu ozan altun, cevdet kızıl, gülay selvi hanişoğlu, nazar demir emerging markets journal | p a g e 7 7 protective paints are generally used to perform the protection process. it is frequently applied to products that are exposed to various external environmental factors, especially on the exterior. powder paints are used as paints brought to micron size. the production of micron paints is divided into a different branch from the paint industry. however, powder paints are often preferred in the industrial field. they are also demanded in the automobile industry, especially for exterior paints of automobiles. auto repair paints are generally made for renewal purposes. auto repair paints are preferred for cars that have been damaged or have a paint problem. these paints can preferably be used for the entire car or locally. woodppaints are generally classified as construction paints. such paints are often used in building structures such as the wooden furniture and doors. in addition, wooden products are usually delivered to the location where the paint will be made. marine paints are used to paint watercraft. marine paints have more durable properties, especially because of the excessive wear caused by sea water. coil paints are applied to flat metal products that are wrapped in bobbins after they are produced. the world paint industry when the world paint sector is analyzed, it is seen that industrial paints are consumed more than construction paints. however, the fact that industrial and construction paints are intertwined in many areas prevents a full distinction from being made. in addition to all these, industrial paints seem to have taken the largest share, as industrial paints are divided into various sub-sections. (tuncgenc, 2015). also, five of the world's top ten paint manufacturers are based in the united states (usa). thus, it is possible to say that the usa has an important share in terms of production in the world paint industry. turkish paint industry actually, there is a lack of data due to the limited number of studies on the structure and size of turkish paint industry. it is not possible to reach precise data about the real size of the paint industry in turkey. on the other hand, in a study published in 2015, detailed data about the turkish paint industry were presented by combining various sources (tunçgenç, 2015). the mentioned data are presented below in table 5. in table 5, quantities and values of the turkish paint market segments are presented for the year of 2015. table 5: quantities and values of the turkish paint market segments (year 2015) market segment quantity (1.000 tons) % value (million €) % construction paints 500 62,0 650 45,8 wood paints 100 12,4 150 10,6 powder paints 52 6,4 150 10,6 vehicle paints 34 4,2 105 7,4 general industrial paints 38 4,7 90 6,3 protective paints 25 3,1 70 4,9 auto repair paints 15 1,9 68 4,8 coil paints 18 2,2 50 3,5 marine paints 15 1,9 65 4,6 other 10 1,2 22 1,5 total 807 100,0 1.420 100,0 source: tunçgenç, m. (2015). türk boya sanayisi. akzonobel kemipol aş yayını, i̇zmir. paint suppliers in turkey it was determined that approximately 600 companies were engaging in paint production in turkey for the year of 2013. also, 200.000 individuals were employed in these firms, while 20 of these corporations had been large-scaled. the rest of enterprises were mostly small-scaled companies with few employees. information about the ten big paint companies producing in turkey is provided below. as of 2013, the net sales of these companies were over 100 million tl (iso, 2014). akzonobel boya akzonobel kemipol axalta boya sistemleri basf boya betek boya dyo frimpeks i̇ba kimya jotun boya kansai altan boya kayalar kimya marshall boya polisan boya ppg construction paints consumption in turkey the sector in which paint is used the most in turkey is the construction industry. especially in the last few years, after urban transformation implementations have gained momentum, paint consumption has a rapid increase. the continuous construction of new buildings due to urban transformation implementations in big cities increases the need for paint. in addition, paint consumption related to the renovation and repair of buildings is quite high. furthermore, the arrival of several immigrants to turkey and the increase in the need for housing higher the demand for paint at the same rate. although the highest paint consumption in turkish paint industry is in the construction industry, 85-90% of this consumption is used for building renovation and repair. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey page |78| emerging markets journal however, paint consumption in new buildings constitutes 10-15% of the share in construction paint (bitlisli, 2014; tunçgenç, 2015). v. data and methodology the aim of this research was to examine the consumers' preference of paint purchase from the viewpoint of individuals employed in the paint industry. the universe of the research consisted of personnel working in two different businesses operating in the paint sector. the total number of employees in the two enterprises was approximately 1.000. the sample calculation table of yazıcıoğlu and erdoğan (2004) was used to determine the required sample size. table 6: sample sizes for = 0.05 source: yazıcıoğlu, y. ve erdoğan, s. (2004). spss uygulamalı bilimsel araştırma yöntemleri. ankara: detay yayıncılık, 50. based on the sample calculation table of yazıcıoğlu and erdoğan (2004), it was aimed to reach at least 278 individuals with a sampling error of 5%. in this context, the research questionnaire was distributed to 350 individuals and 330 responses were received. since missing questions were observed and detected in 4 of the returned questionnaires, the study was carried out with 326 questionnaires. thus, the final sample size of this study was 326. questionnaire form was used as the data collection tool. in the questionnaire, there were 5 questions about demographic characteristics, 17 questions about purchasing and usage behavior, and 29 questions about consumers' preferences for paint. the questions about purchasing and usage behaviors were gathered under 2 sub-titles and the 5-point likert scale was preferred. the factors causing the need for paint consisted of 9 questions and the most frequently applied and most affected factors in the stage of collecting and evaluating information about paint before purchasing it consisted of 8 questions. the questions regarding the preferences of consumers concerning the paint were gathered under 4 sub-titles and again 5-point likert scale was preferred. these sub-headings were considered as sub-dimensions of the scale. the scale was created by making use of obuz's (2012) master's thesis. the validity and reliability tests of the scale was conducted by obuz (2012). the results obtained regarding the reliability of the scale and factor analysis in this study are provided in table 7 below. table 7: reliability of the scale and factor analysis factor loadings cronbach’s alpha purchase features preference 1. the paint being a known brand 0,605 0,763 2. the paint being purchased by order 0,684 3. quality of paint 0,725 4. the paint being the product of a well-known company 0,752 5. the paint having a warranty period 0,741 6. the paint having an economical price 0,731 7. ease of purchasing and payment of the paint 0,765 8. sufficient after-sales delivery and service of the paint 0,715 9. making market research before purchasing the paint 0,681 10. paint having a quality certificate 0,705 usage features preference 1. the paint is suitable for its intended use 0,654 0,805 2. the paint being compatible with the room in which it will be used 0,685 3. the paint being a necessity 0,684 4. the paint being suitable for human taste 0,756 5. the paint being useful and durable 0,715 6. the paint being made of easy-toclean material 0,763 volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu ozan altun, cevdet kızıl, gülay selvi hanişoğlu, nazar demir emerging markets journal | p a g e 7 9 7. the paint being made of durable material 0,685 8. the paint bringing freshness to the room 0,741 choice of decoration features 1. the paint having a nice color 0,684 0,796 2. the paint being fashionable 0,752 3. the paint model (classic, modern) 0,789 4. the paint being suitable for the style/model of its location and other items 0,753 5. the paint matching the color of place and other items 0,763 user expectations 1. the paint being suitable for the status of consumer and family 0,685 0,791 2. the paint being a favorable and liked one 0,687 3. the paint being appropriate to the needs of family and members of the family 0,691 4. the paint suiting the tastes of family and members of the family 0,742 5. the paint bringing freshness and light to the room 0,756 6. the paint not disturbing the consumer and harming his/her comfort 0,732 source: spss 16 software output when cronbach's alpha coefficients are examined, it is possible to say that the scale meets the reliability conditions. because cronbach's alpha is expected to be at least 0,7. (nunnally,1978). data analysis of this research was run using the spss 16 package program. descriptive statistics such as frequency, percentage, mean and standard error were presented for the analysis of data. in addition, t test and anova test were applied to test the relationships among the variables. vi. findings the findings obtained within the scope of this research are provided in tables presented below. findings on demographic characteristics table 8: findings on gender frequency % female 122 37,4 male 204 62,6 total 326 100,0 source: spss 16 software output 37,4% of the participants were female and 62,6% were male. table 9: findings on age frequency % 20-29 61 18,7 30-39 143 43,9 40-49 102 31,3 50 and above 20 6,1 total 326 100,0 source: spss 16 software output 18,7% of the participants were between the ages of 20-29, 43,9% were between the ages of 30-39, 31,3% were between the ages of 40-49 and 6,1% were 50 and over. table 10: findings on education level frequency % associate degree 144 44,2 bachelor degree 162 49,7 graduate degree 20 6,1 total 326 100,0 source: spss 16 software output 44,2% of the participants had an associate degree, 49,7% had a bachelor degree and 6,1% had a graduate degree. table 11: findings on marital status frequency % single 102 31,3 married 224 68,7 total 326 100,0 source: spss 16 software output 31.3% of the respondents were single and 68,7% were married. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey page |80| emerging markets journal table 12: findings on income level frequency % minimum wage-3.000tl 123 37,7 3.001tl5.000tl 182 55,8 5.001tl and above 21 6,4 total 326 100,0 source: spss 16 software output 37,7% of the participants had an income level up to the minimum wage of 3.000tl, 55.8% had an income level between 3.001tl-5.000tl and 6.4% had an income level of 5.001tl or more. findings regarding purchasing and usage behaviors table 13: findings regarding purchasing and usage behaviors n m in im u m m a x im u m m e a n s ta n d a r d d e v ia ti o n factors affecting the need for paint 1. aging of existing wall paint 326 1 5 3,50 ,934 2. to be out of date 1 5 2,30 1,042 3. children's growth 326 1 5 2,36 ,991 4. expansion of space 326 1 5 2,99 1,064 5. marriage 326 1 5 3,75 1,026 6. family 326 1 5 2,07 1,156 7. income increase 326 1 5 2,50 1,013 8. advertisements 326 1 5 2,69 1,052 9. cleaning 326 1 5 3,74 1,042 the most frequently used and most affected factors in the stage of collecting information and evaluating the paint before purchasing 1. previous knowledge and experience 326 2 5 4,01 ,706 2. related catalogs and brochures 326 1 5 3,31 1,109 3. advertisements 326 1 5 3,50 ,937 4. written and visual media 326 1 5 3,44 1,056 5.friends/neighbors 326 1 5 2,94 ,975 6. family 326 1 5 3,31 ,927 7. internet 326 1 5 2,87 1,061 8. shop window 326 1 5 3,06 1,038 source: spss 16 software output when the opinions of participants about the consumers’ purchasing and usage behaviors were examined, it had been determined that the aging of existing wall paint, marriage and cleaning factors were the most important factors in the emergence of need for paint. however, the most important factor affecting the purchasing preference of consumers had been determined as previous knowledge and experience. findings on consumers' preferences for paint table 14: findings on consumers' preferences for paint n m in im u m m a x im u m m e a n s ta n d a r d d e v ia ti o n 1. preference for purchasing properties in paint 1. the paint being a known brand 326 1 5 3,34 ,721 2. the paint being purchased by order 326 1 5 3,35 ,587 3. quality of paint 326 1 5 3,34 ,734 4. the paint being the product of a well-known company 326 1 5 3,44 ,497 5. the paint having a warranty period 326 1 5 3,19 ,873 6. the paint having an economical price 326 1 5 3,33 ,471 7. ease of purchasing and payment of the paint 326 1 5 3,33 ,571 8. sufficient aftersales delivery and service of the paint 326 1 5 3,06 ,991 9. making market research before purchasing the paint 326 1 5 2,93 ,996 10. paint having a quality certificate 326 1 5 3,23 ,823 2. preference for use properties in paint 1. the paint is suitable for its intended use 326 1 5 3,22 ,882 2. the paint being compatible with the room in which it will be used 326 1 5 3,28 ,881 3. the paint being a necessity 326 1 5 3,25 ,885 4. the paint being suitable for human taste 326 1 5 3,20 ,897 5. the paint being useful and durable 326 1 5 3,33 ,867 6. the paint being made of easy-toclean material 326 1 5 3,22 ,864 7. the paint being made of durable material 326 1 5 3,06 ,915 8. the paint bringing freshness to the room 326 1 5 3,19 ,821 3. preference for decoration properties in paint 1. the paint having a nice color 326 1 5 3,31 ,749 volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu ozan altun, cevdet kızıl, gülay selvi hanişoğlu, nazar demir emerging markets journal | p a g e 8 1 2. the paint being fashionable 326 1 5 3,23 ,787 3. the paint model (classic, modern) 326 1 5 3,20 ,778 4. the paint being suitable for the style/model of its location and other items 326 1 5 3,31 ,749 5. the paint matching the color of place and other items 326 1 5 3,45 ,860 4. user expectations 1. the paint being suitable for the status of consumer and family 326 1 5 3,31 ,856 2. the paint being a favorable and liked one 326 1 5 3,24 ,896 3. the paint being appropriate to the needs of family and members of the family 326 1 5 3,18 ,813 4. the paint suiting the tastes of family and members of the family 326 1 5 3,31 ,796 5. the paint bringing freshness and light to the room 326 1 5 3,34 ,686 6. the paint not disturbing the consumer and harming his/her comfort 326 1 5 3,43 ,520 source: spss 16 software output when the factors affecting the paint preferences of consumers were examined, it was observed that the averages had been generally above 3. on the other hand, the average of "making market research before purchasing the paint" was below 3. this showed that consumers did not frequently make market research before purchasing the paint. table 15: t-test on consumers' preferences for paint by gender average t p preference for purchasing properties in paint female 3,17 2,152 0,032 male 3,92 preference for use properties in paint female 3,17 1,123 0,262 male 3,24 preference for decoration properties in paint female 3,23 1,768 0,078 male 3,25 user expectations female 3,23 1,917 0,056 male 3,34 source: spss 16 software output when the relationship between gender and consumers' paint preferences was examined, it had been observed that there was no significant difference among the preference for use properties in paint, decoration properties in paint, user expectations and gender (p>0.05), while there was a significant relationship between gender and preference for purchasing properties in paint (p<0). ,05). men's perception of purchasing preference in paint was found to be higher than that of women. men gave more importance to purchasing properties (characteristics) in their paint preferences than women based on the research. table 16: anova test on consumers' preferences for paint by age average f p preference for purchasing properties in paint 20-29 2,90 4,660 0,000 30-39 3,23 40-49 3,39 50 and above 3,73 preference for use properties in paint 20-29 2,94 5,432 0,000 30-39 3,18 40-49 3,33 50 and above 3,70 preference for decoration properties in paint 20-29 3,00 4,840 0,000 30-39 3,28 40-49 3,43 50 and above 3,62 user expectations 20-29 3,00 5,344 0,000 30-39 3,28 40-49 3,42 50 and above 3,75 source: spss 16 software output when the relationship between age and consumers' paint preferences was examined, it is found that there had been a significant difference between preference for use properties in paint, preference for decoration properties in paint and user expectations (p<0.05). according to the tukey test result, which is one of the post hoc tests, the perceptions of 50 and older individuals’ preference for purchasing properties in paint, volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey page |82| emerging markets journal preference for use properties in paint, preference for decoration properties in paint and user expectations perceptions were higher than those of younger individuals. this shows that older people considered more factors in their paint preferences. table 17: anova test on consumers' preferences for paint by education level average f p preference for purchasing properties in paint associate degree 3,02 1,521 0,190 bachelor degree 3,12 graduate degree 2,95 preference for use properties in paint associate degree 3,23 1,746 0,176 bachelor degree 3,24 graduate degree 2,98 preference for decoration properties in paint associate degree 3,27 1,432 0,221 bachelor degree 3,36 graduate degree 3,13 user expectations associate degree 3,30 1,308 0,292 bachelor degree 3,35 graduate degree 3,04 source: spss 16 software output when the relationship between education level and consumers' preferences for paint was examined, it had been detected that there was no significant difference between the preference for purchasing properties (features) in paint, preference for use properties in paint, preference for decoration properties in paint, and user expectations based on the education level (p>0.05). in other words, educational status of individuals was not an effective factor on paint preferences. table 18: t-test on consumers' preferences for paint by marital status average t p preference for purchasing properties in paint single 2,89 8,085 0,000 married 3,31 preference for use properties in paint single 2,93 6,399 0,000 married 3,35 preference for decoration properties in paint single 2,98 7,979 0,000 married 3,45 user expectations single 2,97 6,031 0,000 married 3,45 source: spss 16 software output when the relationship between marital status and consumers' paint preferences was examined, it had been observed that there was a significant difference in preference for purchasing properties in paint, preference of use properties in paint, preference for decoration properties in paint and user expectations according to marital status (p<0.05). married individuals' preference for purchasing properties in paint, preference for use properties in paint, preference for decoration properties in paint, and user expectations perceptions were higher than those of single individuals. married individuals considered more factors in their paint preferences than single individuals. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu ozan altun, cevdet kızıl, gülay selvi hanişoğlu, nazar demir emerging markets journal | p a g e 8 3 table 19: anova test on consumers' preferences for paint by income level average f p preference for purchasing properties in paint minimum wage3.000tl 3,16 6,129 0,000 3.001tl5.000tl 3,25 5.001tl and above 3,70 preference for use properties in paint minimum wage3.000tl 3,14 6,231 0,000 3.001tl5.000tl 3,23 5.001tl and above 3,62 preference for decoration properties in paint minimum wage3.000tl 3,24 7,598 0,000 3.001tl5.000tl 3,29 5.001tl and above 3,72 user expectations minimum wage3.000tl 3,22 5,631 0,000 3.001tl5.000tl 3,31 5.001tl and above 3,71 source: spss 16 software output when the relationship between income level (status) and consumers' paint preferences was examined, it had been found that there was a significant difference in preference for purchasing properties in paint, preference for use properties in paint, preference for decoration properties in paint and user expectations according to income level (status) (p<0.05). according to the results of tukey test, one of the post hoc tests, individuals with an income of 5.001tl or more had higher perceptions of purchasing properties in paint, use properties in paint, decoration properties in paint, and user expectations compared to other individuals. this showed that, individuals with a higher income considered more factors in their paint preferences. vii. conclusion and recommendations with the development of technologies and globalization, there are more businesses and product types in the market. this situation both obliges businesses to develop their marketing strategies and affects the purchasing behavior of consumers. the fact that there are many products in the market that will meet the same need makes it necessary for consumers to make choices. consumers consider many factors in their purchasing preferences. it is important to determine the factors that affect the purchasing preferences of consumers and to develop marketing strategies based on these factors. in this research, the purchasing preferences of consumers in the turkish paint industry were examined for the year of 2017. based on research findings, 37,4% of the respondents were female and 62,6% were male. 18,7% of the participants were between the ages of 20-29, 43,9% were between the ages of 30-39, 31,3% were between the ages of 40-49 and 6,1% were 50 and over. 44,2% of the participants had an associate degree, 49,7% had an undergraduate degree and 6,1% had a graduate degree. 31,3% of the respondents were single and 68,7% were married. 37,7% of the participants had an income up to the minimum wage of 3.000tl, 55,8% between 3.001tl5.000tl and 6,4% had an income of 5.001tl or more. when the opinions of the participants about the purchasing and usage behaviors of the consumers were examined, it was determined that the aging of existing wall paint, marriage and cleaning factors were the most important factors in the emergence of the need for paint. however, the most important factor affecting the purchasing choice of consumers was determined as previous knowledge and experience. it was also determined that consumers do not frequently conduct market research before choosing the paint. examining the relationship between gender and consumers' paint preferences, it was observed that there had been no significant difference among the preference for use properties in paint, decoration properties in paint, user expectations and gender (p>0.05), while there had been a significant relationship between gender and preference for purchasing properties in paint (p<0). ,05). men's perception of purchasing preference in paint was found to be higher than that of women. men were giving more importance to purchasing properties (characteristics) in their paint preferences than women based on the research. investigating the relationship between age and consumers' paint preferences, it was found that there had been a significant difference between preference for use properties in paint, preference for decoration properties in paint and user expectations (p<0.05). according to the tukey test result, which is one of the post hoc tests, the perceptions of 50 and older individuals’ preference for purchasing properties in paint, preference for use properties in paint, preference for decoration properties in paint and user expectations perceptions had been higher than those of younger individuals. this showed that older people considered more factors in their paint preferences. analyzing the relationship between education level and consumers' preferences for paint, it was found that there been no significant difference between the preference for purchasing properties (features) in paint, preference for use properties in paint, preference for decoration properties in paint, and user expectations based on the education level (p>0.05). in other words, educational status of individuals had not been an effective factor on paint preferences. monitoring the relationship between marital status and consumers' paint preferences, it was observed that there had been a significant difference in preference for purchasing properties in paint, preference of use properties in paint, preference for decoration properties in paint and user expectations according to marital status (p<0.05). married individuals' preference for purchasing properties in paint, preference for use properties in paint, volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey page |84| emerging markets journal preference for decoration properties in paint, and user expectations perceptions had been higher than those of single individuals. married individuals were considering more factors in their paint preferences than single individuals. concentrating on the relationship between income level (status) and consumers' paint preferences, it was found that there had been a significant difference in preference for purchasing properties in paint, preference for use properties in paint, preference for decoration properties in paint and user expectations according to income level (status) (p<0.05). according to the results of tukey test, one of the post hoc tests, individuals with an income of 5.001tl or more had higher perceptions of purchasing properties in paint, use properties in paint, decoration properties in paint, and user expectations compared to other individuals. this showed that, individuals with a higher income were considering more factors in their paint preferences. the research presented critical findings. it had been determined that many factors were effective in the paint preferences of older, married and high income individuals. on the other hand; young, single and lowincome individuals were considering less factors in their paint preferences. in addition, it was found that men were considering features such as the price and quality more than women in their purchasing preferences. finally, this study provides some recommendations for future studies. paint advertisements can be prepared by concentrating on the factors mentioned in research that are effective in paint preferences of consumers. also, businesses can prioritize cleanliness and innovation in their paint marketing strategies. this research was run only on paint industry employees. in future studies, comparisons can be made by running the research on paint consumers. plus, only the questionnaire methodology (technique) was utilized in this study. future studies can take advantage of both the quantitative and qualitative methods (techniques). references acar, a. (2000). gösteriş tüketimi, standart dergisi, 39 (457), 38-50. akın, m., çiçek, r., gürbüz, e., ve i̇nal, m. e. (2009). tüketici etnosentrizmi ve davranış niyetleri arasındaki farklılığın belirlenmesinde cetscale ölçeği. ege academic review, 9(2), 489-512. armağan, e. a., ve gürsoy, ö. (2011). satın alma kararlarında tüketici etnosentrizmi ve menşe ülke etkisinin cetscale ölçeği i̇le değerlendirilmesi. organizasyon ve yönetim bilimleri dergisi, 3(2), 67-77. atılgan, e., aksoy, s., ve akıncı, s. (2005). determinants of the brand equity: a verification approach in the beverage industry in turkey. marketing intelligence and planning. 23(3), 237−248. avcılar, m. y. (2008). tüketici temelli marka değerinin ölçümü. çukurova üniversitesi sosyal bilimler enstitüsü dergisi, 17(1), 11-30. back, k.-j., ve parks, s. c. (2003). a brand loyalty model involving cognitive, affective, and conative brand loyalty and customer satisfaction. journal of hospitality and tourism research, 27(4), 419–435. bilge, f. a., summak, ö. g. m. e., ve karayel, ö. g. s. (2009). konya’da özel hastane yöneticilerinin müşteri odaklı pazarlamaya bakış açıları ve karlılığa etkileri üzerine bir araştırma. selçuk üniversitesi sosyal bilimler myo dergisi, 12(1-2), 1-14. bilgin, f. z., çobanoğlu, e., yalçın, a. m. (2006) pazarlamada yeni açılımlarla üstünlük sağlama, betaş basım, i̇stanbul. bitlisli, k. k. (2014). ciroda avrupa dördüncüsü oldular, dünya, 10.07.2014, http://www.dunya.com/guncel/ciroda-avrupadorduncusu-oldular-233023h.htm blain, c., levy, s. e., ve ritchie, r. b. (2005). destination branding: insights and practices from destination management organizations. journal of travel research, 43, 328-338. bülbül, h., ve özoğlu, b. (2014). tüketici yenilikçiliği ve algılanan riskin satın alma davranışına etkisi. erciyes üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi, (44), 43-58. bülbül, h., topal, a., ve çağlın, c. (2016). raf yönetimi, müşteri memnuniyeti ve tekrar satın alma arasındaki i̇lişki. ömer halisdemir üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi, 9(3), 249-265. çabuk, s. ve yagcı, m., (2003). pazarlamaya çağdaş yaklaşım, nobel kitabevi, adana. çabuk, s., nakıboğlu, b., ve canoğlu, m. (2014). algılanan otel i̇majı ve hizmet kalitesi ile tekrar satın alma niyeti arasındaki i̇lişkiler. anatolia: turizm araştırmaları dergisi, 24(1), 96-108. çakmak, a. ç. (2004). firmaların pazara açılma sürecinde markanın etkinliği ve örnek bir uygulama: mado markası, kahramanmaraş sütçü i̇mam üniversitesi sosyal bilimler enstitüsü i̇şletme anabilim dalı, yüksek lisans tezi, kahramanmaraş. dal, ö. g. v., ve eroğlu, a. h. (2015). farklı kişilik özelliklerine sahip bireylerin risk algılarının tüketici davranışı açısından incelenmesi: üniversite öğrencileri üzerine bir araştırma. süleyman demirel üniversitesi i̇ktisadi ve i̇dari bilimler fakültesi dergisi, 20(2):361-385. ebren, f. (2009) tüketim, tüketici ve pazarlama iletişimi üzerine, detay anatolia akademik yayıncılık, ankara. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu ozan altun, cevdet kızıl, gülay selvi hanişoğlu, nazar demir emerging markets journal | p a g e 8 5 ekonomi bakanlığı (2014). boya sektörü, t.c. ekonomi bakanlığı yayınları. erdil, t. s. ve uzun y. (2009). marka olmak, i̇stanbul: beta yayıncılık. eroglu, a. h., ve erdogan, a. (2014). examination of emarketing by brand loyalty. journal of management marketing and logistics, 1(1), 1636. eryılmaz, b., ve zengin, b. (2014). sosyal medyada konaklama i̇şletmelerine yönelik tüketici yaklaşımları üzerine bir araştırma. i̇şletme bilimi dergisi, 2(1), 147-167. garda, b. (2016). bütünleşik pazarlama i̇letişimi: konya i̇li örneği. selçuk üniversitesi sosyal bilimler meslek yüksek okulu dergisi, 19, 243-260. güler, y. b. (2014). perakendecilik sektöründe i̇şletme ve müşteri pazarlama etik bakış açılarının karşılaştırılması. selçuk üniversitesi sosyal bilimler enstitüsü dergisi, (31), 65-75. güney, s. (2000). davranış bilimleri, nobel yayın dağıtım, 2. baskı, ankara. güreş, n. (2004). müşteri kayıplarıyla i̇lgilenilmesinin i̇şletme açısından önemi, pazarlama dünyası, 2004(2), 54-57. i̇slamoğlu, a.h. (2006). pazarlama yönetimi, beta basım, i̇stanbul. i̇so (2014). “türkiye'nin birinci 500 büyük sanayi kuruluşu – 2013”, i̇stanbul sanayi odası, http://www.iso.org.tr/projeler/arastirmalar/turki yenin-500-buyuk-sanayi-kurulusu/ jackson, t., shaw, d. (2009). mastering fashion marketing, palgrave macmillan, new york. kabakçı, s. (2001). tüketici davranışlarını etkileyen bir faktör olarak yasam tarzı: çukurova üniversitesi’nde okuyan kız öğrencilerin yasam tarzı tiplerinin belirlenmesine yönelik bir araştırma, çukurova üniversitesi sosyal bilimler enstitüsü i̇şletme anabilim dalı, yüksek lisans tezi, adana. kara, g. (2015). marka deneyimi ve tekrar satın alma niyeti arasındaki ilişkide müşteri tatmininin rolü sosyal bilimler enstitüsü, eskişehir osmangazi üniversitesi, yüksek lisans tezi. karafakıoglu, m. (2005). pazarlama i̇lkeleri, literatür yayınları, i̇stanbul. kardes, f., cronley, m., and cline, t. (2014). consumer behavior. cengage learning. kavas, a. (2004). marka değeri yaratma. pi̇: pa. keller, k. l. (2008). strategic brand management: building, measuring and managing brand equity, new jersey: pearson prentice hall. klein, m. (2014). mobile marketing: a classification framework and effect on marketing mix. journal of management marketing and logistics, 1(3), 276-285. konecnik, m., ve gartner, w. c. (2007). customerbased brand equity for a destination. annals of tourism research, 34(2), 400-421. kotler, p. çev. bakkal, a. (2005). a’ dan z’ ye pazarlama, mediacat, i̇stanbul. kotler, p., kartajaya, h., setiawan, i., çev. dündar, k. (2010). pazarlama 3.0, optimist yayın dağıtım, i̇stanbul. köseoglu, ö. (2002). değişim fenomeni karsısında markalaşma süreci ve bu süreçte halkla i̇lişkilerin rolü, ege üniversitesi sosyal bilimler enstitüsü halkla i̇lişkiler anabilim dalı, yüksek lisans tezi, i̇zmir. kwun, j. w., ve oh, h. (2004). effects of brand, price, and risk on customers’ value perceptions and behavioral intentions in the restaurant industry. journal of hospitality and leisure marketing, 11(1), 31-49. levy, s. j. (2005). the evolution of qualitative research in consumer behavior, journal of business research, vol. 58, 341-347. marangoz, m. (2007). tüketici davranışı temeline göre marka değerinin ölçülmesine yönelik bir araştırma. öneri dergisi, 7(28), 87-96. mert, s. (2001). tüketici davranışlarını belirleyen etmenler: sosyal sınıfların tüketici davranışları üzerindeki etkisi, gazi üniversitesi sosyal bilimler enstitüsü i̇şletme anabilim dalı, yüksek lisans tezi, ankara. meyerson, m. (2005) success secrets of the online marketing superstars, dearborn trade publishing, new york. mucuk, i̇. (2007). pazarlama i̇lkeleri (ve örnek olaylar), 16. basım. i̇stanbul: türkmen kitabevi. nunnally, j. c. (1978). psychometric theory (2nd ed.). new york: mcgraw-hill. obuz, k. (2012). tüketicilerin mobilyaya i̇lişkin tercihleri, satın alma, kullanım davranışları ve mobilyaya i̇lişkin sorunları. gazi üniversitesi eğitim bilimleri enstitüsü aile ekonomisi ve beslenme eğitimi ana bilim dalı. yüksek lisans tezi. odabaşı, y. (2014). postmodern pazarlama: tüketim ve tüketici. k. demirgil (ed.). mediacat yayınları. odabaşı, y. ve barış, g., (2003). tüketici davranışı, mediacat akademi, 2. baskı, i̇stanbul. volume 12 no 2 (2022) | issn 2158-8708 (online) | doi 10.5195/emaj.2022.277 | http://emaj.pitt.edu paint marketing and factors affecting the consumers’ paint purchase preference from the viewpoint of paint industry members in turkey page |86| emerging markets journal orhan, i̇. (2002). satın alınan ürünlere i̇lişkin duyguların cinsiyet ve cinsiyet rolleri bakımından i̇ncelenmesi, ankara üniversitesi sosyal bilimler enstitüsü psikoloji anabilim dalı, yüksek lisans tezi, ankara. özcan, s. o. (2010). i̇nternet pazarlama faaliyetlerinde tüketici satın alma karar süreci. iuyd, 1(2), 29-39. öztürk, m. c., ve savaş, a. t. (2014). sosyal amaca yönelik pazarlama reklamlarının markaya yönelik tutum ve satınalma niyetine etkisi: anadolu üniversitesi öğretim elemanlarına yönelik bir uygulama. journal of yasar university, 9(35), 6099-6260. öztürk, s., şerbetci, s., ve gürcan, ş. n. (2014). tüketim değerlerinin satın alma niyeti ve bağlılık üzerindeki rolü: fırsat sitelerine yönelik bir araştırma. anadolu university journal of social sciences, 14(1):1-12. pappu, r., quester, p. g., ve cooksey, r. w. (2005). consumer-based brand equity: improving the measurement – empirical evidence. journal of product and brand management, 14(3), 143154. sağlam, m., ve sağlam, b. ç. (2016). marka güveni ve marka bağlılığının satın alma niyeti üzerine etkisi: akıllı telefon pazarında bir araştırma. international journal of research in business and social science (2147-4478), 5(5), 34-43. sheth, j. n., and sisodia, r. s. (2015). does marketing need reform?: fresh perspectives on the future. routledge. solomon, m. r. (2014). consumer behavior: buying, having, and being (vol. 10). engelwood cliffs, nj: prentice hall. soysal, a. n. (2015). müşteri odaklı anlayışta müşteri memnuniyeti ve hizmet kalite algısı: bir hastane örneği. pamukkale üniversitesi sosyal bilimler enstitüsü, doktora tezi. şahin, a , demir, m . (2014). i̇şletmeler arası pazarlamada i̇lişki pazarlaması i̇le modern pazarlama yöntemleri arasındaki bağıntılar. dokuz eylül üniversitesi i̇şletme fakültesi dergisi, 2 (1):1-11. taşkın, ç. (2016). otomobil sektöründe tüketici temelli marka değerinin ölçümü üzerine bir araştırma. business and economics research journal, 7(3):125-136. tek, ö.b ve özgül, e. (2005). modern pazarlama i̇lkeleri. i̇zmir: birleşik matbaacılık. tekin, m., şahin, e., ve göbenez, y. (2014). postmodern pazarlama yaklaşımıyla modern pazarlama yöntemleri: güncel şirket uygulamaları. selçuk üniversitesi sosyal bilimler enstitüsü dergisi, 225-232. tosun n. b.(2010). i̇letişim temelli marka yönetimi, i̇stanbul: beta yayınevi. tunçgenç, m. (2015). türk boya sanayisi. akzonobel kemipol aş yayını i̇zmir. ural, t. (2009). markalamada yol haritası, ankara: nobel yayıncılık. ural, t., ve perk, h. g. (2012). tüketici temelli marka değerinin kişisel bilgisayar satın alma niyeti üzerine etkisi: antakya’da bir çalışma. anadolu üniversitesi sosyal bilimler dergisi, 12(2):1125. van riel, a. c. r., pahud de mortanges, c., ve streukens, s. (2005). marketing antecedents of industrial brand equity: an empirical investigation in specialty chemicals. industrial marketing management, 34(8), 841-847. villarejo-ramos, a. f., ve sanchez-franco, m. j. (2005). impact of marketing communication and price promotion on brand equity. journal of brand management, 12(6), 431-444. webster, f. e., jr. (2000). understanding the relationships among brands, consumers, and resellers. journal of academy of marketing science, 28(1), 17-23. xiang, z., magnini, v. p., ve fesenmaier, d. r. (2015). information technology and consumer behavior in travel and tourism: insights from travel planning using the internet. journal of retailing and consumer services, 22, 244-249. yağcı, m. i̇., ve i̇larslan, n. (2011). reklamların ve cinsiyet kimliği rolünün tüketicilerin satın alma davranışları üzerindeki etkisi. doğuş üniversitesi dergisi, 11(1), 138-155. yazıcıoğlu, y. ve erdoğan, s. (2004). spss uygulamalı bilimsel araştırma yöntemleri. ankara: detay yayıncılık.